The year 2016 began on an encouraging note for Sallie Mae SLM as it delivered a positive earnings surprise of nearly 17% in the first quarter. The Delaware-based company reported first-quarter core earnings of 14 cents per share, outpacing the Zacks Consensus Estimate of 12 cents. Further, the reported figure improved 40% year over year.
SLM Corporation (SLM) EPS BNRI & Surprise Percent - Last 5 Quarters | FindTheCompany
Results were driven by increased net interest income as well as other income. Continued rise in private education loan originations was among the tailwinds. However, the quarter witnessed higher expenses and provisions.
Sallie Mae, (formally SLM Corporation) reported core earnings (primarily adjusts for derivatives) attributable to the company's common stock of $61 million, up from $41 million in the prior-year quarter.
The company’s GAAP net income came in at $61 million or 14 cents per share, up from $43 million or 10 cents per share in the year-ago quarter.
Performance in Detail
Net interest income came in at $210.0 million, up 23% year over year. The rise was mainly driven by an increase in the portfolio size of private education loans. Net interest margin increased 17 basis points (bps) year over year to 5.77%.
Non-interest income came in at $20.7 million, significantly rising 83% year over year. The increase primarily reflects rise in other income.
The company’s total expenses increased 8% year over year to $93.1 million. The current quarter includes reorganization expenses of $5 million. The rise in expenses is mainly due to increased personnel and technology costs, mostly driven by growth in the company’s loan portfolio.
Provision for loan losses stood at $32.6 million, substantially up from $16.6 million in the prior-year quarter.
As of Mar 31, 2016, the private education loan portfolio stood at $12.0 billion, up 24% year over year. Further, loan origination increased 8% year over year to $1.8 billion in the reported quarter.
Average yield on the loan portfolio was 8.03%, down 4 bps year over year. Delinquencies as a percentage of private education loans in repayment were 2.1%, up from 1.7%.
Deposits
As of Mar 31, 2016, deposits of Sallie Mae Bank stood at $11.5 billion, up from $10.5 billion as of Mar 31, 2015. Increases in brokered deposits along with retail and other deposits contributed to the rise in deposits.
Capital Position
Sallie Mae Bank reported a strong capital position. As of Mar 31, 2016, Tier 1 capital to risk-weighted assets and common equity Tier 1 capital both stood at 13.4%. Capital ratios exceeded the well capitalized regulatory requirements.
Outlook
Sallie Mae reiterated its guidance for full year 2016. The company expects core earnings per share in the range of 49–51 cents for the year. Operating efficiency ratio is expected to improve 8% to10%. Private education loan originations are projected to be $4.6 billion for the year.
Our Viewpoint
Results of Sallie Mae, which started operating independently following the separation of SLM Corporation in Apr 2014, reflects continued focus on enhancing its private education loan assets and revenues, maintaining a strong capital position and improving efficiency.
We believe that Sallie Mae’s leading position in the student lending market and its focus on solidifying its presence in the consumer banking business space would help it to navigate well in the upcoming quarters. The economic recovery and declining unemployment rate should further enhance the prospects of consumer banking.
Nevertheless, we remain cautious owing to several issues that the 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 #3 (Hold).
Among other firms in the finance space, Regional Management Corp. RM and World Acceptance Corp. WRLD are expected to release results on Apr 28 and Ally Financial Inc. ALLY is set to release results on Apr 26.
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