Aided by a fall in loan loss provisions and decrease in
), better known as Sallie Mae, first-quarter 2012 core earnings
came in at $284 million or 55 cents per share, ahead of the Zacks
Consensus Estimate of 52 cents. Results also compare favorably with
the prior-year quarter's core earnings of $260 million or 48 cents
The company's private education loan origination advanced 23%
year over year while loan charge-offs reached the lowest rate since
the third quarter of 2008. However, the benefits were partly offset
by a decline in net interest income and reduction in debt
On a GAAP basis, Sallie Mae's first-quarter 2012 net income came
in at $112 million or 21 cents per share, down from $175 million or
32 cents per share reported in the comparable quarter last
Notably, in the reported quarter, Sallie Mae experienced a $131
million increase in unrealized "mark-to-market" losses on
derivative contracts compared with the year-ago period.
Cost-cutting measures as well as lower servicing costs resulted
in a 13.5% year-over-year decrease in operating expenses to $262
million at Sallie Mae.
The segment's core earnings stood at $81 million in the reported
quarter, substantially up from $44 million in the year-ago quarter.
Reduced loan loss provision aided the upswing. Net interest margin,
before loan loss provision, improved to 4.26% from 4.11% in the
comparable prior-year period. Private education loans origination
were $1.2 billion, up 23% year over year.
The annual charge-off rate (as a percentage of loans in
repayment) was 2.96% down from 3.94% in the prior-year quarter.
This was the lowest charge-off rate on these loans since
third-quarter 2008. Provision for loan losses decreased 15% year
over year to $235 million in the reported quarter.
The segment reported core earnings of $139 million, up 5% from the
year-ago quarter. The company experienced a growth in servicing
revenue in the reported quarter from the Department of Education
loan servicing contract.
Notably, on behalf of the Department of Education, Sallie Mae
provides service to 3.7 million loan customers. The company earned
$17 million in servicing revenue in the first quarter of 2012 from
its Department of Education loan servicing contract, up from $15
million in the year-ago quarter.
Federally Guaranteed Student Loans (FFELP):
The business segment generated core earnings of $82 million in the
reported quarter, down 25% from $109 million in the year-ago
quarter. The reduction stemmed from lower net interest income that
resulted from the fall in balances of the FFELP loan portfolio as
well as higher funding costs.
Sallie Mae has reiterated its guidance for 2012. For the full
year, management expects to generate core earnings of $2.00 per
share and anticipates private education loan originations of $3.2
Capital Deployment Update
Sallie Mae remains committed to boost its shareholder wealth
through dividend and share buybacks. In the reported quarter, the
company has hiked its dividend to 12.5 cents per share from 10
cents paid earlier. Moreover, the company also bought back 16.7
million shares of common stock for $268 million. The share buybacks
were made under the $500 million share repurchase authorization
announced in January 2012.
We believe that Sallie Mae's leading position in the student
lending market, its cost curtailment initiatives and the federal
student loan assets acquisition augur well. Capital deployment
efforts also give a fillip to investors' confidence in the
Though pausing new federal student loan origination to comply
with the legislation would affect revenue generation at student
lenders like Sallie Mae and
), 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 #2 Rank, which translates into a
short-term 'Buy' recommendation.
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