The analysis on the size of the consumer lending industry has been updated.
Industry earnings remained strong in the second quarter of 2007, despite an operating environment that was decidedly less favorable than in earlier quarters. A flat yield curve, rising levels of troubled loans, and a weak housing market all made the task of improving earnings more difficult. Insured commercial banks and savings institutions reported $36.7 billion in net income for the quarter, a decline of $1.3 billion (3.4 percent) from the second quarter of 2006, but $772 million (2.1 percent) more than they earned in the first quarter of 2007. The decline in earnings compared to a year ago was caused by higher provisions for loan losses, particularly at larger institutions, and by increased noninterest expenses.
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Net charge-offs totaled $9.2 billion in the second quarter, the highest quarterly total since the fourth quarter of 2005, and $3.1 billion (51.2 percent) more than in the second quarter of 2006. This was the second consecutive quarter that net charge-offs have had a year-over-year increase. The loan categories with the largest increases in net charge-offs included consumer loans other than credit cards (up $757 million, or 60.9 percent), commercial and industrial (C&I) loans (up $577 million, or 71.4 percent), residential mortgage loans (up $422 million, or 144.3 percent), and credit card loans (up $393 million, or 12.1 percent). All of the major loan categories posted both increased net charge-offs and higher net charge-off rates.
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The amount of loans and leases that were noncurrent (loans 90 days or more past due or in nonaccrual status) grew by $6.4 billion (10.6 percent) during the quarter. This is the largest quarterly increase in noncurrent loans since the fourth quarter of 1990, and marks the fifth consecutive quarter that the industry’s inventory of noncurrent loans has grown. Almost half of the increase (48.1 percent) consisted of residential mortgage loans.
Sallie Mae, a student loan company that last week agreed to sell itself to private equity firms and banks, said Tuesday that first-quarter earnings fell, hurt by wider losses on derivatives and hedging.
Sallie Mae said quarterly earnings fell to $116 million, or 26 cents per share, from $152 million, or 34 cents, a year earlier.
Even ignoring items like changes in derivatives’ value, Sallie Mae earnings fell to $251 million, or 57 cents a share, compared to $287 million or 65 cents, a year earlier.
On that basis, analysts, on average, had expected quarterly earnings of 75 cents.
Reuters via CNNMoney
Student loan provider Sallie Mae has agreed to be acquired in a complex transaction by two private equity firms and two investment banks for $25 billion, according to the Wall Street Journal.
JC Flowers & Co. and Friedman Fleischer & Lowe will share a 50.2% stake in the company while J.P. Morgan and Bank of America will each hold 24.9%. The group will pay $60 per share, a near-50% premium to the shares’ Thursday close prior to news that a deal might take place.
Sallie Mae, the largest U.S. student loan company, might be in talks for a private equity buyout worth more than $20 billion.
One potential bidder for Sallie Mae is the Blackstone Group, according to a New York Times report Friday. Other potential bidders were not named but are thought to include a financial services firm.
SLM Corp., better known as Sallie Mae, agreed to pay $2 million to settle an investigation into financial arrangements it was accused of making with U.S. colleges and universities.
The largest U.S. student loan company also agreed to change some of its business practices, the attorney general’s office said. The $2 million will be paid into a fund to help educate college-bound students.
From the Washington Post
The private student loan industry and its leading company, Reston-based Sallie Mae, are battling against congressional Democrats and President Bush, both of whom would like to pare back the lenders’ sizable federal benefits.
The private student loan industry in general, and Sallie Mae in particular, has never been popular with Democrats. For years, Democratic policymakers have said they would prefer to take for-profit entities out of the market and encourage student lending directly from the federal government.
But this year, in a surprise, Bush broke with the GOP’s usually unwavering support for private lending to students and sided with the Democrats. His budget proposal to Congress in February recommended reducing federal subsidies to private lenders, and increasing some of their fees, for a total savings of $19 billion over five years. Disclosure of the plan on Feb. 5 caused Sallie Mae’s stock to tumble about 9 percent to its lowest closing price in more than two years.
An investigation into student lending practices found that lenders paid kickbacks to colleges and their employees for steering business their way, one of many practices that may violate state laws.
Lenders provided all-expenses-paid trips for financial aid officers and put school officials on their boards to curry favor with schools across the United States, Cuomo said at a Manhattan press conference. The probe showed that many schools, as trusted middlemen, too often recommend lenders that don’t necessarily offer the best deal to students.
New York Attorney General Andrew Cuomo on Thursday will disclose questionable practices uncovered during a nationwide investigation into the college loan industry, his office said.
Last month Cuomo, who succeeded Eliot Spitzer as attorney general on Jan. 1, said his office had expanded a probe of whether lenders use payments and perks to encourage colleges to steer student borrowers their way.