Market Overview

Sallie Mae Reports Second-Quarter 2018 Financial Results

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Diluted Earnings Per Share Up 60 Percent From Year-Ago Quarter to
$0.24

Private Education Loan Originations Increase 13 Percent From
Year-Ago Quarter to $487 Million

Provision for Private Education Loan Losses Declines 6 Percent
From Year-Ago Quarter

Net Interest Income Increases 26 Percent From Year-Ago Quarter to
$341 Million

Sallie Mae (NASDAQ:SLM), formally SLM Corporation, today released
second-quarter 2018 financial results that include growth in diluted
earnings per share and private education loan originations, a lower
provision for private education loan losses, and increased net interest
income. In the second-quarter 2018, the company increased its diluted
earnings per share 60 percent to $0.24, grew its private education loan
originations 13 percent to $487 million, reduced its provision for
private education loan losses 6 percent to $46 million, and increased
its net interest income 26 percent to $341 million, all compared with
the second quarter of 2017.

"We enter this peak student loan processing season with customer
experience enhancements that simplify the process for undergraduates,
graduate students, and their parents, and a full product set to meet
their needs," said Raymond J. Quinlan, Chairman and CEO. "Our product
diversification efforts continue as we seek to build long-term
relationships with our customers and enhance franchise value."

For the second-quarter 2018, GAAP net income was $110 million, compared
with $71 million in the year-ago quarter. GAAP net income attributable
to the company's common stock was $106 million ($0.24 diluted earnings
per share) in the second-quarter 2018, compared with $67 million
($0.15 diluted earnings per share) in the year-ago quarter. The
year-over-year increase was primarily attributable to a $71 million
increase in net interest income, which was offset by a $13 million
increase in provisions for credit losses, and a $24 million increase in
total non-interest expenses. The reduction of the federal statutory
corporate income tax rate from 35 percent to 21 percent because of the
tax cuts enacted in 2017 contributed approximately $21 million to net
income and $0.05 diluted earnings per share.

Second-quarter 2018 results vs. second-quarter 2017 included:

  • Net interest income of $341 million, up 26 percent.
  • Net interest margin of 6.14 percent, up 23 basis points.
  • Private education loan originations of $487 million, up 13 percent.
  • Average private education loans outstanding of $18.8 billion, up 20
    percent.
  • Average yield on the private education loan portfolio was 9.03
    percent, up 70 basis points.
  • Private education loan provision for loan losses was $46 million, down
    from $49 million.
  • Private education loans in forbearance were 3.4 percent of private
    education loans in repayment and forbearance, up from 3.3 percent.
  • Private education loan delinquencies as a percentage of private
    education loans in repayment were unchanged at 2.2 percent.
  • Personal loan originations of $93 million and personal loan
    acquisitions of $277 million.
  • Average personal loans outstanding of $815 million, up from $61
    million.
  • Average yield on the personal loan portfolio was 10.65 percent, up 137
    basis points.
  • Personal loan provision for loan losses was $16 million.

Non-GAAP Core earnings for the second-quarter 2018 were $114 million,
compared with $73 million in the year-ago quarter. Core earnings
attributable to the company's common stock grew 60 percent to $110
million ($0.25 diluted earnings per share) in the second-quarter 2018,
compared with $69 million ($0.16 diluted earnings per share) in the
year-ago quarter.

Second-quarter 2018 GAAP results included $5 million of pre-tax losses
from derivative accounting treatment that are excluded from core
earnings results, compared with $4 million of pre-tax losses in the
year-ago period.

Sallie Mae provides core earnings because it is one of several measures
management uses to evaluate management performance and allocate
corporate resources. The difference between core earnings and GAAP net
income is driven by mark-to-market unrealized gains and losses on
derivative contracts recognized in GAAP net income, but not in core
earnings results. Management believes its derivatives are effective
economic hedges, and, as such, they are a critical element of the
company's interest rate risk management strategy.

Total Non-Interest Expenses

Total non-interest expenses were $135 million in the second-quarter
2018, compared with $111 million in the year-ago quarter. Operating
expenses grew 22 percent from the year-ago quarter, while the non-GAAP
operating efficiency ratio improved to 38.3 percent in the
second-quarter 2018 from 39.7 percent in the year-ago quarter. The
increase in non-interest expenses was driven by the growth in the
portfolio and costs related to product diversification, platform
enhancements, customer experience, and higher compensation and benefits
costs.

In the first-quarter 2018, the company announced a $30 million
investment in technology infrastructure and product diversification in
2018. The company now plans to increase that investment to $40 million
to achieve a revised personal loan originations target of $475 million,
up from $300 million. The company spent $5 million in the second-quarter
2018 on these initiatives and approximately $6 million year-to-date.

As a result of the increased investment to generate interest-earning
assets, the company increased its full-year non-GAAP operating
efficiency ratio guidance from a range of 37 - 38 percent to 38 - 39
percent.

Income Tax Expense

Income tax expense decreased to $40 million in the second-quarter 2018
from $45 million in the year-ago quarter. The effective income tax rate
decreased in the second-quarter 2018 to 26.7 percent from 38.8 percent
in the year-ago quarter, primarily due to the reduction in the federal
statutory corporate income tax rate from 35 percent to 21 percent under
tax cuts enacted in 2017. During the second-quarter 2018, the company
recorded an increase on its uncertain tax positions which increased our
effective tax rate during the quarter from the expected rate of 25
percent.

Capital

The regulatory capital ratios of the company's Sallie Mae Bank
subsidiary continue to exceed guidelines for institutions considered
"well capitalized." At June 30, 2018, Sallie Mae Bank's regulatory
capital ratios were as follows:

           

June 30, 2018

"Well Capitalized"
Regulatory
Requirements

Common Equity Tier 1 Capital (to Risk-Weighted Assets) 12.0 percent 6.5 percent
Tier 1 Capital (to Risk-Weighted Assets) 12.0 percent 8.0 percent
Total Capital (to Risk-Weighted Assets) 13.3 percent 10.0 percent
Tier 1 Capital (to Average Assets) 11.2 percent 5.0 percent
 

Deposits

Deposits at the company totaled $16.7 billion ($8.7 billion in brokered
deposits and $8.0 billion in retail and other deposits) at June 30,
2018, compared with total deposits of $13.8 billion ($7.0 billion in
brokered deposits and $6.8 billion in retail and other deposits) at June
30, 2017.

Guidance

The company expects 2018 results to be as follows:

  • Full-year diluted core earnings per share: $0.99 - $1.01.
  • Full-year private education loan originations of $5.0 billion.
  • Full-year non-GAAP operating efficiency ratio: 38 percent - 39 percent.

Sallie Mae will host an earnings conference call tomorrow, July 25,
2018, at 8 a.m. EDT. Sallie Mae executives will be on hand to discuss
highlights of the quarter and to answer questions related to company
performance. Individuals interested in participating should dial
877-356-5689 (USA and Canada) or 706-679-0623 (international) and use
access code 5469339 starting at 7:45 a.m. EDT. A live audio webcast of
the conference call may be accessed at www.SallieMae.com/investors.
A replay of the conference call will be available approximately two
hours after the call's conclusion and will remain available through Aug.
8, 2018. To hear the replay, please dial 855-859-2056 (USA and Canada)
or 404-537-3406 (international) and use access code 5469339.

Presentation slides for the conference call may be accessed at www.SallieMae.com/investors
under the webcasts tab.

This press release contains "forward-looking statements" and
information based on management's current expectations as of the date of
this release.
Statements that are not historical facts, including
statements about our beliefs, opinions or expectations and statements
that assume or are dependent upon future events, are forward-looking
statements. Forward-looking statements are subject to risks,
uncertainties, assumptions and other factors that may cause actual
results to be materially different from those reflected in such
forward-looking statements. These factors include, among others, the
risks and uncertainties set forth in Item 1A. "Risk Factors" and
elsewhere in the company's Annual Report on Form 10-K for the year ended
Dec. 31, 2017 (filed with the Securities and Exchange Commission ("SEC")
on Feb. 23, 2018) and subsequent filings with the SEC; increases in
financing costs; limits on liquidity; increases in costs associated with
compliance with laws and regulations; failure to comply with consumer
protection, banking and other laws; changes in accounting standards and
the impact of related changes in significant accounting estimates; any
adverse outcomes in any significant litigation to which the company is a
party; credit risk associated with the company's exposure to third
parties, including counterparties to the company's derivative
transactions; and changes in the terms of education loans and the
educational credit marketplace (including changes resulting from new
laws and the implementation of existing laws). We could also be affected
by, among other things: changes in our funding costs and availability;
reductions to our credit ratings; cybersecurity incidents and
cyberattacks and other failures or breaches of our operating systems or
infrastructure, including those of third-party vendors; damage to our
reputation; risks associated with restructuring initiatives, including
failures to successfully implement cost-cutting and restructuring
initiatives and the adverse effects of such initiatives on our business;
changes in the demand for educational financing or in financing
preferences of lenders, educational institutions, students and their
families; changes in law and regulations with respect to the student
lending business and financial institutions generally; changes in
banking rules and regulations, including increased capital requirements;
increased competition from banks and other consumer lenders; the
creditworthiness of our customers; changes in the general interest rate
environment, including the rate relationships among relevant
money-market instruments and those of the our earning assets versus our
funding arrangements; rates of prepayments on the loans that we make or
acquire; changes in general economic conditions and our ability to
successfully effectuate any acquisitions; and other strategic
initiatives. The preparation of our consolidated financial statements
also requires us to make certain estimates and assumptions, including
estimates and assumptions about future events. These estimates or
assumptions may prove to be incorrect. All forward-looking statements
contained in this release are qualified by these cautionary statements
and are made only as of the date of this release. We do not undertake
any obligation to update or revise these forward-looking statements to
conform such statements to actual results or changes in our expectations.

The company reports financial results on a GAAP basis and also provides
certain "Core Earnings" performance measures. The difference between the
company's "Core Earnings" and GAAP results for the periods presented
were the unrealized, mark-to-market gains/losses on derivative contracts
(excluding current period accruals on the derivative instruments), net
of tax. These are recognized in GAAP, but not in "Core Earnings"
results. The company provides "Core Earnings" measures because this is
what management uses when making management decisions regarding the
company's performance and the allocation of corporate resources. The
company's "Core Earnings" are not defined terms within GAAP and may not
be comparable to similarly titled measures reported by other companies.

For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations — ‘Core Earnings' " in the
company's Form 10-Q for the quarter ended June 30, 2018 for a further
discussion and the "‘Core Earnings' to GAAP Reconciliation" table in
this press release for a complete reconciliation between GAAP net income
and "Core Earnings."

Sallie Mae (NASDAQ:SLM) is the nation's saving, planning, and
paying for college company. Whether college is a long way off or just
around the corner, Sallie Mae offers products that promote responsible
personal finance, including private education loans, Upromise rewards,
scholarship search, college financial planning tools, and online retail
banking. Learn more at SallieMae.com.
Commonly known as Sallie Mae, SLM Corporation and its subsidiaries are
not sponsored by or agencies of the United States of America.

 

Selected Financial Information and Ratios

(Unaudited)

         

Three Months Ended

Six Months Ended
June 30, June 30,

(In thousands, except per share data and
percentages)

2018   2017 2018   2017
 
Net income attributable to SLM Corporation common stock $ 105,912 $ 66,643 $ 228,769 $ 156,011
Diluted earnings per common share attributable to SLM Corporation $ 0.24 $ 0.15 $ 0.52 $ 0.35
Weighted average shares used to compute diluted earnings per share 439,445 438,115 439,212 438,424
Return on assets 1.9 % 1.5 % 2.1 % 1.7 %
Non-GAAP operating efficiency ratio(1) 38.3 % 39.7 % 37.4 % 38.2 %
 
Other Operating Statistics
Ending Private Education Loans, net $ 18,488,240 $ 15,523,338 $ 18,488,240 $ 15,523,338
Ending FFELP Loans, net 886,780   968,398   886,780   968,398  
Ending total education loans, net $ 19,375,020   $ 16,491,736   $ 19,375,020   $ 16,491,736  
 
Ending Personal Loans, net $ 933,561 $ 68,690 $ 933,561 $ 68,690
 
Average education loans $ 19,662,863 $ 16,668,281 $ 19,621,379 $ 16,561,077
Average Personal Loans $ 815,356 $ 60,910 $ 672,792 $ 48,464

 

_________

(1) We calculate and report our non-GAAP operating efficiency ratio
as the ratio of (a) the total non-interest expense numerator to (b)
the net revenue denominator (which consists of the sum of net
interest income, before provision for credit losses, and
non-interest income, excluding any gains and losses on sales of
loans and securities, net and the net impact of derivative
accounting as defined in the "‘Core Earnings' to GAAP
Reconciliation" table in this Press Release). This ratio provides
useful information to investors because it is a measure used by our
management team to monitor our effectiveness in managing operating
expenses. Other companies may use similarly titled non-GAAP
financial measures that are calculated differently from our ratio.
Accordingly, our non-GAAP operating efficiency ratio may not be
comparable to similar measures used by other companies.
 
 

SLM CORPORATION

 

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 
      June 30,     December 31,
2018 2017
Assets
Cash and cash equivalents $ 2,043,789 $ 1,534,339
Available-for-sale investments at fair value (cost of $185,749 and
$247,607, respectively)
178,145 244,088
Loans held for investment (net of allowance for losses of $295,277
and $251,475, respectively)
20,308,581 18,567,641
Restricted cash 114,659 101,836
Other interest-earning assets 28,385 21,586
Accrued interest receivable 1,161,161 967,482
Premises and equipment, net 101,335 89,748
Tax indemnification receivable 153,470 168,011
Other assets 99,651   84,853  
Total assets $ 24,189,176   $ 21,779,584  
 
Liabilities
Deposits $ 16,745,957 $ 15,505,383
Long-term borrowings 4,217,119 3,275,270
Income taxes payable, net 79,772 102,285
Upromise member accounts 230,228 243,080
Other liabilities 187,398   179,310  
Total liabilities 21,460,474   19,305,328  
 
Commitments and contingencies
 
Equity
Preferred stock, par value $0.20 per share, 20 million shares
authorized:
Series B: 4 million and 4 million shares issued, respectively, at
stated value of $100 per share
400,000 400,000
Common stock, par value $0.20 per share, 1.125 billion shares
authorized: 449.4 million and 443.5 million shares issued,
respectively
89,882 88,693
Additional paid-in capital 1,260,201 1,222,277
Accumulated other comprehensive income (net of tax expense of $7,448
and $1,696, respectively)
23,216 2,748
Retained earnings 1,096,359   868,182  
Total SLM Corporation stockholders' equity before treasury stock 2,869,658 2,581,900
Less: Common stock held in treasury at cost: 14.0 million and 11.1
million shares, respectively
(140,956 ) (107,644 )
Total equity 2,728,702   2,474,256  
Total liabilities and equity $ 24,189,176   $ 21,779,584  
 
 

SLM CORPORATION

 

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

 
      Three Months Ended     Six Months Ended
June 30, June 30,
2018   2017 2018   2017
Interest income:
Loans $ 454,045 $ 336,739 $ 884,093 $ 661,496
Investments 1,694 2,201 3,641 4,344
Cash and cash equivalents 6,572   3,155   11,808   5,743  
Total interest income 462,311 342,095 899,542 671,583

Interest expense:

Deposits 90,605 50,730 168,061 95,583
Interest expense on short-term borrowings 1,128 1,194 3,521 2,430
Interest expense on long-term borrowings 29,628   20,278   54,396   35,601  
Total interest expense 121,361   72,202   225,978   133,614  
Net interest income 340,950 269,893 673,564 537,969
Less: provisions for credit losses 63,267   50,215   117,198   75,511  
Net interest income after provisions for credit losses 277,683   219,678   556,366   462,458  
Non-interest income:
Gains on sales of loans, net 2,060 2,060
Losses on sales of securities, net (1,549 ) (1,549 )
Losses on derivatives and hedging activities, net (5,268 ) (3,609 ) (1,376 ) (8,987 )
Other income 12,295   10,629   21,937   21,975  
Total non-interest income 7,538   7,020   21,072   12,988  
Non-interest expenses:
Compensation and benefits 60,245 51,007 128,562 106,471
FDIC assessment fees 8,001 6,622 16,797 13,851
Other operating expenses 66,977   53,622   114,738   93,606  
Total operating expenses 135,223 111,251 260,097 213,928
Acquired intangible asset amortization expense 92   117   184   234  
Total non-interest expenses 135,315   111,368   260,281   214,162  
Income before income tax expense 149,906 115,330 317,157 261,284
Income tax expense 40,074   44,713   81,071   95,724  
Net income 109,832 70,617 236,086 165,560
Preferred stock dividends 3,920   3,974   7,317   9,549  
Net income attributable to SLM Corporation common stock $ 105,912   $ 66,643   $ 228,769   $ 156,011  
Basic earnings per common share attributable to SLM Corporation $ 0.24   $ 0.15   $ 0.53   $ 0.36  
Average common shares outstanding 435,187   431,245   434,573   430,572  
Diluted earnings per common share attributable to SLM Corporation $ 0.24   $ 0.15   $ 0.52   $ 0.35  
Average common and common equivalent shares outstanding 439,445   438,115   439,212   438,424  
 
 

"Core Earnings" to GAAP Reconciliation

The following table reflects adjustments associated with our derivative
activities.

      Three Months Ended     Six Months Ended
June 30, June 30,

(Dollars in thousands, except per share
amounts)

2018   2017 2018   2017
 
"Core Earnings" adjustments to GAAP:
GAAP net income attributable to SLM Corporation $ 109,832 $ 70,617 $ 236,086 $ 165,560
Preferred stock dividends 3,920   3,974   7,317   9,549
GAAP net income attributable to SLM Corporation common stock $ 105,912   $ 66,643   $ 228,769   $ 156,011
 
Adjustments:
Net impact of derivative accounting(1) 5,029 3,508 1,247 8,966
Net tax effect(2) 1,222   1,340   303   3,424
Total "Core Earnings" adjustments to GAAP 3,807   2,168   944   5,542
 
"Core Earnings" attributable to SLM Corporation common stock $ 109,719   $ 68,811   $ 229,713   $ 161,553
 
GAAP diluted earnings per common share $ 0.24 $ 0.15 $ 0.52 $ 0.35
Derivative adjustments, net of tax 0.01   0.01     0.02
"Core Earnings" diluted earnings per common share $ 0.25   $ 0.16   $ 0.52   $ 0.37
 
______
(1) Derivative Accounting: "Core Earnings" exclude periodic
unrealized gains and losses caused by the mark-to-market valuations
on derivatives that do not qualify for hedge accounting treatment
under GAAP, as well as the periodic unrealized gains and losses that
are a result of ineffectiveness recognized related to effective
hedges under GAAP (but include current period accruals on the
derivative instruments), net of tax. Under GAAP, for our derivatives
held to maturity, the cumulative net unrealized gain or loss over
the life of the contract will equal $0.
 
(2) "Core Earnings" tax rate is based on the effective tax rate at
the Bank where the derivative instruments are held.
 

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