Sallie Mae posts 1st-quarter net loss

By Dan Wilchins

NEW YORK (Reuters) - Sallie Mae <SLM.N>, the largest U.S. student loan company, posted a first-quarter net loss on Wednesday and said it cannot continue lending at a profit amid the credit crunch.

On an adjusted basis, the company's results beat analysts' average expectations, and shares edged higher in after-market trading. But Sallie Mae's shares closed nearly 7 percent lower on Wednesday before the results came out.

The $85 billion student loan industry is in turmoil now, and its difficulties threaten to create a full-blown crisis. Legislators are working to fix the situation, and the House of Representatives will vote on Thursday on a bill aiming to fix the market.

Lenders' financing costs have risen amid the credit crisis. Also, student loan laws passed last year cut subsidies to lenders, pushing many to make fewer loans or to leave the business altogether.

Sallie Mae Chief Executive Albert Lord said in a statement, "It has become obvious that we can only meet the enormous student credit demands we are seeing at Sallie Mae if there is a near-term, system-wide liquidity solution."

Many investors fear the slowing economy will result in higher losses on student loans. Wednesday's results showed a roughly 20 percent increase in write-offs of bad loans, looking at loans both on and off the company's balance sheet.

As the largest student lender, Sallie Mae could gain market share as competitors leave, but the company is facing problems of its own. It planned to sell itself to a group led by private equity firms last year, but the deal fell apart as financing the transaction proved difficult. And regulators are probing the company's disclosures before and after executives and directors sold shares.

Sallie Mae, formally known as SLM Corp, posted a first-quarter net loss attributable to common shareholders of $132.8 million, or 28 cents a share, compared with net income of $107 million, or 26 cents a share, in the same quarter last year. Net results were hit by declines in the value of derivatives.

"Core earnings," which exclude changes in the value of derivatives as well restructuring expenses and other one-time items, was 48 cents a share, or 10 cents above analysts' average estimates according to Reuters Estimates.

The company wrote off $119 million of loans on a managed basis, up from $98 million the prior year.

POTENTIAL TO RISE?

Loans that the company kept on its books performed much better than loans that it financed off balance sheet, which may signal that SLM Corp keeps better assets for itself and securitizes weaker assets off its balance sheet, said Blake Howells, director of equity research at Becker Capital Management in Portland, Oregon, which owns Sallie Mae shares.

"That may be why Sallie Mae is having trouble getting private loans securitized," Howells said.

But Howells estimates the company can earn about $1.16 a year on a core basis, meaning it trades at about 10 times its estimated earnings. That multiple could rise closer to 15 times when credit markets normalize, Howells said.

Sallie Mae shares have fallen by about 70 percent since the beginning of July.

The U.S. House of Representatives is looking at a bill that would allow the Department of Education to buy federally guaranteed student loans from lenders unable to package them into bonds. The bill would also allow the department to funnel capital to state agencies that could help provide money to colleges looking to fund student loans. The White House said it backs much of the bill.

Sallie Mae could be well positioned in the student loan market long-term because so many other competitors are scaling back or pulling out. Student Loan Corp, <STU.N>, majority owned by Citigroup Inc <C.N>, said it was suspending lending at certain schools and withdrawing from the Federal Consolidation Loan market. CIT Group Inc <CIT.N> said earlier this month it was no longer making student loans.

(Reporting by Dan Wilchins; editing by Carol Bishopric/Jeffrey Benkoe/Gary Hill)