Clearing all skepticism, the new
) delivered a positive earnings surprise in its standalone
financials for second-quarter 2014. Core earnings of 10 cents per
share outpaced the Zacks Consensus Estimate by a penny. However,
results compared unfavorably with 17 cents earned in the year-ago
Sallie Mae started operating independently as a consumer-banking
company focused on offering private education loans, saving and
insurance products for higher education to students and families
following the separation of SLM Corporation into two distinct
publicly-traded entities on Apr 30, 2014. The loan management,
servicing and asset recovery businesses of SLM Corp. remained with
the other public company -
Sallie Mae's second-quarter 2014 results included the impact of the
split. The company stated that the transaction was treated as a
reverse-spin for accounting purposes. Consequently, Sallie Mae's
historical financial statements and details of the education loan
portfolio prior to Apr 30, 2014 include only those operations,
assets, liabilities and equity of the consumer banking business.
Better-than-expected results were aided by increased net interest
income, partially offset by higher expenses. A decent capital
position and increased balance in private education loan portfolio
were the positives.
Sallie Mae reported GAAP net income of $44 million or 9 cents per
share compared with $76 million or 17 cents per share in the
prior-year quarter. Notably, the company's GAAP results for the
year-ago period include gains on sales of loans. Excluding such
gains, GAAP net income stood at $32 million in second-quarter 2013.
GAAP results for second-quarter 2014 included $7 million of pre-tax
losses from derivative accounting treatment, compared with pre-tax
losses of $0.4 million in second-quarter 2013.
Core earnings (primarily adjusts for derivatives) for the quarter
were $48 million compared with $77 million in the year-ago quarter.
Quarter in Detail
Net interest income ('NII') came in at $144 million, up 35% year
over year. The increase was primarily due to higher average private
education loans outstanding. Net interest margin ('NIM') increased
to 5.08 % from 4.64 % in the prior-year period.
The company's operating expenses rose 11.9% year over year to $75
million. The increase primarily reflects reorganization expenses of
Private Education Loan Portfolio
As of Jun 30, 2014, the private education loan portfolio stood at
$7.4 billion, up 40% year over year. Loan origination increased 3%
year over year to $373 million. Average yield on the loan portfolio
was 8.23%, up from 8.20% in the year-ago period. Provision for loan
losses stood at $1 million, mainly due to a benefit of $14 million
from a change to the loss confirmation period charge-off policy of
the company owing to the spin off.
As of Jun 30, 2014, deposits of Sallie Mae Bank stood at $9.5
billion, up from $9.3 billion as of Dec 31, 2013. Increase in money
market accounts contributed to the rise in deposits.
Sallie Mae Bank reported a strong capital position. As of Jun 30,
2014, Tier 1 leverage ratio and Tier 1 risk-based capital stood at
11.6% and 15.2%, respectively.
Outlook for 2014
For full-year 2014, Sallie Mae expects core earnings per share in
the range of 41-43 cents, while operating expenses to be $312
million, including restructuring expenses of $32 million.
Private education loan originations are projected to be $4 billion
for the year. For the later part of 2014, the company expects
private education loan sales of $1.2 billion and provision for
private education loan losses of around $60 million.
Despite the challenges, we believe that Sallie Mae's leading
position in the student lending market, efforts to diversify and
increasing private student loan originations would help it to
navigate well in the upcoming quarters. Also, specialized focus on
solidifying its presence in the consumer banking business space
will be advantageous to the company.
The economic recovery and declining unemployment rate should
further enhance the prospects of consumer banking. We believe the
new company should capitalize on these grounds.
Nevertheless, we remain cautious owing to several issues that the
new entity is encountering. These include a competitive environment
in the saturated banking space, absence of large scale benefits and
the prevailing stringent regulatory landscape.
Sallie Mae currently carries a Zacks Rank #4 (Sell).
Performance of Other Companies in Finance - Consumer Loans
Lower credit cost and growth in fee income drove
Capital One Financial Corp.
) second-quarter 2014 earnings of $2.04 per share, which surpassed
the Zacks Consensus Estimate by 14%. Further, the figure was up 10%
from $1.85 earned in the prior-year quarter.
Discover Financial Services
) managed to keep its surprise streak alive with the second quarter
earnings, marking three straight quarters of earnings beat
averaging 4.6%. Second-quarter 2014 earnings per share of $1.35
exceeded the Zacks Consensus Estimate of $1.30 per share and
improved 13% from the year-ago quarter.
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report
SLM CORP (SLM): Free Stock Analysis Report
DISCOVER FIN SV (DFS): Free Stock Analysis
CAPITAL ONE FIN (COF): Free Stock Analysis
NAVIENT CORP (NAVI): Free Stock Analysis Report
To read this article on Zacks.com click here.