Sallie Mae Posts $338 Million Profit on Derivatives

SLM Corp., the largest U.S. student lender known as Sallie Mae, reported second-quarter profit of $338 million, citing derivative gains.

Net income of 63 cents a share compares with a loss of $122.7 million, or 32 cents a share, a year earlier, according to a statement distributed by Business Wire. Sallie Mae said its core earnings were 39 cents. The Reston, Virginia-based company was predicted to earn 30 cents, excluding some items, according to the average estimate of eight analysts surveyed by Bloomberg.

The lender extended $3.1 billion in government-guaranteed debt in the second quarter, compared with $219 million in private loans, or those that don’t carry U.S. backing. Legislation that ended lending through the Federal Family Education loan program, which took effect June 30, will eliminate a large part of Sallie Mae’s origination business. Students will now obtain federally backed loans directly from the government.

“Growth in private student loans is expected to be one of the largest drivers of business growth,” said Sameer Gokhale, an analyst at Keefe, Bruyette & Woods Inc. in New York. “We would like to see more robust origination volumes at some point. But we never want to see them growing too fast as that’s almost always a sign of lax underwriting.”

The company made $387 million in private student loans during the year-ago period, according to the statement. May and June are typically slow months for lending, as students don’t usually borrow at that time, said Matt Snowling, an analyst at FBR Capital Markets, in an interview before the earnings announcement.

Private Loan Charge-offs

“The third quarter is when they need to deliver on originations,” said Snowling, who is based in Arlington, Virginia.

Private education loan charge-offs rose to $336 million from $284 million during the prior three months. The loan-loss provision for the debt was $349 million, compared with $325 million in the first quarter.

Sallie Mae has cut back on extending private student loans, concerned that students would be unable to pay off debt, and may have become too conservative, according to Snowling.

“They can loosen their underwriting to some degree without jeopardizing the credit performance,” he said.

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