Sallie Mae to Close Debt Purchasing Business, Focus on Contingency Work in ARM

Student loan giant SLM Corporation (NYSE: SLM), more commonly called Sallie Mae, late Wednesday reported disappointing results for the second quarter of 2008, including a net loss of $10 million in the company’s accounts receivable management unit. CEO and Chairman Albert Lord also announced the company would be exiting the debt buying business to concentrate on contingency collection work for the ARM division.

Sallie Mae said that for the second quarter, the company saw corporate-wide net income of $156 million, or $0.27 per share, compared to $189 million in earnings in the second quarter of 2007 on a “core earnings” basis. Analysts had expected core earnings of around $0.40 per share for the second quarter of 2008.

Contributing to the decline in income was a loss of $10 million in the company’s ARM unit, which it calls the Asset Performance Group (APG). The unit had reported net core earnings of $18 million in the first quarter of 2008 and $33 million in the second quarter of 2007. Revenue in the APG unit declined 22.5 percent in Q2 to $110.1 million.

The APG division includes Sallie Mae’s contingency collection operations and debt buying business.

In opening remarks on the company’s investor conference call Thursday morning, Sallie Mae Vice Chairman and CEO Albert Lord said that the company would be exiting the debt purchasing business. “We’ve determined that buying distressed assets is not a core part of our business,” said Lord. He did, however, note that the contingency collection segment of the APG unit was core to the business and would remain a focus going forward.

Lord said that the operating results of the debt buying unit – principally comprised of Arrow Financial Services, which Sallie acquired in 2004 – were “unpredictable,” where the results of the contingency unit were reliably consistent. Lord said that the company is exploring all opportunities, from selling the unit outright, selling off the assets, or winding down operations.

To underscore the point, Vice Chairman and CFO John Remondi noted in the call that the contingency unit saw net income of about $16 million in the quarter while the debt buying unit lost $26 million. This compares to the $4 million the debt purchasing unit lost in the first quarter of 2008 and $7 million in net income in the second quarter of 2007. Meanwhile, the contingency business has been steadier, with net income of $22 million in the first quarter of 2008 and $16 million in earnings in Q2 2007.

The contingency collection unit is anchored by acquired collection agencies Pioneer Credit Recovery and General Revenue Corp. Sallie Mae said that the contingency business was working on $10.4 billion in inventory, $8.7 billion of which was student loan debt and $1.7 billion of which was “other” debt.

Remondi called the results for the debt purchasing business “lumpy,” but said that non-mortgage debt buying was still “an attractive business model.”

Revenues for the purchased debt division have been in decline for some time. In the second quarter, the unit reported revenue of $26.4 million, less than half of the $57.2 million reported in the first quarter and slightly more than one-third of the $77 million in revenue for the second quarter of 2007.

But Sallie leaders noted that the largest losses in its purchased debt unit were from mortgages that the company bought. Losses attributable to mortgage and property debt were $26 million in the second quarter, compared to a break even report from the non-mortgage portfolios.

As such, the company said it purchased no mortgage debt in the second quarter of 2008, while it spent $125 million on $1.35 billion of face value non-mortgage debt in the quarter. The total was down from the $1.5 billion in face value debt purchased in the first quarter, but up from the $1 billion bought in Q2 2007.

The closure of the debt buying unit comes only a few months after Sallie announced major expansions for the Arrow business, including a focus on growing the Arrow Global unit, APG’s European debt buying and collection arm (“Sallie Mae to Grow ARM Unit Overseas as Promotions are Announced,” Feb. 15).

Calls to Arrow Financial and Sallie Mae were not immediately returned Thursday.