Sallie?s Collection Unit Falters as Company Feels Pressure

SLM Corp., the largest education lender in the U.S. and commonly known as Sallie Mae, reported late Wednesday a net loss of $104 million in the first quarter of 2008, primarily driven by recent turmoil in the student loan market. In addition, the company’s typically stalwart debt buying and collection operation also saw declines in revenues and earnings.

Reston, Va.-based Sallie Mae (NYSE: SLM) said that the corporate-wide quarterly loss compared favorably to the $1.6 billion it lost in the fourth quarter of 2007. The company earned $116 million in the first quarter of 2007.

The company blamed the recent credit crunch that has now extended to student loans as one of the main drivers of poor performance ("Student Loans Drying Up, Dodd Warns," April 17). “Today’s environment is the most difficult we have seen in our 35-year history of student lending,” said CEO Albert L. Lord in a press release. “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.”

Sallie’s Asset Performance Group (APG), the company’s accounts receivable management division, also reported strained results for the first quarter. The unit reported core earnings revenue of $141.6 million in the quarter, compared to $165.8 million in the fourth quarter of last year and $152.6 million in the first quarter of 2007.

Net income at the APG unit slipped nearly 44 percent to $18 million. The unit is comprised of collection agencies and debt buyers that Sallie has acquired over the past few years including Arrow Financial Services, General Revenue Corp., GRP Financial Services Corp. and Pioneer Credit Recovery. The unit employs some 3,600 people in offices around the world.

Sallie blamed the drop in collection revenue on impairments recorded on purchased debt portfolios. The company recorded an impairment of $20 million in the quarter on mortgages it bought, compared to a $4 million impairment in the first quarter of 2007. APG also recorded a $9 million impairment on non-mortgage portfolios in the quarter, compared to the $2 impairment it took in Q1 2007.

Debt buying activity was down in the first quarter, although still at historically strong levels. In the first three months of 2008, Sallie’s APG unit spent $143 million on non-mortgage face value debt of $1.53 billion, up from the $1.07 billion in debt it bought in Q1 2007, but down from the $2.23 billion it bought in the fourth quarter of 2007. The company sharply scaled back its mortgage buying activity investing only $19 million in the quarter compared to the $239 million it spent on mortgage debt in Q1 2007.

APG’s contingency unit is currently working $10.25 billion in accounts, of which $1.75 billion is non-student loan debt. The total is up from the $9.6 billion it was working in Q1 2007.