Sallie Mae Misses Slightly, But Profits Soar

| About: SLM Corporation (SLM)

SLM Corporation (NYSE:SLM), commonly known as Sallie Mae, reported fourth quarter core earnings of $249 million or 41 cents per share and just missed the Zacks Consensus Estimate of 44 cents. However, the results were significantly up from the prior-year quarter when the company had earned $65 million or 8 cents. Results reflected higher revenues from interest income and fee income, besides lower provisions.

For fiscal 2009, Sallie Mae reported core earnings of $597 million or 96 cents per share, up from $526 million or 89 cents in 2008.

Quarterly results included a $98 million loss from the sale of the company's mortgage purchased paper business, a $34 million charge against its purchased consumer receivables, and a $33 million charge for early conversion of a portion of the company's series C preferred stock into common stock. These losses were partially offset by a $46 million gain from debt repurchases.

On a GAAP basis, Sallie Mae reported a net quarterly income of $309 million or 52 cents per share, compared to a net loss of $216 million or 52 cents in the year-ago quarter. For the full year 2009, the company reported a net income of $324 million or 38 cents per share, compared to a net loss of $213 million or 69 cents in 2008.

Sallie Mae originated $4.5 billion in federal student loans in the reported quarter. This represents a 14% increase from the prior-year period. However, the origination of private education loans (PELs) decreased significantly during the quarter. Sallie Mae originated $381 million in PELs compared to $893 million in the prior quarter, primarily reflecting a conservative underwriting approach. The company sold $17.6 billion of federal loans originated under the U.S. Department of Education’s loan participation program and received $271 million.

Net interest income (on a core basis) for the quarter was $686 million, compared to $690 million in the prior quarter and $553 million in the year-ago quarter. The company has reported a drop in provision for loan losses in the quarter. Provision for loan losses was $365 million in the reported quarter, down from $448 million in the prior quarter and $392 million in the prior-year quarter.

Credit metrics improved during the reported quarter. Sallie Mae experienced a decline in managed private education loan charge-offs to $298 million in the quarter from $443 million in the prior quarter. Managed delinquencies as a percentage of private education loans in repayment decreased 50 basis points sequentially to 12.1%. As a result, core provision for private education loan losses decreased to $327 million from $413 million in the prior quarter.

Core fee income including the debt repurchase gain was $503 million. Results were well ahead of the prior-year period’s income of $237 million. The company reported core operating expenses of $293 million, a 12.7% increase from the prior-year quarter’s expense of $260 million.

Sallie Mae also remains focused on bolstering its capital levels. This included the completion of $600 million in private education loan securitizations, $840 million in consolidated loan securitizations, $741 million for the repurchase of unsecured debt which generated a gain of $46 million, and $350 million of funding in federal student loans through the Straight A conduit program.

Sallie Mae’s leading position in the student lending market and its sturdy cost structure provides it an edge over its peers, given the expected growth rate of the college-age population. Its business is less prone to interest rate volatility than many other financial institutions.

However, in the near future, the company could face uncertainty over the enactment of the legislation concerning the elimination of private lenders from the student loan market. Additionally, the stressed economic conditions and credit market challenges are expected to be a drag on earnings.

Shares of Sallie Mae gained 44 cents or 3.82% in Wednesday’s regular session to close at $11.97. The stock was, however, down a cent in after-hours trading.