In order to counter regulatory upheavals, leading student lender SLM Corporation (SLM), popularly known as Sallie Mae, announced its board of directors’ decision to split the company’s present business into 2 parts.
The separated units will operate as standalone publicly traded companies. One of them will be in education loan management business while the other will function as a consumer banking business. Sallie Mae expects the division to be completed within a year.
Both newly formed companies will be initially owned by Sallie Mae’s existing shareholders. Moreover, the current executives managing the unit will be at the helm even after the split.
Following the necessary approvals, the split will be made through a tax-free distribution of common shares to the company’s stockholders.
The education loan management business will consist of Sallie Mae’s federally guaranteed (FFELP) and private education loan portfolios, as well as its servicing and collection activities. Mr. Remondi will continue as the chief executive officer of this business.
The education loan management business’ principal assets are expected to constitute about $118.1 billion in FFELP Loans, $31.6 billion in private education loans and $7.9 billion of additional interest-earning assets.
Moreover, it will also constitute a leading education loan servicing platform that services loans for approximately 10 million federal education loan customers, including 4.8 million customer accounts serviced under the Sallie Mae’s agreement with the U.S. Department of Education. On an aggregate, this company will own approximately 95% of Sallie Mae’s current assets.
The other business shall comprise private education loan origination and servicing operations – including Sallie Mae Bank and the private education loans that the company presently holds – which will operate separately under Sallie Mae. Joseph DePaulo, the current executive vice-president, banking and finance, will lead this business as chief executive officer.
The consumer banking business is expected to include approximately $9.9 billion of total assets, including mainly private education loans and related origination and servicing platforms, cash and other investments as well as Sallie Mae Upromise Rewards program.
The decision to separate Sallie Mae’s operations comes after the suspension of new federal student loan origination, in compliance with the legislation passed by both the House and the Senate in 2012. This legislation effectively removed federal subsidy to the company.
Further, defaulting student loans, in the face of persistent unemployment and a sluggish economy, worsened the situation. We believe that Sallie Mae’s decision to split the 2 businesses was in order to separate its flourishing private student loan business from its shrinking government-backed loan servicing counterpart.
The newly created companies will be able to navigate the challenging operating environment because of Sallie Mae’s leading position in the student lending market, diversifying efforts and steadily increasing private student loan originations. Moreover, by creating a separate bank, the company can look forward to finance new streams of loans.
Sallie Mae currently carries a Zacks Rank #3 (Hold). Better performing stocks in the same sector include Meta Financial Group, Inc. (CASH), WSFS Financial Corp. (WSFS) and Provident Financial Holdings, Inc. (PROV), all of which carry a Zacks Rank #1 (Strong Buy).
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