Sallie Mae ARM Unit Posts Loss, Sells UK Debt Buying Operation

Student loan giant Sallie Mae last week reported a significant decline in earnings for the third quarter of 2008 while the company reported a loss in its accounts receivable management unit as it shuts down its debt buying operations. Sallie also said that it has sold its international debt purchasing unit, Arrow Global.

Sallie Mae’s ARM unit, called the Asset Performance Group (APG), reported a net loss of $123.9 million in the third quarter, compared to net income of $17.3 million in the third quarter of 2007. The loss was driven by massive impairment charges — $147 million on the group’s mortgage portfolio and $39 million on the non-mortgage portfolio – and charges related to restructuring the unit.

Sallie Mae announced in July that it would be exiting the debt purchasing market to concentrate its ARM business on contingency collections (“Sallie Mae to Close Debt Purchasing Business, Focus on Contingency Work in ARM,” July 24). In winding down the debt buying business, Sallie said it would be exploring strategic alternatives for the unit, comprised principally of Arrow Financial, which it acquired in 2004.

Tuesday, a Sallie Mae spokesperson told insideARM that “after carefully evaluating bids from potential buyers and evaluating the financing environment, we have concluded that a sale of [U.S. based] Arrow Financial is not in our best interest at this time.” The company instead recorded restructuring charges of $4.2 million related to the ARM unit in the third quarter.

But company officials indicated on a conference call last week that they had found a buyer for Arrow’s international debt purchasing operations, Arrow Global. Although no details were provided, the company said the deal is expected to close in November. Sallie Mae also noted that it recorded a $56 million loss on the business due to the expected final sale price.

As the debt portfolio purchasing unit is being shut off, Sallie Mae’s contingency collection arm is performing well. The contingency business, which includes Pioneer Credit Recovery and other acquired debt collection agencies, posted “core earnings” net income of $26 million in the third quarter of 2008, a 62.5 percent increase from income in the year-ago period. Revenue in the unit was up 17.5 percent in the quarter to $87 million.

The company’s contingency collection unit counted an inventory of accounts totaling $11.2 billion at the end of the third quarter, up from $10.4 billion in the second quarter and $9.9 billion in the third quarter of 2007. Of the total for the most recent quarter, $1.7 billion was classified as “Other” inventory, with the rest classified as student loan accounts.

Overall, Sallie Mae reported net income of $117 million, or $.19 diluted earnings per share in the third quarter of 2008, compared to net income totaled $259 million, or $.59 diluted earnings per share in the third quarter of 2007.