By Tanya Agrawal
(Reuters) - Sallie Mae Corp , the largest U.S. student loan provider, said it would split into two publicly traded companies as it seeks better valuation for its private student lending business.
The company also named Chief Operating Officer John Remondi as its new chief executive, replacing Albert Lord, who has had two separate stints with the company as CEO.
The company said it plans to separate its consumer banking business, which will continue making new loans to students and take deposits, from its education loan management business, which will service existing loans including those backed by the government.
The Federal Family Education Loans Program (FFELP), under which private lenders made student loans backed by the government, ended in 2010, pushing companies such as Sallie Mae to grow their private student lending businesses.
"The split makes sense as the company wasn't growing since their biggest business was running-off. It's like separating the good from the bad," said Sanjay Sakhrani, an analyst with Keefe, Bruyette & Woods.
Sallie Mae, which does business under the formal name of SLM Corp, said the split would be undertaken through a tax-free distribution of common stock to its shareholders.
The education loan management business will own about 95 percent of Sallie Mae's existing assets, including $118.1 billion in FFELP loans, $31.6 billion in private education loans, $7.9 billion of other interest-earning assets.
The consumer banking business, which will be known as Sallie Mae Bank, is expected to include about $9.9 billion of assets, comprising primarily private education loans and related origination and servicing platforms.
Sallie Mae Bank will be headed by Joseph DePaulo, executive vice president of banking and finance.
The splitting of Sallie Mae, which was created in 1972 as a quasi-governmental company, is expected to be completed in the next 12 months.
"I do regret not completing the spin or achieving more of the intrinsic value in the share price before my exit," outgoing CEO Lord said in a statement.
Lord, who was expected to retire in December 2013, began his career with Sallie Mae in 1981 as a controller. During his tenure as chairman in 2007, a $25 billion leveraged buyout deal to take the company private fell apart.
First-quarter net income at Sallie Mae, which has a market capitalization of about $10 billion, more than doubled as the lender benefited from a smaller loss in its derivatives and hedging activities and posted a gain from the sale of a loan securitization trust.
TRILLION DOLLAR DEBT
Student debt nearly tripled over the last eight years, with total amount owed by Americans approaching $1 trillion, according to a study by the Federal Reserve Bank of New York.
It has become the only kind of household debt that continued to rise through the Great Recession and has the second largest balance after mortgage debt, the study said.
Delinquency rates also have spiked as the lingering effects of the recession make it difficult for recent graduates to find jobs. About 17 percent of borrowers are at least 90 days delinquent on loan payments, the study said.
Student debt affects borrowers' credit and may limit their ability to start small businesses, save for retirement, or invest in new homes or cars.
The Consumer Financial Protection Bureau is seeking to regulate non-bank student loan servicing companies as more Americans struggle to meet hefty monthly repayments.
Sallie Mae shares, which have gained about a third in value this year, were up 4.4 percent at $23.98 in afternoon trade. The stock rose as much as 14 percent earlier in the day.
(Reporting by Anil D'Silva and Avik Das in Bangalore; Editing by Roshni Menon and Saumyadeb Chakrabarty)