Rising Charge-Offs Eat into Earnings at Sallie Mae

RESTON, Va. – Student loan giant Sallie Mae, in the process of being taken over for $25 billion, reported yesterday that continuing fluctuations in its huge hedging portfolio pushed first quarter earnings down 23% to $116 million, or 26 cents a share. Sallie Mae, which is regularly whip-sawed by the marking to market of its financial derivatives, reported a $357 million loss on its hedging in the quarter, up from $87 million of losses in last year’s first quarter. At the same time, servicing and securitization from its managing of the secondary market for student loans more than doubled to $252 million for the quarter, up from $99 million last year. Core earnings, the way the company likes to explain its operations, declined by 13% because of an almost tripling in loan loss reserved to $199 million. The charge-off ratio for the nation’s biggest student lender rose to 3.4% for the quarter, from just 1.3% in the same period last year. Sallie Mae, which has agreed to be acquired in a blockbuster $25 billion deal, reported its student loan portfolio grew 18% since last year’s first quarter to $150 billion, and the company originated $4.8 billion through its own brands in the quarter, a 35% increase compared to last year. The acquirers of the once-government sponsored enterprise are banking giants JP Morgan Chase and Bank of America, two other leading players in the student loan market, and private equity funds J.C. Flowers and Friedman Fleischer & Lowe for $60 a share.