SLM CORP
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-K
| (Mark One) | ||
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2009 or | ||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to |
Commission file numbers
001-13251
SLM Corporation
(Exact Name of Registrant as
Specified in Its Charter)
| Delaware | 52-2013874 | |
|
(State of Other Jurisdiction
of
Incorporation or Organization) |
(I.R.S. Employer
Identification No.) |
|
| 12061 Bluemont Way, Reston, Virginia | 20190 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(703) 810-3000
(Registrant’s Telephone Number, Including Area Code)
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the
Act
Common Stock, par value $.20 per share.
Name of Exchange on which Listed:
New York Stock Exchange
6.97% Cumulative Redeemable Preferred Stock, Series A, par value $.20 per share
Floating Rate Non-Cumulative Preferred Stock, Series B, par value $.20 per share
Name of Exchange on which Listed:
New York Stock Exchange
Medium Term Notes, Series A, CPI-Linked Notes due 2017
Medium Term Notes, Series A, CPI-Linked Notes due 2018
6% Senior Notes due December 15, 2043
Name of Exchange on which Listed:
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Common Stock, par value $.20 per share.
Name of Exchange on which Listed:
New York Stock Exchange
6.97% Cumulative Redeemable Preferred Stock, Series A, par value $.20 per share
Floating Rate Non-Cumulative Preferred Stock, Series B, par value $.20 per share
Name of Exchange on which Listed:
New York Stock Exchange
Medium Term Notes, Series A, CPI-Linked Notes due 2017
Medium Term Notes, Series A, CPI-Linked Notes due 2018
6% Senior Notes due December 15, 2043
Name of Exchange on which Listed:
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
þ
No
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes
o
No
þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes
þ
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
|
Large accelerated filer
þ
|
Accelerated filer o |
Non-accelerated filer
o
(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
o
No
þ
The aggregate market value of voting stock held by
non-affiliates of the registrant as of June 30, 2009 was
$4.8 billion (based on closing sale price of $10.27 per
share as reported for the New York Stock Exchange —
Composite Transactions).
As of January 31, 2010, there were 484,912,370 shares
of voting common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the
registrant’s Annual Meeting of Shareholders scheduled to be
held May 13, 2010 are incorporated by reference into
Part III of this Report.
FORWARD-LOOKING
AND CAUTIONARY STATEMENTS
This report contains forward-looking statements and information
based on management’s current expectations as of the date
of this document. Statements that are not historical facts,
including statements about our beliefs or expectations and
statements that assume or are dependent upon future events, are
forward-looking statements. Forward-looking statements are
subject to risks, uncertainties, assumptions and other factors
that may cause actual results to be materially different from
those reflected in such forward-looking statements. These
factors include, among others, increases in financing costs;
limits on liquidity; any adverse outcomes in any significant
litigation to which we are a party; our derivative
counterparties terminating their positions with the Company if
permitted by their contracts and the Company substantially
incurring additional costs to replace any terminated positions;
and changes in the terms of student loans and the educational
credit marketplace (including changes resulting from new laws,
such as any laws enacted to implement the Obama
Administration’s current budget proposals as they relate to
the Federal Family Education Loan Program (“FFELP”)
and from the implementation of applicable laws and regulations)
which, among other things, may change the volume, average term
and yields on student loans under the FFELP, may result in loans
being originated or refinanced under non-FFELP programs, or may
affect the terms upon which banks and others agree to sell FFELP
loans to the Company. The Company could be affected by: changes
in or the termination of various liquidity programs implemented
by the federal government; changes in the demand for educational
financing or in financing preferences of lenders, educational
institutions, students and their families; changes in the
composition of our Managed FFELP and Private Education Loan
portfolios; changes in the general interest rate environment,
including the rate relationships among relevant money-market
instruments, and in the securitization markets, which may
increase the costs or limit the availability of financings
necessary to initiate, purchase or carry education loans;
changes in projections of losses from loan defaults; changes in
general economic conditions; changes in prepayment rates and
credit spreads; changes in the demand for debt management
services; and new laws or changes in existing laws. The
preparation of our consolidated financial statements also
requires management to make certain estimates and assumptions
including estimates and assumptions about future events. These
estimates or assumptions may prove to be incorrect. All
forward-looking statements contained in this report are
qualified by these cautionary statements and are made only as of
the date of this document. The Company does not undertake any
obligation to update or revise these forward-looking statements
to conform the statement to actual results or changes in the
Company’s expectations.
Definitions for capitalized terms used in this document can be
found in the “Glossary” at the end of this document.
1
| Item 1. | Business |
INTRODUCTION
TO SLM CORPORATION
SLM Corporation, more commonly known as Sallie Mae, is the
nation’s leading saving, planning and paying for education
company. SLM Corporation is a holding company that operates
through a number of subsidiaries. References in this Annual
Report to the “Company” refer to SLM Corporation and
its subsidiaries. The Company was formed in 1972 as the Student
Loan Marketing Association, a federally chartered government
sponsored enterprise (“GSE”), with the goal of
furthering access to higher education by providing liquidity to
the student loan marketplace. On December 29, 2004, we
completed the privatization process that began in 1997 and
resulted in the wind-down of the GSE.
Our primary business is to originate, service and collect loans
made to students and/or their parents to finance the cost of
their education. We provide funding, delivery and servicing
support for education loans in the United States through our
participation in the Federal Family Education Loan Program
(“FFELP”), as a servicer of loans for the Department
of Education (“ED”), and through our non-federally
guaranteed Private Education Loan programs.
We have used internal growth and strategic acquisitions to
attain our leadership position in the education finance market.
The core of our marketing strategy is to generate student loan
originations by promoting our brands on campus through the
financial aid office and through direct marketing to students
and their parents. These sales and marketing efforts are
supported by the largest and most diversified servicing
capabilities in the industry.
In addition to the net interest income generated by our lending
activities, we earn fee income from a number of services
including student loan and guarantee servicing, loan default
aversion and defaulted loan collections, and for providing
processing capabilities and information technology to
educational institutions as well as 529 college savings plan
program management, transfer and servicing agent services, and
administrative services through Upromise Investments, Inc.
(“UII”) and Upromise Investment Advisors, LLC
(“UIA”). We also operate a consumer savings network
through Upromise, Inc. (“Upromise”). References in
this Annual Report to “Upromise” refer to Upromise and
its subsidiaries, UII and UIA.
At December 31, 2009, we had approximately eight thousand
employees.
Recent
Developments and Expected Future Trends
On February 26, 2009, the Obama Administration (the
“Administration”) issued their 2010 fiscal year budget
request to Congress which included provisions that called for
the elimination of the FFELP program and which would require all
new federal loans to be made through the Direct Student Loan
Program (“DSLP”). On September 17, 2009 the House
of Representatives passed H.R. 3221, the Student Aid and Fiscal
Responsibility act (“SAFRA”), which was consistent
with the Administration’s 2010 budget request to Congress.
If it became law SAFRA would eliminate the FFELP and require
that, after July 1, 2010, all new federal loans be made
through the DSLP. The Administration’s 2011 fiscal year
budget continued these requests.
The Senate has not yet introduced legislation on this issue. The
Company, together with other members of the student loan
community, has been working with members of Congress to enhance
SAFRA to allow students and schools to continue to choose their
loan originator and to require servicers to share in the risk of
loan default. This proposal is referred to as the
“Community Proposal” because it has the widespread
support of the student lending community, which includes
lenders, Guarantors, financial aid advisors and others. We
believe that maintaining competition in the student loan
programs and requiring participants to assume a portion of the
risk inherent in the program, two of the major tenets of the
Community Proposal, would result in a more efficient and cost
effective program that better serves students, schools, ED and
taxpayers.
2
The Administration’s 2010 fiscal year budget also called
for the hiring of additional loan servicers to help ease the
transition to a full DSLP and to handle the significant increase
in future volume. On June 17, 2009, we announced that we
were selected by ED as one of four private sector servicers
awarded a servicing contract (the “ED Servicing
Contract”) to service loans we sell to ED plus a portion of
loans others sell to ED, existing DSLP loans and loans
originated in the future. We began servicing loans under this
contract in the third quarter of 2009.
Under both SAFRA and the Community Proposal, the Company would
no longer originate, fund or hold new FFELP loans to earn a net
interest margin. However, the Company would continue to earn net
interest income from our portfolio of existing FFELP loans as
the portfolio runs off over a period of time. The Company would
become a fee for service provider in the federal loan business.
We will continue to originate, fund and hold Private Education
Loans.
In addition, the legislation would eliminate the need for the
Guarantors and the services we provide to the sector. The
Company earns a fee when it processes a loan guarantee for a
Guarantor client for the life of the loan for servicing the
Guarantor’s portfolio of loans. If either SAFRA or the
Community Proposal become laws, we would no longer earn the
origination fee paid by Guarantors. The portfolio that generates
the maintenance fee would go into run-off and we would continue
to earn the maintenance fee and perform the associated default
aversion and prevention work for the remaining life of the
loans. In 2009, we earned guarantor servicing fees of
$136 million, which was approximately evenly split between
origination and maintenance fees.
Our student loan contingent collection business would also be
impacted by the pending legislation. We currently have 12
Guarantors and ED as clients. We earn revenue from Guarantors
for collecting defaulted loans as well as for managing their
portfolios of defaulted loans. Revenue from Guarantor clients is
approximately 66 percent of our contingent collection
revenue. We anticipate that revenue from Guarantors will be
relatively stable through 2012 and then begin to steadily
decline if either SAFRA or the Community Proposal are adopted.
The Company, through its subsidiary Pioneer Credit, has been
collecting defaulted student loans on behalf of ED since 1997.
The contract is merit based and accounts are awarded on
collection performance. Pioneer Credit has consistently ranked
number one or two among the ED collectors. In anticipation of a
surge in volume as more loans switch to DSLP, ED recently added
five new collection companies bringing the total to 22. This led
to a decline in account placements with Pioneer Credit, which we
believe is temporary. The Company expects that as the DSLP grows
the decline in revenue we would experience from our Guarantor
clients would be partially offset by increased revenue under the
ED contract in future years.
If SAFRA becomes law, a significant restructuring which would
result in significant job losses throughout the Company and we
will be required to adapt to our new business environment.
The Company is exploring available liquidity to fund FFELP loans
for our student customers if legislation is not passed and The
Ensuring Continued Access to Student Loans Act of 2008
(“ECASLA”) is not extended in time for the academic
year (“AY”) 2010 — 2011. We believe that
adequate liquidity will be available to fund the anticipated
number of loans.
Student
Lending Market
Students and their families use multiple sources of funding to
pay for their college education, including savings, current
income, grants, scholarships, and federally guaranteed and
private education loans. Over the last five years, these sources
of funding for higher education have been relatively stable with
a general trend towards an increased use of student loans. In
the last academic year, 39 percent of students used
federally guaranteed student loans or private education loans to
finance their education. Due to an increase in federal loan
limits that took effect in 2007 and 2008, the Company has seen a
substantial increase in borrowing from federal loan programs in
recent years.
3
Federally
Guaranteed Student Lending Programs
There are currently two loan delivery programs that provide
federal government guaranteed student loans: the FFELP and the
DSLP. FFELP loans are provided by the private sector. DSLP loans
are provided to borrowers directly by ED on terms similar to
student loans provided under the FFELP. We participate in and
are the largest lender under the FFELP. The Company is
participating in ED’s Participation and Put program, which
were established under the authority provided in ECASLA. This
program is scheduled to terminate on June 30, 2010. Under
this program, ED provides funding to lenders for up to one year
at a cost of commercial paper (“CP”) plus
50 basis points. The lender has the option to sell the
loans to ED within 90 days of the end of the AY for a fee
of $75 per loan plus the principal amount of and accrued
interest on the loan plus the one percent origination fee for
which we are reimbursed. We are also a contractor to service
loans sold to ED and DSLP loans.
For the federal fiscal year (“FFY”) ended
September 30, 2009 (“FFY 2009”), ED estimated
that the market share of FFELP loans was 69 percent, down
from 76 percent in FFY 2008. (See “LENDING BUSINESS
SEGMENT — Competition.”) Total FFELP and DSLP
volume for FFY 2009 grew by 28 percent, with the FFELP
portion growing 17 percent and the DSLP portion growing
63 percent.
The Higher Education Act (the “HEA”) regulates every
aspect of the federally guaranteed student loan program,
including communications with borrowers, loan originations and
default aversion requirements. Failure to service a student loan
properly could jeopardize the guarantee on federal student
loans. This guarantee generally covers 98 and 97 percent of
the student loan’s principal and accrued interest for loans
disbursed before and after July 1, 2006, respectively. In
the case of death, disability or bankruptcy of the borrower, the
guarantee covers 100 percent of the loan’s principal
and accrued interest. The guarantee on our existing loan
portfolio would not be impacted by pending legislation.
FFELP loans are guaranteed by state agencies or non-profit
companies designated as Guarantors, with ED providing
reinsurance to the Guarantor. Guarantors are responsible for
performing certain functions necessary to ensure the
program’s soundness and accountability. These functions
include reviewing loan application data to detect and prevent
fraud and abuse and to assist lenders in preventing default by
providing counseling to borrowers. Generally, the Guarantor is
responsible for ensuring that loans are serviced in compliance
with the requirements of the HEA. When a borrower defaults on a
FFELP loan, we submit a claim to the Guarantor who provides
reimbursements of principal and accrued interest subject to the
Risk Sharing (See APPENDIX A, “FEDERAL FAMILY
EDUCATION LOAN PROGRAM,” to this document for a description
of the role of Guarantors.)
Private
Education Loan Products
In addition to federal loan programs, which have statutory
limits on annual and total borrowing, we offer Private Education
Loan programs to bridge the gap between the cost of education
and a student’s resources. Historically, the majority of
our Private Education Loans were made in conjunction with a
FFELP Stafford Loan and are marketed to schools through the same
marketing channels and by the same sales force as FFELP loans.
However, we also originate Private Education Loans at DSLP
schools. We expect no interruption in our presence in the school
channel if SAFRA were to pass. As a result of the credit market
dislocation discussed above, a large number of lenders have
exited the Private Education Loan business and only a few of the
country’s largest banks continue to offer the product.
Drivers
of Growth in the Student Loan Industry
Growth in our Managed student loan portfolio and our servicing
and collection businesses is driven by the growth in the overall
market for student loans, as well as by our own market share
gains. Rising enrollment and college costs and increases in
borrowing limits have resulted in the size of the federally
insured student loan market more than tripling over the last
10 years. Federally insured student loan originations grew
from $30 billion in FFY 1999 to $96 billion in FFY
2009.
4
According to the College Board, tuition and fees at four-year
public institutions and four-year private institutions have
increased 88 percent and 66 percent, respectively, in
constant, inflation-adjusted dollars, since AY
1999-2000.
Under the FFELP, there are limits to the amount students can
borrow each academic year. The first loan limit increases since
1992 were implemented July 1, 2007. In response to the
credit crisis, Congress significantly increased loan limits
again in 2008. As a result, students rely more on federal loans
to fund their tuition needs. Both federal and private loans as a
percentage of total student aid were 49 percent of total
student aid in AY
1998-1999
and 53 percent in AY
2008-2009.
Private Education Loans accounted for 12 percent of total
student loans — both federally guaranteed and Private
Education Loans — in AY
2008-2009,
compared to 8 percent in AY
1998-1999.
The National Center for Education Statistics predicts that the
college-age population will increase approximately
10 percent from 2009 to 2018. Demand for education credit
is expected to increase due to this population demographic,
first-time college enrollments of older students and continuing
interest in adult education.
The following charts show the historical and projected
enrollment and average tuition and fee growth for four-year
public and private colleges and universities.
Historical
and Projected Enrollment
(in millions)
(in millions)
Source: National Center for
Education Statistics
Note: Total enrollment
in all degree-granting institutions; middle alternative
projections for 2006 onward.
Cost of
Attendance
(1)
Cumulative % Increase from AY 1998-1999
Cumulative % Increase from AY 1998-1999
Source: The College Board
| (1) |
Cost of attendance is in current
dollars and includes
tuition, fees and on-campus room and board. |
5
BUSINESS
SEGMENTS
We provide credit products and related services to the higher
education and consumer credit communities and others through two
primary business segments: our Lending business segment and our
Asset Performance Group (“APG”) business segment. In
addition, within our Corporate and Other business segment, we
provide a number of products and services that are managed
within smaller operating segments, the most prominent being our
Guarantor Servicing and Loan Servicing businesses. As discussed
above, some of our businesses are expected to go into run-off as
a result of pending legislation. Each of these segments is
summarized below. The accounting treatment for the segments is
explained in “MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.”
LENDING
BUSINESS SEGMENT
In the Lending business segment, we originate and acquire both
federally guaranteed student loans, and Private Education Loans,
which are not federally guaranteed. We manage the largest
portfolio of FFELP and Private Education Loans in the student
loan industry, and have 10 million student and parent
customers through our ownership and management of
$176.4 billion in Managed student loans as of
December 31, 2009, of which $141.4 billion or
80 percent are federally insured. We serve over
6,000 clients, including educational and financial
institutions and non-profit state agencies. We are the largest
servicer and collector of student loans, servicing
$194.2 billion in assets, including $26.3 billion for
third parties, of which $19.2 billion is serviced for ED as
of December 31, 2009.
Sallie
Mae’s Lending Business
Our primary marketing
point-of-contact
is the school’s financial aid office. We deliver flexible
and cost-effective products to the school and its students. The
focus of our sales force is to market Sallie Mae’s suite of
education finance products to colleges. These include FFELP and
Private Education Loans and through our Web-based loan
origination and servicing platform
OpenNet
®
.
As a result of the changes taking place in the student loan
marketplace, we are broadening our marketing activities to
include Direct to Consumer initiatives and referral lending
relationships. We also intend to drive loan volume through our
Planning, Paying and Saving for college activities.
In 2009, we originated $24.9 billion in student loans.
FFELP originations for the year ended December 31, 2009
totaled $21.7 billion, an increase of 21 percent from
the year ended December 31, 2008. The increase in FFELP
loan origination growth was due to higher loan limits and an
increase in market share. Given the legislative uncertainty
around FFELP and the ongoing transition of certain schools to
Direct Lending, FFELP originations could be substantially lower
in the AY 2010–2011. Private Education Loan
originations totaled $3.2 billion, a decrease of
50 percent from the prior year. The decline in Private
Education Loan originations was due to a tightening of our
underwriting requirements, an increase in federal student loan
limits and the Company’s withdrawal from certain markets.
Private
Education Loans
We bear the full credit risk for Private Education Loans, which
are underwritten and priced according to credit risk based upon
customized credit scoring criteria. Due to their higher risk
profile, generally Private Education Loans have higher interest
rates than FFELP loans. Despite a decline in the growth rate of
Private Education Loan originations, the portfolio grew
5 percent from the prior year. All new Private Education
Loans are being funded at Sallie Mae Bank through our deposit
taking activities.
In 2008 and 2009, the credit environment created significant
challenges for funding Private Education Loans. At the same
time, we became more restrictive in our underwriting criteria.
In addition, as discussed above, federal lending limits
increased significantly in 2007 and 2008. As a result of these
factors, originations declined in 2008 and 2009. We expect
originations to grow once again in 2010 and subsequent years as
the credit markets continue to recover and the impact of the
2007 and 2008 federal loan limit increases is offset by tuition
increases and market share gains.
6
Over the course of 2009, we made improvements in the structure,
pricing, underwriting, servicing, collecting and funding of
Private Education Loans. These changes were made to increase the
profitability and decrease the risk of the product. For example,
the average FICO score for loans disbursed in 2009 was up 19
points to 745 and the percentage of co-signed loans increased to
84 percent from 66 percent in the prior year.
These improvements in portfolio quality are being driven
primarily by our more selective underwriting criteria. We have
instituted higher FICO cut-offs and require cosigners for
borrowers with higher credit scores than in the past. Our
experience shows that adding a cosigner to a loan reduces the
default rate by more than 50 percent. We are capturing more
data on our borrowers and cosigners and using this data in the
credit decision and pricing process. In 2009, we began using a
new Custom Underwriting Scorecard, that we believe will further
improve our underwriting. We have also introduced judgmental
lending.
In 2009, we introduced the Smart Option Student
Loan
®
,
which is offered to undergraduate and graduate students through
the financial aid offices of colleges and universities to
supplement traditional federal loans. The Smart Option Student
Loan
®
significantly reduces the customer’s total cost and
repayment term by requiring interest payments while the student
is in school.
Competition
Historically, we have faced competition for both federally
guaranteed and non-guaranteed student loans from a variety of
financial institutions, including banks, thrifts and
state-supported secondary markets. However, as a result of the
CCRAA which was passed in 2007, the legislation currently
pending and the dislocation in the capital markets, the student
loan industry is undergoing a significant transition. A number
of student lenders have ceased operations altogether or
curtailed activity.
ASSET
PERFORMANCE GROUP BUSINESS SEGMENT
In our APG business segment, we provide student loan default
aversion services, defaulted student loan portfolio management
services and contingency collections services for student loans
and other asset classes. In 2008, we decided to wind down our
accounts receivable management and collections services on
consumer and mortgage receivable portfolios. We made this
decision because we did not realize the expected synergies
between this business and our traditional contingent student
loan collection business. During 2009 we sold GRP, our mortgage
purchased paper company, and wound down our unsecured
receivables portfolio to $285 million.
In 2009, our APG business segment had revenues totaling
$346 million and a net loss of $154 million due to
impairments in our collections servicing portfolios. Our largest
customer, USA Funds, accounted for 39 percent, excluding
impairments, of our revenue in this segment in 2009.
Please read the section “Recent Developments and Expected
Future Trends
”
to see how pending legislation could
impact this business segment.
Products
and Services
Student
Loan Default Aversion Services
We provide default aversion services for five Guarantors,
including the nation’s largest, USA Funds. These services
are designed to prevent a default once a borrower’s loan
has been placed in delinquency status.
Defaulted
Student Loan Portfolio Management Services
Our APG business segment manages the defaulted student loan
portfolios for six Guarantors under long-term contracts.
APG’s largest customer, USA Funds, represents approximately
17 percent of defaulted student loan portfolios we manage. Our
portfolio management services include selecting collection
agencies and determining account placements to those agencies,
processing loan consolidations and loan rehabilitations, and
managing federal and state offset programs.
7
Contingency
Collection Services
Our APG business segment is also engaged in the collection of
defaulted student loans on behalf of various clients, including
schools, Guarantors, ED and other federal and state agencies. We
earn fees that are contingent on the amounts collected. We
provide collection services for approximately 16 percent of
the total market for federal student loan collections. We have
relationships with approximately 900 colleges and universities
to provide collection services for delinquent student loans and
other receivables from various campus-based programs. We also
collect other debt for federal and state agencies, and retail
clients.
Competition
The private sector collections industry is highly fragmented
with a few large companies and a large number of small scale
companies. The APG businesses that provide third-party
collections services for ED, FFELP Guarantors and other federal
holders of defaulted debt are highly competitive. In addition to
competing with other collection enterprises, we also compete
with credit grantors who each have unique mixes of internal
collections, outsourced collections and debt sales. The scale,
diversification and performance of our APG business segment have
been, and the Company expects them to remain, a competitive
advantage for the Company.
CORPORATE
AND OTHER BUSINESS SEGMENT
The Company’s Corporate and Other business segment includes
the aggregate activity of its smaller operating segments,
primarily its Guarantor Servicing, Loan Servicing, and Upromise
operating segments. Corporate and Other also includes several
smaller products and services, including comprehensive financing
and loan delivery solutions to college financial aid offices and
students to streamline the financial aid process.
Please read the section above, “INTRODUCTION TO SLM
CORPORATION — Recent Developments and Expected Future
Trends” to see how we expect pending legislation to impact
this business segment.
Guarantor
Servicing
We earn fees for providing a full complement of administrative
services to FFELP Guarantors. FFELP student loans are guaranteed
by these agencies, with ED providing reinsurance to the
Guarantor. The Guarantors are non-profit institutions or state
agencies that, in addition to providing the primary guarantee on
FFELP loans, are responsible for other activities, including:
| • | guarantee issuance — the initial approval of loan terms and guarantee eligibility; | |
| • | account maintenance — the maintaining, updating and reporting of records of guaranteed loans; | |
| • | default aversion services — these services are designed to prevent a default once a borrower’s loan has been placed in delinquency status (we perform these activities within our APG business segment); | |
| • | guarantee fulfillment — the review and processing of guarantee claims; | |
| • | post-claim assistance — assisting borrowers in determining the best way to resolve a defaulted loan; and | |
| • | systems development and maintenance — the development of automated systems to maintain compliance and accountability with ED regulations. |
Currently, we provide a variety of these services to 15
Guarantors and, in AY
2008-2009,
we processed $24.0 billion in new FFELP loan guarantees, of
which $19.3 billion was for USA Funds, the nation’s
largest Guarantor. We processed guarantees for approximately 35
percent of the FFELP loan market in AY
2008-2009.
Guarantor servicing fee revenue, which includes guarantee
issuance and account maintenance fees, was $136 million for
the year ended December 31, 2009, 86 percent of which we
earned from services performed on behalf of USA Funds. Under
some of our guarantee services agreements, including our
agreement with
8
USA Funds, we receive certain scheduled fees for the services
that we provide under such agreements. The payment for these
services includes a contractually
agreed-upon
percentage of the account maintenance fees that the Guarantors
receive from ED.
The Company’s guarantee services agreement with USA Funds
has a five-year term that will be automatically extended on
October 1 of each year unless prior notice is given by either
party.
Our primary non-profit competitors in Guarantor Servicing are
state and non-profit guarantee agencies that provide third-party
outsourcing to other Guarantors.
(See APPENDIX A, “FEDERAL FAMILY EDUCATION LOAN
PROGRAM — Guarantor Funding” for details of the
fees paid to Guarantors.)
Upromise
Upromise provides a number of programs that encourage consumers
to save for college. Upromise has established a consumer savings
network which is designed to promote college savings by
consumers who are members of this program by allowing them to
earn rewards from the purchase of goods and services from the
companies that participate in the program (“Participating
Companies”). Participating Companies generally pay Upromise
transaction fees based on member purchase volume, either online
or in stores depending on the contractual arrangement with the
Participating Company. Typically, a percentage of the purchase
price of the consumer members’ eligible purchases with
Participating Companies is set aside in an account maintained by
Upromise on behalf of its members.
Upromise, through its wholly-owned subsidiaries, UII, a
registered broker-dealer, and UIA, a registered investment
advisor, provides program management, transfer and servicing
agent services, and administration services for various 529
college-savings plans. UII and UIA manage approximately
$23 billion in 529 college-savings plans.
REGULATION
Like other participants in the FFELP, the Company is subject to
the HEA and, from time to time, to review of its student loan
operations by ED and guarantee agencies. As a servicer of
federal student loans, the Company is subject to certain ED
regulations regarding financial responsibility and
administrative capability that govern all third-party servicers
of insured student loans. In connection with our Guarantor
Servicing operations, the Company must comply with, on behalf of
its Guarantor Servicing customers, certain ED regulations that
govern Guarantor activities as well as agreements for
reimbursement between the Secretary of Education and the
Company’s Guarantor Servicing customers. As a third-party
service provider to financial institutions, the Company is also
subject to examination by the Federal Financial Institutions
Examination Council (“FFIEC”).
The Company’s originating or servicing of federal and
private student loans also subjects it to federal and state
consumer protection, privacy and related laws and regulations.
Some of the more significant federal laws and regulations that
are applicable to our student loan business include:
| • | the Truth-In-Lending Act; | |
| • | the Fair Credit Reporting Act; | |
| • | the Equal Credit Opportunity Act; | |
| • | the Gramm Leach-Bliley Act; and | |
| • | the U.S. Bankruptcy Code. |
APG’s debt collection and receivables management activities
are subject to federal and state consumer protection, privacy
and related laws and regulations. Some of the more significant
federal laws and regulations that are applicable to our APG
business segment include:
| • | the Fair Debt Collection Practices Act; |
9
| • | the Fair Credit Reporting Act; | |
| • | the Gramm-Leach-Bliley Act; and | |
| • | the U.S. Bankruptcy Code. |
Our APG business segment is subject to state laws and
regulations similar to the federal laws and regulations listed
above. Finally, certain APG subsidiaries are subject to
regulation under the HEA and under the various laws and
regulations that govern government contractors.
Sallie Mae Bank is subject to Utah banking regulations as well
as regulations issued by the Federal Deposit Insurance
Corporation, and undergoes periodic regulatory examinations by
the FDIC and the Utah Department of Financial Institutions.
UII and UIA, which administer 529 college-savings plans, are
subject to regulation by the Municipal Securities Rulemaking
Board, the Financial Industry Regulatory Authority (formerly the
National Association of Securities Dealers, Inc.) and the
Securities and Exchange Commission (“SEC”) through the
Investment Advisers Act of 1940.
AVAILABLE
INFORMATION
The SEC maintains an Internet site
(http://www.
sec.gov) that contains periodic and other reports such as
annual, quarterly and current reports on
Forms 10-K,
10-Q
and
8-K,
respectively, as well as proxy and information statements
regarding SLM Corporation and other companies that file
electronically with the SEC. Copies of our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and other periodic reports are available on our website as soon
as reasonably practicable after we electronically file such
reports with the SEC. Investors and other interested parties can
also access these reports at www.salliemae.com/about/investors.
Our Code of Business Conduct, which applies to Board members and
all employees, including our Chief Executive Officer and Chief
Financial Officer, is also available, free of charge, on our
website at www.salliemae.com/about/business_code. htm. We intend
to disclose any amendments to or waivers from our Code of
Business Conduct (to the extent applicable to our Chief
Executive Officer or Chief Financial Officer) by posting such
information on our website.
In 2009, the Company submitted the annual certification of its
Chief Executive Officer regarding the Company’s compliance
with the NYSE’s corporate governance listing standards,
pursuant to Section 303A.12(a) of the NYSE Listed Company
Manual.
In addition, we filed as exhibits to the Company’s annual
reports on
Form 10-K
for the years ended December 31, 2007 and 2008 and to this
Annual Report on
Form 10-K,
the certifications required under Section 302 of the
Sarbanes-Oxley Act of 2002.
10
| Item 1A. | Risk Factors |
Our business activities involve a variety of risks. Below we
describe the significant risk factors affecting our business.
The risks described below are not the only risks facing
us — other risks also could impact our business.
Funding
and Liquidity.
Our
business is affected by funding constraints in the credit market
and dependence on various government funding sources, and the
interest rate characteristics of our earning assets do not
always match the interest rate characteristics of our funding
arrangements. These factors may increase the price of or
decrease our ability to obtain liquidity as well expose us to
basis risk and repricing.
The capital markets are experiencing a prolonged period of
volatility. This volatility has had varying degrees of impact on
most financial organizations. These conditions have impacted the
Company’s access to and cost of capital necessary to manage
our business. Additional factors that could make financing
difficult, more expensive or unavailable on any terms include,
but are not limited to, financial results and losses of the
Company, changes within our organization, events that have an
adverse impact on our reputation, changes in the activities of
our business partners, events that have an adverse impact on the
financial services industry, counterparty availability, changes
affecting our assets, corporate and regulatory actions, absolute
and comparative interest rate changes, ratings agencies’
actions, general economic conditions and the legal, regulatory,
accounting and tax environments governing our funding
transactions.
Our business is also affected by various government funding
sources and funding constraints in the capital markets.
Funding for new FFELP loan originations is currently dependent
to a large degree on financial programs established by the
federal government. These programs are described in the
“LIQUIDITY AND CAPITAL RESOURCES” section of this
Form 10-K.
These federal programs are not permanent and may not be extended
past their expiration dates. There is no assurance that the
capital markets will be able to totally support FFELP loan
originations beyond the time these programs are presently
scheduled to end. Upon termination of the government programs
mentioned, if cost effective funding sources were not available,
we could be compelled to reduce or suspend the origination of
new FFELP loans.
FFELP loans originated under the government programs mentioned
above must be re-financed or sold to the government by a date
determined under the terms of the programs. It is our intention
to sell these loans to the government under the terms of the
programs.
During 2009, the Company funded private, non-federally
guaranteed loan originations primarily through term brokered
deposits raised by Sallie Mae Bank. Assets funded in this manner
result in re-financing risk because the average term of the
deposits is shorter than the expected term of some of the same
assets. There is no assurance that this or other sources of
funding, such as the term asset-backed securities market, will
be available at a level and a cost that makes new Private
Education Loan originations possible or profitable, nor is there
any assurance that the loans can be re-financed at profitable
margins.
At some time, the Company may decide that it is prudent or
necessary to raise additional equity capital through the sale of
common stock, preferred stock, or securities that convert into
common stock. There are no restrictions on entering into the
sale of any equity securities in either public or private
transactions, except that any private transaction involving more
than 20 percent of shares outstanding requires shareholder
approval and any holder owning more than 10 percent of our fully
diluted shares requires approval of the FDIC relating to a
change of control of our Bank. Under current market conditions,
the terms of an equity transaction may subject existing security
holders to potential subordination or dilution and may involve a
change in governance.
The interest rate characteristics of our earning assets do not
always match the interest rate characteristics of our funding
arrangements. This mismatch exposes us to risk in the form of
basis risk and repricing risk. While most of such basis risks
are hedged using interest rate swap contracts, such hedges are
not always perfect matches and, therefore, may result in losses.
While the asset and hedge indices are short-term with rate
movements that are typically highly correlated, there can be no
assurance that the historically high correlation will not be
disrupted by capital market dislocations or other factors not
within our control. For instance, as a result of the turmoil in
the capital markets, the historically tight spread between CP
and LIBOR began to widen dramatically in the fourth
11
quarter of 2008. It subsequently reverted to more normal levels
beginning in the third quarter of 2009 and has been stable since
then. In such circumstances, our earnings could be adversely
affected, possibly to a material extent.
Our credit ratings are important to our liquidity. A reduction
in our credit ratings could adversely affect our liquidity,
increase our borrowing costs, limit our access to the markets or
trigger obligations under certain provisions in collateralized
arrangements. Under these provisions, counterparties may require
us to segregate collateral or terminate certain contracts.
Economic
Conditions.
We may
be adversely affected by deterioration in economic
conditions.
We may continue to be adversely affected by economic conditions.
A continuation of the current downturn in the economy, or a
further deterioration, could result in lessened demand for
consumer credit and credit quality could continue to be
impacted. Adverse economic conditions may result in declines in
collateral values. Higher credit-related losses and weaker
credit quality could impact our financial position and limit
funding options, including capital markets activity, which could
adversely impact the Company’s liquidity position.
Operations.
A
failure of our operational systems or infrastructure, or those
of our third-party vendors, could disrupt our business, result
in disclosure of confidential customer information, damage our
reputation and cause losses.
A failure of our operational systems or infrastructure, or those
of our third-party vendors, could disrupt our business. Our
business is dependent on our ability to process and monitor, on
a daily basis, a large number of transactions. These
transactions must be processed in compliance with legal and
regulatory standards and our product specifications, which we
change to reflect our business needs. As processing demands
change and grow, developing and maintaining our operational
systems and infrastructure becomes increasingly challenging.
Our loan originations and servicing, financial, accounting, data
processing or other operating systems and facilities may fail to
operate properly or become disabled as a result of events that
are beyond our control, adversely affecting our ability to
process these transactions. Any such failure could adversely
affect our ability to service our clients, result in financial
loss or liability to our clients, disrupt our business, result
in regulatory action or cause reputational damage. Despite the
plans and facilities we have in place, our ability to conduct
business may be adversely impacted by a disruption in the
infrastructure that supports our businesses. This may include a
disruption involving electrical, communications, internet,
transportation or other services used by us or third parties
with which we conduct business. Notwithstanding our efforts to
maintain business continuity, a disruptive event impacting our
processing locations could negatively affect our business.
Our operations rely on the secure processing, storage and
transmission of personal, confidential and other information in
our computer systems and networks. Although we take protective
measures, our computer systems, software and networks may be
vulnerable to unauthorized access, computer viruses, malicious
attacks and other events that could have a security impact
beyond our control. If one or more of such events occur,
personal, confidential and other information processed and
stored in, and transmitted through, our computer systems and
networks, could be jeopardized or otherwise interruptions or
malfunctions in our operations could result in significant
losses or reputational damage. We may be required to expend
significant additional resources to modify our protective
measures or to investigate and remediate vulnerabilities or
other exposures, and we may be subject to litigation and
financial losses that are either not insured against or not
fully covered through any insurance maintained by us.
We routinely transmit and receive personal, confidential and
proprietary information, some through third parties. We have put
in place secure transmission capability, and work to ensure
third parties follow similar procedures. An interception, misuse
or mishandling of personal, confidential or proprietary
information being sent to or received from a customer or third
party could result in legal liability, regulatory action and
reputational harm.
12
Political.
Changes
in laws and regulations that affect the FFELP and consumer
lending could affect the profitability of our
business.
Changes in laws and regulations that affect our businesses,
including our FFELP and private credit education lending and
debt collection businesses, could affect the profitability and
viability of our Company. During September 2009, the House of
Representatives passed H.R. 3221, the Student Aid and Fiscal
Responsibility Act (“SAFRA”), which would eliminate
the FFELP and require that, after July 1, 2010, all new
federal student loans be made through the Direct Student Loan
Program. There are several proposals in the Senate, including
SAFRA and related proposals, and an alternative proposal
submitted by Senator Casey to the Congressional Budget Office
for scoring, which maintains a structure similar to the
Community Proposal but reduces the purchase fee from $75 to $55.
The Administration’s budget for the 2011 fiscal year,
submitted to Congress on February 1, 2010, includes
proposals consistent with SAFRA that could negatively impact the
FFELP. The Obama Administration’s (the
“Administration”) budget request and the current
economic environment may make legislative changes more likely,
making this risk to our business greater. The Administration has
also proposed a financial responsibility tax for financial
institutions which may also impact the Company.
Competition.
We
operate in a competitive environment, and our product offerings
are primarily concentrated in loan and savings products for
higher education.
The education loan business is highly competitive. We compete in
the FFELP business and the private credit lending business with
banks and other consumer lending institutions, many with strong
consumer brand name recognition. We compete based on our
products, origination capability and customer service. To the
extent our competitors compete aggressively or more effectively,
including with private credit loan products that are more
accepted than ours or lower private credit pricing, we could
lose market share to them or subject our existing loans to
refinancing risk.
We are a leading provider of saving- and
paying-for-college
products and programs. This concentration gives us a competitive
advantage in the market place. This concentration also creates
risks in our business, particularly in light of our
concentration as a FFELP and private credit lender and servicer
for the FFELP and DSLP. The market for federally-guaranteed
student loans is shared among the Company and other private
sector lenders who participate in the FFELP, and the federal
government through the DSLP. The market for private credit loans
is shared among many banks and financial institutions. If
population demographics result in a decrease in college-age
individuals, if demand for higher education decreases, if the
cost of attendance of higher education decreases, if public
support for higher education costs increases, or if the demand
for higher education loans decreases or increases from one
product to another, our FFELP and private credit lending
business could be negatively affected.
In addition, if we introduce new education or other loan
products, there is a risk that those new products will not be
accepted in the marketplace. We might not have other profitable
product offerings that offset loss of business in the education
credit market.
Credit
and Counterparty.
Unexpected
and sharp changes in the overall economic environment may
negatively impact the performance of our credit
portfolio.
Unexpected changes in the overall economic environment may
result in the credit performance of our loan portfolio being
materially different from what we expect. Our earnings are
critically dependent on the evolving creditworthiness of our
student loan customers. We maintain a reserve for credit losses
based on expected future charge-offs which consider many
factors, including levels of past due loans and forbearances and
expected economic conditions. However, management’s
determination of the appropriate reserve level may under- or
over-estimate future losses. If the credit quality of our
customer base materially decreases, if a market risk changes
significantly, or if our reserves for credit losses are not
adequate, our business, financial condition and results of
operations could suffer.
In addition to the credit risk associated with our education
loan customers, we are also subject to the creditworthiness of
other third parties, including counterparties to our derivative
transactions. For example, we
13
have exposure to the financial condition of various lending,
investment and derivative counterparties. If any of our
counterparties is unable to perform its obligations, we would,
depending on the type of counterparty arrangement, experience a
loss of liquidity or an economic loss. In addition, we might not
be able to cost effectively replace the derivative position
depending on the type of derivative and the current economic
environment, and thus be exposed to a greater level of interest
rate
and/or
foreign currency exchange rate risk which could lead to
additional losses. The Company’s counterparty exposure is
more fully discussed herein in “LIQUIDITY AND CAPITAL
RESOURCES — Counterparty Exposure.”
Regulatory
and Compliance.
Our
businesses are regulated by various state and federal laws and
regulations, and our failure to comply with these laws and
regulations may result in significant costs, sanctions and/or
litigation.
Our businesses are subject to numerous state and federal laws
and regulations and our failure to comply with these laws and
regulations may result in significant costs, including
litigation costs,
and/or
business sanctions.
Our private credit lending and debt collection business are
subject to regulation and oversight by various state and federal
agencies, particularly in the area of consumer protection
regulation. Some state attorneys general have been active in
this area of consumer protection. We are subject, and may be
subject in the future, to inquiries and audits from state and
federal regulators as well as frequent litigation from private
plaintiffs.
Sallie Mae Bank is subject to state and FDIC regulation,
oversight and regular examination. At the time of this filing,
Sallie Mae Bank was the subject of a cease and desist order for
weaknesses in its compliance function. While the issues
addressed in the order have largely been remediated, the order
has not yet been lifted. Our failure to comply with various laws
and regulations or with the terms of the cease and desist order
or to have issues raised during an examination could result in
litigation expenses, fines, business sanctions, limitations on
our ability to fund our Private Education Loans, which are
currently funded by term deposits issued by Sallie Mae Bank, or
restrictions on the operations of Sallie Mae Bank.
Loans originated and serviced under the FFELP are subject to
legislative and regulatory changes. A summary of the program,
which indicates its complexity and frequent changes, may be
found in APPENDIX A, “FEDERAL FAMILY EDUCATION LOAN
PROGRAM” of this
Form 10-K.
We continually update our FFELP loan originations and servicing
policies and procedures and our systems technologies, provide
training to our staff and maintain quality control over
processes through compliance reviews and internal and external
audits. We are at risk, however, for misinterpretation of ED
guidance and incorrect application of ED regulations and
policies, which could result in fines, the loss of the federal
guarantee on FFELP loans, or limits on our participation in the
FFELP.
Reliance
on Estimates.
Incorrect
estimates and assumptions by management in connection with the
preparation of our consolidated financial statements could
adversely affect the reported assets, liabilities, income and
expenses.
Incorrect estimates and assumptions by management in connection
with the preparation of our consolidated financial statements
could adversely affect the reported amounts of assets and
liabilities and the reported amounts of income and expenses. The
preparation of our consolidated financial statements requires
management to make certain critical accounting estimates and
assumptions that could affect the reported amounts of assets and
liabilities and the reported amounts of income and expense
during the reporting periods. A description of our critical
accounting estimates and assumptions may be found in
“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS — CRITICAL
ACCOUNTING POLICIES AND ESTIMATES” in this
Form 10-K.
If we make incorrect assumptions or estimates, we may under- or
overstate reported financial results, which could result in
actual results being significantly different than current
estimates which could adversely affect our business.
| Item 1B. | Unresolved Staff Comments |
None.
14
| Item 2. | Properties |
The following table lists the principal facilities owned by the
Company as of December 31, 2009:
|
Approximate
|
||||||
|
Location
|
Business Segment / Function | Square Feet | ||||
|
Fishers, IN
|
Lending/Loan Servicing and Data Center | 450,000 | ||||
|
Newark, DE
|
Lending/Credit and Collections Center | 160,000 | ||||
|
Wilkes-Barre, PA
|
Lending/Loan Servicing Center | 133,000 | ||||
|
Killeen,
TX
(1)
|
Lending/Loan Servicing Center | 133,000 | ||||
|
Lynn Haven, FL
|
Lending/Loan Servicing Center | 133,000 | ||||
|
Indianapolis, IN
|
APG/Collections Center | 100,000 | ||||
|
Big Flats, NY
|
APG/Collections Center | 60,000 | ||||
|
Arcade,
NY
(2)
|
APG/Collections Center | 46,000 | ||||
|
Perry,
NY
(2)
|
APG/Collections Center | 45,000 | ||||
|
Swansea, MA
|
Corporate and Other/AMS Headquarters | 36,000 | ||||
| (1) | Excludes approximately 30,000 square feet Class B single story building located across the street from the Loan Servicing Center. | |
| (2) | In the first quarter of 2003, the Company entered into a ten year lease with the Wyoming County Industrial Development Authority with a right of reversion to the Company for the Arcade and Perry, New York facilities. |
The following table lists the principal facilities leased by the
Company as of December 31, 2009:
|
Approximate
|
||||||
|
Location
|
Business Segment / Function | Square Feet | ||||
|
Reston, VA
|
Corporate and Other/Headquarters | 240,000 | ||||
|
Niles, IL
|
APG/Collections Center | 84,000 | ||||
|
Newton, MA
|
Corporate and Other/Upromise | 78,000 | ||||
|
Cincinnati, OH
|
APG/Collections Center | 59,000 | ||||
|
Muncie, IN
|
APG/Collections Center | 54,000 | ||||
|
Mt. Laurel,
NJ
(1)
|
N/A | 42,000 | ||||
|
Moorestown, NJ
|
APG/Collections Center | 30,000 | ||||
|
Novi,
MI
(2)
|
N/A | 27,000 | ||||
|
White Plains, NY
|
APG/Collections Center | 26,000 | ||||
|
Gaithersburg,
MD
(3)
|
N/A | 24,000 | ||||
|
Whitewater, WI
|
APG/Collections Center | 16,000 | ||||
|
Las Vegas, NV
|
APG/Collections Center | 16,000 | ||||
|
Newark, DE
|
Lending/Loan Servicing Center | 15,000 | ||||
|
Seattle, WA
|
Corporate and Other/Guarantor Servicing | 13,000 | ||||
|
Perry, NY
|
APG/Collections Center | 12,000 | ||||
| (1) | Space vacated in March 2009; the Company is actively searching for subtenants. | |
| (2) | Space vacated in September 2007; approximately 100 percent of space is currently being subleased. | |
| (3) | Space vacated in September 2006; the Company is actively searching for subtenants. |
None of the facilities owned by the Company is encumbered by a
mortgage. The Company believes that its headquarters, loan
servicing centers, data center,
back-up
facility and data management and collections centers are
generally adequate to meet its long-term student loan and
business goals. The Company’s principal office is currently
in leased space at 12061 Bluemont Way, Reston, Virginia, 20190.
| Item 3. | Legal Proceedings |
The Company is involved in a number of judicial and regulatory
proceedings, including those described below, concerning matters
arising in connection with the conduct of our business. We
believe, based on
15
currently available information, that the results of such
proceedings, if resolved in a manner adverse to the Company in
the aggregate, will not have a material adverse effect on the
financial condition of the Company.
Investor
Litigation
On January 31, 2008, a putative class action lawsuit was
filed against the Company and certain officers in the
U.S. District Court for the Southern District of New York.
This case and other actions arising out of the same
circumstances and alleged acts have been consolidated and are
now identified as In Re SLM Corporation Securities Litigation.
The case purports to be brought on behalf of those who acquired
common stock of the Company between January 18, 2007 and
January 23, 2008 (the “Securities
Class Period”). The complaint alleges that the Company
and certain officers violated federal securities laws by issuing
a series of materially false and misleading statements and that
the statements had the effect of artificially inflating the
market price for the Company’s securities. The complaint
alleges that defendants caused the Company’s results for
year-end 2006 and for the first quarter of 2007 to be materially
misstated because the Company failed to adequately provide for
loan losses, which overstated the Company’s net income, and
that the Company failed to adequately disclose allegedly known
trends and uncertainties with respect to its non-traditional
loan portfolio. On July 23, 2008, the court appointed
Westchester Capital Management (“Westchester”) Lead
Plaintiff. On December 8, 2008, Lead Plaintiff filed a
consolidated amended complaint. In addition to the prior
allegations, the consolidated amended complaint alleges that the
Company understated loan delinquencies and loan loss reserves by
promoting loan forbearances. On December 19, 2008, and
December 31, 2008, two rejected lead plaintiffs filed a
challenge to Westchester as Lead Plaintiff. On April 1,
2009, the court named a new Lead Plaintiff, SLM Venture, and
Westchester appealed to the Second Circuit Court of Appeals. On
September 3, 2009, Lead Plaintiffs filed a Second Amended
Consolidated Complaint on largely the same allegations as the
Consolidated Amended Complaint, but dropped one of the three
senior officers as a defendant. On October 1, 2009, the
Second Circuit Court of Appeals denied Westchester’s
Writ of Mandamus
, thereby deciding the Lead Plaintiff
question in favor of SLM Venture. On December 11, 2009,
Defendants filed a Motion to Dismiss the Second Amended
Consolidated Complaint. This Motion is pending. Lead Plaintiff
seeks unspecified compensatory damages, attorneys’ fees,
costs, and equitable and injunctive relief.
A similar case is pending against the Company, certain officers,
retirement plan fiduciaries, and the Board of Directors, In Re
SLM Corporation ERISA Litigation, also in the U.S. District
Court for the Southern District of New York. The proposed class
consists of participants in or beneficiaries of the Sallie Mae
401(K) Retirement Savings Plan (“401K Plan”) between
January 18, 2007 and “the present” whose accounts
included investments in Sallie Mae stock (“401K
Class Period”). The complaint alleges breaches of
fiduciary duties and prohibited transactions in violation of the
Employee Retirement Income Security Act arising out of alleged
false and misleading public statements regarding the
Company’s business made during the 401K Class Period
and investments in the Company’s common stock by
participants in the 401K Plan. On December 15, 2008,
Plaintiffs filed a Consolidated Class Action Complaint and
a Second Consolidated Amended Complaint on September 10,
2009. On November 10, 2009, Defendants filed a Motion to
Dismiss the matter on all counts. This Motion is pending. The
plaintiffs seek unspecified damages, attorneys’ fees,
costs, and equitable and injunctive relief.
Lending
and Collection Litigation and Investigations
On April 6, 2007, the Company was served with a putative
class action suit by several borrowers in U.S. District
Court for the Central District of California (Anne Chae et
al. v. SLM Corporation et al.). Plaintiffs challenged under
California common and statutory law the Company’s FFELP
billing practices as they relate to the use of the simple daily
interest method for calculating interest, the charging of late
fees while charging simple daily interest, and setting the first
payment date at 60 days after loan disbursement for
Consolidation and PLUS Loans thereby alleging that the Company
effectively capitalizes interest. The plaintiffs seek
unspecified actual and punitive damages, restitution,
disgorgement of late fees, pre-judgment and post-judgment
interest, attorneys’ fees, costs, and equitable and
injunctive relief. On June 16, 2008, the Court granted
summary judgment to the Company on all counts on the basis of
federal preemption. The
16
decision was appealed to the Ninth Circuit Court of Appeals. On
January 25, 2010, the Ninth Circuit Court of Appeals
affirmed the summary judgment on all counts on the basis of
federal preemption.
On September 17, 2007, the Company became a party to a qui
tam whistleblower case, United States ex. Rel. Rhonda
Salmeron v. Sallie Mae, in the U.S. District Court for
the Northern District of Illinois. The relator alleged that
various defendants submitted false claims
and/or
created records to support false claims in connection with
collection activity on federally guaranteed student loans, and
specifically that the Company was negligent in auditing the
collection practices of one of the defendants. The relator
sought money damages in excess of $12 million plus treble
damages on behalf of the federal government. The District Court
dismissed the case with prejudice in August 2008 and the relator
appealed to the Seventh Circuit Court of Appeals in September
2008. On August 27, 2009, the Seventh Circuit Court of
Appeals affirmed the dismissal.
On December 17, 2007, plaintiffs filed a complaint against
the Company, Rodriguez v. SLM Corporation et al., in the
U.S. District Court for the District of Connecticut
alleging that the Company engaged in underwriting practices
which, among other things, resulted in certain applicants for
student loans being directed into substandard and expensive
loans on the basis of race. The plaintiffs have not stated the
relief they seek. The court denied SLM Corporation’s Motion
for Summary Judgment without prejudice on June 24, 2009.
The Court granted Defendants partial Motion to Dismiss the Truth
in Lending Act counts on November 10, 2009. Discovery is
proceeding.
On April 20, 2009, the Company received a letter on behalf
of a shareholder, SEIU Pension Plans Master Trust, demanding,
among other things, that the Company’s Board of Directors
take action to recover Company funds it alleges were
“unjustly paid to certain current and former employees and
executive officers of the Company” from 2005 to the
present, file civil lawsuits against former and current
executives, revise the executive compensation structure, and
offer shareholders an annual nonbinding “say on pay.”
Twenty-nine financial services companies received similar
letters that same week. This letter was referred to the Board of
Directors. After investigation and consideration, the Board
determined that it was not in the best interest of the
Company’s shareholders for the Company to take any further
action with respect to the allegations in the letter. Board
counsel conveyed that decision to counsel for the SEIU Pension
Plans Master Trust in a letter dated November 9, 2009.
On July 15, 2009, the U.S. District Court for the
District of Columbia unsealed the
qui tam
False Claims
Act complaint of relator Sheldon Batiste, a former employee of
SLM Financial Corporation (U.S. ex rel. Batiste v. SLM
Corporation, et al.). The First Amended Complaint alleges that
the Company violated the False Claims Act by its “systemic
failure to service loans and abide by forbearance
regulations” and “its receipt of U.S. subsidies
to which it was not entitled” through the federally
guaranteed student loan program, FFELP. No amount in controversy
is specified, but the relator seeks treble actual damages, as
well as civil monetary penalties on each of its claims. The
U.S. Department of Justice declined intervention. The
Company filed its Motion to Dismiss on September 21, 2009.
The Motion remains pending.
On August 3, 2009, the Company received the final audit
report of ED’s Office of the Inspector General
(“OIG”) related to the Company’s billing
practices for special allowance payments. Among other things,
the OIG recommended that ED instruct the Company to return
approximately $22 million in alleged special allowance
overpayments. The Company continues to believe that its
practices were consistent with longstanding ED guidance and all
applicable rules and regulations and intends to continue
disputing these findings. The Company provided its response to
the Secretary on October 2, 2009. The OIG has audited other
industry participants with regard to special allowance payments
for loans funded by tax exempt obligations and in certain cases
the Secretary of ED has disagreed with the OIG’s
recommendations.
On August 26, 2009, the U.S. District Court for the
Eastern District of Virginia unsealed a
qui tam
False
Claims Act complaint filed on September 21, 2007 by a
former ED researcher, Dr. Jon Oberg, against eleven student
loan companies, including two Sallie Mae companies, SLM
Corporation and Southwest Student Services Corporation
(Southwest) (U.S. ex rel. Oberg v. Nelnet et al.). The
complaint seeks the return of approximately $1 billion in
the aggregate from the eleven companies as a result of alleged
improper “recycling” of 9.5 percent SAP loans.
The U.S. Department of Justice declined to intervene. The
allegations against SLM Corporation in the amended complaint
appear to be that Southwest allegedly engaged in wrongful
“recycling” of student loans. The Company purchased
Southwest in 2004. According to the
17
amended complaint, Southwest allegedly overbilled the ED
approximately $35 million in unlawful SAP claims. SLM is
not alleged to have improperly billed the government, but is
alleged to be the alter ego of Southwest. The court denied SLM
Corporation’s and Southwest’s Motion to Dismiss on
December 1, 2009 and SLM Corporation’s Judgment on the
Pleadings on January 20, 2010. Discovery is proceeding.
On February 2, 2010, a putative class action suit was filed
by a borrower in U.S. District Court for the Western
District of Washington (Mark A. Arthur et al. v. SLM
Corporation). The suit complains that Sallie Mae allegedly
contacted “tens of thousands” of consumers on their
cellular telephones without their prior express consent in
violation of the Telephone Consumer Protection Act,
§ 227 et seq. (TCPA). Each violation under the TCPA
provides for $500 in statutory damages ($1,500 if a willful
violation is shown). Plaintiffs seek statutory damages, damages
for willful violations, attorneys’ fees, costs, and
injunctive relief.
We are also subject to various claims, lawsuits and other
actions that arise in the normal course of business. Most of
these matters are claims by borrowers disputing the manner in
which their loans have been processed or the accuracy of our
reports to credit bureaus. In addition, the collections
subsidiaries in our APG segment are routinely named in
individual plaintiff or class action lawsuits in which the
plaintiffs allege that we have violated a federal or state law
in the process of collecting their accounts. Management believes
that these claims, lawsuits and other actions, individually or
in the aggregate, will not have a material adverse effect on our
business, financial condition or results of operations. Finally,
from time to time, we receive information and document requests
from state attorneys general and other governmental agencies
concerning certain of our business practices. Our practice has
been and continues to be to cooperate with the state attorneys
general and governmental agencies and to be responsive to any
such requests.
| Item 4. | Submission of Matters to a Vote of Security Holders |
We did not submit any matters to a vote of security holders
during the three months ended December 31, 2009.
18
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The Company’s common stock is listed and traded on the New
York Stock Exchange under the symbol SLM. The number of holders
of record of the Company’s common stock as of
January 31, 2010 was 536. The following table sets forth
the high and low sales prices for the Company’s common
stock for each full quarterly period within the two most recent
fiscal years.
Common
Stock Prices
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||||||
|
2009
|
High | $ | 12.43 | $ | 10.47 | $ | 10.39 | $ | 12.11 | |||||||||||
| Low | 3.11 | 4.02 | 8.12 | 8.01 | ||||||||||||||||
|
2008
|
High | $ | 23.00 | $ | 25.05 | $ | 19.81 | $ | 12.03 | |||||||||||
| Low | 14.70 | 15.45 | 9.37 | 4.19 | ||||||||||||||||
The Company paid quarterly cash dividends of $.25 for the first
quarter of 2007. There were no dividends paid in 2008 or 2009.
Issuer
Purchases of Equity Securities
The following table summarizes the Company’s common share
repurchases during 2009. The only repurchases conducted by the
Company during the period were in connection with the exercise
of stock options and vesting of restricted stock to satisfy
minimum statutory tax withholding obligations and shares
tendered by employees to satisfy option exercise costs (which
combined totaled approximately 200,000 shares for 2009 and
not in connection with any authorized buy back program). See
Note 11, “Stockholders’ Equity,” to the
consolidated financial statements.
|
Maximum Number
|
||||||||||||||||
|
Total Number of
|
of Shares that
|
|||||||||||||||
|
Shares Purchased
|
May Yet Be
|
|||||||||||||||
|
Total Number
|
Average Price
|
as Part of Publicly
|
Purchased Under
|
|||||||||||||
|
of Shares
|
Paid per
|
Announced Plans
|
the Plans or
|
|||||||||||||
| Purchased | Share | or Programs | Programs | |||||||||||||
|
(Common shares in millions)
|
||||||||||||||||
|
Period:
|
||||||||||||||||
|
January 1 – March 31, 2009
|
.1 | $ | 10.31 | — | 38.8 | |||||||||||
|
April 1 – June 30, 2009
|
— | — | — | 38.8 | ||||||||||||
|
July 1 – September 30, 2009
|
— | — | — | 38.8 | ||||||||||||
|
October 1 – October 31, 2009
|
— | — | — | 38.8 | ||||||||||||
|
November 1 – November 30, 2009
|
.1 | 11.27 | — | 38.8 | ||||||||||||
|
December 1 – December 31, 2009
|
— | — | — | 38.8 | ||||||||||||
|
Total fourth quarter
|
.1 | 11.27 | — | 38.8 | ||||||||||||
|
Year ended December 31, 2009
|
.2 | $ | 10.79 | — | 38.8 | |||||||||||
19
Stock
Performance
The following graph compares the yearly percentage change in the
Company’s cumulative total shareholder return on its common
stock to that of Standard & Poor’s 500 Stock
Index and Standard & Poor’s Financials Index. The
graph assumes a base investment of $100 at December 31,
2003 and reinvestment of dividends through December 31,
2009.
Five Year
Cumulative Total Shareholder Return
|
Company/Index
|
12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | ||||||||||||||||||
|
SLM Corporation
|
$ | 100.0 | $ | 104.8 | $ | 94.6 | $ | 39.6 | $ | 17.5 | $ | 22.1 | ||||||||||||
|
S&P 500 Financials
|
100.0 | 106.3 | 126.4 | 103.5 | 47.4 | 55.3 | ||||||||||||||||||
|
S&P Index
|
100.0 | 104.8 | 121.2 | 127.8 | 81.1 | 102.2 | ||||||||||||||||||
Source: Bloomberg Total Return
Analysis
20
| Item 6. | Selected Financial Data |
Selected
Financial Data
2005-2009
(Dollars in millions, except per share amounts)
(Dollars in millions, except per share amounts)
The following table sets forth selected financial and other
operating information of the Company. The selected financial
data in the table is derived from the consolidated financial
statements of the Company. The data should be read in
conjunction with the consolidated financial statements, related
notes, and “MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS” included in
this
Form 10-K.
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Operating Data:
|
||||||||||||||||||||
|
Net interest income
|
$ | 1,723 | $ | 1,365 | $ | 1,588 | $ | 1,454 | $ | 1,451 | ||||||||||
|
Net income (loss) attributable to SLM Corporation:
|
||||||||||||||||||||
|
Continuing operations, net of tax
|
$ | 482 | $ | (70 | ) | $ | (902 | ) | $ | 1,147 | $ | 1,379 | ||||||||
|
Discontinued operations, net of tax
|
(158 | ) | (143 | ) | 6 | 10 | 3 | |||||||||||||
|
Net income (loss) attributable to SLM Corporation
|
$ | 324 | $ | (213 | ) | $ | (896 | ) | $ | 1,157 | $ | 1,382 | ||||||||
|
Basic earnings (loss) per common share attributable to SLM
Corporation common shareholders:
|
||||||||||||||||||||
|
Continuing operations
|
$ | .71 | $ | (.39 | ) | $ | (2.28 | ) | $ | 2.71 | $ | 3.24 | ||||||||
|
Discontinued operations
|
(.33 | ) | (.30 | ) | .02 | .02 | .01 | |||||||||||||
|
Total
|
$ | .38 | $ | (.69 | ) | $ | (2.26 | ) | $ | 2.73 | $ | 3.25 | ||||||||
|
Diluted earnings (loss) per common share attributable to SLM
Corporation common shareholders:
|
||||||||||||||||||||
|
Continuing operations
|
$ | .71 | $ | (.39 | ) | $ | (2.28 | ) | $ | 2.61 | $ | 3.04 | ||||||||
|
Discontinued operations
|
(.33 | ) | (.30 | ) | .02 | .02 | .01 | |||||||||||||
|
Total
|
$ | .38 | $ | (.69 | ) | $ | (2.26 | ) | $ | 2.63 | $ | 3.05 | ||||||||
|
Dividends per common share attributable to SLM Corporation
common shareholders
|
$ | — | $ | — | $ | .25 | $ | .97 | $ | .85 | ||||||||||
|
Return on common stockholders’ equity
|
5 | % | (9 | )% | (22 | )% | 32 | % | 45 | % | ||||||||||
|
Net interest margin
|
1.05 | .93 | 1.26 | 1.54 | 1.77 | |||||||||||||||
|
Return on assets
|
.20 | (.14 | ) | (.71 | ) | 1.22 | 1.68 | |||||||||||||
|
Dividend payout ratio
|
— | — | (11 | ) | 37 | 28 | ||||||||||||||
|
Average equity/average assets
|
2.96 | 3.45 | 3.51 | 3.98 | 3.82 | |||||||||||||||
|
Balance Sheet Data:
|
||||||||||||||||||||
|
Student loans, net
|
$ | 143,807 | $ | 144,802 | $ | 124,153 | $ | 95,920 | $ | 82,604 | ||||||||||
|
Total assets
|
169,985 | 168,768 | 155,565 | 116,136 | 99,339 | |||||||||||||||
|
Total borrowings
|
161,443 | 160,158 | 147,046 | 108,087 | 91,929 | |||||||||||||||
|
Total SLM Corporation stockholders’ equity
|
5,279 | 4,999 | 5,224 | 4,360 | 3,792 | |||||||||||||||
|
Book value per common share
|
8.05 | 7.03 | 7.84 | 9.24 | 7.81 | |||||||||||||||
|
Other Data:
|
||||||||||||||||||||
|
Off-balance sheet securitized student loans, net
|
$ | 32,638 | $ | 35,591 | $ | 39,423 | $ | 46,172 | $ | 39,925 | ||||||||||
21
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended December 31, 2007-2009
(Dollars in millions, except per share amounts, unless otherwise stated)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended December 31, 2007-2009
(Dollars in millions, except per share amounts, unless otherwise stated)
FORWARD-LOOKING
AND CAUTIONARY STATEMENTS
Some of the statements contained in this Annual Report discuss
future expectations and business strategies or include other
“forward-looking” information. These statements are
subject to known and unknown risks, uncertainties and other
factors that could cause the actual results to differ materially
from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using
numerous assumptions.
OVERVIEW
This section provides an overview of the Company’s 2009
business results from a financial perspective. Certain financial
impacts of funding and liquidity, loan losses, asset growth and
net interest margin, fee income, the distressed debt purchased
paper business, operating expenses, and capital adequacy are
summarized below.
The income statement amounts discussed in this Overview section
are on a “Core Earning” basis. Although “Core
Earnings” is the basis used for the Company’s segment
disclosures required under GAAP (see Note 20, “Segment
Reporting” to the consolidated financial statements), the
consolidation of the individual segments’ income statements
is considered a non-GAAP financial measure and thus is not
considered to be presented in accordance with GAAP. See
“RESULTS OF OPERATIONS,” below, for a discussion of
income statement amounts on a GAAP basis. See “BUSINESS
SEGMENTS — Limitations of ‘Core
Earnings’ —
Pre-tax Differences between
‘Core Earnings’ and GAAP by Business Segment
”
for a discussion of “Core Earnings” and a
reconciliation of “Core Earnings” income to GAAP
income.
In the second quarter of 2009, the Department of Education
(“ED”) named Sallie Mae as one of four private sector
servicers awarded a servicing contract (the “ED Servicing
Contract”) to service loans. The contract covers the
servicing of all federally-owned student loans, including loans
under the DSLP and the servicing of FFELP loans purchased by ED
as part of the Loan Purchase Commitment Program (“Purchase
Program”) pursuant to The Ensuring Continued Access to
Student Loans Act of 2008 (“ECASLA”). See
“LIQUIDITY AND CAPITAL RESOURCES — ED Funding
Programs” for a further discussion. Beginning in 2010, the
contract will also cover the servicing of new Direct Loans. The
contract has an initial term of five years with one, five-year
renewal at the option of ED.
Through December 31, 2009, the Company has sold to ED
approximately $18.5 billion face amount of loans as part of
the Purchase Program. Borrowings of $18.5 billion related
to the Loan Purchase Participation Program (“Participation
Program”) pursuant to ECASLA were paid down in connection
with these loan sales. The Company recognized a
$284 million gain in 2009 related to this loan sale. The
Company is servicing approximately 2 million accounts under
the ED Servicing Contract as of December 31, 2009. This
amount serviced includes loans sold by the Company to ED as well
as loans sold by other companies to ED.
As discussed in the Business section, legislative changes to the
FFELP, the credit markets and the economic downturn impacted the
Company’s financial results for 2008 and 2009. The Company
reported $597 million in “Core Earnings” net
income in 2009, an increase from $526 million in 2008.
Funding
and Liquidity
In 2009, we extended the duration of our liabilities by
executing term financings to replace short-term funding. In
2009, we completed a total of $5.9 billion of FFELP loan
securitizations, $14.6 billion in funding
22
through the Straight A conduit and $7.5 billion in Private
Education Loan securitizations ($6.0 billion through the
Term Asset-Backed Securities Loan Facility (“TALF”)).
We also raised $4.5 billion in term deposits at Sallie Mae
Bank which was used to originate Private Education Loans.
The Company began actively repurchasing its outstanding debt in
the second quarter of 2008. The Company repurchased
$3.4 billion and $1.9 billion face amount of its
senior unsecured notes for the years ended December 31,
2009 and 2008, respectively. The debt repurchased had maturity
dates ranging from 2008 to 2016. This repurchase activity
resulted in gains of $536 million and $64 million in
2009 and 2008, respectively. In January 2010, the Company
repurchased $812 million of unsecured debt through a tender
offer for a gain of $45 million.
During 2009, the Company converted $339 million of its
Series C Preferred Stock to common stock. As part of this
conversion, the Company delivered to the holders of the
preferred stock: (1) approximately 17 million shares
(the number of common shares they would most likely receive if
the preferred stock they held mandatorily converted to common
shares in the fourth quarter of 2010) plus (2) a
discounted amount of the preferred stock dividends the holders
of the preferred stock would have received if they held the
preferred stock through the mandatory conversion date. The
accounting treatment for this conversion resulted in additional
expense recorded as a part of preferred stock dividends for the
period of approximately $53 million. From the transaction
date through the mandatory conversion date of December 15,
2010, these transactions are cash flow positive.
In January 2010, we terminated our existing ABCP facility and
replaced it with a multiyear facility that will allow us to fund
federal loans at a much lower cost. The new facility provides
funding of up to
$
10 billion in the first year,
$5 billion in the second year and $2 billion in the
third year. The upfront fees were $4 million and the
interest rate is commercial paper issuance cost plus
0.50 percent, a sharp reduction from the fees and interest
rate associated with the prior facility. In 2008 and 2009, we
paid upfront fees of $390 million and $151 million,
respectively, on our ABCP facilities.
In January 2010, we also became a member of the Federal Home
Loan Bank of Des Moines (the “FHLB”) through our HICA
insurance subsidiary. Through this membership, the FHLB will
provide advances backed by Federal Housing Finance Agency
approved collateral, which include federally-guaranteed student
loans. The amount, price and tenor of future advances will vary
and will be determined at the time of each borrowing.
At December 31, 2009, 85 percent of our Managed
student loans were funded for the life of the loans, up from
70 percent in the prior year. We also had
$12.5 billion in primary liquidity at December 31,
2009 consisting of cash and investments and committed lines of
credit.
Loan
Losses
On a “Core Earnings” basis, the loan loss provision
for the year was $1.6 billion, of which $1.4 billion
was for Private Education Loans. Provision expense has remained
elevated since the fourth quarter of 2008 primarily as a result
of the continued uncertainty of the U.S. economy. The
Private Education Loan portfolio had experienced a significant
increase in delinquencies through the first quarter of 2009;
however, delinquencies as a percentage of loans in repayment
declined in the second, third and fourth quarters of 2009. The
Company believes charge-offs peaked in the third quarter of 2009
and will decline in future quarters as evidenced by the
33 percent decline in charge-offs that occurred between the
third and fourth quarters of 2009.
Asset
Growth and Net Interest Margin
In 2009, the Company originated $21.7 billion in FFELP
loans, a 21 percent increase over 2008. We refocused our
FFELP originations on our internal lending brands, which grew
40 percent over 2008. See “LENDING BUSINESS
SEGMENT — Loan Originations” for a further
discussion.
Private Education Loan originations for 2009 were
$3.2 billion, a 50 percent decline from 2008. This
decline is primarily a result of a continued tightening of our
underwriting criteria, an increase in guaranteed student loan
borrowing limits and the Company’s withdrawal from certain
markets. Beginning in 2008, the Company increased its
underwriting standards, and as a result, average FICO scores and
the percentage of
23
loans with cosigners have increased. The Company expects to
maintain its high quality underwriting standards. The impact of
this initiative and the overall economy may impact future
Private Education Loan asset growth.
“Core Earnings” net interest income was
$2.3 billion in 2009 compared to $2.4 billion in 2008.
“Core Earnings” net interest income was negatively
impacted in 2009 compared to 2008 primarily as a result of an
18 basis point widening of the CP/LIBOR spread and higher
credit spreads on the Company’s ABS debt issued in 2008 and
2009 due to the current credit environment. Partially offsetting
these decreases to net interest income were lower cost of funds
related to the ED Conduit Program, lower borrowing costs
associated with our ABCP facility, higher asset spreads earned
on Private Education Loans originated during 2009 compared to
prior years, and a $12 billion increase in the average
balance of Managed student loans.
Fee
Income
“Core Earnings” fee income from our contingency
business declined $44 million from $340 million in
2008 to $296 million in 2009. This decline was primarily a
result of significantly less guarantor collections revenue
associated with rehabilitating delinquent FFELP loans. Loans are
considered rehabilitated after a certain number of on-time
payments have been collected. The Company earns a rehabilitation
fee only when the Guarantor sells the rehabilitated loan. The
disruption in the credit markets has limited the sale of
rehabilitated loans.
“Core Earnings” fee income from our Guarantor
Servicing business was $136 million for the year, a
$15 million increase from last year. This increase
primarily relates to an increase in guarantor issuance fees
earned as a result of a significant increase in FFELP loan
guarantees (consistent with the significant increase in the
Company’s FFELP loan originations) over the prior year as
well as an increase in account maintenance fees earned which are
a function of the size of the FFELP portfolio.
A source of additional fee income for 2010 will be third-party
servicing revenue. As previously discussed, the Company began
servicing 2 million accounts in the fourth quarter of 2009
under the ED Servicing Contract. The Company earned
$9 million of servicing revenue in the fourth quarter of
2009 related to this contract and expects this to grow
significantly as this
third-party
serviced portfolio increases over time.
Purchased
Paper Business
In 2008, we decided to exit the debt purchased paper business
(see “ASSET PERFORMANCE GROUP BUSINESS SEGMENT”).
The Company sold its international Purchased Paper —
Non-Mortgage business in the first quarter of 2009. The Company
sold all of the assets in its Purchased Paper —
Mortgage/Properties business in the fourth quarter of 2009. With
the sale of GRP, the Purchased Paper —
Mortgage/Properties business is required to be presented
separately as discontinued operations for all periods presented.
This sale of assets in the fourth quarter of 2009 resulted in an
after-tax loss of $95 million. As of December 31,
2009, the portfolio of assets related to the Purchased Paper
business was $285 million.
Operating
Expenses
For 2009, operating expenses on a “Core Earnings”
basis were $1.18 billion, compared to $1.23 billion in
2008. The $50 million decrease in operating expenses was
primarily due to the Company’s cost reduction efforts,
offset by an increase in collection costs for delinquent and
defaulted loans as well as higher expenses incurred to
reconfigure the Company’s servicing system to meet the
requirements of the ED Servicing Contract awarded in 2009.
Capital
Adequacy
At
year-end,
the Company’s tangible capital ratio was 2.0 percent
of Managed assets, compared to 1.8 percent at
2008 year-end.
With 80 percent of our Managed loans carrying an explicit
federal government guarantee and 85 percent of our Managed
loans funded for the life of the loan, we currently believe that
our
24
capital levels are appropriate. In the current economic
environment, we cannot predict the availability nor cost of
additional capital, should the Company determine that additional
capital is necessary.
Legislative &
Regulatory Developments
On February 26, 2009, the Administration issued their 2010
fiscal year budget request to Congress which included provisions
that called for the elimination of the FFELP program and which
would require all new federal loans to be made through the
Direct Student Loan Program (“DSLP”). On
September 17, 2009 the House of Representatives passed H.R.
3221, the Student Aid and Fiscal Responsibility act
(“SAFRA”), which was consistent with the
Administration’s 2010 budget request to Congress. If it
became law SAFRA would eliminate the FFELP and require that,
after July 1, 2010 all new federal loans be made through
the DSLP. The Administration’s 2011 fiscal year budget
continued these requests.
The Senate has not yet introduced legislation on this issue. The
Company, together with other members of the student loan
community, has been working with members of Congress to enhance
SAFRA to allow students and schools to continue to choose their
loan originator and to require servicers to share in the risk of
loan default. This proposal is referred to as the
“Community Proposal” because it has the widespread
support of the student lending community, which includes
lenders, Guarantors, financial aid advisors and others. We
believe that maintaining competition in the student loan
programs and requiring participants to assume a portion of the
risk inherent in the program, two of the major tenets of the
Community Proposal, would result in a more efficient and cost
effective program that better serves students, schools, ED and
taxpayers.
Although the ultimate outcome of this proposed legislation is
still unknown, the following summarizes the impact on the
Company’s business if SAFRA is passed:
| 1. | The Company would no longer originate FFELP loans and therefore would no longer earn revenue on new FFELP loan volume. The Company would make significant reductions in operating expense as the FFELP origination function would no longer be needed. | |
| 2. | The Company earns collections revenue on delinquent and defaulted FFELP loans as well as guarantor account maintenance fees which are based on the size of the underlying FFELP portfolio. Because there would no longer be any new FFELP loan originations, this collections revenue and guarantor account maintenance fee revenue would decline over time as the underlying FFELP portfolio winds down. These revenues are recorded in contingency fee revenue and guarantor servicing fees. | |
| 3. | The Company earns guarantor issuance fees on new FFELP guarantees. This revenue would no longer occur. This revenue is recorded in guarantor servicing fees. | |
| 4. | The Company would service a percentage of the Direct Lending loans originated subsequent to the passage of SAFRA under the Company’s current contract to service ED loans, increasing our servicing revenue. |
If the Community Proposal is passed the following would be the
impact on the Company’s business:
| 1. | The Company would originate FFELP loans and would subsequently sell those loans to ED for a fee. Because the loans would be sold, the Company would no longer earn net interest margin on new FFELP loan volume. | |
| 2. | The impact to collections revenue, guarantor account maintenance fees and guarantor issuance fees is the same as if SAFRA passes. | |
| 3. | The Company would service a percentage of the Direct Lending loans originated subsequent to the passage of the Community Proposal under the Company’s current contract to service ED loans. The Community Proposal would create incentives for enhanced default prevention through servicing risk-sharing. |
25
See the “LENDING BUSINESS SEGMENT,” “APG BUSINESS
SEGMENT” and “CORPORATE AND OTHER BUSINESS
SEGMENT” discussions for greater detail on the nature and
extent of our income and operations related to these areas.
On January 14, 2010, President Obama announced his
intention to propose a Financial Crisis Responsibility Fee that
would require certain institutions which own insured depository
institutions to pay a tax equal to 15 basis points
(0.15 percent) of certain liabilities. This tax is intended
to raise up to $117 billion to reimburse the federal
government for the projected cost of the Troubled Asset Relief
Program (“TARP”). Congress has not yet taken up any
legislation and no legislative language has been proposed. As
such, the Company cannot say whether it will be subject to this
new tax, if enacted. Additionally, since the Company did not
receive any money from the TARP, the Company’s position is
that the Company should not be subject to the tax. Moreover, the
majority of loans held by the Company were originated under the
FFELP, with program terms and interest rates determined by
Congress, and subjecting those assets to this new tax would not
be consistent with the behavior the tax is intended to penalize.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition
and Results of Operations addresses our consolidated financial
statements, which have been prepared in accordance with
generally accepted accounting principles in the United States of
America (“GAAP”). Note 2 to the consolidated
financial statements, “Significant Accounting
Policies,” includes a summary of the significant accounting
policies and methods used in the preparation of our consolidated
financial statements. The preparation of these financial
statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
the reported amounts of income and expenses during the reporting
periods. Actual results may differ from these estimates under
varying assumptions or conditions. On a quarterly basis,
management evaluates its estimates, particularly those that
include the most difficult, subjective or complex judgments and
are often about matters that are inherently uncertain. The most
significant judgments, estimates and assumptions relate to the
following critical accounting policies that are discussed in
more detail below.
Allowance
for Loan Losses
We maintain an allowance for loan losses at an amount sufficient
to absorb losses incurred in our FFELP loan and Private
Education Loan portfolios at the reporting date based on a
projection of estimated probable credit losses incurred in the
portfolio. We analyze those portfolios to determine the effects
that the various stages of delinquency and forbearance have on
borrower default behavior and ultimate charge-off. We estimate
the allowance for loan losses for our loan portfolio using a
migration analysis of delinquent and current accounts. A
migration analysis is a technique used to estimate the
likelihood that a loan receivable may progress through the
various delinquency stages and ultimately charge off and is a
widely used reserving methodology in the consumer finance
industry. We also use the migration analysis to estimate the
amount of uncollectible accrued interest on Private Education
Loans and reserve for that amount against current period
interest income. The evaluation of the allowance for loan losses
is inherently subjective, as it requires material estimates that
may be susceptible to significant changes. Our default estimates
are based on a loss confirmation period of generally two years
(i.e., our allowance for loan loss covers the next two years of
expected losses). The two-year estimate of the allowance for
loan losses is subject to a number of assumptions. If actual
future performance in delinquency, charge-offs and recoveries
are significantly different than estimated, this could
materially affect our estimate of the allowance for loan losses
and the related provision for loan losses on our income
statement. We believe that the Private Education Loan and FFELP
allowance for loan losses are appropriate to cover probable
losses incurred in the student loan portfolio.
When calculating the allowance for loan losses on Private
Education Loans, we divide the portfolio into categories of
similar risk characteristics based on loan program type, loan
status (in-school, grace, forbearance, repayment and
delinquency), underwriting criteria (FICO scores), and existence
or absence of a cosigner. As noted above, we use historical
experience of borrower default behavior and charge-offs to
estimate the probable credit losses incurred in the loan
portfolio at the reporting date. Also, we use historical
borrower payment behavior to estimate the timing and amount of
future recoveries on charged-off loans. We then apply the
default and collection
26
rate projections to each category of loans. Once the
quantitative calculation is performed, management reviews the
adequacy of the allowance for loan losses and determines if
qualitative adjustments need to be considered. One technique for
making this determination is through projection modeling, which
is used to determine if the allowance for loan losses is
sufficient to absorb credit losses anticipated during the loss
confirmation period. Projection modeling is a forward-looking
projection of charge-offs. Assumptions that are utilized in the
projection modeling include (but are not limited to) historical
experience, recent changes in collection policies and
procedures, collection performance, and macroeconomic
indicators. Additionally, management considers changes in laws
and regulations that could potentially impact the allowance for
loan losses.
The current and future economic environment is taken into
account by the Company when calculating the allowance for loan
loss. The Company analyzes key economic statistics and the
impact they will have on future charge-offs. Key economic
statistics analyzed as part of the allowance for loan loss are
unemployment rates (total and specific to college graduates),
consumer confidence and other asset type delinquency rates
(credit cards, mortgages). As a result of the economy, provision
expense has remained elevated since the fourth quarter of 2008.
If the economy weakens beyond our expectations, the expected
losses resulting from our default and collection estimates
embedded in the allowance could be higher than currently
projected.
As part of concluding on the adequacy of the allowance for loan
loss, the Company also reviews key allowance and loan metrics.
The most relevant of these metrics considered are the allowance
coverage of
charge-offs
ratio; the allowance as a percentage of total loans and of loans
in repayment; and delinquency and forbearance percentages.
In 2009, the Company implemented a program which offers loan
modifications to borrowers who qualify. Temporary interest rate
concessions are granted to borrowers experiencing financial
difficulties and who meet other criteria. The allowance on these
loans is calculated based on the present value of the expected
cash flows (including estimates of future defaults) discounted
at the loan’s effective interest rate. This calculation
contains estimates which are inherently subjective and are
evaluated on a periodic basis.
Historically, our Private Education Loan programs do not require
that borrowers begin repayment until six months after they have
graduated or otherwise left school. Consequently, our loss
estimates for these programs are generally low while the
borrower is in school. At December 31, 2009,
31 percent of the principal balance in the higher education
Managed Private Education Loan portfolio is related to borrowers
who are in in-school or grace status and not required to make
payments. As the current portfolio ages, an increasing
percentage of the borrowers will leave school and be required to
begin payments on their loans. The allowance for losses will
change accordingly.
Similar to the rules governing FFELP payment requirements, our
collection policies allow for periods of nonpayment for
borrowers requesting additional payment grace periods upon
leaving school or experiencing temporary difficulty meeting
payment obligations. This is referred to as forbearance status
and is considered separately in our allowance for loan losses.
The loss confirmation period is in alignment with our typical
collection cycle and takes into account these periods of
forbearance.
In general, Private Education Loan principal is charged-off
against the allowance when the loan exceeds 212 days
delinquency. The charge-off amount equals the estimated loss of
the defaulted loan balance. Actual recoveries, as they are
received, are applied against the remaining loan balance that
was not charged off. If periodic recoveries are less than
originally expected, the difference results in immediate
additional provision expense and charge off of such amount.
FFELP loans are guaranteed as to their principal and accrued
interest in the event of default subject to a Risk Sharing level
set based on the date of loan disbursement. For loans disbursed
after October 1, 1993, and before July 1, 2006, we
receive 98 percent reimbursement on all qualifying default
claims. For loans disbursed on or after July 1, 2006, we
receive 97 percent reimbursement. The CCRAA reduces the
Risk Sharing level for loans disbursed on or after
October 1, 2012 to 95 percent reimbursement.
Similar to the allowance for Private Education Loan losses, the
allowance for FFELP loan losses uses historical experience of
borrower default behavior and a two-year loss confirmation
period to estimate the credit losses incurred in the loan
portfolio at the reporting date. We divide the portfolio into
categories of
27
similar risk characteristics based on loan program type, school
type and loan status. We then apply the default rate
projections, net of applicable Risk Sharing, to each category
for the current period to perform our quantitative calculation.
Once the quantitative calculation is performed, management
reviews the adequacy of the allowance for loan losses, in the
same manner described above for Private Education Loans, and
determines if qualitative adjustments need to be considered.
Premium
and Discount Amortization
For both federally insured and Private Education Loans, we
account for premiums paid, discounts received, and capitalized
direct origination costs incurred on the origination of student
loans in accordance with the Financial Accounting Standards
Board’s (“FASB”) Accounting Standards
Codification (“ASC”) 310, “Receivables.” The
unamortized portion of the premiums and the discounts is
included in the carrying value of the student loans on the
consolidated balance sheet. We recognize income on our student
loan portfolio based on the expected yield over the estimated
life of the student loan after giving effect to the amortization
of purchase premiums and accretion of student loan discounts. In
arriving at the expected yield, we make a number of estimates
that when changed are reflected as a cumulative adjustment to
interest income in the current period. The most critical
estimates for premium and discount amortization are incorporated
in the Constant Prepayment Rate (“CPR”), which
measures the rate at which loans in the portfolio pay down
principal compared to their stated terms. The CPR estimate is
based on historical prepayments due to consolidation activity,
defaults, and term extensions from the utilization of
forbearance as well as management’s qualitative expectation
of future prepayments and term extensions.
As a result of the CCRAA and the current U.S. economic and
credit environment, we, as well as many other industry
competitors, have suspended our FFELP consolidation program. In
lieu of consolidation, we may offer a term extension option for
FFELP loans based on the borrower’s total indebtedness.
Based upon these market factors, we have updated our CPR
assumptions that are affected by consolidation activity, and we
have updated the estimates used in developing the cash flows and
effective yield calculations as they relate to the amortization
of student loan premium and discount amortization.
Consolidation activity affects estimates differently depending
on whether the original loans being consolidated were on-balance
sheet or off-balance sheet and whether the resulting
consolidation is retained by us or consolidated with a third
party. When we consolidate a loan that was in our portfolio, the
term of that loan is generally extended and the term of the
amortization of associated student loan premiums and discounts
is likewise extended to match the new term of the loan. In that
process, the unamortized premium balance must be adjusted to
reflect the new expected term of the consolidated loan as if it
had been in place from inception.
At the beginning of 2008, when we evaluated our estimates by
taking into consideration the suspension of our FFELP
consolidation program, there was an expectation of increased
external consolidations to third parties but an overall decrease
in total consolidation activity (when taking into account both
internal consolidations and consolidations to third parties) due
to a lack of financial incentive for lenders to continue
offering a consolidation product. External consolidations did
not significantly increase as expected; therefore, the
consolidation assumptions implemented in the first quarter of
2008 were reduced during the third quarter of 2008, as we made
the decision to lower the consolidation rate as additional
information became available. This consolidation assumption was
reduced again in the third quarter of 2009 as additional
information became available. The total GAAP impact to interest
income of CPR assumption changes in 2009 and 2008, related to
FFELP loans, was $37.2 million and $20.1 million,
respectively.
Additionally, in previous years, the increased activity in FFELP
Consolidation Loans had led to demand for the consolidation of
Private Education Loans. The private loan consolidation
assumption was established in 2007 and was changed to explicitly
consider private loan consolidation in the same manner as for
FFELP. Because of limited historical data on private loan
consolidation, the assumption primarily relies on near term plan
data and timing assumptions. In the second quarter of 2008, due
to funding limitations, we suspended making private
consolidation loans, which impacted this assumption. The total
GAAP impact to interest income of CPR assumption changes in 2009
and 2008, related to Private Education Loans, was ($2.4) million
and $9.4 million, respectively.
28
Loan consolidation, default, term extension and other prepayment
factors affecting our CPR estimates are impacted by changes in
our business strategy, FFELP legislative changes, and changes to
the current economic and credit environment. If our accounting
estimates, especially CPRs, are different as a result of changes
to our business environment or actual consolidation or default
activity, the previously recognized interest income on our
student loan portfolio based on the expected yield of the
student loan would potentially result in a material adjustment
in the current period.
Fair
Value Measurement
The Company uses estimates of fair value in applying various
accounting standards for its financial statements. Under GAAP,
fair value measurements are used in one of four ways:
| • | In the consolidated balance sheet with changes in fair value recorded in the consolidated statement of income; | |
| • | In the consolidated balance sheet with changes in fair value recorded in the accumulated other comprehensive income section of the consolidated statement of changes in stockholders’ equity; | |
| • | In the consolidated balance sheet for instruments carried at lower of cost or fair value with impairment charges recorded in the consolidated statement of income; and | |
| • | In the notes to the financial statements. |
Fair value is defined as the price to sell an asset or transfer
a liability in an orderly transaction between willing and able
market participants. In general, the Company’s policy in
estimating fair values is to first look at observable market
prices for identical assets and liabilities in active markets,
where available. When these are not available, other inputs are
used to model fair value such as prices of similar instruments,
yield curves, volatilities, prepayment speeds, default rates and
credit spreads (including for the Company’s liabilities),
relying first on observable data from active markets. Additional
adjustments may be made for factors, including liquidity,
credit, bid/offer spreads, etc., depending on current market
conditions. Transaction costs are not included in the
determination of fair value. When possible, the Company seeks to
validate the model’s output to market transactions.
Depending on the availability of observable inputs and prices,
different valuation models could produce materially different
fair value estimates. The values presented may not represent
future fair values and may not be realizable.
The Company categorizes its fair value estimates based on a
hierarchical framework associated with three levels of price
transparency utilized in measuring financial instruments at fair
value. Classification is based on the lowest level of input that
is significant to the fair value of the instrument. The three
levels are as follows:
| • | Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. The types of financial instruments included in level 1 are highly liquid instruments with quoted prices. | |
| • | Level 2 — Inputs from active markets, other than quoted prices for identical instruments, are used to model fair value. Significant inputs are directly observable from active markets for substantially the full term of the asset or liability being valued. | |
| • | Level 3 — Pricing inputs significant to the valuation are unobservable. Inputs are developed based on the best information available; however, significant judgment is required by management in developing the inputs. |
In August 2009, the FASB issued a topic update to ASC 820,
“Fair Value Measurements and Disclosures.” The update
provides clarification for the valuation of liabilities when a
quoted price in an active market for the liability does not
exist and clarifies that a quoted price for the liability when
traded as an asset (when no adjustments are required) is a
Level 1 fair value measurement. In addition, it also
clarifies that an entity is not required to adjust the value of
a liability for the existence of a restriction that prevents the
transfer of the liability. This topic update was effective for
the Company beginning October 1, 2009 and was not material
to the Company.
On April 9, 2009, the FASB issued three ASC topic updates
regarding fair value measurements and recognition of impairment.
Under ASC 320, “Investments — Debt and Equity
Securities,” impairment must be recorded within the
consolidated statements of income for debt securities if there
exists a fair value loss and the entity intends to sell the
security or it is more likely than not the entity will be
required to sell the security
29
before recovery of the loss. Additionally, expected credit
losses must be recorded through income regardless of the
impairment determination above. Remaining fair value losses are
recorded to other comprehensive income. ASC 825, “Financial
Instruments,” requires interim disclosures of the fair
value of financial instruments that were previously only
required annually. Finally, the update to ASC 820 provides
guidance for determining when a significant decrease in market
activity has occurred and when a transaction is not orderly. It
further reiterates that prices from inactive markets or
disorderly transactions should carry less weight, if any, in the
determination of fair value. These topic updates were effective
for the Company beginning April 1, 2009. The adoption of
these updates was not material to the Company.
Significant assumptions used in fair value measurements,
including those related to credit and liquidity risk, are as
follows:
| 1. | Investments — Our investments primarily consist of overnight/weekly maturity instruments with high credit quality counterparties. However, we have considered credit and liquidity risk involving specific instruments. These assumptions have further been validated by the successful maturity of these investments in the period immediately following the end of the reporting period. In the fourth quarter of 2008, we recorded an impairment of $8 million related to our investment in the Reserve Primary Fund based on an internal assessment of the collectability of our remaining investment. See “LIQUIDITY AND CAPITAL RESOURCES — Counterparty Exposure” for a further discussion. | |
| 2. | Derivatives — When determining the fair value of derivatives, we take into account counterparty credit risk for positions where we are exposed to the counterparty on a net basis by assessing exposure net of collateral held. The net exposures for each counterparty are adjusted based on market information available for the specific counterparty, including spreads from credit default swaps. Additionally, when the counterparty has exposure to the Company related to SLM Corporation derivatives, we fully collateralize the exposure, minimizing the adjustment necessary to the derivative valuations for our credit risk. Trusts that contain derivatives are not required to post collateral to counterparties as the credit quality and securitized nature of the trusts minimizes any adjustments for the counterparty’s exposure to the trusts. Adjustments related to credit risk reduced the overall value of our derivatives by $65 million as of December 31, 2009. We also take into account changes in liquidity when determining the fair value of derivative positions. We adjusted the fair value of certain less liquid positions downward by approximately $195 million to take into account a significant reduction in liquidity as of December 31, 2009, related primarily to basis swaps indexed to interest rate indices with inactive markets. A major indicator of market inactivity is the widening of the bid/ask spread in these markets. In general, the widening of counterparty credit spreads and reduced liquidity for derivative instruments as indicated by wider bid/ask spreads will reduce the fair value of derivatives. In addition, certain cross-currency interest rate swaps hedging foreign currency denominated reset rate and amortizing notes in the Company’s on-balance sheet trusts contain extension features that coincide with the remarketing dates of the notes. The valuation of the extension feature requires significant judgment based on internally developed inputs. These swaps were transferred into Level 3 during the first quarter of 2009 due to a change in the assumption regarding successful remarketing and significant unobservable inputs used to model notional amortizations. The significant inputs used are prepayment and default rate assumptions used to project the cash flows of the trust. These swaps were carried at $1.6 billion as of December 31, 2009. | |
| 3. | Residual Interests — We have never sold our Residual Interests. We do not consider our Residual Interests to be liquid, which we take into account when valuing our Residual Interests. We use non-binding broker quotes and industry analyst reports which show changes in the indicative prices of the asset-backed securities tranches immediately senior to the Residual Interest as an indication of potential changes in the discount rate used to value the Residual Interest. We also use the most current prepayment and default rate assumptions to project the cash flows used to value Residual Interests. These assumptions are internally developed and primarily based on analyzing the actual results of loan performance from past periods. See Note 8, “Student Loan Securitization,” to the consolidated financial statements for a discussion of all assumption changes made during the quarter |
30
| to properly determine the fair value of the Residual Interests, as well as a shock analysis to fair value related to all significant assumptions. |
| 4. | Student Loans — Our FFELP loans and Private Education Loans are accounted for at cost or at the lower of cost or market if the loan is held-for-sale. The fair value is disclosed in compliance with ASC 825. For both FFELP loans and Private Education Loans accounted for at cost, fair value is determined by modeling loan level cash flows using stated terms of the assets and internally-developed assumptions to determine aggregate portfolio yield, net present value and average life. The significant assumptions used to project cash flows are prepayment speeds, default rates, cost of funds, and required return on equity. In addition, the Floor Income component of our FFELP loan portfolio is valued through discounted cash flow and option models using both observable market inputs and internally developed inputs. Significant inputs into the models are not generally market observable. They are either derived internally through a combination of historical experience and management’s qualitative expectation of future performance (in the case of prepayment speeds, default rates, and capital assumptions) or are obtained through external broker quotes (as in the case of cost of funds). When possible, market transactions are used to validate the model. In most cases, these are either infrequent or not observable. For FFELP loans classified as held-for-sale and accounted for at the lower of cost or market, the fair value is based on the committed sales price of the various loan purchase programs established by ED. |
For further information regarding the impact of Level 3
fair values to the results of operations, see Note 16,
“Fair Value Measurements,” to the consolidated
financial statements.
Securitization
Accounting and Retained Interests
We regularly engage in securitization transactions as part of
our Lending segment financing strategy (see also “LIQUIDITY
AND CAPITAL RESOURCES — Securitization
Activities”). In a securitization, we sell student loans to
a trust that issues bonds backed by the student loans as part of
the transaction. When our securitizations meet the sale criteria
of ASC 860, “Transfers and Servicing,” we record a
gain on the sale of the student loans, which is the difference
between the allocated cost basis of the assets sold and the
relative fair value of the assets received including the
Residual Interest component of the Retained Interest in the
securitization transaction. The Residual Interest is the right
to receive cash flows from the student loans and reserve
accounts in excess of the amounts needed to pay servicing,
derivative costs (if any), other fees, and the principal and
interest on the bonds backed by the student loans. We have not
structured any securitization transaction to meet the sale
criteria since March 2007 and all securitizations settled since
that date have been accounted for on-balance sheet as secured
financings as a result.
Under ASC 825, we elected to carry all existing Residual
Interests at fair value with subsequent changes in fair value
recorded in servicing and securitization revenue. Since there
are no quoted market prices for our Residual Interests, we
estimate their fair value both initially and each subsequent
quarter using the key assumptions listed below:
| • | The CPR (see “Premium and Discount Amortization” above for discussion of this assumption). | |
| • | The expected credit losses from the underlying securitized loan portfolio. Although loss estimates related to the allowance for loan loss are based on a loss confirmation period of generally two years, expected credit losses related to the Residual Interests use a life of loan default rate. The life of loan default rate is used to determine the percentage of the loan’s original balance that will default. The life of loan default rate is then applied using a curve to determine the percentage of the overall default rate that should be recognized annually throughout the life of the loan (see also “Allowance for Loan Losses” above for the determination of default rates and the factors that may impact them). | |
| • | The discount rate used (see “Fair Value Measurement” discussed above). |
We also receive income for servicing the loans in our
securitization trusts. We assess the amounts received as
compensation for these activities at inception and on an ongoing
basis to determine if the amounts
31
received are adequate compensation as defined in ASC 860. To the
extent such compensation is determined to be no more or less
than adequate compensation, no servicing asset or obligation is
recorded.
See discussion that follows on changes to accounting principles
associated with transfers of financial assets and the Variable
Interest Entity Consolidation Model that will be effective in
2010.
Transfers
of Financial Assets and the Variable Interest Entity
(“VIE”) Consolidation Model — Changes
in Accounting Principles effective January 1,
2010
In June 2009, the FASB issued topic updates to ASC 860,
“Transfers and Servicing,” and to ASC 810,
“Consolidation.”
The topic update to ASC 860, among other things,
(1) eliminates the concept of a Qualifying Special Purpose
Entity (“QSPE”), (2) changes the requirements for
derecognizing financial assets, (3) changes the amount of
the recognized gain/loss on a transfer accounted for as a sale
when beneficial interests are received by the transferor, and
(4) requires additional disclosure. The topic update to ASC
860 is effective for transactions which occur in fiscal years
beginning after November 15, 2009. The impact of ASC 860 to
future transactions will depend on how such transactions are
structured. ASC 860 relates primarily to the Company’s
secured borrowing facilities. All of the Company’s secured
borrowing facilities entered into in 2008 and 2009, including
securitization trusts, have been accounted for as on balance
sheet financing facilities. These transactions would have been
accounted for in the same manner if ASC 860 had been effective
during these years.
The topic update to ASC 810 significantly changes the
consolidation model for Variable Interest Entities
(“VIEs”). The topic update amends ASC 810 and, among
other things, (1) eliminates the exemption for QSPEs,
(2) provides a new approach for determining who should
consolidate a VIE that is more focused on control rather than
economic interest, (3) changes when it is necessary to
reassess who should consolidate a VIE and (4) requires
additional disclosure. The topic update to ASC 810 is effective
for the first annual reporting period beginning after
November 15, 2009.
Under ASC 810, if an entity has a Variable Interest in a VIE and
that entity is determined to be the Primary Beneficiary of the
VIE then that entity will consolidate the VIE. The Primary
Beneficiary is the entity which has both: (1) the power to
direct the activities of the VIE that most significantly impact
the VIE’s economic performance and (2) the obligation
to absorb losses or receive benefits of the entity that could
potentially be significant to the VIE. As it relates to the
Company’s securitized assets, the Company is the servicer
of the securitized assets and owns the Residual Interest of the
securitization trusts. As a result the Company is the Primary
Beneficiary of its securitization trusts and will consolidate
those trusts that are off-balance sheet at their historical cost
basis on January 1, 2010. The historical cost basis is the
basis that would exist if these securitization trusts had
remained on balance sheet since they settled. ASC 810 did not
change the accounting of any other VIEs the Company has on its
balance sheet as of January 1, 2010. These new accounting
rules apply to new transactions entered into from
January 1, 2010 forward as well.
On January 1, 2010, upon adopting ASC 810, the Company
removed the $1.8 billion of Residual Interests associated
with these trusts from the consolidated balance sheet and the
Company consolidated $35.0 billion of assets
($32.6 billion of which are student loans, net of a
$550 million allowance for loan loss) and
$34.4 billion of liabilities (primarily trust debt), which
resulted in an approximate $0.7 billion after-tax reduction
of stockholders’ equity (through retained earnings). After
adoption of ASC 810, related to the securitization trusts that
were consolidated on January 1, 2010, the Company’s
results of operations will no longer reflect servicing and
securitization income related to these securitization trusts,
but will instead report interest income, provisions for loan
losses associated with the securitized assets and interest
expense associated with the debt issued from the securitization
trusts to third parties. This presentation will be identical to
the Company’s accounting treatment of prior
on-balance
securitization trusts. The Company has not had a securitization
that was treated as a sale since 2007.
Management allocates capital on a Managed Basis. This change
will not impact management’s view of capital adequacy for
the Company. The Company’s unsecured revolving credit
facilities contain two principal
32
financial covenants related to tangible net worth and net
revenue. The tangible net worth covenant requires the Company to
maintain consolidated tangible net worth of at least
$1.38 billion at all times. Consolidated tangible net worth
as calculated for purposes of this covenant was
$3.5 billion as of December 31, 2009. Upon adoption of
ASC 810 on January 1, 2010, consolidated tangible net worth
as calculated for this covenant was $2.7 billion. Because
the transition adjustment upon adoption of ASC 810 is recorded
through retained earnings the net revenue covenant was not
impacted by the adoption of ASC 810. The ongoing net revenue
covenant will not be impacted by ASC 810’s impact on our
securitization trusts as the net revenue covenant treated all
off balance sheet trusts as on balance sheet for purposes of
calculating net revenue.
Derivative
Accounting
We use interest rate swaps, cross-currency interest rate swaps,
interest rate futures contracts, Floor Income Contracts and
interest rate cap contracts as an integral part of our overall
risk management strategy to manage interest rate and foreign
currency risk arising from our fixed rate and floating rate
financial instruments. We account for these instruments in
accordance with ASC 815, “Derivatives and Hedging,”
which requires that every derivative instrument, including
certain derivative instruments embedded in other contracts, be
recorded at fair value on the balance sheet as either an asset
or liability. We determine the fair value for our derivative
instruments primarily by using pricing models that consider
current market conditions and the contractual terms of the
derivative contracts. Market inputs into the model include
interest rates, forward interest rate curves, volatility
factors, forward foreign exchange rates, and the closing price
of our stock (related to our equity forward contracts). Inputs
are generally from active financial markets; however, as
mentioned under “Fair Value Measurements” above,
adjustments are made for inputs from illiquid markets and to
adjust for credit risk. In some instances, counterparty
valuations are used in determining the fair value of a
derivative when deemed a more appropriate estimate of the fair
value. Pricing models and their underlying assumptions impact
the amount and timing of unrealized gains and losses recognized
and, as such, the use of different pricing models or assumptions
could produce different financial results. As a matter of
policy, we compare the fair values of our derivatives that we
calculate to those provided by our counterparties on a monthly
basis. Any significant differences are identified and resolved
appropriately.
ASC 815 requires that changes in the fair value of derivative
instruments be recognized currently in earnings unless specific
hedge accounting criteria as specified by ASC 815 are met. We
believe that all of our derivatives are effective economic
hedges and are a critical element of our interest rate risk
management strategy. However, under ASC 815, some of our
derivatives, primarily Floor Income Contracts, certain
Eurodollar futures contracts, basis swaps and equity forwards,
do not qualify for “hedge treatment” under ASC 815.
Therefore, changes in market value along with the periodic net
settlements must be recorded through the “gains (losses) on
derivative and hedging activities, net” line in the
consolidated statement of income with no consideration for the
corresponding change in fair value of the hedged item. The
derivative market value adjustment is primarily caused by
interest rate and foreign currency exchange rate volatility,
changing credit spreads during the period, and changes in our
stock price (related to equity forwards), as well as the volume
and term of derivatives not receiving hedge accounting
treatment. See also “BUSINESS SEGMENTS —
Limitations of ‘Core Earnings’ —
Pre-tax
Differences between ‘Core Earnings’ and GAAP by
Business Segment
— Derivative Accounting” for
a detailed discussion of our accounting for derivatives.
Goodwill
and Intangible Assets
Goodwill
The Company accounts for goodwill and acquired intangible assets
in accordance with ASC 350, “Intangibles —
Goodwill and Other,” pursuant to which goodwill is not
amortized. Goodwill is tested for impairment annually as of
September 30 at the reporting unit level, which is the same as
or one level below an operating segment as defined in ASC 280,
“Segment Reporting.” Goodwill is also tested at
interim periods if an event occurs or circumstances change that
would indicate the carrying amount may be impaired.
In accordance with ASC 350, Step 1 of the goodwill impairment
analysis consists of a comparison of the fair value of the
reporting unit to its carrying value. The carrying value
includes goodwill of $991 million at
33
December 31, 2009 and 2008. The Company retains an
appraisal firm to perform annual Step 1 impairment testing.
Accordingly, the Company engages the appraisal firm to determine
the fair value of each of its four reporting units to which
goodwill is allocated as of September 30. These four
reporting units are Lending, APG, Guarantor Servicing and
Upromise. The fair value of each reporting unit is determined by
weighting different valuation approaches, as applicable, with
the primary approach being the income approach.
The income approach measures the value of each reporting unit
based on the present value of the reporting unit’s future
economic benefit determined based on discounted cash flows
derived from the Company’s projections for each reporting
unit. These projections are generally five-year projections that
reflect the future strategic operating and financial performance
of each respective reporting unit, including assumptions related
to applicable cost savings and planned dispositions or wind down
activities. If a component of a reporting unit is winding down
or is assumed to wind down, the projections extend through the
anticipated wind down period. In conjunction with the
Company’s September 30, 2009 annual impairment
assessment, cash flow projections for the Lending, APG, and
Guarantor Servicing reporting units were valued assuming the
proposed SAFRA legislation is passed. If the Community Proposal
is passed, it would result in additional cash flows for the
Lending reporting unit but no material change in cash flows for
the APG and Guarantor Servicing reporting units. (SAFRA
legislation and Community Proposal are discussed in more detail
in “OVERVIEW —
Legislative and Regulatory
Developments
.)
Under the Company’s guidance, the appraisal firm develops
both an asset rate of return and an equity rate of return (or
discount rate) for each reporting unit incorporating such
factors as a risk free rate, a market rate of return, a measure
of volatility (Beta) and a company specific and capital markets
risk premium, as appropriate, to adjust for volatility and
uncertainty in the economy and to capture specific risk related
to the respective reporting units. The Company considers whether
an asset sale or an equity sale would be the most likely sale
structure for each reporting unit and values each reporting unit
based on the more likely hypothetical scenario. The Company has
concluded that a hypothetical equity sale scenario would be more
likely for its Lending reporting unit, while a hypothetical
asset sale would be more likely for the APG, Guarantor Servicing
and Upromise reporting units.
Discount rates employed in conjunction with the income approach
reflect market based estimates of capital costs and are adjusted
for management’s assessment of a market participant’s
view with respect to execution, concentration and other risks
associated with the projected cash flows of individual reporting
units. Accordingly, these discount rates are reflective of the
long standing contractual relationships associated with these
cash flows as well as the wind down nature of the cash flows for
certain components of the Lending and APG reporting units and
the Guarantor Servicing reporting unit as a whole. Management
reviews and approves these discount rates, including the factors
incorporated to develop the discount rates for each reporting
unit. For the valuation of the Lending reporting unit, which
assumes an equity sale, the discount rate is applied to the
reporting unit’s projected net cash flows and the residual
or terminal value yielding the fair value of equity for the
reporting unit. For valuations assuming an asset sale, the
discount rates applicable to the individual reporting units are
applied to the respective reporting units’ projected asset
cash flows and residual or terminal values, as applicable,
yielding the fair value of the assets for the respective
reporting units. The estimated proceeds from the hypothetical
asset sale are then used to pay off any liabilities of the
reporting unit with the remaining cash equaling the fair value
of the reporting unit’s equity.
The guideline company or market approach as well as the publicly
traded stock approach are also considered for the Company’s
reporting units, as applicable. The market approach generally
measures the value of a reporting unit as compared to recent
sales or offerings of comparable companies. The secondary market
approach indicates value based on multiples calculated using the
market value of minority interests in publicly traded comparable
companies or guideline companies. Whether analyzing comparable
transactions or the market value of minority interests in
publicly traded or guideline companies, consideration is given
to the line of business and the operating performance of the
comparable companies versus the reporting unit being tested.
Given current market conditions, the lack of recent sales or
offerings in the market and the low correlation between the
operations of identified guideline companies to the
Company’s reporting units, less emphasis is placed on the
market approach for the APG, Guarantor Servicing and Upromise
reporting units.
34
The Company acknowledges that its stock price (as well as that
of its peers) is a consideration in determining the value of its
reporting units and the Company as a whole. However, management
believes the income approach is a better measure of the value of
its reporting units in the current environment. During the
latter half of 2008 and during 2009, the Company experienced a
trend of lower and very volatile market capitalization. During
2009, the Company’s stock price fluctuated significantly
from a low of $3.19 in March 2009 subsequent to the
Administration’s 2010 budget proposal, which included its
plan to eliminate the FFELP and require all federally funded
students loans to be originated through the DSLP, to a high of
$12.00 in December 2009. At September 30 and December 31,
2009, the Company’s stock price was $8.72 and $11.27,
respectively. The Company believes the share price has been
significantly reduced due to the continued downturn in the
credit and economic environment as well as uncertainties
surrounding the ongoing legislative process, as addressed
previously in “OVERVIEW —
Legislative and
Regulatory Developments.
” Management believes these
economic factors should not have a long-term impact. In
addition, the Company will review and revise, potentially
significantly, its business model based on the final form of
legislation upon completion of the legislative process.
In the event that the carrying value of the reporting unit
exceeds the fair value as determined in Step 1, Step 2 of the
goodwill impairment analysis compares the implied fair value of
the reporting unit’s goodwill to the carrying value of the
reporting unit’s goodwill. The implied fair value of
goodwill is determined in a manner consistent with determining
goodwill in a business combination. If the carrying amount of
the reporting unit’s goodwill exceeds the implied fair
value of the goodwill, an impairment loss is recognized in an
amount equal to that excess.
Other
Acquired Intangibles
Other acquired intangible assets, which include but are not
limited to tradenames, customer and other relationships, and
non-compete agreements, are also accounted for in accordance
with ASC 350. Acquired intangible assets with definite or finite
lives are amortized over their estimated useful lives in
proportion to their estimated economic benefit. Finite-lived
acquired intangible assets are reviewed for impairment using an
undiscounted cash flow analysis when an event occurs or
circumstances change indicating the carrying amount of a
finite-lived asset or asset group may not be recoverable. An
impairment loss would be recognized if the carrying amount of
the asset (or asset group) exceeds the estimated undiscounted
cash flows used to determine the fair value of the asset or
asset group. The impairment loss recognized would be the
difference between the carrying amount and fair value.
Indefinite-life acquired intangible assets are not amortized.
They are tested for impairment annually as of September 30 or at
interim periods if an event occurs or circumstances change that
would indicate the carrying value of these assets may be
impaired. The annual or interim impairment test of
indefinite-lived acquired intangible assets is based primarily
on a discounted cash flow analysis.
35
SELECTED
FINANCIAL DATA
| Increase (Decrease) | ||||||||||||||||||||||||||||
| Years Ended December 31, | 2009 vs. 2008 | 2008 vs. 2007 | ||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | $ | % | $ | % | ||||||||||||||||||||||
|
Net interest income
|
$ | 1,723 | $ | 1,365 | $ | 1,588 | $ | 358 | 26 | % | $ | (223 | ) | (14 | )% | |||||||||||||
|
Less: provisions for loan losses
|
1,119 | 720 | 1,015 | 399 | 55 | (295 | ) | (29 | ) | |||||||||||||||||||
|
Net interest income after provisions for loan losses
|
604 | 645 | 573 | (41 | ) | (6 | ) | 72 | 13 | |||||||||||||||||||
|
Gains on student loan securitizations
|
— | — | 367 | — | — | (367 | ) | (100 | ) | |||||||||||||||||||
|
Servicing and securitization revenue
|
295 | 262 | 437 | 33 | 13 | (175 | ) | (40 | ) | |||||||||||||||||||
|
Gains (losses) on loans and securities, net
|
284 | (186 | ) | (95 | ) | 470 | 253 | (91 | ) | (96 | ) | |||||||||||||||||
|
Gains (losses) on derivative and hedging activities, net
|
(604 | ) | (445 | ) | (1,361 | ) | (159 | ) | (36 | ) | 916 | 67 | ||||||||||||||||
|
Contingency fee revenue
|
296 | 340 | 336 | (44 | ) | (13 | ) | 4 | 1 | |||||||||||||||||||
|
Collections revenue
|
51 | 128 | 220 | (77 | ) | (60 | ) | (92 | ) | (42 | ) | |||||||||||||||||
|
Guarantor servicing fees
|
136 | 121 | 156 | 15 | 12 | (35 | ) | (22 | ) | |||||||||||||||||||
|
Other income
|
928 | 392 | 385 | 536 | 137 | 7 | 2 | |||||||||||||||||||||
|
Restructuring expenses
|
14 | 83 | 23 | (69 | ) | (83 | ) | 60 | 261 | |||||||||||||||||||
|
Operating expenses
|
1,255 | 1,316 | 1,487 | (61 | ) | (5 | ) | (171 | ) | (11 | ) | |||||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
721 | (142 | ) | (492 | ) | 863 | (608 | ) | 350 | 71 | ||||||||||||||||||
|
Income tax expense (benefit)
|
238 | (76 | ) | 408 | 314 | (413 | ) | (484 | ) | (119 | ) | |||||||||||||||||
|
Net income (loss) from continuing operations
|
483 | (66 | ) | (900 | ) | 549 | 832 | 834 | 93 | |||||||||||||||||||
|
(Loss) income from discontinued operations, net of tax
|
(158 | ) | (143 | ) | 6 | (15 | ) | (10 | ) | (149 | ) | (2483 | ) | |||||||||||||||
|
Net income (loss)
|
325 | (209 | ) | (894 | ) | 534 | 256 | 685 | 77 | |||||||||||||||||||
|
Less: net income attributable to noncontrolling interest
|
1 | 4 | 2 | (3 | ) | (75 | ) | 2 | 100 | |||||||||||||||||||
|
Net income (loss) attributable to SLM Corporation
|
324 | (213 | ) | (896 | ) | 537 | 252 | 683 | 76 | |||||||||||||||||||
|
Preferred stock dividends
|
146 | 111 | 37 | 35 | 32 | 74 | 200 | |||||||||||||||||||||
|
Net income (loss) attributable to common stock
|
$ | 178 | $ | (324 | ) | $ | (933 | ) | $ | 502 | 155 | % | $ | 609 | 65 | % | ||||||||||||
|
Net income (loss) attributable to SLM Corporation:
|
||||||||||||||||||||||||||||
|
Continuing operations, net of tax
|
$ | 482 | $ | (70 | ) | $ | (902 | ) | $ | 552 | 789 | % | $ | 832 | 92 | % | ||||||||||||
|
Discontinued operations, net of tax
|
(158 | ) | (143 | ) | 6 | (15 | ) | (10 | ) | (149 | ) | (2483 | ) | |||||||||||||||
|
Net income (loss) attributable to SLM Corporation
|
$ | 324 | $ | (213 | ) | $ | (896 | ) | $ | 537 | 252 | % | $ | 683 | 76 | % | ||||||||||||
|
Basic earnings (loss) per common share:
|
||||||||||||||||||||||||||||
|
Continuing operations
|
$ | .71 | $ | (.39 | ) | $ | (2.28 | ) | $ | 1.10 | 282 | % | $ | 1.89 | 83 | % | ||||||||||||
|
Discontinued operations
|
$ | (.33 | ) | $ | (.30 | ) | $ | .02 | $ | (.03 | ) | (10 | )% | $ | (.32 | ) | 1600 | % | ||||||||||
|
Total
|
$ | .38 | $ | (.69 | ) | $ | (2.26 | ) | $ | 1.07 | 155 | % | $ | 1.57 | 69 | % | ||||||||||||
|
Diluted earnings (loss) per common share:
|
||||||||||||||||||||||||||||
|
Continuing operations
|
$ | .71 | $ | (.39 | ) | $ | (2.28 | ) | $ | 1.10 | 282 | % | $ | 1.89 | 83 | % | ||||||||||||
|
Discontinued operations
|
$ | (.33 | ) | $ | (.30 | ) | $ | .02 | $ | (.03 | ) | (10 | )% | $ | (.32 | ) | 1600 | % | ||||||||||
|
Total
|
$ | .38 | $ | (.69 | ) | $ | (2.26 | ) | $ | 1.07 | 155 | % | $ | 1.57 | 69 | % | ||||||||||||
|
Dividends per common share
|
$ | — | $ | — | $ | .25 | $ | — | — | % | $ | (.25 | ) | (100 | )% | |||||||||||||
36
|
Increase (Decrease)
|
||||||||||||||||
| December 31, | 2009 vs. 2008 | |||||||||||||||
| 2009 | 2008 | $ | % | |||||||||||||
|
Assets
|
||||||||||||||||
|
FFELP Stafford and Other Student Loans, net
|
$ | 42,979 | $ | 44,025 | $ | (1,046 | ) | (2 | )% | |||||||
|
FFELP Stafford Loans
Held-for-Sale
|
9,696 | 8,451 | 1,245 | 15 | ||||||||||||
|
FFELP Consolidation Loans, net
|
68,379 | 71,744 | (3,365 | ) | (5 | ) | ||||||||||
|
Private Education Loans, net
|
22,753 | 20,582 | 2,171 | 11 | ||||||||||||
|
Other loans, net
|
420 | 729 | (309 | ) | (42 | ) | ||||||||||
|
Cash and investments
|
8,084 | 5,112 | 2,972 | 58 | ||||||||||||
|
Restricted cash and investments
|
5,169 | 3,535 | 1,634 | 46 | ||||||||||||
|
Retained Interest in off-balance sheet securitized loans
|
1,828 | 2,200 | (372 | ) | (17 | ) | ||||||||||
|
Goodwill and acquired intangible assets, net
|
1,177 | 1,249 | (72 | ) | (6 | ) | ||||||||||
|
Other assets
|
9,500 | 11,141 | (1,641 | ) | (15 | ) | ||||||||||
|
Total assets
|
$ | 169,985 | $ | 168,768 | $ | 1,217 | 1 | % | ||||||||
|
Liabilities and Stockholders’ Equity
|
||||||||||||||||
|
Short-term borrowings
|
$ | 30,897 | $ | 41,933 | $ | (11,036 | ) | (26 | )% | |||||||
|
Long-term borrowings
|
130,546 | 118,225 | 12,321 | 10 | ||||||||||||
|
Other liabilities
|
3,263 | 3,604 | (341 | ) | (9 | ) | ||||||||||
|
Total liabilities
|
164,706 | 163,762 | 944 | 1 | ||||||||||||
|
SLM Corporation stockholders’ equity before treasury stock
|
7,140 | 6,855 | 285 | 4 | ||||||||||||
|
Common stock held in treasury
|
1,861 | 1,856 | 5 | — | ||||||||||||
|
SLM Corporation stockholders’ equity
|
5,279 | 4,999 | 280 | 6 | ||||||||||||
|
Noncontrolling interest
|
— | 7 | (7 | ) | (100 | ) | ||||||||||
|
Total equity
|
5,279 | 5,006 | 273 | 5 | ||||||||||||
|
Total liabilities and equity
|
$ | 169,985 | $ | 168,768 | $ | 1,217 | 1 | % | ||||||||
RESULTS
OF OPERATIONS
We present the results of operations first on a consolidated
basis in accordance with GAAP. As discussed in
“Item 1. Business,” we have two primary business
segments, Lending and APG, plus a Corporate and Other business
segment. Since these business segments operate in distinct
business environments, the discussion following the Consolidated
Earnings Summary is primarily presented on a segment basis. See
“BUSINESS SEGMENTS” for further discussion on the
components of each segment. Securitization gains and the ongoing
servicing and securitization income are included in
“LIQUIDITY AND CAPITAL RESOURCES — Securitization
Activities.” The discussion of derivative market value
gains and losses is under “BUSINESS SEGMENTS —
Limitations of ‘Core Earnings’ —
Pre-tax
Differences between ‘Core Earnings’ and GAAP by
Business Segment —
Derivative Accounting.”
The discussion of goodwill and acquired intangible amortization
and impairment is discussed under “BUSINESS
SEGMENTS — Limitations of ‘Core
Earnings’ —
Pre-tax Differences between
‘Core Earnings’ and GAAP by Business
Segment —
Acquired Intangibles.”
37
CONSOLIDATED
EARNINGS SUMMARY
The main drivers of our net income are the growth in our Managed
student loan portfolio and our financing cost, which drives net
interest income, gains and losses on the sales of student loans,
gains on debt repurchases, unrealized gains and losses on
derivatives that do not receive hedge accounting treatment,
growth in our fee-based business, and expense control.
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
For the year ended December 31, 2009, net income
attributable to SLM Corporation was $324 million, or $.38
diluted earnings per common share attributable to SLM
Corporation common shareholders, compared to a net loss of
$213 million, or $.69 diluted loss per common share
attributable to SLM Corporation common shareholders, for the
year ended December 31, 2008. For the year ended
December 31, 2009, net income attributable to SLM
Corporation from continuing operations was $482 million, or
$.71 diluted earnings from continuing operations per common
share attributable to SLM Corporation common shareholders,
compared to a net loss from continuing operations of
$70 million, or $.39 diluted loss from continuing
operations per common share attributable to SLM Corporation
common shareholders, for year ended December 31, 2008. For
the year ended December 31, 2009, net loss attributable to
SLM Corporation from discontinued operations was
$158 million or $.33 diluted loss from discontinued
operations per common share attributable to SLM Corporation
common shareholders, compared to a net loss from discontinued
operations of $143 million, or $.30 diluted loss from
discontinued operations per common share attributable to SLM
Corporation common shareholders, for the year ended
December 31, 2008.
For the year ended December 31, 2009, the Company’s
pre-tax income from continuing operations was $721 million
compared to a pre-tax loss of $142 million in the prior
year. The increase in pre-tax income of $863 million was
primarily due to an increase in gains on debt repurchases of
$472 million and an increase in gains on sales of loans and
securities of $470 million offset by an increase of
$159 million in net losses on derivative and hedging
activities. The change in the net losses on derivative and
hedging activities is primarily the result of
mark-to-market
derivative valuations on derivatives that do not qualify for
“hedge treatment” under GAAP.
There were no gains on student loan securitizations in either
the year ended December 31, 2009 or the prior year as the
Company did not complete any off-balance sheet securitizations
in those years. Servicing and securitization revenue increased
by $33 million from $262 million in the year ended
December 31, 2008 to $295 million in the year ended
December 31, 2009. This increase was primarily due to a
$95 million decrease in the current-year unrealized
mark-to-market
loss of $330 million on the Company’s Residual
Interests compared with the prior-year unrealized
mark-to-market
loss of $425 million, offset by the decrease in net
Embedded Floor Income. See “LIQUIDITY AND CAPITAL
RESOURCES — Securitization Activities —
Retained Interest in Securitized Receivables
” for
further discussion of the factors impacting the fair values.
Net interest income after provisions for loan losses decreased
by $41 million in the year ended December 31, 2009
from the prior year. This decrease was due to a
$399 million increase in provisions for loan losses offset
by a $358 million increase in net interest income. The
increase in net interest income was primarily due to an increase
in the student loan spread, a decrease in the 2008 Asset Backed
Financing Facilities fees and a $15 billion increase in the
average balance of on-balance sheet student loans (see
“LENDING BUSINESS SEGMENT — Net Interest
Income —
Net Interest Margin — On-Balance
Sheet
”). The increase in provisions for loan losses
related primarily to increases in charge-off expectations on
Private Education Loans primarily as a result of the continued
weakening of the U.S. economy (see “LENDING BUSINESS
SEGMENT — Private Education Loan Losses —
Private Education Loan Delinquencies and
Forbearance
” and “—
Allowance for
Private Education Loan Losses
”).
There were $284 million in net gains on sales of loans and
securities in the year ended December 31, 2009, primarily
related to the ED Purchase Program as previously discussed,
compared to net losses of $186 million incurred in the
prior year. Prior to the fourth quarter of 2008, these losses
were primarily the result of the Company’s repurchase of
delinquent Private Education Loans from the Company’s
off-balance sheet securitization trusts. When Private Education
Loans in the Company’s off-balance sheet securitization
38
trusts that settled before September 30, 2005 became
180 days delinquent, the Company previously exercised its
contingent call option to repurchase these loans at par value
out of the trusts and recorded a loss for the difference in the
par value paid and the fair market value of the loans at the
time of purchase. The Company does not hold this contingent call
option for any trusts that settled after September 30,
2005. In October 2008, the Company decided to no longer exercise
its contingent call option. The loss in 2008 also relates to the
sale of approximately $1.0 billion FFELP loans to the ED
under ECASLA, which resulted in a $53 million loss.
For the year ended December 31, 2009, contingency fee,
collections and guarantor servicing fee revenue totaled
$483 million, a $106 million decrease from
$589 million in the prior year. This decrease was primarily
due to a decline in revenue due to a significantly smaller
non-mortgage purchased paper portfolio
year-over-year
as a result of winding down this collections business. Total
impairment in the non-mortgage purchased paper portfolio was
$79 million in 2009 compared to $111 million in 2008.
The impairment is a result of the continued impact of the
economy on the ability to collect on these assets (see
“ASSET PERFORMANCE GROUP BUSINESS SEGMENT”).
In response to the College Cost Reduction and Access Act of 2007
(“CCRAA”) and challenges in the capital markets, the
Company initiated a restructuring plan in the fourth quarter of
2007. The plan focused on conforming our lending activities to
the economic environment, exiting certain customer relationships
and product lines, winding down our debt purchased paper
businesses, and significantly reducing our operating expenses.
The restructuring plan is essentially completed and our
objectives have been met. As part of the Company’s cost
reduction efforts, restructuring expenses of $14 million
and $83 million were recognized in continuing operations in
the years ended December 31, 2009 and 2008, respectively.
Restructuring expenses from the fourth quarter of 2007 through
December 31, 2009 totaled $129 million, of which
$120 million was recorded in continuing operations and
$9 million was recorded in discontinued operations. The
majority of these restructuring expenses were severance costs
related to the completed and planned elimination of
approximately 2,900 positions, or approximately 25 percent
of the workforce. We estimate approximately $5 million of
additional restructuring expenses associated with our current
cost reduction efforts will be incurred during 2010. On
September 17, 2009, the House passed SAFRA which, if signed
into law, would eliminate the FFELP and require that, after
July 1, 2010, all new federal loans be made through the
Direct Loan program. The Senate has yet to take up the
legislation. If this legislation is signed into law, the Company
will undertake another significant restructuring to conform its
infrastructure to the elimination of the FFELP and achieve
additional expense reduction. See “OVERVIEW —
Legislative and Regulatory Developments
” for a
further discussion of SAFRA.
Operating expenses were $1.26 billion in the year ended
December 31, 2009 compared to $1.32 billion in the
prior year. The $61 million decrease in operating expenses
was primarily due to the Company’s cost reduction efforts
discussed above as well as an $11 million reduction in
amortization and impairment of acquired intangible assets. The
amortization and impairment of acquired intangibles for
continuing operations totaled $75 million and
$86 million for the years ended December 31, 2009 and
2008, respectively.
Income tax expense from continuing operations was
$238 million in the year ended December 31, 2009
compared to income tax (benefit) of $(76) million in the
prior year, resulting in effective tax rates of 33 percent
and 54 percent. The movement in the effective tax rate in
2009 compared with the prior year was primarily driven by the
reduction of tax and interest on U.S. federal and state
uncertain tax positions in both periods, as well as the
permanent tax impact of deducting Proposed Merger-related
transaction costs in the year ended December 31, 2008. Also
contributing to the movement was the impact of significantly
higher reported pre-tax income in 2009 and the resulting changes
in the proportion of income subject to federal and state taxes.
For additional information, see Note 19, “Income
Taxes,” to the consolidated financial statements.
During 2009, the Company converted $339 million of its
Series C Preferred Stock to common stock. As part of this
conversion, the Company delivered to the holders of the
preferred stock: (1) approximately 17 million shares
(the number of common shares they would most likely receive if
the preferred stock they held mandatorily converted to common
shares in the fourth quarter of 2010) plus (2) a
discounted amount of the preferred stock dividends the holders
of the preferred stock would have received if they held the
preferred
39
stock through the mandatory conversion date. The accounting
treatment for this conversion resulted in additional expense
recorded as a part of preferred stock dividends for the period
of approximately $53 million.
Net loss attributable to SLM Corporation from discontinued
operations was $158 million for the year ended
December 31, 2009 compared to $143 million for the
prior year. As discussed above, the Company sold all of the
assets in its Purchased Paper — Mortgage/Properties
business in the fourth quarter of 2009 which resulted in an
after-tax loss of $95 million. In the year ended
December 31, 2009, the Company incurred $154 million
of after-tax asset impairments associated with this business
line compared to the prior year, during which the Company
incurred $161 million of after-tax asset impairments.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
For the year ended December 31, 2008, our net loss
attributable to SLM Corporation was $213 million, or $.69
diluted loss per share attributable to SLM Corporation common
shareholders, compared to a net loss of $896 million, or
$2.26 diluted loss per share attributable to SLM Corporation
common shareholders, for the year December 31, 2007. For
the year ended December 31, 2008, net loss attributable to
SLM Corporation from continuing operations was $70 million,
or $.39 diluted earnings from continuing operations per common
share attributable to SLM Corporation common shareholders,
compared to a net loss from continuing operations of
$902 million, or $2.28 diluted loss from continuing
operations per common share attributable to SLM Corporation
common shareholders, for year ended December 31, 2007. For
the year ended December 31, 2008, net loss attributable to
SLM Corporation from discontinued operations was
$143 million, or $.30 diluted loss from discontinued
operations per common share attributable to SLM Corporation
common shareholders, compared to a net income from discontinued
operations of $6 million, or $.02 diluted earnings from
discontinued operations per common share attributable to SLM
Corporation common shareholders, for the year ended
December 31, 2007.
Pre-tax loss from continuing operations decreased by
$350 million versus 2007 primarily due to a decrease in net
losses on derivative and hedging activities from
$1.4 billion for the year ended December 31, 2007 to
$445 million for the year ended December 31, 2008,
which was primarily a result of the
mark-to-market
on the equity forward contracts in the fourth quarter of 2007.
This increase in income was partially offset by a
$367 million decrease in gains on student loan
securitizations and a $175 million decrease in servicing
and securitization revenue.
There were no gains on student loan securitizations in the year
ended December 31, 2008, compared to gains of
$367 million in the year-ago period. We did not complete
any off-balance sheet securitizations in the year ended
December 31, 2008, versus one Private Education Loan
securitization in 2007. In accordance with ASC 825,
“Financial Instruments,” we elected the fair value
option on all of the Residual Interests effective
January 1, 2008. We made this election in order to simplify
the accounting for Residual Interests by having all Residual
Interests under one accounting model. Prior to this election,
Residual Interests were accounted for either with changes in
fair value recorded through other comprehensive income or with
changes in fair value recorded through income. We reclassified
the related accumulated other comprehensive income of
$195 million into retained earnings and as a result equity
was not impacted at transition on January 1, 2008. Changes
in fair value of Residual Interests on and after January 1,
2008 are recorded through servicing and securitization income.
We have not elected the fair value option for any other
financial instruments at this time. Servicing and securitization
revenue decreased by $175 million from $437 million in
the year ended December 31, 2007 to $262 million in
the year ended December 31, 2008. This decrease was
primarily due to a $425 million unrealized
mark-to-market
loss recorded in 2008 compared to a $278 million unrealized
mark-to-market
loss in the prior year, which included both impairment and an
unrealized
mark-to-market
gain recorded under ASC
815-15,
“Embedded Derivatives”. The increase in the unrealized
mark-to-market
loss in 2008 versus 2007 was primarily due to increases in the
discount rates used to value the Residual Interests. See
“LIQUIDITY AND CAPITAL RESOURCES — Securitization
Activities —
Residual Interest in Securitized
Receivables
” for further discussion of the factors
impacting the fair values.
40
Net interest income after provisions for loan losses increased
by $72 million in the year ended December 31, 2008
from the prior year. This increase was due to a
$295 million decrease in provisions for loan losses, offset
by a $223 million decrease in net interest income. The
decrease in net interest income was primarily due to a decrease
in the student loan spread (see “LENDING BUSINESS
SEGMENT — Net Interest Income —
Net
Interest Margin — On-Balance Sheet
”) and an
increase in the 2008 Asset-Backed Financing Facilities Fees,
partially offset by a $25 billion increase in the average
balance of on-balance sheet student loans. The decrease in
provisions for loan losses relates to the higher provision
amounts in the fourth quarter of 2007 for Private Education
Loans, FFELP loans and mortgage loans, primarily due to a
weakening U.S. economy. The significant provision in the
fourth quarter of 2007 primarily related to the non-traditional
portfolio which was particularly impacted by the weakening
U.S. economy (see “LENDING BUSINESS
SEGMENT — Private Education Loan Losses —
Private Education Loan Delinquencies and
Forbearance
” and “—
Allowance for
Private Education Loan Losses
”).
For the year ended December 31, 2008, contingency fee,
collections and guarantor servicing fee revenue totaled
$589 million, a $123 million decrease from
$712 million in the prior year. This decrease was primarily
the result of $111 million of impairment related to our
non-mortgage purchased paper subsidiary recorded in 2008
compared to $17 million in 2007. The increase in impairment
is a result of the impact of the economy on the ability to
collect on these assets (see “ASSET PERFORMANCE GROUP
BUSINESS SEGMENT”).
Losses on loans and securities, net, totaled $186 million
for the year ended December 31, 2008, a $91 million
increase from $95 million incurred in the year ended
December 31, 2007. Prior to the fourth quarter of 2008,
these losses were primarily the result of our repurchase of
delinquent Private Education Loans from our off-balance sheet
securitization trusts. When Private Education Loans in our
off-balance sheet securitization trusts that settled before
September 30, 2005 became 180 days delinquent, we
previously exercised our contingent call option to repurchase
these loans at par value out of the trusts and recorded a loss
for the difference in the par value paid and the fair market
value of the loans at the time of purchase. We do not hold the
contingent call option for any trusts that settled after
September 30, 2005. Beginning in October 2008, we decided
to no longer exercise our contingent call option. The loss in
the fourth quarter of 2008 primarily relates to the sale of
approximately $1.0 billion FFELP loans to ED under the
ECASLA, which resulted in a $53 million loss. See
“LIQUIDITY AND CAPITAL RESOURCES — ED Funding
Programs” for a further discussion.
Restructuring expenses of $83 million and $23 million
were recognized in the years ended December 31, 2008 and
2007, respectively, as previously discussed.
Operating expenses totaled $1.3 billion and
$1.5 billion for the years ended December 31, 2008 and
2007, respectively. The
year-over-year
reduction is primarily due to our cost reduction efforts
discussed above. Of these amounts, $86 million and
$98 million, respectively, relate to amortization and
impairment of goodwill and intangible assets for continuing
operations.
Income tax (benefit) from continuing operations was
$(76) million in the year ended December 31, 2008
compared to income tax expense of $408 million in the prior
year resulting in effective tax rates of 54 percent and
(83) percent. The movement in the effective tax rate in
2008 compared with the prior year was primarily driven by the
permanent tax impact of excluding non-taxable gains and losses
on equity forward contracts which were marked to market through
earnings under ASC 815 in 2007. Also contributing to the
movement was the impact of significantly lower reported pre-tax
loss in 2008 and the resulting changes in the proportion of
income subject to federal and state taxes. For additional
information, see Note 19, “Income Taxes,” to the
consolidated financial statements.
Net loss attributable to SLM Corporation from discontinued
operations was $143 million for the year ended
December 31, 2008, compared to net income of
$6 million for the prior year. As discussed above, the
Company sold all of the assets in its Purchased
Paper — Mortgage/Properties business in the fourth
quarter of 2009. In 2008, the Company incurred $161 million
of after-tax asset impairments associated with this business
line compared to the prior year, during which the Company
incurred $2 million of after-tax asset impairments.
41
Other
Income
The following table summarizes the components of “Other
income” in the consolidated statements of income for the
years ended December 31, 2009, 2008 and 2007.
|
Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Gains on debt repurchases
|
$ | 536 | $ | 64 | $ | — | ||||||
|
Late fees and forbearance fees
|
146 | 143 | 136 | |||||||||
|
Asset servicing and other transaction fees
|
112 | 108 | 110 | |||||||||
|
Loan servicing fees
|
53 | 26 | 26 | |||||||||
|
Foreign currency translation gains (losses)
|
23 | (31 | ) | (3 | ) | |||||||
|
Gains on sales of mortgages and other loan fees
|
— | 3 | 11 | |||||||||
|
Other
|
59 | 79 | 105 | |||||||||
|
Total other income
|
$ | 929 | $ | 392 | $ | 385 | ||||||
The change in other income over the year-ago periods presented
is primarily the result of the gains on debt repurchases. The
Company began repurchasing its outstanding debt in the second
quarter of 2008. The Company repurchased $3.4 billion and
$1.9 billion face amount of its senior unsecured notes for
the years ended December 31, 2009 and 2008, respectively.
Since the second quarter of 2008, the Company has repurchased
$5.3 billion face amount of its senior unsecured notes in
the aggregate, with maturity dates ranging from 2008 to 2016.
BUSINESS
SEGMENTS
The results of operations of the Company’s Lending and APG
operating segments are presented below. These defined business
segments operate in distinct business environments and are
considered reportable segments under ASC 280, “Segment
Reporting,” based on quantitative thresholds applied to the
Company’s financial statements. In addition, we provide
other complementary products and services, including Guarantor
Servicing and Loan Servicing, through smaller operating segments
that do not meet such thresholds and are aggregated in the
Corporate and Other reportable segment for financial reporting
purposes.
The management reporting process measures the performance of the
Company’s operating segments based on the management
structure of the Company as well as the methodology used by
management to evaluate performance and allocate resources. In
accordance with the Rules and Regulations of the Securities and
Exchange Commission (“SEC”), we prepare financial
statements in accordance with GAAP. In addition to evaluating
the Company’s GAAP-based financial information, management,
including the Company’s chief operation decision makers,
evaluates the performance of the Company’s operating
segments based on their profitability on a basis that, as
allowed under ASC 280, differs from GAAP. We refer to
management’s basis of evaluating our segment results as
“Core Earnings” presentations for each business
segment and we refer to these performance measures in our
presentations with credit rating agencies and lenders.
Accordingly, information regarding the Company’s reportable
segments is provided herein based on “Core Earnings,”
which are discussed in detail below.
Our “Core Earnings” are not defined terms within GAAP
and may not be comparable to similarly titled measures reported
by other companies. “Core Earnings” net income
reflects only current period adjustments to GAAP net income as
described below. Unlike financial accounting, there is no
comprehensive, authoritative guidance for management reporting
and as a result, our management reporting is not necessarily
comparable with similar information for any other financial
institution. The Company’s operating segments are defined
by the products and services they offer or the types of
customers they serve, and they reflect the manner in which
financial information is currently evaluated by management.
Intersegment revenues and expenses are netted within the
appropriate financial statement line items consistent with the
income statement presentation
42
provided to management. Changes in management structure or
allocation methodologies and procedures may result in changes in
reported segment financial information.
“Core Earnings” are the primary financial performance
measures used by management to develop the Company’s
financial plans, track results, and establish corporate
performance targets and incentive compensation. While “Core
Earnings” are not a substitute for reported results under
GAAP, the Company relies on “Core Earnings” in
operating its business because “Core Earnings” permit
management to make meaningful
period-to-period
comparisons of the operational and performance indicators that
are most closely assessed by management. Management believes
this information provides additional insight into the financial
performance of the core business activities of our operating
segments. Accordingly, the tables presented below reflect
“Core Earnings” which are reviewed and utilized by
management to manage the business for each of the Company’s
reportable segments. A further discussion regarding “Core
Earnings” is included under “Limitations of ‘Core
Earnings’” and
“Pre-tax Differences between
‘Core Earnings’ and GAAP by Business Segment.”
The “LENDING BUSINESS SEGMENT” section includes all
discussion of income and related expenses associated with the
net interest margin, the student loan spread and its components,
the provisions for loan losses, and other fees earned on our
Managed portfolio of student loans. The “APG BUSINESS
SEGMENT” section reflects the fees earned and expenses
incurred in providing accounts receivable management and
collection services. Our “CORPORATE AND OTHER BUSINESS
SEGMENT” section includes our remaining fee businesses and
other corporate expenses that do not pertain directly to the
primary operating segments identified above.
43
|
Year Ended
|
||||||||||||
| December 31, 2009 | ||||||||||||
|
Corporate
|
||||||||||||
| Lending | APG | and Other | ||||||||||
|
Interest income:
|
||||||||||||
|
FFELP Stafford and Other Student Loans
|
$ | 1,282 | $ | — | $ | — | ||||||
|
FFELP Consolidation Loans
|
1,645 | — | — | |||||||||
|
Private Education Loans
|
2,254 | — | — | |||||||||
|
Other loans
|
56 | — | — | |||||||||
|
Cash and investments
|
9 | — | 20 | |||||||||
|
Total interest income
|
5,246 | — | 20 | |||||||||
|
Total interest expense
|
2,971 | 19 | 15 | |||||||||
|
Net interest income (loss)
|
2,275 | (19 | ) | 5 | ||||||||
|
Less: provisions for loan losses
|
1,564 | — | — | |||||||||
|
Net interest income (loss) after provisions for loan losses
|
711 | (19 | ) | 5 | ||||||||
|
Contingency fee revenue
|
— | 296 | — | |||||||||
|
Collections revenue
|
— | 50 | — | |||||||||
|
Guarantor serving fees
|
— | — | 136 | |||||||||
|
Other income
|
974 | — | 215 | |||||||||
|
Total other income
|
974 | 346 | 351 | |||||||||
|
Restructuring expenses
|
10 | 1 | 3 | |||||||||
|
Operating expenses
|
581 | 315 | 284 | |||||||||
|
Total expenses
|
591 | 316 | 287 | |||||||||
|
Income from continuing operations, before income tax expense
|
1,094 | 11 | 69 | |||||||||
|
Income tax
expense
(1)
|
388 | 7 | 24 | |||||||||
|
Net income from continuing operations
|
706 | 4 | 45 | |||||||||
|
Loss from discontinued operations, net of tax
|
— | (157 | ) | — | ||||||||
|
Net income (loss)
|
706 | (153 | ) | 45 | ||||||||
|
Less: net income attributable to noncontrolling interest
|
— | 1 | — | |||||||||
|
“Core Earnings” net income (loss) attributable to SLM
Corporation
|
$ | 706 | $ | (154 | ) | $ | 45 | |||||
|
Economic Floor Income (net of tax) not included in “Core
Earnings”
|
$ | 205 | $ | — | $ | — | ||||||
| (1) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
|
“Core Earnings” net income (loss) attributable to SLM
Corporation:
|
||||||||||||
|
Continuing operations, net of tax
|
$ | 706 | $ | 3 | $ | 45 | ||||||
|
Discontinued operations, net of tax
|
— | (157 | ) | — | ||||||||
|
“Core Earnings” net income (loss) attributable to SLM
Corporation
|
$ | 706 | $ | (154 | ) | $ | 45 | |||||
44
|
Year Ended
|
||||||||||||
| December 31, 2008 | ||||||||||||
|
Corporate
|
||||||||||||
| Lending | APG | and Other | ||||||||||
|
Interest income:
|
||||||||||||
|
FFELP Stafford and Other Student Loans
|
$ | 2,216 | $ | — | $ | — | ||||||
|
FFELP Consolidation Loans
|
3,748 | — | — | |||||||||
|
Private Education Loans
|
2,752 | — | — | |||||||||
|
Other loans
|
83 | — | — | |||||||||
|
Cash and investments
|
304 | — | 25 | |||||||||
|
Total interest income
|
9,103 | — | 25 | |||||||||
|
Total interest expense
|
6,665 | 25 | 19 | |||||||||
|
Net interest income (loss)
|
2,438 | (25 | ) | 6 | ||||||||
|
Less: provisions for loan losses
|
1,029 | — | — | |||||||||
|
Net interest income (loss) after provisions for loan losses
|
1,409 | (25 | ) | 6 | ||||||||
|
Contingency fee revenue
|
— | 340 | — | |||||||||
|
Collections revenue
|
— | 129 | — | |||||||||
|
Guarantor serving fees
|
— | — | 121 | |||||||||
|
Other income
|
180 | — | 199 | |||||||||
|
Total other income
|
180 | 469 | 320 | |||||||||
|
Restructuring expenses
|
49 | 11 | 23 | |||||||||
|
Operating expenses
|
583 | 389 | 256 | |||||||||
|
Total expenses
|
632 | 400 | 279 | |||||||||
|
Income from continuing operations, before income tax expense
|
957 | 44 | 47 | |||||||||
|
Income tax
expense
(1)
|
338 | 23 | 17 | |||||||||
|
Net income from continuing operations
|
619 | 21 | 30 | |||||||||
|
Loss from discontinued operations, net of tax
|
— | (140 | ) | — | ||||||||
|
Net income (loss)
|
619 | (119 | ) | 30 | ||||||||
|
Less: net income attributable to noncontrolling interest
|
— | 4 | — | |||||||||
|
“Core Earnings” net income (loss) attributable to SLM
Corporation
|
$ | 619 | $ | (123 | ) | $ | 30 | |||||
|
Economic Floor Income (net of tax) not included in “Core
Earnings”
|
$ | 55 | $ | — | $ | — | ||||||
| (1) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
|
“Core Earnings” net income (loss) attributable to SLM
Corporation:
|
||||||||||||
|
Continuing operations, net of tax
|
$ | 619 | $ | 17 | $ | 30 | ||||||
|
Discontinued operations, net of tax
|
— | (140 | ) | — | ||||||||
|
“Core Earnings” net income (loss) attributable to SLM
Corporation
|
$ | 619 | $ | (123 | ) | $ | 30 | |||||
45
|
Year Ended
|
||||||||||||
| December 31, 2007 | ||||||||||||
|
Corporate
|
||||||||||||
| Lending | APG | and Other | ||||||||||
|
Interest income:
|
||||||||||||
|
FFELP Stafford and Other Student Loans
|
$ | 2,848 | $ | — | $ | — | ||||||
|
FFELP Consolidation Loans
|
5,522 | — | — | |||||||||
|
Private Education Loans
|
2,835 | — | — | |||||||||
|
Other loans
|
106 | — | — | |||||||||
|
Cash and investments
|
868 | — | 21 | |||||||||
|
Total interest income
|
12,179 | — | 21 | |||||||||
|
Total interest expense
|
9,597 | 27 | 21 | |||||||||
|
Net interest income (loss)
|
2,582 | (27 | ) | — | ||||||||
|
Less: provisions for loan losses
|
1,394 | — | 1 | |||||||||
|
Net interest income (loss) after provisions for loan losses
|
1,188 | (27 | ) | (1 | ) | |||||||
|
Contingency fee revenue
|
— | 336 | — | |||||||||
|
Collections revenue
|
— | 217 | — | |||||||||
|
Guarantor serving fees
|
— | — | 156 | |||||||||
|
Other income
|
194 | — | 218 | |||||||||
|
Total other income
|
194 | 553 | 374 | |||||||||
|
Restructuring expenses
|
19 | 2 | 2 | |||||||||
|
Operating expenses
|
690 | 361 | 339 | |||||||||
|
Total expenses
|
709 | 363 | 341 | |||||||||
|
Income from continuing operations, before income tax expense
|
673 | 163 | 32 | |||||||||
|
Income tax
expense
(1)
|
249 | 60 | 12 | |||||||||
|
Net income from continuing operations
|
424 | 103 | 20 | |||||||||
|
Income from discontinued operations, net of tax
|
— | 15 | — | |||||||||
|
Net income
|
424 | 118 | 20 | |||||||||
|
Less: net income attributable to noncontrolling interest
|
— | 2 | — | |||||||||
|
“Core Earnings” net income attributable to SLM
Corporation
|
$ | 424 | $ | 116 | $ | 20 | ||||||
|
Economic Floor Income (net of tax) not included in “Core
Earnings”
|
$ | 8 | $ | — | $ | — | ||||||
| (1) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
|
“Core Earnings” net income attributable to SLM
Corporation:
|
||||||||||||
|
Continuing operations, net of tax
|
$ | 424 | $ | 101 | $ | 20 | ||||||
|
Discontinued operations, net of tax
|
— | 15 | — | |||||||||
|
“Core Earnings” net income attributable to SLM
Corporation
|
$ | 424 | $ | 116 | $ | 20 | ||||||
46
Limitations of “Core Earnings”
While GAAP provides a uniform, comprehensive basis of
accounting, for the reasons described above, management believes
that “Core Earnings” are an important additional tool
for providing a more complete understanding of the
Company’s results of operations. Nevertheless, “Core
Earnings” are subject to certain general and specific
limitations that investors should carefully consider. For
example, as stated above, unlike financial accounting, there is
no comprehensive, authoritative guidance for management
reporting. Our “Core Earnings” are not defined terms
within GAAP and may not be comparable to similarly titled
measures reported by other companies. Unlike GAAP, “Core
Earnings” reflect only current period adjustments to GAAP.
Accordingly, the Company’s “Core Earnings”
presentation does not represent a comprehensive basis of
accounting. Investors, therefore, may not compare our
Company’s performance with that of other financial services
companies based upon “Core Earnings.” “Core
Earnings” results are only meant to supplement GAAP results
by providing additional information regarding the operational
and performance indicators that are most closely used by
management, the Company’s board of directors, rating
agencies and lenders to assess performance.
Other limitations arise from the specific adjustments that
management makes to GAAP results to derive “Core
Earnings” results. For example, in reversing the unrealized
gains and losses that result from ASC 815, “Derivatives and
Hedging,” on derivatives that do not qualify for
“hedge treatment,” as well as on derivatives that do
qualify but are in part ineffective because they are not perfect
hedges, we focus on the long-term economic effectiveness of
those instruments relative to the underlying hedged item and
isolate the effects of interest rate volatility and changing
credit spreads on the fair value of such instruments during the
period. Under GAAP, the effects of these factors on the fair
value of the derivative instruments (but not on the underlying
hedged item) tend to show more volatility in the short term.
While our presentation of our results on a “Core
Earnings” basis provides important information regarding
the performance of our Managed portfolio, a limitation of this
presentation is that we are presenting the ongoing spread income
on loans that have been sold to a trust managed by us. While we
believe that our “Core Earnings” presentation presents
the economic substance of our Managed loan portfolio, it
understates earnings volatility from securitization gains. Our
“Core Earnings” results exclude certain Floor Income,
which is real cash income, from our reported results and
therefore may understate earnings in certain periods.
Management’s financial planning and valuation of operating
results, however, does not take into account Floor Income
because of its inherent uncertainty, except when it is Fixed
Rate Floor Income that is economically hedged through Floor
Income Contracts.
Pre-tax
Differences between “Core Earnings” and GAAP by
Business Segment
Our “Core Earnings” are the primary financial
performance measures used by management to evaluate performance
and to allocate resources. Accordingly, financial information is
reported to management on a “Core Earnings” basis by
reportable segment, as these are the measures used regularly by
our chief operating decision makers. Our “Core
Earnings” are used in developing our financial plans and
tracking results and also in establishing corporate performance
targets and incentive compensation. Management believes this
information provides additional insight into the financial
performance of the Company’s core business activities.
“Core Earnings” net income reflects only current
period adjustments to GAAP net income, as described in the more
detailed discussion of the differences between “Core
Earnings” and GAAP that follows, which includes further
detail on each specific adjustment required to reconcile our
“Core Earnings” segment presentation to our GAAP
earnings.
47
| Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
|
Corporate
|
Corporate
|
Corporate
|
||||||||||||||||||||||||||||||||||
| Lending | APG | and Other | Lending | APG | and Other | Lending | APG | and Other | ||||||||||||||||||||||||||||
|
“Core Earnings” adjustments:
|
||||||||||||||||||||||||||||||||||||
|
Net impact of securitization accounting
|
$ | (201 | ) | $ | — | $ | — | $ | (442 | ) | $ | — | $ | — | $ | 247 | $ | — | $ | — | ||||||||||||||||
|
Net impact of derivative accounting
|
(306 | ) | — | — | (560 | ) | — | — | 217 | — | (1,558 | ) | ||||||||||||||||||||||||
|
Net impact of Floor Income
|
129 | — | — | (102 | ) | — | — | (169 | ) | — | — | |||||||||||||||||||||||||
|
Net impact of acquired intangibles
|
(13 | ) | (6 | ) | (57 | ) | (53 | ) | (22 | ) | (14 | ) | (55 | ) | (22 | ) | (29 | ) | ||||||||||||||||||
|
Total “Core Earnings” adjustments to GAAP,
pre-tax
(1)
|
$ | (391 | ) | $ | (6 | ) | $ | (57 | ) | $ | (1,157 | ) | $ | (22 | ) | $ | (14 | ) | $ | 240 | $ | (22 | ) | $ | (1,587 | ) | ||||||||||
| (1) | The net tax effect of total differences for combined segments is $181 million, $454 million and $(87) million for the years ended December 31, 2009, 2008 and 2007, respectively. Income taxes are based on a percentage of net income before tax for the individual reportable segments. |
1)
Securitization Accounting:
Under
GAAP, certain securitization transactions in our Lending
operating segment are accounted for as sales of assets. Under
“Core Earnings” for the Lending operating segment, we
present all securitization transactions on a “Core
Earnings” basis as long-term non-recourse financings. The
upfront “gains” on sale from securitization
transactions, as well as ongoing “servicing and
securitization revenue” presented in accordance with GAAP,
are excluded from “Core Earnings” and are replaced by
interest income, provisions for loan losses, and interest
expense as earned or incurred on the securitization loans and
debt. We also exclude transactions with our off-balance sheet
trusts from “Core Earnings” as they are considered
intercompany transactions on a “Core Earnings” basis.
The following table summarizes “Core Earnings”
securitization adjustments for the Lending operating segment for
the years ended December 31, 2009, 2008 and 2007.
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
“Core Earnings” securitization adjustments:
|
||||||||||||
|
Net interest income on securitized loans, before provisions for
loan losses and before intercompany transactions
|
$ | (942 | ) | $ | (872 | ) | $ | (818 | ) | |||
|
Provisions for loan losses
|
445 | 309 | 380 | |||||||||
|
Net interest income on securitized loans, after provisions for
loan losses, before intercompany transactions
|
(497 | ) | (563 | ) | (438 | ) | ||||||
|
Intercompany transactions with off-balance sheet trusts
|
1 | (141 | ) | (119 | ) | |||||||
|
Net interest income on securitized loans, after provisions for
loan losses
|
(496 | ) | (704 | ) | (557 | ) | ||||||
|
Gains on student loan securitizations
|
— | — | 367 | |||||||||
|
Servicing and securitization revenue
|
295 | 262 | 437 | |||||||||
|
Total “Core Earnings” securitization
adjustments
(1)
|
$ | (201 | ) | $ | (442 | ) | $ | 247 | ||||
| (1) | Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income and positive amounts are added to “Core Earnings” net income to arrive at GAAP net income. |
“Intercompany transactions with off-balance sheet
trusts” in the above table relate primarily to losses that
result from the repurchase of delinquent loans from our
off-balance sheet securitization trusts. When Private Education
Loans in our securitization trusts settling before
September 30, 2005 became 180 days delinquent, we
previously exercised our contingent call option to repurchase
these loans at par value out of the trust and recorded a loss
for the difference in the par value paid and the fair market
value of the loan at the time of purchase. We do not hold the
contingent call option for any trusts settled after
September 30, 2005. In October 2008, the Company decided to
no longer exercise its contingent call option.
48
2)
Derivative Accounting:
“Core
Earnings” exclude periodic unrealized gains and losses that
are caused primarily by the one-sided
mark-to-market
derivative valuations prescribed by ASC 815 on derivatives that
do not qualify for “hedge treatment” under GAAP. These
unrealized gains and losses occur in our Lending operating
segment. In our “Core Earnings” presentation, we
recognize the economic effect of these hedges, which generally
results in any cash paid or received being recognized ratably as
an expense or revenue over the hedged item’s life.
ASC 815 requires that changes in the fair value of derivative
instruments be recognized currently in earnings unless specific
hedge accounting criteria, as specified by ASC 815, are met. We
believe that our derivatives are effective economic hedges, and
as such, are a critical element of our interest rate risk
management strategy. However, some of our derivatives, primarily
Floor Income Contracts and certain basis swaps, do not qualify
for “hedge treatment” as defined by ASC 815, and the
stand-alone derivative must be
marked-to-market
in the income statement with no consideration for the
corresponding change in fair value of the hedged item. The gains
and losses described in “Gains (losses) on derivative and
hedging activities, net” are primarily caused by interest
rate and foreign currency exchange rate volatility and changing
credit spreads during the period, as well as the volume and term
of derivatives not receiving hedge treatment.
Our Floor Income Contracts are written options that must meet
more stringent requirements than other hedging relationships to
achieve hedge effectiveness under ASC 815. Specifically, our
Floor Income Contracts do not qualify for hedge accounting
treatment because the pay down of principal of the student loans
underlying the Floor Income embedded in those student loans does
not exactly match the change in the notional amount of our
written Floor Income Contracts. Under ASC 815, the upfront
payment is deemed a liability and changes in fair value are
recorded through income throughout the life of the contract. The
change in the value of Floor Income Contracts is primarily
caused by changing interest rates that cause the amount of Floor
Income earned on the underlying student loans and paid to the
counterparties to vary. This is economically offset by the
change in value of the student loan portfolio, including our
Retained Interests, earning Floor Income but that offsetting
change in value is not recognized under ASC 815. We believe the
Floor Income Contracts are economic hedges because they
effectively fix the amount of Floor Income earned over the
contract period, thus eliminating the timing and uncertainty
that changes in interest rates can have on Floor Income for that
period. Prior to ASC 815, we accounted for Floor Income
Contracts as hedges and amortized the upfront cash compensation
ratably over the lives of the contracts.
Basis swaps are used to convert floating rate debt from one
floating interest rate index to another to better match the
interest rate characteristics of the assets financed by that
debt. We primarily use basis swaps to change the index of our
floating rate debt to better match the cash flows of our student
loan assets that are primarily indexed to a commercial paper,
Prime or Treasury bill index. In addition, we use basis swaps to
convert debt indexed to the Consumer Price Index to three-month
month LIBOR debt. ASC 815 requires that when using basis swaps,
the change in the cash flows of the hedge effectively offset
both the change in the cash flows of the asset and the change in
the cash flows of the liability. Our basis swaps hedge variable
interest rate risk; however, they generally do not meet this
effectiveness test because the index of the swap does not
exactly match the index of the hedged assets as required by ASC
815. Additionally, some of our FFELP loans can earn at either a
variable or a fixed interest rate depending on market interest
rates. We also have basis swaps that do not meet the ASC 815
effectiveness test that economically hedge off-balance sheet
instruments. As a result, under GAAP, these swaps are recorded
at fair value with changes in fair value reflected currently in
the income statement.
The table below quantifies the adjustments for derivative
accounting under ASC 815 on our net income for the years ended
December 31, 2009, 2008 and 2007 when compared with the
accounting principles employed in all years prior to the ASC 815
implementation.
49
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
“Core Earnings” derivative adjustments:
|
||||||||||||
|
Gains (losses) on derivative and hedging activities, net,
included in other
income
(1)
|
$ | (604 | ) | $ | (445 | ) | $ | (1,361 | ) | |||
|
Less: Realized (gains) losses on derivative and hedging
activities,
net
(1)
|
322 | (107 | ) | 18 | ||||||||
|
Unrealized gains (losses) on derivative and hedging activities,
net
|
(282 | ) | (552 | ) | (1,343 | ) | ||||||
|
Other pre-ASC 815 accounting adjustments
|
(24 | ) | (8 | ) | 2 | |||||||
|
Total net impact of ASC 815 derivative
accounting
(2)
|
$ | (306 | ) | $ | (560 | ) | $ | (1,341 | ) | |||
| (1) | See “Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” below for a detailed breakdown of the components of realized losses on derivative and hedging activities. | |
| (2) | Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income and positive amounts are added to “Core Earnings” net income to arrive at GAAP net income. |
Reclassification
of Realized Gains (Losses) on Derivative and Hedging
Activities
ASC 815 requires net settlement income/expense on derivatives
and realized gains/losses related to derivative dispositions
(collectively referred to as “realized gains (losses) on
derivative and hedging activities”) that do not qualify as
hedges under ASC 815 to be recorded in a separate income
statement line item below net interest income. The table below
summarizes the realized losses on derivative and hedging
activities and the associated reclassification on a “Core
Earnings” basis for the years ended December 31, 2009,
2008 and 2007.
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Reclassification of realized gains (losses) on derivative and
hedging activities:
|
||||||||||||
|
Net settlement expense on Floor Income Contracts reclassified to
net interest income
|
$ | (717 | ) | $ | (488 | ) | $ | (67 | ) | |||
|
Net settlement income (expense) on interest rate swaps
reclassified to net interest income
|
412 | 563 | 47 | |||||||||
|
Foreign exchange derivatives gains/(losses) reclassified to
other income
|
(15 | ) | 11 | — | ||||||||
|
Net realized gains (losses) on terminated derivative contracts
reclassified to other income
|
(2 | ) | 21 | 2 | ||||||||
|
Total reclassifications of realized (gains)losses on
derivative and hedging activities
|
(322 | ) | 107 | (18 | ) | |||||||
|
Add: Unrealized gains (losses) on derivative and hedging
activities,
net
(1)
|
(282 | ) | (552 | ) | (1,343 | ) | ||||||
|
Gains (losses) on derivative and hedging activities, net
|
$ | (604 | ) | $ | (445 | ) | $ | (1,361 | ) | |||
| (1) | “Unrealized gains (losses) on derivative and hedging activities, net” comprises the following unrealized mark-to-market gains (losses): |
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Floor Income Contracts
|
$ | 483 | $ | (529 | ) | $ | (209 | ) | ||||
|
Basis swaps
|
(413 | ) | (239 | ) | 360 | |||||||
|
Foreign currency hedges
|
(255 | ) | 328 | 73 | ||||||||
|
Equity forward contracts
|
— | — | (1,558 | ) | ||||||||
|
Other
|
(97 | ) | (112 | ) | (9 | ) | ||||||
|
Total unrealized gains (losses) on derivative and hedging
activities, net
|
$ | (282 | ) | $ | (552 | ) | $ | (1,343 | ) | |||
50
Unrealized gains and losses on Floor Income Contracts are
primarily caused by changes in interest rates and the forward
interest rate curve. In general, an increase in interest rates,
or a steepening of the forward interest rate curve, results in
an unrealized gain and vice versa. Unrealized gains and losses
on basis swaps result from changes in the spread between indices
and on changes in the forward interest rate curves that impact
basis swaps hedging repricing risk between quarterly reset debt
and daily reset assets. Unrealized gains (losses) on foreign
currency hedges are primarily the result of ineffectiveness on
cross-currency interest rate swaps hedging foreign currency
denominated debt related to differences between forward and spot
foreign currency exchange rates.
3)
Floor Income:
The timing and amount
(if any) of Floor Income earned in our Lending operating segment
is uncertain and in excess of expected spreads. Therefore, we
only include such income in “Core Earnings” when it is
Fixed Rate Floor Income that is economically hedged. We employ
derivatives, primarily Floor Income Contracts, to economically
hedge Floor Income. As discussed above in “Derivative
Accounting,” these derivatives do not qualify as effective
accounting hedges and, therefore, under GAAP, they are
marked-to-market
through the “gains (losses) on derivative and hedging
activities, net” line in the consolidated statement of
income with no offsetting gain or loss recorded for the
economically hedged items. For “Core Earnings,” we
reverse the fair value adjustments on the Floor Income Contracts
economically hedging Floor Income and include in income the
amortization of net premiums received on contracts economically
hedging Fixed Rate Floor Income.
The following table summarizes the Floor Income adjustments in
our Lending operating segment for the years ended
December 31, 2009, 2008 and 2007.
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
“Core earnings” Floor Income adjustments:
|
||||||||||||
|
Floor Income earned on Managed loans, net of payments on Floor
Income Contracts
|
$ | 286 | $ | 69 | $ | — | ||||||
|
Amortization of net premiums on Floor Income Contracts and
futures in net interest income
|
(157 | ) | (171 | ) | (169 | ) | ||||||
|
Total “Core Earnings” Floor Income
adjustments
(1)
|
$ | 129 | $ | (102 | ) | $ | (169 | ) | ||||
| (1) | Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income and positive amounts are added to “Core Earnings” net income to arrive at GAAP net income. | |
| (2) | The following table summarizes the amount of Economic Floor Income earned during the years ended December 31, 2009, 2008 and 2007 that is not included in “Core Earnings” net income: |
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Floor Income earned on Managed loans, net of payments on Floor
Income Contracts, not included in “Core Earnings”
|
$ | 286 | $ | 69 | $ | — | ||||||
|
Amortization of net premiums on Variable Rate Floor Income
Contracts not included in “Core Earnings”
|
40 | 20 | 13 | |||||||||
|
Amortization of net premiums on Fixed Rate Floor Income
Contracts included in “Core Earnings”
|
157 | 171 | 169 | |||||||||
|
Total Economic Floor Income earned
|
483 | 260 | 182 | |||||||||
|
Less: Amortization of net premiums on Fixed Rate Floor Income
Contracts included in “Core Earnings”
|
(157 | ) | (171 | ) | (169 | ) | ||||||
|
Total Economic Floor Income earned, not included in “Core
Earnings”
|
$ | 326 | $ | 89 | $ | 13 | ||||||
51
4) Acquired Intangibles:
Our “Core
Earnings” exclude goodwill and intangible impairment and
the amortization of acquired intangibles. The following table
summarizes the goodwill and acquired intangible adjustments for
the years ended December 31, 2009, 2008 and 2007.
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
“Core Earnings” goodwill and acquired intangibles
adjustments:
|
||||||||||||
|
Goodwill and intangible impairment and the amortization of
acquired intangibles from continuing operations
|
$ | (75 | ) | $ | (86 | ) | $ | (98 | ) | |||
|
Goodwill and intangible impairment and the amortization of
acquired intangibles from discontinued operations, net of tax
|
(1 | ) | (3 | ) | (8 | ) | ||||||
|
Total “Core Earnings” acquired intangibles adjustments
|
$ | (76 | ) | $ | (89 | ) | $ | (106 | ) | |||
| (1) | Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income and positive amounts are added to “Core Earnings” net income to arrive at GAAP net income. |
Our “Core Earnings” exclude goodwill and intangible
impairment and the amortization of acquired intangibles. These
amounts totaled $76 million, $89 million and $106 million after
tax effecting the amounts related to discontinued operations.
The
pre-tax
amounts totaled $76 million, $91 million and
$112 million, respectively, for the years ended
December 31, 2009, 2008 and 2007. In 2009, $37 million
of intangible assets primarily related to Guarantor Servicing
were impaired as a result of the legislative uncertainty
surrounding the role of Guarantors in the future. As discussed
in “ASSET PERFORMANCE GROUP BUSINESS SEGMENT,” the
Company decided to wind down its purchased paper businesses.
This decision resulted in $36 million of impairment of
intangible assets for the year ended December 31, 2008, of
which $28 million related to the impairment of two trade
names and $8 million related to certain banking customer
relationships. In 2007, we recognized impairments related
principally to our mortgage origination and mortgage purchased
paper businesses, including approximately $20 million of
goodwill and $10 million of value attributable to certain
banking relationships. In connection with our acquisition of
Southwest Student Services Corporation and Washington Transferee
Corporation, we acquired certain tax exempt bonds that enabled
us to earn a 9.5 percent SAP rate on student loans funded
by those bonds in indentured trusts. In 2007, we also recognized
intangible impairments of $9 million, due to changes in
projected interest rates used to initially value the intangible
asset and to a regulatory change that restricts the loans on
which we are entitled to earn a 9.5 percent yield.
LENDING
BUSINESS SEGMENT
In our Lending business segment, we originate and acquire
federally guaranteed student loans and Private Education Loans,
which are not federally guaranteed. Typically, a Private
Education Loan is made in conjunction with a FFELP Stafford Loan
and as a result is marketed through the same marketing channels
as FFELP loans. While FFELP loans and Private Education Loans
have different overall risk profiles due to the federal
guarantee of the FFELP loans, they currently share many of the
same characteristics such as similar repayment terms, the same
marketing channel and sales force, and are originated and
serviced on the same servicing platform. Finally, where
possible, the borrower receives a single bill for both FFELP and
Private Education Loans.
On a Managed Basis, the Company had $107.2 billion and
$127.2 billion as of December 31, 2009 and 2008,
respectively, of FFELP loans indexed to three-month financial
commercial paper rate (“CP”) funded with debt indexed
to LIBOR. As a result of the turmoil in the capital markets, the
historically tight spread between CP and LIBOR began to widen
dramatically in the fourth quarter of 2008. It subsequently
reverted to more normal levels beginning in the third quarter of
2009 and has been stable since then.
For the fourth quarter of 2008, ED announced that for purposes
of calculating the FFELP loan index from October 27, 2008
to the end of the fourth quarter of 2008, the Federal
Reserve’s Commercial Paper Funding Facility rates
(“CPFF”) would be used for those days in which no
published CP rate was available. This resulted in a CP/LIBOR
spread of 21 basis points in the fourth quarter of 2008.
The CP/LIBOR spread would
52
have been 62 basis points in the fourth quarter of 2008 if
ED had not addressed this issue by using the CPFF. ED decided
that no such correction was required during 2009. This resulted
in a CP/LIBOR spread of 52 basis points, 45 basis
points, 13 basis points and 6 basis points in the
first, second, third and fourth quarters of 2009, respectively,
(29 basis points for the full year of 2009) compared
to the CP/LIBOR spread of 21 basis points in the fourth
quarter of 2008 and the historic average spread through the
third quarter of 2008 of approximately 10 basis points.
“Core Earnings” net interest income would have been
$139 million, $105 million and $5 million higher
in the first, second and third quarters of 2009, respectively,
at a historical CP/LIBOR spread of 10 basis points. Because
of the low interest rate environment, the Company earned
additional Economic Floor Income not included in “Core
Earnings” of $126 million, $141 million, and
$36 million in the first, second and third quarters of
2009, respectively. Although we exclude these amounts from our
“Core Earnings” presentation, the levels earned in
2009 quarters can be viewed as offsets to the CP/LIBOR basis
exposure in low interest rate environments where we earned Floor
Income.
Additionally, the index paid on borrowings under ED’s
Participation Program is based on the prior quarter’s CP
rates, whereas the index earned on the underlying loans is based
on the current quarter’s CP rates. The declines in CP rates
during the first, second, third and fourth quarters of 2009
resulted in $40 million, $13 million, $6 million
and $2 million of higher interest expense in the first,
second, third and fourth quarters of 2009, respectively.
An overview of this segment and recent developments that have
significantly impacted this segment are included in the
“Item 1. Business” section of this document.
53
The following table summarizes the “Core Earnings”
results of operations for our Lending business segment.
| Years Ended December 31, | % Increase (Decrease) | |||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 vs. 2008 | 2008 vs. 2007 | ||||||||||||||||
|
“Core Earnings” interest income:
|
||||||||||||||||||||
|
FFELP Stafford and Other Student Loans
|
$ | 1,282 | $ | 2,216 | $ | 2,848 | (42 | )% | (22 | )% | ||||||||||
|
FFELP Consolidation Loans
|
1,645 | 3,748 | 5,522 | (56 | ) | (32 | ) | |||||||||||||
|
Private Education Loans
|
2,254 | 2,752 | 2,835 | (18 | ) | (3 | ) | |||||||||||||
|
Other loans
|
56 | 83 | 106 | (33 | ) | (22 | ) | |||||||||||||
|
Cash and investments
|
9 | 304 | 868 | (97 | ) | (65 | ) | |||||||||||||
|
Total “Core Earnings” interest income
|
5,246 | 9,103 | 12,179 | (42 | ) | (25 | ) | |||||||||||||
|
Total “Core Earnings” interest expense
|
2,971 | 6,665 | 9,597 | (55 | ) | (31 | ) | |||||||||||||
|
Net “Core Earnings” interest income
|
2,275 | 2,438 | 2,582 | (7 | ) | (6 | ) | |||||||||||||
|
Less: provisions for loan losses
|
1,564 | 1,029 | 1,394 | (52 | ) | (26 | ) | |||||||||||||
|
Net “Core Earnings” interest income after provisions
for loan losses
|
711 | 1,409 | 1,188 | (50 | ) | 19 | ||||||||||||||
|
Other income
|
974 | 180 | 194 | 441 | (7 | ) | ||||||||||||||
|
Restructuring expenses
|
10 | 49 | 19 | (80 | ) | 158 | ||||||||||||||
|
Operating expenses
|
581 | 583 | 690 | — | (15 | ) | ||||||||||||||
|
Total expenses
|
591 | 632 | 709 | (6 | ) | (10 | ) | |||||||||||||
|
Income from continuing operations, before income tax expense
|
1,094 | 957 | 673 | 14 | 41 | |||||||||||||||
|
Income tax expense
|
388 | 338 | 249 | 15 | 35 | |||||||||||||||
|
Net income
|
706 | 619 | 424 | 14 | 45 | |||||||||||||||
|
Less: net income attributable to noncontrolling interest
|
— | — | — | — | — | |||||||||||||||
|
“Core Earnings” net income attributable to SLM
Corporation
|
$ | 706 | $ | 619 | $ | 424 | 14 | % | 45 | % | ||||||||||
|
Economic Floor Income (net of tax) not included in “Core
Earnings”
|
$ | 205 | $ | 55 | $ | 8 | 273 | % | 45 | % | ||||||||||
|
|
||||||||||||||||||||
|
“Core Earnings” net income attributable to SLM
Corporation:
|
||||||||||||||||||||
|
Continuing operations, net of tax
|
$ | 706 | $ | 619 | $ | 424 | 14 | % | 45 | % | ||||||||||
|
Discontinued operations, net of tax
|
— | — | — | — | — | |||||||||||||||
|
“Core Earnings” net income attributable to SLM
Corporation
|
$ | 706 | $ | 619 | $ | 424 | 14 | % | 45 | % | ||||||||||
54
Net
Interest Income
Changes in net interest income are primarily due to fluctuations
in the student loan and other asset spread discussed below, the
growth of our student loan portfolio, and changes in the level
of cash and investments we hold on our balance sheet for
liquidity purposes.
Average
Balance Sheets — On-Balance Sheet
The following table reflects the rates earned on
interest-earning assets and paid on interest-bearing liabilities
for the years ended December 31, 2009, 2008 and 2007. This
table reflects the net interest margin for the entire Company
for our on-balance sheet assets. It is included in the Lending
business segment discussion because the Lending business segment
includes substantially all interest-earning assets and
interest-bearing liabilities.
| Years Ended December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Balance | Rate | Balance | Rate | Balance | Rate | |||||||||||||||||||
|
Average Assets
|
||||||||||||||||||||||||
|
FFELP Stafford and Other Student Loans
|
$ | 58,492 | 2.07 | % | $ | 44,291 | 4.50 | % | $ | 31,294 | 6.59 | % | ||||||||||||
|
FFELP Consolidation Loans
|
70,046 | 2.69 | 73,091 | 4.35 | 67,918 | 6.39 | ||||||||||||||||||
|
Private Education Loans
|
23,154 | 6.83 | 19,276 | 9.01 | 12,507 | 11.65 | ||||||||||||||||||
|
Other loans
|
561 | 9.98 | 955 | 8.66 | 1,246 | 8.49 | ||||||||||||||||||
|
Cash and investments
|
11,046 | .24 | 9,279 | 2.98 | 12,710 | 5.57 | ||||||||||||||||||
|
Total interest-earning assets
|
163,299 | 2.91 | % | 146,892 | 4.95 | % | 125,675 | 6.90 | % | |||||||||||||||
|
Non-interest-earning assets
|
8,693 | 9,999 | 9,715 | |||||||||||||||||||||
|
Total assets
|
$ | 171,992 | $ | 156,891 | $ | 135,390 | ||||||||||||||||||
|
Average Liabilities and Stockholders’ Equity
|
||||||||||||||||||||||||
|
Short-term borrowings
|
$ | 44,485 | 1.84 | % | $ | 36,059 | 4.73 | % | $ | 16,385 | 5.74 | % | ||||||||||||
|
Long-term borrowings
|
118,699 | 1.87 | 111,625 | 3.76 | 109,984 | 5.59 | ||||||||||||||||||
|
Total interest-bearing liabilities
|
163,184 | 1.86 | % | 147,684 | 4.00 | % | 126,369 | 5.61 | % | |||||||||||||||
|
Non-interest-bearing liabilities
|
3,719 | 3,797 | 4,272 | |||||||||||||||||||||
|
Stockholders’ equity
|
5,089 | 5,410 | 4,749 | |||||||||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 171,992 | $ | 156,891 | $ | 135,390 | ||||||||||||||||||
|
Net interest margin
|
1.05 | % | .93 | % | 1.26 | % | ||||||||||||||||||
55
Rate/Volume
Analysis — On-Balance Sheet
The following rate/volume analysis shows the relative
contribution of changes in interest rates and asset volumes.
|
(Decrease)
|
||||||||||||
|
Increase
|
||||||||||||
|
Attributable to
|
||||||||||||
|
(Decrease)
|
Change in | |||||||||||
| Increase | Rate | Volume | ||||||||||
|
2009 vs. 2008
|
||||||||||||
|
Interest income
|
$ | (2,512 | ) | $ | (3,386 | ) | $ | 874 | ||||
|
Interest expense
|
(2,870 | ) | (3,534 | ) | 664 | |||||||
|
Net interest income
|
$ | 358 | $ | 148 | $ | 210 | ||||||
|
2008 vs. 2007
|
||||||||||||
|
Interest income
|
$ | (1,404 | ) | $ | (3,163 | ) | $ | 1,759 | ||||
|
Interest expense
|
(1,181 | ) | (2,402 | ) | 1,221 | |||||||
|
Net interest income
|
$ | (223 | ) | $ | (761 | ) | $ | 538 | ||||
Net
Interest Margin — On-Balance Sheet
The following table reflects the net interest margin of
on-balance sheet interest-earning assets, before provisions for
loan losses. (Certain percentages do not add or subtract down as
they are based on average balances.)
|
Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Student loan
spread
(1)(2)
|
1.42 | % | 1.28 | % | 1.44 | % | ||||||
|
Other asset
spread
(1)(3)
|
(1.96 | ) | (.27 | ) | (.16 | ) | ||||||
|
Net interest margin, before the impact of 2008 Asset-Backed
Financing Facilities
fees
(1)
|
1.18 | 1.17 | 1.26 | |||||||||
|
Less: 2008 Asset-Backed Financing Facilities fees
|
(.13 | ) | (.24 | ) | — | |||||||
|
Net interest margin
|
1.05 | % | .93 | % | 1.26 | % | ||||||
| (1) | Before commitment and liquidity fees associated with the 2008 Asset-Backed Financing Facilities, which are referred to as the “2008 Asset-Backed Financing Facilities fees” (see “LIQUIDITY AND CAPITAL RESOURCES — Additional Funding Sources for General Corporate Purposes” for a further discussion). | |
| (2) | Composition of student loan spread: |
|
Student loan yield, before Floor Income
|
3.27 | % | 5.60 | % | 7.92 | % | ||||||
|
Gross Floor Income
|
.49 | .28 | .05 | |||||||||
|
Consolidation Loan Rebate Fees
|
(.48 | ) | (.55 | ) | (.63 | ) | ||||||
|
Repayment Borrower Benefits
|
(.09 | ) | (.11 | ) | (.12 | ) | ||||||
|
Premium and discount amortization
|
(.11 | ) | (.16 | ) | (.18 | ) | ||||||
|
Student loan net yield
|
3.08 | 5.06 | 7.04 | |||||||||
|
Student loan cost of funds
|
(1.66 | ) | (3.78 | ) | (5.60 | ) | ||||||
|
Student loan spread, before 2008 Asset-Backed Financing
Facilities fees
|
1.42 | % | 1.28 | % | 1.44 | % | ||||||
| (3) | Comprised of investments, cash and other loans. |
56
Student
Loan Spread — On-Balance Sheet
The student loan spread is impacted by changes in its various
components, as reflected in footnote (2) to the
“Net Interest Margin — On-Balance Sheet”
table above. Gross Floor Income is impacted by interest
rates and the percentage of the FFELP portfolio earning Floor
Income. Floor Income Contracts used to economically hedge Gross
Floor Income do not qualify as ASC 815 hedges and as a result
the net settlements on such contracts are not recorded in net
interest margin but rather in “gains (losses) on derivative
and hedging activities, net” line in the consolidated
statements of income. The spread impact from Consolidation Loan
Rebate Fees fluctuates as a function of the percentage of FFELP
Consolidation Loans on our balance sheet. Repayment Borrower
Benefits are generally impacted by the terms of the Repayment
Borrower Benefits being offered as well as the payment behavior
of the underlying loans. Premium and discount amortization is
generally impacted by the prices previously paid for loans and
amounts capitalized related to such purchases or originations.
Premium and discount amortization is also impacted by prepayment
behavior of the underlying loans.
The student loan spread, before 2008 Asset-Backed Financing
Facilities fees, for the year ended December 31, 2009,
increased 14 basis points from the prior year. The student
loan spread was positively impacted by lower cost of funds
related to the ED Conduit Program (See “LIQUIDITY AND
CAPITAL RESOURCES — ED Funding Programs”), higher
asset spreads earned on Private Education Loans originated
during 2009 compared to prior years, an increase in Gross Floor
Income and a lower cost of funds due to the impact of ASC 815
(discussed below). Partially offsetting these improvements to
the student loan spread was a 18 basis point widening of
the CP/LIBOR spread, higher credit spreads on the Company’s
ABS debt issued in 2008 and 2009 due to the current credit
environment and lower spreads earned on FFELP loans funded
through the ED Participation Program.
The student loan spread for 2008, before 2008 Asset-Backed
Financing Facilities fees, decreased 16 basis points from
2007. The decrease was primarily due to an increase in our cost
of funds, which is the result of both an increase in the credit
spread on the Company’s debt issued in the previous year as
a result of the credit environment as well as due to the impact
of ASC 815 (discussed below). This was partially offset by an
increase in Floor Income due to a decrease in interest rates in
2008 compared to 2007.
The cost of funds for on-balance sheet student loans excludes
the impact of basis swaps that are intended to economically
hedge the re-pricing and basis mismatch between our funding and
student loan asset indices, but do not receive hedge accounting
treatment under ASC 815. We use basis swaps to manage the basis
risk associated with our interest rate sensitive assets and
liabilities. These swaps generally do not qualify as accounting
hedges and, as a result, are required to be accounted for in the
“gains (losses) on derivatives and hedging activities,
net” line on the income statement, as opposed to being
accounted for in interest expense. As a result, these basis
swaps are not considered in the calculation of the cost of funds
in the table above. Therefore, in times of volatile movements of
interest rates like those experienced in 2008 and 2009, the
student loan spread can be volatile. See the
“
‘Core Earnings’ Net Interest Margin”
table
below, which reflects these basis swaps in interest expense and
demonstrates the economic hedge effectiveness of these basis
swaps.
Other
Asset Spread — On-Balance Sheet
The other asset spread is generated from cash and investments
(both restricted and unrestricted) primarily in our liquidity
portfolio and other loans. The Company invests its liquidity
portfolio primarily in short-term securities with maturities of
one week or less in order to manage counterparty credit risk and
maintain available cash balances. The other asset spread
decreased 169 basis points from 2008 to 2009, and decreased
11 basis points from 2007 to 2008. Changes in the other
asset spread primarily relate to differences in the index basis
and reset frequency between the asset indices and funding
indices. A portion of this risk is hedged with derivatives that
do not receive hedge accounting treatment under ASC 815 and will
impact the other asset spread in a similar fashion as the impact
to the on-balance sheet student loan spread as discussed above.
In volatile interest rate environments, these spreads may move
significantly from period to period and differ from the
“Core Earnings” basis other asset spread discussed
below.
57
Net
Interest Margin — On-Balance Sheet
The net interest margin, before 2008 Asset-Backed Financing
Facilities fees, for 2009 increased 1 basis point from 2008
and decreased 9 basis points from 2007 to 2008. These
changes primarily relate to the previously discussed changes in
the on-balance sheet student loan and other asset spreads. The
student loan portfolio as a percentage of the overall
interest-earning asset portfolio did not change substantially
between 2009 and 2008; however, the increase in the percentage
between 2008 and 2007 increased the net interest margin by
7 basis points. This increase was more than offset for the
reasons discussed above.
See “LIQUIDITY AND CAPITAL RESOURCES
—
Additional Funding Sources for General
Corporate Purposes
— Asset-Backed Financing
Facilities
” for a discussion of the 2008 Asset-Backed
Financing Facilities fees and related extensions.
“Core
Earnings” Net Interest Margin
The following table analyzes the earnings from our portfolio of
Managed interest-earning assets on a “Core Earnings”
basis (see “BUSINESS SEGMENTS — Pre-tax
Differences between ‘Core Earnings’ and GAAP by
Business Segment”). The “ ‘Core
Earnings’ Net Interest Margin” presentation and
certain components used in the calculation differ from the
“Net Interest Margin — On-Balance Sheet”
presentation. The “Core Earnings” presentation, when
compared to our on-balance sheet presentation, is different in
that it:
| • | Includes the net interest margin related to our off-balance sheet student loan securitization trusts. This includes any related fees or costs such as the Consolidation Loan Rebate Fees, premium/discount amortization and Repayment Borrower Benefits yield adjustments; | |
| • | Includes the reclassification of certain derivative net settlement amounts. The net settlements on certain derivatives that do not qualify as ASC 815 hedges are recorded as part of the “gain (loss) on derivative and hedging activities, net” line in the consolidated statements of income and are therefore not recognized in the on-balance sheet student loan spread. Under this presentation, these gains and losses are reclassified to the income statement line item of the economically hedged item. For our “Core Earnings” net interest margin, this would primarily include: (a) reclassifying the net settlement amounts related to our written Floor Income Contracts to student loan interest income and (b) reclassifying the net settlement amounts related to certain of our basis swaps to debt interest expense; | |
| • | Excludes unhedged Floor Income and hedged Variable Rate Floor Income earned on the Managed student loan portfolio; and | |
| • | Includes the amortization of upfront payments on Fixed Rate Floor Income Contracts in student loan income that we believe are economically hedging the Floor Income. |
58
The following table reflects the “Core Earnings” net
interest margin, before provisions for loan losses. (Certain
percentages do not add or subtract down as they are based on
average balances.)
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
“Core Earnings” basis student loan
spread
(1)
:
|
||||||||||||
|
FFELP loan spread
|
.63 | % | .83 | % | .96 | % | ||||||
|
Private Education Loan
spread
(2)
|
4.54 | 5.09 | 5.12 | |||||||||
|
Total “Core Earnings” basis student loan
spread
(3)
|
1.39 | 1.63 | 1.67 | |||||||||
|
“Core Earnings” basis other asset
spread
(1)(4)
|
(.93 | ) | (.51 | ) | (.11 | ) | ||||||
|
“Core Earnings” net interest margin, before 2008
Asset-Backed Financing Facilities
fees
(1)
|
1.25 | 1.49 | 1.49 | |||||||||
|
Less: 2008 Asset-Backed Financing Facilities fees
|
(.11 | ) | (.19 | ) | — | |||||||
|
“Core Earnings” net interest
margin
(5)
|
1.14 | % | 1.30 | % | 1.49 | % | ||||||
|
(1)
|
Before commitment and liquidity fees associated with the 2008 Asset-Backed Financing Facilities, which are referred to as the “2008 Asset-Backed Financing Facilities fees” (see “LIQUIDITY AND CAPITAL RESOURCES — Additional Funding Sources for General Corporate Purposes” for a further discussion). | |||||||||||||
|
(2)
|
“Core Earnings” basis Private Education Loan Spread, before 2008 Asset-Backed Financing Facilities fees and after provision for loan losses | .66 | % | 2.41 | % | .41 | % | |||||||
|
(3)
|
Composition of “Core Earnings” basis student loan spread: | |||||||||||||
| “Core Earnings” basis student loan yield | 3.43 | % | 5.77 | % | 8.12 | % | ||||||||
| Consolidation Loan Rebate Fees | (.47 | ) | (.52 | ) | (.57 | ) | ||||||||
| Repayment Borrower Benefits | (.09 | ) | (.11 | ) | (.11 | ) | ||||||||
| Premium and discount amortization | (.09 | ) | (.14 | ) | (.17 | ) | ||||||||
| “Core Earnings” basis student loan net yield | 2.78 | 5.00 | 7.27 | |||||||||||
| “Core Earnings” basis student loan cost of funds | (1.39 | ) | (3.37 | ) | (5.60 | ) | ||||||||
| “Core Earnings” basis student loan spread, before 2008 Asset-Backed Financing Facilities fees | 1.39 | % | 1.63 | % | 1.67 | % | ||||||||
|
(4)
|
Comprised of investments, cash and other loans | |||||||||||||
|
(5)
|
The average balances of our Managed interest-earning assets for the respective periods are: | |||||||||||||
| FFELP loans | $ | 150,059 | $ | 141,647 | $ | 127,940 | ||||||||
| Private Education Loans | 36,046 | 32,597 | 26,190 | |||||||||||
| Total student loans | 186,105 | 174,244 | 154,130 | |||||||||||
| Other interest-earning assets | 12,897 | 12,403 | 17,455 | |||||||||||
| Total Managed interest-earning assets | $ | 199,002 | $ | 186,647 | $ | 171,585 | ||||||||
“Core
Earnings” Basis Student Loan Spread
The “Core Earnings” basis student loan spread, before
the 2008 Asset-Backed Financing Facilities fees, for 2009
decreased 24 basis points from 2008. The “Core
Earnings” basis student loan spread was negatively impacted
primarily by a 18 basis point widening of the CP/LIBOR
spread, higher credit spreads on the Company’s ABS debt
issued in 2008 and 2009 due to the current credit environment
and lower spreads earned on FFELP loans funded through the ED
Participation Program. Partially offsetting these decreases to
the student loan spread are lower cost of funds related to the
ED Conduit Program (See “LIQUIDITY AND CAPITAL
RESOURCES — ED Funding Programs”) and higher
asset spreads earned on Private Education Loans originated
during 2009 compared to prior years.
59
The “Core Earnings” basis student loan spread, before
the 2008 Asset Backed Financing Facilities fees, decreased
4 basis points from 2007 for 2008, primarily due to an
increase in the Company’s cost of funds, due to an increase
in the credit spreads on the Company’s debt issued during
the past year due to the current credit environment. The
decrease to the student loan spread was partially offset by the
growth in the Private Education Loan portfolio which earns a
higher margin than FFELP.
The “Core Earnings” basis FFELP loan spread for 2009
declined from 2008 and 2007 primarily as a result of the
increase in cost of funds previously discussed, as well as the
mix of the FFELP portfolio shifting towards loans originated
subsequent to October 1, 2007, which have lower yields as a
result of the CCRAA.
The “Core Earnings” basis Private Education Loan
spread before provision for loan losses for 2009 decreased from
2008 primarily as a result of the increase in cost of funds
previously discussed. The changes in the “Core
Earnings” basis Private Education Loan spread after
provision for loan losses for all periods presented was
primarily due to the timing and amount of provision associated
with our allowance for Private Education Loan Losses as
discussed below (see “Private Education Loan
Losses —
Allowance for Private Education Loan
Losses
”).
“Core
Earnings” Basis Other Asset Spread
The “Core Earnings” basis other asset spread is
generated from cash and investments (both restricted and
unrestricted) primarily in our liquidity portfolio, and other
loans. The Company invests its liquidity portfolio primarily in
short-term securities with maturities of one week or less in
order to manage counterparty credit risk and maintain available
cash balances. The “Core Earnings” basis other asset
spread for 2009 decreased 42 basis points from 2008 and
decreased 40 basis points from 2007 to 2008. Changes in
this spread primarily relate to differences between the index
basis and reset frequency of the asset indices and funding
indices. In volatile interest rate environments, the asset and
debt reset frequencies will lag each other. Changes in this
spread are also a result of the increase in our cost of funds,
as previously discussed.
“Core
Earnings” Net Interest Margin
The “Core Earnings” net interest margin for 2009,
before the 2008 Asset-Backed Financing Facilities fees,
decreased 24 basis points from 2008 and remained constant
from 2007 to 2008. These changes primarily relate to the
previously discussed changes in the “Core Earnings”
basis student loan and other asset spreads. The Managed student
loan portfolio, as a percentage of the overall interest-earning
asset portfolio did not change substantially between 2009 and
2008; however, the increase in the percentage between 2008 and
2007 increased the net interest margin by 6 basis points.
This increase was offset by the factors discussed above.
See “LIQUIDITY AND CAPITAL RESOURCES — Additional
Funding Sources for General Corporate Purposes —
Asset-Backed Financing Facilities
” for a discussion
of the 2008 Asset-Backed Financing Facilities fees and related
extensions.
60
Summary
of our Managed Student Loan Portfolio
The following tables summarize the components of our Managed
student loan portfolio and show the changing composition of our
portfolio.
Ending
Managed Student Loan Balances, net
| December 31, 2009 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Private
|
||||||||||||||||||
|
Stafford and
|
Consolidation
|
Total
|
Education
|
|||||||||||||||||
| Other (1) | Loans | FFELP | Loans | Total | ||||||||||||||||
|
On-balance sheet:
|
||||||||||||||||||||
|
In-school
|
$ | 15,250 | $ | — | $ | 15,250 | $ | 6,058 | $ | 21,308 | ||||||||||
|
Grace and repayment
|
36,543 | 67,235 | 103,778 | 18,198 | 121,976 | |||||||||||||||
|
Total on-balance sheet, gross
|
51,793 | 67,235 | 119,028 | 24,256 | 143,284 | |||||||||||||||
|
On-balance sheet unamortized premium/(discount)
|
986 | 1,201 | 2,187 | (559 | ) | 1,628 | ||||||||||||||
|
On-balance sheet receivable for partially charged-off loans
|
— | — | — | 499 | 499 | |||||||||||||||
|
On-balance sheet allowance for losses
|
(104 | ) | (57 | ) | (161 | ) | (1,443 | ) | (1,604 | ) | ||||||||||
|
Total on-balance sheet, net
|
52,675 | 68,379 | 121,054 | 22,753 | 143,807 | |||||||||||||||
|
Off-balance sheet:
|
||||||||||||||||||||
|
In-school
|
232 | — | 232 | 773 | 1,005 | |||||||||||||||
|
Grace and repayment
|
5,143 | 14,369 | 19,512 | 12,213 | 31,725 | |||||||||||||||
|
Total off-balance sheet, gross
|
5,375 | 14,369 | 19,744 | 12,986 | 32,730 | |||||||||||||||
|
Off-balance sheet unamortized premium/(discount)
|
139 | 438 | 577 | (349 | ) | 228 | ||||||||||||||
|
Off-balance sheet receivable for partially charged-off loans
|
— | — | — | 229 | 229 | |||||||||||||||
|
Off-balance sheet allowance for losses
|
(15 | ) | (10 | ) | (25 | ) | (524 | ) | (549 | ) | ||||||||||
|
Total off-balance sheet, net
|
5,499 | 14,797 | 20,296 | 12,342 | 32,638 | |||||||||||||||
|
Total Managed
|
$ | 58,174 | $ | 83,176 | $ | 141,350 | $ | 35,095 | $ | 176,445 | ||||||||||
|
% of on-balance sheet FFELP
|
44 | % | 56 | % | 100 | % | ||||||||||||||
|
% of Managed FFELP
|
41 | % | 59 | % | 100 | % | ||||||||||||||
|
% of total
|
33 | % | 47 | % | 80 | % | 20 | % | 100 | % | ||||||||||
| (1) | FFELP category is primarily Stafford Loans, but also includes federally guaranteed PLUS and HEAL Loans. |
61
| December 31, 2008 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Private
|
||||||||||||||||||
|
Stafford and
|
Consolidation
|
Total
|
Education
|
|||||||||||||||||
| Other (1) | Loans | FFELP | Loans | Total | ||||||||||||||||
|
On-balance sheet:
|
||||||||||||||||||||
|
In-school
|
$ | 18,961 | $ | — | $ | 18,961 | $ | 7,972 | $ | 26,933 | ||||||||||
|
Grace and repayment
|
32,455 | 70,511 | 102,966 | 14,231 | 117,197 | |||||||||||||||
|
Total on-balance sheet, gross
|
51,416 | 70,511 | 121,927 | 22,203 | 144,130 | |||||||||||||||
|
On-balance sheet unamortized premium/(discount)
|
1,151 | 1,280 | 2,431 | (535 | ) | 1,896 | ||||||||||||||
|
On-balance sheet receivable for partially charged-off loans
|
— | — | — | 222 | 222 | |||||||||||||||
|
On-balance sheet allowance for losses
|
(91 | ) | (47 | ) | (138 | ) | (1,308 | ) | (1,446 | ) | ||||||||||
|
Total on-balance sheet, net
|
52,476 | 71,744 | 124,220 | 20,582 | 144,802 | |||||||||||||||
|
Off-balance sheet:
|
||||||||||||||||||||
|
In-school
|
473 | — | 473 | 1,629 | 2,102 | |||||||||||||||
|
Grace and repayment
|
6,583 | 15,078 | 21,661 | 12,062 | 33,723 | |||||||||||||||
|
Total off-balance sheet, gross
|
7,056 | 15,078 | 22,134 | 13,691 | 35,825 | |||||||||||||||
|
Off-balance sheet unamortized premium/(discount)
|
105 | 462 | 567 | (361 | ) | 206 | ||||||||||||||
|
Off-balance sheet receivable for partially charged-off loans
|
— | — | — | 92 | 92 | |||||||||||||||
|
Off-balance sheet allowance for losses
|
(18 | ) | (9 | ) | (27 | ) | (505 | ) | (532 | ) | ||||||||||
|
Total off-balance sheet, net
|
7,143 | 15,531 | 22,674 | 12,917 | 35,591 | |||||||||||||||
|
Total Managed
|
$ | 59,619 | $ | 87,275 | $ | 146,894 | $ | 33,499 | $ | 180,393 | ||||||||||
|
% of on-balance sheet FFELP
|
42 | % | 58 | % | 100 | % | ||||||||||||||
|
% of Managed FFELP
|
41 | % | 59 | % | 100 | % | ||||||||||||||
|
% of total
|
33 | % | 48 | % | 81 | % | 19 | % | 100 | % | ||||||||||
| (1) | FFELP category is primarily Stafford Loans, but also includes federally guaranteed PLUS and HEAL Loans. |
62
Student
Loan Average Balances (net of unamortized
premium/discount)
The following tables summarize the components of our Managed
student loan portfolio and show the changing composition of our
portfolio.
| Year Ended December 31, 2009 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Private
|
||||||||||||||||||
|
Stafford and
|
Consolidation
|
Education
|
||||||||||||||||||
| Other (1) | Loans | Total FFELP | Loans | Total | ||||||||||||||||
|
On-balance sheet
|
$ | 58,492 | $ | 70,046 | $ | 128,538 | $ | 23,154 | $ | 151,692 | ||||||||||
|
Off-balance sheet
|
6,365 | 15,156 | 21,521 | 12,892 | 34,413 | |||||||||||||||
|
Total Managed
|
$ | 64,857 | $ | 85,202 | $ | 150,059 | $ | 36,046 | $ | 186,105 | ||||||||||
|
% of on-balance sheet FFELP
|
46 | % | 54 | % | 100 | % | ||||||||||||||
|
% of Managed FFELP
|
43 | % | 57 | % | 100 | % | ||||||||||||||
|
% of total
|
35 | % | 46 | % | 81 | % | 19 | % | 100 | % | ||||||||||
| Year Ended December 31, 2008 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Private
|
||||||||||||||||||
|
Stafford and
|
Consolidation
|
Education
|
||||||||||||||||||
| Other (1) | Loans | Total FFELP | Loans | Total | ||||||||||||||||
|
On-balance sheet
|
$ | 44,291 | $ | 73,091 | $ | 117,382 | $ | 19,276 | $ | 136,658 | ||||||||||
|
Off-balance sheet
|
8,299 | 15,966 | 24,265 | 13,321 | 37,586 | |||||||||||||||
|
Total Managed
|
$ | 52,590 | $ | 89,057 | $ | 141,647 | $ | 32,597 | $ | 174,244 | ||||||||||
|
% of on-balance sheet FFELP
|
38 | % | 62 | % | 100 | % | ||||||||||||||
|
% of Managed FFELP
|
37 | % | 63 | % | 100 | % | ||||||||||||||
|
% of total
|
30 | % | 51 | % | 81 | % | 19 | % | 100 | % | ||||||||||
| Year Ended December 31, 2007 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Private
|
||||||||||||||||||
|
Stafford and
|
Consolidation
|
Education
|
||||||||||||||||||
| Other (1) | Loans | Total FFELP | Loans | Total | ||||||||||||||||
|
On-balance sheet
|
$ | 31,294 | $ | 67,918 | $ | 99,212 | $ | 12,507 | $ | 111,719 | ||||||||||
|
Off-balance sheet
|
11,533 | 17,195 | 28,728 | 13,683 | 42,411 | |||||||||||||||
|
Total Managed
|
$ | 42,827 | $ | 85,113 | $ | 127,940 | $ | 26,190 | $ | 154,130 | ||||||||||
|
% of on-balance sheet FFELP
|
32 | % | 68 | % | 100 | % | ||||||||||||||
|
% of Managed FFELP
|
33 | % | 67 | % | 100 | % | ||||||||||||||
|
% of total
|
28 | % | 55 | % | 83 | % | 17 | % | 100 | % | ||||||||||
| (1) | FFELP category is primarily Stafford Loans, but also includes federally guaranteed PLUS and HEAL Loans. |
63
Floor
Income — Managed Basis
The following table analyzes the ability of the FFELP loans in
our Managed portfolio to earn Floor Income after
December 31, 2009 and 2008, based on interest rates as of
those dates.
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||
|
Fixed
|
Variable
|
Fixed
|
Variable
|
|||||||||||||||||||||
|
Borrower
|
Borrower
|
Borrower
|
Borrower
|
|||||||||||||||||||||
|
(Dollars in billions)
|
Rate | Rate | Total | Rate | Rate | Total | ||||||||||||||||||
|
Student loans eligible to earn Floor Income:
|
||||||||||||||||||||||||
|
On-balance sheet student loans
|
$ | 103.3 | $ | 14.9 | $ | 118.2 | $ | 104.9 | $ | 16.1 | $ | 121.0 | ||||||||||||
|
Off-balance sheet student loans
|
14.3 | 5.4 | 19.7 | 15.0 | 7.0 | 22.0 | ||||||||||||||||||
|
Managed student loans eligible to earn Floor Income
|
117.6 | 20.3 | 137.9 | 119.9 | 23.1 | 143.0 | ||||||||||||||||||
|
Less: post-March 31, 2006 disbursed loans required to
rebate Floor Income
|
(64.9 | ) | (1.2 | ) | (66.1 | ) | (64.3 | ) | (1.3 | ) | (65.6 | ) | ||||||||||||
|
Less: economically hedged Floor Income Contracts
|
(39.6 | ) | — | (39.6 | ) | (28.6 | ) | — | (28.6 | ) | ||||||||||||||
|
Net Managed student loans eligible to earn Floor Income
|
$ | 13.1 | $ | 19.1 | $ | 32.2 | $ | 27.0 | $ | 21.8 | $ | 48.8 | ||||||||||||
|
Net Managed student loans earning Floor Income as of
December 31,
|
$ | 13.1 | $ | 3.0 | $ | 16.1 | $ | 4.3 | $ | 4.8 | $ | 9.1 | ||||||||||||
We have sold Floor Income contracts to hedge the potential Floor
Income from specifically identified pools of FFELP Consolidation
Loans that are eligible to earn Floor Income.
The following table presents a projection of the average Managed
balance of FFELP Consolidation Loans for which Fixed Rate Floor
Income has already been economically hedged through Floor Income
Contracts for the period January 1, 2010 to
September 30, 2013. These loans are both on-and off-balance
sheet and the related hedges do not qualify under ASC 815
accounting as effective hedges.
| Years Ended December 31, | ||||||||||||||||||||
|
(Dollars in billions)
|
2010 | 2011 | 2012 | 2013 | ||||||||||||||||
|
Average balance of FFELP Consolidation Loans whose Floor Income
is economically hedged (Managed Basis)
|
$ | 37 | $ | 25 | $ | 16 | $ | 5 | ||||||||||||
Private
Education Loan Losses
On-Balance
Sheet versus Managed Basis Presentation
All Private Education Loans are initially acquired on-balance
sheet. The securitization of Private Education Loans prior to
2009 has been accounted for off-balance sheet. For our Managed
Basis presentation in the table below, when loans are
securitized, we reduce the on-balance sheet allowance for loan
losses for amounts previously provided and then increase the
allowance for loan losses for these loans off-balance sheet,
with the total of both on-balance sheet and off-balance sheet
being the Managed Basis allowance for loan losses.
When Private Education Loans in our securitized trusts settling
before September 30, 2005 became 180 days delinquent,
we previously exercised our contingent call option to repurchase
these loans at par value out of the trust and recorded a loss
for the difference in the par value paid and the fair market
value of the loan at the time of purchase. Revenue is recognized
over the anticipated remaining life of the loan based upon the
amount and timing of anticipated cash flows. Beginning in
October 2008, the Company decided to no longer exercise its
contingent call option. On a Managed Basis, the losses recorded
under GAAP for loans repurchased at day 180 were reversed and
the full amount is charged-off at day 212 of delinquency. We do
not hold the contingent call option for any trusts settled after
September 30, 2005.
64
When measured as a percentage of ending loans in repayment, the
off-balance sheet allowance for loan losses percentage is lower
than the on-balance sheet percentage because of the different
mix and aging of loans on-balance sheet and off-balance sheet.
Private
Education Loan Delinquencies and Forbearance
The table below presents our Private Education Loan delinquency
trends as of December 31, 2009, 2008 and 2007.
Delinquencies have the potential to adversely impact earnings as
they are an indication of the borrower’s potential to
possibly default and as a result require a higher loan loss
reserve than loans in current status. Delinquent loans also
require increased servicing and collection efforts, resulting in
higher operating costs.
|
On-Balance Sheet Private Education
|
||||||||||||||||||||||||
| Loan Delinquencies | ||||||||||||||||||||||||
|
December 31,
|
December 31,
|
December 31,
|
||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Balance | % | Balance | % | Balance | % | |||||||||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 8,910 | $ | 10,159 | $ | 8,151 | ||||||||||||||||||
|
Loans in
forbearance
(2)
|
967 | 862 | 974 | |||||||||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||||||||||
|
Loans current
|
12,421 | 86.4 | % | 9,748 | 87.2 | % | 6,236 | 88.5 | % | |||||||||||||||
|
Loans delinquent
31-60 days
(3)
|
647 | 4.5 | 551 | 4.9 | 306 | 4.3 | ||||||||||||||||||
|
Loans delinquent
61-90 days
(3)
|
340 | 2.4 | 296 | 2.6 | 176 | 2.5 | ||||||||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
971 | 6.7 | 587 | 5.3 | 329 | 4.7 | ||||||||||||||||||
|
Total Private Education Loans in repayment
|
14,379 | 100 | % | 11,182 | 100 | % | 7,047 | 100 | % | |||||||||||||||
|
Total Private Education Loans, gross
|
24,256 | 22,203 | 16,172 | |||||||||||||||||||||
|
Private Education Loan unamortized discount
|
(559 | ) | (535 | ) | (468 | ) | ||||||||||||||||||
|
Total Private Education Loans
|
23,697 | 21,668 | 15,704 | |||||||||||||||||||||
|
Private Education Loan receivable for partially charged-off loans
|
499 | 222 | 118 | |||||||||||||||||||||
|
Private Education Loan allowance for losses
|
(1,443 | ) | (1,308 | ) | (1,004 | ) | ||||||||||||||||||
|
Private Education Loans, net
|
$ | 22,753 | $ | 20,582 | $ | 14,818 | ||||||||||||||||||
|
Percentage of Private Education Loans in repayment
|
59.3 | % | 50.4 | % | 43.6 | % | ||||||||||||||||||
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
13.6 | % | 12.8 | % | 11.5 | % | ||||||||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
6.3 | % | 7.2 | % | 12.1 | % | ||||||||||||||||||
| (1) | Loans for borrowers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation. | |
| (2) | Loans for borrowers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with established loan program servicing policies and procedures. | |
| (3) | The period of delinquency is based on the number of days scheduled payments are contractually past due. |
65
|
Off-Balance Sheet Private Education
|
||||||||||||||||||||||||
| Loan Delinquencies | ||||||||||||||||||||||||
|
December 31,
|
December 31,
|
December 31,
|
||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Balance | % | Balance | % | Balance | % | |||||||||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 2,546 | $ | 3,461 | $ | 4,963 | ||||||||||||||||||
|
Loans in
forbearance
(2)
|
453 | 700 | 1,417 | |||||||||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||||||||||
|
Loans current
|
8,987 | 90.0 | % | 8,843 | 92.8 | % | 7,403 | 94.7 | % | |||||||||||||||
|
Loans delinquent
31-60 days
(3)
|
332 | 3.3 | 315 | 3.3 | 202 | 2.6 | ||||||||||||||||||
|
Loans delinquent
61-90 days
(3)
|
151 | 1.5 | 121 | 1.3 | 84 | 1.1 | ||||||||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
517 | 5.2 | 251 | 2.6 | 130 | 1.6 | ||||||||||||||||||
|
Total Private Education Loans in repayment
|
9,987 | 100 | % | 9,530 | 100 | % | 7,819 | 100 | % | |||||||||||||||
|
Total Private Education Loans, gross
|
12,986 | 13,691 | 14,199 | |||||||||||||||||||||
|
Private Education Loan unamortized discount
|
(349 | ) | (361 | ) | (355 | ) | ||||||||||||||||||
|
Total Private Education Loans
|
12,637 | 13,330 | 13,844 | |||||||||||||||||||||
|
Private Education Loan receivable for partially charged-off loans
|
229 | 92 | 28 | |||||||||||||||||||||
|
Private Education Loan allowance for losses
|
(524 | ) | (505 | ) | (362 | ) | ||||||||||||||||||
|
Private Education Loans, net
|
$ | 12,342 | $ | 12,917 | $ | 13,510 | ||||||||||||||||||
|
Percentage of Private Education Loans in repayment
|
76.9 | % | 69.6 | % | 55.1 | % | ||||||||||||||||||
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
10.0 | % | 7.2 | % | 5.3 | % | ||||||||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
4.3 | % | 6.8 | % | 15.3 | % | ||||||||||||||||||
| (1) | Loans for borrowers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation. | |
| (2) | Loans for borrowers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with established loan program servicing policies and procedures. | |
| (3) | The period of delinquency is based on the number of days scheduled payments are contractually past due. |
66
|
Managed Basis Private Education
|
||||||||||||||||||||||||
| Loan Delinquencies | ||||||||||||||||||||||||
|
December 31,
|
December 31,
|
December 31,
|
||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Balance | % | Balance | % | Balance | % | |||||||||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 11,456 | $ | 13,620 | $ | 13,114 | ||||||||||||||||||
|
Loans in
forbearance
(2)
|
1,420 | 1,562 | 2,391 | |||||||||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||||||||||
|
Loans current
|
21,408 | 87.9 | % | 18,591 | 89.8 | % | 13,639 | 91.7 | % | |||||||||||||||
|
Loans delinquent
31-60 days
(3)
|
979 | 4.0 | 866 | 4.2 | 508 | 3.4 | ||||||||||||||||||
|
Loans delinquent
61-90 days
(3)
|
491 | 2.0 | 417 | 2.0 | 260 | 1.8 | ||||||||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
1,488 | 6.1 | 838 | 4.0 | 459 | 3.1 | ||||||||||||||||||
|
Total Private Education Loans in repayment
|
24,366 | 100 | % | 20,712 | 100 | % | 14,866 | 100 | % | |||||||||||||||
|
Total Private Education Loans, gross
|
37,242 | 35,894 | 30,371 | |||||||||||||||||||||
|
Private Education Loan unamortized discount
|
(908 | ) | (896 | ) | (823 | ) | ||||||||||||||||||
|
Total Private Education Loans
|
36,334 | 34,998 | 29,548 | |||||||||||||||||||||
|
Private Education Loan receivable for partially charged-off loans
|
728 | 314 | 146 | |||||||||||||||||||||
|
Private Education Loan allowance for losses
|
(1,967 | ) | (1,813 | ) | (1,366 | ) | ||||||||||||||||||
|
Private Education Loans, net
|
$ | 35,095 | $ | 33,499 | $ | 28,328 | ||||||||||||||||||
|
Percentage of Private Education Loans in repayment
|
65.4 | % | 57.7 | % | 48.9 | % | ||||||||||||||||||
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
12.1 | % | 10.2 | % | 8.3 | % | ||||||||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
5.5 | % | 7.0 | % | 13.9 | % | ||||||||||||||||||
| (1) | Loans for borrowers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation. | |
| (2) | Loans for borrowers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with established loan program servicing policies and procedures. | |
| (3) | The period of delinquency is based on the number of days scheduled payments are contractually past due. |
67
Allowance
for Private Education Loan Losses
The following table summarizes changes in the allowance for
Private Education Loan losses for the years ended
December 31, 2009, 2008 and 2007.
| Activity in Allowance for Private Education Loans | ||||||||||||||||||||||||||||||||||||
|
On-Balance Sheet
|
Off-Balance Sheet
|
Managed Basis
|
||||||||||||||||||||||||||||||||||
| Years Ended December 31, | Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||
|
Allowance at beginning of period
|
$ | 1,308 | $ | 1,004 | $ | 372 | $ | 505 | $ | 362 | $ | 86 | $ | 1,813 | $ | 1,366 | $ | 458 | ||||||||||||||||||
|
Provision for Private Education Loan losses
|
967 | 586 | 884 | 432 | 288 | 349 | 1,399 | 874 | 1,233 | |||||||||||||||||||||||||||
|
Charge-offs
|
(876 | ) | (320 | ) | (246 | ) | (423 | ) | (153 | ) | (79 | ) | (1,299 | ) | (473 | ) | (325 | ) | ||||||||||||||||||
|
Reclassification of interest
reserve
(1)
|
44 | 38 | — | 10 | 8 | — | 54 | 46 | — | |||||||||||||||||||||||||||
|
Balance before securitization of Private Education Loans
|
1,443 | 1,308 | 1,010 | 524 | 505 | 356 | 1,967 | 1,813 | 1,366 | |||||||||||||||||||||||||||
|
Reduction for securitization of Private Education Loans
|
— | — | (6 | ) | — | — | 6 | — | — | — | ||||||||||||||||||||||||||
|
Allowance at end of period
|
$ | 1,443 | $ | 1,308 | $ | 1,004 | $ | 524 | $ | 505 | $ | 362 | $ | 1,967 | $ | 1,813 | $ | 1,366 | ||||||||||||||||||
|
Charge-offs as a percentage of average loans in repayment
|
7.2 | % | 3.8 | % | 4.1 | % | 4.4 | % | 1.9 | % | 1.1 | % | 6.0 | % | 2.9 | % | 2.5 | % | ||||||||||||||||||
|
Charge-offs as a percentage of average loans in repayment and
forbearance
|
6.7 | % | 3.3 | % | 3.7 | % | 4.2 | % | 1.6 | % | .9 | % | 5.6 | % | 2.5 | % | 2.2 | % | ||||||||||||||||||
|
Allowance as a percentage of the ending total loan
balance
(2)
|
5.8 | % | 5.8 | % | 6.2 | % | 4.0 | % | 3.7 | % | 2.5 | % | 5.2 | % | 5.0 | % | 4.5 | % | ||||||||||||||||||
|
Allowance as a percentage of ending loans in repayment
|
10.0 | % | 11.7 | % | 14.2 | % | 5.2 | % | 5.3 | % | 4.6 | % | 8.1 | % | 8.8 | % | 9.2 | % | ||||||||||||||||||
|
Average coverage of charge-offs
|
1.6 | 4.1 | 4.1 | 1.2 | 3.3 | 4.6 | 1.5 | 3.8 | 4.2 | |||||||||||||||||||||||||||
|
Ending total
loans
(2)
|
$ | 24,755 | $ | 22,426 | $ | 16,290 | $ | 13,215 | $ | 13,782 | $ | 14,227 | $ | 37,970 | $ | 36,208 | $ | 30,517 | ||||||||||||||||||
|
Average loans in repayment
|
$ | 12,137 | $ | 8,533 | $ | 5,949 | $ | 9,597 | $ | 8,088 | $ | 7,305 | $ | 21,734 | $ | 16,621 | $ | 13,254 | ||||||||||||||||||
|
Ending loans in repayment
|
$ | 14,379 | $ | 11,182 | $ | 7,047 | $ | 9,987 | $ | 9,530 | $ | 7,819 | $ | 24,366 | $ | 20,712 | $ | 14,866 | ||||||||||||||||||
| (1) | Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance. Prior to 2008, the interest provision was reversed in interest income and then provided for through provision within the allowance for loan loss. For the year ended December 31, 2007, this amount was $21 million and $27 million on an On-Balance Sheet Basis and a Managed Basis, respectively. | |
| (2) | Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans. |
68
The following table provides the detail for our traditional and
non-traditional Managed Private Education Loans at
December 31, 2009, 2008 and 2007.
| December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||||||||||||||||||||||||||
|
Non-
|
Non-
|
Non-
|
||||||||||||||||||||||||||||||||||
| Traditional | Traditional | Total | Traditional | Traditional | Total | Traditional | Traditional | Total | ||||||||||||||||||||||||||||
|
Ending total
loans
(1)
|
$ | 33,223 | $ | 4,747 | $ | 37,970 | $ | 31,101 | $ | 5,107 | $ | 36,208 | $ | 25,848 | $ | 4,669 | $ | 30,517 | ||||||||||||||||||
|
Ending loans in repayment
|
21,453 | 2,913 | 24,366 | 17,715 | 2,997 | 20,712 | 12,711 | 2,155 | 14,866 | |||||||||||||||||||||||||||
|
Private Education Loan allowance for losses
|
1,056 | 911 | 1,967 | 859 | 954 | 1,813 | 495 | 871 | 1,366 | |||||||||||||||||||||||||||
|
Charge-offs as a percentage of average loans in repayment
|
3.6 | % | 21.4 | % | 6.0 | % | 1.4 | % | 11.1 | % | 2.9 | % | 1.2 | % | 9.5 | % | 2.5 | % | ||||||||||||||||||
|
Allowance as a percentage of ending total loan
balance
(1)
|
3.2 | % | 19.2 | % | 5.2 | % | 2.8 | % | 18.7 | % | 5.0 | % | 1.9 | % | 18.7 | % | 4.5 | % | ||||||||||||||||||
|
Allowance as a percentage of ending loans in repayment
|
4.9 | % | 31.3 | % | 8.1 | % | 4.8 | % | 31.8 | % | 8.8 | % | 3.9 | % | 40.4 | % | 9.2 | % | ||||||||||||||||||
|
Average coverage of charge-offs
|
1.6 | 1.5 | 1.5 | 4.2 | 3.5 | 3.8 | 3.6 | 4.6 | 4.2 | |||||||||||||||||||||||||||
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
9.5 | % | 31.4 | % | 12.1 | % | 7.1 | % | 28.9 | % | 10.2 | % | 5.2 | % | 26.3 | % | 8.3 | % | ||||||||||||||||||
|
Delinquencies greater than 90 days as a percentage of
Private Education Loans in repayment
|
4.6 | % | 17.5 | % | 6.1 | % | 2.6 | % | 12.7 | % | 4.0 | % | 1.7 | % | 11.1 | % | 3.1 | % | ||||||||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
5.3 | % | 7.1 | % | 5.5 | % | 6.7 | % | 9.0 | % | 7.0 | % | 12.8 | % | 19.4 | % | 13.9 | % | ||||||||||||||||||
|
Percentage of Private Education Loans with a cosigner
|
61 | % | 28 | % | 57 | % | 59 | % | 26 | % | 55 | % | 57 | % | 25 | % | 52 | % | ||||||||||||||||||
|
Average FICO at origination
|
725 | 623 | 713 | 723 | 622 | 710 | 723 | 620 | 708 | |||||||||||||||||||||||||||
| (1) | Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans. |
Managed provision expense for Private Education Loans was
$1.4 billion in 2009 compared to $874 million for 2008
and $1.2 billion in 2007. The increase in provision expense
from 2008 to 2009 is a result of the weak U.S. economy and
the continued uncertainty surrounding the U.S. economy. As
a result of the economy, provision expense has remained elevated
since the fourth quarter of 2008. The Private Education Loan
portfolio experienced a significant increase in delinquencies
through the first quarter of 2009 (as of March 31, 2009,
delinquencies as a percentage of loans in repayment was 13.4
percent); however, delinquencies as a percentage of loans in
repayment declined in the second, third and fourth quarters of
2009. The Company believes charge-offs peaked in the third
quarter of 2009 and will decline in future quarters as evidenced
by the 33 percent decline in charge-offs that occurred
between the third and fourth quarters of 2009. The increase in
charge-off levels through the third quarter of 2009 was
generally anticipated and was previously reflected in our
allowance for loan losses. As of December 31, 2009, the
Managed Private Education Loan allowance coverage of
current-year charge-offs ratio was 1.5 compared to 3.8 as of
December 31, 2008. This decrease in the allowance coverage
ratio was expected as evidenced by the charge-off activity
during 2009, noted above. The allowance for loan losses as a
percentage of ending Private Education Loans in repayment has
remained relatively consistent at approximately 8.1 percent
at December 31, 2009 and 8.8 percent at
December 31, 2008. Managed Private Education Loan
delinquencies as a percentage of loans in repayment increased
from 10.2 percent to 12.1 percent from
December 31, 2008 to December 31, 2009. Managed
Private Education Loans in forbearance as a percentage of loans
in repayment and forbearance decreased from 7.0 percent as
of December 31, 2008 to 5.5 percent at
December 31, 2009. As part of concluding that the allowance
for loan losses for Private Education Loans is appropriate as of
December 31, 2009, the Company analyzed changes in the key
ratios disclosed in the tables above.
69
Managed provision expense decreased to $874 million in 2008
from $1.2 billion in 2007. In the fourth quarter of 2007,
the Company recorded provision expense of $667 million for
the Managed Private Education Loan portfolio. This significant
level of provision expense, compared to prior and subsequent
quarters, primarily related to the non-traditional portion of
the Company’s Private Education Loan portfolio which the
Company had been expanding over the past few years. The Company
has terminated these non-traditional loan programs because the
performance of these loans was found to be materially different
from original expectations. The non-traditional portfolio is
particularly impacted by the weakening U.S. economy and an
underlying borrower’s ability to repay.
Forbearance involves granting the borrower a temporary cessation
of payments (or temporary acceptance of smaller than scheduled
payments) for a specified period of time. Using forbearance in
this manner effectively extends the original term of the loan.
Forbearance does not grant any reduction in the total repayment
obligation (principal or interest). While a loan is in
forbearance status, interest continues to accrue and is
capitalized to principal when the loan re-enters repayment
status. Our forbearance policies include limits on the number of
forbearance months granted consecutively and the total number of
forbearance months granted over the life of the loan. In some
instances, we require good-faith payments before granting
forbearance. Exceptions to forbearance policies are permitted
when such exceptions are judged to increase the likelihood of
ultimate collection of the loan. Forbearance as a collection
tool is used most effectively when applied based on a
borrower’s unique situation, including historical
information and judgments. We combine borrower information with
a risk-based segmentation model to assist in our decision making
as to who will be granted forbearance based on our expectation
as to a borrower’s ability and willingness to repay their
obligation. This strategy is aimed at mitigating the overall
risk of the portfolio as well as encouraging cash resolution of
delinquent loans.
Forbearance may be granted to borrowers who are exiting their
grace period to provide additional time to obtain employment and
income to support their obligations, or to current borrowers who
are faced with a hardship and request forbearance time to
provide temporary payment relief. In these circumstances, a
borrower’s loan is placed into a forbearance status in
limited monthly increments and is reflected in the forbearance
status at month-end during this time. At the end of their
granted forbearance period, the borrower will enter repayment
status as current and is expected to begin making their
scheduled monthly payments on a go-forward basis.
Forbearance may also be granted to borrowers who are delinquent
in their payments. In these circumstances, the forbearance cures
the delinquency and the borrower is returned to a current
repayment status. In more limited instances, delinquent
borrowers will also be granted additional forbearance time. As
we have obtained further experience about the effectiveness of
forbearance, we have reduced the amount of time a loan will
spend in forbearance, thereby increasing our ongoing contact
with the borrower to encourage consistent repayment behavior
once the loan is returned to a current repayment status. As a
result, the balance of loans in a forbearance status as of
month-end has decreased over the course of 2008 and 2009. In
addition, the monthly average amount of loans granted
forbearance as a percentage of loans in repayment and
forbearance declined to 5.6 percent in the fourth quarter
of 2009 compared to the year-ago quarter of 6.5 percent. As
of December 31, 2009, 1.9 percent of loans in current
status were delinquent as of the end of the prior month, but
were granted a forbearance that made them current during
December.
70
The table below reflects the historical effectiveness of using
forbearance. Our experience has shown that three years after
being granted forbearance for the first time, over
70 percent of the loans are current,
paid-in-full
or receiving an in-school grace or deferment, and
14 percent have defaulted. The default experience
associated with loans which utilize forbearance is considered in
our allowance for loan losses.
| Tracking by First Time in Forbearance Compared to All Loans Entering Repayment | ||||||||||||
|
Status distribution
|
Status distribution
|
|||||||||||
|
36 months after
|
Status distribution
|
36 months after
|
||||||||||
|
being granted
|
36 months after
|
entering repayment for
|
||||||||||
|
forbearance
|
entering repayment
|
loans never entering
|
||||||||||
| for the first time | (all loans) | forbearance | ||||||||||
|
In-school/grace/deferment
|
8.4 | % | 8.2 | % | 3.2 | % | ||||||
|
Current
|
52.2 | 57.9 | 63.9 | |||||||||
|
Delinquent
31-60 days
|
3.2 | 2.0 | .4 | |||||||||
|
Delinquent
61-90 days
|
1.9 | 1.1 | .2 | |||||||||
|
Delinquent greater than 90 days
|
4.1 | 2.4 | .3 | |||||||||
|
Forbearance
|
6.0 | 4.1 | — | |||||||||
|
Defaulted
|
14.3 | 7.5 | 4.9 | |||||||||
|
Paid
|
9.9 | 16.8 | 27.1 | |||||||||
|
Total
|
100 | % | 100 | % | 100 | % | ||||||
The tables below show the composition and status of the Managed
Private Education Loan portfolio aged by number of months in
active repayment status (months for which a scheduled monthly
payment was due). As indicated in the tables, the percentage of
loans in forbearance status decreases the longer the loans have
been in active repayment status. At December 31, 2009,
loans in forbearance status as a percentage of loans in
repayment and forbearance are 7.3 percent for loans that
have been in active repayment status for less than
25 months. The percentage drops to 1.8 percent for
loans that have been in active repayment status for more than
48 months. Approximately 86 percent of our Managed
Private Education Loans in forbearance status have been in
active repayment status less than 25 months.
| Monthly Scheduled Payments Due |
Not Yet in
|
|||||||||||||||||||
|
December 31, 2009
|
0 to 24 | 25 to 48 | More than 48 | Repayment | Total | |||||||||||||||
|
Loans in-school/grace/deferment
|
$ | — | $ | — | $ | — | $ | 11,456 | $ | 11,456 | ||||||||||
|
Loans in forbearance
|
1,224 | 136 | 60 | — | 1,420 | |||||||||||||||
|
Loans in repayment — current
|
13,122 | 5,194 | 3,092 | — | 21,408 | |||||||||||||||
|
Loans in repayment — delinquent
31-60 days
|
779 | 135 | 65 | — | 979 | |||||||||||||||
|
Loans in repayment — delinquent
61-90 days
|
386 | 71 | 34 | — | 491 | |||||||||||||||
|
Loans in repayment — delinquent greater than
90 days
|
1,210 | 193 | 85 | — | 1,488 | |||||||||||||||
|
Total
|
$ | 16,721 | $ | 5,729 | $ | 3,336 | $ | 11,456 | 37,242 | |||||||||||
|
Unamortized discount
|
(908 | ) | ||||||||||||||||||
|
Receivable for partially charged-off loans
|
728 | |||||||||||||||||||
|
Allowance for loan losses
|
(1,967 | ) | ||||||||||||||||||
|
Total Managed Private Education Loans, net
|
$ | 35,095 | ||||||||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
7.3 | % | 2.4 | % | 1.8 | % | — | % | 5.5 | % | ||||||||||
71
| Monthly Scheduled Payments Due |
Not Yet in
|
|||||||||||||||||||
|
December 31, 2008
|
0 to 24 | 25 to 48 | More than 48 | Repayment | Total | |||||||||||||||
|
Loans in-school/grace/deferment
|
$ | — | $ | — | $ | — | $ | 13,620 | $ | 13,620 | ||||||||||
|
Loans in forbearance
|
1,406 | 106 | 50 | — | 1,562 | |||||||||||||||
|
Loans in repayment — current
|
12,551 | 3,798 | 2,242 | — | 18,591 | |||||||||||||||
|
Loans in repayment — delinquent
31-60 days
|
728 | 93 | 45 | — | 866 | |||||||||||||||
|
Loans in repayment — delinquent
61-90 days
|
351 | 44 | 22 | — | 417 | |||||||||||||||
|
Loans in repayment — delinquent greater than
90 days
|
691 | 97 | 50 | — | 838 | |||||||||||||||
|
Total
|
$ | 15,727 | $ | 4,138 | $ | 2,409 | $ | 13,620 | 35,894 | |||||||||||
|
Unamortized discount
|
(896 | ) | ||||||||||||||||||
|
Receivable for partially charged-off loans
|
314 | |||||||||||||||||||
|
Allowance for loan losses
|
(1,813 | ) | ||||||||||||||||||
|
Total Managed Private Education Loans, net
|
$ | 33,499 | ||||||||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
8.9 | % | 2.6 | % | 2.1 | % | — | % | 7.0 | % | ||||||||||
| Monthly Scheduled Payments Due |
Not Yet in
|
|||||||||||||||||||
|
December 31, 2007
|
0 to 24 | 25 to 48 | More than 48 | Repayment | Total | |||||||||||||||
|
Loans in-school/grace/deferment
|
$ | — | $ | — | $ | — | $ | 13,114 | $ | 13,114 | ||||||||||
|
Loans in forbearance
|
2,228 | 118 | 45 | — | 2,391 | |||||||||||||||
|
Loans in repayment — current
|
9,184 | 2,807 | 1,648 | — | 13,639 | |||||||||||||||
|
Loans in repayment — delinquent
31-60 days
|
407 | 64 | 37 | — | 508 | |||||||||||||||
|
Loans in repayment — delinquent
61-90 days
|
221 | 25 | 14 | — | 260 | |||||||||||||||
|
Loans in repayment — delinquent greater than
90 days
|
376 | 52 | 31 | — | 459 | |||||||||||||||
|
Total
|
$ | 12,416 | $ | 3,066 | $ | 1,775 | $ | 13,114 | 30,371 | |||||||||||
|
Unamortized discount
|
(823 | ) | ||||||||||||||||||
|
Receivable for partially charged-off loans
|
146 | |||||||||||||||||||
|
Allowance for loan losses
|
(1,366 | ) | ||||||||||||||||||
|
Total Managed Private Education Loans, net
|
$ | 28,328 | ||||||||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
17.9 | % | 3.8 | % | 2.5 | % | — | % | 13.9 | % | ||||||||||
The table below stratifies the portfolio of Managed Private
Education Loans in forbearance by the cumulative number of
months the borrower has used forbearance as of the dates
indicated. As detailed in the table below, 3 percent of
loans currently in forbearance have cumulative forbearance of
more than 24 months.
|
December 31,
|
December 31,
|
December 31,
|
||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
|
Forbearance
|
% of
|
Forbearance
|
% of
|
Forbearance
|
% of
|
|||||||||||||||||||
| Balance | Total | Balance | Total | Balance | Total | |||||||||||||||||||
|
Cumulative number of months borrower has used forbearance
|
||||||||||||||||||||||||
|
Up to 12 months
|
$ | 1,050 | 74 | % | $ | 1,075 | 69 | % | $ | 1,641 | 69 | % | ||||||||||||
|
13 to 24 months
|
332 | 23 | 368 | 23 | 629 | 26 | ||||||||||||||||||
|
More than 24 months
|
38 | 3 | 119 | 8 | 121 | 5 | ||||||||||||||||||
|
Total
|
$ | 1,420 | 100 | % | $ | 1,562 | 100 | % | $ | 2,391 | 100 | % | ||||||||||||
72
FFELP
Loan Losses
FFELP
Delinquencies and Forbearance
The tables below present our FFELP loan delinquency trends as of
December 31, 2009, 2008 and 2007. Delinquencies have the
potential to adversely impact earnings as they are an indication
of the borrower’s potential to possibly default and as a
result require a higher loan loss reserve than loans in current
status. Delinquent loans also require increased servicing and
collection efforts, resulting in higher operating costs.
|
On-Balance Sheet FFELP
|
||||||||||||||||||||||||
| Loan Delinquencies | ||||||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
|
(Dollars in millions)
|
Balance | % | Balance | % | Balance | % | ||||||||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 35,079 | $ | 39,270 | $ | 31,200 | ||||||||||||||||||
|
Loans in
forbearance
(2)
|
14,121 | 12,483 | 10,675 | |||||||||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||||||||||
|
Loans current
|
57,528 | 82.4 | % | 58,811 | 83.8 | % | 55,128 | 84.4 | % | |||||||||||||||
|
Loans delinquent
31-60 days
(3)
|
4,250 | 6.1 | 4,044 | 5.8 | 3,650 | 5.6 | ||||||||||||||||||
|
Loans delinquent
61-90 days
(3)
|
2,205 | 3.1 | 2,064 | 2.9 | 1,841 | 2.8 | ||||||||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
5,844 | 8.4 | 5,255 | 7.5 | 4,671 | 7.2 | ||||||||||||||||||
|
Total FFELP loans in repayment
|
69,827 | 100 | % | 70,174 | 100 | % | 65,290 | 100 | % | |||||||||||||||
|
Total FFELP loans, gross
|
119,027 | 121,927 | 107,165 | |||||||||||||||||||||
|
FFELP loan unamortized premium
|
2,187 | 2,431 | 2,259 | |||||||||||||||||||||
|
Total FFELP loans
|
121,214 | 124,358 | 109,424 | |||||||||||||||||||||
|
FFELP loan allowance for losses
|
(161 | ) | (138 | ) | (89 | ) | ||||||||||||||||||
|
FFELP loans, net
|
$ | 121,053 | $ | 124,220 | $ | 109,335 | ||||||||||||||||||
|
Percentage of FFELP loans in repayment
|
58.7 | % | 57.6 | % | 60.9 | % | ||||||||||||||||||
|
Delinquencies as a percentage of FFELP loans in repayment
|
17.6 | % | 16.2 | % | 15.6 | % | ||||||||||||||||||
|
FFELP loans in forbearance as a percentage of loans in repayment
and forbearance
|
16.8 | % | 15.1 | % | 14.1 | % | ||||||||||||||||||
| (1) | Loans for borrowers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for borrowers who have requested extension of grace period during employment transition or who have temporarily ceased making full payments due to hardship or other factors. | |
| (2) | Loans for borrowers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors. | |
| (3) | The period of delinquency is based on the number of days scheduled payments are contractually past due. |
73
|
Off-Balance Sheet FFELP
|
||||||||||||||||||||||||
| Loan Delinquencies | ||||||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
|
(Dollars in millions)
|
Balance | % | Balance | % | Balance | % | ||||||||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 3,312 | $ | 4,115 | $ | 5,060 | ||||||||||||||||||
|
Loans in
forbearance
(2)
|
2,726 | 2,821 | 2,950 | |||||||||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||||||||||
|
Loans current
|
11,304 | 82.5 | % | 12,441 | 81.9 | % | 13,703 | 79.2 | % | |||||||||||||||
|
Loans delinquent
31-60 days
(3)
|
804 | 5.9 | 881 | 5.8 | 1,017 | 5.9 | ||||||||||||||||||
|
Loans delinquent
61-90 days
(3)
|
439 | 3.2 | 484 | 3.2 | 577 | 3.3 | ||||||||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
1,160 | 8.4 | 1,392 | 9.1 | 1,999 | 11.6 | ||||||||||||||||||
|
Total FFELP loans in repayment
|
13,707 | 100 | % | 15,198 | 100 | % | 17,296 | 100 | % | |||||||||||||||
|
Total FFELP loans, gross
|
19,745 | 22,134 | 25,306 | |||||||||||||||||||||
|
FFELP loan unamortized premium
|
577 | 567 | 636 | |||||||||||||||||||||
|
Total FFELP loans
|
20,322 | 22,701 | 25,942 | |||||||||||||||||||||
|
FFELP loan allowance for losses
|
(25 | ) | (27 | ) | (29 | ) | ||||||||||||||||||
|
FFELP loans, net
|
$ | 20,297 | $ | 22,674 | $ | 25,913 | ||||||||||||||||||
|
Percentage of FFELP loans in repayment
|
69.4 | % | 68.7 | % | 68.4 | % | ||||||||||||||||||
|
Delinquencies as a percentage of FFELP loans in repayment
|
17.5 | % | 18.1 | % | 20.8 | % | ||||||||||||||||||
|
FFELP loans in forbearance as a percentage of loans in repayment
and forbearance
|
16.6 | % | 15.7 | % | 14.6 | % | ||||||||||||||||||
| (1) | Loans for borrowers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for borrowers who have requested extension of grace period during employment transition or who have temporarily ceased making full payments due to hardship or other factors. | |
| (2) | Loans for borrowers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors. | |
| (3) | The period of delinquency is based on the number of days scheduled payments are contractually past due. |
74
|
Managed Basis FFELP
|
||||||||||||||||||||||||
| Loan Delinquencies | ||||||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
|
(Dollars in millions)
|
Balance | % | Balance | % | Balance | % | ||||||||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 38,391 | $ | 43,385 | $ | 36,260 | ||||||||||||||||||
|
Loans in
forbearance
(2)
|
16,847 | 15,304 | 13,625 | |||||||||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||||||||||
|
Loans current
|
68,832 | 82.4 | % | 71,252 | 83.5 | % | 68,831 | 83.3 | % | |||||||||||||||
|
Loans delinquent
31-60 days
(3)
|
5,054 | 6.0 | 4,925 | 5.8 | 4,667 | 5.7 | ||||||||||||||||||
|
Loans delinquent
61-90 days
(3)
|
2,644 | 3.2 | 2,548 | 2.9 | 2,418 | 2.9 | ||||||||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
7,004 | 8.4 | 6,647 | 7.8 | 6,670 | 8.1 | ||||||||||||||||||
|
Total FFELP loans in repayment
|
83,534 | 100 | % | 85,372 | 100 | % | 82,586 | 100 | % | |||||||||||||||
|
Total FFELP loans, gross
|
138,772 | 144,061 | 132,471 | |||||||||||||||||||||
|
FFELP loan unamortized premium
|
2,764 | 2,998 | 2,895 | |||||||||||||||||||||
|
Total FFELP loans
|
141,536 | 147,059 | 135,366 | |||||||||||||||||||||
|
FFELP loan allowance for losses
|
(186 | ) | (165 | ) | (118 | ) | ||||||||||||||||||
|
FFELP loans, net
|
$ | 141,350 | $ | 146,894 | $ | 135,248 | ||||||||||||||||||
|
Percentage of FFELP loans in repayment
|
60.2 | % | 59.3 | % | 62.3 | % | ||||||||||||||||||
|
Delinquencies as a percentage of FFELP loans in repayment
|
17.6 | % | 16.5 | % | 16.7 | % | ||||||||||||||||||
|
FFELP loans in forbearance as a percentage of loans in repayment
and forbearance
|
16.8 | % | 15.2 | % | 14.2 | % | ||||||||||||||||||
| (1) | Loans for borrowers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for borrowers who have requested extension of grace period during employment transition or who have temporarily ceased making full payments due to hardship or other factors. | |
| (2) | Loans for borrowers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors. | |
| (3) | The period of delinquency is based on the number of days scheduled payments are contractually past due. |
75
Allowance
for FFELP Loan Losses
The provision for student loan losses represents the periodic
expense of maintaining an allowance sufficient to absorb
incurred Risk Sharing losses, in the portfolio of FFELP loans.
The following table summarizes changes in the allowance for
FFELP loan losses for the years ended December 31, 2009,
2008 and 2007.
| Activity in Allowance for FFELP Loans | ||||||||||||||||||||||||||||||||||||
|
On-Balance Sheet
|
Off-Balance Sheet
|
Managed Basis
|
||||||||||||||||||||||||||||||||||
| Years Ended December 31, | Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||
|
Allowance at beginning of period
|
$ | 138 | $ | 89 | $ | 20 | $ | 27 | $ | 29 | $ | 14 | $ | 165 | $ | 118 | $ | 34 | ||||||||||||||||||
|
Provision for FFELP loan losses
|
106 | 106 | 89 | 13 | 21 | 32 | 119 | 127 | 121 | |||||||||||||||||||||||||||
|
Charge-offs
|
(79 | ) | (58 | ) | (21 | ) | (15 | ) | (21 | ) | (15 | ) | (94 | ) | (79 | ) | (36 | ) | ||||||||||||||||||
|
Student loan sales and securitization activity
|
(4 | ) | 1 | 1 | — | (2 | ) | (2 | ) | (4 | ) | (1 | ) | (1 | ) | |||||||||||||||||||||
|
Allowance at end of period
|
$ | 161 | $ | 138 | $ | 89 | $ | 25 | $ | 27 | $ | 29 | $ | 186 | $ | 165 | $ | 118 | ||||||||||||||||||
|
Charge-offs as a percentage of average loans in repayment
|
.1 | % | .1 | % | .0 | % | .1 | % | .1 | % | .1 | % | .1 | % | .1 | % | .1 | % | ||||||||||||||||||
|
Charge-offs as a percentage of average loans in repayment and
forbearance
|
.1 | % | .1 | % | .0 | % | .1 | % | .1 | % | .1 | % | .1 | % | .1 | % | .0 | % | ||||||||||||||||||
|
Allowance as a percentage of the ending total loans, gross
|
.1 | % | .1 | % | .1 | % | .1 | % | .1 | % | .1 | % | .1 | % | .1 | % | .1 | % | ||||||||||||||||||
|
Allowance as a percentage of ending loans in repayment
|
.2 | % | .2 | % | .1 | % | .2 | % | .2 | % | .2 | % | .2 | % | .2 | % | .1 | % | ||||||||||||||||||
|
Average coverage of charge-offs
|
2.0 | 2.4 | 4.2 | 1.7 | 1.3 | 1.9 | 2.0 | 2.1 | 3.2 | |||||||||||||||||||||||||||
|
Ending total loans, gross
|
$ | 119,027 | $ | 121,927 | $ | 107,165 | $ | 19,745 | $ | 22,134 | $ | 25,306 | $ | 138,772 | $ | 144,061 | $ | 132,471 | ||||||||||||||||||
|
Average loans in repayment
|
$ | 69,020 | $ | 66,392 | $ | 58,999 | $ | 14,293 | $ | 16,086 | $ | 18,624 | $ | 83,313 | $ | 82,478 | $ | 77,623 | ||||||||||||||||||
|
Ending loans in repayment
|
$ | 69,827 | $ | 70,174 | $ | 65,290 | $ | 13,707 | $ | 15,198 | $ | 17,296 | $ | 83,534 | $ | 85,372 | $ | 82,586 | ||||||||||||||||||
Total
Provisions for Loan Losses
The following tables summarize the total loan provisions on both
an on-balance sheet and on a Managed Basis for the years ended
December 31, 2009, 2008 and 2007.
Total
on-balance sheet loan provisions
|
Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Private Education Loans
|
$ | 967 | $ | 586 | $ | 884 | ||||||
|
FFELP Loans
|
106 | 106 | 89 | |||||||||
|
Mortgage and consumer loans
|
46 | 28 | 42 | |||||||||
|
Total on-balance sheet provisions for loan losses
|
$ | 1,119 | $ | 720 | $ | 1,015 | ||||||
76
Total
Managed Basis loan provisions
|
Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Private Education Loans
|
$ | 1,399 | $ | 874 | $ | 1,233 | ||||||
|
FFELP loans
|
119 | 127 | 121 | |||||||||
|
Mortgage and consumer loans
|
46 | 28 | 40 | |||||||||
|
Total Managed Basis provisions for loan losses
|
$ | 1,564 | $ | 1,029 | $ | 1,394 | ||||||
Provision expense for Private Education Loans was previously
discussed above (see Private Education Loan Losses —
“Allowance for Private Education Loan Losses”
).
Total
Loan Charge-offs
The following tables summarize the charge-offs for all loan
types on-balance sheet and on a Managed Basis for the years
ended December 31, 2009, 2008 and 2007.
Total
on-balance sheet loan charge-offs
|
Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Private Education Loans
|
$ | 876 | $ | 320 | $ | 246 | ||||||
|
FFELP loans
|
79 | 58 | 21 | |||||||||
|
Mortgage and consumer loans
|
35 | 17 | 11 | |||||||||
|
Total on-balance sheet loan charge-offs
|
$ | 990 | $ | 395 | $ | 278 | ||||||
Total
Managed Basis loan charge-offs
|
Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Private Education Loans
|
$ | 1,299 | $ | 473 | $ | 325 | ||||||
|
FFELP loans
|
94 | 79 | 36 | |||||||||
|
Mortgage and consumer loans
|
35 | 17 | 11 | |||||||||
|
Total Managed loan charge-offs
|
$ | 1,428 | $ | 569 | $ | 372 | ||||||
The increase in charge-offs on FFELP loans from 2007 through
2009 was primarily the result of legislative changes occurring
in 2006 (the reduction in the federal guaranty on new loans to
97 percent) and 2007 (the repeal of the Exceptional
Performer designation, under which claims were paid at
99 percent). The majority of our FFELP loans now possess a
federal guaranty level on claims filed of either 97 percent
or 98 percent, depending on date of disbursement. The
increase in charge-offs is also due to the continued weakening
of the U.S. economy. See “Private Education Loan
Losses —
Allowance for Private Education Loan
Losses”
above for a discussion of net charge-offs
related to our Private Education Loans.
77
Receivable
for Partially Charged-Off Private Education Loans
The Company charges off the estimated loss of a defaulted loan
balance. Actual recoveries are applied against the remaining
loan balance that was not charged off. We refer to this
remaining loan balance as the “receivable for partially
charged-off loans.” If actual periodic recoveries are less
than expected, the difference is charged off and immediately
included in provision expense.
The following tables summarize the activity in the receivable
for partially charged-off loans (see
“Allowance for
Private Education Loan Losses,”
above, for a further
discussion) for the years ended December 31, 2009, 2008 and
2007.
| Activity in Receivable for Partially Charged-Off Loans | ||||||||||||||||||||||||||||||||||||
| On-Balance Sheet | Off-Balance Sheet | Managed Basis | ||||||||||||||||||||||||||||||||||
|
Years Ended
|
Years Ended
|
Years Ended
|
||||||||||||||||||||||||||||||||||
| December 31, | December 31, | December 31, | ||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||
|
Receivable at beginning of period
|
$ | 222 | $ | 118 | $ | 64 | $ | 92 | $ | 28 | $ | — | $ | 314 | $ | 146 | $ | 64 | ||||||||||||||||||
|
Expected future recoveries of current period
defaults
(1)
|
320 | 140 | 86 | 154 | 72 | 28 | 474 | 212 | 114 | |||||||||||||||||||||||||||
|
Recoveries
|
(43 | ) | (36 | ) | (32 | ) | (17 | ) | (8 | ) | — | (60 | ) | (44 | ) | (32 | ) | |||||||||||||||||||
|
Receivable at end of period
|
$ | 499 | $ | 222 | $ | 118 | $ | 229 | $ | 92 | $ | 28 | $ | 728 | $ | 314 | $ | 146 | ||||||||||||||||||
| (1) | Net of any current period recoveries that were less than expected. |
Student
Loan Acquisitions
The following tables summarize the components of our student
loan acquisition activity for the years ended December 31,
2009, 2008 and 2007.
|
Year Ended
|
||||||||||||
| December 31, 2009 | ||||||||||||
| FFELP | Private | Total | ||||||||||
|
Internal lending brands and Lender Partners
|
$ | 22,375 | $ | 3,394 | $ | 25,769 | ||||||
|
Other commitment clients
|
347 | — | 347 | |||||||||
|
Spot purchases
|
1,523 | — | 1,523 | |||||||||
|
Consolidations and
clean-up
calls of off-balance sheet securitized loans
|
3,376 | 797 | 4,173 | |||||||||
|
Capitalized interest, premiums and discounts
|
2,583 | 949 | 3,532 | |||||||||
|
Total on-balance sheet student loan acquisitions
|
30,204 | 5,140 | 35,344 | |||||||||
|
Consolidations and
clean-up
calls of off-balance sheet securitized loans
|
(3,376 | ) | (797 | ) | (4,173 | ) | ||||||
|
Capitalized interest, premiums and discounts —
off-balance sheet securitized loans
|
342 | 498 | 840 | |||||||||
|
Total Managed student loan acquisitions
|
$ | 27,170 | $ | 4,841 | $ | 32,011 | ||||||
78
|
Year Ended
|
||||||||||||
| December 31, 2008 | ||||||||||||
| FFELP | Private | Total | ||||||||||
|
Internal lending brands and Lender Partners
|
$ | 19,894 | $ | 6,437 | $ | 26,331 | ||||||
|
Other commitment clients
|
701 | — | 701 | |||||||||
|
Spot purchases
|
206 | — | 206 | |||||||||
|
Consolidations from third parties
|
462 | 149 | 611 | |||||||||
|
Consolidations and
clean-up
calls of off-balance sheet securitized loans
|
986 | 280 | 1,266 | |||||||||
|
Capitalized interest, premiums and discounts
|
2,446 | 921 | 3,367 | |||||||||
|
Total on-balance sheet student loan acquisitions
|
24,695 | 7,787 | 32,482 | |||||||||
|
Consolidations and
clean-up
calls of off-balance sheet securitized loans
|
(986 | ) | (280 | ) | (1,266 | ) | ||||||
|
Capitalized interest, premiums and discounts —
off-balance sheet securitized loans
|
457 | 741 | 1,198 | |||||||||
|
Total Managed student loan acquisitions
|
$ | 24,166 | $ | 8,248 | $ | 32,414 | ||||||
|
Year Ended
|
||||||||||||
| December 31, 2007 | ||||||||||||
| FFELP | Private | Total | ||||||||||
|
Internal lending brands and Lender Partners
|
$ | 17,577 | $ | 7,888 | $ | 25,465 | ||||||
|
Wholesale Consolidation
Loans
(1)
|
7,048 | — | 7,048 | |||||||||
|
Other commitment clients
|
248 | 57 | 305 | |||||||||
|
Spot purchases
|
1,120 | — | 1,120 | |||||||||
|
Consolidations from third parties
|
2,206 | 235 | 2,441 | |||||||||
|
Consolidations and
clean-up
calls of off-balance sheet securitized loans
|
3,744 | 582 | 4,326 | |||||||||
|
Capitalized interest, premiums and discounts
|
2,279 | 444 | 2,723 | |||||||||
|
Total on-balance sheet student loan acquisitions
|
34,222 | 9,206 | 43,428 | |||||||||
|
Consolidations and
clean-up
calls of off-balance sheet securitized loans
|
(3,744 | ) | (582 | ) | (4,326 | ) | ||||||
|
Capitalized interest, premiums and discounts —
off-balance sheet securitized loans
|
539 | 703 | 1,242 | |||||||||
|
Total Managed student loan acquisitions
|
$ | 31,017 | $ | 9,327 | $ | 40,344 | ||||||
| (1) | Includes FFELP Consolidation Loans purchased by the Company primarily via the spot market, which augmented the Company’s in-house FFELP Consolidation Loan origination process. Wholesale Consolidation Loans were considered incremental volume to the Company’s core acquisition channels. In 2008, the Company ceased acquiring Wholesale Consolidation Loans. |
As shown in the above tables, off-balance sheet FFELP Stafford
Loans that consolidate with us become an on-balance sheet
interest–earning asset. This activity results in
impairments of our Retained Interests in securitizations, but
this is offset by an increase in on-balance sheet
interest–earning assets, for which we do not record an
offsetting gain.
79
The following table includes on-balance sheet asset information
for our Lending business segment.
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
FFELP Stafford and Other Student Loans, net
|
$ | 42,979 | $ | 44,025 | ||||
|
FFELP Stafford Loans
Held-for-Sale
|
9,696 | 8,451 | ||||||
|
FFELP Consolidation Loans, net
|
68,379 | 71,744 | ||||||
|
Private Education Loans, net
|
22,753 | 20,582 | ||||||
|
Other loans, net
|
420 | 729 | ||||||
|
Investments
(1)
|
12,387 | 8,445 | ||||||
|
Retained Interest in off-balance sheet securitized loans
|
1,828 | 2,200 | ||||||
|
Other
(2)
|
9,398 | 9,947 | ||||||
|
Total assets
|
$ | 167,840 | $ | 166,123 | ||||
| (1) | Investments include cash and cash equivalents, short and long-term investments, restricted cash and investments, leveraged leases, and municipal bonds. | |
| (2) | Other assets include accrued interest receivable, goodwill and acquired intangible assets and other non-interest-earning assets. |
Loan
Originations
The Company originates loans under its own brand names, which we
refer to as internal lending brands, and also through Lender
Partners under forward contracts to purchase loans at
contractual prices. In the past, we referred to these combined
channels as Preferred Channel Originations. As discussed at the
beginning of this “LENDING BUSINESS SEGMENT,”
legislative changes and credit market conditions have resulted
in other FFELP lenders reducing their participation in the FFELP
program.
As a result of the impacts described above, our FFELP internal
brand originations were up sharply in 2009, increasing
40 percent from the prior year. Our FFELP lender partner
originations declined 42 percent from 2008 to 2009. A
number of these Lender Partners, including some of our largest
originators have converted to third-party servicing arrangements
in which we service loans on their behalf. Combined, total FFELP
loan originations increased 21 percent in 2009.
Total Private Education Loan originations declined
50 percent from the prior year to $3.2 billion in the
year ended December 31, 2009, as a result of a continued
tightening of our underwriting criteria, an increase in
guaranteed student loan limits and the Company’s withdrawal
from certain markets.
At December 31, 2009, the Company was committed to purchase
$1.3 billion of loans originated by our Lender Partners
($820 million of FFELP loans and $456 million of
Private Education Loans). Approximately $240 million of
these FFELP loans were originated prior to CCRAA. Approximately
$533 million of these FFELP loans are eligible for
ED’s Purchase and Participation Programs (see
“LIQUIDITY AND CAPITAL RESOURCES — ED Funding
Programs”).
80
The following tables summarize our loan originations by type of
loan and source.
| Years Ended | ||||||||||||
|
December 31,
|
December 31,
|
December 31,
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Loan Originations — Internal lending brands
|
||||||||||||
|
Stafford
|
$ | 16,675 | $ | 11,593 | $ | 7,404 | ||||||
|
PLUS
|
1,594 | 1,437 | 1,439 | |||||||||
|
GradPLUS
|
1,094 | 801 | 498 | |||||||||
|
Total FFELP
|
19,363 | 13,831 | 9,341 | |||||||||
|
Private Education Loans
|
2,969 | 5,791 | 7,267 | |||||||||
|
Total
|
$ | 22,332 | $ | 19,622 | $ | 16,608 | ||||||
| Years Ended | ||||||||||||
|
December 31,
|
December 31,
|
December 31,
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Loan Originations — Lender Partners
|
||||||||||||
|
Stafford
|
$ | 2,178 | $ | 3,652 | $ | 6,963 | ||||||
|
PLUS
|
144 | 362 | 855 | |||||||||
|
GradPLUS
|
61 | 62 | 103 | |||||||||
|
Total FFELP
|
2,383 | 4,076 | 7,921 | |||||||||
|
Private Education Loans
|
207 | 545 | 648 | |||||||||
|
Total
|
$ | 2,590 | $ | 4,621 | $ | 8,569 | ||||||
| Years Ended | ||||||||||||
|
December 31,
|
December 31,
|
December 31,
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Loan Originations — Total
|
||||||||||||
|
Stafford
|
$ | 18,853 | $ | 15,245 | $ | 14,367 | ||||||
|
PLUS
|
1,738 | 1,799 | 2,294 | |||||||||
|
GradPLUS
|
1,155 | 863 | 601 | |||||||||
|
Total FFELP
|
21,746 | 17,907 | 17,262 | |||||||||
|
Private Education Loans
|
3,176 | 6,336 | 7,915 | |||||||||
|
Total
|
$ | 24,922 | $ | 24,243 | $ | 25,177 | ||||||
81
Student
Loan Activity
The following tables summarize the activity in our on-balance
sheet, off-balance sheet and Managed portfolios of FFELP loans
and Private Education Loans and highlight the effects of FFELP
Consolidation Loan activity on our FFELP portfolios.
|
On-Balance Sheet
|
||||||||||||||||||||
| Years Ended December 31, 2009 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total Private
|
Total On-
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
Total
|
Education
|
Balance Sheet
|
||||||||||||||||
| Other (1) | Loans | FFELP | Loans | Portfolio | ||||||||||||||||
|
Beginning balance
|
$ | 52,476 | $ | 71,744 | $ | 124,220 | $ | 20,582 | $ | 144,802 | ||||||||||
|
Net consolidations:
|
||||||||||||||||||||
|
Incremental consolidations from third parties
|
— | — | — | — | — | |||||||||||||||
|
Consolidations to third parties
|
(1,113 | ) | (518 | ) | (1,631 | ) | (8 | ) | (1,639 | ) | ||||||||||
|
Net consolidations
|
(1,113 | ) | (518 | ) | (1,631 | ) | (8 | ) | (1,639 | ) | ||||||||||
|
Acquisitions
|
25,677 | 1,150 | 26,827 | 4,343 | 31,170 | |||||||||||||||
|
Net acquisitions
|
24,564 | 632 | 25,196 | 4,335 | 29,531 | |||||||||||||||
|
Internal
consolidations
(2)
|
— | — | — | — | — | |||||||||||||||
|
Securitization-related
(3)
|
645 | — | 645 | — | 645 | |||||||||||||||
|
Sales
|
(19,300 | ) | — | (19,300 | ) | — | (19,300 | ) | ||||||||||||
|
Repayments/claims/other
|
(5,710 | ) | (3,997 | ) | (9,707 | ) | (2,164 | ) | (11,871 | ) | ||||||||||
|
Ending balance
|
$ | 52,675 | $ | 68,379 | $ | 121,054 | $ | 22,753 | $ | 143,807 | ||||||||||
|
Off-Balance Sheet
|
||||||||||||||||||||
| Years Ended December 31, 2009 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total Private
|
Total Off-
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
Total
|
Education
|
Balance Sheet
|
||||||||||||||||
| Other (1) | Loans | FFELP | Loans | Portfolio | ||||||||||||||||
|
Beginning balance
|
$ | 7,143 | $ | 15,531 | $ | 22,674 | $ | 12,917 | $ | 35,591 | ||||||||||
|
Net consolidations:
|
||||||||||||||||||||
|
Incremental consolidations from third parties
|
— | — | — | — | — | |||||||||||||||
|
Consolidations to third parties
|
(413 | ) | (138 | ) | (551 | ) | (18 | ) | (569 | ) | ||||||||||
|
Net consolidations
|
(413 | ) | (138 | ) | (551 | ) | (18 | ) | (569 | ) | ||||||||||
|
Acquisitions
|
135 | 208 | 343 | 498 | 841 | |||||||||||||||
|
Net acquisitions
|
(278 | ) | 70 | (208 | ) | 480 | 272 | |||||||||||||
|
Internal
consolidations
(2)
|
— | — | — | — | — | |||||||||||||||
|
Securitization-related
(3)
|
(645 | ) | — | (645 | ) | — | (645 | ) | ||||||||||||
|
Sales
|
— | — | — | — | — | |||||||||||||||
|
Repayments/claims/other
|
(720 | ) | (804 | ) | (1,524 | ) | (1,056 | ) | (2,580 | ) | ||||||||||
|
Ending balance
|
$ | 5,500 | $ | 14,797 | $ | 20,297 | $ | 12,341 | $ | 32,638 | ||||||||||
|
Managed Portfolio
|
||||||||||||||||||||
| Years Ended December 31, 2009 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total Private
|
Total
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
Total
|
Education
|
Managed Basis
|
||||||||||||||||
| Other (1) | Loans | FFELP | Loans | Portfolio | ||||||||||||||||
|
Beginning balance
|
$ | 59,619 | $ | 87,275 | $ | 146,894 | $ | 33,499 | $ | 180,393 | ||||||||||
|
Net consolidations:
|
||||||||||||||||||||
|
Incremental consolidations from third parties
|
— | — | — | — | — | |||||||||||||||
|
Consolidations to third parties
|
(1,526 | ) | (656 | ) | (2,182 | ) | (26 | ) | (2,208 | ) | ||||||||||
|
Net consolidations
|
(1,526 | ) | (656 | ) | (2,182 | ) | (26 | ) | (2,208 | ) | ||||||||||
|
Acquisitions
|
25,812 | 1,358 | 27,170 | 4,841 | 32,011 | |||||||||||||||
|
Net acquisitions
|
24,286 | 702 | 24,988 | 4,815 | 29,803 | |||||||||||||||
|
Internal
consolidations
(2)
|
— | — | — | — | — | |||||||||||||||
|
Securitization-related
(3)
|
— | — | — | — | — | |||||||||||||||
|
Sales
|
(19,300 | ) | — | (19,300 | ) | — | (19,300 | ) | ||||||||||||
|
Repayments/claims/other
|
(6,430 | ) | (4,801 | ) | (11,231 | ) | (3,220 | ) | (14,451 | ) | ||||||||||
|
Ending
balance
(4)
|
$ | 58,175 | $ | 83,176 | $ | 141,351 | $ | 35,094 | $ | 176,445 | ||||||||||
|
Total Managed
Acquisitions
(5)
|
$ | 25,812 | $ | 1,358 | $ | 27,170 | $ | 4,841 | $ | 32,011 | ||||||||||
| (1) | FFELP category is primarily Stafford Loans but also includes federally guaranteed PLUS and HEAL Loans. | |
| (2) | Represents borrowers consolidating their loans into a new Consolidation Loan. Loans in our off-balance sheet securitization trusts that are consolidated are bought out of the trusts and moved on-balance sheet. | |
| (3) | Represents loans within securitization trusts that we are required to consolidate under GAAP once the trusts’ loan balances are below the clean-up call threshold. | |
| (4) | As of December 31, 2009, the ending balance includes $15.9 billion of FFELP Stafford and Other Loans and $2.6 billion of FFELP Consolidation Loans disbursed on or after October 1, 2007, which are impacted by CCRAA legislation. | |
| (5) | The Total Managed Acquisitions line includes incremental consolidations from third parties and acquisitions. |
82
|
On-Balance Sheet
|
||||||||||||||||||||
| Year Ended December 31, 2008 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total Private
|
Total On-
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
Total
|
Education
|
Balance Sheet
|
||||||||||||||||
| Other (1) | Loans | FFELP | Loans | Portfolio | ||||||||||||||||
|
Beginning balance
|
$ | 35,726 | $ | 73,609 | $ | 109,335 | $ | 14,818 | $ | 124,153 | ||||||||||
|
Net consolidations:
|
||||||||||||||||||||
|
Incremental consolidations from third parties
|
— | 462 | 462 | 149 | 611 | |||||||||||||||
|
Consolidations to third parties
|
(703 | ) | (392 | ) | (1,095 | ) | (41 | ) | (1,136 | ) | ||||||||||
|
Net consolidations
|
(703 | ) | 70 | (633 | ) | 108 | (525 | ) | ||||||||||||
|
Acquisitions
|
21,889 | 1,358 | 23,247 | 7,357 | 30,604 | |||||||||||||||
|
Net acquisitions
|
21,186 | 1,428 | 22,614 | 7,465 | 30,079 | |||||||||||||||
|
Internal
consolidations
(2)
|
(409 | ) | 529 | 120 | 228 | 348 | ||||||||||||||
|
Off-balance sheet securitizations
|
— | — | — | — | — | |||||||||||||||
|
Sales
|
(522 | ) | (26 | ) | (548 | ) | — | (548 | ) | |||||||||||
|
Repayments/claims/other
|
(3,505 | ) | (3,796 | ) | (7,301 | ) | (1,929 | ) | (9,230 | ) | ||||||||||
|
Ending balance
|
$ | 52,476 | $ | 71,744 | $ | 124,220 | $ | 20,582 | $ | 144,802 | ||||||||||
|
Off-Balance Sheet
|
||||||||||||||||||||
| Year Ended December 31, 2008 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total Private
|
Total Off-
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
Total
|
Education
|
Balance Sheet
|
||||||||||||||||
| Other (1) | Loans | FFELP | Loans | Portfolio | ||||||||||||||||
|
Beginning balance
|
$ | 9,472 | $ | 16,441 | $ | 25,913 | $ | 13,510 | $ | 39,423 | ||||||||||
|
Net consolidations:
|
||||||||||||||||||||
|
Incremental consolidations from third parties
|
— | — | — | — | — | |||||||||||||||
|
Consolidations to third parties
|
(311 | ) | (83 | ) | (394 | ) | (57 | ) | (451 | ) | ||||||||||
|
Net consolidations
|
(311 | ) | (83 | ) | (394 | ) | (57 | ) | (451 | ) | ||||||||||
|
Acquisitions
|
246 | 211 | 457 | 742 | 1,199 | |||||||||||||||
|
Net acquisitions
|
(65 | ) | 128 | 63 | 685 | 748 | ||||||||||||||
|
Internal
consolidations
(2)
|
(84 | ) | (36 | ) | (120 | ) | (228 | ) | (348 | ) | ||||||||||
|
Off-balance sheet securitizations
|
— | — | — | — | — | |||||||||||||||
|
Sales
|
— | — | — | — | — | |||||||||||||||
|
Repayments/claims/other
|
(2,180 | ) | (1,002 | ) | (3,182 | ) | (1,050 | ) | (4,232 | ) | ||||||||||
|
Ending balance
|
$ | 7,143 | $ | 15,531 | $ | 22,674 | $ | 12,917 | $ | 35,591 | ||||||||||
|
Managed Portfolio
|
||||||||||||||||||||
| Year Ended December 31, 2008 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total Private
|
Total
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
Total
|
Education
|
Managed Basis
|
||||||||||||||||
| Other (1) | Loans | FFELP | Loans | Portfolio | ||||||||||||||||
|
Beginning balance
|
$ | 45,198 | $ | 90,050 | $ | 135,248 | $ | 28,328 | $ | 163,576 | ||||||||||
|
Net consolidations:
|
||||||||||||||||||||
|
Incremental consolidations from third parties
|
— | 462 | 462 | 149 | 611 | |||||||||||||||
|
Consolidations to third parties
|
(1,014 | ) | (475 | ) | (1,489 | ) | (98 | ) | (1,587 | ) | ||||||||||
|
Net consolidations
|
(1,014 | ) | (13 | ) | (1,027 | ) | 51 | (976 | ) | |||||||||||
|
Acquisitions
|
22,135 | 1,569 | 23,704 | 8,099 | 31,803 | |||||||||||||||
|
Net acquisitions
|
21,121 | 1,556 | 22,677 | 8,150 | 30,827 | |||||||||||||||
|
Internal
consolidations
(2)
|
(493 | ) | 493 | — | — | — | ||||||||||||||
|
Off-balance sheet securitizations
|
— | — | — | — | — | |||||||||||||||
|
Sales
|
(522 | ) | (26 | ) | (548 | ) | — | (548 | ) | |||||||||||
|
Repayments/claims/other
|
(5,685 | ) | (4,798 | ) | (10,483 | ) | (2,979 | ) | (13,462 | ) | ||||||||||
|
Ending
balance
(3)
|
$ | 59,619 | $ | 87,275 | $ | 146,894 | $ | 33,499 | $ | 180,393 | ||||||||||
|
Total Managed
Acquisitions
(4)
|
$ | 22,135 | $ | 2,031 | $ | 24,166 | $ | 8,248 | $ | 32,414 | ||||||||||
| (1) | FFELP category is primarily Stafford Loans but also includes federally guaranteed PLUS and HEAL Loans. | |
| (2) | Represents borrowers consolidating their loans into a new Consolidation Loan. Loans in our off-balance sheet securitization trusts that are consolidated are bought out of the trusts and moved on-balance sheet. | |
| (3) | As of December 31, 2008, the ending balance includes $13.7 billion of FFELP Stafford and Other Loans and $2.6 billion of FFELP Consolidation Loans disbursed on or after October 1, 2007, which are impacted by CCRAA legislation. | |
| (4) | The Total Managed Acquisitions line includes incremental consolidations from third parties and acquisitions. |
83
|
On-Balance Sheet
|
||||||||||||||||||||
| Year Ended December 31, 2007 | ||||||||||||||||||||
|
FFELP
|
Total
|
|||||||||||||||||||
|
Stafford
|
FFELP
|
Private
|
Total On-
|
|||||||||||||||||
|
and
|
Consolidation
|
Total
|
Education
|
Balance Sheet
|
||||||||||||||||
| Other (1) | Loans | FFELP | Loans | Portfolio | ||||||||||||||||
|
Beginning balance
|
$ | 24,841 | $ | 61,324 | $ | 86,165 | $ | 9,755 | $ | 95,920 | ||||||||||
|
Net consolidations:
|
||||||||||||||||||||
|
Incremental consolidations from third parties
|
— | 2,206 | 2,206 | 235 | 2,441 | |||||||||||||||
|
Consolidations to third parties
|
(2,352 | ) | (801 | ) | (3,153 | ) | (45 | ) | (3,198 | ) | ||||||||||
|
Net consolidations
|
(2,352 | ) | 1,405 | (947 | ) | 190 | (757 | ) | ||||||||||||
|
Acquisitions
|
19,835 | 8,437 | 28,272 | 8,388 | 36,660 | |||||||||||||||
|
Net acquisitions
|
17,483 | 9,842 | 27,325 | 8,578 | 35,903 | |||||||||||||||
|
Internal consolidations
|
(4,413 | ) | 6,652 | 2,239 | 536 | 2,775 | ||||||||||||||
|
Off-balance sheet securitizations
|
— | — | — | (1,871 | ) | (1,871 | ) | |||||||||||||
|
Sales
|
(331 | ) | (701 | ) | (1,032 | ) | — | (1,032 | ) | |||||||||||
|
Repayments/claims/other
|
(1,854 | ) | (3,508 | ) | (5,362 | ) | (2,180 | ) | (7,542 | ) | ||||||||||
|
Ending balance
|
$ | 35,726 | $ | 73,609 | $ | 109,335 | $ | 14,818 | $ | 124,153 | ||||||||||
|
Off-Balance Sheet
|
||||||||||||||||||||
| Year Ended December 31, 2007 | ||||||||||||||||||||
|
FFELP
|
Total
|
|||||||||||||||||||
|
Stafford
|
FFELP
|
Private
|
Total Off-
|
|||||||||||||||||
|
and
|
Consolidation
|
Total
|
Education
|
Balance Sheet
|
||||||||||||||||
| Other (1) | Loans | FFELP | Loans | Portfolio | ||||||||||||||||
|
Beginning balance
|
$ | 15,028 | $ | 18,311 | $ | 33,339 | $ | 12,833 | $ | 46,172 | ||||||||||
|
Net consolidations:
|
||||||||||||||||||||
|
Incremental consolidations from third parties
|
— | — | — | — | — | |||||||||||||||
|
Consolidations to third parties
|
(933 | ) | (207 | ) | (1,140 | ) | (93 | ) | (1,233 | ) | ||||||||||
|
Net consolidations
|
(933 | ) | (207 | ) | (1,140 | ) | (93 | ) | (1,233 | ) | ||||||||||
|
Acquisitions
|
330 | 209 | 539 | 704 | 1,243 | |||||||||||||||
|
Net acquisitions
|
(603 | ) | 2 | (601 | ) | 611 | 10 | |||||||||||||
|
Internal
consolidations
(2)
|
(1,494 | ) | (745 | ) | (2,239 | ) | (536 | ) | (2,775 | ) | ||||||||||
|
Off-balance sheet securitizations
|
— | — | — | 1,871 | 1,871 | |||||||||||||||
|
Sales
|
(33 | ) | (85 | ) | (118 | ) | — | (118 | ) | |||||||||||
|
Repayments/claims/other
|
(3,426 | ) | (1,042 | ) | (4,468 | ) | (1,269 | ) | (5,737 | ) | ||||||||||
|
Ending balance
|
$ | 9,472 | $ | 16,441 | $ | 25,913 | $ | 13,510 | $ | 39,423 | ||||||||||
|
Managed Portfolio
|
||||||||||||||||||||
| Year Ended December 31, 2007 | ||||||||||||||||||||
|
FFELP
|
Total
|
|||||||||||||||||||
|
Stafford
|
FFELP
|
Private
|
Total
|
|||||||||||||||||
|
and
|
Consolidation
|
Total
|
Education
|
Managed
|
||||||||||||||||
| Other (1) | Loans | FFELP | Loans | Basis Portfolio | ||||||||||||||||
|
Beginning balance
|
$ | 39,869 | $ | 79,635 | $ | 119,504 | $ | 22,588 | $ | 142,092 | ||||||||||
|
Net consolidations:
|
||||||||||||||||||||
|
Incremental consolidations from third parties
|
— | 2,206 | 2,206 | 235 | 2,441 | |||||||||||||||
|
Consolidations to third parties
|
(3,285 | ) | (1,008 | ) | (4,293 | ) | (138 | ) | (4,431 | ) | ||||||||||
|
Net consolidations
|
(3,285 | ) | 1,198 | (2,087 | ) | 97 | (1,990 | ) | ||||||||||||
|
Acquisitions
|
20,165 | 8,646 | 28,811 | 9,092 | 37,903 | |||||||||||||||
|
Net acquisitions
|
16,880 | 9,844 | 26,724 | 9,189 | 35,913 | |||||||||||||||
|
Internal
consolidations
(2)
|
(5,907 | ) | 5,907 | — | — | — | ||||||||||||||
|
Off-balance sheet securitizations
|
— | — | — | — | — | |||||||||||||||
|
Sales
|
(364 | ) | (786 | ) | (1,150 | ) | — | (1,150 | ) | |||||||||||
|
Repayments/claims/other
|
(5,280 | ) | (4,550 | ) | (9,830 | ) | (3,449 | ) | (13,279 | ) | ||||||||||
|
Ending
balance
(3)
|
$ | 45,198 | $ | 90,050 | $ | 135,248 | $ | 28,328 | $ | 163,576 | ||||||||||
|
Total Managed
Acquisitions
(4)
|
$ | 20,165 | $ | 10,852 | $ | 31,017 | $ | 9,327 | $ | 40,344 | ||||||||||
| (1) | FFELP category is primarily Stafford Loans and also includes PLUS and HEAL Loans. | |
| (2) | Represents loans that we either own on-balance sheet or loans that we consolidated from our off-balance sheet securitization trusts. | |
| (3) | As of December 31, 2007, the ending balance includes $1.3 billion of FFELP Stafford and Other Loans and $1.4 billion of FFELP Consolidation Loans disbursed on or after October 1, 2007, which are impacted by CCRAA legislation. | |
| (4) | The Total Managed Acquisitions line includes incremental consolidations from third parties and acquisitions. |
84
Other
Income — Lending Business Segment
The following table summarizes the components of other income,
net, for our Lending business segment for the years ended
December 31, 2009, 2008 and 2007.
|
Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Gains on debt repurchases
|
$ | 536 | $ | 64 | $ | — | ||||||
|
Gains (losses) on sales of loans and securities, net
|
284 | (51 | ) | 24 | ||||||||
|
Late fees and forbearance fees
|
146 | 143 | 134 | |||||||||
|
Gains on sales of mortgages and other loan fees
|
— | 3 | 11 | |||||||||
|
Other
|
8 | 21 | 25 | |||||||||
|
Total other income, net
|
$ | 974 | $ | 180 | $ | 194 | ||||||
The change in other income over the prior periods presented is
primarily the result of the gains on debt repurchased and gains
on sales of loans. The Company began repurchasing its
outstanding debt in the second quarter of 2008. The Company
repurchased $3.4 billion and $1.9 billion face amount
of its senior unsecured notes during the years ended
December 31, 2009 and 2008, respectively. Since the second
quarter of 2008, the Company repurchased $5.3 billion face
amount of its senior unsecured notes in the aggregate, with
maturity dates ranging from 2008 to 2016. The $284 million
of gains on sales of loans and securities, net, in the year
ended December 31, 2009 related to the sale of
approximately $18.5 billion face amount of FFELP loans to
the ED as part of the Purchase Program. The loss in 2008
primarily relates to the sale of approximately $1.0 billion
FFELP loans to ED under ECASLA, which resulted in a
$53 million loss.
Operating
Expenses — Lending Business Segment
The following table summarizes the components of operating
expenses for our Lending business segment for the years ended
December 31, 2009, 2008 and 2007.
|
Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Sales and originations
|
$ | 212 | $ | 235 | $ | 351 | ||||||
|
Servicing
|
266 | 237 | 227 | |||||||||
|
Corporate overhead
|
103 | 111 | 112 | |||||||||
|
Total operating expenses
|
$ | 581 | $ | 583 | $ | 690 | ||||||
Operating expenses for our Lending business segment include
costs incurred to service our Managed student loan portfolio and
acquire student loans, as well as other general and
administrative expenses.
2009
versus 2008
Operating expenses for the year ended December 31, 2009,
remained relatively unchanged from the prior year. In 2009,
operating expenses were higher as a result of higher collection
costs from a higher number of loans in repayment and delinquent
status and higher
direct-to-consumer
marketing costs related to Private Education Loans. These
increases in operating expenses were offset primarily by the
full-year effect of the Company’s cost reduction efforts
conducted throughout 2008.
2008
versus 2007
Operating expenses for the year ended December 31, 2008,
decreased by 16 percent from 2007. The decrease is
primarily due to the impact of our cost reduction efforts and to
the suspension of certain student loan programs.
85
ASSET
PERFORMANCE GROUP (“APG”) BUSINESS SEGMENT
In our APG business segment, we provide a wide range of accounts
receivable and collections services, including student loan
default aversion services, defaulted student loan portfolio
management services, contingency collections services for
student loans and other asset classes, and accounts receivable
management and collection for purchased portfolios of
receivables that are delinquent or have been charged off by
their original creditors as well as
sub-performing
and non-performing mortgage loans. In the purchased receivables
business, we focus on a variety of consumer debt types with
emphasis on charged off credit card receivables and distressed
mortgage receivables. We purchase these portfolios at a discount
to their face value and then use both our internal collection
operations, coupled with third-party collection agencies, to
maximize the recovery on these receivables.
An overview of this segment and recent developments that have
significantly impacted this segment are included in the
“Item 1. Business” section of this document. The
private sector collections industry is highly fragmented with
few large public companies and a large number of small scale
privately-held companies. The collections industry is highly
competitive. We are responding to these competitive challenges
through enhanced servicing efficiencies and by continuing to
build on customer relationships through value added services and
financings.
Condensed
Statements of Income
The following tables include “Core Earnings” results
of operations for our APG business segment.
| Year Ended December 31, 2009 | ||||||||||||||||
|
Purchased
|
Purchased
|
|||||||||||||||
|
Paper —
|
Paper —
|
|||||||||||||||
|
Non-
|
Mortgage/
|
Contingency
|
||||||||||||||
| Mortgage | Properties | & Other | Total APG | |||||||||||||
|
Contingency fee income
|
$ | 2 | $ | — | $ | 294 | $ | 296 | ||||||||
|
Collections revenue
|
50 | — | — | 50 | ||||||||||||
|
Total income
|
52 | 294 | 346 | |||||||||||||
|
Restructuring expenses
|
— | — | 1 | 1 | ||||||||||||
|
Operating expenses
|
138 | — | 177 | 315 | ||||||||||||
|
Total expenses
|
138 | 178 | 316 | |||||||||||||
|
Net interest expense
|
10 | — | 9 | 19 | ||||||||||||
|
Income (loss) from continuing operations before income tax
expense (benefit)
|
(96 | ) | — | 107 | 11 | |||||||||||
|
Income tax expense (benefit)
|
(34 | ) | — | 41 | 7 | |||||||||||
|
Net income (loss) from continuing operations
|
(62 | ) | — | 66 | 4 | |||||||||||
|
Loss from discontinued operations, net of tax
|
— | (157 | ) | — | (157 | ) | ||||||||||
|
Net income (loss)
|
(62 | ) | (157 | ) | 66 | (153 | ) | |||||||||
|
Less: net income attributable to noncontrolling interest
|
1 | — | — | 1 | ||||||||||||
|
“Core Earnings” net income (loss) attributable to SLM
Corporation
|
$ | (63 | ) | $ | (157 | ) | $ | 66 | $ | (154 | ) | |||||
|
“Core Earnings” net income (loss) attributable to SLM
Corporation:
|
||||||||||||||||
|
Continuing operations, net of tax
|
$ | (63 | ) | $ | — | $ | 66 | $ | 3 | |||||||
|
Discontinued operations, net of tax
|
— | (157 | ) | — | (157 | ) | ||||||||||
|
“Core Earnings” net income (loss) attributable to SLM
Corporation
|
$ | (63 | ) | $ | (157 | ) | $ | 66 | $ | (154 | ) | |||||
86
| Year Ended December 31, 2008 | ||||||||||||||||
|
Purchased
|
Purchased
|
|||||||||||||||
|
Paper —
|
Paper —
|
|||||||||||||||
|
Non-
|
Mortgage/
|
Contingency
|
||||||||||||||
| Mortgage | Properties | & Other | Total APG | |||||||||||||
|
Contingency fee income
|
$ | 10 | $ | — | $ | 330 | $ | 340 | ||||||||
|
Collections revenue
|
129 | — | — | 129 | ||||||||||||
|
Total income
|
139 | — | 330 | 469 | ||||||||||||
|
Restructuring expenses
|
6 | — | 5 | 11 | ||||||||||||
|
Operating expenses
|
202 | — | 187 | 389 | ||||||||||||
|
Total expenses
|
208 | — | 192 | 400 | ||||||||||||
|
Net interest expense
|
13 | — | 12 | 25 | ||||||||||||
|
Income (loss) from continuing operations before income tax
expense (benefit)
|
(82 | ) | — | 126 | 44 | |||||||||||
|
Income tax expense (benefit)
|
(29 | ) | — | 52 | 23 | |||||||||||
|
Net income (loss) from continuing operations
|
(53 | ) | — | 74 | 21 | |||||||||||
|
Loss from discontinued operations, net of tax
|
— | (140 | ) | — | (140 | ) | ||||||||||
|
Net income (loss)
|
(53 | ) | (140 | ) | 74 | (119 | ) | |||||||||
|
Less: net income attributable to noncontrolling interest
|
4 | — | — | 4 | ||||||||||||
|
“Core Earnings” net income (loss) attributable to SLM
Corporation
|
$ | (57 | ) | $ | (140 | ) | $ | 74 | $ | (123 | ) | |||||
|
“Core Earnings” net income (loss) attributable to SLM
Corporation:
|
||||||||||||||||
|
Continuing operations, net of tax
|
$ | (57 | ) | $ | — | $ | 74 | $ | 17 | |||||||
|
Discontinued operations, net of tax
|
— | (140 | ) | — | (140 | ) | ||||||||||
|
“Core Earnings” net income (loss) attributable to SLM
Corporation
|
$ | (57 | ) | $ | (140 | ) | $ | 74 | $ | (123 | ) | |||||
87
| Year Ended December 31, 2007 | ||||||||||||||||
|
Purchased
|
Purchased
|
|||||||||||||||
|
Paper —
|
Paper —
|
|||||||||||||||
|
Non-
|
Mortgage/
|
Contingency
|
||||||||||||||
| Mortgage | Properties | & Other | Total APG | |||||||||||||
|
Contingency fee income
|
$ | 9 | $ | — | $ | 327 | $ | 336 | ||||||||
|
Collections revenue
|
217 | — | — | 217 | ||||||||||||
|
Total income
|
226 | — | 327 | 553 | ||||||||||||
|
Restructuring expenses
|
1 | — | 1 | 2 | ||||||||||||
|
Operating expenses
|
164 | — | 197 | 361 | ||||||||||||
|
Total expenses
|
165 | — | 198 | 363 | ||||||||||||
|
Net interest expense
|
13 | — | 14 | 27 | ||||||||||||
|
Income from continuing operations before income tax expense
|
48 | — | 115 | 163 | ||||||||||||
|
Income tax expense
|
18 | — | 42 | 60 | ||||||||||||
|
Net income from continuing operations
|
30 | — | 73 | 103 | ||||||||||||
|
Income from discontinued operations, net of tax
|
— | 15 | — | 15 | ||||||||||||
|
Net income
|
30 | 15 | 73 | 118 | ||||||||||||
|
Less: net income attributable to noncontrolling interest
|
2 | — | — | 2 | ||||||||||||
|
“Core Earnings” net income attributable to SLM
Corporation
|
$ | 28 | $ | 15 | $ | 73 | $ | 116 | ||||||||
|
“Core Earnings” net income attributable to SLM
Corporation:
|
||||||||||||||||
|
Continuing operations, net of tax
|
$ | 28 | $ | — | $ | 73 | $ | 101 | ||||||||
|
Discontinued operations, net of tax
|
— | 15 | — | 15 | ||||||||||||
|
“Core Earnings” net income attributable to SLM
Corporation
|
$ | 28 | $ | 15 | $ | 73 | $ | 116 | ||||||||
Collections
Revenue
In 2008, the Company concluded that its APG purchased paper
businesses were no longer a strategic fit. The Company sold its
international Purchased Paper — Non-Mortgage business
in the first quarter of 2009. A loss of $51 million was
recognized in the fourth quarter of 2008 related to this sale as
the net assets were held for sale and carried at the lower of
its book basis and fair value as of December 31, 2008. The
Company sold all of the assets in its Purchased
Paper — Mortgage/Properties business in the fourth
quarter of 2009 (which is further discussed below), which
resulted in an after-tax loss of $95 million. The Company
continues to wind down the domestic side of its Purchased
Paper — Non-Mortgage business. The Company will
continue to consider opportunities to sell this business at
acceptable prices in the future.
The Company’s domestic Purchased Paper —
Non-Mortgage business had certain forward purchase obligations
under which the Company was committed to buy purchased paper
through April 2009. The Company did not purchase any additional
purchased paper in excess of these obligations. The Company
recognized $79 million, $111 million and
$17 million of impairments in the years ended
December 31, 2009, 2008 and 2007, respectively. The
impairment is primarily a result of the impact of the economy on
the ability to collect on these assets. The impairment of
$111 million in 2008 includes the $51 million loss on
the sale of the Company’s international Purchased
Paper — Non-Mortgage business discussed above. Similar
to the Purchased Paper — Mortgage/Properties business
discussion below, when the Purchased Paper —
Non-Mortgage business either sells all of its remaining assets
or completely winds down its operations, its results will be
shown as discontinued operations.
88
Net loss attributable to SLM Corporation from discontinued
operations was $157 million and $140 million for the
years ended December 31, 2009 and 2008, respectively,
compared to net income of $15 million for the year ended
December 31, 2007. The Company sold all of the assets in
its Purchased Paper — Mortgage/Properties business in
the fourth quarter of 2009 for $280 million. Because of the
sale, the Purchased Paper — Mortgage/Properties
business is required to be presented separately as discontinued
operations for all periods presented. This sale of assets in the
fourth quarter of 2009 resulted in an after-tax loss of
$95 million. Total after-tax impairments, including the
loss on sale, for the years ended December 31, 2009, 2008
and 2007 were $154 million, $161 million and
$2 million, respectively.
Contingency
Fee Income
Contingency fee income decreased $44 million from
$340 million for the year ended December 31, 2008 to
$296 million for the year ended December 31, 2009.
This decrease was primarily a result of significantly less
guarantor collections revenue associated with rehabilitating
delinquent FFELP loans. Loans are considered rehabilitated after
a certain number of on-time payments have been collected. The
Company earns a rehabilitation fee only when the Guarantor sells
the rehabilitated loan. The disruption in the credit markets has
limited the sale of rehabilitated loans.
The contingency fee income for the year ended December 31,
2008 was relatively unchanged compared to 2007.
Purchased
Paper — Non-Mortgage
|
Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Face value of purchases for the period
|
$ | 390 | $ | 5,353 | $ | 6,111 | ||||||
|
Purchase price for the period
|
30 | 483 | 556 | |||||||||
|
Purchase price as a percentage of face value purchased
|
7.6 | % | 9.0 | % | 9.1 | % | ||||||
|
Gross Cash Collections (“GCC”)
|
$ | 376 | $ | 655 | $ | 463 | ||||||
|
Collections revenue
|
50 | 129 | 217 | |||||||||
|
Collections revenue as a percentage of GCC
|
13 | % | 20 | % | 47 | % | ||||||
|
Carrying value of purchased paper
|
$ | 285 | $ | 544 | $ | 587 | ||||||
The decrease in collections revenue as a percentage of gross
cash collections (“GCC”) in 2009 compared to 2008 and
2007 was primarily due to the significant impairment recognized
in 2008.
Contingency
Inventory
The following table presents the outstanding inventory of
receivables serviced through our APG business segment. These
assets are not on our balance sheet.
|
As of
|
||||||||||||
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Contingency:
|
||||||||||||
|
Student loans
|
$ | 8,762 | $ | 9,852 | $ | 8,195 | ||||||
|
Other
|
1,262 | 1,726 | 1,509 | |||||||||
|
Total
|
$ | 10,024 | $ | 11,578 | $ | 9,704 | ||||||
Operating
Expenses — APG Business Segment
For the years ended December 31, 2009, 2008 and 2007,
operating expenses for the APG contingency and other businesses
totaled $177 million, $187 million and
$197 million, respectively. The decrease in operating
expenses in 2009 versus prior years is primarily due to the
Company’s cost reduction initiatives.
89
For the years ended December 31, 2009, 2008 and 2007,
operating expenses for the APG Purchased Paper —
Non-Mortgage business totaled $138 million,
$202 million and $164 million, respectively. The
decrease from the prior years is primarily due to lower
collection costs due to the decreasing size of the portfolio as
a result of winding down the business.
At December 31, 2009 and 2008, the APG business segment had
total assets of $1.1 billion and $2.0 billion,
respectively.
CORPORATE
AND OTHER BUSINESS SEGMENT
Our Corporate and Other reportable segment reflects the
aggregate activity of our smaller operating units, including our
Guarantor Servicing and Loan Servicing operating units,
Upromise, other products and services, as well as corporate
expenses that do not pertain directly to our operating segments.
In our Guarantor Servicing operating unit, we provide a full
complement of administrative services to FFELP Guarantors,
including guarantee issuance, processing, account maintenance
and guarantee fulfillment. In our Loan Servicing operating unit,
we originate and service student loans on behalf of lenders,
including ED, who are unrelated to SLM Corporation. In our
Upromise operating unit, we provide 529 college-savings plan
program management, transfer and servicing agent services, and
administration services, and operate a consumer savings network.
90
Condensed
Statements of Income
The following tables include “Core Earnings” results
of operations for our Corporate and Other business segment.
|
Years Ended
|
||||||||||||||||||||
| December 31, | % Increase (Decrease) | |||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 vs. 2008 | 2008 vs. 2007 | ||||||||||||||||
|
Net interest income after provisions for losses
|
$ | 5 | $ | 6 | $ | (1 | ) | $ | (17 | ) | $ | 700 | % | |||||||
|
Guarantor servicing fees
|
136 | 121 | 156 | 12 | (22 | ) | ||||||||||||||
|
Loan servicing fees
|
53 | 26 | 23 | 104 | 13 | |||||||||||||||
|
Upromise
|
112 | 108 | 110 | 4 | (2 | ) | ||||||||||||||
|
Other
|
50 | 65 | 85 | (23 | ) | (24 | ) | |||||||||||||
|
Total other income
|
351 | 320 | 374 | 10 | (14 | ) | ||||||||||||||
|
Restructuring expenses
|
3 | 23 | 2 | (87 | ) | 1,050 | ||||||||||||||
|
Operating expenses
|
284 | 256 | 339 | 11 | (24 | ) | ||||||||||||||
|
Total expenses
|
287 | 279 | 341 | 3 | (18 | ) | ||||||||||||||
|
Income from continuing operations, before income tax expense
|
69 | 47 | 32 | 47 | 47 | |||||||||||||||
|
Income tax expense
|
24 | 17 | 12 | 41 | 42 | |||||||||||||||
|
Net income
|
45 | 30 | 20 | 50 | 50 | |||||||||||||||
|
Less: net income attributable to noncontrolling interest
|
— | — | — | — | — | |||||||||||||||
|
“Core Earnings” net income attributable to SLM
Corporation
|
$ | 45 | $ | 30 | $ | 20 | 50 | % | 50 | % | ||||||||||
|
“Core Earnings” net income attributable to SLM
Corporation:
|
||||||||||||||||||||
|
Continuing operations, net of tax
|
$ | 45 | $ | 30 | $ | 20 | 50 | % | 50 | % | ||||||||||
|
Discontinued operations, net of tax
|
— | — | — | — | — | |||||||||||||||
|
“Core Earnings” net income attributable to SLM
Corporation
|
$ | 45 | $ | 30 | $ | 20 | 50 | % | 50 | % | ||||||||||
USA Funds, the nation’s largest guarantee agency, accounted
for 86 percent, 85 percent and 86 percent,
respectively, of guarantor servicing fees and 2 percent,
11 percent and 16 percent, respectively, of revenues
associated with other products and services for the years ended
December 31, 2009, 2008 and 2007.
2009
versus 2008
The increase in guarantor servicing fees from 2008 to 2009
primarily relates to an increase in guarantor issuance fees
earned as a result of a significant increase in FFELP loan
guarantees (consistent with the significant increase in the
Company’s FFELP loan originations) over the prior year as
well as an increase in account maintenance fees earned which are
a function of the size of the FFELP portfolio. The increase in
loan servicing fees from 2008 to 2009 is primarily due to
$9 million of servicing revenue related to the
2 million accounts the Company began servicing under the ED
Servicing Contract in 2009 and $8 million of additional
loan conversion fees earned by the Company when third-party
servicing clients sold their FFELP loans to ED under the ED
Purchase Program in the third quarter of 2009, as well as an
increase in the size of other third-party servicing
relationships the Company has.
91
2008
versus 2007
The decrease in guarantor servicing fees from 2007 to 2008 was
primarily due to the recognition of $15 million in the
fourth quarter of 2007 of previously deferred guarantee account
maintenance fee revenue related to a negotiated settlement with
USA Funds, as well as a decrease in the account maintenance fees
earned in 2008 due to the legislative changes effective
October 1, 2007 as a result of CCRAA.
Operating
Expenses — Corporate and Other Business
Segment
The following table summarizes the components of operating
expenses for our Corporate and Other business segment.
|
Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Operating expenses
|
$ | 110 | $ | 90 | $ | 109 | ||||||
|
Upromise
|
84 | 91 | 94 | |||||||||
|
General and administrative expenses
|
90 | 75 | 136 | |||||||||
|
Total
|
$ | 284 | $ | 256 | $ | 339 | ||||||
Operating expenses for our Corporate and Other business segment
include direct costs incurred to service loans for unrelated
third parties, perform guarantor servicing on behalf of
Guarantor agencies and operate our Upromise subsidiary, as well
as information technology expenses related to these functions.
Operating expenses also include unallocated corporate overhead
expenses for centralized headquarters functions.
2009
versus 2008
For the years ended December 31, 2009 and 2008, operating
expenses for the Corporate and Other business segment totaled
$284 million and $256 million, respectively. The
increase in operating expenses in 2009 versus the prior year was
primarily due to higher expenses incurred to reconfigure the
Company’s servicing system to meet the requirements of the
ED Servicing Contract awarded to the Company on June 17,
2009 to service FFELP loans that have been or will be sold to
ED, as well as professional services fees incurred in connection
with strategic planning.
2008
versus 2007
The decrease in operating expenses in 2008 compared to 2007 was
primarily due to $56 million of non-recurring Proposed
Merger-related expenses in 2007, as well as the Company’s
cost reduction initiatives.
At December 31, 2009 and 2008, the Corporate and Other
business segment had total assets of $1.2 million and
$685 million, respectively.
92
LIQUIDITY
AND CAPITAL RESOURCES
The following “LIQUIDITY AND CAPITAL RESOURCES”
discussion concentrates on our Lending business segment. Our APG
contingency collections and Corporate and Other business
segments are not capital intensive businesses and, as such, a
minimal amount of debt capital is allocated to these segments.
Historically, we funded new loan originations with a combination
of term unsecured debt and student loan asset-backed securities.
Following the Proposed Merger announcement in April 2007, we
temporarily suspended issuance of unsecured debt and began
funding loan originations primarily through the issuance of
student loan asset-backed securities and short-term secured
student loan financing facilities. In June 2008, the Company
accessed the corporate bond market with a $2.5 billion
issuance of
10-year
senior unsecured notes. In August 2008, we began funding new
FFELP Stafford and PLUS Loan originations for AY
2008-2009
pursuant to ED’s Loan Participation Program. During the
fourth quarter of 2008, the Company began retaining its Private
Education Loan originations in its banking subsidiary, Sallie
Mae Bank, and funding these assets with term bank deposits. In
May 2009, we began using the ED Conduit Program to
fund FFELP Stafford and PLUS Loans. We discuss these
liquidity sources below.
In the near term, we expect to continue to use ED’s
Purchase and Participation Programs to fund future FFELP
Stafford and PLUS Loan originations and to use deposits at
Sallie Mae Bank and term asset-backed securities to
fund Private Education Loan originations. We plan to use
term asset-backed securities, asset-backed financing facilities,
cash flows provided by earnings and repayment of principal on
our unencumbered student loan assets and distributions from our
securitization trusts, as well as other sources, to retire
maturing debt and provide cash for operations and other needs.
ED
Funding Programs
In August 2008, ED implemented the Purchase Program and the Loan
Purchase Participation Program (the “Participation
Program”) pursuant to ECASLA. Under the Purchase Program,
ED purchases eligible FFELP loans at a price equal to the sum of
(i) par value, (ii) accrued interest, (iii) the
one-percent origination fee paid to ED, and (iv) a fixed
amount of $75 per loan. Under the Participation Program, ED
provides short-term liquidity to FFELP lenders by purchasing
participation interests in pools of FFELP loans. FFELP lenders
are charged a rate equal to the preceding quarter commercial
paper rate plus 0.50 percent on the principal amount of
participation interests outstanding. Under the terms of the
Participation Program, on September 30, 2010, AY
2009-2010
loans funded under the Participation Program must be either
repurchased by the Company or sold to ED pursuant to the
Participation Program, which has identical economics to the
Purchase Program. Given the state of the credit markets, we
currently expect to sell all of the loans we fund under the
Participation Program to ED. Loans eligible for the
Participation or Purchase Programs are limited to FFELP Stafford
or PLUS Loans, first disbursed on or after May 1, 2008 but
no later than July 1, 2010, with no ongoing borrower
benefits other than permitted rate reductions of
0.25 percent for automatic payment processing.
As of December 31, 2009, the Company had $9.0 billion
of advances outstanding under the Participation Program. Through
December 31, 2009, the Company has sold to ED approximately
$18.5 billion face amount of loans as part of the Purchase
Program. Outstanding debt of $18.5 billion was paid down
related to the Participation Program in connection with these
loan sales. These loan sales resulted in a $284 million
gain. The settlement of the fourth quarter sale of loans out of
the Participation Program included repaying the debt by
delivering the related loans to ED in a non-cash transaction and
receipt of cash from ED for $484 million, representing the
reimbursement of a one-percent payment made to ED plus a $75 fee
per loan.
Also pursuant to ECASLA, on January 15, 2009, ED published
summary terms under which it will purchase eligible FFELP
Stafford and PLUS Loans from a conduit vehicle established to
provide funding for eligible student lenders (the “ED
Conduit Program”). Loans eligible for the ED Conduit
Program must be first disbursed on or after October 1,
2003, but not later than July 1, 2009, and fully disbursed
before September 30, 2009, and meet certain other
requirements, including those relating to borrower benefits. The
ED Conduit Program was launched on May 11, 2009 and will
accept eligible loans through July 1, 2010. The ED Conduit
Program has a term of five years and will expire on
January 19, 2014. Funding for the ED Conduit Program is
provided by the capital markets at a cost based on market rates,
with the Company being advanced 97 percent of the student
loan face amount. If the conduit does not have sufficient funds
to make the required payments on the notes issued by the
conduit, then
93
the notes will be repaid with funds from the Federal Financing
Bank (“FFB”). The FFB will hold the notes for a short
period of time and, if at the end of that time the notes still
cannot be paid off, the underlying FFELP loans that serve as
collateral to the ED Conduit will be sold to ED through the Put
Agreement at a price of 97 percent of the face amount of
the loans. As of December 31, 2009, approximately
$14.6 billion face amount of our Stafford and PLUS Loans
were funded through the ED Conduit Program. For 2009, the
average interest rate paid on this facility was approximately
0.75 percent. As of December 31, 2009, there are
approximately $820 million face amount of additional FFELP
Stafford and PLUS Loans (excluding loans currently in the
Participation Program) that can be funded through the ED Conduit
Program.
Additional
Funding Sources for General Corporate Purposes
In addition to funding FFELP loans through ED’s
Participation and Purchase Programs and the ED Conduit Program,
the Company employs other financing sources for general
corporate purposes, which include originating Private Education
Loans and repurchases and repayments of unsecured debt
obligations.
Secured borrowings, including securitizations, asset-backed
commercial paper (“ABCP”) borrowings, ED financing
facilities and indentured trusts, comprised 82 percent of
our Managed debt outstanding at December 31, 2009 versus
78 percent at December 31, 2008.
Sallie
Mae Bank
During the fourth quarter of 2008, Sallie Mae Bank, our Utah
industrial bank subsidiary, began expanding its deposit base to
fund new Private Education Loan originations. Sallie Mae Bank
raises deposits primarily through intermediaries in the retail
brokered CD market. As of December 31, 2009, total term
bank deposits were $5.6 billion and cash and liquid
investments totaled $2.4 billion. As of December 31,
2009, $4.2 billion of Private Education Loans were held at
Sallie Mae Bank. We ultimately expect to raise additional
long-term financing, through Private Education Loan
securitizations or other financings, to fund these loans. In the
near term, we expect Sallie Mae Bank to continue to fund newly
originated Private Education Loans through long-term bank
deposits.
ABS
Transactions
On January 6, 2009, we closed a $1.5 billion
12.5 year asset-backed securities (“ABS”) based
facility. This facility is used to provide up to
$1.5 billion term financing for Private Education Loans.
The fully-utilized cost of financing obtained under this
facility is expected to be LIBOR plus 5.75 percent. In
connection with this facility, we completed one Private
Education Loan term ABS transaction totaling $1.5 billion
in the first quarter of 2009. The net funding received under the
asset-backed securities based facility for this issuance was
$1.1 billion.
In 2009, we completed four FFELP long-term ABS transactions
totaling $5.9 billion. The FFELP transactions were composed
primarily of FFELP Consolidation Loans which were not eligible
for the ED Conduit Program or the Term Asset-Backed Securities
Loan Facility (“TALF”) discussed below.
During 2009, we completed $7.5 billion of Private Education
Loan term ABS transactions, all of which were private placement
transactions. On January 6, 2009, we closed a
$1.5 billion 12.5 year asset-backed securities
(“ABS”) based facility. This facility is used to
provide up to $1.5 billion term financing for Private
Education Loans. The fully utilized cost of financing obtained
under this facility is expected to be LIBOR plus
5.75 percent. In connection with this facility, we
completed one Private Education Loan term ABS transaction
totaling $1.5 billion in the first quarter of 2009. The net
funding received under the asset-backed securities based
facility for this issuance was $1.1 billion. In addition,
we completed $6.0 billion of Private Education Loan term
ABS transactions which were TALF-eligible. See “
Term
Asset-Backed Securities Loan Facility
(“TALF”)
” below for additional details.
Although we have demonstrated our access to the ABS market in
2009 and we expect ABS financing to remain a primary source of
funding over the long term, we expect our transaction volumes to
be more limited and pricing less favorable than prior to the
credit market dislocation that began in the summer of 2007, with
significantly reduced opportunities to place subordinated
tranches of ABS with investors. At present, while the markets
have demonstrated some signs of recovery, we are unable to
predict when market conditions will allow for more regular,
reliable and cost-effective access to the term ABS market.
94
Asset-Backed
Financing Facilities
During the first quarter of 2008, the Company entered into three
new asset-backed financing facilities (the “2008
Asset-Backed Financing Facilities”): (i) a
$26.0 billion FFELP loan ABCP conduit facility (the
“2008 FFELP ABCP Facility”); (ii) a
$5.9 billion Private Education Loan ABCP conduit facility
(the “2008 Private Education Loan ABCP Facility”)
(collectively, the “2008 ABCP Facilities”); and
(iii) a $2.0 billion secured FFELP loan facility (the
“2008 Asset-Backed Loan Facility”). The initial term
of the 2008 Asset-Backed Financing Facilities was 364 days.
The underlying cost of borrowing under the 2008 ABCP Facilities
was approximately LIBOR plus 0.68 percent for the FFELP
loan facilities and LIBOR plus 1.55 percent for the Private
Education Loan facility, excluding upfront and unused commitment
fees. All-in pricing on the 2008 ABCP Facilities varied based on
usage. For the full year 2008, the combined, all-in cost of
borrowings related to the 2008 Asset-Backed Financing
Facilities, including amortized upfront fees and unused
commitment fees, was three-month LIBOR plus 2.47 percent.
The primary use of the 2008 Asset-Backed Financing Facilities
was to refinance comparable ABCP facilities incurred in
connection with the Proposed Merger, with the expectation that
outstanding balances under the 2008 Asset-Backed Financing
Facilities would be reduced through securitization of the
underlying student loan collateral in the term ABS market.
On February 2, 2009, the Company extended the maturity date
of the 2008 ABCP Facilities from February 28, 2009 to
April 28, 2009 for a $61 million upfront fee. The
other terms of the facilities remained materially unchanged.
On February 27, 2009, the Company extended the maturity
date of the 2008 Asset-Backed Loan Facility from
February 28, 2009 to April 28, 2009 for a
$4 million upfront fee. The other terms of this facility
remained materially unchanged.
On April 24, 2009, the Company extended the maturity of
$21.8 billion of the 2008 FFELP ABCP Facility for one year
to April 23, 2010. The Company also extended its 2008
Asset-Backed Loan Facility in the amount of $1.5 billion.
The extended 2008 Asset-Backed Loan Facility matured on
June 26, 2009 and was paid in full. A total of
$86 million in fees were paid related to these extensions.
The 2008 Private Education Loan ABCP Facility was paid off and
terminated on April 24, 2009. The stated borrowing rate of
the 2008 FFELP ABCP Facility was the applicable funding rate
plus 130 basis points excluding upfront fees. The
applicable funding rate generally was either a LIBOR or
commercial paper rate. The terms of the 2008 FFELP ABCP Facility
called for an increase in the applicable funding spread to
300 basis points if the outstanding borrowing amount was
not reduced to $15.2 billion and $10.9 billion as of
June 30, 2009 and September 30, 2009, respectively. If
the Company did not negotiate an extension or pay off all
outstanding amounts of the 2008 FFELP ABCP Facility at maturity,
the facility would extend by 90 days with the interest rate
generally increasing from LIBOR plus 250 basis points to
550 basis points over the 90 day period. The other
terms of the facilities remained materially unchanged.
The maximum amount the Company could borrow under the 2008 FFELP
ABCP Facility was limited based on certain factors, including
market conditions and the fair value of student loans in the
facility. As of December 31, 2009, the maximum borrowing
amount was approximately $10.5 billion. Funding under the
2008 FFELP ABCP Facility was subject to usual and customary
conditions. The 2008 FFELP ABCP Facility was subject to
termination under certain circumstances, including the
Company’s failure to comply with the principal financial
covenants in its unsecured revolving credit facilities.
Borrowings under the 2008 FFELP ABCP Facility were non-recourse
to the Company. As of December 31, 2009, the Company had
$8.8 billion outstanding in connection with the 2008 FFELP
ABCP Facility. The book basis of the assets securing this
facility as of December 31, 2009 was $10.2 billion.
On January 15, 2010, the Company terminated the 2008 FFELP
ABCP Facility and entered into new multi-year ABCP facilities
(the “2010 Facility”) which will continue to provide
funding for the Company’s federally guaranteed student
loans. The 2010 Facility provides for maximum funding of
$10 billion for the first year, $5 billion for the
second year and $2 billion for the third year. Upfront fees
related to the 2010 Facility were approximately $4 million.
The underlying cost of borrowing under the 2010 Facility for the
first year is expected to be commercial paper issuance cost plus
0.50 percent, excluding up-front commitment and unused fees.
95
Borrowings under the 2010 Facility are non-recourse to the
Company. The maximum amount the Company may borrow under the
2010 Facility is limited based on certain factors, including
market conditions and the fair value of student loans in the
facility. Funding under the 2010 Facility is subject to usual
and customary conditions. The 2010 Facility is subject to
termination under certain circumstances, including the
Company’s failure to comply with the principal financial
covenants in its unsecured revolving credit facilities.
Increases in the borrowing rate of up to LIBOR plus
450 basis points could occur if certain asset coverage
ratio thresholds are not met. Failure to pay off the 2010
Facility on the maturity date or to reduce amounts outstanding
below the annual maximum step downs will result in a
90-day
extension of the 2010 Facility with the interest rate increasing
from LIBOR plus 200 basis points to LIBOR plus
300 basis points over that period. If, at the end of the
90-day extension, these required paydown amounts have not been
made, the collateral can be foreclosed upon.
Term
Asset-Backed Securities Loan Facility
(“TALF”)
On February 6, 2009, the Federal Reserve Bank of New York
published proposed terms for a program designed to facilitate
renewed issuance of consumer and small business ABS at lower
interest rate spreads. TALF was initiated on March 17, 2009
and currently provides investors who purchase eligible ABS with
funding of up to five years. Eligible ABS include
‘AAA’ rated student loan ABS backed by FFELP and
Private Education Loans first disbursed since May 1, 2007.
As of December 31, 2009, we had approximately
$9.4 billion book basis of student loans (including
$6.9 billion book basis of Private Education Loans and
$2.5 billion book basis of Consolidation Loans) eligible to
serve as collateral for ABS funded under TALF; this amount does
not include loans eligible for ECASLA financing programs. For
student loan collateral, TALF is scheduled to expire on
March 31, 2010.
On May 5, 2009, we priced a $2.6 billion Private
Education Loan securitization which closed on May 12, 2009.
The issue bears a coupon of
1-month
LIBOR plus 6.0 percent and is callable at the issuer’s
option at 93 percent of the outstanding balance of the ABS
between November 15, 2011 and April 16, 2012. If the
issue is called on November 15, 2011, we expect the
effective cost of the financing will be approximately
1-month
LIBOR plus 3.7 percent. This transaction was TALF-eligible.
On July 2, 2009, we priced a $1.1 billion Private
Education Loan securitization which closed on July 14,
2009. The issue bears a coupon of Prime plus 1.25 percent
and is callable at the issuer’s option at 94 percent
of the outstanding balance of the ABS between January 16,
2012 and June 15, 2012. If the issue is called on
January 16, 2012, we expect the effective cost of the
financing will be approximately Prime minus 0.71 percent.
This transaction was TALF-eligible.
On August 5, 2009, we priced a $1.7 billion Private
Education Loan securitization which closed on August 13,
2009. The issue bears a coupon of Prime plus 0.25 percent
and is callable at the issuer’s option at 94 percent
of the outstanding balance of the ABS between August 15,
2013 and July 15, 2014. If the issue is called on
August 15, 2013, we expect the effective cost of the
financing will be approximately Prime minus 0.55 percent.
This transaction was TALF-eligible.
On December 2, 2009, we priced a $590 million Private
Education Career Training Loan securitization which closed on
December 10, 2009. The issue includes one tranche that
bears a coupon of Prime minus 0.90 percent and a second
tranche that bears a coupon of
1-month
LIBOR plus 1.85 percent. This transaction was TALF-eligible.
Federal
Home Loan Bank in Des Moines
On January 15, 2010, HICA Education Loan Corporation, a
subsidiary of the Company, entered into a lending agreement with
the Federal Home Loan Bank of Des Moines (the “FHLB”).
Under the agreement, the FHLB will provide advances backed by
Federal Housing Finance Agency approved collateral which
includes federally-guaranteed student loans. The initial
borrowing of $25 million at a rate of .23 percent
under this facility occurred on January 15, 2010 and
matured on January 22, 2010. The amount, price and tenor of
future advances will vary and will be determined at the time of
each borrowing. The maximum amount that can be borrowed, as of
January 15, 2010, subject to available collateral, is
approximately $11 billion. The Company has provided a
guarantee to the FHLB for the performance and payment of
HICA’s obligations.
96
Auction
Rate Securities
At December 31, 2009, we had $3.3 billion of taxable
and $1.1 billion of tax-exempt auction rate securities
outstanding in securitizations and indentured trusts,
respectively, on a Managed Basis. Since February 2008, problems
in the auction rate securities market as a whole led to failures
of the auctions pursuant to which certain of our auction rate
securities’ interest rates are set. As a result, all of the
Company’s auction rate securities as of December 31,
2009 bore interest at the maximum rate allowable under their
terms. The maximum allowable interest rate on our
$3.3 billion of taxable auction rate securities is
generally LIBOR plus 1.50 percent. The maximum allowable
interest rate on many of the Company’s $1.1 billion of
tax-exempt auction rate securities is a formula driven rate,
which produced various maximum rates up to 1.14 percent
during the fourth quarter of 2009. Since December 31, 2009,
certain auction rate securities with short terms to maturity
have begun to have successful auctions.
Reset
Rate Notes
Certain tranches of our term ABS are reset rate notes. Reset
rate notes are subject to periodic remarketing, at which time
the interest rates on the notes are reset. The Company also has
the option to repurchase a reset rate note upon a failed
remarketing and hold it as an investment until such time it can
be remarketed. In the event a reset rate note cannot be
remarketed on its remarketing date, and is not repurchased, the
interest rate generally steps up to and remains at LIBOR plus
0.75 percent until such time as the bonds are successfully
remarketed or repurchased. The Company’s repurchase of a
reset rate note requires additional funding, the availability
and pricing of which may be less favorable to the Company than
it was at the time the reset rate note was originally issued.
Unlike the repurchase of a reset rate note, the occurrence of a
failed remarketing does not require additional funding. As a
result of the ongoing dislocation in the capital markets, at
December 31, 2009, $1.8 billion of our reset rate
notes bore interest at, or were swapped to LIBOR plus
0.75 percent due to a failed remarketing. Until capital
markets conditions improve, it is possible additional reset rate
notes will experience failed remarketings. On October 26,
2009, the Company successfully remarketed a $590 million
reset rate note at LIBOR plus 0.40 percent to maturity. All
subsequent remarketings have been unsuccessful. As of
December 31, 2009, on a Managed Basis, the Company had
$4.3 billion and $2.0 billion of reset rate notes due
to be remarketed in 2010 and 2011, respectively, and an
additional $6.5 billion to be remarketed thereafter.
On January 11, 2010, the Company announced that it
repurchased $812 million U.S. dollar equivalent face
amount of its
non-U.S. dollar
denominated senior unsecured notes through a tender offer which
settled on January 14, 2010. This transaction resulted in a
taxable gain of approximately $45 million.
Primary
Sources of Liquidity and Available Capacity
We expect to fund our ongoing liquidity needs, including the
origination of new loans and the repayment of $5.2 billion
of senior unsecured notes maturing in 2010, through our current
cash and investment portfolio, cash flow provided by earnings
and repayment of principal on unencumbered student loan assets
and distributions from our securitization trusts (including
servicing fees which have priority payments within the trusts),
the liquidity facilities made available by ED, TALF, the 2010
Facility, the issuance of term ABS, term bank deposits, and, to
a lesser extent, if possible, unsecured debt and other sources.
To supplement our funding sources, we maintained an additional
$3.5 billion in unsecured revolving credit facilities as of
December 31, 2009; $1.9 billion of our unsecured
revolving facilities matures in October 2010 and
$1.6 billion matures in October 2011. These figures reflect
the amended size of the facilities as a $215 million
commitment from Aurora Bank, FSB, formerly known as Lehman
Brothers Bank, FSB, a subsidiary of Lehman Brothers Holdings
Inc., was removed from the facility in the fourth quarter of
2009 (see “Counterparty Exposure,” below). On
April 24, 2009, in conjunction with the extension of the
2008 ABCP Facilities, a $1.4 billion revolving credit
facility maturing in October 2009 was retired and the
$1.9 billion revolving credit facility maturing in October
2011 was reduced to $1.6 billion. The principal financial
covenants in the unsecured revolving credit facilities require
the Company to maintain consolidated tangible net worth of at
least $1.38 billion at all times. Consolidated tangible net
worth as calculated for purposes of this covenant was
$3.5 billion as of December 31,
97
2009. The covenants also require the Company to meet either a
minimum interest coverage ratio or a minimum net adjusted
revenue test based on the four preceding quarters’ adjusted
“Core Earnings” financial performance. The Company was
compliant with both of the minimum interest coverage ratio and
the minimum net adjusted revenue tests as of the quarter ended
December 31, 2009. In the past, we have not relied upon our
unsecured revolving credit facilities as a primary source of
liquidity. Even though we have never borrowed under these
facilities, they are available to be drawn upon for general
corporate purposes.
During the year, the Company’s new financing transactions
generated excess liquidity, some of which was used to repurchase
$3.4 billion of the Company’s short-term senior
unsecured notes, generating pre-tax gains of $536 million.
The following table details our main sources of primary
liquidity and the available capacity at December 31, 2009
and 2008.
|
December 31, 2009
|
December 31, 2008
|
|||||||
| Available Capacity | Available Capacity | |||||||
|
Sources of primary liquidity available for new FFELP Stafford
and PLUS Loan originations:
|
||||||||
|
ED Purchase and Participation
Programs
(1)
|
Unlimited (1 | ) | Unlimited (1 | ) | ||||
|
Sources of primary liquidity for general corporate purposes:
|
||||||||
|
Unrestricted cash and liquid investments:
|
||||||||
|
Cash and cash equivalents
|
$ | 6,070 | $ | 4,070 | ||||
|
Commercial paper and asset-backed commercial paper
|
1,150 | 801 | ||||||
|
Other
(2)
|
131 | 133 | ||||||
|
Total unrestricted cash and liquid
investments
(3)(4)(5)
|
7,351 | 5,004 | ||||||
|
Unused commercial paper and bank lines of credit
|
3,485 | 5,192 | ||||||
|
2008 FFELP ABCP
Facilities
(6)
|
1,703 | 807 | ||||||
|
2008 Private Education Loan ABCP Facility
|
— | 332 | ||||||
|
Total sources of primary liquidity for general corporate
purposes
(7)
|
$ | 12,539 | $ | 11,335 | ||||
| (1) | The ED Purchase and Participation Programs provide unlimited funding for eligible FFELP Stafford and PLUS Loans made by the Company for the academic years 2008-2009 and 2009-2010. See “ED Funding Programs” discussed earlier in this section. | |
| (2) | At December 31, 2009 and 2008, includes $32 million and $97 million, respectively, due from The Reserve Primary Fund (see “Counterparty Exposure” below). The Company received $32 million from The Reserve Primary Fund on January 29, 2010. | |
| (3) | At December 31, 2009 and 2008, excludes $25 million and $26 million, respectively, of investments pledged as collateral related to certain derivative positions and $708 million and $82 million, respectively, of other non-liquid investments, classified as cash and investments on our balance sheet in accordance with GAAP. | |
| (4) | At December 31, 2009 and 2008, includes $821 million and $1.6 billion, respectively, of cash collateral pledged by derivative counterparties and held by the Company in unrestricted cash. | |
| (5) | At December 31, 2009 and 2008, includes $2.4 billion and $1.1 billion, respectively, of cash and liquid investments at Sallie Mae Bank, for which Sallie Mae Bank is not authorized to dividend to the Company without FDIC approval. This cash will be used primarily to originate or acquire student loans. | |
| (6) | Borrowing capacity is subject to availability of collateral. As of December 31, 2009 and 2008, the Company had $2.1 billion and $5.4 billion, respectively, of outstanding unencumbered FFELP loans, net. | |
| (7) | General corporate purposes primarily include originating Private Education Loans and repaying unsecured debt as it matures. |
In addition to the assets listed in the table above, we hold
on-balance sheet a number of other unencumbered assets,
consisting primarily of Private Education Loans, Retained
Interests and other assets. At December 31, 2009, we had a
total of $31.3 billion of unencumbered assets, including
goodwill and acquired intangibles. Total student loans, net,
comprised $14.6 billion of this unencumbered asset total of
which $12.5 billion relates to Private Education Loans, net.
98
The following table reconciles encumbered and unencumbered
assets and their net impact on total equity.
|
December 31,
|
December 31,
|
|||||||
|
(Dollars in billions)
|
2009 | 2008 | ||||||
|
Net assets in secured financing facilities
|
$ | 14.5 | $ | 15.6 | ||||
|
Unencumbered assets
|
31.3 | 36.1 | ||||||
|
Unsecured debt, term bank deposits, and other borrowings
|
(35.1 | ) | (42.1 | ) | ||||
|
ASC 815
mark-to-market
on all hedged
debt
(1)
|
(3.4 | ) | (3.4 | ) | ||||
|
Other liabilities, net
|
(2.0 | ) | (1.2 | ) | ||||
|
Total GAAP equity
|
$ | 5.3 | $ | 5.0 | ||||
| (1) | At December 31, 2009 and 2008, there are $3.4 billion and $3.6 billion, respectively, of net gains on derivatives hedging this debt, which partially offsets these losses. These gains are a part of the net assets in secured financing facilities and unencumbered assets. |
Counterparty
Exposure
Counterparty exposure related to financial instruments arises
from the risk that a lending, investment or derivative
counterparty will not be able to meet its obligations to the
Company.
Aurora Bank, FSB, formerly known as Lehman Brothers Bank, FSB, a
subsidiary of Lehman Brothers Holdings Inc., was a party to the
Company’s unsecured revolving credit facilities under which
they provided the Company with commitments totaling
$215 million as of September 30, 2009. Lehman Brothers
Holdings Inc. declared bankruptcy on September 15, 2008.
The Company and the other banks which are a party to the
agreement amended the unsecured revolving credit facilities in
the fourth quarter of 2009 to eliminate this commitment.
To provide liquidity for future cash needs, we invest in high
quality money market investments. At December 31, 2009, the
Company had investments of $32 million with The Reserve
Primary Fund (“The Fund”). In September 2008, the
Company requested redemption of all monies invested in The Fund
prior to The Fund’s announcement that it suspended
distributions as a result of The Fund’s exposure to Lehman
Brothers Holdings Inc.’s bankruptcy filing and The
Fund’s net asset value being below one dollar per share. We
were originally informed by The Fund that we would receive our
entire investment amount. As of December 31, 2009, we have
received a total of $460 million of an initial investment
of $500 million from The Fund. In the fourth quarter of
2008, we recorded an impairment of $8 million related to
our investment in The Fund in anticipation of losses on our
remaining investment. Subsequently, the SEC granted The Fund an
indefinite extension to pay distributions as The Fund is being
liquidated. On November 25, 2009, the court issued an order
providing for (i) the distribution of the remaining assets
on a pro rata basis; (ii) an injunction barring all claims
against the fund and any of the defendants; and (iii) the
appointment of a monitor to oversee the distribution and to
review any claims by The Fund’s advisor or distributor for
management fees and expenses. On January 29, 2010, the
Company received $32 million from The Fund.
Protection against counterparty risk in derivative transactions
is generally provided by International Swaps and Derivatives
Association, Inc. (“ISDA”) Credit Support Annexes
(“CSAs”). CSAs require a counterparty to post
collateral if a potential default would expose the other party
to a loss. The Company is a party to derivative contracts for
its corporate purposes and also within its securitization
trusts. The Company has CSAs and collateral requirements with
all of its derivative counterparties requiring collateral to be
exchanged based on the net fair value of derivatives with each
counterparty. The Company’s securitization trusts require
collateral in all cases if the counterparty’s credit rating
is withdrawn or downgraded below a certain level. If the
counterparty does not post the required collateral or is
downgraded further, the counterparty must find a suitable
replacement counterparty or provide the trust with a letter of
credit or a guaranty from an entity that has the required credit
ratings. Failure to post the collateral or find a replacement
counterparty could result in a termination event under the
derivative contract. The Company considers counterparties’
credit risk when determining the fair value of derivative
positions on its exposure net of collateral. Securitizations
involving foreign currency notes issued after November 2005 also
require the counterparty to post collateral to the trust based
on the fair value of the derivative, regardless of credit
rating. The trusts are not required to post
99
collateral to the counterparties. If we were unable to collect
from a counterparty related to the Company and on-balance sheet
trust derivatives, we would have a loss equal to the amount the
derivative is recorded on our balance sheet. If we were unable
to collect from a counterparty related to an off-balance sheet
trust derivative, the value of our Residual Interest on our
balance sheet would be reduced through earnings.
The Company has liquidity exposure related to collateral
movements between SLM Corporation and its derivative
counterparties. The collateral movements can increase or
decrease our primary liquidity depending on the nature of the
collateral (whether cash or securities), the Company’s and
counterparties’ credit ratings and on movements in the
value of the derivatives, which are primarily impacted by
changes in interest rate and foreign exchange rates. These
movements may require the Company to return cash collateral
posted or may require the Company to access primary liquidity to
post collateral to counterparties. As of December 31, 2009,
the Company held $821 million cash collateral in
unrestricted cash accounts. If the Company’s credit ratings
are downgraded from current levels, it may be required to
segregate such collateral in restricted accounts.
The table below highlights exposure related to our derivative
counterparties at December 31, 2009.
|
On-Balance Sheet
|
Off-Balance Sheet
|
|||||||||||
|
SLM Corporation
|
Securitizations
|
Securitizations
|
||||||||||
| Contracts | Contracts | Contracts | ||||||||||
|
Exposure, net of collateral
|
$ | 246 | $ | 1,182 | $ | 603 | ||||||
|
Percent of exposure to counterparties with credit ratings below
S&P AA- or Moody’s Aa3
|
56 | % | 42 | % | 28 | % | ||||||
|
Percent of exposure to counterparties with credit ratings below
S&P A- or Moody’s A3
|
0 | % | 0 | % | 0 | % | ||||||
100
Managed
Borrowings
The following tables present the ending balances of our Managed
borrowings at December 31, 2009, 2008 and 2007, and average
balances and average interest rates of our Managed borrowings
for the years ended December 31, 2009, 2008 and 2007. The
average interest rates include derivatives that are economically
hedging the underlying debt but do not qualify for hedge
accounting treatment under ASC 815. (See “BUSINESS
SEGMENTS — Limitations of ‘Core
Earnings’ —
Pre-tax Differences between
‘Core Earnings’ and GAAP by Business
Segment —
Derivative Accounting —
Reclassification of Realized Gains (Losses) on Derivative and
Hedging Activities
.”)
Ending
Balances
| As of December 31, | ||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
| Ending Balance | Ending Balance | Ending Balance | ||||||||||||||||||||||||||||||||||
|
Total
|
Total
|
Total
|
||||||||||||||||||||||||||||||||||
|
Short
|
Long
|
Managed
|
Short
|
Long
|
Managed
|
Short
|
Long
|
Managed
|
||||||||||||||||||||||||||||
| Term | Term | Basis | Term | Term | Basis | Term | Term | Basis | ||||||||||||||||||||||||||||
|
Unsecured borrowings
|
$ | 5,185 | $ | 22,797 | $ | 27,982 | $ | 6,794 | $ | 31,182 | $ | 37,976 | $ | 8,297 | $ | 36,796 | $ | 45,093 | ||||||||||||||||||
|
Unsecured term bank deposits
|
842 | 4,795 | 5,637 | 1,148 | 1,108 | 2,256 | 254 | — | 254 | |||||||||||||||||||||||||||
|
Indentured trusts (on-balance sheet)
|
64 | 1,533 | 1,597 | 31 | 1,972 | 2,003 | 100 | 2,481 | 2,581 | |||||||||||||||||||||||||||
|
ED Participation Program facility (on-balance
sheet)
(1)
|
9,006 | — | 9,006 | 7,365 | — | 7,365 | — | — | — | |||||||||||||||||||||||||||
|
ED Conduit Program facility (on-balance sheet)
|
14,314 | — | 14,314 | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
ABCP borrowings (on-balance
sheet)
(2)
|
— | 8,801 | 8,801 | 24,768 | — | 24,768 | 25,960 | 67 | 26,027 | |||||||||||||||||||||||||||
|
Securitizations (on-balance sheet)
|
— | 89,200 | 89,200 | — | 80,601 | 80,601 | — | 68,048 | 68,048 | |||||||||||||||||||||||||||
|
Securitizations (off-balance sheet)
|
— | 33,615 | 33,615 | — | 37,159 | 37,159 | — | 42,088 | 42,088 | |||||||||||||||||||||||||||
|
Other
|
1,472 | — | 1,472 | 1,827 | — | 1,827 | 1,342 | — | 1,342 | |||||||||||||||||||||||||||
|
Total
|
$ | 30,883 | $ | 160,741 | $ | 191,624 | $ | 41,933 | $ | 152,022 | $ | 193,955 | $ | 35,953 | $ | 149,480 | $ | 185,433 | ||||||||||||||||||
| (1) | The Company has the option of paying off this amount with cash or by putting the loans to ED as previously discussed. | |
| (2) | Includes $1.9 billion outstanding in the 2008 Asset-Backed Loan Facility at December 31, 2008. There was no outstanding balance at December 31, 2009 or December 31, 2007. |
Average
Balances
| Years Ended December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||
| Balance | Rate | Balance | Rate | Balance | Rate | |||||||||||||||||||
|
Unsecured borrowings
|
$ | 31,863 | 1.93 | % | $ | 39,794 | 3.65 | % | $ | 46,095 | 5.58 | % | ||||||||||||
|
Unsecured term bank deposits
|
4,754 | 3.50 | 854 | 4.07 | 166 | 5.26 | ||||||||||||||||||
|
Indentured trusts (on-balance sheet)
|
1,811 | 1.07 | 2,363 | 3.90 | 2,768 | 4.90 | ||||||||||||||||||
|
ED Participation Program facility (on-balance sheet)
|
14,174 | 1.43 | 1,727 | 3.43 | — | — | ||||||||||||||||||
|
ED Conduit Program facility (on-balance sheet)
|
7,340 | .75 | — | — | — | — | ||||||||||||||||||
|
ABCP borrowings (on-balance
sheet)
(1)
|
16,239 | 2.93 | 24,855 | 5.27 | 13,938 | 5.85 | ||||||||||||||||||
|
Securitizations (on-balance sheet)
|
85,612 | 1.38 | 76,028 | 3.26 | 62,765 | 5.55 | ||||||||||||||||||
|
Securitizations (off-balance sheet)
|
35,377 | .82 | 39,625 | 3.11 | 45,733 | 5.68 | ||||||||||||||||||
|
Other
|
1,391 | .31 | 2,063 | 2.35 | 637 | 4.85 | ||||||||||||||||||
|
Total
|
$ | 198,561 | 1.51 | % | $ | 187,309 | 3.58 | % | $ | 172,102 | 5.60 | % | ||||||||||||
| (1) | Includes the 2008 Asset-Backed Loan Facility. |
101
Unsecured
On-Balance Sheet Financing Activities
The following table presents the senior unsecured credit ratings
assigned by major rating agencies as of February 26, 2010.
| Moody’s | S&P | Fitch | ||||
|
Short-term unsecured debt
|
Not Prime | A-3 | F3 | |||
|
Long-term senior unsecured debt
|
Ba1 | BBB- | BBB- |
The table below presents our unsecured on-balance sheet funding
by funding source for the years ended December 31, 2009 and
2008.
|
Debt Issued
|
||||||||||||||||
|
For The Years
|
Outstanding at
|
|||||||||||||||
| Ended December 31, | December 31, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Retail notes
|
$ | — | $ | — | $ | 3,471 | $ | 3,914 | ||||||||
|
Foreign currency denominated
notes
(1)
|
— | — | 9,230 | 12,127 | ||||||||||||
|
Extendible notes
|
— | — | — | 1,464 | ||||||||||||
|
Global notes (Institutional)
|
— | 2,437 | 14,694 | 19,874 | ||||||||||||
|
Medium-term notes (Institutional)
|
— | — | 587 | 597 | ||||||||||||
|
Total unsecured corporate borrowings
|
— | 2,437 | 27,982 | 37,976 | ||||||||||||
|
Unsecured term bank deposits
|
4,531 | 2,845 | 5,637 | 2,256 | ||||||||||||
|
Total
|
$ | 4,531 | $ | 5,282 | $ | 33,619 | $ | 40,232 | ||||||||
| (1) | All foreign currency denominated notes are hedged using derivatives that exchange the foreign denomination for U.S. dollars. |
102
Securitization
Activities
Securitization
Program
The following table summarizes our securitization activity for
the years ended December 31, 2009, 2008 and 2007. Those
securitizations listed as sales are off-balance sheet
transactions and those listed as financings remain on-balance
sheet.
| Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Loan
|
Loan
|
Loan
|
||||||||||||||||||||||||||||||||||||||||||||||
|
No. of
|
Amount
|
Pre-Tax
|
Gain
|
No. of
|
Amount
|
Pre-Tax
|
Gain
|
No. of
|
Amount
|
Pre-Tax
|
Gain
|
|||||||||||||||||||||||||||||||||||||
| Transactions | Securitized | Gain | % | Transactions | Securitized | Gain | % | Transactions | Securitized | Gain | % | |||||||||||||||||||||||||||||||||||||
|
Securitizations sales:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
FFELP Stafford/PLUS Loans
|
— | $ | — | $ | — | — | % | — | $ | — | $ | — | — | % | — | $ | — | $ | — | — | % | |||||||||||||||||||||||||||
|
FFELP Consolidation Loans
|
— | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
|
Private Education Loans
|
— | — | — | — | — | — | — | — | 1 | 2,001 | 367 | 18.4 | ||||||||||||||||||||||||||||||||||||
|
Total securitizations sales
|
— | — | $ | — | — | % | — | — | $ | — | — | % | 1 | 2,001 | $ | 367 | 18.4 | % | ||||||||||||||||||||||||||||||
|
Securitizations financings:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
FFELP Stafford/PLUS
Loans
(1)
|
— | — | 9 | 18,546 | 3 | 8,955 | ||||||||||||||||||||||||||||||||||||||||||
|
FFELP Consolidation
Loans
(1)(2)
|
3 | 5,339 | — | — | 5 | 14,476 | ||||||||||||||||||||||||||||||||||||||||||
|
Private Education
Loans
(1)
|
5 | 11,122 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
|
Total securitizations financings
|
8 | 16,461 | 9 | 18,546 | 8 | 23,431 | ||||||||||||||||||||||||||||||||||||||||||
|
Total securitizations
|
8 | $ | 16,461 | 9 | $ | 18,546 | 9 | $ | 25,432 | |||||||||||||||||||||||||||||||||||||||
| (1) | In certain securitizations there are terms within the deal structure that result in such securitizations not qualifying for sale treatment and, accordingly, they are accounted for on-balance sheet as VIEs. Terms that prevent sale treatment include: (1) allowing the Company to hold certain rights that can affect the remarketing of certain bonds, (2) allowing the trust to enter into interest rate cap agreements (which do not relate to the reissuance of third-party beneficial interests) after initial settlement of the securitization or (3) allowing the Company to hold an unconditional call option related to a certain percentage of the securitized assets. | |
| (2) | In addition to the transactions listed in the above table, the Company settled on a repackaging trust and issued new asset backed securities in the amount of $1.0 billion. The debt issued is collateralized by reset rate notes totaling $1.2 billion. |
103
Residual
Interest in Securitized Receivables
The following tables summarize the fair value of our Residual
Interests and the assumptions used to value such Residual
Interests, along with the underlying off-balance sheet student
loans that relate to those securitizations in securitization
transactions that were treated as sales as of December 31,
2009 and 2008.
| As of December 31, 2009 | ||||||||||||||||
|
FFELP
|
Consolidation
|
Private
|
||||||||||||||
|
Stafford and
|
Loan
|
Education
|
||||||||||||||
| PLUS | Trusts (1) | Loan Trusts | Total | |||||||||||||
|
Fair value of Residual Interests
|
$ | 243 | $ | 791 | $ | 794 | $ | 1,828 | ||||||||
|
Underlying securitized loan balance
|
5,377 | 14,369 | 12,986 | 32,732 | ||||||||||||
|
Weighted average life
|
3.3 yrs. | 9.0 yrs. | 6.3 yrs | |||||||||||||
|
Prepayment speed (annual
rate)
(2)
|
||||||||||||||||
|
Interim status
|
0 | % | N/A | 0 | % | |||||||||||
|
Repayment status
|
0-14 | % | 2-4 | % | 2-15 | % | ||||||||||
|
Life of loan — repayment status
|
9 | % | 3 | % | 6 | % | ||||||||||
|
Expected remaining credit losses (% of outstanding student loan
principal)
(3)(4)
|
.10 | % | .25 | % | 5.31 | % | ||||||||||
|
Residual cash flows discount rate
|
10.6 | % | 12.3 | % | 27.5 | % | ||||||||||
| As of December 31, 2008 | ||||||||||||||||
|
FFELP
|
Consolidation
|
Private
|
||||||||||||||
|
Stafford and
|
Loan
|
Education
|
||||||||||||||
| PLUS | Trusts (1) | Loan Trusts | Total | |||||||||||||
|
Fair value of Residual Interests
|
$ | 250 | $ | 918 | $ | 1,032 | $ | 2,200 | ||||||||
|
Underlying securitized loan balance
|
7,057 | 15,077 | 13,690 | 35,824 | ||||||||||||
|
Weighted average life
|
3.0 yrs. | 8.1 yrs. | 6.4 yrs. | |||||||||||||
|
Prepayment speed (annual
rate)
(2)
|
||||||||||||||||
|
Interim status
|
0 | % | N/A | 0 | % | |||||||||||
|
Repayment status
|
2-19 | % | 1-6 | % | 2-15 | % | ||||||||||
|
Life of loan — repayment status
|
12 | % | 4 | % | 6 | % | ||||||||||
|
Expected remaining credit losses (% of outstanding student loan
principal)
(3)(4)
|
.11 | % | .23 | % | 5.22 | % | ||||||||||
|
Residual cash flows discount rate
|
13.1 | % | 11.9 | % | 26.3 | % | ||||||||||
| (1) | Includes $569 million and $762 million related to the fair value of the Embedded Floor Income as of December 31, 2009 and 2008, respectively. Changes in the fair value of the Embedded Floor Income are primarily due to changes in the interest rates and the pay down of the underlying loans. | |
| (2) | The Company uses CPR curves for Residual Interest valuations that are based on seasoning (the number of months since entering repayment). Under this methodology, a different CPR is applied to each year of a loan’s seasoning. Repayment status CPR used is based on the number of months since first entering repayment (seasoning). Life of loan CPR is related to repayment status only and does not include the impact of the loan while in interim status. The CPR assumption used for all periods includes the impact of projected defaults. | |
| (3) | Remaining expected credit losses as of the respective balance sheet date. | |
| (4) | For Private Education Loan trusts, estimated defaults from settlement to maturity are 12.2 percent and 9.1 percent at December 31, 2009 and 2008, respectively. These estimated defaults do not include recoveries related to defaults but do include prior purchases of loans at par by the Company when loans reached 180 days delinquency (prior to default) under a contingent call option. Although these loan purchases do not result in a realized loss to the trust, the Company has included them here. Not including these purchases in the disclosure would result in estimated defaults of 9.3 percent and 6.1 percent at December 31, 2009 and 2008, respectively. |
104
Off-Balance
Sheet Net Assets
The following table summarizes our off-balance sheet net assets
at December 31, 2009 and 2008 on a basis equivalent to our
GAAP on-balance sheet trusts, which presents the assets and
liabilities in the off-balance sheet trusts as if they were
being accounted for on-balance sheet rather than off-balance
sheet. This presentation, therefore, includes a theoretical
calculation of the premiums on student loans, the allowance for
loan losses, and the discounts and deferred financing costs on
the debt. However, this presentation does not include any impact
of accounting under ASC 815 or ASC 830 for trust derivatives or
foreign currency denominated debt. This presentation is not, nor
is it intended to be, a liquidation basis of accounting. (See
also “LENDING BUSINESS SEGMENT — Summary of our
Managed Student Loan Portfolio —
Ending Managed
Student Loan Balances, net
” and “LIQUIDITY AND
CAPITAL RESOURCES — Managed Borrowings —
Ending Balances
” earlier in this section.)
|
December 31,
|
December 31,
|
|||||||
| 2009 | 2008 | |||||||
|
Off-Balance Sheet Assets:
|
||||||||
|
Total student loans, net
|
$ | 32,611 | $ | 35,591 | ||||
|
Restricted cash and investments
|
1,055 | 1,557 | ||||||
|
Accrued interest receivable
|
537 | 937 | ||||||
|
Total off-balance sheet assets
|
34,203 | 38,085 | ||||||
|
Off-Balance Sheet Liabilities:
|
||||||||
|
Debt, par value
|
33,583 | 37,228 | ||||||
|
Debt, unamortized discount and deferred issuance costs
|
(77 | ) | (69 | ) | ||||
|
Total debt
|
33,506 | 37,159 | ||||||
|
Accrued interest payable
|
25 | 166 | ||||||
|
Total off-balance sheet liabilities
|
33,531 | 37,325 | ||||||
|
Off-Balance Sheet Net Assets
|
$ | 672 | $ | 760 | ||||
Servicing
and Securitization Revenue
Servicing and securitization revenue, the ongoing revenue from
securitized loan pools accounted for off-balance sheet as QSPEs,
includes the interest earned on the Residual Interest asset and
the revenue we receive for servicing the loans in the
securitization trusts.
105
The following table summarizes the components of servicing and
securitization revenue for the years ended December 31,
2009, 2008 and 2007.
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Servicing revenue
|
$ | 226 | $ | 247 | $ | 285 | ||||||
|
Securitization revenue, before net Embedded Floor Income,
impairment and unrealized fair value adjustment
|
309 | 323 | 419 | |||||||||
|
Servicing and securitization revenue, before net Embedded Floor
Income, impairment and unrealized fair value adjustment
|
535 | 570 | 704 | |||||||||
|
Embedded Floor Income
|
284 | 191 | 20 | |||||||||
|
Less: Floor Income previously recognized in gain calculation
|
(214 | ) | (76 | ) | (9 | ) | ||||||
|
Net Embedded Floor Income
|
70 | 115 | 11 | |||||||||
|
Servicing and securitization revenue, before impairment and
unrealized fair value adjustment
|
605 | 685 | 715 | |||||||||
|
Unrealized fair value adjustment
|
(330 | ) | (425 | ) | (24 | ) | ||||||
|
Gain on consolidation of off-balance sheet trusts
|
20 | 2 | — | |||||||||
|
Retained Interest impairment
|
— | — | (254 | ) | ||||||||
|
Total servicing and securitization revenue
|
$ | 295 | $ | 262 | $ | 437 | ||||||
|
Average off-balance sheet student loans
|
$ | 34,414 | $ | 37,586 | $ | 42,411 | ||||||
|
Average balance of Retained Interest
|
$ | 1,911 | $ | 2,596 | $ | 3,385 | ||||||
|
Servicing and securitization revenue as a percentage of the
average balance of off-balance sheet student loans
|
.86 | % | .70 | % | 1.03 | % | ||||||
Servicing and securitization revenue is primarily driven by the
average balance of off-balance sheet student loans, the amount
of and the difference in the timing of Embedded Floor Income
recognition for off-balance sheet student loans and the
unrealized fair value adjustments.
The Company recorded net unrealized
mark-to-market
losses of $330 million, $425 million and
$24 million in the years ended December 31, 2009, 2008
and 2007, respectively, related to the Residual Interest.
As of December 31, 2009, the Company changed the following
significant assumptions compared to those used as of
December 31, 2008, to determine the fair value of the
Residual Interests:
| • | Prepayment speed assumptions on FFELP Stafford and Consolidation Loans were decreased. This change reflects the significant decrease in prepayment activity experienced since 2008. This decrease in prepayment activity, which the Company expects will continue into the foreseeable future, was primarily due to a reduction in third-party consolidation activity as a result of the CCRAA and the current U.S. economic and credit environment. This resulted in a $61 million unrealized mark-to-market gain. | |
| • | Life of loan default rate assumptions for Private Education Loans were increased from 9.1 percent to 12.2 percent as a result of the continued weakening of the U.S. economy. This resulted in a $426 million unrealized mark-to-market loss. |
As of December 31, 2008, the Company had changed the
following significant assumptions compared to those used as of
December 31, 2007, to determine the fair value of the
Residual Interests:
| • | Prepayment speed assumptions were decreased for all three asset types primarily as a result of a significant reduction in prepayment activity experienced, which is expected to continue into the foreseeable future. The decrease in prepayment speeds was primarily due to a reduction in third-party consolidation activity as a result of the CCRAA (for FFELP only) and the current U.S. economic and credit environment. This resulted in a $114 million unrealized mark-to-market gain. |
106
| • | Life of loan default rate assumptions for Private Education Loans were increased as a result of the continued weakening of the U.S. economy. This resulted in a $79 million unrealized mark-to-market loss. | |
| • | Cost of funds assumptions related to the underlying auction rate securities bonds ($2.3 billion face amount of bonds) within FFELP loan ($1.7 billion face amount of bonds) and Private Education Loan ($0.6 billion face amount of bonds) trusts were increased to take into account the expectations these auction rate securities would continue to reset at higher rates for an extended period of time. This resulted in a $116 million unrealized mark-to-market loss. | |
| • | The discount rate assumption related to the Private Education Loan and FFELP Residual Interests was increased. The Company assessed the appropriateness of the current risk premium, which was added to the risk free rate for the purpose of arriving at a discount rate, in light of the current economic and credit uncertainty that existed in the market as of December 31, 2008. This discount rate was applied to the projected cash flows to arrive at a fair value representative of the then current economic conditions. The Company increased the risk premium by 1,550 basis points and 390 basis points for Private Education and FFELP, respectively, to take into account the then current level of cash flow uncertainty and lack of liquidity that existed with the Residual Interests. This resulted in a $904 million unrealized mark-to-market loss. |
The Company recorded net unrealized
mark-to-market
losses related to the Residual Interests of $425 million
during the year ended December 31, 2008. The
mark-to-market
losses were primarily related to the increase in the discount
rate assumptions discussed above which resulted in a
$904 million
mark-to-market
loss. This was partially offset by an unrealized
mark-to-market
gain of $555 million related to the Floor Income component
of the Residual Interest primarily due to the significant
decrease in interest rates from December 31, 2007 to
December 31, 2008.
The Company recorded impairments to the Retained Interests of
$254 million for the year ended December 31, 2007. The
impairment charges were the result of FFELP loans prepaying
faster than projected through loan consolidations
($110 million), impairment to the Floor Income component of
the Company’s Retained Interest due to increases in
interest rates during the period ($24 million), and
increases in prepayments, defaults, and the discount rate
related to Private Education Loans ($120 million).
CONTRACTUAL
CASH OBLIGATIONS
The following table provides a summary of our obligations
associated with long-term notes at December 31, 2009. For
further discussion of these obligations, see Note 7,
“Borrowings,” to the consolidated financial
statements. The Company has no outstanding equity forward
positions outstanding after the contract settlement on
January 9, 2008. See Note 11, “Stockholders’
Equity,” to the consolidated financial statements.
|
1 Year
|
2 to 3
|
4 to 5
|
Over
|
|||||||||||||||||
| or Less | Years | Years | 5 Years | Total | ||||||||||||||||
|
Long-term notes:
|
||||||||||||||||||||
|
Unsecured borrowings
|
$ | — | $ | 8,569 | $ | 7,936 | $ | 6,292 | $ | 22,797 | ||||||||||
|
Unsecured term bank deposits
|
— | 3,122 | 1,614 | 59 | 4,795 | |||||||||||||||
|
Secured
borrowings
(1)(2)
|
6,883 | 23,706 | 15,202 | 53,743 | 99,534 | |||||||||||||||
|
Total contractual cash
obligations
(3)
|
$ | 6,883 | $ | 35,397 | $ | 24,752 | $ | 60,094 | $ | 127,126 | ||||||||||
| (1) | Includes long-term beneficial interests of $89.2 billion of notes issued by consolidated VIEs in conjunction with our on-balance sheet securitization transactions and included in long-term notes in the consolidated balance sheet. Timing of obligations is estimated based on the Company’s current projection of prepayment speeds of the securitized assets. | |
| (2) | Includes $8.8 billion of 2008 Asset-Backed Financing Facilities. On December 31, 2009, ABCP borrowings were reclassified to long-term as the facility was renegotiated on January 15, 2010, resulting in the maturity date being greater than one year from December 31, 2009. | |
| (3) | Only includes principal obligations and specifically excludes ASC 815 derivative market value adjustments of $3.4 billion for long-term notes. Interest obligations on notes is predominantly variable in nature, resetting quarterly based on 3-month LIBOR. |
107
Unrecognized tax benefits were $101 million and
$81 million for the years ended December 31, 2009 and
2008, respectively. For additional information, see
Note 19, “Income Taxes,” to the consolidated
financial statements.
OFF-BALANCE
SHEET LENDING ARRANGEMENTS
We have issued lending-related financial instruments, including
lines of credit, to meet the financing needs of our
institutional customers. In connection with these agreements,
the Company also enters into a participation agreement with the
institution to participate in the loans as they are originated.
In the event that a line of credit is drawn upon, the loan is
collateralized by underlying student loans and is usually
participated on the same day. The contractual amount of these
financial instruments, $850 million at December 31,
2009, represents the maximum possible credit risk should the
counterparty draw down the commitment, the Company does not
participate in the loan, and the counterparty subsequently fails
to perform according to the terms of our contract. The remaining
total contractual amount available to be borrowed under these
commitments is $850 million. All commitments mature in
2010. We do not believe that these instruments are
representative of our actual future credit exposure. To the
extent that the lines of credit are drawn upon, the balance
outstanding is collateralized by student loans. At
December 31, 2009, there were no outstanding draws on lines
of credit. For additional information, see Note 17,
“Commitments, Contingencies and Guarantees,” to the
consolidated financial statements.
The Company maintains forward contracts to purchase loans from
our lending partners at contractual prices. These contracts
typically have a maximum amount we are committed to buy, but
lack a fixed or determinable amount as it ultimately is based on
the lending partner’s origination activity. FFELP forward
purchase contracts typically contain language relieving us of
most of our responsibilities under the contract due to, among
other things, changes in student loan legislation. These
commitments are not accounted for as derivatives under ASC 815
as they do not meet the definition of a derivative due to the
lack of a fixed and determinable purchase amount. At
December 31, 2009, there were $1.3 billion originated
loans (FFELP and Private Education Loans) in the pipeline that
the Company was committed to purchase.
MANAGEMENT
OF RISKS
Significant risks that affect the Company may be grouped into
the following categories: (1) funding and liquidity;
(2) operations; (3) political/reputation;
(4) market competition; (5) credit and counterparty;
and (6) regulatory and compliance. These risks are
discussed in the “Item 1A. Risk Factors” section
of this document. Management’s strategies for managing
these risks are discussed below.
Risk
Management Processes
Risk management is a shared responsibility throughout the
Company. The Board of Directors and its committees oversee
significant risks and review the Company’s risk management
practices. Executive management is responsible for monitoring
and assessing the Company’s significant risks. Committees
composed of management oversee many of these risks. Also, senior
managers of each business division have direct and primary
responsibility and accountability for managing risks specific to
their operations by identifying and assessing risks,
implementing internal controls and reporting control issues to
the Company’s Risk Assessment Department. The Risk
Assessment Department monitors these efforts, identifies areas
that require increased focus and resources, and reports
significant control issues to executive management and the Audit
Committee of the Board. The Company’s centralized staff
functions, such as accounting, compliance, credit risk, human
resources and legal, further strengthen our risk controls.
At least annually, the Risk Assessment Department performs a
risk assessment to identify the Company’s top risks, which
supports the development of the internal audit plan. The risk
assessment process is based on the risk universe of the Company
and solicits input from over 200 managers in the Company
regarding effectiveness of internal controls, compliance with
laws and regulations and the adequacy of anti-fraud programs,
and is the basis for the Company’s internal audit plan.
Risks are rated on significance and likelihood of occurrence.
Risks with the greatest significance and highest likelihood of
occurrence are prioritized for
108
attention and resources from management and designated for the
appropriate management committee
and/or
committee of the Board for oversight.
Management risk committees and their primary responsibility are
as follows:
Consumer Products and Services Assessment Committee —
reviews new products and services, including operational
implications;
Credit Committee: establishes, approves and enforces credit
lending policies and practices;
Compliance Committee: advises on and reviews regulatory
compliance;
Asset/Liability Committee: manages market, interest rate and
balance sheet risk, and investments;
Disclosure Committee: manages risk of compliance with SEC
disclosure obligations;
Critical Accounting Assumptions Committee: reviews key critical
accounting assumptions, judgments and estimates and manages risk
of compliance with financial reporting requirements;
Information Technology Steering Committee: manages security and
confidentiality of information and effectiveness of IT
infrastructure;
Business Continuity Steering Committee: manages risk of
emergency loss of IT and other infrastructure resources;
Allowance for Loan Loss Steering Committee — approves
the loan loss reserve based upon review of assumptions and
estimates involved in the calculation;
Internal Controls Excellence Steering Committee: monitors
internal controls and compliance with the Sarbanes-Oxley
Act; and
Regulation Dissemination and Implementation Committee:
monitors and disseminates changes in regulations affecting the
business lines and advises on implementation of changes where
applicable.
The formal risk management process represents only one portion
of our overall risk management framework. Our Code of Business
Conduct and the on-going training our employees receive in many
compliance areas provide a framework for employees to conduct
themselves with the highest integrity. We instill a
risk-conscious culture through communications, training,
policies and procedures and organizational roles and
responsibilities. We have strengthened the linkage between the
management performance process and individual compensation to
encourage employees to work toward corporate-wide compliance
goals.
Liquidity
Risk Management
Liquidity is the ongoing ability to accommodate liability
maturities and deposit withdrawals, fund asset growth and
business operations, and meet contractual obligations at
reasonable market rates. Liquidity management involves
forecasting funding requirements and maintaining sufficient
capacity to meet the needs and accommodate fluctuations in asset
and liability levels due to changes in our business operations
or unanticipated events. Sources of liquidity include wholesale
market-based funding, temporary federal government programs and
deposits at Sallie Mae Bank.
The Finance Committee of the Board of Directors is responsible
for approving the Company’s Asset and Liability Management
Policy. The Finance Committee of the Board and, in some cases,
the full Board, monitor the Company’s liquidity on an
ongoing basis. The Corporate Finance Department is responsible
for planning and executing our funding activities and strategy.
In order to ensure adequate liquidity through the full range of
potential operating environments and market conditions, we
conduct our liquidity management and business activities in a
manner that will preserve and enhance funding stability,
flexibility and diversity. Key components of this operating
strategy include maintaining direct relationships with wholesale
market funding providers and maintaining the ability to
liquidate unencumbered assets if necessary. For a further
discussion of our liquidity and capital resources and
109
the sources and uses of liquidity see the “LIQUIDITY AND
CAPITAL RESOURCES” section of this
Form 10-K.
Credit
Risk Management
The Company’s Chief Credit Officer reports, on a regular
basis, to the Board regarding the Company’s asset quality.
In addition, during 2009, the Chief Credit Officer commenced
reporting, on a regular basis, to the Audit Committee of the
Board regarding asset quality.
Private credit is managed within a credit risk infrastructure
which includes (i) a well-defined underwriting and
collection policy framework; (ii) an ongoing monitoring and
review process of portfolio segments and trends;
(iii) assignment and management of credit authorities and
responsibilities; and (iv) establishment of an allowance
that covers estimated losses based upon portfolio and economic
analysis.
Private Education Loans are underwritten and priced according to
the risk profile of the borrower, generally determined by a
custom credit scoring system and the Company’s proprietary
underwriting process. Additionally, for borrowers who do not
meet our lending requirements or who desire more favorable
terms, we generally require credit-worthy cosigners. The Company
bears the full risk of loss of these loans.
Probable losses for Private Education Loans are based upon
statistical analysis of inherent losses over specific periods of
time and are estimated using sophisticated portfolio modeling,
credit scoring and decision support tools to project credit
losses. Potential credit losses are considered in our risk-based
pricing model. The performance of the Private Education Loan
portfolio may be affected by borrowers who fail to complete
their education and by the economy. A prolonged economic
downturn may have an adverse effect on our credit performance.
This is taken into account when establishing allowances to cover
estimated losses.
We have credit risk exposure to the various counterparties with
whom we have entered into derivative contracts. We review the
credit strength of these companies on an ongoing basis. Our
credit policies place limits on the amount of exposure we may
take with any one counterparty and, in most cases, require
collateral to secure the position. The credit risk associated
with derivatives is measured based on the replacement cost
should the counterparties with contracts in a gain position to
the Company fail to perform under the terms of the contract.
Credit risk in our investment portfolio is minimized by only
investing in paper with highly rated issuers. Additionally,
limits per issuer are determined by our internal credit and
investment guidelines to limit our exposure to any one issuer.
We also have credit risk with several higher education
institutions related to academic facilities loans secured by
real estate.
Market
and Interest Rate Risk Management
We measure interest rate risk by calculating the variability of
net interest income in future periods under various interest
rate scenarios using projected balances for interest-earning
assets, interest-bearing liabilities and derivatives used to
hedge interest rate risk. Many assumptions are utilized by
management to calculate the impact that changes in interest
rates may have on net interest income, the more significant of
which are related to student loan volumes and pricing, the
timing of cash flows from our student loan portfolio,
particularly the impact of Floor Income, and the rate of student
loan consolidations, basis risk, credit spreads and the maturity
of our debt and derivatives.
Asset and
Liability Funding Gap
The tables below present our assets and liabilities (funding)
arranged by underlying indices as of December 31, 2009. In
the following GAAP presentation, the funding gap only includes
derivatives that qualify as effective ASC 815 hedges (those
derivatives which are reflected in net interest margin, as
opposed to those reflected in the “gains/(losses) on
derivatives and hedging activities, net” line on the
consolidated statements of income). The difference between the
asset and the funding is the funding gap for the specified
index. This represents our exposure to interest rate risk in the
form of basis risk and repricing risk, which is
110
the risk that the different indices may reset at different
frequencies or may not move in the same direction or at the same
magnitude.
Management analyzes interest rate risk on a Managed Basis, which
consists of both on-balance sheet and off-balance sheet assets
and liabilities and includes all derivatives that are
economically hedging our debt, whether they qualify as effective
hedges under ASC 815 or not. Accordingly, we are also presenting
the asset and liability funding gap on a Managed Basis in the
table that follows the GAAP presentation.
GAAP Basis
|
Frequency of
|
||||||||||||||
|
Index
|
Variable
|
Funding
|
||||||||||||
|
(Dollars in billions)
|
Resets | Assets | Funding (1) | Gap | ||||||||||
|
3-month
Commercial
paper
(2)
|
daily | $ | 112.6 | $ | 9.1 | $ | 103.5 | |||||||
|
3-month
Treasury bill
|
weekly | 6.4 | .1 | 6.3 | ||||||||||
|
Prime
|
annual | .5 | — | .5 | ||||||||||
|
Prime
|
quarterly | 1.3 | — | 1.3 | ||||||||||
|
Prime
|
monthly | 16.9 | — | 16.9 | ||||||||||
|
Prime
|
daily | — | 3.1 | (3.1 | ) | |||||||||
|
PLUS Index
|
annual | .5 | — | .5 | ||||||||||
|
3-month
LIBOR
|
daily | — | — | — | ||||||||||
|
3-month
LIBOR
|
quarterly | — | 103.4 | (103.4 | ) | |||||||||
|
1-month
LIBOR
|
monthly | 5.2 | 5.7 | (.5 | ) | |||||||||
|
CMT/CPI Index
|
monthly/quarterly | — | 2.6 | (2.6 | ) | |||||||||
|
Non-Discrete
reset
(3)
|
monthly | — | 25.3 | (25.3 | ) | |||||||||
|
Non-Discrete
reset
(4)
|
daily/weekly | 13.1 | 1.9 | 11.2 | ||||||||||
|
Fixed
Rate
(5)
|
13.5 | 18.8 | (5.3 | ) | ||||||||||
|
Total
|
$ | 170.0 | $ | 170.0 | $ | — | ||||||||
| (1) | Funding includes all derivatives that qualify as hedges under ASC 815. | |
| (2) | Funding includes $9.0 billion of ED Participation Program facility which resets based on the prior quarter student loan commercial paper index. | |
| (3) | Funding consists of auction rate securities, the 2008 ABCP Facilities and the ED Conduit Program facility. | |
| (4) | Assets include restricted and non-restricted cash equivalents and other overnight type instruments. | |
| (5) | Assets include receivables and other assets (including Retained Interests, goodwill and acquired intangibles). Funding includes other liabilities and stockholders’ equity (excluding Series B Preferred Stock). |
The “Funding Gaps” in the above table are primarily
interest rate mismatches in short-term indices between our
assets and liabilities. We address this issue typically through
the use of basis swaps that typically convert quarterly
three-month LIBOR to other indices that are more correlated to
our asset indices. These basis swaps do not qualify as effective
hedges under ASC 815 and as a result the effect on the funding
index is not included in our interest margin and is therefore
excluded from the GAAP presentation.
111
Managed
Basis
|
Frequency of
|
||||||||||||||
|
Index
|
Variable
|
Funding
|
||||||||||||
|
(Dollars in billions)
|
Resets | Assets | Funding (1) | Gap | ||||||||||
|
3-month
Commercial
paper
(2)
|
daily | $ | 130.6 | $ | 9.1 | $ | 121.5 | |||||||
|
3-month
Treasury bill
|
weekly | 8.6 | 5.9 | 2.7 | ||||||||||
|
Prime
|
annual | .9 | — | .9 | ||||||||||
|
Prime
|
quarterly | 6.0 | 1.5 | 4.5 | ||||||||||
|
Prime
|
monthly | 24.2 | 11.8 | 12.4 | ||||||||||
|
Prime
|
daily | — | 3.1 | (3.1 | ) | |||||||||
|
PLUS Index
|
annual | .5 | .1 | .4 | ||||||||||
|
3-month
LIBOR
(3)
|
daily | — | 82.4 | (82.4 | ) | |||||||||
|
3-month
LIBOR
|
quarterly | — | 21.3 | (21.3 | ) | |||||||||
|
1-month
LIBOR
|
monthly | 5.2 | 13.6 | (8.4 | ) | |||||||||
|
1-month
LIBOR
|
daily | — | 8.0 | (8.0 | ) | |||||||||
|
Non-Discrete
reset
(4)
|
monthly | — | 26.3 | (26.3 | ) | |||||||||
|
Non-Discrete
reset
(5)
|
daily/weekly | 14.2 | 1.5 | 12.7 | ||||||||||
|
Fixed
Rate
(6)
|
10.1 | 15.7 | (5.6 | ) | ||||||||||
|
Total
|
$ | 200.3 | $ | 200.3 | $ | — | ||||||||
| (1) | Funding includes all derivatives that management considers economic hedges of interest rate risk and reflects how we internally manage our interest rate exposure. | |
| (2) | Funding includes $9.0 billion of ED Participation Program facility which resets based on the prior quarter student loan commercial paper index. | |
| (3) | Funding includes $1.4 billion of auction rate securities. | |
| (4) | Funding consists of auction rate securities, the 2008 ABCP Facilities and the ED Conduit Program facility. | |
| (5) | Assets include restricted and non-restricted cash equivalents and other overnight type instruments. | |
| (6) | Assets include receivables and other assets (including Retained Interests, goodwill and acquired intangibles). Funding includes other liabilities and stockholders’ equity (excluding Series B Preferred Stock). |
We use interest rate swaps and other derivatives to achieve our
risk management objectives. To the extent possible, we fund our
assets with debt (in combination with derivatives) that has the
same underlying index (index type and index reset frequency).
When it is more economical, we also fund our assets with debt
that has a different index
and/or
reset
frequency than the asset, but only in instances where we believe
there is a high degree of correlation between the interest rate
movement of the two indices. For example, we use daily reset
three-month LIBOR to fund a large portion of our daily reset
three-month commercial paper indexed assets. In addition, we use
quarterly reset three-month LIBOR to fund a portion of our
quarterly reset Prime rate indexed Private Education Loans. We
also use our monthly Non-Discrete reset and
1-month
LIBOR funding to fund various asset types. In using different
index types and different index reset frequencies to fund our
assets, we are exposed to interest rate risk in the form of
basis risk and repricing risk, which is the risk that the
different indices that may reset at different frequencies will
not move in the same direction or at the same magnitude. While
we believe that this risk is low, as all of these indices are
short-term with rate movements that are highly correlated over a
long period of time, market disruptions can lead to a temporary
divergence between indices as was experienced beginning in the
second half of 2007 through the second quarter of 2009 with the
commercial paper and LIBOR indices. As of December 31,
2009, on a Managed Basis, we have approximately
$107.2 billion of FFELP loans indexed to three-month
commercial paper (“3M CP”) that are funded with debt
indexed to LIBOR. See “LENDING BUSINESS SEGMENT” in
“MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS” for further discussion
of this CP/LIBOR relationship.
112
When compared with the GAAP presentation, the Managed Basis
presentation includes all of our off-balance sheet assets and
funding, and also includes basis swaps that primarily convert
quarterly three-month LIBOR to other indices that are more
correlated to our asset indices.
Weighted
Average Life
The following table reflects the weighted average life for our
Managed earning assets and liabilities at December 31, 2009.
|
December 31,
|
||||||||
| 2009 | ||||||||
|
On-Balance
|
||||||||
|
(Averages in Years)
|
Sheet | Managed | ||||||
|
Earning assets
|
||||||||
|
Student loans
|
7.9 | 7.9 | ||||||
|
Other loans
|
6.4 | 6.4 | ||||||
|
Cash and investments
|
.1 | .1 | ||||||
|
Total earning assets
|
7.3 | 7.3 | ||||||
|
Borrowings
|
||||||||
|
Short-term borrowings
|
.5 | .5 | ||||||
|
Long-term borrowings
|
6.6 | 6.7 | ||||||
|
Total borrowings
|
5.4 | 5.7 | ||||||
Long-term debt issuances likely to be called by us or putable by
the investor have been categorized according to their call or
put dates rather than their maturity dates.
Foreign
Currency Exchange Rate Exposure
Foreign currency exchange rate exposure is primarily the result
of foreign denominated liabilities issued by the Company.
Cross-currency interest rate swaps are used to lock-in the
exchange rate for the term of the liability.
113
COMMON
STOCK
The following table summarizes the Company’s common share
repurchases and issuances for the years ended December 31,
2009, 2008 and 2007. Equity forward activity for the year ended
December 31, 2007 is also reported.
| Years Ended December 31, | ||||||||||||
|
(Shares in millions)
|
2009 | 2008 | 2007 | |||||||||
|
Common shares repurchased:
|
||||||||||||
|
Open market
|
— | — | 1.8 | |||||||||
|
Equity forward contracts
|
— | — | 4.2 | |||||||||
|
Equity forward contracts agreed to be
settled
(1)
|
— | — | 44.0 | |||||||||
|
Benefit
plans
(2)
|
.3 | 1.0 | 3.3 | |||||||||
|
Total shares repurchased
|
.3 | 1.0 | 53.3 | |||||||||
|
Average purchase price per share
|
$ | 20.29 | $ | 24.51 | $ | 44.59 | ||||||
|
Common shares issued
|
17.8 | 1.9 | 109.2 | |||||||||
|
Equity forward contracts:
|
||||||||||||
|
Outstanding at beginning of period
|
— | — | 48.2 | |||||||||
|
New contracts
|
— | — | — | |||||||||
|
Settlements
|
— | — | (4.2 | ) | ||||||||
|
Agreed to be
settled
(1)
|
— | — | (44.0 | ) | ||||||||
|
Outstanding at end of period
|
— | — | — | |||||||||
|
Authority remaining at end of period for repurchases
|
38.8 | 38.8 | 38.8 | |||||||||
| (1) | On December 31, 2007, the Company and Citibank agreed to physically settle the contract as detailed below. Consequently, the common shares outstanding and shareholders’ equity on the Company’s year-end balance sheet reflect the physical settlement of the equity forward contract. As of December 31, 2007, the 44 million shares under this equity forward contract are reflected in treasury stock. | |
| (2) | Shares withheld from stock option exercises and vesting of restricted stock for employees’ tax withholding obligations and shares tendered by employees to satisfy option exercise costs. |
Beginning on November 29, 2007, the Company amended or
closed out certain equity forward contracts. On
December 19, 2007, the Company entered into a series of
transactions with its equity forward counterparties and Citibank
to assign all of its remaining equity forward contracts,
covering 44,039,890 shares, to Citibank. In connection with
the assignment of the equity forward contracts, the Company and
Citibank amended the terms of the equity forward contract to
eliminate all stock price triggers (which had previously allowed
the counterparty to terminate the contracts prior to their
scheduled maturity date) and termination events based on the
Company’s credit ratings. The strike price of the equity
forward contract on December 19, 2007, was $45.25 with a
maturity date of February 22, 2008. The new Citibank equity
forward contract was 100 percent collateralized with cash.
On December 31, 2007, the Company and Citibank agreed to
physically settle the contract and the Company paid Citibank
approximately $1.1 billion, the difference between the
contract purchase price and the previous market closing price on
the 44,039,890 shares. Consequently, the common shares
outstanding and shareholders’ equity on the Company’s
year-end balance sheet reflect the shares issued in the public
offerings and the physical settlement of the equity forward
contract. As of December 31, 2007, the 44 million
shares under this equity forward contract are reflected in
treasury stock. The Company paid Citibank the remaining balance
of approximately $0.9 billion due under the contract on
January 9, 2008. The Company now has no outstanding equity
forward positions.
On December 31, 2007, the Company issued
101,781,170 shares of its common stock at a price of $19.65
per share. Net proceeds from the sale were approximately
$1.9 billion. The Company used approximately
$2.0 billion of the net proceeds from the sale of
Series C Preferred Stock and the sale of its common stock
to
114
settle its outstanding equity forward contract (see
Note 11, “Stockholders’ Equity,” to the
consolidated financial statements for a further discussion). The
remaining proceeds were used for general corporate purposes. The
Company issued 9,781,170 shares of the 102 million
share offering from its treasury stock. These shares were
removed from treasury stock at an average cost of $43.13,
resulting in a $422 million decrease to the balance of
treasury stock with an offsetting $235 million decrease to
retained earnings.
During 2009, the Company converted $339 million of its
Series C Preferred Stock to common stock. As part of this
conversion, the Company delivered to the holders of the
preferred stock: (1) approximately 17 million shares
(the number of common shares they would most likely receive if
the preferred stock they held mandatorily converted to common
shares in the fourth quarter of 2010) plus (2) a
discounted amount of the preferred stock dividends the holders
of the preferred stock would have received if they held the
preferred stock through the mandatory conversion date. The
accounting treatment for this conversion resulted in additional
expense recorded as part of preferred stock dividends for the
year of approximately $53 million.
The closing price of the Company’s common stock on
December 31, 2009 was $11.27.
RECENTLY
ISSUED ACCOUNTING STANDARDS
See Note 2, “Significant Accounting
Policies —
Recently Issued Accounting
Standards
.” to the consolidated financial statements.
115
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Interest
Rate Sensitivity Analysis
The Company’s interest rate risk management seeks to limit
the impact of short-term movements in interest rates on our
results of operations and financial position. The following
tables summarize the effect on earnings for the years ended
December 31, 2009 and 2008 and the effect on fair values at
December 31, 2009 and 2008, based upon a sensitivity
analysis performed by management assuming a hypothetical
increase in market interest rates of 100 basis points and
300 basis points while funding spreads remain constant.
Additionally, as it relates to the effect on earnings, a
sensitivity analysis was performed assuming the funding index
increases 25 basis points while holding the asset index
constant, if the funding index is different than the asset
index. Both of these analyses do not consider any potential
impairment to our Residual Interests that may result from asset
and funding basis divergence or a higher discount rate that
would be used to compute the present value of the cash flows if
long-term interest rates increased. See Note 8,
“Student Loan Securitization,” to the consolidated
financial statements which details the potential decrease to the
fair value of the Residual Interest that could occur under the
referenced interest rate environment.
| Year Ended December 31, 2009 | ||||||||||||||||||||||||
|
Asset
|
||||||||||||||||||||||||
| Interest Rates: |
and Funding
|
|||||||||||||||||||||||
|
Change from
|
Change from
|
Index
|
||||||||||||||||||||||
|
Increase of
|
Increase of
|
Mismatches (1) | ||||||||||||||||||||||
|
100 Basis
|
300 Basis
|
Increase of
|
||||||||||||||||||||||
| Points | Points | 25 Basis Points | ||||||||||||||||||||||
|
(Dollars in millions, except per share amounts)
|
$ | % | $ | % | $ | % | ||||||||||||||||||
|
Effect on Earnings
|
||||||||||||||||||||||||
|
Increase/(decrease) in pre-tax net income before unrealized
gains (losses) on derivative and hedging activities
|
$ | (70 | ) | (7 | )% | $ | (31 | ) | (3 | )% | $ | (321 | ) | (31 | )% | |||||||||
|
Unrealized gains (losses) on derivative and hedging activities
|
108 | 33 | 18 | 5 | 106 | 33 | ||||||||||||||||||
|
Increase in net income before taxes
|
$ | 38 | 5 | % | $ | (13 | ) | (2 | )% | $ | (215 | ) | (30 | )% | ||||||||||
|
Increase in diluted earnings per common share
|
$ | .080 | 21 | % | $ | (.027 | ) | (7 | )% | $ | (.456 | ) | (120 | )% | ||||||||||
| Year Ended December 31, 2008 | ||||||||||||||||||||||||
|
Asset
|
||||||||||||||||||||||||
| Interest Rates: |
and Funding
|
|||||||||||||||||||||||
|
Change from
|
Change from
|
Index
|
||||||||||||||||||||||
|
Increase of
|
Increase of
|
Mismatches (1) | ||||||||||||||||||||||
|
100 Basis
|
300 Basis
|
Increase of
|
||||||||||||||||||||||
| Points | Points | 25 Basis Points | ||||||||||||||||||||||
|
(Dollars in millions, except per share amounts)
|
$ | % | $ | % | $ | % | ||||||||||||||||||
|
Effect on Earnings
|
||||||||||||||||||||||||
|
Increase/(decrease) in pre-tax net income before unrealized
gains (losses) on derivative and hedging activities
|
$ | (6 | ) | (3 | )% | $ | 13 | 7 | % | $ | (297 | ) | (162 | )% | ||||||||||
|
Unrealized gains (losses) on derivative and hedging activities
|
460 | 82 | 956 | 171 | 95 | 17 | ||||||||||||||||||
|
Increase in net income before taxes
|
$ | 454 | 121 | % | $ | 969 | 258 | % | $ | (202 | ) | (54 | )% | |||||||||||
|
Increase in diluted earnings per common share
|
$ | .974 | 141 | % | $ | 2.076 | 301 | % | $ | (.433 | ) | (63 | )% | |||||||||||
| (1) | If an asset is not funded with the same index/frequency reset of the asset then it is assumed the funding index increases 25 basis points while holding the asset index constant. |
116
| At December 31, 2009 | ||||||||||||||||||||
| Interest Rates: | ||||||||||||||||||||
|
Change from
|
Change from
|
|||||||||||||||||||
|
Increase of
|
Increase of
|
|||||||||||||||||||
|
100 Basis
|
300 Basis
|
|||||||||||||||||||
| Points | Points | |||||||||||||||||||
|
(Dollars in millions)
|
Fair Value | $ | % | $ | % | |||||||||||||||
|
Effect on Fair Values
|
||||||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Total FFELP loans
|
$ | 119,747 | $ | (470 | ) | — | % | $ | (979 | ) | (1 | )% | ||||||||
|
Private Education Loans
|
20,278 | — | — | — | — | |||||||||||||||
|
Other earning assets
|
13,472 | (4 | ) | — | (11 | ) | — | |||||||||||||
|
Other assets
|
12,506 | (690 | ) | (6 | ) | (1,266 | ) | (10 | ) | |||||||||||
|
Total assets
|
$ | 166,003 | $ | (1,164 | ) | (1 | )% | $ | (2,256 | ) | (1 | )% | ||||||||
|
Liabilities
|
||||||||||||||||||||
|
Interest bearing liabilities
|
$ | 154,037 | $ | (852 | ) | (1 | )% | $ | (2,159 | ) | (1 | )% | ||||||||
|
Other liabilities
|
3,263 | (21 | ) | (1 | ) | 547 | (17 | ) | ||||||||||||
|
Total liabilities
|
$ | 157,300 | $ | (873 | ) | (1 | )% | $ | (1,612 | ) | (1 | )% | ||||||||
| At December 31, 2008 | ||||||||||||||||||||
| Interest Rates: | ||||||||||||||||||||
|
Change from
|
Change from
|
|||||||||||||||||||
|
Increase of
|
Increase of
|
|||||||||||||||||||
|
100 Basis
|
300 Basis
|
|||||||||||||||||||
| Points | Points | |||||||||||||||||||
|
(Dollars in millions)
|
Fair Value | $ | % | $ | % | |||||||||||||||
|
Effect on Fair Values
|
||||||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Total FFELP loans
|
$ | 107,319 | $ | (758 | ) | (1 | )% | $ | (1,602 | ) | (1 | )% | ||||||||
|
Private Education Loans
|
14,141 | — | — | — | — | |||||||||||||||
|
Other earning assets
|
9,265 | (9 | ) | — | (25 | ) | — | |||||||||||||
|
Other assets
|
14,590 | (848 | ) | (6 | ) | (2,108 | ) | (14 | ) | |||||||||||
|
Total assets
|
$ | 145,315 | $ | (1,615 | ) | (1 | )% | $ | (3,735 | ) | (3 | )% | ||||||||
|
Liabilities
|
||||||||||||||||||||
|
Interest bearing liabilities
|
$ | 135,070 | $ | (837 | ) | (1 | )% | $ | (2,500 | ) | (2 | )% | ||||||||
|
Other liabilities
|
3,604 | (293 | ) | (8 | ) | (273 | ) | (8 | ) | |||||||||||
|
Total liabilities
|
$ | 138,674 | $ | (1,130 | ) | (1 | )% | $ | (2,773 | ) | (2 | )% | ||||||||
A primary objective in our funding is to minimize our
sensitivity to changing interest rates by generally funding our
floating rate student loan portfolio with floating rate debt.
However, as discussed under “LENDING BUSINESS
SEGMENT — Summary of our Managed Student Loan
Portfolio —
Floor
Income
—
Managed Basis
,” we can
have a fixed versus floating mismatch in funding if the student
loan earns at the fixed borrower rate and the funding remains
floating. In addition, we can have a mismatch in the index of
floating rate debt versus floating rate assets.
During the years ended December 31, 2009 and 2008, certain
FFELP loans were earning Floor Income and we locked in a portion
of that Floor Income through the use of interest rate swaps and
Floor Income Contracts. The result of these hedging transactions
was to convert a portion of the fixed rate nature of student
loans to variable rate, and to fix the relative spread between
the student loan asset rate and the variable rate liability.
117
In the preceding tables, under the scenario where interest rates
increase 100 and 300 basis points, the change in pre-tax
net income before the unrealized gains (losses) on derivative
and hedging activities is primarily due to the impact of
(i) our unhedged on-balance sheet loans being in a
fixed-rate mode due to the Embedded Floor Income, while being
funded with variable debt in low interest rate environments; and
(ii) a portion of our variable assets being funded with
fixed debt. Item (i) will generally cause income to
decrease when interest rates increase from a low interest rate
environment, whereas item (ii) will generally offset this
decrease. In the 100 and 300 basis point scenarios for the
year ended December 31, 2009, the decrease in income
resulted from item (i) above due to the impact of the low
interest rate environment on Floor Income. This was offset by
item (ii) above, which had a greater impact in the
300 basis point scenario. In the year ended
December 31, 2008, item (i) above was partially offset
by item (ii), resulting in a decrease to pretax income in
the 100 basis point scenario. In the 300 basis point
scenario, item (ii) more than offset item
(i), resulting in an increase to pre-tax income.
Under the scenario in the tables above labeled “Asset and
Funding Index Mismatches,” the main driver of the decrease
in pre-tax income before unrealized gains (losses) on derivative
and hedging activities is the result of LIBOR-based debt funding
commercial paper-indexed assets. See “LIQUIDITY AND CAPITAL
RESOURCES — Interest Rate Risk Management
— Asset and Liability Funding Gap
” for a
further discussion. Increasing the spread between indices will
also impact the unrealized gains (losses) on derivatives and
hedging activities as it relates to basis swaps. Basis swaps
used to convert LIBOR-based debt to indices that we believe are
economic hedges of the indices of the assets being funded
resulted in an unrealized loss of $(102) million for both
years ended December 31, 2009 and 2008. Offsetting this
unrealized loss are basis swaps that economically hedge our
off-balance sheet Private Education Loan securitization trusts.
Unrealized gains for these basis swaps totaled $208 million
for the year ended December 31, 2009, and $197 million
for the year ended December 31, 2008. The net impact of
both of these items was an unrealized gain for all periods
presented.
In addition to interest rate risk addressed in the preceding
tables, the Company is also exposed to risks related to foreign
currency exchange rates. Foreign currency exchange risk is
primarily the result of foreign currency denominated debt issued
by the Company. As it relates to the Company’s corporate
unsecured and securitization debt programs used to fund the
Company’s business, the Company’s policy is to use
cross currency interest rate swaps to swap all foreign currency
denominated debt payments (fixed and floating) to
U.S. dollar LIBOR using a fixed exchange rate. In the
tables above, there would be an immaterial impact on earnings if
exchange rates were to decrease or increase, due to the terms of
the hedging instrument and hedged items matching. The balance
sheet interest bearing liabilities would be affected by a change
in exchange rates; however, the change would be materially
offset by the cross currency interest rate swaps in other assets
or other liabilities. In the current economic environment,
volatility in the spread between spot and forward foreign
exchange rates has resulted in material
mark-to-market
impacts to current-period earnings which have not been factored
into the above analysis. The earnings impact is noncash, and at
maturity of the instruments the cumulative
mark-to-market
impact will be zero.
| Item 8. | Financial Statements and Supplementary Data |
Reference is made to the financial statements listed under the
heading “(a) 1.A. Financial Statements” of
Item 15 hereof, which financial statements are incorporated
by reference in response to this Item 8.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Nothing to report.
| Item 9A. | Controls and Procedures |
Disclosure
Controls and Procedures
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)) as of December 31,
118
2009. Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that, as of December 31,
2009, our disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is
(a) recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms and
(b) accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer as appropriate to allow timely decisions regarding
required disclosure.
Changes
in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as
defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934, as amended) occurred
during the fiscal quarter ended December 31, 2009 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
| Item 9B. | Other Information |
Nothing to report.
119
| Item 10. | Directors, Executive Officers and Corporate Guidance |
The information regarding directors and executive officers set
forth under the captions “Proposal 1: Election of
Directors” and “Executive Officers” in the Proxy
Statement to be filed on schedule 14A relating to the
Company’s Annual Meeting of Stockholders scheduled to be
held on May 13, 2010 (the “2010 Proxy Statement”)
is incorporated by reference in this section.
The information regarding reports filed under Section 16 of
the Securities and Exchange Act of 1934 set forth under the
caption “Section 16(a) Beneficial Ownership Reporting
Compliance” of our 2010 Proxy Statement is incorporated by
reference in this section.
The information regarding the Company’s Code of Business
Conduct set forth under the caption “Code of Business
Conduct” of our 2010 Proxy Statement is incorporated by
reference in this section.
The information regarding the Company’s process regarding
nominees to the board of directors and the identification of the
“audit committee financial experts” set forth under
the caption “Corporate Governance” of our 2010 Proxy
Statement is incorporated by reference in this section.
| Item 11. | Executive Compensation |
The information set forth under the caption “Executive and
Director Compensation” in the 2010 Proxy Statement is
incorporated by reference in this section.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information set forth under the captions “Stock
Ownership,” “General Information — Principal
Shareholders” and “Equity Compensation Plan
Information” in the 2010 Proxy Statement is incorporated by
reference in this section. There are no arrangements known to
the Company, the operation of which may at a subsequent date
result in a change in control of the Company.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information set forth under the caption “Related
Persons Transactions” and, regarding director independence
under the caption “Corporate Governance” in the 2010
Proxy Statement is incorporated by reference in this section.
| Item 14. | Principal Accounting Fees and Services |
The information set forth under the caption “Ratification
of the Appointment of Independent Registered Public Accounting
Firm” in the Proxy Statement is incorporated by reference
in this section.
120
| Item 15. | Exhibits, Financial Statement Schedules |
| (a) | 1. Financial Statements |
A. The following consolidated financial statements of SLM
Corporation and the Report of the Independent Registered Public
Accounting Firm thereon are included in Item 8 above:
|
Management’s Annual Report on Internal Control over
Financial Reporting
|
F-2 | |||
|
Report of Independent Registered Public Accounting Firm
|
F-3 | |||
|
Consolidated Balance Sheets as of December 31, 2009 and 2008
|
F-4 | |||
|
Consolidated Statements of Income for the years ended
December 31, 2009, 2008 and 2007
|
F-5 | |||
|
Consolidated Statements of Changes in Stockholders’ Equity
for the years ended December 31, 2009, 2008 and 2007
|
F-6 | |||
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2009, 2008 and 2007
|
F-9 | |||
|
Notes to Consolidated Financial Statements
|
F-10 |
| 2. | Financial Statement Schedules |
All schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial
statements or notes thereto.
| 3. | Exhibits |
The exhibits listed in the accompanying index to exhibits are
filed or incorporated by reference as part of this Annual Report.
The Company will furnish at cost a copy of any exhibit filed
with or incorporated by reference into this Annual Report. Oral
or written requests for copies of any exhibits should be
directed to the Corporate Secretary.
| 4. | Appendices |
Appendix A — Federal Family Education Loan Program
| (b) | Exhibits |
| 10 | .1 | Amended and Restated Certificate of Incorporation of the “Company,” incorporated by reference to Exhibit 4.1 of the Company’s Form S-8 filed on May 22, 2009. | ||
| 10 | .2 | Amended By-Laws of the Company incorporated by reference to Exhibit 3.1(ii) of the Company’s Current Report on Form 8-K filed on August 6, 2008. | ||
| 10 | .3 | Board of Directors Stock Option Plan (Incorporated by reference to the “Company” Definitive Proxy Statement on Schedule 14A, as filed with the Securities and Exchange Commission on April 10, 1998.† | ||
| 10 | .4 | SLM Holding Corporation Management Incentive Plan, incorporated by reference to Exhibit B of the Company’s Definitive Proxy Statement on Schedule 14A, as filed on April 10, 1998.† | ||
| 10 | .5 | Stock Option Agreement, SLM Corporation Incentive Plan, ISO, Price-Vested with Replacements 2004, incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed on November 9, 2004.† | ||
| 10 | .6 | Stock Option Agreement, SLM Corporation Incentive Plan, Non-Qualified, Price-Vested Options-2004, incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q filed on November 9, 2004.† | ||
| 10 | .7 | Terms of Performance Stock Grant, incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q filed on November 9, 2004. |
121
| 10 | .8 | Amended and Restated SLM Corporation Incentive Plan, incorporated by reference to Exhibit 10.24 of the Company’s Current Report on Form 8-K filed on May 25, 2005.† | ||
| 10 | .9 | Director’s Stock Plan, incorporated by reference to Exhibit 10.25 of the Company’s Current Report on Form 8-K filed on May 25, 2005.† | ||
| 10 | .10 | SLM Corporation Incentive Plan Performance Stock Term Sheet “Core” Net Income Target, incorporated by reference to Exhibit 10.25 of the Company’s Annual Report on Form 10-K filed on March 9, 2006.† | ||
| 10 | .11 | Stock Option Agreement SLM Corporation incentive Plan Net-Settled, Price-Vested Options — 1 year minimum — 2006, incorporated by reference to Exhibit 10.25 of the Company’s Annual Report on Form 10-K filed on March 9, 2006.† | ||
| 10 | .12 | SLM Corporation Change in Control Severance Plan for Senior Officers, incorporated by reference to Exhibit 10.27 of the Company’s Annual Report on Form 10-K filed on March 9, 2006.† | ||
| 10 | .13 | Retainer Agreement between Anthony P. Terracciano and the Company, incorporated by reference to Exhibit 10.30 of the Company’s Quarterly Report on Form 10-Q filed on May 9, 2008.† | ||
| 10 | .14 | Employment Agreement between Albert L. Lord and the Company, incorporated by reference to Exhibit 10.31 of the Company’s Quarterly Report on Form 10-Q filed on May 9, 2008.† | ||
| 10 | .15 | Note of Purchase and Security Agreement between Phoenix Funding I, Sallie Mae, Bank of NY Trust Company, Deutsche Bank Trust Company Americas, UBS Real Estate Securities, UBS Securities LLC, incorporated by reference to Exhibit 10.31 of the Company’s Quarterly Report on Form 10-Q filed on May 9, 2008. | ||
| 10 | .16 | Note of Purchase and Security Agreement between Rendezvous Funding I, Bank of America, JPMorgan Chase, Bank of America Securities LLC, JP Morgan Securities, Barclays Bank PLC, Royal Bank of Scotland, Deutsche Bank Securities, Credit Suisse, Bank of NY Trust Co., Sallie Mae, incorporated by reference to Exhibit 10.31 of the Company’s Quarterly Report on Form 10-Q filed on May 9, 2008. | ||
| 10 | .17 | Note of Purchase and Security Agreement between Bluemont Funding I, Bank of America, JPMorgan Chase, Bank of America Securities LLC, JP. Morgan Securities, Barclays Bank PLC, Royal Bank of Scotland, Deutsche Bank Securities, Credit Suisse, Bank of NY Trust Co., Sallie Mae, incorporated by reference to Exhibit 10.31 of the Company’s Quarterly Report on Form 10-Q filed on May 9, 2008. | ||
| 10 | .18 | Employment Agreement between John F. Remondi and the Company, incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed on August 6, 2008.† | ||
| 10 | .19 | Sallie Mae Deferred Compensation Plan for Key Employees Restatement Effective January 1, 2009, filed with this Form 10-K.† | ||
| 10 | .20 | Sallie Mae Supplemental 401(k) Savings Plan, filed with this Form 10-K,† | ||
| 10 | .21 | Sallie Mae Supplemental Cash Account Retirement Plan, filed with this Form 10-K.† | ||
| 10 | .22 | Amendment to the Note of Purchase and Security Agreement between Phoenix Funding I, Sallie Mae, Bank of NY Trust Company, Deutsche Bank Trust Company Americas, UBS Real Estate Securities, UBS Securities LLC, incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on May 9, 2008. | ||
| 10 | .23 | Amendment to the “Note of Purchase and Security Agreement between Rendezvous Funding I, Bank of America, JPMorgan Chase, Bank of America Securities LLC, JF Morgan Securities, Barclays Bank PLC, Royal Bank of Scotland, Deutsche Bank Securities, Credit Suisse, Bank of NY Trust Co., Sallie Mae, incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on May 9, 2008. | ||
| 10 | .24 | Amendment to the Note of Purchase and Security Agreement between Bluemont Funding I, Bank of America, JPMorgan Chase, Bank of America Securities LLC, JP Morgan Securities, Barclays Bank PLC, Royal Bank of Scotland, Deutsche Bank Securities, Credit Suisse, Bank of NY Trust Co., Sallie Mae, incorporated by reference to the Company’s Quarterly Report on Form 10-Q filed on May 9, 2008. | ||
| 10 | .25 | Amendment to Schedule of Contracts Substantially Identical to Exhibit 10.34 of the Company’s Quarterly Report on Form 10-Q filed on May 9, 2008. |
122
| 10 | .26 | SLM Corporation Incentive Stock Plan Stock Option Agreement, Net-Settled, Performance Vested Options, 2009, filed with this Form 10-K.† | ||
| 10 | .27 | SLM Corporation Incentive Plan Performance Stock Term Sheet, “Core Earnings” Net Income Target-Sustained Performance, 2009, filed with this Form 10-K.† | ||
| 10 | .28 | SLM Corporation Directors Equity Plan, incorporated by reference to Exhibit 10.1 of the Company’s Form S-8 filed on May 22, 2009.† | ||
| 10 | .29 | SLM Corporation 2009-2012 Incentive Plan, incorporated by reference to Exhibit 10.2 of the Company’s Form S-8 filed on May 22, 2009.† | ||
| 10 | .30 | Confidential Agreement and Release of C.E. Andrews, incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed on August 5, 2009.† | ||
| 10 | .31 | Confidential Agreement and Release of Robert Autor, incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed on August 5, 2009.† | ||
| 10 | .32 | Amended and Restated Note Purchase and Security Agreement: Bluemont Funding I; the Conduit Lenders; the Alternate Lenders; the LIBOR lenders; the Managing Agents; Bank of America, N.A.; JPMorgan Chase Bank, N.A.; Banc of America Securities LLC; J.P. Morgan Securities Inc.; The Bank of New York Mellon Trust Company, National Association; and Sallie Mae, Inc., incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q filed on August 5,2009. | ||
| 10 | .33 | Schedule of Contracts Substantially Identical to Exhibit 10.3 in all Material Respects:. Town Center Funding I LLC and: Town Hall Funding I LLC, incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q filed on August 5, 2009. | ||
| 10 | .34 | SLM Corporation Directors Equity Plan, Non-Employee Director Restricted Stock Agreement 2009, incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q filed on November 4, 2009.† | ||
| 10 | .35 | SLM Corporation Directors Equity Plan, Non-Employee Director Stock Option Agreement 2009, incorporated by reference to Exhibit 10.6 of the Company’s Quarterly Report on Form 10-Q filed on November 4, 2009.† | ||
| 10 | .36 | Confidential Agreement and Release of Barry Feierstein, filed with this Form 10-K.† | ||
| 10 | .37 | Amendment to Retainer Agreement Anthony Terracciano and SLM Corporation, dated December 24, 2009, filed with this Form 10-K.† | ||
| 10 | .38 | Affiliate Collateral Pledge and Security Agreement between SLM Education Credit Finance Corporation, HICA Education Loan Corporation and the Federal Home Loan Bank of Des Moines, dated January 15, 2010, filed with this Form 10-K. | ||
| 10 | .39 | Advances, Pledge and Security Agreement between HICA Education Loan Corporation and the Federal Home Loan Bank of Des Moines, dated January 15, 2010, filed with this Form 10-K. | ||
| 10 | .40 | Note Purchase and Security Agreement between Bluemont Funding 1; the Conduit Lenders; the Alternate Lenders; the LIBOR lenders; the Managing Agents; Bank of America, N.A.; JPMorgan Chase Bank, N.A.; Banc of America Securities LLC; J.P. Morgan Securities Inc.; The Bank of New York Mellon Trust Company, “National Association; and Sallie Mae, Inc., dated January 15, 2010, filed with this Form 10-K. | ||
| 10 | .41 | Schedule of Contracts Substantially Identical to Exhibit 10,40 in all Material Respects: between Town Center Funding 1 LLC and Town Hall Funding I LLC, dated January 15, 2010, filed with this Form 10-K. | ||
| 10 | .42 | Executive Severance Plan for Senior Officers, finalized February 2010, filed with this Form 10-K.† | ||
| 14 | Code of Business Conduct (filed with-the Securities and Exchange Commission with the “Company” Annual Report on Form 10-K for the year ended December 31, 2003). | |||
| 21 | .1 | List of Subsidiaries, filed with this Form 10-K. | ||
| 23 | Consent of PricewaterhouseCoopers LLP (Filed with the Securities and Exchange Commission with this Form 10-K). | |||
| 31 | .1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2003 (Filed with the Securities and Exchange Commission with this Form 10-K). | ||
| 31 | .2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2003 (Filed with the Securities and Exchange Commission with this Form 10-K). |
123
| 32 | .1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2003 (Filed with the Securities and Exchange Commission with this Form 10-K). | ||
| 32 | .2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2003 (Filed with the Securities and Exchange Commission with this Form 10-K). |
† Management Contract or Compensatory Plan or
Arrangement
124
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: February 26, 2010
SLM CORPORATION
| By: |
/s/
Albert
L. Lord
|
Albert L. Lord
Vice Chairman and Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of
1934, as amended, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||||
|
/s/
Albert
L. Lord
|
Vice Chairman and Chief Executive Officer (Principal Executive Officer) | February 26, 2010 | ||||
|
/s/
John
F. Remondi
|
Vice Chairman and Chief Financial Officer (Principal Financial and Accounting Officer) | February 26, 2010 | ||||
|
/s/
Anthony
P. Terracciano
|
Chairman of the Board of Directors | February 26, 2010 | ||||
|
/s/
Ann
Torre Bates
|
Director | February 26, 2010 | ||||
|
/s/
William
M. Diefenderfer, III
|
Director | February 26, 2010 | ||||
|
/s/
Diane
Suitt Gilleland
|
Director | February 26, 2010 | ||||
|
/s/
Earl
A. Goode
|
Director | February 26, 2010 | ||||
|
/s/
Ronald
F. Hunt
|
Director | February 26, 2010 | ||||
|
/s/
Michael
E. Martin
|
Director | February 26, 2010 | ||||
|
/s/
Barry
A. Munitz
|
Director | February 26, 2010 | ||||
125
|
Signature
|
Title
|
Date
|
||||
|
/s/
Howard
H. Newman
|
Director | February 26, 2010 | ||||
|
/s/
A.
Alexander Porter, Jr.
|
Director | February 26, 2010 | ||||
|
/s/
Frank
C. Puleo
|
Director | February 26, 2010 | ||||
|
/s/
Wolfgang
Schoellkopf
|
Director | February 26, 2010 | ||||
|
/s/
Steven
L. Shapiro
|
Director | February 26, 2010 | ||||
|
/s/
J.
Terry Strange
|
Director | February 26, 2010 | ||||
|
/s/
Barry
L. Williams
|
Director | February 26, 2010 | ||||
126
CONSOLIDATED
FINANCIAL STATEMENTS
INDEX
INDEX
| Page | ||||
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| F-9 | ||||
| F-10 | ||||
F-1
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended). Under
the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, we assessed the effectiveness of our internal control
over financial reporting as of December 31, 2009. In making
this assessment, our management used the criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). Management also used an IT
governance framework that is based on the COSO framework,
Control Objectives for Information and related
Technology
, which was issued by the Information Systems
Audit and Control Association and the IT Governance Institute.
Based on our assessment and those criteria, management concluded
that, as of December 31, 2009, our internal control over
financial reporting is effective.
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, audited the effectiveness of the Company’s
internal control over financial reporting as of
December 31, 2009, as stated in their report which appears
below.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
F-2
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of SLM Corporation:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of SLM Corporation and its subsidiaries
at December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2009, based on criteria
established in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial
statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Management’s Annual Report on Internal Control
over Financial Reporting. Our responsibility is to express
opinions on these financial statements and on the Company’s
internal control over financial reporting based on our
integrated audits. We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial
statements, the Company changed the manner in which it accounts
for retained interests in 2008.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
PricewaterhouseCoopers LLP
McLean, VA
February 26, 2010
F-3
SLM
CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands, except per share amounts)
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands, except per share amounts)
|
December 31,
|
December 31,
|
|||||||
| 2009 | 2008 | |||||||
|
Assets
|
||||||||
|
FFELP Stafford and Other Student Loans (net of allowance for
losses of $104,219 and $90,906, respectively)
|
$ | 42,978,874 | $ | 44,025,361 | ||||
|
FFELP Stafford Loans
Held-for-Sale
|
9,695,714 | 8,450,976 | ||||||
|
FFELP Consolidation Loans (net of allowance for losses of
$56,949 and $46,637, respectively)
|
68,378,560 | 71,743,435 | ||||||
|
Private Education Loans (net of allowance for losses of
$1,443,440 and $1,308,043, respectively)
|
22,753,462 | 20,582,298 | ||||||
|
Other loans (net of allowance for losses of $73,985 and $58,395,
respectively)
|
420,233 | 729,380 | ||||||
|
Investments
|
||||||||
|
Available-for-sale
|
1,273,275 | 861,008 | ||||||
|
Other
|
740,553 | 180,397 | ||||||
|
Total investments
|
2,013,828 | 1,041,405 | ||||||
|
Cash and cash equivalents
|
6,070,013 | 4,070,002 | ||||||
|
Restricted cash and investments
|
5,168,871 | 3,535,286 | ||||||
|
Retained Interest in off-balance sheet securitized loans
|
1,828,075 | 2,200,298 | ||||||
|
Goodwill and acquired intangible assets, net
|
1,177,310 | 1,249,219 | ||||||
|
Other assets
|
9,500,358 | 11,140,777 | ||||||
|
Total assets
|
$ | 169,985,298 | $ | 168,768,437 | ||||
|
Liabilities
|
||||||||
|
Short-term borrowings
|
$ | 30,896,811 | $ | 41,933,043 | ||||
|
Long-term borrowings
|
130,546,272 | 118,224,794 | ||||||
|
Other liabilities
|
3,263,593 | 3,604,260 | ||||||
|
Total liabilities
|
164,706,676 | 163,762,097 | ||||||
|
Commitments and contingencies
|
||||||||
|
Equity
|
||||||||
|
Preferred stock, par value $.20 per share, 20,000 shares
authorized
|
||||||||
|
Series A: 3,300 and 3,300 shares issued, respectively,
at stated value of $50 per share
|
165,000 | 165,000 | ||||||
|
Series B: 4,000 and 4,000 shares issued, respectively,
at stated value of $100 per share
|
400,000 | 400,000 | ||||||
|
Series C, 7.25% mandatory convertible preferred stock; 810
and 1,150 shares, respectively, issued at liquidation
preference of $1,000 per share
|
810,370 | 1,149,770 | ||||||
|
Common stock, par value $.20 per share, 1,125,000 shares
authorized: 552,220 and 534,411 shares issued, respectively
|
110,444 | 106,883 | ||||||
|
Additional paid-in capital
|
5,090,891 | 4,684,112 | ||||||
|
Accumulated other comprehensive loss (net of tax benefit of
$23,448 and $43,202, respectively)
|
(40,825 | ) | (76,476 | ) | ||||
|
Retained earnings
|
604,467 | 426,175 | ||||||
|
Total SLM Corporation stockholders’ equity before treasury
stock
|
7,140,347 | 6,855,464 | ||||||
|
Common stock held in treasury at cost: 67,222 and
66,958 shares, respectively
|
1,861,738 | 1,856,394 | ||||||
|
Total SLM Corporation stockholders’ equity
|
5,278,609 | 4,999,070 | ||||||
|
Noncontrolling interest
|
13 | 7,270 | ||||||
|
Total equity
|
5,278,622 | 5,006,340 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 169,985,298 | $ | 168,768,437 | ||||
See accompanying notes to consolidated financial statements.
F-4
SLM
CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Interest income:
|
||||||||||||
|
FFELP Stafford and Other Student Loans
|
$ | 1,211,587 | $ | 1,994,394 | $ | 2,060,993 | ||||||
|
FFELP Consolidation Loans
|
1,882,195 | 3,178,692 | 4,343,138 | |||||||||
|
Private Education Loans
|
1,582,514 | 1,737,554 | 1,456,471 | |||||||||
|
Other loans
|
56,005 | 82,734 | 105,843 | |||||||||
|
Cash and investments
|
26,064 | 276,264 | 707,577 | |||||||||
|
Total interest income
|
4,758,365 | 7,269,638 | 8,674,022 | |||||||||
|
Total interest expense
|
3,035,639 | 5,905,418 | 7,085,772 | |||||||||
|
Net interest income
|
1,722,726 | 1,364,220 | 1,588,250 | |||||||||
|
Less: provisions for loan losses
|
1,118,960 | 719,650 | 1,015,308 | |||||||||
|
Net interest income after provisions for loan losses
|
603,766 | 644,570 | 572,942 | |||||||||
|
Other income (loss):
|
||||||||||||
|
Gains on student loan securitizations
|
— | — | 367,300 | |||||||||
|
Servicing and securitization revenue
|
295,297 | 261,819 | 437,097 | |||||||||
|
Gains (losses) on sales of loans and securities, net
|
283,836 | (186,155 | ) | (95,492 | ) | |||||||
|
Gains (losses) on derivative and hedging activities, net
|
(604,535 | ) | (445,413 | ) | (1,360,584 | ) | ||||||
|
Contingency fee revenue
|
295,883 | 340,140 | 335,737 | |||||||||
|
Collections revenue
|
51,152 | 127,823 | 219,683 | |||||||||
|
Guarantor servicing fees
|
135,562 | 121,363 | 156,429 | |||||||||
|
Other
|
929,151 | 392,076 | 385,303 | |||||||||
|
Total other income
|
1,386,346 | 611,653 | 445,473 | |||||||||
|
Expenses:
|
||||||||||||
|
Salaries and benefits
|
549,137 | 602,868 | 728,095 | |||||||||
|
Other operating expenses
|
706,169 | 712,083 | 759,895 | |||||||||
|
Restructuring expenses
|
13,767 | 83,516 | 22,505 | |||||||||
|
Total expenses
|
1,269,073 | 1,398,467 | 1,510,495 | |||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
721,039 | (142,244 | ) | (492,080 | ) | |||||||
|
Income tax expense (benefit)
|
238,364 | (76,769 | ) | 408,275 | ||||||||
|
Net income (loss) from continuing operations
|
482,675 | (65,475 | ) | (900,355 | ) | |||||||
|
Income (loss) from discontinued operations, net of tax benefit
|
(157,690 | ) | (143,219 | ) | 6,276 | |||||||
|
Net income (loss)
|
324,985 | (208,694 | ) | (894,079 | ) | |||||||
|
Less: net income attributable to noncontrolling interest
|
847 | 3,932 | 2,315 | |||||||||
|
Net income (loss) attributable to SLM Corporation
|
324,138 | (212,626 | ) | (896,394 | ) | |||||||
|
Preferred stock dividends
|
145,836 | 111,206 | 37,145 | |||||||||
|
Net income (loss) attributable to SLM Corporation common stock
|
$ | 178,302 | $ | (323,832 | ) | $ | (933,539 | ) | ||||
|
Net income (loss) attributable to SLM Corporation:
|
||||||||||||
|
Continuing operations, net of tax
|
$ | 481,828 | $ | (69,407 | ) | $ | (902,670 | ) | ||||
|
Discontinued operations, net of tax
|
(157,690 | ) | (143,219 | ) | 6,276 | |||||||
|
Net income (loss) attributable to SLM Corporation
|
$ | 324,138 | $ | (212,626 | ) | $ | (896,394 | ) | ||||
|
Basic earnings (loss) per common share attributable to SLM
Corporation common shareholders:
|
||||||||||||
|
Continuing operations
|
$ | .71 | $ | (.39 | ) | $ | (2.28 | ) | ||||
|
Discontinued operations
|
$ | (.33 | ) | $ | (.30 | ) | $ | .02 | ||||
|
Total
|
$ | .38 | $ | (.69 | ) | $ | (2.26 | ) | ||||
|
Average common shares outstanding
|
470,858 | 466,642 | 412,233 | |||||||||
|
Diluted earnings (loss) per common share attributable to SLM
Corporation common shareholders:
|
||||||||||||
|
Continuing operations
|
$ | .71 | $ | (.39 | ) | $ | (2.28 | ) | ||||
|
Discontinued operations
|
$ | (.33 | ) | $ | (.30 | ) | $ | .02 | ||||
|
Total
|
$ | .38 | $ | (.69 | ) | $ | (2.26 | ) | ||||
|
Average common and common equivalent shares outstanding
|
471,584 | 466,642 | 412,233 | |||||||||
|
Dividends per common share attributable to SLM Corporation
common shareholders
|
$ | — | $ | — | $ | .25 | ||||||
See accompanying notes to consolidated financial statements.
F-5
SLM
CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share and per share amounts)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share and per share amounts)
|
Accumulated
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred
|
Additional
|
Other
|
Total
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
Stock
|
Common Stock Shares |
Preferred
|
Common
|
Paid-In
|
Comprehensive
|
Retained
|
Treasury
|
Stockholders’
|
Noncontrolling
|
Total
|
||||||||||||||||||||||||||||||||||||||||||
| Shares | Issued | Treasury | Outstanding | Stock | Stock | Capital | Income (Loss) | Earnings | Stock | Equity | Interest | Equity | ||||||||||||||||||||||||||||||||||||||||
|
Balance at December 31, 2006
|
7,300,000 | 433,112,982 | (22,496,170 | ) | 410,616,812 | $565,000 | $ | 86,623 | $ | 2,565,211 | $ | 349,111 | $ | 1,834,718 | $ | (1,040,621 | ) | $ | 4,360,042 | $ | 9,115 | $ | 4,369,157 | |||||||||||||||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net income (loss)
|
(896,394 | ) | (896,394 | ) | 2,315 | (894,079 | ) | |||||||||||||||||||||||||||||||||||||||||||||
|
Other comprehensive income, net of tax:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Change in unrealized gains (losses) on investments, net of tax
|
(101,591 | ) | (101,591 | ) | (101,591 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Change in unrealized gains (losses) on derivatives, net of tax
|
(15,004 | ) | (15,004 | ) | (15,004 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Defined benefit pension plans adjustment
|
3,848 | 3,848 | 3,848 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Comprehensive income
|
(1,009,141 | ) | 2,315 | (1,006,826 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
|
Cash dividends:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Common stock ($.25 per share)
|
(102,658 | ) | (102,658 | ) | (102,658 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, Series A ($3.49 per share)
|
(11,500 | ) | (11,500 | ) | (11,500 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, Series B ($6.25 per share)
|
(24,796 | ) | (24,796 | ) | (24,796 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, Series C ($.20 per share)
|
(201 | ) | (201 | ) | (201 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Restricted stock dividend
|
(8 | ) | (8 | ) | (8 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Issuance of common shares
|
99,380,099 | 9,816,534 | 109,196,633 | 19,876 | 1,940,708 | (235,548 | ) | 423,446 | 2,148,482 | 2,148,482 | ||||||||||||||||||||||||||||||||||||||||||
|
Issuance of preferred shares
|
1,000,000 | 1,000,000 | (30,678 | ) | (648 | ) | 968,674 | 968,674 | ||||||||||||||||||||||||||||||||||||||||||||
|
Tax benefit related to employee stock option and purchase plans
|
49,016 | 49,016 | 49,016 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Stock-based compensation cost
|
65,917 | 65,917 | 65,917 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Cumulative effect of accounting change
|
(5,761 | ) | (5,761 | ) | (5,761 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Repurchase of common shares:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Open market repurchases
|
(1,809,700 | ) | (1,809,700 | ) | (65,018 | ) | (65,018 | ) | (65,018 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Equity forward settlement:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Settlement cost, cash
|
(4,110,929 | ) | (4,110,929 | ) | (164,437 | ) | (164,437 | ) | (164,437 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
(Gain) loss on settlement
|
— | — | 54,716 | 54,716 | 54,716 | |||||||||||||||||||||||||||||||||||||||||||||||
|
Equity forwards agreed to be settled:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Settlement cost, cash
|
(44,039,890 | ) | (44,039,890 | ) | (1,992,938 | ) | (1,992,938 | ) | (1,992,938 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
(Gain) loss on settlement
|
— | — | 1,105,975 | 1,105,975 | 1,105,975 | |||||||||||||||||||||||||||||||||||||||||||||||
|
Benefit plans
|
(3,311,239 | ) | (3,311,239 | ) | (152,829 | ) | (152,829 | ) | (152,829 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Contributions
|
— | 2,947 | 2,947 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Noncontrolling interest — other
|
— | (3,017 | ) | (3,017 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
|
Balance at December 31, 2007
|
8,300,000 | 532,493,081 | (65,951,394 | ) | 466,541,687 | $1,565,000 | $ | 106,499 | $ | 4,590,174 | $ | 236,364 | $ | 557,204 | $ | (1,831,706 | ) | $ | 5,223,535 | $ | 11,360 | $ | 5,234,895 | |||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
F-6
SLM
CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share and per share amounts)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share and per share amounts)
|
Accumulated
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred
|
Additional
|
Other
|
Total
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
Stock
|
Common Stock Shares |
Preferred
|
Common
|
Paid-In
|
Comprehensive
|
Retained
|
Treasury
|
Stockholders’
|
Noncontrolling
|
Total
|
||||||||||||||||||||||||||||||||||||||||||
| Shares | Issued | Treasury | Outstanding | Stock | Stock | Capital | Income (Loss) | Earnings | Stock | Equity | Interest | Equity | ||||||||||||||||||||||||||||||||||||||||
|
Balance at December 31, 2007
|
8,300,000 | 532,493,081 | (65,951,394 | ) | 466,541,687 | $1,565,000 | $ | 106,499 | $ | 4,590,174 | $ | 236,364 | $ | 557,204 | $ | (1,831,706 | ) | $ | 5,223,535 | $ | 11,360 | $ | 5,234,895 | |||||||||||||||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net income (loss)
|
(212,626 | ) | (212,626 | ) | 3,932 | (208,694 | ) | |||||||||||||||||||||||||||||||||||||||||||||
|
Other comprehensive income, net of tax:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Change in unrealized gains (losses) on investments, net of tax
|
(45,360 | ) | (45,360 | ) | (45,360 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Change in unrealized gains (losses) on derivatives, net of tax
|
(71,412 | ) | (71,412 | ) | (71,412 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Defined benefit pension plans adjustment
|
(1,413 | ) | (1,413 | ) | (1,413 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Comprehensive income
|
(330,811 | ) | 3,932 | (326,879 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
|
Cash dividends:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, Series A ($3.49 per share)
|
(11,501 | ) | (11,501 | ) | (11,501 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, Series B ($4.09 per share)
|
(15,927 | ) | (15,927 | ) | (15,927 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, Series C ($69.48 per share)
|
(83,128 | ) | (83,128 | ) | (83,128 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Restricted stock dividend
|
(1,852 | ) | (1,852 | ) | (1,852 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Issuance of common shares
|
1,908,595 | 3,667 | 1,912,262 | 382 | 38,575 | 79 | 39,036 | 39,036 | ||||||||||||||||||||||||||||||||||||||||||||
|
Issuance of preferred shares
|
150,000 | 150,000 | (4,005 | ) | (650 | ) | 145,345 | 145,345 | ||||||||||||||||||||||||||||||||||||||||||||
|
Conversion of preferred shares
|
(230 | ) | 9,595 | 9,595 | (230 | ) | 2 | 228 | — | — | ||||||||||||||||||||||||||||||||||||||||||
|
Tax benefit related to employee stock option and purchase plans
|
(16,981 | ) | (16,981 | ) | (16,981 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Stock-based compensation cost
|
76,121 | 76,121 | 76,121 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Cumulative effect of accounting change
|
(194,655 | ) | 194,655 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
|
Repurchase of common shares:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Benefit plans
|
(1,010,673 | ) | (1,010,673 | ) | (24,767 | ) | (24,767 | ) | (24,767 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Acquisition of noncontrolling interest in Purchased Paper
business
|
— | (4,355 | ) | (4,355 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
|
Noncontrolling interest — other
|
— | (3,667 | ) | (3,667 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
|
Balance at December 31, 2008
|
8,449,770 | 534,411,271 | (66,958,400 | ) | 467,452,871 | $1,714,770 | $ | 106,883 | $ | 4,684,112 | $ | (76,476 | ) | $ | 426,175 | $ | (1,856,394 | ) | $ | 4,999,070 | $ | 7,270 | $ | 5,006,340 | ||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements
F-7
SLM
CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share and per share amounts)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share and per share amounts)
|
Accumulated
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred
|
Additional
|
Other
|
Total
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
Stock
|
Common Stock Shares |
Preferred
|
Common
|
Paid-In
|
Comprehensive
|
Retained
|
Treasury
|
Stockholders’
|
Noncontrolling
|
Total
|
||||||||||||||||||||||||||||||||||||||||||
| Shares | Issued | Treasury | Outstanding | Stock | Stock | Capital | Income (Loss) | Earnings | Stock | Equity | Interest | Equity | ||||||||||||||||||||||||||||||||||||||||
|
Balance at December 31, 2008
|
8,449,770 | 534,411,271 | (66,958,400 | ) | 467,452,871 | $1,714,770 | $ | 106,883 | $ | 4,684,112 | $ | (76,476 | ) | $ | 426,175 | $ | (1,856,394 | ) | $ | 4,999,070 | $ | 7,270 | $ | 5,006,340 | ||||||||||||||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net income (loss)
|
324,138 | 324,138 | 847 | 324,985 | ||||||||||||||||||||||||||||||||||||||||||||||||
|
Other comprehensive income, net of tax:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Change in unrealized gains (losses) on investments, net of tax
|
2,872 | 2,872 | 2,872 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Change in unrealized gains (losses) on derivatives, net of tax
|
40,087 | 40,087 | 40,087 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Defined benefit pension plans adjustment
|
(7,308 | ) | (7,308 | ) | (7,308 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Comprehensive income
|
359,789 | 847 | 360,636 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Cash dividends:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, Series A ($3.49 per share)
|
(11,500 | ) | (11,500 | ) | (11,500 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, Series B ($1.76 per share)
|
(6,752 | ) | (6,752 | ) | (6,752 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, Series C ($72.50 per share)
|
(97,523 | ) | (97,523 | ) | (97,523 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Restricted stock dividend
|
(10 | ) | (10 | ) | (10 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Issuance of common shares
|
536,036 | 98 | 536,134 | 107 | 3,186 | 5 | 3,298 | 3,298 | ||||||||||||||||||||||||||||||||||||||||||||
|
Issuance of preferred shares
|
650 | (650 | ) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
|
Conversion of preferred shares
|
(339,400 | ) | 17,272,269 | 17,272,269 | (339,400 | ) | 3,454 | 365,357 | (29,411 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||
|
Tax benefit related to employee stock option and purchase plans
|
(9,710 | ) | (9,710 | ) | (9,710 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Stock-based compensation cost
|
47,296 | 47,296 | 47,296 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Repurchase of common shares:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Benefit plans
|
(263,640 | ) | (263,640 | ) | (5,349 | ) | (5,349 | ) | (5,349 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Sale of international Purchased Paper — Non-Mortgage
business
|
— | (7,257 | ) | (7,257 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
|
Noncontrolling interest — other
|
— | (847 | ) | (847 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
|
Balance at December 31, 2009
|
8,110,370 | 552,219,576 | (67,221,942 | ) | 484,997,634 | $1,375,370 | $ | 110,444 | $ | 5,090,891 | $ | (40,825 | ) | $ | 604,467 | $ | (1,861,738 | ) | $ | 5,278,609 | $ | 13 | $ | 5,278,622 | ||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Operating activities
|
||||||||||||
|
Net income (loss)
|
$ | 324,985 | $ | (208,694 | ) | $ | (894,079 | ) | ||||
|
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
|
||||||||||||
|
Loss (income) from discontinued operations, net of tax
|
157,690 | 143,219 | (6,276 | ) | ||||||||
|
Gains on student loan securitizations
|
— | — | (367,300 | ) | ||||||||
|
Losses on loans and securities, net
|
580 | 186,155 | 95,492 | |||||||||
|
Stock-based compensation cost
|
51,065 | 86,271 | 74,621 | |||||||||
|
Unrealized (gains)/losses on derivative and hedging activities,
excluding equity forwards
|
324,443 | 559,895 | (214,963 | ) | ||||||||
|
Unrealized (gains)/losses on derivative and hedging
activities — equity forwards
|
— | — | 1,558,025 | |||||||||
|
Provisions for loan losses
|
1,118,960 | 719,650 | 1,015,308 | |||||||||
|
Student loans originated for sale, net
|
(19,099,583 | ) | (7,787,869 | ) | — | |||||||
|
Decrease (increase) in restricted cash — other
|
40,051 | 96,617 | (84,537 | ) | ||||||||
|
Decrease (increase) in accrued interest receivable
|
893,516 | (279,082 | ) | (1,046,124 | ) | |||||||
|
(Decrease) increase in accrued interest payable
|
(517,401 | ) | (200,501 | ) | 214,401 | |||||||
|
Adjustment for non-cash (income)/loss related to Retained
Interest
|
329,953 | 425,462 | 279,246 | |||||||||
|
(Increase) decrease in other assets, goodwill and acquired
intangible assets, net
|
(23,405 | ) | 421,667 | 836,564 | ||||||||
|
(Decrease) in other liabilities
|
(29,276 | ) | (155,768 | ) | (890,464 | ) | ||||||
|
Cash (used in) provided by operating activities —
continuing operations
|
(16,753,407 | ) | (5,784,284 | ) | 1,463,993 | |||||||
|
Cash provided by (used in) operating activities —
discontinued operations
|
514,713 | 301,234 | (618,117 | ) | ||||||||
|
Total net cash (used in) operating activities
|
(15,913,709 | ) | (5,691,744 | ) | (48,203 | ) | ||||||
|
Investing activities
|
||||||||||||
|
Student loans acquired
|
(9,403,093 | ) | (23,337,946 | ) | (39,303,005 | ) | ||||||
|
Loans purchased from securitized trusts
|
(5,978 | ) | (1,243,671 | ) | (4,448,766 | ) | ||||||
|
Reduction of student loans:
|
||||||||||||
|
Installment payments, claims and other
|
10,749,227 | 10,333,901 | 11,413,044 | |||||||||
|
Proceeds from securitization of student loans treated as sales
|
— | — | 1,976,599 | |||||||||
|
Proceeds from sales of student loans
|
788,221 | 496,183 | 1,013,295 | |||||||||
|
Other loans — originated
|
(2,823 | ) | (1,138,355 | ) | (3,396,501 | ) | ||||||
|
Other loans — repaid
|
261,491 | 1,542,307 | 3,420,187 | |||||||||
|
Other investing activities, net
|
(573,251 | ) | (135,041 | ) | (358,209 | ) | ||||||
|
Purchases of
available-for-sale
securities
|
(128,478,198 | ) | (101,140,587 | ) | (90,087,504 | ) | ||||||
|
Proceeds from sales of
available-for-sale
securities
|
100,056 | 328,530 | 73,217 | |||||||||
|
Proceeds from maturities of
available-for-sale
securities
|
127,951,879 | 102,436,912 | 89,353,103 | |||||||||
|
Purchases of
held-to-maturity
and other securities
|
(889 | ) | (500,255 | ) | (330,450 | ) | ||||||
|
Proceeds from maturities of
held-to-maturity
securities and other securities
|
79,171 | 407,180 | 435,468 | |||||||||
|
(Increase) decrease in restricted cash — on-balance
sheet trusts
|
(1,181,275 | ) | 918,403 | (1,293,846 | ) | |||||||
|
Return of investment from Retained Interest
|
26,513 | 403,020 | 276,996 | |||||||||
|
Purchase of subsidiaries, net of cash acquired
|
— | (37,868 | ) | — | ||||||||
|
Net cash provided by (used in) investing activities
|
311,051 | (10,667,287 | ) | (31,256,372 | ) | |||||||
|
Financing activities
|
||||||||||||
|
Borrowings collateralized by loans in trust — issued
|
12,997,915 | 17,986,955 | 23,943,837 | |||||||||
|
Borrowings collateralized by loans in trust — repaid
|
(5,689,713 | ) | (6,299,483 | ) | (6,429,648 | ) | ||||||
|
Asset-backed commercial paper conduits, net
|
(16,138,186 | ) | (1,649,287 | ) | 21,073,857 | |||||||
|
ED Participation Program, net
|
19,301,929 | 7,364,969 | — | |||||||||
|
ED Conduit Program facility, net
|
14,313,837 | — | — | |||||||||
|
Other short-term borrowings issued
|
298,294 | 2,592,429 | 594,434 | |||||||||
|
Other short-term borrowings repaid
|
(1,434,538 | ) | (1,512,031 | ) | (2,342,953 | ) | ||||||
|
Other long-term borrowings issued
|
4,333,181 | 3,563,003 | 1,567,602 | |||||||||
|
Other long-term borrowings repaid
|
(9,504,267 | ) | (9,518,655 | ) | (3,188,249 | ) | ||||||
|
Other financing activities, net
|
(751,087 | ) | 284,659 | 901,263 | ||||||||
|
Excess tax benefit from the exercise of stock-based awards
|
— | 281 | 30,316 | |||||||||
|
Common stock issued
|
664 | 5,979 | 2,125,111 | |||||||||
|
Net settlements on equity forward contracts
|
— | — | (614,217 | ) | ||||||||
|
Common stock repurchased
|
— | — | (2,222,394 | ) | ||||||||
|
Common dividends paid
|
— | — | (102,658 | ) | ||||||||
|
Preferred stock issued
|
— | 145,345 | 968,674 | |||||||||
|
Preferred dividends paid
|
(115,775 | ) | (110,556 | ) | (36,497 | ) | ||||||
|
Noncontrolling interest,net
|
(9,585 | ) | (6,606 | ) | (3,094 | ) | ||||||
|
Net cash provided by financing activities
|
17,602,669 | 12,847,002 | 36,265,384 | |||||||||
|
Net increase (decrease) in cash and cash equivalents
|
2,000,011 | (3,512,029 | ) | 4,960,809 | ||||||||
|
Cash and cash equivalents at beginning of year
|
4,070,002 | 7,582,031 | 2,621,222 | |||||||||
|
Cash and cash equivalents at end of year
|
$ | 6,070,013 | $ | 4,070,002 | $ | 7,582,031 | ||||||
|
Cash disbursements made for:
|
||||||||||||
|
Interest
|
$ | 3,656,545 | $ | 6,157,096 | $ | 6,897,773 | ||||||
|
Income taxes
|
$ | 298,285 | $ | 699,364 | $ | 1,097,340 | ||||||
See accompanying notes to consolidated financial statements.
F-9
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 1. | Organization and Business |
SLM Corporation (the “Company”) is a holding company
that operates through a number of subsidiaries. The Company was
formed 37 years ago as the Student Loan Marketing
Association, a federally chartered government-sponsored
enterprise (the “GSE”), with the goal of furthering
access to higher education by acting as a secondary market for
student loans. In 2004, the Company completed its transformation
to a private company through its wind-down of the GSE. The
GSE’s outstanding obligations were placed into a Master
Defeasance Trust Agreement as of December 29, 2004,
which was fully collateralized by direct, noncallable
obligations of the United States.
The Company’s primary business is to originate and hold
student loans by providing funding, delivery and servicing
support for education loans in the United States through its
participation in the Federal Family Education Loan Program
(“FFELP”) and through offering non-federally
guaranteed Private Education Loans. The Company primarily
markets its FFELP Stafford and Private Education Loans through
on-campus financial aid offices.
The Company has expanded into a number of fee-based businesses,
most notably its Asset Performance Group (“APG”),
which is presented as a distinct segment in accordance with the
Financial Accounting Standards Board’s (“FASB”)
Accounting Standards Codification (“ASC”) 280,
“Segment Reporting.” The Company’s APG business
segment provides a wide range of accounts receivable and
collections services including student loan default aversion
services, defaulted student loan portfolio management services,
contingency collections services for student loans and other
asset classes, and accounts receivable management and collection
for purchased portfolios of receivables that are delinquent or
have been charged off by their original creditors as well as
sub-performing
and non-performing mortgage loans. In 2008, the Company
concluded that its APG purchased paper business no longer
produced a mutual strategic fit. The Company sold its
international Purchased Paper— Non-Mortgage business in the
first quarter of 2009. The Company sold all of its assets in the
Purchased-Paper—Mortgage/Properties business in the fourth
quarter of 2009. The Company continues to wind down the domestic
side of its Purchased Paper—Non-Mortgage business.
The Company also earns fees for a number of services, including
student loan and guarantee servicing, and for providing
processing capabilities and information technology to
educational institutions as well as 529 college savings
plan program management, transfer and servicing agent services,
and administration services through Upromise Investments, Inc.
(“UII”) and Upromise Investment Advisors, LLC
(“UIA”). The Company also operates a consumer savings
network through Upromise, Inc. (“Upromise”).
References in this Annual Report to “Upromise” refer
to Upromise and its subsidiaries, UII and UIA.
On April 16, 2007, the Company announced that a buyer group
(“Buyer Group”) led by J.C. Flowers & Co.
(“J.C. Flowers”), Bank of America, N.A. and JPMorgan
Chase, N.A. had signed a definitive agreement (“Merger
Agreement”) to acquire the Company (the “Proposed
Merger”) for approximately $25.3 billion or $60.00 per
share of common stock. On January 25, 2008, the Company,
Mustang Holding Company Inc. (“Mustang Holding”),
Mustang Merger Sub, Inc. (“Mustang Sub”), J.C.
Flowers, Bank of America, N.A. and JPMorgan Chase Bank, N.A.
entered into a Settlement, Termination and Release Agreement
(the “Agreement”). Under the Agreement, the lawsuit
filed by the Company on October 8, 2007, related to the
Proposed Merger, as well as all counterclaims, was dismissed and
the Merger Agreement dated April 15, 2007, among the
Company, Mustang Holding and Mustang Sub was terminated on
January 25, 2008.
On February 26, 2009, the Obama Administration (the
“Administration”) issued their 2010 fiscal year budget
request to Congress which included provisions that called for
the elimination of the FFELP program and which would require all
new federal loans to be made through the Direct Student Loan
Program (“DSLP”). On September 17, 2009 the House
of Representatives passed H.R. 3221, the Student Aid and Fiscal
Responsibility act (“SAFRA”), which was consistent
with the Administration’s 2010 budget request to
F-10
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 1. | Organization and Business (Continued) |
Congress. If it became law SAFRA would eliminate the FFELP and
require that, after July 1, 2010, all new federal loans be
made through the DSLP. The Administration’s 2011 fiscal
year budget continued these requests.
The Senate has not yet introduced legislation on this issue. The
Company, together with other members of the student loan
community, has been working with members of Congress to enhance
SAFRA to allow students and schools to continue to choose their
loan originator and to require servicers to share in the risk of
loan default. This proposal is referred to as the
“Community Proposal” because it has the widespread
support of the student lending community, which includes
lenders, Guarantors, financial aid advisors and others. The
Company believes that maintaining competition in the student
loan programs and requiring participants to assume a portion of
the risk inherent in the program, two of the major tenets of the
Community Proposal, would result in a more efficient and cost
effective program that better serves students, schools, ED and
taxpayers.
| 2. | Significant Accounting Policies |
Consolidation
The consolidated financial statements include the accounts of
SLM Corporation and its majority-owned and controlled
subsidiaries and those Variable Interest Entities
(“VIEs”) for which SLM Corporation is the primary
beneficiary, after eliminating the effects of intercompany
accounts and transactions.
ASC 810, “Consolidation,” requires VIEs to be
consolidated by their primary beneficiaries. A VIE exists when
either the total equity investment at risk is not sufficient to
permit the entity to finance its activities by itself, or the
equity investors lack one of three characteristics associated
with owning a controlling financial interest. Those
characteristics are the direct or indirect ability to make
decisions about an entity’s activities that have a
significant impact on the success of the entity, the obligation
to absorb the expected losses of an entity, and the rights to
receive the expected residual returns of the entity.
As further discussed in Note 8, “Student Loan
Securitization,” the Company does not consolidate any
qualifying special purpose entities (“QSPEs”) created
for securitization purposes in accordance with ASC 860,
“Transfers and Servicing.” All of the Company’s
off-balance sheet securitizations meet the definition of a QSPE
and are not consolidated. The Company’s accounting
treatment for its on-balance sheet securitizations, which are
not QSPEs, are governed by ASC 810 and are consolidated in the
accompanying financial statements as the Company is the primary
beneficiary.
Use of
Estimates
The Company’s financial reporting and accounting policies
conform to generally accepted accounting principles in the
United States of America (“GAAP”). The preparation of
financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates. Key accounting policies that include significant
judgments and estimates include valuation and income recognition
related to allowance for loan losses, loan effective interest
rate method (student loan premiums and discounts), fair value
measurements, securitization activities (gain on sale and the
related Retained Interest), and derivative accounting.
F-11
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 2. | Significant Accounting Policies (Continued) |
Fair
Value Measurement
The Company uses estimates of fair value in applying various
accounting standards for its financial statements. Under GAAP,
fair value measurements are used in one of four ways:
| • | In the consolidated balance sheet with changes in fair value recorded in the consolidated statement of income; | |
| • | In the consolidated balance sheet with changes in fair value recorded in the accumulated other comprehensive income section of the consolidated statement of changes in stockholders’ equity; | |
| • | In the consolidated balance sheet for instruments carried at lower of cost or fair value with impairment charges recorded in the consolidated statement of income; and | |
| • | In the notes to the financial statements. |
Fair value is defined as the price to sell an asset or transfer
a liability in an orderly transaction between willing and able
market participants. In general, the Company’s policy in
estimating fair values is to first look at observable market
prices for identical assets and liabilities in active markets,
where available. When these are not available, other inputs are
used to model fair value such as prices of similar instruments,
yield curves, volatilities, prepayment speeds, default rates and
credit spreads (including for the Company’s liabilities),
relying first on observable data from active markets. Additional
adjustments may be made for factors including liquidity, credit,
bid/offer spreads, etc., depending on current market conditions.
Transaction costs are not included in the determination of fair
value. When possible, the Company seeks to validate the
model’s output to market transactions. Depending on the
availability of observable inputs and prices, different
valuation models could produce materially different fair value
estimates. The values presented may not represent future fair
values and may not be realizable.
The Company categorizes its fair value estimates based on a
hierarchical framework associated with three levels of price
transparency utilized in measuring financial instruments at fair
value. Classification is based on the lowest level of input that
is significant to the fair value of the instrument. The three
levels are as follows:
| • | Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. The types of financial instruments included in level 1 are highly liquid instruments with quoted prices. | |
| • | Level 2 — Inputs from active markets, other than quoted prices for identical instruments, are used to determine fair value. Significant inputs are directly observable from active markets for substantially the full term of the asset or liability being valued. | |
| • | Level 3 — Pricing inputs significant to the valuation are unobservable. Inputs are developed based on the best information available. However, significant judgment is required by management in developing the inputs. |
Loans
Loans, consisting of federally insured student loans, Private
Education Loans, student loan participations, lines of credit,
academic facilities financings, and other consumer and mortgage
loans that the Company has the ability and intent to hold for
the foreseeable future are classified as held for investment and
are carried at amortized cost. Amortized cost includes the
unamortized premiums, discounts, and capitalized origination
costs and fees, all of which are amortized to interest income as
further discussed below. Loans which are
held-for-investment
also have an allowance for loan loss as needed. Any loans the
Company has the ability
F-12
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 2. | Significant Accounting Policies (Continued) |
and intent to sell are classified as held for sale, and carried
at the lower of cost or fair value. Loans which are
held-for-sale
do not have the associated premium, discount, and capitalized
origination costs and fees amortized into interest income. In
addition, once a loan is classified as
held-for-sale,
there is no further adjustment to the loan’s allowance for
loan loss that existed immediately prior to the reclassification
to
held-for-sale.
As market conditions permit, the Company actively securitizes
loans but securitization is viewed as one of many different
sources of financing. At the time of a funding need, the most
advantageous funding source is identified and, if that source is
the securitization program, loans are selected based on the
required characteristics to structure the desired transaction
(e.g., type of loan, mix of interim vs. repayment status, credit
rating, maturity dates, etc.). The Company structures
securitizations to obtain the most favorable financing terms.
Due to some of the structuring terms, certain transactions
qualify for sale treatment under ASC 860 while others do not
qualify for sale treatment and are recorded as financings. All
student loans are initially categorized as held for investment
until there is certainty as to each specific loan’s
ultimate financing because the Company does not securitize all
loans and not all securitizations qualify as sales. It is only
when the Company has selected the loans to securitize and that
securitization transaction qualifies as a sale under ASC 860
does the Company make the decision to sell such loans. At that
time, the loans selected are transferred into the
held-for-sale
classification and carried at the lower of cost or fair value.
If the Company anticipates recognizing a gain related to the
impending securitization, then the fair value of the loans is
higher than their respective cost basis and no valuation
allowance is needed.
Under The Ensuring Continued Access to Student Loans Act of 2008
(“ECASLA”), ED has implemented the Loan Purchase
Commitment Program (“Purchase Program”). Under the
Purchase Program, ED will purchase eligible FFELP loans at a set
price by September 30, 2010 at the option of the Company.
The Company is classifying all loans eligible to be sold to ED
under the Purchase Program as
held-for-sale.
The Company currently has the ability and intent to sell such
loans to ED under the Purchase Program due to the current
environment in the capital markets. These loans are included in
the “FFELP Stafford
Held-for-Sale
Loans” line on the consolidated balance sheets.
Student
Loan Income
The Company recognizes student loan interest income as earned,
adjusted for the amortization of premiums and capitalized direct
origination costs, accretion of discounts, and borrower benefits
for timely payment (“Repayment Borrower Benefits”).
These adjustments are made in accordance with ASC 310,
“Receivables,” which requires income to be recognized
based upon the expected yield of the loan over its life after
giving effect to prepayments and extensions, and to estimates
related to Repayment Borrower Benefits. As a result, for loans
that are held for investment, premiums, discounts, and
capitalized direct origination costs and fees are amortized over
the estimated life of the loan, which includes an estimate of
prepayment speeds. The estimate of the prepayment speed must
consider the effect of consolidations, voluntary prepayments and
student loan defaults, all of which shorten the life of loan.
Prepayment speed estimates must also consider the utilization of
deferment and forbearance, which lengthen the life of loan,
coupled with management’s expectation of future activity.
For Repayment Borrower Benefits, the estimates of their effect
on student loan yield are based on analyses of historical
payment behavior of borrowers who are eligible for the
incentives and its effect on the ultimate qualification rate for
these incentives. The Company regularly evaluates the
assumptions used to estimate its loan life and the qualification
rates used for Repayment Borrower Benefits. In instances where
there are changes to the assumptions, amortization is adjusted
on a cumulative basis to reflect the change since the
acquisition of the loan. The Company pays an annual
105 basis point Consolidation Loan Rebate Fee on FFELP
Consolidation Loans which is netted against student loan income.
F-13
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 2. | Significant Accounting Policies (Continued) |
Additionally, interest earned on student loans reflects
potential non-payment adjustments in accordance with the
Company’s non-accrual policy as discussed further in
“
Allowance for Student Loan Losses
” below.
The Company recognizes certain fee income (primarily late fees
and forbearance fees) on student loans according to the
contractual provisions of the promissory notes, as well as the
Company’s expectation of collectability. Student loan fee
income is recorded when earned in “other income” in
the consolidated statements of income.
Allowance
for Student Loan Losses
The Company maintains an allowance for loan losses at an amount
sufficient to absorb losses incurred in its FFELP loan and
Private Education Loan portfolios at the reporting date based on
a projection of estimated probable credit losses incurred in the
portfolio. The Company analyzes those portfolios to determine
the effects that the various stages of delinquency and
forbearance have on borrower default behavior and ultimate
charge-off. The Company estimates the allowance for loan losses
for its loan portfolio using a migration analysis of delinquent
and current accounts. A migration analysis is a technique used
to estimate the likelihood that a loan receivable may progress
through the various delinquency stages and ultimately charge
off, and is a widely used reserving methodology in the consumer
finance industry. The Company also uses the migration analysis
to estimate the amount of uncollectible accrued interest on
Private Education Loans and write-off that amount against
current period interest income. The evaluation of the allowance
for loan losses is inherently subjective, as it requires
material estimates that may be susceptible to significant
changes. The Company’s default estimates are based on a
loss confirmation period of generally two years (i.e., the
Company’s allowance for loan loss covers the next two years
of expected losses). The two-year estimate of the allowance for
loan losses is subject to a number of assumptions. If actual
future performance in delinquency, charge-offs and recoveries
are significantly different than estimated, this could
materially affect the Company’s estimate of the allowance
for loan losses and the related provision for loan losses on the
Company’s income statement. The Company believes that the
Private Education Loan and FFELP allowance for loan losses are
appropriate to cover probable losses incurred in the student
loan portfolio.
When calculating the allowance for loan losses on Private
Education Loans, the Company divides the portfolio into
categories of similar risk characteristics based on loan program
type, loan status (in-school, grace, forbearance, repayment, and
delinquency), underwriting criteria (FICO scores), and existence
or absence of a cosigner. As noted above, the Company uses
historical experience of borrower default behavior and
charge-offs to estimate the probable credit losses incurred in
the loan portfolio at the reporting date. Also, the Company uses
historical borrower payment behavior to estimate the timing and
amount of future recoveries on charged off loans. The Company
then applies the default and collection rate projections to each
category of loans. Once the quantitative calculation is
performed, management reviews the adequacy of the allowance for
loan losses and determines if qualitative adjustments need to be
considered. One technique for making this determination is
through projection modeling, which is used to determine if the
allowance for loan losses is sufficient to absorb credit losses
anticipated during the loss confirmation period. Projection
modeling is a forward-looking projection of charge-offs.
Assumptions that are utilized in the projection modeling include
(but are not limited to) historical experience, recent changes
in collection policies and procedures, collection performance,
and macroeconomic indicators. Additionally, management considers
changes in laws and regulations that could potentially impact
the allowance for loan losses.
The current and future economic environment is taken into
account by the Company when calculating the allowance for loan
loss. The Company analyzes key economic statistics and the
impact they will have on future charge offs. Key economic
statistics analyzed as part of the allowance for loan loss are
unemployment rates (total and specific to college graduates),
consumer confidence and other asset type delinquency rates
F-14
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 2. | Significant Accounting Policies (Continued) |
(credit cards, mortgages). As a result of the economy, provision
expense has remained elevated since the fourth quarter of 2008.
If the economy weakens beyond the Company’s expectations,
the expected losses resulting from its default and collection
estimates embedded in the allowance could be higher than
currently projected.
As part of concluding on the adequacy of the allowance for loan
loss, the Company also reviews key allowance and loan metrics.
The most relevant of these metrics considered are the allowance
coverage of
charge-offs
ratio; the allowance as a percentage of total loans and of loans
in repayment; and delinquency and forbearance percentages.
In 2009, the Company implemented a program which offers loan
modifications to borrowers who qualify. Temporary interest rate
concessions are granted to borrowers experiencing financial
difficulties and who meet other criteria. The allowance on these
loans is calculated based on the present value of the expected
cash flows (including estimates of future defaults) discounted
at the loan’s effective interest rate. This calculation
contains estimates which are inherently subjective and are
evaluated on a periodic basis.
The majority of the Company’s Private Education Loan
programs do not require that borrowers begin repayment until six
months after they have graduated or otherwise left school.
Consequently, the Company’s loss estimates for these
programs are generally low while the borrower is in school. At
December 31, 2009, 37 percent of the principal balance
in the higher education Private Education Loan portfolio was
related to borrowers who are in in-school or grace status and
not required to make payments. As the current portfolio ages, an
increasing percentage of the borrowers will leave school and be
required to begin payments on their loans. The allowance for
losses will change accordingly.
Similar to the rules governing FFELP payment requirements, the
Company’s collection policies allow for periods of
nonpayment for borrowers requesting additional payment grace
periods upon leaving school or experiencing temporary difficulty
meeting payment obligations. This is referred to as forbearance
status and is considered separately in the Company’s
allowance for loan losses. The loss confirmation period is in
alignment with the Company’s typical collection cycle and
takes into account these periods of nonpayment.
In general, Private Education Loan principal is charged off
against the allowance when the loan exceeds 212 days
delinquency. The
charge-off
amount equals the estimated loss of the defaulted loan balance.
Actual recoveries, as they are received, are applied against the
remaining loan balance that was not charged-off. If periodic
recoveries are less than originally expected, the difference
results in immediate additional provision expense and charge-off
of such amount.
FFELP loans are guaranteed as to their principal and accrued
interest in the event of default subject to a Risk Sharing level
set based on the date of loan disbursement. For loans disbursed
after October 1, 1993, and before July 1, 2006, the
Company receives 98 percent reimbursement on all qualifying
default claims. For loans disbursed on or after July 1,
2006, the Company receives 97 percent reimbursement. The
College Cost Reduction and Access Act of 2007
(“CCRAA”) reduces the Risk Sharing level for loans
disbursed on or after October 1, 2012 to 95 percent
reimbursement, which will impact the allowance for loan losses
in the future.
Similar to the allowance for Private Education Loan losses, the
allowance for FFELP loan losses uses historical experience of
borrower default behavior and a two year loss confirmation
period to estimate the credit losses incurred in the loan
portfolio at the reporting date. The Company divides the
portfolio into categories of similar risk characteristics based
on loan program type, school type and loan status. The Company
then applies the default rate projections, net of applicable
Risk Sharing, to each category for the current period to perform
its quantitative calculation. Once the quantitative calculation
is performed,
F-15
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 2. | Significant Accounting Policies (Continued) |
management reviews the adequacy of the allowance for loan losses
and determines if qualitative adjustments need to be considered.
Previously, when Private Education Loans in the Company’s
off-balance sheet securitized trusts settling before
September 30, 2005 become 180 days delinquent, the
Company exercised its contingent call option (the Company does
not hold the contingent call option for any trusts settling
after September 30, 2005) to repurchase these loans at
par value and record a loss for the difference in the par value
paid and the fair market value of the loan at the time of
purchase, in accordance with ASC 310. Beginning in October 2008,
the Company decided to no longer exercise its contingent call
option. The losses recorded upon repurchase of loans under the
contingent call option, for the years ended December 31,
2009, 2008, and 2007 were $0, $141 million, and
$123 million, respectively, and were recorded in the
“Gains (losses) on sales of loans and securities,
net” line item in the consolidated statements of income.
Subsequent to buyback, the Company accounts for these loans
under ASC 310 in the same manner as discussed under
“Collections Revenue”
for the Company’s
purchased paper portfolio. The initial valuation at buyback uses
a discount rate similar to that used in valuing the Private
Education Loan Residual Interests as that rate takes into
account the credit and liquidity risks inherent in the loans
being repurchased. Interest income recognized is recorded as
part of student loan interest income.
Cash
and Cash Equivalents
Cash and cash equivalents includes term federal funds,
Eurodollar deposits, money market funds and bank deposits with
original terms to maturity of less than three months.
Restricted
Cash and Investments
Restricted cash primarily includes amounts for on-balance sheet
student loan securitizations and other secured borrowings. This
cash must be used to make payments related to trust obligations.
Amounts on deposit in these accounts are primarily the result of
timing differences between when principal and interest is
collected on the trust assets and when principal and interest is
paid on trust liabilities.
In connection with the Company’s tuition payment plan
product, the Company receives cash from students and parents
that in turn is owed to schools. This cash, a majority of which
has been deposited at Sallie Mae Bank, is held in escrow for the
beneficial owners. In addition, the cash rebates that Upromise
members earn from qualifying purchases from Upromise’s
participating companies are held in trust for the benefit of the
members. This cash is held pursuant to a trust document until
distributed in accordance with the Upromise member’s
request and the terms of the Upromise service. Upromise, which
acts as the trustee for the trust, has deposited a majority of
the cash with Sallie Mae Bank pursuant to a money market deposit
account agreement between Sallie Mae Bank and Upromise as
trustee of the trust. Subject to capital requirements and other
laws, regulations and restrictions applicable to Utah industrial
banks, the cash that is deposited with Sallie Mae Bank in
connection with the tuition payment plan and the Upromise
rebates described above is not restricted and, accordingly, is
not included in restricted cash and investments in the
Company’s consolidated financial statements, as there is no
restriction surrounding the use of funds by the Company.
Securities pledged as collateral related to the Company’s
derivative portfolio where the counterparty has rights of
rehypothecation, are classified as restricted. When the
counterparty does not have these rights, the security is
recorded in investments and disclosed as pledged collateral in
the notes. Additionally, certain counterparties require cash
collateral pledged to the Company to be segregated and held in
restricted cash accounts per the terms of their International
Swaps and Derivatives Association, Inc. (“ISDA”)
Credit Support Annexes (“CSAs”). Cash balances that
the Company’s indentured trusts deposit in guaranteed
investment contracts that are held in trust for the related
F-16
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 2. | Significant Accounting Policies (Continued) |
note holders are classified as restricted investments. Finally,
cash received from lending institutions that is invested pending
disbursement for student loans is restricted and cannot be
disbursed for any other purpose.
Investments
Investments are held to provide liquidity and to serve as a
source of income. The majority of the Company’s investments
are classified as
available-for-sale
and such securities are carried at fair value, with the
temporary changes in fair value carried as a separate component
of stockholders’ equity. Changes in fair value for
available-for-sale
securities that have been designated as the hedged item in an
ASC 815, “Derivatives and Hedging,” fair value hedge
(as it relates to the hedged risks) are recorded in the
“gains (losses) on derivative and hedging activities,
net” line in the consolidated statements of income
offsetting changes in fair value of the derivative which is
hedging such investment. Temporary changes in fair value of the
security as it relates to non-hedged risks are carried as a
separate component of stockholders’ equity. The amortized
cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts, which are
amortized using the effective interest rate method.
Other-than-temporary
impairment is evaluated by considering several factors including
the length of time and extent to which the fair value has been
less than the amortized cost basis, the financial condition and
near-term prospects of the security (considering factors such as
adverse conditions specific to the security and ratings agency
actions), and the intent and ability to retain the investment in
order to allow for an anticipated recovery in fair value.
Other-than-temporary
impairment is recorded in earnings if the fair value is less
than the amortized cost and the Company intends to sell the
security or it is more likely than not that the Company will be
required to sell the security before recovery of the loss. If
the impairment is not
other-than-temporary,
the portion of the impairment related to credit losses is
recorded in earnings and the impairment related to other factors
is recorded in other comprehensive income. Securities classified
as trading are accounted for at fair value with unrealized gains
and losses included in investment income. Securities that the
Company has the intent and ability to hold to maturity are
classified as
held-to-maturity
and are accounted for at amortized cost unless the security is
determined to have an other-than-temporary impairment. In this
case it is accounted for in the same manner described above.
The Company also has other investments, including a receivable
for cash collateral posted to derivative counterparties, the
Company’s remaining investment in The Reserve Primary Fund
and leveraged leases, primarily with U.S. commercial
airlines. These investments are accounted for at amortized cost
net of impairments in other investments. Insurance-related
investments are carried in other assets.
Interest
Expense
Interest expense is based upon contractual interest rates
adjusted for the amortization of debt issuance costs and
premiums and the accretion of discounts. The Company’s
interest expense may also be adjusted for net payments/receipts
related to interest rate and foreign currency swap agreements
and interest rate futures contracts that qualify and are
designated as hedges under GAAP. Interest expense also includes
the amortization of deferred gains and losses on closed hedge
transactions that qualified as cash flow hedges. Amortization of
debt issue costs, premiums, discounts and terminated hedge basis
adjustments are recognized using the effective interest rate
method.
Transfer
of Financial Assets
The Company accounts for the transfer of financial assets under
ASC 860. The primary activity which falls under ASC 860 for the
Company is securitization and other secured borrowing accounting
which is further discussed below. The company’s indentured
trust debt, ABCP borrowings, Ed Conduit and ED
F-17
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 2. | Significant Accounting Policies (Continued) |
Participation Program facility were accounted for as on-balance
sheet secured borrowings under ASC 860 as the trusts were either
not QSPEs
and/or
the
Company controlled the transferred assets. See
“Securitization Accounting”
below for further
discussion on the criteria assessed under ASC 860 to determine
whether a transfer of financial assets is a sale or a secured
borrowing.
Securitization
Accounting
To meet the sale criteria of ASC 860 the Company’s
securitizations use a two-step structure with a QSPE that
legally isolates the transferred assets from the Company, even
in the event of bankruptcy. Transactions receiving sale
treatment are also structured to ensure that the holders of the
beneficial interests issued by the QSPE are not constrained from
pledging or exchanging their interests, and that the Company
does not maintain effective control over the transferred assets.
If these criteria are not met, then the transaction is accounted
for as an on-balance sheet secured borrowing under ASC 810,
“Consolidation,” as the Company is the primary
beneficiary of the VIE. In all cases, irrespective of whether
they qualify as sales under ASC 860, the Company’s
securitizations are structured such that legally they are sales
of assets that isolate the transferred assets from the Company.
The Company assesses the financial structure of each
securitization to determine whether the trust or other
securitization vehicle meets the sale criteria as defined in ASC
860 and accounts for the transaction accordingly. To be a QSPE,
the trust must meet all of the following conditions:
| • | It is demonstrably distinct from the Company and cannot be unilaterally dissolved by the Company and at least 10 percent of the fair value of its interests is held by independent third parties. | |
| • | The permitted activities in which the trust can participate are significantly limited. These activities must be entirely specified in the legal documents at the inception of the QSPE. | |
| • | There are limits to the assets the QSPE can hold; specifically, it can hold only financial assets transferred to it that are either passive in nature, passive derivative instruments pertaining to the beneficial interests held by independent third parties, servicing rights, temporary investments pending distribution to security holders, or cash. | |
| • | It can only dispose of its assets in automatic response to the occurrence of an event specified in the applicable legal documents and must be outside the control of the Company. |
In certain securitizations there are certain terms present
within the deal structure that result in such securitizations
not qualifying for sale treatment by failing to meet the
criteria required for the securitization entity (trust) to be a
QSPE, or by failing other criteria for the securitization to
qualify as a sale. Accordingly, these securitization trusts are
accounted for as VIEs. Because the Company is considered the
primary beneficiary in such VIEs, the transfer is deemed a
financing and the trust is consolidated in the financial
statements. The terms present in these structures that prevent
sale treatment are: (1) the Company holds rights that can
affect the remarketing of specific trust bonds that are not
significantly limited in nature, (2) the trust has the
right to enter into interest rate cap agreements after its
settlement date that do not relate to the reissuance of
third-party beneficial interests or (3) the Company holds
an unconditional call option related to a certain percentage of
trust assets.
Irrespective of whether a securitization receives sale treatment
or not, the Company’s continuing involvement with its
securitization trusts is generally limited to:
| • | Owning the equity certificates of the trust. | |
| • | The servicing of the student loan assets within the securitization trusts, on both a pre- and post-default basis. |
F-18
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 2. | Significant Accounting Policies (Continued) |
| • | The Company acting as administrator for the securitization transactions it sponsored, which includes remarketing certain bonds at future dates. | |
| • | The Company’s responsibilities relative to representation and warranty violations and the reimbursement of borrower benefits. | |
| • | Certain back-to-back derivatives entered into by the Company contemporaneously with the execution of derivatives by certain Private Education Loan securitization trusts. | |
| • | The option held by the Company to buy certain delinquent loans from certain Private Education Loan securitization trusts. | |
| • | The option to exercise the clean-up call and purchase the student loans from the trust when the asset balance is 10 percent or less of the original loan balance. | |
| • | The option (in certain trusts) to call rate reset notes in instances where the remarketing process has failed. | |
| • | The option (in certain trusts that were TALF eligible in 2009) to call the outstanding bonds at a discount to par at a future date |
The investors of the securitization trusts have no recourse to
the Company’s other assets should there be a failure of the
trusts to pay when due. Generally, the only arrangements under
which the Company has to provide financial support to the trusts
are:
| • | representation and warranty violations requiring the buyback of loans; | |
| • | the reimbursement to the trust of borrower benefits afforded the borrowers of student loans that have been securitized; or | |
| • | funding specific cash accounts within certain trusts related to the remarketing of certain bonds. |
Under the terms of the transaction documents of certain trusts,
the Company has, from time to time, exercised its options to
purchase delinquent loans from Private Education Loan trusts, to
purchase the remaining loans from trusts once the loan balance
falls below 10 percent of the original amount, or to call
rate reset notes. The Company has not provided any financial
support to the securitization trusts that it was not
contractually required to provide in the past. Certain trusts
maintain financial arrangements with third parties also typical
of securitization transactions, such as derivative contracts
(swaps) and bond insurance policies that, in the case of a
counterparty failure, could adversely impact the value of the
Company’s Residual Interest.
Retained
Interest
The Company securitizes its student loan assets, and for
transactions qualifying as sales, retains Residual Interests and
servicing rights (as the Company retains the servicing
responsibilities), all of which are referred to as the
Company’s Retained Interest in off-balance sheet
securitized loans. The Residual Interest is the right to receive
cash flows from the student loans and reserve accounts in excess
of the amounts needed to pay servicing, derivative costs (if
any), other fees, and the principal and interest on the bonds
backed by the student loans.
When the Company qualifies for sale treatment on its
securitizations, it recognizes the resulting gain on student
loan securitizations in the consolidated statements of income.
This gain is based upon the difference between the allocated
cost basis of the assets sold and the relative fair value of the
assets received. The component in determining the fair value of
the assets received that involves the most judgment is the
valuation
F-19
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 2. | Significant Accounting Policies (Continued) |
of the Residual Interest. The Company estimates the fair value
of the Residual Interest, both initially and each subsequent
quarter, based on the present value of future expected cash
flows using management’s best estimates of the following
key assumptions — credit losses, prepayment speeds and
discount rates commensurate with the risks involved. Quoted
market prices are not available. The Company adopted ASC 825,
“Financial Instruments,” effective January 1,
2008, whereby the Company elected to carry all Residual
Interests at fair value with subsequent changes in fair value
recorded in earnings. The Company chose this election in order
to simplify the accounting for Residual Interests under one
accounting model.
The fair value of the Fixed Rate Embedded Floor Income is a
component of the Residual Interest and is determined both
initially at the time of the sale of the student loans and each
subsequent quarter. This estimate is based on an option
valuation and a discounted cash flow calculation that considers
the current borrower rate, Special Allowance Payment
(“SAP”) spreads and the term for which the loan is
eligible to earn Floor Income as well as time value, forward
interest rate curve and volatility factors. Variable Rate Floor
Income received is recorded as earned in securitization income.
The Company also receives income for servicing the loans in its
securitization trusts which is recognized as earned. The Company
assesses the amounts received as compensation for these
activities at inception and on an ongoing basis to determine if
the amounts received are adequate compensation as defined in ASC
860. To the extent such compensation is determined to be no more
or less than adequate compensation, no servicing asset or
obligation is recorded at the time of securitization. Servicing
rights are subsequently carried at the lower of cost or market.
At December 31, 2009 and 2008, the Company did not have
servicing assets or liabilities recorded on the balance sheet.
Derivative
Accounting
The Company accounts for its derivatives, which include interest
rate swaps, cross-currency interest rate swaps, interest rate
futures contracts, interest rate cap contracts, Floor Income
Contracts and equity forward contracts in accordance with ASC
815, “Derivatives and Hedging,” which requires that
every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded at fair
value on the balance sheet as either an asset or liability.
Derivative positions are recorded as net positions by
counterparty based on master netting arrangements (see
Note 9, “Derivative Instruments,” under
Risk
Management Strategy
) exclusive of accrued interest and cash
collateral held or pledged. The Company determines the fair
value for its derivative contracts primarily using pricing
models that consider current market conditions and the
contractual terms of the derivative contract. These factors
include interest rates, time value, forward interest rate curve,
volatility factors, forward foreign exchange rates, and the
closing price of the Company’s stock (related to its equity
forward contracts). Inputs are generally from active financial
markets; however, adjustments are made to derivative valuations
for inputs from illiquid markets, and for credit for both when
the Company has an exposure to the counterparty net of
collateral held and when the counterparty has exposure to the
Company net of collateral pledged. The fair values of some
derivatives are determined using counterparty valuations.
Pricing models and their underlying assumptions impact the
amount and timing of unrealized gains and losses recognized with
regard to derivatives, and the use of different pricing models
or assumptions could produce different financial results. As a
matter of policy, the Company compares the fair values of its
derivatives that it calculates to those provided by its
counterparties. Any significant differences are identified and
resolved appropriately.
Many of the Company’s derivatives, mainly interest rate
swaps hedging the fair value of fixed-rate assets and
liabilities, cross-currency interest rate swaps, and certain
Eurodollar futures contracts, qualify as effective hedges under
ASC 815. For these derivatives, the relationship between the
hedging instrument and the hedged items (including the hedged
risk and method for assessing effectiveness), as well as the
risk management objective and
F-20
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 2. | Significant Accounting Policies (Continued) |
strategy for undertaking various hedge transactions at the
inception of the hedging relationship, is documented. Each
derivative is designated to either a specific (or pool of)
asset(s) or liability(ies) on the balance sheet or expected
future cash flows, and designated as either a “fair
value” or a “cash flow” hedge. Fair value hedges
are designed to hedge the Company’s exposure to changes in
fair value of a fixed rate or foreign denominated asset or
liability, while cash flow hedges are designed to hedge the
Company’s exposure to variability of either a floating rate
asset’s or liability’s cash flows or an expected fixed
rate debt issuance. For effective fair value hedges, both the
hedge and the hedged item (for the risk being hedged) are
marked-to-market
with any difference reflecting ineffectiveness and recorded
immediately in the statement of income. For effective cash flow
hedges, the change in the fair value of the derivative is
recorded in other comprehensive income, net of tax, and
recognized in earnings in the same period as the earnings
effects of the hedged item. The ineffective portion of a cash
flow hedge is recorded immediately through earnings. The
assessment of the hedge’s effectiveness is performed at
inception and on an ongoing basis, generally using regression
testing. For hedges of a pool of assets or liabilities, tests
are performed to demonstrate the similarity of individual
instruments of the pool. When it is determined that a derivative
is not currently an effective hedge, ineffectiveness is
recognized for the full change in value of the derivative with
no offsetting
mark-to-market
of the hedged item for the current period. If it is also
determined the hedge will not be effective in the future, the
Company discontinues the hedge accounting prospectively, ceases
recording changes in the fair value of the hedged item, and
begins amortization of any basis adjustments that exist related
to the hedged item.
The Company also has a number of derivatives, primarily Floor
Income Contracts and certain basis swaps, that the Company
believes are effective economic hedges but are not considered
hedges under ASC 815. These derivatives are classified as
“trading” for GAAP purposes and as a result they are
marked-to-market
through GAAP earnings with no consideration for the price
fluctuation of the economically hedged item.
Under ASC 450, “Distinguishing Liabilities from
Equity,” equity forward contracts that allow a net
settlement option either in cash or the Company’s stock are
required to be accounted for in accordance with ASC 815 as
derivatives. Prior to 2008, the Company used these contracts to
lock-in the purchase price of the Company’s stock related
to share repurchases. As a result, the Company marks its equity
forward contracts to market through earnings in the “gains
(losses) on derivative and hedging activities, net” line
item in the consolidated statements of income along with the net
settlement expense on the contracts. The Company has not had any
outstanding contracts since January 2008.
The “gains (losses) on derivative and hedging activities,
net” line item in the consolidated statements of income
includes the unrealized changes in the fair value of the
Company’s derivatives (except effective cash flow hedges
which are recorded in other comprehensive income), the
unrealized changes in fair value of hedged items in qualifying
fair value hedges, as well as the realized changes in fair value
related to derivative net settlements and dispositions that do
not qualify for hedge accounting. Net settlement income/expense
on derivatives that qualify as hedges under ASC 815 are included
with the income or expense of the hedged item (mainly interest
expense).
Goodwill
and Acquired Intangible Assets
The Company accounts for goodwill and acquired intangible assets
in accordance with ASC 350, “Intangibles—Goodwill and
Other,” pursuant to which goodwill is not amortized.
Goodwill is tested for impairment annually as of September 30 at
the reporting unit level, which is the same as or one level
below an operating segment as defined in ASC 280, “Segment
Reporting.” Goodwill is also tested at interim periods if
an event occurs or circumstances change that would indicate the
carrying amount may be impaired.
F-21
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 2. | Significant Accounting Policies (Continued) |
In accordance with ASC 350, Step 1 of the goodwill impairment
analysis consists of a comparison of the fair value of the
reporting unit to its carrying value, including goodwill. If the
carrying value of the reporting unit exceeds the fair value,
Step 2 in the goodwill impairment analysis is performed to
measure the amount of impairment loss, if any. Step 2 of the
goodwill impairment analysis compares the implied fair value of
the reporting unit’s goodwill to the carrying value of the
reporting unit’s goodwill. The implied fair value of
goodwill is determined in a manner consistent with determining
goodwill in a business combination. If the carrying amount of
the reporting unit’s goodwill exceeds the implied fair
value of the goodwill, an impairment loss is recognized in an
amount equal to that excess.
Other acquired intangible assets, which include but are not
limited to tradenames, customer and other relationships, and
non-compete agreements, are also accounted for in accordance
with ASC 350. Acquired intangible assets with definite or finite
lives are amortized over their estimated useful lives in
proportion to their estimated economic benefit. Finite-lived
acquired intangible assets are reviewed for impairment using an
undiscounted cash flow analysis when an event occurs or
circumstances change indicating the carrying amount of a
finite-lived asset or asset group may not be recoverable. An
impairment loss would be recognized if the carrying amount of
the asset (or asset group) exceeds the estimated undiscounted
cash flows used to determine the fair value of the asset or
asset group. The impairment loss recognized would be the
difference between the carrying amount and fair value.
Indefinite-life acquired intangible assets are not amortized.
They are tested for impairment annually as of September 30 or at
interim periods if an event occurs or circumstances change that
would indicate the carrying value of these assets may be
impaired. The annual or interim impairment test of
indefinite-lived acquired intangible assets is based primarily
on a discounted cash flow analysis.
Guarantor
Servicing Fees
The Company provides a full complement of administrative
services to FFELP Guarantors including guarantee issuance,
process, account maintenance, and guarantee fulfillment services
for Guarantor agencies, the U.S. Department of Education
(“ED”), educational institutions and financial
institutions. The fees associated with these services are
recognized as earned based on contractually determined rates.
The Company is party to a Guarantor Servicing contract with
United Student Aid Funds, Inc. (“USA Funds”), which
accounted for 86 percent, 85 percent and
86 percent of guarantor servicing fees for the years ended
December 31, 2009, 2008, and 2007, respectively.
Contingency
Fee Revenue
The Company receives fees for collections of delinquent debt on
behalf of clients performed on a contingency basis. Revenue is
earned and recognized upon receipt of the borrower funds.
The Company also receives fees from Guarantor agencies for
performing default aversion services on delinquent loans prior
to default. The fee is received when the loan is initially
placed with the Company and the Company is obligated to provide
such services for the remaining life of the loan for no
additional fee. In the event that the loan defaults, the Company
is obligated to rebate a portion of the fee to the Guarantor
agency in proportion to the principal and interest outstanding
when the loan defaults. The Company recognizes fees received,
net of actual rebates for defaults, over the service period
which is estimated to be the life of the loan.
Collections
Revenue
The Company has purchased delinquent and charged-off receivables
on various types of consumer debt with a primary emphasis on
charged-off credit card receivables, and
sub-performing
and non-performing mortgage loans. The Company accounts for its
investments in charged-off receivables and
sub-performing
and
F-22
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 2. | Significant Accounting Policies (Continued) |
non-performing mortgage loans in accordance with ASC 310. Under
ASC 310, the Company establishes static pools of each
quarter’s purchases and aggregates them based on common
risk characteristics. The pools when formed are initially
recorded at fair value, based on each pool’s estimated
future cash flows and internal rate of return. The Company
recognizes income each month based on each static pool’s
effective interest rate. The static pools are tested quarterly
for impairment by re-estimating the future cash flows to be
received from the pools. If the new estimated cash flows result
in a pool’s effective interest rate increasing, then this
new yield is used prospectively over the remaining life of the
static pool. If the new estimated cash flows result in a
pool’s effective interest rate decreasing, the pool is
impaired and written down through a valuation allowance to
maintain the effective interest rate. The Company recognized
$79 million and $111 million of impairments for the
years ended December 31, 2009 and 2008, respectively, as
discussed in Note 20, “Segment Reporting.”
Net interest income earned, less any impairments recognized, on
the purchased portfolios is recorded as collection revenue in
the consolidated statements of income. When mortgage loans
default and the Company forecloses and owns the underlying real
estate, the Company carries such real estate at the lower of
cost or fair value. There is approximately $285 million on
the balance sheet as of December 31, 2009 related to
purchased paper assets.
Restructuring
Activities
From time to time, the Company implements plans to restructure
its business. In conjunction with these restructuring plans,
one-time, involuntary benefit arrangements, disposal costs
(including contract termination costs and other exit costs), as
well as certain other costs that are incremental and incurred as
a direct result of the Company’s restructuring plans, are
accounted for in accordance with ASC 420, “Exit or Disposal
Cost Obligations,” and are classified as restructuring
expenses in the accompanying consolidated statements of income.
In conjunction with its restructuring plans, the Company has
entered into one-time benefit arrangements with employees,
primarily senior executives, who have been involuntarily
terminated. The Company recognizes a liability when all of the
following conditions have been met and the benefit arrangement
has been communicated to the employees:
| • | Management, having the authority to approve the action, commits to a plan of termination; | |
| • | The plan of termination identifies the number of employees to be terminated, their job classifications or functions and their locations and the expected completion date; | |
| • | The plan of termination establishes the terms of the benefit arrangement, including the benefits that employees will receive upon termination, in sufficient detail to enable employees to determine the type and amount of benefits they will receive if they are involuntarily terminated; and | |
| • | Actions required to complete the plan of termination indicate that it is unlikely that significant changes to the plan of termination will be made or that the plan of termination will be withdrawn. |
Severance costs under such one-time termination benefit
arrangements may include all or some combination of severance
pay, medical and dental benefits, outplacement services, and
certain other costs.
Contract termination costs are expensed at the earlier of
(1) the contract termination date or (2) the cease use
date under the contract. Other exit costs are expensed as
incurred and classified as restructuring expenses if
(1) the cost is incremental to and incurred as a direct
result of planned restructuring activities, and (2) the
cost is not associated with or incurred to generate revenues
subsequent to the Company’s consummation of the related
restructuring activities.
F-23
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 2. | Significant Accounting Policies (Continued) |
In addition to one-time involuntary benefit arrangements, the
Company sponsors the SLM Corporation Employee Severance Plan,
which provides severance benefits in the event of termination of
the Company’s and its subsidiaries’ full-time
employees (with the exception of certain specified levels of
management and employees of the Company’s APG subsidiaries)
and part-time employees who work at least 24 hours per
week. The Company also sponsors the DMO Employee Severance Plan,
which provides severance benefits to certain specified levels of
full-time management and full-time employees in the
Company’s APG subsidiaries. The Employee Severance Plan and
the DMO Employee Severance Plan (collectively, the
“Severance Plan”) establishes specified benefits based
on base salary, job level immediately preceding termination and
years of service upon termination of employment due to
Involuntary Termination or a Job Abolishment, as defined in the
Severance Plan. The benefits payable under the Severance Plan
relate to past service and they accumulate and vest.
Accordingly, the Company recognizes severance costs to be paid
pursuant to the Severance Plan in accordance with ASC 712,
“Compensation—Nonretirement Postemployment
Benefits,” when payment of such benefits is probable and
reasonably estimable. Such benefits, including severance pay
calculated based on the Severance Plan, outplacement services
and continuation pay, have been incurred during the years ended
December 31, 2009 and 2008, and the fourth quarter of 2007
as a direct result of the Company’s restructuring
initiatives. Accordingly, such costs are classified as
restructuring expenses in the accompanying consolidated
statements of income. See Note 15, “Restructuring
Activities,” for further information regarding the
Company’s restructuring activities.
Software
Development Costs
Certain direct development costs associated with internal-use
software are capitalized, including external direct costs of
services and payroll costs for employees devoting time to the
software projects. These costs are included in other assets and
are amortized over a period not to exceed five years beginning
when the asset is technologically feasible and substantially
ready for use. Maintenance costs and research and development
costs relating to software to be sold or leased are expensed as
incurred.
During the years ended December 31, 2009, 2008 and 2007,
the Company capitalized $16 million, $23 million and
$19 million, respectively, in costs related to software
development, and expensed $138 million, $120 million
and $126 million, respectively, related to routine
maintenance, betterments and amortization. At December 31,
2009 and 2008, the unamortized balance of capitalized internally
developed software included in other assets was $53 million
and $56 million, respectively. The Company amortizes
software development costs over three to five years.
Accounting
for Stock-Based Compensation
On January 1, 2006, the Company adopted the provisions of
ASC 718, “Compensation-Stock Compensation,” which
includes a revision of SFAS No. 123, “Accounting
for Stock-Based Compensation,” and began recognizing
stock-based compensation cost in its consolidated statements of
income using the fair value based method. Prior to 2006, the
Company accounted for its stock option plans using the intrinsic
value method of accounting provided and no compensation cost
related to its stock option grants was recognized in its
consolidated statements of income.
ASC 718 requires that the excess tax benefits from tax
deductions on the exercise of share-based payments exceeding the
deferred tax assets from the cumulative compensation cost
previously recognized be classified as cash inflows from
financing activities in the consolidated statement of cash
flows. Prior to the adoption of ASC 718, the Company presented
all excess tax benefits resulting from the exercise of
share-based payments as operating cash flows. The excess tax
benefit for the year ended December 31, 2009 was $0.
F-24
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 2. | Significant Accounting Policies (Continued) |
Income
Taxes
Income taxes are recorded in accordance with ASC 740,
“Income Taxes.” The asset and liability approach
underlying ASC 740 requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences
of temporary differences between the carrying amounts and tax
basis of the Company’s assets and liabilities. To the
extent tax laws change, deferred tax assets and liabilities are
adjusted in the period that the tax change is enacted.
“Income tax expense/(benefit)” includes
(i) deferred tax expense/(benefit), which represents the
net change in the deferred tax asset or liability balance during
the year plus any change in a valuation allowance, and
(ii) current tax expense/(benefit), which represents the
amount of tax currently payable to or receivable from a tax
authority plus amounts accrued for unrecognized tax benefits.
Income tax expense/(benefit) excludes the tax effects related to
adjustments recorded in equity.
New provisions under ASC 740, pertaining to the accounting of
uncertainty in income taxes, were adopted on January 1,
2007. Under ASC 740, an uncertain tax position is recognized
only if it is more likely than not to be sustained upon
examination based on the technical merits of the position. The
amount of tax benefit recognized in the financial statements is
the largest amount of benefit that is more than fifty percent
likely of being sustained upon ultimate settlement of the
uncertain tax position. The Company recognizes interest related
to unrecognized tax benefits in income tax expense/(benefit),
and penalties, if any, in operating expenses.
Earnings
(Loss) per Common Share
The Company computes earnings (loss) per common share
(“EPS”) in accordance with ASC 260, “Earnings per
Share.” See Note 12, “Earnings (Loss) per Common
Share,” for further discussion.
Discontinued
Operations
A “Component” of a business comprises operations and
cash flows that can be clearly distinguished operationally and
for financial reporting purposes from the rest of the Company.
When a Component of a business is disposed of or is classified
as held for sale in accordance with ASC 360, “Property,
Plant and Equipment,” such Component is presented
separately as discontinued operations in accordance with ASC
205, “Presentation of Financial Statements —
Discontinued Operations,” if the operations of the
Component have been or will be eliminated from the ongoing
operations of the Company and the Company will have no
continuing involvement with the Component after the disposal
transaction is complete. See Note 21, “Discontinued
Operations,” for further discussion.
Foreign
Currency Transactions
The Company had financial services operations in foreign
countries through the first quarter of 2009. The financial
statements of these foreign businesses have been translated into
U.S. dollars in accordance with U.S. GAAP. The net
investments of the parent in the foreign subsidiary are
translated at the current exchange rate at each period-end
through the “other comprehensive income” component of
stockholders’ equity for net investments deemed to be
long-term in nature or through net income if the net investment
is short-term in nature. Income statement items are translated
at the average exchange rate for the period through income.
Transaction gains and losses resulting from exchange rate
changes on transactions denominated in currencies other than the
entity’s functional currency are included in other
operating income.
F-25
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 2. | Significant Accounting Policies (Continued) |
Statement
of Cash Flows
Included in the Company’s financial statements is the
consolidated statement of cash flows. It is the policy of the
Company to include all derivative net settlements, irrespective
of whether the derivative is a qualifying hedge, in the same
section of the statement of cash flows that the derivative is
economically hedging.
As discussed above under
“Restricted Cash and
Investments,”
the Company’s restricted cash
balances primarily relate to on-balance sheet securitizations.
This balance is primarily the result of timing differences
between when principal and interest is collected on the trust
assets and when principal and interest is paid on the trust
liabilities. As such, changes in this balance are reflected in
investing activities.
Reclassifications
Certain reclassifications have been made to the balances as of
and for the years ended December 31, 2008 and 2007, to be
consistent with classifications adopted for 2009, which had no
impact on net income, total assets or total liabilities.
Recently
Issued Accounting Standards
FASB
Accounting Standards Codification
The Company adopted, as of July 1, 2009, the FASB’s
Accounting Standards Codification (“ASC”) as the
source of authoritative accounting principles recognized by the
FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with GAAP. The
ASC does not change authoritative guidance. Accordingly,
implementing the ASC did not change any of the Company’s
accounting and, therefore, did not have an impact on the
consolidated results of the Company. References to authoritative
GAAP literature have been updated accordingly.
Transfers
of Financial Assets and the Variable Interest Entity
(“VIE”) Consolidation Model
In June 2009, the FASB issued topic updates to ASC 860,
“Transfers and Servicing,” and to ASC 810,
“Consolidation.”
The topic update to ASC 860, among other things,
(1) eliminates the concept of a Qualifying Special Purpose
Entity (“QSPE”), (2) changes the requirements for
derecognizing financial assets, (3) changes the amount of
the recognized gain/loss on a transfer accounted for as a sale
when beneficial interests are received by the transferor, and
(4) requires additional disclosure. The topic update to ASC
860 is effective for transactions which occur in fiscal years
beginning after November 15, 2009. The impact of ASC 860 to
future transactions will depend on how such transactions are
structured. ASC 860 relates primarily to the Company’s
secured borrowing facilities. All of the Company’s secured
borrowing facilities entered into in 2008 and 2009, including
securitization trusts, have been accounted for as on balance
sheet financing facilities. These transactions would have been
accounted for in the same manner if ASC 860 had been effective
during these years.
The topic update to ASC 810 significantly changes the
consolidation model for Variable Interest Entities
(“VIEs”). The topic update amends ASC 810 and, among
other things, (1) eliminates the exemption for QSPEs,
(2) provides a new approach for determining who should
consolidate a VIE that is more focused on control rather than
economic interest, (3) changes when it is necessary to
reassess who should consolidate a VIE and (4) requires
additional disclosure. The topic update to ASC 810 is effective
for the first annual reporting period beginning after
November 15, 2009.
F-26
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 2. | Significant Accounting Policies (Continued) |
Under ASC 810, if an entity has a Variable Interest in a VIE and
that entity is determined to be the Primary Beneficiary of the
VIE then that entity will consolidate the VIE. The Primary
Beneficiary is the entity which has both: (1) the power to
direct the activities of the VIE that most significantly impact
the VIE’s economic performance, and (2) the obligation
to absorb losses or receive benefits of the entity that could
potentially be significant to the VIE. As it relates to the
Company’s securitized assets, the Company is the servicer
of the securitized assets and owns the Residual Interest of the
securitization trusts. As a result, the Company is the Primary
Beneficiary of its securitization trusts and will consolidate
those trusts that are off-balance sheet at their historical cost
basis on January 1, 2010. The historical cost basis is the
basis that would exist if these securitization trusts had
remained on balance sheet since they settled. ASC 810 did not
change the accounting of any other VIEs the Company has a
variable interest in as of January 1, 2010. These new
accounting rules will also apply to new transactions entered
into from January 1, 2010 forward.
On January 1, 2010, upon adopting ASC 810, the Company
removed the $1.8 billion of Residual Interests associated
with these trusts from the consolidated balance sheet and the
Company consolidated $35.0 billion of assets
($32.6 billion of which are student loans, net of a
$550 million allowance for loan loss) and
$34.4 billion of liabilities (primarily trust debt), which
resulted in an approximate $0.7 billion after-tax reduction
of stockholders’ equity (through retained earnings). After
adoption of ASC 810, with respect to the securitization trusts
that were consolidated on January 1, 2010, the
Company’s results of operations will no longer reflect
servicing and securitization income related to these
securitization trusts, but will instead report interest income,
provisions for loan losses associated with the securitized
assets and interest expense associated with the debt issued from
the securitization trusts to third parties. This presentation
will be identical to the Company’s accounting treatment of
prior on-balance securitization trusts. The Company has not had
a securitization that was treated as a sale since 2007.
Management allocates capital on a Managed Basis. This change
will not impact management’s view of capital adequacy for
the Company. The Company’s unsecured revolving credit
facilities contains two principal financial covenants related to
tangible net worth and net revenue. The tangible net worth
covenant requires the Company to maintain consolidated tangible
net worth of at least $1.38 billion at all times.
Consolidated tangible net worth as calculated for purposes of
this covenant was $3.5 billion as of December 31,
2009. Upon adoption of ASC 810 on January 1, 2010,
consolidated tangible net worth as calculated for this covenant
was $2.7 billion. Because the transition adjustment upon
adoption of ASC 810 is recorded through retained earnings, the
net revenue covenant was not impacted by the adoption of ASC
810. The ongoing net revenue covenant will not be affected by
ASC 810’s impact on the Company’s securitization
trusts as the net revenue covenant treated all off-balance sheet
trusts as on-balance sheet for purposes of calculating net
revenue.
Subsequent
Events
In May 2009, the FASB issued a topic update on ASC 855,
“Subsequent Events.” This topic update is intended to
establish general standards of accounting for, and disclosure
of, events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
Specifically, this topic update sets forth the period after the
balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements,
the circumstances under which an entity should recognize events
or transactions occurring after the balance sheet date in its
financial statements, and the disclosures that an entity should
make about events or transactions that occurred after the
balance sheet date. The topic update to ASC 855 is effective for
fiscal years and interim periods ending after June 15,
2009. The Company adopted this topic update effective
June 15, 2009 and has evaluated any events subsequent to
December 31, 2009, and their impact on the reported results
and disclosures.
F-27
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 2. | Significant Accounting Policies (Continued) |
Fair
Value Measurements
In January 2010, the FASB issued a topic update to ASC 820,
“Fair Value Measurements and Disclosures.” The update
improves reporting by requiring separate disclosures of the
amounts of significant transfers in and out of Level 1 and
2 of fair value measurements and a description of the reasons
for the transfers. In addition, a reporting unit should report
separately information about purchases, sales, issuances, and
settlements within the reconciliation of activity in
Level 3 fair value measurements. Finally, the update
clarifies existing disclosure requirements regarding the level
of disaggregation in reporting classes of assets and liabilities
and discussion of the inputs and valuation techniques used for
level 2 and 3 fair values. This topic update is effective
for annual and interim periods beginning January 1, 2010,
except for disclosures about purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair
value measurements. Those disclosures are effective for annual
and interim periods beginning January 1, 2011.
In August 2009, the FASB issued another topic update to ASC 820.
The update provides clarification for the valuation of
liabilities when a quoted price in an active market for the
liability does not exist and clarifies that a quoted price for
the liability when traded as an asset (when no adjustments are
required) is a Level 1 fair value measurement. In addition,
it also clarifies that an entity is not required to adjust the
value of a liability for the existence of a restriction that
prevents the transfer of the liability. This topic update was
effective for the Company beginning October 1, 2009 and was
not material to the Company.
On April 9, 2009, the FASB issued three ASC topic updates
regarding fair value measurements and impairment. Under ASC 320,
“Investments — Debt and Equity Securities,”
impairment must be recorded within the consolidated statements
of income for debt securities if there exists a fair value loss
and the entity intends to sell the security or it is more likely
than not the entity will be required to sell the security before
recovery of the loss. Additionally, expected credit losses must
be recorded through income regardless of the impairment
determination above. Remaining fair value losses are recorded to
other comprehensive income. ASC 825, “Financial
Instruments,” requires interim disclosures of the fair
value of financial instruments that were previously only
required annually. Finally, the topic update to ASC 820 provides
guidance for determining when a significant decrease in market
activity has occurred and when a transaction is not orderly. It
further reiterates that prices from inactive markets or
disorderly transactions should carry less weight, if any, to the
determination of fair value. These topic updates were effective
for the Company beginning April 1, 2009. The adoption of
these topic updates was not material to the Company.
Business
Combinations
In December 2007, the FASB issued a topic update to ASC 805,
“Business Combinations.” The update requires the
acquiring entity in a business combination to recognize the
entire acquisition-date fair value of assets acquired and
liabilities assumed in both full and partial acquisitions;
changes the recognition of assets acquired and liabilities
assumed related to contingencies; changes the recognition and
measurement of contingent consideration; requires expensing of
most transaction and restructuring costs; and requires
additional disclosures to enable the users of the financial
statements to evaluate and understand the nature and financial
effect of the business combination. The ASC 805 topic update
applies to all transactions or other events in which the Company
obtains control of one or more businesses. The ASC topic update
applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the reporting
period beginning on or after December 15, 2008, which for
the Company was January 1, 2009. The adoption of this topic
update on January 1, 2009 did not have a material effect on
the Company’s results of operations or financial position.
F-28
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 2. | Significant Accounting Policies (Continued) |
In February 2009, the FASB issued another topic update to ASC
805. This additional update amends the provisions related to the
initial recognition and measurement, subsequent measurement and
disclosure of assets and liabilities arising from contingencies
in a business combination under ASC 805. The ASC topic update
had the same effective date as the topic update to ASC 805
referenced above. The adoption of this topic update did not have
a material effect on the Company’s results of operations or
financial position.
Noncontrolling
Interests in Consolidated Financial Statements
In December 2007, the FASB issued a topic update to ASC 810,
“Consolidation.” This update requires reporting
entities to present noncontrolling (minority) interests as
equity (as opposed to presentation as a liability or mezzanine
equity) and provides guidance on the accounting for transactions
between an entity and noncontrolling interests. On
January 1, 2009, the Company adopted this ASC topic update,
the provisions of which, among other things, require that
minority interests be renamed “noncontrolling
interests” and that a company present a consolidated net
income (loss) measure that includes the amount attributable to
such “noncontrolling interests” for all periods
presented. The topic update to ASC 810 applies prospectively for
reporting periods beginning on or after December 15, 2008,
except for the presentation and disclosure requirements which
are applied retrospectively for all periods presented. The
Company has reclassified financial statement line items within
its consolidated balance sheets, statements of income,
statements of changes in stockholders’ equity and
statements of cash flows for the prior periods to conform to
this topic update. Other than the change in presentation of
noncontrolling interests, the adoption of this topic update had
no impact on the consolidated financial statements.
Disclosures
about Derivative Investments and Hedging Activities
In March 2008, the FASB updated ASC 815, “Derivatives and
Hedging.” This topic update requires enhanced disclosures
about an entity’s derivative and hedging activities,
including (1) how and why an entity uses derivative
instruments, (2) how derivative instruments and related
hedged items are accounted for under ASC 815 and its related
interpretations, and (3) how derivative instruments and
related hedged items affect an entity’s financial position,
financial performance, and cash flows. To meet those objectives,
the topic update requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts and gains and losses on
derivative instruments, and disclosures about
credit-risk-related contingent features in derivative
agreements. This ASC topic update is effective for financial
statements issued for fiscal years and interim periods beginning
after November 15, 2008. The Company adopted this topic
update on January 1, 2009.
| 3. | Student Loans |
The FFELP is subject to comprehensive reauthorization every five
years and to frequent statutory and regulatory changes. The most
recent reauthorization of the student loan programs was the
Higher Education Reconciliation Act of 2005 (the
“Reconciliation Legislation”).
There are three principal categories of FFELP loans: Stafford,
PLUS, and FFELP Consolidation Loans. Generally, Stafford and
PLUS Loans have repayment periods of between five and ten years.
FFELP Consolidation Loans have repayment periods of twelve to
thirty years. FFELP loans do not require repayment, or have
modified repayment plans, while the borrower is in-school and
during the grace period immediately upon leaving school. The
borrower may also be granted a deferment or forbearance for a
period of time based on need, during which time the borrower is
not considered to be in repayment. Interest continues to accrue
on loans in the in-school, deferment and forbearance period.
FFELP loans obligate the borrower to pay interest at a stated
fixed rate or a variable rate reset annually (subject to a cap)
on July 1 of each year depending on
F-29
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 3. | Student Loans (Continued) |
when the loan was originated and the loan type. The Company
earns interest at the greater of the borrower’s rate or a
floating rate based on the SAP formula, with the interest earned
on the floating rate that exceeds the interest earned from the
borrower being paid directly by ED. In low or certain declining
interest rate environments when student loans are earning at the
fixed borrower rate, and the interest on the funding for the
loans is variable and declining, the Company can earn additional
spread income that it refers to as Floor Income. For loans
disbursed after April 1, 2006, FFELP loans effectively only
earn at the SAP rate, as the excess interest earned when the
borrower rate exceeds the SAP rate (Floor Income) must be
refunded to ED.
FFELP loans are guaranteed as to their principal and accrued
interest in the event of default subject to a Risk Sharing level
based on the date of loan disbursement. For loans disbursed
after October 1, 1993 and before July 1, 2006, the
Company receives 98 percent reimbursement on all qualifying
default claims. For loans disbursed on or after July 1,
2006, the Company receives 97 percent reimbursement.
In 2009, the Company sold to ED approximately $18.5 billion
face amount of loans as part of the Purchase Program
(approximately $840 million face amount of this amount was
sold in the third quarter of 2009, with the remainder sold in
the fourth quarter of 2009). Outstanding debt of
$18.5 billion was paid down related to the Loan Purchase
Participation Program (“Participation Program”)
pursuant to ECASLA in connection with these loan sales. These
loan sales resulted in a $284 million gain. The settlement
of the fourth quarter sale of loans out of the Participation
Program included repaying the debt by delivering the related
loans to ED in a non-cash transaction and receipt of cash from
ED for $484 million, representing the reimbursement of a of
one-percent payment made to ED plus a $75 fee per loan.
In December 2008, the Company sold approximately
$494 million (principal and accrued interest) of FFELP
loans to ED at a price of 97 percent of principal and
unpaid interest pursuant to ED’s authority under ECASLA to
make such purchases, and recorded a loss on the sale.
Additionally, in early January 2009, the Company sold an
additional $486 million (principal and accrued interest) in
FFELP loans to ED under this program. The loss related to this
sale in January was recognized in 2008 as the loans were
classified as
“held-for-sale”
under GAAP. The total loss recognized on these two sales for the
year ended December 31, 2008 was $53 million and was
recorded in “Losses on sales of loans and securities,
net” in the consolidated statements of income.
In addition to FFELP loan programs, which place statutory limits
on per year and total borrowing, the Company offers a variety of
Private Education Loans. Private Education Loans for
post-secondary education and loans for career training can be
subdivided into two main categories: loans that supplement FFELP
loans primarily for higher and lifelong learning programs and
loans for career training. For the majority of the Private
Education Loan portfolio, the Company bears the full risk of any
losses experienced and, as a result, these loans are
underwritten and priced based upon standardized consumer credit
scoring criteria.
Forbearance involves granting the borrower a temporary cessation
of payments (or temporary acceptance of smaller than scheduled
payments) for a specified period of time. Using forbearance in
this manner effectively extends the original term of the loan.
Forbearance does not grant any reduction in the total repayment
obligation (principal or interest). While a loan is in
forbearance status, interest continues to accrue and is
capitalized to principal when the loan re-enters repayment
status. The Company’s forbearance policies include limits
on the number of forbearance months granted consecutively and
the total number of forbearance months granted over the life of
the loan. In some instances, the Company requires good-faith
payments before granting forbearance. Exceptions to forbearance
policies are permitted when such exceptions are judged to
increase the likelihood of ultimate collection of the loan.
Forbearance as a collection tool is used most
F-30
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 3. | Student Loans (Continued) |
effectively when applied based on a borrower’s unique
situation, including historical information and judgments. The
Company combines borrower information with a risk-based
segmentation model to assist in its decision making as to who
will be granted forbearance based on the Company’s
expectations as to a borrower’s ability and willingness to
repay their obligation. This strategy is aimed at mitigating the
overall risk of the portfolio as well as encouraging cash
resolution of delinquent loans.
Forbearance may be granted to borrowers who are exiting their
grace period to provide additional time to obtain employment and
income to support their obligations, or to current borrowers who
are faced with a hardship and request forbearance time to
provide temporary payment relief. In these circumstances, a
borrower’s loan is placed into a forbearance status in
limited monthly increments and is reflected in the forbearance
status at month-end during this time. At the end of their
granted forbearance period, the borrower will enter repayment
status as current and is expected to begin making their
scheduled monthly payments on a go-forward basis.
Forbearance may also be granted to borrowers who are delinquent
in their payments. In these circumstances, the forbearance cures
the delinquency and the borrower is returned to a current
repayment status. In more limited instances, delinquent
borrowers will also be granted additional forbearance time. As
the Company has obtained further experience about the
effectiveness of forbearance, the Company has reduced the amount
of time a loan will spend in forbearance, thereby increasing the
Company’s ongoing contact with the borrower to encourage
consistent repayment behavior once the loan is returned to a
current repayment status.
During the second quarter of 2009, the Company instituted an
interest rate reduction program to assist customers in repaying
their Private Education Loans through reduced payments, while
continuing to reduce their outstanding principal balance. This
program is offered in situations where the potential for
principal recovery, through a modification of the monthly
payment amount, is better than other alternatives currently
available. Along with the ability and willingness to pay, the
customer must make three consecutive monthly payments at the
reduced rate in order to qualify for the program. Once the
customer has made the initial three payments, the loans status
is returned to current and the interest rate is reduced for the
successive twelve month period. At December 31, 2009,
approximately $181 million face amount had qualified for
the program and are currently receiving a reduction in their
interest rate.
The Company may charge the borrower fees on certain Private
Education Loans, either at origination, when the loan enters
repayment, or both. Such fees are deferred and recognized into
income as a component of interest over the estimated average
life of the related pool of loans.
As of December 31, 2009 and 2008, 59 percent and
56 percent, respectively, of the Company’s
on-balance
sheet student loan portfolio was in repayment.
F-31
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 3. | Student Loans (Continued) |
The estimated weighted average life of student loans in the
Company’s portfolio was approximately 7.9 years and
7.8 years at December 31, 2009 and 2008, respectively.
The following table reflects the distribution of the
Company’s student loan portfolio by program.
|
December 31,
|
Year Ended
|
|||||||||||||||
| 2009 | December 31, 2009 | |||||||||||||||
|
Average
|
||||||||||||||||
|
Effective
|
||||||||||||||||
|
Ending
|
% of
|
Average
|
Interest
|
|||||||||||||
| Balance | Balance | Balance | Rate | |||||||||||||
|
FFELP Stafford and Other Student Loans,
net
(1)
|
$ | 52,674,588 | 37 | % | $ | 58,491,748 | 2.07 | % | ||||||||
|
FFELP Consolidation Loans, net
|
68,378,560 | 47 | 70,045,863 | 2.69 | ||||||||||||
|
Private Education Loans, net
|
22,753,462 | 16 | 23,153,975 | 6.83 | ||||||||||||
|
Total student loans,
net
(2)
|
$ | 143,806,610 | 100 | % | $ | 151,691,586 | 3.08 | % | ||||||||
|
December 31,
|
Year Ended
|
|||||||||||||||
| 2008 | December 31, 2008 | |||||||||||||||
|
Average
|
||||||||||||||||
|
Effective
|
||||||||||||||||
|
Ending
|
% of
|
Average
|
Interest
|
|||||||||||||
| Balance | Balance | Balance | Rate | |||||||||||||
|
FFELP Stafford and Other Student Loans,
net
(1)
|
$ | 52,476,337 | 36 | % | $ | 44,290,909 | 4.50 | % | ||||||||
|
FFELP Consolidation Loans, net
|
71,743,435 | 50 | 73,091,087 | 4.35 | ||||||||||||
|
Private Education Loans, net
|
20,582,298 | 14 | 19,276,067 | 9.01 | ||||||||||||
|
Total student loans,
net
(2)
|
$ | 144,802,070 | 100 | % | $ | 136,658,063 | 5.06 | % | ||||||||
| (1) | The FFELP category is primarily Stafford Loans, but also includes federally guaranteed PLUS and HEAL Loans along with $9.7 billion and $8.5 billion of Stafford Loans held-for-sale at December 31, 2009 and 2008, respectively. | |
| (2) | The total student loan ending balance includes net unamortized premiums/discounts of $1,628,693 and $1,895,220 as of December 31, 2009 and 2008, respectively. |
| 4. | Allowance for Loan Losses |
The Company’s provisions for loan losses represent the
periodic expense of maintaining an allowance sufficient to
absorb incurred losses, net of recoveries, in the
held-for-investment
loan portfolios. The evaluation of the provisions for student
loan losses is inherently subjective as it requires material
estimates that may be susceptible to significant changes. The
Company believes that the allowance for student loan losses is
appropriate to cover probable losses incurred in the loan
portfolios.
The following tables summarize the total loan loss provisions
for the years ended December 31, 2009, 2008 and 2007.
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Private Education Loans
|
$ | 966,591 | $ | 586,169 | $ | 883,474 | ||||||
|
FFELP Stafford and Other Student Loans
|
106,221 | 105,568 | 89,083 | |||||||||
|
Mortgage and consumer loans
|
46,148 | 27,913 | 42,751 | |||||||||
|
Total provisions for loan losses
|
$ | 1,118,960 | $ | 719,650 | $ | 1,015,308 | ||||||
F-32
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 4. | Allowance for Loan Losses (Continued) |
Allowance
for Private Education Loan Losses
The following table summarizes changes in the allowance for
Private Education Loan losses for the years ended
December 31, 2009, 2008 and 2007.
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Allowance at beginning of year
|
$ | 1,308,043 | $ | 1,003,963 | $ | 372,612 | ||||||
|
Total provision
|
966,591 | 586,169 | 883,474 | |||||||||
|
Charge-offs
|
(875,667 | ) | (320,240 | ) | (246,343 | ) | ||||||
|
Reclassification of interest
reserve
(1)
|
44,473 | 38,151 | — | |||||||||
|
Balance before securitization of Private Education Loans
|
1,443,440 | 1,308,043 | 1,009,743 | |||||||||
|
Reduction for securitization of Private Education Loans
|
— | — | (5,780 | ) | ||||||||
|
Allowance at end of
year
(2)
|
$ | 1,443,440 | $ | 1,308,043 | $ | 1,003,963 | ||||||
|
Charge-offs as a percentage of average loans in repayment
|
7.2 | % | 3.8 | % | 4.1 | % | ||||||
|
Charge-offs as a percentage of average loans in repayment and
forbearance
|
6.7 | % | 3.3 | % | 3.7 | % | ||||||
|
Allowance as a percentage of the ending total loan
balance
(3)
|
5.8 | % | 5.8 | % | 6.2 | % | ||||||
|
Allowance as a percentage of the ending loans in repayment
|
10.0 | % | 11.7 | % | 14.3 | % | ||||||
|
Allowance coverage of charge-offs
|
1.6 | 4.1 | 4.1 | |||||||||
|
Ending total
loans
(3)
|
$ | 24,755,598 | $ | 22,425,640 | $ | 16,289,784 | ||||||
|
Average loans in repayment
|
$ | 12,137,430 | $ | 8,533,356 | $ | 5,949,007 | ||||||
|
Ending loans in repayment
|
$ | 14,379,102 | $ | 11,182,053 | $ | 7,046,709 | ||||||
| (1) | Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance. Prior to 2008, the interest provision was reversed in interest income and then provided for through provision within the allowance for loan loss. For the year ended December 31, 2007, this amount was $21 million. | |
| (2) | Includes $32 million in 2009 related to the loan modification program. Prior to 2009 this program was not offered. As of December 31, 2009, $181 million face amount of loans were currently receiving a reduction in their interest rate under this program. | |
| (3) | Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans. |
F-33
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 4. | Allowance for Loan Losses (Continued) |
The table below shows the Company’s Private Education Loan
delinquency trends as of December 31, 2009, 2008 and 2007.
| December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Balance | % | Balance | % | Balance | % | |||||||||||||||||||
|
(Dollars in millions)
|
||||||||||||||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 8,910 | $ | 10,159 | $ | 8,151 | ||||||||||||||||||
|
Loans in
forbearance
(2)
|
967 | 862 | 974 | |||||||||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||||||||||
|
Loans current
|
12,421 | 86.4 | % | 9,748 | 87.2 | % | 6,236 | 88.5 | % | |||||||||||||||
|
Loans delinquent
31-60 days
(3)
|
647 | 4.5 | 551 | 4.9 | 306 | 4.3 | ||||||||||||||||||
|
Loans delinquent
61-90 days
|
340 | 2.4 | 296 | 2.6 | 176 | 2.5 | ||||||||||||||||||
|
Loans delinquent greater than 90 days
|
971 | 6.7 | 587 | 5.3 | 329 | 4.7 | ||||||||||||||||||
|
Total Private Education Loans in repayment
|
14,379 | 100 | % | 11,182 | 100 | % | 7,047 | 100 | % | |||||||||||||||
|
Total Private Education Loans, gross
|
24,256 | 22,203 | 16,172 | |||||||||||||||||||||
|
Private Education Loan unamortized discount
|
(559 | ) | (535 | ) | (468 | ) | ||||||||||||||||||
|
Total Private Education Loans
|
23,697 | 21,668 | 15,704 | |||||||||||||||||||||
|
Private Education Loan receivable for partially charged-off loans
|
499 | 222 | 118 | |||||||||||||||||||||
|
Private Education Loan allowance for losses
|
(1,443 | ) | (1,308 | ) | (1,004 | ) | ||||||||||||||||||
|
Private Education Loans, net
|
$ | 22,753 | $ | 20,582 | $ | 14,818 | ||||||||||||||||||
|
Percentage of Private Education Loans in repayment
|
59.3 | % | 50.4 | % | 43.6 | % | ||||||||||||||||||
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
13.6 | % | 12.8 | % | 11.5 | % | ||||||||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
6.3 | % | 7.2 | % | 12.1 | % | ||||||||||||||||||
| (1) | Loans for borrowers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation. | |
| (2) | Loans for borrowers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with the established loan program servicing procedures and policies. | |
| (3) | The period of delinquency is based on the number of days scheduled payments are contractually past due. |
F-34
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 4. | Allowance for Loan Losses (Continued) |
Allowance
for FFELP Loan Losses
The following table summarizes changes in the allowance for
student loan losses for federally insured student loan
portfolios for the years ended December 31, 2009, 2008, and
2007.
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Allowance at beginning of year
|
$ | 137,543 | $ | 88,729 | $ | 20,315 | ||||||
|
Provisions for student loan losses
|
106,221 | 105,568 | 89,083 | |||||||||
|
Charge-offs
|
(78,861 | ) | (57,510 | ) | (21,235 | ) | ||||||
|
Increase/decrease for student loan sales and securitizations
|
(3,735 | ) | 756 | 566 | ||||||||
|
Allowance at end of year
|
$ | 161,168 | $ | 137,543 | $ | 88,729 | ||||||
|
Charge-offs as a percentage of average loans in repayment
|
.1 | % | .1 | % | .04 | % | ||||||
|
Charge-offs as a percentage of average loans in repayment and
forbearance
|
.1 | % | .1 | % | .03 | % | ||||||
|
Allowance as a percentage of the ending total loans, gross
|
.1 | % | .1 | % | .1 | % | ||||||
|
Allowance as a percentage of the ending loans in repayment
|
.2 | % | .2 | % | .1 | % | ||||||
|
Allowance coverage of charge-offs
|
2.0 | 2.4 | 4.2 | |||||||||
|
Ending total loans, gross
|
$ | 119,026,931 | $ | 121,926,798 | $ | 107,164,729 | ||||||
|
Average loans in repayment
|
$ | 69,020,295 | $ | 66,392,120 | $ | 58,999,119 | ||||||
|
Ending loans in repayment
|
$ | 69,826,790 | $ | 70,174,192 | $ | 65,289,865 | ||||||
The Company maintains an allowance for Risk Sharing loan losses
on its FFELP portfolio. The level of Risk Sharing has varied for
the Company over the past few years with legislative changes. As
of December 31, 2009, 50 percent of the on-balance
sheet FFELP loan portfolio was subject to three-percent Risk
Sharing, 49 percent was subject to two-percent Risk Sharing
and the remaining 1 percent was not subject to any Risk
Sharing.
F-35
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 4. | Allowance for Loan Losses (Continued) |
The table below shows the Company’s FFELP loan delinquency
trends as of December 31, 2009, 2008 and 2007.
| December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Balance | % | Balance | % | Balance | % | |||||||||||||||||||
|
(Dollars in millions)
|
||||||||||||||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 35,079 | $ | 39,270 | $ | 31,200 | ||||||||||||||||||
|
Loans in
forbearance
(2)
|
14,121 | 12,483 | 10,675 | |||||||||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||||||||||
|
Loans current
|
57,528 | 82.4 | % | 58,811 | 83.8 | % | 55,128 | 84.4 | % | |||||||||||||||
|
Loans delinquent
31-60 days
(3)
|
4,250 | 6.1 | 4,044 | 5.8 | 3,650 | 5.6 | ||||||||||||||||||
|
Loans delinquent
61-90 days
|
2,205 | 3.1 | 2,064 | 2.9 | 1,841 | 2.8 | ||||||||||||||||||
|
Loans delinquent greater than 90 days
|
5,844 | 8.4 | 5,255 | 7.5 | 4,671 | 7.2 | ||||||||||||||||||
|
Total FFELP loans in repayment
|
69,827 | 100 | % | 70,174 | 100 | % | 65,290 | 100 | % | |||||||||||||||
|
Total FFELP loans, gross
|
119,027 | 121,927 | 107,165 | |||||||||||||||||||||
|
FFELP loan unamortized premium
|
2,187 | 2,431 | 2,259 | |||||||||||||||||||||
|
Total FFELP loans
|
121,214 | 124,358 | 109,424 | |||||||||||||||||||||
|
FFELP loan allowance for losses
|
(161 | ) | (138 | ) | (89 | ) | ||||||||||||||||||
|
FFELP loans, net
|
$ | 121,053 | $ | 124,220 | $ | 109,335 | ||||||||||||||||||
|
Percentage of FFELP loans in repayment
|
58.7 | % | 57.6 | % | 60.9 | % | ||||||||||||||||||
|
Delinquencies as a percentage of FFELP loans in repayment
|
17.6 | % | 16.2 | % | 15.6 | % | ||||||||||||||||||
|
FFELP loans in forbearance as a percentage of loans in repayment
and forbearance
|
16.8 | % | 15.1 | % | 14.1 | % | ||||||||||||||||||
| (1) | Loans for borrowers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as, loans for borrowers who have requested extension of grace period during employment transition or who have temporarily ceased making full payments due to hardship or other factors. | |
| (2) | Loans for borrowers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors. | |
| (3) | The period of delinquency is based on the number of days scheduled payments are contractually past due. |
F-36
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 5. | Investments |
A summary of investments and restricted investments as of
December 31, 2009 and 2008 follows:
| December 31, 2009 | ||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
|
Investments
|
||||||||||||||||
|
Available-for-sale
|
||||||||||||||||
|
U.S. Treasury securities and other U.S. government agency
obligations
|
$ | 272 | $ | $ | — | $ | 272 | |||||||||
|
Other securities:
|
||||||||||||||||
|
Asset-backed securities
|
110,336 | 306 | (893 | ) | 109,749 | |||||||||||
|
Commercial paper and asset-backed commercial paper
|
1,149,981 | — | — | 1,149,981 | ||||||||||||
|
Municipal bonds
|
9,935 | 1,942 | — | 11,877 | ||||||||||||
|
Other
|
1,550 | — | (154 | ) | 1,396 | |||||||||||
|
Total investment securities
available-for-sale
|
$ | 1,272,074 | $ | 2,248 | $ | (1,047 | ) | $ | 1,273,275 | |||||||
|
Restricted Investments
|
||||||||||||||||
|
Available-for sale
|
||||||||||||||||
|
U.S. Treasury securities and other U.S. government agency
obligations
|
$ | 25,026 | $ | — | $ | — | $ | 25,026 | ||||||||
|
Guaranteed investment contracts
|
26,951 | — | — | 26,951 | ||||||||||||
|
Total restricted investments
available-for-sale
|
$ | 51,977 | $ | — | $ | — | $ | 51,977 | ||||||||
|
Held-to-maturity
|
||||||||||||||||
|
Guaranteed investment contracts
|
$ | 3,550 | $ | — | $ | — | $ | 3,550 | ||||||||
|
Other
|
215 | — | — | 215 | ||||||||||||
|
Total restricted investments
held-to-maturity
|
$ | 3,765 | $ | — | $ | — | $ | 3,765 | ||||||||
F-37
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 5. | Investments (Continued) |
| December 31, 2008 | ||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
|
Investments
|
||||||||||||||||
|
Available-for-sale
|
||||||||||||||||
|
U.S. Treasury and other U.S. government agency obligations:
|
||||||||||||||||
|
U.S. Treasury securities and other U.S. government agency
obligations
|
$ | 8,908 | $ | 195 | $ | — | $ | 9,103 | ||||||||
|
Other securities:
|
||||||||||||||||
|
Asset-backed securities
|
40,907 | 13 | (4,299 | ) | 36,621 | |||||||||||
|
Commercial paper and asset-backed commercial paper
|
801,169 | — | — | 801,169 | ||||||||||||
|
Municipal bonds
|
10,883 | 1,924 | — | 12,807 | ||||||||||||
|
Other
|
1,673 | — | (365 | ) | 1,308 | |||||||||||
|
Total investment securities
available-for-sale
|
$ | 863,540 | $ | 2,132 | $ | (4,664 | ) | $ | 861,008 | |||||||
|
Restricted Investments
|
||||||||||||||||
|
Available-for-sale
|
||||||||||||||||
|
Guaranteed investment contracts
|
$ | 31,914 | $ | — | $ | — | $ | 31,914 | ||||||||
|
Total restricted investments
available-for-sale
|
$ | 31,914 | $ | — | $ | — | $ | 31,914 | ||||||||
|
Held-to-maturity
|
||||||||||||||||
|
Guaranteed investment contracts
|
$ | 5,500 | $ | — | $ | — | $ | 5,500 | ||||||||
|
Other securities
|
215 | — | — | 215 | ||||||||||||
|
Total restricted investments
held-to-maturity
|
$ | 5,715 | $ | — | $ | — | $ | 5,715 | ||||||||
In addition to the restricted investments detailed above, at
December 31, 2009 and 2008, the Company had restricted cash
of $5.1 billion and $3.5 billion, respectively.
As of December 31, 2009 and 2008, $1 million and
$2 million of the net unrealized gain/(loss) (after tax)
related to
available-for-sale
investments was included in accumulated other comprehensive
income. As of December 31, 2009 and 2008, $50 million
($25 million of which is in restricted cash and investments
on the balance sheet) and $26 million (none of which is in
restricted cash and investments on the balance sheet),
respectively, of
available-for-sale
investment securities were pledged as collateral.
The Company sold
available-for-sale
securities with a fair value of $100 million,
$457 million and $73 million for the years ended
December 31, 2009, 2008, and 2007, respectively. There were
no realized gains/(losses) for the years ended December 31,
2009 and 2007. There were $14 million in realized gains
(net of hedging losses totaling $4 million) for the year
ended December 31, 2008. The cost basis for these
securities was determined through specific identification of the
securities sold.
F-38
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 5. | Investments (Continued) |
As of December 31, 2009, the stated maturities for the
investments (including restricted investments) are shown in the
following table:
| December 31, 2009 | ||||||||||||
|
Held-to-
|
Available-for-
|
|||||||||||
| Maturity | Sale (1) | Other | ||||||||||
|
Year of Maturity
|
||||||||||||
|
2010
|
$ | 215 | $ | 1,176,675 | $ | 675,725 | ||||||
|
2011
|
— | — | 5,162 | |||||||||
|
2012
|
— | — | — | |||||||||
|
2013
|
— | 751 | — | |||||||||
|
2014
|
— | — | — | |||||||||
|
2015-2019
|
— | 11,877 | 59,666 | |||||||||
|
After 2019
|
3,550 | 135,949 | 739 | |||||||||
|
Total
|
$ | 3,765 | $ | 1,325,252 | $ | 741,292 | ||||||
(1)
Available-for-sale
securities are stated at fair value.
At December 31, 2009 and 2008, the Company also had other
investments of $741 million and $180 million,
respectively. At December 31, 2009, other investments
included a $636 million receivable for cash collateral
posted to derivative counterparties. Other investments also
included leveraged leases which at December 31, 2009 and
2008, totaled $66 million and $76 million,
respectively, that are general obligations of American Airlines
and Federal Express Corporation. At December 31, 2009 and
2008, other investments also included the Company’s
remaining investment in The Reserve Primary Fund totaling
$32 million and $97 million, respectively. The Company
received $32 million from The Reserve Primary Fund on
January 29, 2010.
| 6. | Goodwill and Acquired Intangible Assets |
Goodwill
All acquisitions must be assigned to a reporting unit or units.
A reporting unit is the same as or one level below an operating
segment. The following table summarizes the Company’s
historical allocation of goodwill to its reporting units,
accumulated impairments and net goodwill for each reporting unit.
|
As of December 31,
|
||||||||||||
| 2009 and 2008 | ||||||||||||
|
Accumulated
|
||||||||||||
| Gross | Impairments | Net | ||||||||||
|
(Dollars in millions)
|
||||||||||||
|
Lending
|
$ | 412 | $ | (24 | ) | $ | 388 | |||||
|
APG
|
401 | — | 401 | |||||||||
|
Guarantor Servicing
|
62 | — | 62 | |||||||||
|
Upromise
|
140 | — | 140 | |||||||||
|
Other
|
1 | (1 | ) | — | ||||||||
|
Total
|
$ | 1,016 | $ | (25 | ) | $ | 991 | |||||
F-39
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 6. | Goodwill and Acquired Intangible Assets (Continued) |
Impairment
Testing
The Company performs goodwill impairment testing annually in the
fourth quarter as of a September 30 valuation date or more
frequently if an event occurs or circumstances change such that
there is a potential that the fair value of a reporting unit or
reporting units may be below their respective carrying values.
On February 26, 2009, the Administration issued their 2010
fiscal year budget request to Congress which included provisions
that called for the elimination of the FFELP program and which
would require all new federal loans to be made through the DSLP.
On September 17, 2009 the House of Representatives passed
SAFRA which was consistent with the Administration’s 2010
budget request to Congress. If it became law SAFRA would
eliminate the FFELP and require that, after July 1, 2010,
all new federal loans be made through the DSLP. The
Administration’s 2011 fiscal year budget continued these
requests.
The Senate has not yet introduced legislation on this issue. The
Company, together with other members of the student loan
community, has been working with members of Congress to enhance
SAFRA to allow students and schools to continue to choose their
loan originator and to require servicers to share in the risk of
loan default. The Company believes that maintaining competition
in the student loan programs and requiring participants to
assume a portion of the risk inherent in the program, two of the
major tenets of the Community Proposal, would result in a more
efficient and cost effective program better that serves
students, schools, ED and taxpayers.
In light of the potential implications of the
Administration’s 2010 budget proposal to the Company’s
business model, as well as continued uncertainty in the economy,
the tight credit markets and the Company’s decline in
market capitalization during the first quarter of 2009, the
Company assessed goodwill impairment as of March 31, 2009.
This assessment resulted in estimated fair values of the
Company’s reporting units in excess of their carrying
values. Accordingly, no goodwill impairment was recorded in the
first quarter as a result of this impairment assessment.
During the second and third quarters of 2009, no new unfavorable
events or changes in circumstances occurred to warrant an
impairment assessment as of June 30 and September 30, 2009,
as SAFRA, which was passed by the House of Representatives in
the third quarter, was consistent with the Administration’s
2010 budget request submitted to Congress in the first quarter
of 2009.
In the fourth quarter of 2009, although no new unfavorable
events or changes in circumstances occurred, the Company
retained an appraisal firm to perform its annual Step 1
impairment testing as prescribed in ASC 350,
“Intangibles — Goodwill and Other.”
Accordingly, the Company engaged the appraisal firm to determine
the fair value of each of its four reporting units to which
goodwill was allocated as of September 30, 2009. The fair
value of each reporting unit was determined by weighting
different valuation approaches, as applicable, with the primary
approach being the income approach.
The income approach measures the value of each reporting unit
based on the present value of the reporting unit’s future
economic benefit determined based on discounted cash flows
derived from the Company’s projections for each reporting
unit. These projections are generally five-year projections that
reflect the future strategic operating and financial performance
of each respective reporting unit, including assumptions related
to applicable cost savings and planned dispositions or wind down
activities. If a component of a reporting unit is winding down
or is assumed to wind down, the projections extend through the
anticipated wind down period. In conjunction with the
Company’s September 30, 2009 annual impairment
assessment, cash flow projections for the Lending, APG and
Guarantor Servicing reporting units were valued assuming the
proposed SAFRA legislation is passed. If the Community Proposal
is passed, it would result in
F-40
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 6. | Goodwill and Acquired Intangible Assets (Continued) |
additional cash flows for the Lending reporting unit but no
material change in cash flows for the APG or Guarantor Servicing
reporting units.
Under the Company’s guidance, the appraisal firm developed
both an asset rate of return and an equity rate of return (or
discount rate) for each reporting unit incorporating such
factors as a risk free rate, a market rate of return, a measure
of volatility (Beta) and a company specific and capital markets
risk premium, as appropriate, to adjust for volatility and
uncertainty in the economy and to capture specific risk related
to the respective reporting units. The Company considered
whether an asset sale or an equity sale would be the most likely
sale structure for each reporting unit and valued each reporting
unit based on the more likely hypothetical scenario. Resulting
discount rates and growth rates used as of September 30,
2009, for the Lending, APG, Guarantor Servicing, and Upromise
reporting units were:
| Discount Rate | Growth Rate | |||||||
|
Lending
(1)
|
11 | % | 3 | % | ||||
|
APG
(2)
|
10 | % | 4 | % | ||||
|
Guarantor
Servicing
(2)
|
10 | % | 0 | % | ||||
|
Upromise
(2)
|
15 | % | 4 | % | ||||
| (1) | Assumes an equity sale; therefore, the discount rate is used to value the entire reporting unit. |
| (2) | Assumes an asset sale; therefore, the discount rate is used to value the assets of the reporting unit. |
The discount rates reflect market based estimates of capital
costs and are adjusted for management’s assessment of a
market participant’s view with respect to execution,
concentration and other risks associated with the projected cash
flows of individual reporting units. Accordingly, these discount
rates are reflective of the long standing contractual
relationships associated with these cash flows as well as the
wind down nature of the cash flows for certain components of the
Lending and APG reporting units and the Guarantor Servicing
reporting unit as a whole. Management reviewed and approved
these discount rates, including the factors incorporated to
develop the discount rates for each reporting unit. For the
valuation of the Lending reporting unit, which assumed an equity
sale, the discount rate was applied to the reporting unit’s
projected net cash flows and the residual or terminal value
yielding the fair value of equity for the reporting unit. For
valuations assuming an asset sale, the discount rates applicable
to the individual reporting units were applied to the respective
reporting units’ projected asset cash flows and residual or
terminal values, as applicable, yielding the fair value of the
assets for the respective reporting units. The estimated
proceeds from the hypothetical asset sale were then used to
payoff any liabilities of the reporting unit with the remaining
cash equaling the fair value of the reporting unit’s equity.
The guideline company or market approach, as well as the
publicly traded stock approach, were also considered for the
Company’s reporting units, as applicable. The market
approach generally measures the value of a reporting unit as
compared to recent sales or offerings of comparable companies.
The secondary market approach indicates value based on multiples
calculated using the market value of minority interests in
publicly traded comparable companies or guideline companies.
Whether analyzing comparable transactions or the market value of
minority interests in publicly traded guideline companies,
consideration is given to the line of business and the operating
performance of the comparable companies versus the reporting
unit being tested. Given current market conditions, the lack of
recent sales or offerings in the market and the low correlation
between the operations of identified guideline companies to the
Company’s reporting units, less emphasis was placed on the
market approach for the APG, Guarantor Servicing and Upromise
reporting units.
The Company acknowledges that its stock price (as well as that
of its peers) is a consideration in determining the value of its
reporting units and the Company as a whole. However, management
believes the
F-41
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 6. | Goodwill and Acquired Intangible Assets (Continued) |
income approach is a better measure of the value of its
reporting units in the current environment. During the latter
half of 2008 and during 2009, the Company experienced a trend of
lower and very volatile market capitalization. During 2009, the
Company’s stock price fluctuated significantly from a low
of $3.19 in March 2009 subsequent to the Administration’s
2010 budget proposal which would eliminate the FFELP and require
all federally funded students loans to be originated through the
DSLP, to a high of $12.00 in December 2009. At September 30 and
December 31, 2009, the Company’s stock price was $8.72
and $11.27, respectively. Based on these share prices as of
September 30 and December 31, alone, the market
capitalization of the Company was greater than the carrying
value of the reporting units. The Company believes the share
price has been significantly reduced due to the continued
downturn in the credit and economic environment as well as
uncertainties surrounding the ongoing legislative process.
Management believes these economic factors should not have a
long-term impact. In addition, the Company will review and
revise, potentially significantly, its business model based on
the final form of legislation upon completion of the legislative
process.
The following table illustrates the book basis of equity for
each reporting unit and the estimated fair value determined in
conjunction with Step 1 impairment testing as of
September 30, 2009.
|
Book Basis
|
Fair Value
|
|||||||||||||||
| of Equity | of Equity | $ Difference | % Difference | |||||||||||||
|
(Dollars in millions)
|
||||||||||||||||
|
Lending
|
$ | 1,474 | $ | 3,270 | $ | 1,796 | 122 | % | ||||||||
|
APG
|
1,390 | 1,690 | 300 | 22 | ||||||||||||
|
Guarantor Servicing
|
142 | 221 | 79 | 56 | ||||||||||||
|
Upromise
|
297 | 430 | 133 | 45 | ||||||||||||
The estimated fair value of the Company resulting from its step
1 impairment test was 41 percent higher than its market
capitalization. The Company views this as a reasonable
“control premium.” As discussed above, the
Company’s stock price was at $12.00 per share during
December 2009, which by itself results in a market
capitalization that is greater than the carrying value of the
reporting units which results in no impairment. Management
reviewed and approved the valuation prepared by the appraisal
firm for each reporting unit, including the valuation methods
employed and the key assumptions used, such as the discount
rates, growth rates and control premiums, as applicable, for
each reporting unit. Management also performed stress tests of
key assumptions using a range of discount rates and growth
rates, as applicable. Based on the valuations performed in
conjunction with Step 1 impairment testing and these stress
tests, there was no indicated impairment for any reporting units
at September 30, 2009.
Management acknowledges that the economic slowdown could
adversely affect the operating results of the Company’s
reporting units. In addition, the decrease in the market price
of the Company’s common stock resulting from the market
turbulence and uncertainty surrounding the ongoing legislative
process has reduced its total market capitalization. Both of
these factors adversely affect the fair value of the
Company’s reporting units. If the forecasted performance of
the Company’s reporting units is not achieved, or if the
Company’s stock price remains at a depressed level or
declines further resulting in continued deterioration in the
Company’s total market capitalization, and depending on the
final form of legislation, if any, the fair value of one or more
of the reporting units could be significantly reduced, and the
Company may be required to record a charge, which could be
material, for an impairment of goodwill. Management believes
that the turbulence in the stock market and uncertainties
surrounding the legislative process has resulted in a market
price for the Company’s common stock that is not indicative
of the true value of the Company’s reporting units.
In addition, if SAFRA or the Community Proposal are passed,
certain revenue streams in the Lending and APG reporting units
and the entire revenue stream of the Guarantor Servicing
reporting unit will wind
F-42
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 6. | Goodwill and Acquired Intangible Assets (Continued) |
down over time. As a result, as these revenue streams wind down,
goodwill impairment may be triggered for the Lending and APG
reporting units and will definitely be triggered for the
Guarantor Servicing reporting unit due to the passage of time
and depletion of projected cash flows stemming from
FFELP-related contracts.
As of September 30, 2008, annual impairment testing
indicated no impairment for any reporting units. As of
September 30, 2007, annual impairment testing indicated no
impairment for any reporting units with the exception of the
mortgage and consumer lending reporting unit, due largely to the
wind down of one of the Company’s mortgage operations. As a
result, the Company recognized goodwill impairment of
approximately $20 million in the fourth quarter of 2007.
Goodwill
by Reportable Segments
A summary of changes in the Company’s goodwill by
reportable segment is as follows:
|
December 31,
|
Acquisitions/
|
December 31,
|
||||||||||
| 2008 | Other | 2009 | ||||||||||
|
(Dollars in millions)
|
||||||||||||
|
Lending
|
$ | 388 | $ | — | $ | 388 | ||||||
|
Asset Performance Group
|
401 | — | 401 | |||||||||
|
Corporate and Other
|
202 | — | 202 | |||||||||
|
Total
|
$ | 991 | $ | — | $ | 991 | ||||||
|
December 31,
|
Acquisitions/
|
December 31,
|
||||||||||
| 2007 | Other | 2008 | ||||||||||
|
(Dollars in millions)
|
||||||||||||
|
Lending
|
$ | 388 | $ | — | $ | 388 | ||||||
|
Asset Performance Group
|
377 | 24 | 401 | |||||||||
|
Corporate and Other
|
200 | 2 | 202 | |||||||||
|
Total
|
$ | 965 | $ | 26 | $ | 991 | ||||||
From September 2004 through January 2008, the Company acquired a
100 percent controlling interest in AFS Holdings, LLC
(“AFS”) through a series of transactions commencing
with the Company’s September 2004 acquisition of a
64 percent controlling interest and annual exercise of
options to purchase successive 12 percent interests in the
Company from December 2005 through January 2008. AFS was a
full-service accounts receivable management company that
purchased charged off debt and performed third-party receivables
servicing across a number of consumer asset classes. As a result
of this series of transactions, the Company’s APG
reportable segment and reporting unit recognized excess purchase
price over the fair value of net assets acquired, or goodwill,
of $226 million. The total purchase price associated with
the Company’s acquisition of AFS was approximately
$324 million, including cash consideration and certain
acquisition costs.
F-43
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 6. | Goodwill and Acquired Intangible Assets (Continued) |
Acquired
Intangible Assets
Acquired intangible assets include the following:
|
Average
|
As of December 31, 2009 | |||||||||||||||
|
Amortization
|
Accumulated
|
|||||||||||||||
| Period | Gross | Amortization | Net | |||||||||||||
|
(Dollars in millions)
|
||||||||||||||||
|
Intangible assets subject to amortization:
|
||||||||||||||||
|
Customer, services, and lending relationships
|
12 years | $ | 332 | $ | (208 | ) | $ | 124 | ||||||||
|
Software and technology
|
7 years | 98 | (89 | ) | 9 | |||||||||||
|
Non-compete agreements
|
11 | (11 | ) | — | ||||||||||||
|
Total
|
441 | (308 | ) | 133 | ||||||||||||
|
Intangible assets not subject to amortization:
|
||||||||||||||||
|
Trade name and trademark
|
Indefinite | 54 | — | 54 | ||||||||||||
|
Total acquired intangible assets
|
$ | 495 | $ | (308 | ) | $ | 187 | |||||||||
|
Average
|
As of December 31, 2008 | |||||||||||||||
|
Amortization
|
Accumulated
|
|||||||||||||||
| Period | Gross | Amortization | Net | |||||||||||||
|
(Dollars in millions)
|
||||||||||||||||
|
Intangible assets subject to amortization:
|
||||||||||||||||
|
Customer, services, and lending relationships
|
13 years | $ | 332 | $ | (173 | ) | $ | 159 | ||||||||
|
Software and technology
|
7 years | 93 | (85 | ) | 8 | |||||||||||
|
Non-compete agreements
|
2 years | 11 | (10 | ) | 1 | |||||||||||
|
Total
|
436 | (268 | ) | 168 | ||||||||||||
|
Intangible assets not subject to amortization:
|
||||||||||||||||
|
Trade name and trademark
|
Indefinite | 91 | — | 91 | ||||||||||||
|
Total acquired intangible assets
|
$ | 527 | $ | (268 | ) | $ | 259 | |||||||||
The Company recorded amortization of acquired intangible assets
from continuing operations totaling $39 million,
$53 million, and $63 million for the years ended
December 31, 2009, 2008 and 2007, respectively. The Company
recorded amortization of acquired intangible assets from
discontinued operations totaling $0, $1 million, and
$4 million for the years ended December 31, 2009, 2008
and 2007, respectively. The Company will continue to amortize
its intangible assets with definite useful lives over their
remaining estimated useful lives. The Company estimates
amortization expense associated with these intangible assets
will be $33 million, $27 million, $20 million,
$18 million and $13 million for the years ended
December 31, 2010, 2011, 2012, 2013 and 2014, respectively.
As discussed in Note 2, “Significant Accounting
Policies,” the Company tests its indefinite life intangible
assets annually as of September 30 or during the course of the
year if an event occurs or circumstances change which indicate
potential impairment of these assets. The Company also assesses
quarterly whether an event or circumstance has occurred which
may indicate impairment of its definite life (amortizing)
intangible assets.
F-44
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 6. | Goodwill and Acquired Intangible Assets (Continued) |
The Company recorded impairment of certain acquired intangible
assets from continuing operations of $37 million,
$32 million and $16 million, respectively, for the
years ended December 31, 2009, 2008 and 2007. The Company
recorded impairment of certain acquired intangible assets from
discontinued operations of $0, $5 million and
$10 million, respectively, for the years ended
December 31, 2009, 2008 and 2007.
In the fourth quarter of 2009, the Company recognized intangible
impairments of $37 million primarily related to the
Company’s exclusive right to market under the USAF
Guarantee. This intangible was impaired as a result of the
legislative uncertainty surrounding the role of Guarantors in
the future. This impairment charge was recorded to operating
expense in the Corporate and Other reportable segment.
In 2008, as discussed in Note 20, “Segment
Reporting,” the Company decided to wind down its purchased
paper businesses. As a result, in the third quarter of 2008, the
Company recorded an aggregate amount of $37 million of
impairment of acquired intangible assets, of which
$25 million and $3 million related to the impairment
of two trade names associated with continuing operations and
discontinued operations, respectively, and $7 million and
$2 million related to certain banking customer
relationships associated with continuing operations and
discontinued operations, respectively.
In 2007, the Company recognized intangible impairments of
$10 million attributed to certain banking relationships
associated with its discontinued operations. The Company also
recognized intangible impairments of $7 million related to
certain trade names and relationships in the Lending reporting
segment. The Company also recognized intangible impairments of
$9 million related to certain tax exempt bonds that enabled
the Company to earn a 9.5 percent SAP rate on student loans
funded by those bonds in indentured trusts acquired with the
Company’s acquisition of Southwest Student Services
Corporation and Washington Transferee Corporation. The
impairment was recognized due to changes in projected interest
rates used to initially value the intangible asset and to a
regulatory change that restricts the loans on which the Company
is entitled to earn a 9.5 percent yield. These impairment
charges were recorded to operating expense in the Lending
reportable segment.
| 7. | Borrowings |
Borrowings consist of secured borrowings issued through the
Company’s securitization program, borrowings through
secured facilities and participation programs, unsecured notes
issued by the Company, term and demand deposits at Sallie Mae
Bank, and as other interest-bearing liabilities related
primarily to obligations to return cash collateral held. To
match the interest rate and currency characteristics of its
borrowings with the interest rate and currency characteristics
of its assets, the Company enters into interest rate and foreign
currency swaps with independent parties. Under these agreements,
the Company makes periodic payments, generally indexed to the
related asset rates or rates which are highly correlated to the
asset rates, in exchange for periodic payments which generally
match the Company’s interest obligations on fixed or
variable rate notes (see Note 9, “Derivative Financial
Instruments”). Payments and receipts on the Company’s
interest rate and currency swaps are not reflected in the
following tables.
F-45
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 7. | Borrowings (Continued) |
The following table summarizes activity related to the senior
unsecured debt repurchases for the years ended December 31,
2009 and 2008. The Company began actively repurchasing its
outstanding debt in the second quarter of 2008. “Gains on
debt repurchases” is shown net of hedging-related gains and
losses.
| Years Ended December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Unsecured debt principal repurchased
|
$ | 3,447,245 | $ | 1,910,326 | ||||
|
Cash outlay for principal repurchases
|
3,129,415 | 1,866,269 | ||||||
|
Gains on debt repurchases
|
536,190 | 64,477 | ||||||
In January 2010, the Company repurchased $812 million of
unsecured debt through a tender offer for a gain of
$45 million.
The following table summarizes the Company’s borrowings as
of December 31, 2009 and 2008.
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||
|
Short
|
Long
|
Short
|
Long
|
|||||||||||||||||||||
| Term | Term | Total | Term | Term | Total | |||||||||||||||||||
|
(Dollars in millions)
|
||||||||||||||||||||||||
|
Unsecured borrowings
|
$ | 5,185 | $ | 22,797 | $ | 27,982 | $ | 6,794 | $ | 31,182 | $ | 37,976 | ||||||||||||
|
Unsecured term bank deposits
|
842 | 4,795 | 5,637 | 1,148 | 1,108 | 2,256 | ||||||||||||||||||
|
ED Participation Program facility
|
9,006 | — | 9,006 | 7,365 | — | 7,365 | ||||||||||||||||||
|
ED Conduit Program facility
|
14,314 | — | 14,314 | — | — | — | ||||||||||||||||||
|
2008 Asset-Backed Financing
Facilities
(1)
|
— | 8,801 | 8,801 | 24,768 | — | 24,768 | ||||||||||||||||||
|
On-balance sheet securitizations
|
— | 89,200 | 89,200 | — | 80,601 | 80,601 | ||||||||||||||||||
|
Indentured trusts
|
64 | 1,533 | 1,597 | 31 | 1,972 | 2,003 | ||||||||||||||||||
|
Other
|
1,472 | — | 1,472 | 1,827 | — | 1,827 | ||||||||||||||||||
|
Total before fair value adjustments
|
30,883 | 127,126 | 158,009 | 41,933 | 114,863 | 156,796 | ||||||||||||||||||
|
ASC 815 fair value adjustments
|
14 | 3,420 | 3,434 | — | 3,362 | 3,362 | ||||||||||||||||||
|
Total
|
$ | 30,897 | $ | 130,546 | $ | 161,443 | $ | 41,933 | $ | 118,225 | $ | 160,158 | ||||||||||||
| (1) | On December 31, 2009, ABCP borrowings were reclassified to long-term as the facility was renegotiated on January 15, 2010 resulting in the maturity date being greater than one year from December 31, 2009. |
Short-term
Borrowings
Short-term borrowings have a remaining term to maturity of one
year or less. The following tables summarize outstanding
short-term borrowings (secured and unsecured) at
December 31, 2009 and 2008, the
F-46
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 7. | Borrowings (Continued) |
weighted average interest rates at the end of each period, and
the related average balances and weighted average interest rates
during the periods.
| December 31, 2009 | Year Ended December 31, 2009 | |||||||||||||||
|
Weighted Average
|
Weighted Average
|
|||||||||||||||
| Ending Balance | Interest Rate | Average Balance | Interest Rate | |||||||||||||
|
Unsecured term bank deposits
|
$ | 842,636 | 3.33 | % | $ | 929,442 | 3.23 | % | ||||||||
|
ABCP borrowings
|
— | — | 16,238,782 | 1.64 | ||||||||||||
|
ED Participation Program Facility
|
9,006,053 | .79 | 14,174,433 | 1.42 | ||||||||||||
|
ED Conduit Program facility
|
14,313,837 | .59 | 7,339,592 | .72 | ||||||||||||
|
Short-term portion of long-term borrowings
|
5,259,278 | 2.58 | 4,408,990 | 2.05 | ||||||||||||
|
Other interest bearing liabilities
|
1,475,007 | .12 | 1,393,280 | .31 | ||||||||||||
|
Total short-term borrowings
|
$ | 30,896,811 | 1.04 | % | $ | 44,484,519 | 1.45 | % | ||||||||
|
Maximum outstanding at any month end
|
$ | 53,406,554 | ||||||||||||||
| December 31, 2008 | Year Ended December 31, 2008 | |||||||||||||||
|
Weighted Average
|
Weighted Average
|
|||||||||||||||
| Ending Balance | Interest Rate | Average Balance | Interest Rate | |||||||||||||
|
Unsecured term bank deposits
|
$ | 1,147,825 | 3.34 | % | $ | 696,442 | 3.67 | % | ||||||||
|
ABCP borrowings
|
24,767,825 | 2.74 | 24,692,143 | 3.82 | ||||||||||||
|
ED Participation Program Facility
|
7,364,969 | 3.37 | 1,726,751 | 3.41 | ||||||||||||
|
Short-term portion of long-term borrowings
|
6,821,846 | 3.60 | 6,879,459 | 3.69 | ||||||||||||
|
Other interest bearing liabilities
|
1,830,578 | 0.55 | 2,064,547 | 2.35 | ||||||||||||
|
Total short-term borrowings
|
$ | 41,933,043 | 2.91 | % | $ | 36,059,342 | 3.69 | % | ||||||||
|
Maximum outstanding at any month end
|
$ | 41,933,043 | ||||||||||||||
As of December 31, 2009, the Company had $3.5 billion
in unsecured revolving credit facilities which provide liquidity
support for general corporate purposes. The Company has never
drawn on these facilities. These facilities include a
$1.9 billion revolving credit facility maturing in October
2010 and a $1.6 billion revolving credit facility maturing
in October 2011. These figures reflect the amended size of the
facilities as a $215 million commitment from Aurora Bank,
FSB, formerly known as Lehman Brothers Bank, FSB, a subsidiary
of Lehman Brothers Holdings Inc. was removed in the fourth
quarter of 2009.
On April 24, 2009, in conjunction with the extension of the
2008 ABCP Facilities (see
“Asset-Backed Financing
Facilities”
below), a $1.4 billion revolving
credit facility maturing in October 2009 was retired and the
$1.9 billion revolving credit facility maturing in October
2011 was reduced to $1.6 billion. The principal financial
covenants in the unsecured revolving credit facilities require
the Company to maintain consolidated tangible net worth of at
least $1.38 billion at all times. Consolidated tangible net
worth as calculated for
F-47
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 7. | Borrowings (Continued) |
purposes of this covenant was $3.5 billion as of
December 31, 2009. The covenants also require the Company
to meet either a minimum interest coverage ratio or a minimum
net adjusted revenue test based on the four preceding
quarters’ adjusted “Core Earnings” financial
performance. The Company was compliant with both of the minimum
interest coverage ratio and the minimum net adjusted revenue
tests as of the quarter ended December 31, 2009. In the
past, the Company has not relied upon the Company’s
unsecured revolving credit facilities as a primary source of
liquidity. Even though the Company has never borrowed under
these facilities, they are available to be drawn upon for
general corporate purposes.
Long-term
Borrowings
The following tables summarize outstanding long-term borrowings
(secured and unsecured) at December 31, 2009 and 2008, the
weighted average interest rates at the end of the periods, and
the related average balances during the periods.
| December 31, 2009 |
Year Ended
|
|||||||||||
|
Weighted
|
December 31,
|
|||||||||||
|
Average
|
2009 | |||||||||||
|
Ending
|
Interest
|
Average
|
||||||||||
| Balance (1) | Rate (2) | Balance | ||||||||||
|
Floating rate notes:
|
||||||||||||
|
U.S. dollar-denominated:
|
||||||||||||
|
Interest bearing, due
2011-2047
|
$ | 84,849,160 | 1.20 | % | $ | 83,001,692 | ||||||
|
Non-U.S.
dollar-denominated:
|
||||||||||||
|
Australian dollar-denominated, due 2011
|
161,804 | 4.57 | 443,080 | |||||||||
|
Euro-denominated, due
2011-2041
|
7,624,485 | .91 | 8,411,807 | |||||||||
|
Sterling-denominated, due
2011-2039
|
1,153,134 | .88 | 1,273,890 | |||||||||
|
Hong Kong dollar-denominated, due 2011
|
113,741 | .41 | 113,716 | |||||||||
|
Swedish krona-denominated, due 2011
|
85,353 | .66 | 116,736 | |||||||||
|
Canadian dollar-denominated, due 2011
|
229,885 | .67 | 229,885 | |||||||||
|
Total floating rate notes
|
94,217,562 | 1.17 | 93,590,806 | |||||||||
|
Fixed rate notes:
|
||||||||||||
|
U.S. dollar-denominated:
|
||||||||||||
|
Interest bearing, due
2011-2043
|
12,355,688 | 5.55 | 11,556,520 | |||||||||
|
Non-U.S.-dollar
denominated:
|
||||||||||||
|
Australian dollar-denominated, due 2012
|
165,394 | 4.42 | 278,983 | |||||||||
|
Canadian dollar-denominated, due 2011
|
478,566 | 3.98 | 557,333 | |||||||||
|
Euro-denominated, due
2011-2039
|
6,903,465 | 2.74 | 4,695,963 | |||||||||
|
Hong Kong dollar-denominated, due
2014-2016
|
140,173 | 4.38 | 154,613 | |||||||||
|
Japanese yen-denominated, due
2011-2035
|
426,551 | 1.99 | 671,595 | |||||||||
|
Singapore dollar-denominated, due 2014
|
46,015 | 3.15 | 45,498 | |||||||||
|
Sterling-denominated, due
2011-2039
|
1,901,094 | 5.33 | 2,913,991 | |||||||||
|
Swiss franc-denominated, due 2011
|
182,907 | 2.24 | 160,568 | |||||||||
|
New Zealand dollar-denominated
|
— | — | 96,529 | |||||||||
|
Mexican peso-denominated, due 2016
|
78,078 | 10.30 | 91,593 | |||||||||
|
Swedish krona-denominated, due 2011
|
60,141 | 3.63 | 60,547 | |||||||||
|
Total fixed rate notes
|
22,738,072 | 4.51 | 21,283,733 | |||||||||
|
Unsecured term bank deposits — U.S.
dollar-denominated, due
2011-2019
|
4,789,223 | 3.19 | 3,824,908 | |||||||||
|
ABCP borrowings
|
8,801,415 | 1.55 | — | |||||||||
|
Total long-term borrowings
|
$ | 130,546,272 | 1.84 | % | $ | 118,699,447 | ||||||
| (1) | Ending balance is expressed in U.S. dollars at December 31, 2009 spot currency exchange rate. Includes fair value adjustments under ASC 815 for notes designated as the hedged item in a fair value hedge. |
| (2) | Weighted average interest rate is stated rate relative to currency denomination of note. |
F-48
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 7. | Borrowings (Continued) |
| December 31, 2008 |
Year Ended
|
|||||||||||
|
Weighted
|
December 31,
|
|||||||||||
|
Average
|
2008 | |||||||||||
|
Ending
|
Interest
|
Average
|
||||||||||
| Balance (1) | Rate (2) | Balance | ||||||||||
|
Floating rate notes:
|
||||||||||||
|
U.S. dollar-denominated:
|
||||||||||||
|
Interest bearing, due
2010-2047
|
$ | 79,212,638 | 4.12 | % | $ | 76,604,044 | ||||||
|
Non-U.S.
dollar-denominated:
|
||||||||||||
|
Australian dollar-denominated, due
2010-2011
|
462,022 | 7.45 | 523,837 | |||||||||
|
Euro-denominated, due
2010-2041
|
8,713,084 | 4.40 | 8,876,737 | |||||||||
|
Singapore dollar-denominated
|
— | — | 4,508 | |||||||||
|
Sterling-denominated, due
2010-2039
|
975,851 | 5.72 | 975,808 | |||||||||
|
Japanese yen-denominated
|
— | — | 8,687 | |||||||||
|
Hong Kong dollar-denominated, due 2011
|
113,691 | 5.06 | 113,666 | |||||||||
|
Swedish krona-denominated, due
2010-2011
|
154,780 | 4.35 | 252,540 | |||||||||
|
Canadian dollar-denominated, due 2011
|
229,885 | 4.57 | 229,885 | |||||||||
|
Total floating rate notes
|
89,861,951 | 4.19 | 87,589,712 | |||||||||
|
Fixed rate notes:
|
||||||||||||
|
U.S. dollar-denominated:
|
||||||||||||
|
Interest bearing, due
2010-2043
|
14,749,681 | 5.08 | 12,473,864 | |||||||||
|
Non-U.S.-dollar
denominated:
|
||||||||||||
|
Australian dollar-denominated, due
2010-2012
|
247,928 | 7.37 | 407,308 | |||||||||
|
Canadian dollar-denominated, due
2010-2011
|
635,274 | 4.49 | 972,215 | |||||||||
|
Euro-denominated, due
2010-2039
|
6,874,043 | 2.86 | 4,807,924 | |||||||||
|
Hong Kong dollar-denominated, due
2010-2016
|
189,860 | 4.14 | 167,518 | |||||||||
|
Japanese yen-denominated, due
2010-2035
|
1,087,652 | 1.34 | 929,419 | |||||||||
|
Singapore dollar-denominated, due 2014
|
80,576 | 2.95 | 58,884 | |||||||||
|
Sterling-denominated, due
2010-2039
|
2,873,765 | 6.28 | 3,441,142 | |||||||||
|
Swiss franc-denominated, due 2011
|
219,687 | 2.02 | 246,749 | |||||||||
|
New Zealand dollar-denominated, due 2010
|
179,934 | 7.71 | 213,316 | |||||||||
|
Mexican peso-denominated, due 2016
|
72,730 | 11.05 | 91,548 | |||||||||
|
Swedish krona-denominated, due 2011
|
43,066 | 6.33 | 68,110 | |||||||||
|
Total fixed rate notes
|
27,254,196 | 4.51 | 23,877,997 | |||||||||
|
Unsecured term bank deposits — U.S.
dollar-denominated, due
2010-2013
|
1,108,647 | 4.36 | 157,268 | |||||||||
|
Total long-term borrowings
|
$ | 118,224,794 | 4.26 | % | $ | 111,624,977 | ||||||
| (1) | Ending balance is expressed in U.S. dollars at December 31, 2008 spot currency exchange rate. Includes fair value adjustments under ASC 815 for notes designated as the hedged item in a fair value hedge. |
| (2) | Weighted average interest rate is stated rate relative to currency denomination of note. |
F-49
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 7. | Borrowings (Continued) |
At December 31, 2009, the Company had outstanding long-term
borrowings with call features totaling $3.3 billion and
$100 million of outstanding long-term borrowings that are
putable by the investor to the Company prior to the stated
maturity date. Generally, these instruments are callable and
putable at the par amount. As of December 31, 2009, the
stated maturities (for putable debt, the stated maturity date is
the put date) and maturities if accelerated to the call dates
are shown in the following table:
| December 31, 2009 | ||||||||||||||||||||||||||||||||
| Stated Maturity (1) | Maturity to Call Date (1) | |||||||||||||||||||||||||||||||
|
Unsecured
|
Unsecured
|
|||||||||||||||||||||||||||||||
|
Unsecured
|
Term Bank
|
Secured
|
Unsecured
|
Term Bank
|
Secured
|
|||||||||||||||||||||||||||
| Borrowings | Deposits | Borrowings | Total | Borrowings | Deposits | Borrowings | Total | |||||||||||||||||||||||||
|
Year of Maturity
|
||||||||||||||||||||||||||||||||
|
2010
|
$ | — | $ | — | $ | 6,882,823 | $ | 6,882,823 | $ | 1,434,248 | $ | 246,496 | $ | 16,784,947 | $ | 18,465,691 | ||||||||||||||||
|
2011
|
6,372,950 | 1,425,425 | 12,923,080 | 20,721,455 | 6,526,521 | 1,446,423 | 9,121,664 | 17,094,608 | ||||||||||||||||||||||||
|
2012
|
2,195,766 | 1,696,413 | 10,783,347 | 14,675,526 | 2,241,214 | 1,531,966 | 7,783,347 | 11,556,527 | ||||||||||||||||||||||||
|
2013
|
2,812,148 | 775,155 | 9,149,050 | 12,736,353 | 2,785,701 | 758,760 | 7,149,050 | 10,693,511 | ||||||||||||||||||||||||
|
2014
|
5,124,268 | 838,999 | 6,052,836 | 12,016,103 | 5,221,591 | 811,135 | 6,052,836 | 12,085,562 | ||||||||||||||||||||||||
|
2015
|
710,055 | — | 5,889,838 | 6,599,893 | 798,924 | — | 5,889,838 | 6,688,762 | ||||||||||||||||||||||||
|
2016-2047
|
5,581,984 | 58,788 | 47,852,746 | 53,493,518 | 3,788,972 | — | 46,752,038 | 50,541,010 | ||||||||||||||||||||||||
| 22,797,171 | 4,794,780 | 99,533,720 | 127,125,671 | 22,797,171 | 4,794,780 | 99,533,720 | 127,125,671 | |||||||||||||||||||||||||
|
ASC 815 (gains) losses on derivative hedging activities
|
1,947,250 | (5,557 | ) | 1,478,908 | 3,420,601 | 1,947,250 | (5,557 | ) | 1,478,908 | 3,420,601 | ||||||||||||||||||||||
|
Total
|
$ | 24,744,421 | $ | 4,789,223 | $ | 101,012,628 | $ | 130,546,272 | $ | 24,744,421 | $ | 4,789,223 | $ | 101,012,628 | $ | 130,546,272 | ||||||||||||||||
| (1) | The Company views its on-balance sheet securitization trust debt as long-term based on the contractual maturity dates and projects the expected principal paydowns based on the Company’s current estimates regarding loan prepayment speeds. The projected principal paydowns in year 2010 include $6.9 billion related to the on-balance sheet securitization trust debt. |
Secured
Borrowings
Variable Interest Entities (“VIEs”) are required to be
consolidated by their primary beneficiaries. A VIE exists when
either the total equity investment at risk is not sufficient to
permit the entity to finance its activities by itself, or the
equity investors lack one of three characteristics associated
with owning a controlling financial interest. Those
characteristics are the direct or indirect ability to make
decisions about an entity’s activities that have a
significant impact on the success of the entity, the obligation
to absorb the expected losses of an entity, and the rights to
receive the expected residual returns of the entity.
The Company currently consolidates a number of financing
entities that are VIEs as a result of being the entities’
primary beneficiary. As a result, these financing VIEs are
accounted for as secured borrowings. The process of identifying
the primary beneficiary involves identifying all other parties
that hold variable interests in the entity and determining which
of the parties, including the Company, has the responsibility to
absorb the majority of the entity’s expected losses or the
rights to its expected residual returns. The Company is the
F-50
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 7. | Borrowings (Continued) |
primary beneficiary of and currently consolidates the following
financing VIEs as of December 31, 2009 and 2008:
| December 31, 2009 | ||||||||||||||||||||||||||||
|
(Dollars in millions)
|
Debt Outstanding | |||||||||||||||||||||||||||
|
Short
|
Long
|
Carrying Amount of Assets Securing Debt Outstanding | ||||||||||||||||||||||||||
| Term | Term | Total | Loans | Cash | Other Assets | Total | ||||||||||||||||||||||
|
Secured Borrowings:
|
||||||||||||||||||||||||||||
|
ED Participation Program facility
|
$ | 9,006 | $ | — | $ | 9,006 | $ | 9,397 | $ | 115 | $ | 61 | $ | 9,573 | ||||||||||||||
|
ED Conduit Program facility
|
14,314 | — | 14,314 | 14,594 | 478 | 372 | 15,444 | |||||||||||||||||||||
|
2008 Asset-Backed Financing Facilities
|
— | 8,801 | 8,801 | 9,929 | 204 | 100 | 10,233 | |||||||||||||||||||||
|
On-balance sheet securitizations
|
— | 89,200 | 89,200 | 93,020 | 3,627 | 3,084 | 99,731 | |||||||||||||||||||||
|
Indentured trusts
|
64 | 1,533 | 1,597 | 2,225 | 172 | 24 | 2,421 | |||||||||||||||||||||
| 23,384 | 99,534 | 122,918 | 129,165 | 4,596 | 3,641 | 137,402 | ||||||||||||||||||||||
|
ASC 815 fair value adjustment
|
— | 1,479 | 1,479 | — | — | — | — | |||||||||||||||||||||
|
Total
|
$ | 23,384 | $ | 101,013 | $ | 124,397 | $ | 129,165 | $ | 4,596 | $ | 3,641 | $ | 137,402 | ||||||||||||||
| December 31, 2008 | ||||||||||||||||||||||||||||
|
(Dollars in millions)
|
Debt Outstanding | |||||||||||||||||||||||||||
|
Short
|
Long
|
Carrying Amount of Assets Securing Debt Outstanding | ||||||||||||||||||||||||||
| Term | Term | Total | Loans | Cash | Other Assets | Total | ||||||||||||||||||||||
|
Secured Borrowings:
|
||||||||||||||||||||||||||||
|
ED Participation Program
|
$ | 7,365 | $ | — | $ | 7,365 | $ | 7,733 | $ | 88 | $ | 85 | $ | 7,906 | ||||||||||||||
|
2008 Asset-Backed Financing Facilities
|
24,768 | — | 24,768 | 31,953 | 462 | 816 | 33,231 | |||||||||||||||||||||
|
On-balance sheet securitizations
|
— | 80,601 | 80,601 | 81,547 | 2,632 | 2,521 | 86,700 | |||||||||||||||||||||
|
Indentured trusts
|
31 | 1,972 | 2,003 | 2,199 | 236 | 40 | 2,475 | |||||||||||||||||||||
| 32,164 | 82,573 | 114,737 | 123,432 | 3,418 | 3,462 | 130,312 | ||||||||||||||||||||||
|
ASC 815 fair value adjustment
|
— | 872 | 872 | — | — | — | — | |||||||||||||||||||||
|
Total
|
$ | 32,164 | $ | 83,445 | $ | 115,609 | $ | 123,432 | $ | 3,418 | $ | 3,462 | $ | 130,312 | ||||||||||||||
Asset-Backed
Financing Facilities
During the first quarter of 2008, the Company entered into three
new asset-backed financing facilities (the “2008
Asset-Backed Financing Facilities”): (i) a
$26.0 billion FFELP loan ABCP conduit facility (the
“2008 FFELP ABCP Facility”); (ii) a
$5.9 billion Private Education Loan ABCP conduit facility
(the “2008 Private Education Loan ABCP Facility”)
(collectively, the “2008 ABCP Facilities”); and
(iii) a $2.0 billion secured FFELP loan facility (the
“2008 Asset-Backed Loan Facility”). The initial term
of the 2008 Asset-Backed Financing Facilities was 364 days.
The underlying cost of borrowing under the 2008 ABCP Facilities
was approximately LIBOR plus 0.68 percent for the FFELP
loan facilities and LIBOR plus 1.55 percent for the Private
Education Loan facility, excluding upfront and unused commitment
fees. All-in pricing on the 2008 ABCP Facilities varied based on
usage. For the full year 2008, the combined, all-in cost of
borrowings related to the 2008 Asset-Backed Financing
Facilities, including amortized upfront fees and unused
commitment fees, was three-month LIBOR plus 2.47 percent.
The primary use of the 2008 Asset-Backed Financing Facilities
was to refinance comparable ABCP facilities incurred in
connection with the Proposed Merger, with the expectation that
outstanding balances under the 2008 Asset-Backed Financing
Facilities would be reduced through securitization of the
underlying student loan collateral in the term ABS market.
On February 2, 2009, the Company extended the maturity date
of the 2008 ABCP Facilities from February 28, 2009 to
April 28, 2009 for a $61 million upfront fee. The
other terms of the facilities remained materially unchanged.
F-51
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 7. | Borrowings (Continued) |
On February 27, 2009, the Company extended the maturity
date of the 2008 Asset-Backed Loan Facility from
February 28, 2009 to April 28, 2009 for a
$4 million upfront fee. The other terms of this facility
remained materially unchanged.
On April 24, 2009, the Company extended the maturity of
$21.8 billion of the 2008 FFELP ABCP Facility for one year
to April 23, 2010. The Company also extended its 2008
Asset-Backed Loan Facility in the amount of $1.5 billion.
The extended 2008 Asset-Backed Loan Facility matured on
June 26, 2009 and was paid in full. A total of
$86 million in fees were paid related to these extensions.
The 2008 Private Education Loan ABCP Facility was paid off and
terminated on April 24, 2009. The stated borrowing rate of
the 2008 FFELP ABCP Facility was the applicable funding rate
plus 130 basis points excluding upfront fees. The
applicable funding rate generally was either a LIBOR or
commercial paper rate. The terms of the 2008 FFELP ABCP Facility
called for an increase in the applicable funding spread to
300 basis points if the outstanding borrowing amount was
not reduced to $15.2 billion and $10.9 billion as of
June 30, 2009 and September 30, 2009, respectively. If
the Company did not negotiate an extension or pay off all
outstanding amounts of the 2008 FFELP ABCP Facility at maturity,
the facility would extend by 90 days with the interest rate
generally increasing from LIBOR plus 250 basis points to
550 basis points over the 90 day period. The other
terms of the facilities remained materially unchanged.
The maximum amount the Company could borrow under the 2008 FFELP
ABCP Facility was limited based on certain factors, including
market conditions and the fair value of student loans in the
facility. As of December 31, 2009, the maximum borrowing
amount was approximately $10.5 billion. Funding under the
2008 FFELP ABCP Facility was subject to usual and customary
conditions. The 2008 FFELP ABCP Facility was subject to
termination under certain circumstances, including the
Company’s failure to comply with the principal financial
covenants in its unsecured revolving credit facilities.
Borrowings under the 2008 FFELP ABCP Facility were
non-recourse
to the Company. As of December 31, 2009, the Company had
$8.8 billion outstanding in connection with the 2008 FFELP
ABCP Facility. The book basis of the assets securing this
facility as of December 31, 2009 was $10.2 billion.
On January 15, 2010, the Company terminated the 2008 FFELP
ABCP Facility and entered into new multi-year ABCP facilities
(the “2010 Facility”) which will continue to provide
funding for the Company’s federally guaranteed student
loans. The 2010 Facility provides for maximum funding of
$10 billion for the first year, $5 billion for the
second year and $2 billion for the third year. Upfront fees
related to the 2010 Facility were approximately $4 million.
The underlying cost of borrowing under the 2010 Facility for the
first year is expected to be approximately commercial paper
issuance cost plus 0.50 percent, excluding up-front
commitment and unused fees.
Borrowings under the 2010 Facility are non-recourse to the
Company. The maximum amount the Company may borrow under the
2010 Facility is limited based on certain factors, including
market conditions and the fair value of student loans in the
facility. Funding under the 2010 Facility is subject to usual
and customary conditions. The 2010 Facility is subject to
termination under certain circumstances, including the
Company’s failure to comply with the principal financial
covenants in its unsecured revolving credit facilities.
Increases in the borrowing rate of up to LIBOR plus 450 basis
points could occur if certain asset coverage ratio thresholds
are not met. Failure to pay off the 2010 Facility on the
maturity date or to reduce amounts outstanding below the annual
maximum step downs will result in a
90-day
extension of the 2010 Facility with the interest rate increasing
from LIBOR plus 200 basis points to LIBOR plus
300 basis points, over that period. If, at the end of the
90-day
extension, these required paydown amounts have not been made,
the collateral can be foreclosed upon.
F-52
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 7. | Borrowings (Continued) |
The
Department of Education (“ED”) Funding
Programs
In August 2008, ED implemented the Purchase Program and the Loan
Purchase Participation Program (the “Participation
Program”) pursuant to ECASLA. Under the Purchase Program,
ED purchases eligible FFELP loans at a price equal to the sum of
(i) par value, (ii) accrued interest, (iii) the
one-percent origination fee paid to ED, and (iv) a fixed
amount of $75 per loan. Under the Participation Program, ED
provides short-term liquidity to FFELP lenders by purchasing
participation interests in pools of FFELP loans. FFELP lenders
are charged a rate equal to the preceding quarter commercial
paper rate plus 0.50 percent on the principal amount of
participation interests outstanding. Under the terms of the
Participation Program, on September 30, 2010, AY
2009-2010
loans funded under the Participation Program must be either
repurchased by the Company or sold to ED pursuant to the
Participation Program, which has identical economics to the
Purchase Program. Given the state of the credit markets, the
Company currently expect to sell all of the loans it funds under
the Participation Program to ED. Loans eligible for the
Participation or Purchase Programs are limited to FFELP Stafford
or PLUS Loans, first disbursed on or after May 1, 2008 but
no later than July 1, 2010, with no ongoing borrower
benefits other than permitted rate reductions of
0.25 percent for automatic payment processing.
As of December 31, 2009, the Company had $9.0 billion
of advances outstanding under the Participation Program. Through
December 31, 2009, the Company has sold to ED approximately
$18.5 billion face amount of loans as part of the Purchase
Program. Outstanding debt of $18.5 billion was paid down
related to the Participation Program in connection with these
loan sales. These loan sales resulted in a $284 million
gain. The settlement of the fourth quarter sale of loans out of
the Participation Program included repaying the debt by
delivering the related loans to ED in a non-cash transaction and
receipt of cash from ED for $484 million, representing the
reimbursement of a of one-percent payment made to ED plus a $75
fee per loan.
Also pursuant to ECASLA, on January 15, 2009, ED published
summary terms under which it will purchase eligible FFELP
Stafford and PLUS Loans from a conduit vehicle established to
provide funding for eligible student lenders (the “ED
Conduit Program”). Loans eligible for the ED Conduit
Program must be first disbursed on or after October 1,
2003, but not later than July 1, 2009, and fully disbursed
before September 30, 2009, and meet certain other
requirements, including those relating to borrower benefits. The
ED Conduit Program was launched on May 11, 2009 and will
accept eligible loans through July 1, 2010. The ED Conduit
Program has a term of five years and will expire on
January 19, 2014. Funding for the ED Conduit Program is
provided by the capital markets at a cost based on market rates,
with the Company being advanced 97 percent of the student
loan face amount. If the conduit does not have sufficient funds
to make the required payments on the notes issued by the
conduit, then the notes will be repaid with funds from the
Federal Financing Bank (“FFB”). The FFB will hold the
notes for a short period of time and if at the end of that time
the notes still cannot be paid off, the underlying FFELP loans
that serve as collateral to the ED Conduit will be sold to ED
through the Put Agreement at a price of 97 percent of the
face amount of the loans. As of December 31, 2009,
approximately $14.6 billion face amount of the
Company’s Stafford and PLUS Loans were funded through the
ED Conduit Program. For 2009, the average interest rate paid on
this facility was approximately 0.75 percent. As of
December 31, 2009, there are approximately
$820 million face amount of additional FFELP Stafford and
PLUS Loans (excluding loans currently in the Participation
Program) that can be funded through the ED Conduit Program.
Securitizations
In 2009, the Company completed four FFELP long-term ABS
transactions totaling $5.9 billion. The FFELP transactions
were composed primarily of FFELP Consolidation Loans which were
not eligible for the ED Conduit Program or the Term Asset-Backed
Securities Loan Facility (“TALF”) discussed below.
F-53
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 7. | Borrowings (Continued) |
On January 6, 2009, the Company closed a $1.5 billion
12.5 year asset-backed securities (“ABS”) based
facility. This facility is used to provide up to
$1.5 billion term financing for Private Education Loans.
The fully-utilized cost of financing obtained under this
facility is expected to be LIBOR plus 5.75 percent. In
connection with this facility, the Company completed one Private
Education Loan term ABS transaction totaling $1.5 billion
in the first quarter of 2009. The net funding received under the
asset-backed securities based facility for this issuance was
$1.1 billion.
On February 6, 2009, the Federal Reserve Bank of New York
published proposed terms for a program designed to facilitate
renewed issuance of consumer and small business ABS at lower
interest rate spreads. TALF was initiated on March 17, 2009
and currently provides investors who purchase eligible ABS with
funding of up to five years. Eligible ABS include
‘AAA’ rated student loan ABS backed by FFELP and
Private Education Loans first disbursed since May 1, 2007.
The following $6.0 Billion of Private Education Loan
securitizations were completed in 2009 and were TALF eligible:
| • | On May 5, 2009, the Company priced a $2.6 billion Private Education Loan securitization which closed on May 12, 2009. The issue bears a coupon of 1-month LIBOR plus 6.0 percent and is callable at the issuer’s option at 93 percent of the outstanding balance of the ABS between November 15, 2011 and April 16, 2012. If the issue is called on November 15, 2011, the Company expects the effective cost of the financing will be approximately 1-month LIBOR plus 3.7 percent. | |
| • | On July 2, 2009, the Company priced a $1.1 billion Private Education Loan securitization which closed on July 14, 2009. The issue bears a coupon of Prime plus 1.25 percent and is callable at the issuer’s option at 94 percent of the outstanding balance of the ABS between January 16, 2012 and June 15, 2012. If the issue is called on January 16, 2012, the Company expects the effective cost of the financing will be approximately Prime minus 0.71 percent. | |
| • | On August 5, 2009, the Company priced a $1.7 billion Private Education Loan securitization which closed on August 13, 2009. The issue bears a coupon of Prime plus 0.25 percent and is callable at the issuer’s option at 94 percent of the outstanding balance of the ABS between August 15, 2013 and July 15, 2014. If the issue is called on August 15, 2013, the Company expects the effective cost of the financing will be approximately Prime minus 0.55 percent. | |
| • | On December 2, 2009, the Company priced a $590 million Private Education Career Training Loan securitization which closed on December 10, 2009. The issue includes one tranche that bears a coupon of Prime minus 0.90 percent and a second tranche that bears a coupon of 1-month LIBOR plus 1.85 percent. |
In certain of the Company’s securitizations, there are
terms within the deal structure that result in such
securitization not qualifying for sale treatment and, as a
result, is accounted for as a secured borrowing. Terms that
prevent sale treatment include: (1) allowing the Company to
hold certain rights that can affect the remarketing of certain
bonds, (2) allowing the trust to enter into interest rate
cap agreements after the initial settlement of the
securitization which do not relate to the reissuance of
third-party beneficial interests or (3) allowing the
Company to hold an unconditional call option related to a
certain percentage of the securitized assets. These
securitizations completed in 2009 are accounted for as secured
borrowings.
The Company has concluded, for the Private Education Loan
securitizations above which contain the ability to call the
bonds in the future at a discount to par, that it is probable it
will call these bonds at the call date at the respective
discount. Probability is based on the Company’s assessment
of whether these bonds can be refinanced at the call date at or
lower than a breakeven cost of funds based on the call discount.
As a result, the Company is accreting this call discount as a
reduction to interest expense through the call date. If it
F-54
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 7. | Borrowings (Continued) |
becomes less than probable the Company will call these bonds at
a future date, it will result in the Company reversing this
prior accretion as a cumulative catch up adjustment. The Company
has accreted approximately $59 million as a reduction of
interest expense through December 31, 2009.
During 2009 and 2008, five and two, respectively, of the
Company’s off-balance sheet securitization trusts were
re-evaluated and it was determined that they no longer met the
criteria to be considered QSPEs. These trusts were then
evaluated as VIEs and it was determined that they should be
consolidated and accounted for as secured borrowings as the
Company is the primary beneficiary. These trusts had reached
their 10 percent
clean-up
call levels but the call was not exercised by the Company.
Because the Company can now exercise that option at its
discretion going forward, the Company effectively controls the
assets of the trusts. This resulted in the Company consolidating
at fair value $685 million and $289 million in assets
and $649 million and $278 million in liabilities
related to these trusts during 2009 and 2008, respectively. This
resulted in $20 million and $2 million recognized
gains in 2009 and 2008, respectively.
Auction
Rate Securities
At December 31, 2009, the Company had $1.0 billion of
taxable and $1.1 billion of tax-exempt auction rate
securities outstanding in on-balance sheet securitizations and
indentured trusts, respectively. Since February 2008, problems
in the auction rate securities market as a whole led to failures
of the auctions pursuant to which certain of the Company’s
auction rate securities’ interest rates are set. As a
result, all of the Company’s auction rate securities as of
December 31, 2009 bore interest at the maximum rate
allowable under their terms. The maximum allowable interest rate
on the Company’s $1.0 billion of taxable auction rate
securities is generally LIBOR plus 1.50 percent. The
maximum allowable interest rate on many of the Company’s
$1.1 billion of tax-exempt auction rate securities is a
formula driven rate, which produced various maximum rates up to
1.14 percent during the fourth quarter of 2009. Since
December 31, 2009, certain of the Company’s taxable
auction rate securities with shorter terms to maturity have had
successful auctions.
Indentured
Trusts
The Company has secured assets and outstanding bonds in
indentured trusts resulting from the acquisition of various
student loan providers in prior periods. The indentures were
created and bonds issued to finance the acquisition of student
loans guaranteed under the Higher Education Act. The bonds are
limited obligations of the Company and are secured by and
payable from payments associated with the underlying secured
loans.
Federal
Home Loan Bank in Des Moines
On January 15, 2010, HICA Education Loan Corporation, a
subsidiary of the Company, entered into a lending agreement with
the Federal Home Loan Bank of Des Moines (the “FHLB”).
Under the agreement, the FHLB will provide advances backed by
Federal Housing Finance Agency approved collateral including
federally-guaranteed student loans. The initial borrowing of
$25 million at a rate of .23 percent under this
facility occurred on January 15, 2010 and matured on
January 22, 2010. The amount, price and tenor of future
advances will vary and will be determined at the time of each
borrowing. The maximum amount that can be borrowed, as of
January 15, 2010, subject to available collateral, is
approximately $11 billion. The Company has provided a
guarantee to the FHLB for the performance and payment of
HICA’s obligations.
| 8. | Student Loan Securitization |
The Company securitizes its FFELP Stafford Loans, FFELP
Consolidation Loans and Private Education Loan assets and, for
transactions qualifying as sales, retains a Residual Interest
and servicing rights (as the
F-55
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 8. | Student Loan Securitization (Continued) |
Company retains the servicing responsibilities), all of which
are referred to as the Company’s Retained Interest in
off-balance sheet securitized loans. The Residual Interest is
the right to receive cash flows from the student loans and
reserve accounts in excess of the amounts needed to pay
servicing, derivative costs (if any), other fees, and the
principal and interest on the bonds backed by the student loans.
Securitization
Activity
The following table summarizes the Company’s securitization
activity for the years ended December 31, 2009, 2008 and
2007. Those securitizations listed as sales are off-balance
sheet transactions and those listed as financings remain
on-balance sheet.
| Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Loan
|
Pre-
|
Loan
|
Pre-
|
Loan
|
Pre-
|
|||||||||||||||||||||||||||||||||||||||||||
|
No. of
|
Amount
|
Tax
|
Gain
|
No. of
|
Amount
|
Tax
|
Gain
|
No. of
|
Amount
|
Tax
|
Gain
|
|||||||||||||||||||||||||||||||||||||
| Transactions | Securitized | Gain | % | Transactions | Securitized | Gain | % | Transactions | Securitized | Gain | % | |||||||||||||||||||||||||||||||||||||
|
(Dollars in millions)
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Securitizations — sales:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
FFELP Stafford/PLUS Loans
|
— | $ | — | $ | — | — | % | — | $ | — | $ | — | — | % | — | $ | — | $ | — | — | % | |||||||||||||||||||||||||||
|
FFELP Consolidation Loans
|
— | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
|
Private Education Loans
|
— | — | — | — | — | — | — | — | 1 | 2,001 | 367 | 18.4 | ||||||||||||||||||||||||||||||||||||
|
Total securitizations — sales
|
— | — | $ | — | — | % | — | — | $ | — | — | % | 1 | 2,001 | $ | 367 | 18.4 | % | ||||||||||||||||||||||||||||||
|
Securitizations — financings:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
FFELP Stafford/PLUS
Loans
(1)
|
— | — | 9 | 18,546 | 3 | 8,955 | ||||||||||||||||||||||||||||||||||||||||||
|
FFELP Consolidation
Loans
(1)(2)
|
3 | 5,339 | — | — | 5 | 14,476 | ||||||||||||||||||||||||||||||||||||||||||
|
Private Education
Loans
(1)
|
5 | 11,122 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
|
Total securitizations — financings
|
8 | 16,461 | 9 | 18,546 | 8 | 23,431 | ||||||||||||||||||||||||||||||||||||||||||
|
Total securitizations
|
8 | $ | 16,461 | 9 | $ | 18,546 | 9 | $ | 25,432 | |||||||||||||||||||||||||||||||||||||||
| (1) | In certain securitizations there are terms within the deal structure that result in such securitizations not qualifying for sale treatment and, accordingly, they are accounted for on-balance sheet as VIEs. Terms that prevent sale treatment include: (1) allowing the Company to hold certain rights that can affect the remarketing of certain bonds, (2) allowing the trust to enter into interest rate cap agreements (which do not relate to the reissuance of third-party beneficial interests) after initial settlement of the securitization, or (3) allowing the Company to hold an unconditional call option related to a certain percentage of the securitized assets. | |
| (2) | In addition to the transactions listed in the above table, the Company settled on a repackaging trust and issued new asset backed securities in the amount of $1.0 billion. The debt issued is collateralized by reset rate notes totaling $1.2 billion. |
F-56
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 8. | Student Loan Securitization (Continued) |
Key economic assumptions used in estimating the fair value of
the Residual Interests at the date of securitization resulting
from the student loan securitization sale transactions completed
during the years ended December 31, 2009, 2008 and 2007
were as follows:
| Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
|
FFELP
|
||||||||||||||||||||||||||||||||||||
|
Stafford
|
FFELP
|
Private
|
FFELP
|
FFELP
|
Private
|
FFELP
|
FFELP
|
Private
|
||||||||||||||||||||||||||||
|
and
|
Consolidation
|
Education
|
Stafford
|
Consolidation
|
Education
|
Stafford
|
Consolidation
|
Education
|
||||||||||||||||||||||||||||
| PLUS (1) | Loans (1) | Loans (1) | and PLUS (1) | Loans (1) | Loans (1) | and PLUS (1) | Loans (1) | Loans | ||||||||||||||||||||||||||||
|
Prepayment speed (annual
rate)
(2)
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Interim status
|
— | — | — | — | — | — | — | — | 0 | % | ||||||||||||||||||||||||||
|
Repayment status
|
— | — | — | — | — | — | — | — | 4-7 | % | ||||||||||||||||||||||||||
|
Life of loan repayment status
|
— | — | — | — | — | — | — | — | 6 | % | ||||||||||||||||||||||||||
|
Weighted average life
|
— | — | — | — | — | — | — | — | 9.4 y | rs. | ||||||||||||||||||||||||||
|
Expected credit losses (% of principal securitized)
|
— | — | — | — | — | — | — | — | 4.69 | % | ||||||||||||||||||||||||||
|
Residual cash flows discounted at (weighted average)
|
— | — | — | — | — | — | — | — | 12.5 | % | ||||||||||||||||||||||||||
| (1) | No securitizations qualified for sale treatment in the period. | |
| (2) | The Company uses CPR curves for Residual Interest valuations that are based on seasoning (the number of months since entering repayment). Under this methodology, a different CPR is applied to each year of a loan’s seasoning. The repayment status CPR used is based on the number of months since first entering repayment (seasoning). Life of loan CPR is related to repayment status only and does not include the impact of the loan while in interim status. The CPR assumption used for all periods includes the impact of projected defaults. |
The following table summarizes cash flows received from or paid
to the off-balance sheet securitization trusts during the years
ended December 31, 2009, 2008 and 2007:
| Years Ended December 31, | ||||||||||||
|
(Dollars in millions)
|
2009 | 2008 | 2007 | |||||||||
|
Net proceeds from new securitizations completed during the period
|
$ | — | $ | — | $ | 1,977 | ||||||
|
Cash distributions from trusts related to Residual Interests
|
477 | 909 | 782 | |||||||||
|
Servicing fees
received
(1)
|
225 | 246 | 286 | |||||||||
|
Purchases of previously transferred financial assets for
representation and warranty violations
|
(7 | ) | (37 | ) | (33 | ) | ||||||
|
Reimbursements of borrower
benefits
(2)
|
(36 | ) | (29 | ) | (22 | ) | ||||||
|
Purchases of delinquent Private Education Loans from
securitization trusts using delinquent loan call option
|
— | (172 | ) | (162 | ) | |||||||
|
Purchases of loans using
clean-up
call option
|
— | (697 | ) | (1,500 | ) | |||||||
| (1) | The Company receives annual servicing fees of 90 basis points, 50 basis points and 70 basis points of the outstanding securitized loan balance related to its FFELP Stafford, FFELP Consolidation Loan and Private Education Loan securitizations, respectively. | |
| (2) | Under the terms of the securitizations, the transaction documents require that the Company reimburse the trusts for any borrower benefits afforded the borrowers of the underlying securitized loans. |
F-57
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 8. | Student Loan Securitization (Continued) |
Residual
Interest in Securitized Receivables
The following tables summarize the fair value of the
Company’s Residual Interests included in the Company’s
Retained Interest (and the assumptions used to value such
Residual Interests), along with the underlying off-balance sheet
student loans that relate to those securitizations in
transactions that were treated as sales as of December 31,
2009 and 2008.
| As of December 31, 2009 | ||||||||||||||||
|
FFELP
|
Consolidation
|
Private
|
||||||||||||||
|
Stafford and
|
Loan
|
Education
|
||||||||||||||
| PLUS | Trusts (1) | Loan Trusts | Total | |||||||||||||
|
(Dollars in millions)
|
||||||||||||||||
|
Fair value of Residual Interests
|
$ | 243 | $ | 791 | $ | 794 | $ | 1,828 | ||||||||
|
Underlying securitized loan balance
|
5,377 | 14,369 | 12,986 | 32,732 | ||||||||||||
|
Weighted average life
|
3.3 yrs. | 9.0 yrs. | 6.3 yrs. | |||||||||||||
|
Prepayment speed (annual
rate)
(2)
|
||||||||||||||||
|
Interim status
|
0 | % | N/A | 0 | % | |||||||||||
|
Repayment status
|
0-14 | % | 2-4 | % | 2-15 | % | ||||||||||
|
Life of loan — repayment status
|
9 | % | 3 | % | 6 | % | ||||||||||
|
Expected credit losses (% of student loan
principal)
(3)(4)
|
.10 | % | .25 | % | 5.31 | % | ||||||||||
|
Residual cash flows discount rate
|
10.6 | % | 12.3 | % | 27.5 | % | ||||||||||
| As of December 31, 2008 | ||||||||||||||||
|
FFELP
|
Consolidation
|
Private
|
||||||||||||||
|
Stafford and
|
Loan
|
Education
|
||||||||||||||
| PLUS | Trusts (1) | Loan Trusts | Total | |||||||||||||
|
(Dollars in millions)
|
||||||||||||||||
|
Fair value of Residual Interests
|
$ | 250 | $ | 918 | $ | 1,032 | $ | 2,200 | ||||||||
|
Underlying securitized loan balance
|
7,057 | 15,077 | 13,690 | 35,824 | ||||||||||||
|
Weighted average life
|
3.0 yrs. | 8.1 yrs. | 6.4 yrs. | |||||||||||||
|
Prepayment speed (annual
rate)
(2)
|
||||||||||||||||
|
Interim status
|
0 | % | N/A | 0 | % | |||||||||||
|
Repayment status
|
2-19 | % | 1-6 | % | 2-15 | % | ||||||||||
|
Life of loan — repayment status
|
12 | % | 4 | % | 6 | % | ||||||||||
|
Expected credit losses (% of student loan
principal)
(3)(4)
|
.11 | % | .23 | % | 5.22 | % | ||||||||||
|
Residual cash flows discount rate
|
13.1 | % | 11.9 | % | 26.3 | % | ||||||||||
| (1) | Includes $569 million and $762 million related to the fair value of the Embedded Floor Income as of December 31, 2009 and 2008, respectively. Changes in the fair value of the Embedded Floor Income are primarily due to changes in the interest rates and the paydown of the underlying loans. | |
| (2) | The Company uses CPR curves for Residual Interest valuations that are based on seasoning (the number of months since entering repayment). Under this methodology, a different CPR is applied to each year of a loan’s seasoning. The repayment status CPR used is based on the number of months since first entering repayment (seasoning). Life of loan CPR is related to repayment status only and does not include the impact of the loan while in interim status. The CPR assumption used for all periods includes the impact of projected defaults. | |
| (3) | Remaining expected credit losses as of the respective balance sheet date. | |
| (4) | For Private Education Loan trusts, estimated defaults from settlement to maturity are 12.2 percent and 9.1 percent at December 31, 2009 and 2008, respectively. These estimated defaults do not include recoveries related to defaults but do include prior purchases of loans at par by the Company when loans reached 180 days delinquency (prior to default) under a contingent call option. Although these loan purchases do not result in a realized loss to the trust, the Company has included them here. Not including these purchases in the disclosure would result in estimated defaults of 9.3 percent and 6.1 percent at December 31, 2009 and 2008, respectively. |
F-58
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 8. | Student Loan Securitization (Continued) |
Servicing and securitization revenue is primarily driven by the
average balance of off-balance sheet student loans, the amount
of and the difference in the timing of Embedded Floor Income
recognition for off-balance sheet student loans, and the fair
value adjustment related to those Residual Interests where the
Company has elected to carry such Residual Interests at fair
value through earnings under ASC 825.
The Company recorded net unrealized
mark-to-market
losses of $330 million, $425 million and
$24 million in the years ended December 31, 2009, 2008
and 2007, respectively, related to the Residual Interest.
As of December 31, 2009, the Company changed the following
significant assumptions compared to those used as of
December 31, 2008, to determine the fair value of the
Residual Interests:
| • | Prepayment speed assumptions on FFELP Stafford and Consolidation Loans were decreased. This change reflects the significant decrease in prepayment activity experienced since 2008. This decrease in prepayment activity, which the Company expects will continue into the foreseeable future, was primarily due to a reduction in third-party consolidation activity as a result of the CCRAA and the current U.S. economic and credit environment. This resulted in a $61 million unrealized mark-to-market gain. |
| • | Life of loan default rate assumptions for Private Education Loans were increased from 9.1 percent to 12.2 percent as a result of the continued weakening of the U.S. economy. This resulted in a $426 million unrealized mark-to-market loss. |
As of December 31, 2008, the Company had changed the
following significant assumptions compared to those used as of
December 31, 2007, to determine the fair value of the
Residual Interests:
| • | Prepayment speed assumptions were decreased for all three asset types primarily as a result of a significant reduction in prepayment activity experienced, which is expected to continue into the foreseeable future. The decrease in prepayment speeds was primarily due to a reduction in third-party consolidation activity as a result of the CCRAA (for FFELP only) and the current U.S. economic and credit environment. This resulted in a $114 million unrealized mark-to-market gain. |
| • | Life of loan default rate assumptions for Private Education Loans were increased as a result of the continued weakening of the U.S. economy. This resulted in a $79 million unrealized mark-to-market loss. |
| • | Cost of funds assumptions related to the underlying auction rate securities bonds ($2.3 billion face amount of bonds) within FFELP loan ($1.7 billion face amount of bonds) and Private Education Loan ($0.6 billion face amount of bonds) trusts were increased to take into account the expectations these auction rate securities would continue to reset at higher rates for an extended period of time. This resulted in a $116 million unrealized mark-to-market loss. |
| • | The discount rate assumption related to the Private Education Loan and FFELP Residual Interests was increased. The Company assessed the appropriateness of the current risk premium, which was added to the risk free rate for the purpose of arriving at a discount rate, in light of the current economic and credit uncertainty that existed in the market as of December 31, 2008. This discount rate was applied to the projected cash flows to arrive at a fair value representative of the then current economic conditions. The Company increased the risk premium by 1,550 basis points and 390 basis points for Private Education Loans and FFELP loans, respectively, to take into account the then current level of cash flow uncertainty and lack of liquidity that existed with the Residual Interests. This resulted in a $904 million unrealized mark-to-market loss. |
The Company recorded impairments to the Retained Interests of
$254 million for the year ended December 31, 2007. The
impairment charges were the result of FFELP loans prepaying
faster than projected through loan consolidations
($110 million), impairment to the Floor Income component of
the Company’s
F-59
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 8. | Student Loan Securitization (Continued) |
Retained Interest due to increases in interest rates during the
period ($24 million), and increases in prepayments,
defaults, and the discount rate related to Private Education
Loans ($120 million).
The following table reflects the sensitivity of the current fair
value of the Residual Interests to adverse changes in the key
economic assumptions used in the valuation of the Residual
Interest at December 31, 2009, discussed in detail in the
preceding table. The effect of a variation in a particular
assumption on the fair value of the Residual Interest is
calculated without changing any other assumption. In reality,
changes in one factor may result in changes in another (for
example, increases in market interest rates may result in lower
prepayments and increased credit losses), which might magnify or
counteract the sensitivities. These sensitivities are
hypothetical, as the actual results could be materially
different than these estimates.
| Year Ended December 31, 2009 | ||||||||||||
|
FFELP
|
FFELP
|
|||||||||||
|
Stafford/PLUS
|
Consolidation
|
Private Education
|
||||||||||
| Loan Trusts (5) | Loan Trusts (5) | Loan Trusts (5) | ||||||||||
|
(Dollars in millions)
|
||||||||||||
|
Fair value of Residual Interest
|
$ | 243 | $ | 791 | (1) | $ | 794 | |||||
|
Weighted-average life
|
3.3 yrs. | 9.0 yrs. | 6.3 yrs. | |||||||||
|
Prepayment speed
assumptions
(2)
|
||||||||||||
|
Interim status
|
0 | % | N/A | 0 | % | |||||||
|
Repayment status
|
0-14 | % | 2-4 | % | 2-15 | % | ||||||
|
Life of loan — repayment status
|
9 | % | 3 | % | 6 | % | ||||||
|
Impact on fair value of 5% absolute increase
|
$ | (26 | ) | $ | (85 | ) | $ | (128 | ) | |||
|
Impact on fair value of 10% absolute increase
|
$ | (47 | ) | $ | (151 | ) | $ | (229 | ) | |||
|
Expected credit losses (as a % of student loan principal)
|
.10 | % | .25 | % | 5.31 | % (3) | ||||||
|
Impact on fair value of 5% absolute increase in default rate
|
$ | (4 | ) | $ | (8 | ) | $ | (176 | ) | |||
|
Impact on fair value of 10% absolute increase in default rate
|
$ | (9 | ) | $ | (17 | ) | $ | (346 | ) | |||
|
Residual cash flows discount rate
|
10.6 | % | 12.3 | % | 27.5 | % | ||||||
|
Impact on fair value of 5% absolute increase
|
$ | (29 | ) | $ | (136 | ) | $ | (116 | ) | |||
|
Impact on fair value of 10% absolute increase
|
$ | (53 | ) | $ | (230 | ) | $ | (205 | ) | |||
|
3 month LIBOR forward curve at December 31, 2009
plus contracted spreads
|
||||||||||||
|
Difference between Asset and Funding underlying
indices
(4)
|
||||||||||||
|
Impact on fair value of 0.25% absolute increase in funding index
compared to asset index
|
$ | (41 | ) | $ | (173 | ) | $ | (2 | ) | |||
|
Impact on fair value of 0.50% absolute increase in funding index
compared to asset index
|
$ | (82 | ) | $ | (345 | ) | $ | (4 | ) | |||
| (1) | Certain consolidation trusts have $3.3 billion of non-U.S. dollar (Euro denominated) bonds outstanding. To convert these non-U.S. dollar denominated bonds into U.S. dollar liabilities, the trusts have entered into foreign-currency swaps with certain counterparties. Additionally, certain Private Education Loan trusts contain interest rate swaps that hedge the basis and reset risk between the Prime indexed assets and LIBOR index notes. As of December 31, 2009, these swaps are in a $910 million gain position (in the aggregate) and the trusts had $603 million of exposure to counterparties (gain position less collateral posted) primarily as a result of the decline in the exchange rates between the U.S. dollar and the Euro. This unrealized market value gain is not part of the fair value of the Residual Interest in the table above. Not all derivatives within the trusts require the swap counterparties to post collateral to the respective trust for changes in market value, unless the trust’s swap counterparty’s credit rating has been withdrawn or has been downgraded below a certain level. If the swap counterparty does not post the required collateral or is downgraded further, the counterparty must find a suitable replacement counterparty or provide the trust with a letter of credit or a guaranty from an entity that has the required credit ratings. Ultimately, the Company’s exposure related to a swap counterparty failing to make its payments is limited to the fair value of the related trust’s Residual Interest, which was $1.3 billion as of December 31, 2009. | |
| (2) | See previous table for details on CPR. Impact on fair value due to increase in prepayment speeds only increases the repayment status speeds. Interim status CPR remains 0%. | |
| (3) | Expected credit losses are used to project future cash flows related to the Private Education Loan securitization’s Residual Interest. However, until the fourth quarter of 2008 when it ceased this activity for all trusts settling prior to September 30, 2005, the Company purchased loans at par when the loans reach 180 days delinquent prior to default under a contingent call option, resulting in no credit losses at the trust nor related to the Company’s Residual Interest. When the Company exercises its contingent call option and purchases the loan from the trust at par, the Company records a loss related to these loans that are now on the Company’s balance sheet. The Company recorded losses of $0, $141 million and $123 million for the years ended December 31, 2009, 2008 and 2007, respectively, related to this activity and specialty claims. For all trusts settling after October 1, 2005, the Company does not hold this contingent call option. | |
| (4) | Student loan assets are primarily indexed to a Treasury bill, commercial paper or a prime index. Funding within the trust is primarily indexed to a LIBOR index. Sensitivity analysis increases funding indexes as indicated while keeping the assets underlying indexes fixed. | |
| (5) | In addition to the assumptions in the table above, the Company also projects the reduction in distributions that will result from the various benefit programs that exist related to consecutive on-time payments by borrowers. Related to the entire $1.8 billion Residual Interest, there is $214 million (present value) of benefits projected, which reduce the fair value. |
F-60
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 8. | Student Loan Securitization (Continued) |
The table below shows the Company’s off-balance sheet
Private Education Loan delinquency trends as of
December 31, 2009 and 2008.
|
Off-Balance Sheet Private Education Loan
|
||||||||||||||||
| Delinquencies | ||||||||||||||||
|
December 31,
|
December 31,
|
|||||||||||||||
| 2009 | 2008 | |||||||||||||||
| Balance | % | Balance | % | |||||||||||||
|
(Dollars in millions)
|
||||||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 2,546 | $ | 3,461 | ||||||||||||
|
Loans in
forbearance
(2)
|
453 | 700 | ||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||
|
Loans current
|
8,987 | 90.0 | % | 8,843 | 92.8 | % | ||||||||||
|
Loans delinquent
31-60 days
(3)
|
332 | 3.3 | 315 | 3.3 | ||||||||||||
|
Loans delinquent
61-90 days
|
151 | 1.5 | 121 | 1.3 | ||||||||||||
|
Loans delinquent greater than 90 days
|
517 | 5.2 | 251 | 2.6 | ||||||||||||
|
Total off-balance sheet Private Education Loans in repayment
|
9,987 | 100 | % | 9,530 | 100 | % | ||||||||||
|
Total off-balance sheet Private Education Loans, gross
|
$ | 12,986 | $ | 13,691 | ||||||||||||
| (1) | Loans for borrowers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation. |
| (2) | Loans for borrowers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with the established loan program servicing policies and procedures. | |
| (3) | The period of delinquency is based on the number of days scheduled payments are contractually past due. |
The following table summarizes charge-off activity for Private
Education Loans in the off-balance sheet trusts for the years
ended December 31, 2009, 2008 and 2007.
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
(Dollars in millions)
|
||||||||||||
|
Charge-offs
|
(423 | ) | (153 | ) | (79 | ) | ||||||
|
Charge-offs as a percentage of average loans in repayment
|
4.4 | % | 1.9 | % | 1.1 | % | ||||||
|
Charge-offs as a percentage of average loans in repayment and
forbearance
|
4.2 | % | 1.6 | % | .9 | % | ||||||
|
Ending off-balance sheet total Private Education
Loans
(1)
|
$ | 13,215 | $ | 13,782 | $ | 14,227 | ||||||
|
Average off-balance sheet Private Education Loans in repayment
|
$ | 9,597 | $ | 8,088 | $ | 7,305 | ||||||
|
Ending off-balance sheet Private Education Loans in repayment
|
$ | 9,987 | $ | 9,530 | $ | 7,819 | ||||||
| (1) | Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans (see Note 4,“Allowance for Loan Losses”). |
F-61
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 9. | Derivative Financial Instruments |
Risk
Management Strategy
The Company maintains an overall interest rate risk management
strategy that incorporates the use of derivative instruments to
minimize the economic effect of interest rate changes. The
Company’s goal is to manage interest rate sensitivity by
modifying the repricing frequency and underlying index
characteristics of certain balance sheet assets and liabilities
(including the Residual Interest from off-balance sheet
securitizations) so that the net interest margin is not, on a
material basis, adversely affected by movements in interest
rates. The Company does not use derivative instruments to hedge
credit risk associated with debt issued by the Company. As a
result of interest rate fluctuations, hedged assets and
liabilities will appreciate or depreciate in market value.
Income or loss on the derivative instruments that are linked to
the hedged assets and liabilities will generally offset the
effect of this unrealized appreciation or depreciation for the
period the item is being hedged. The Company views this strategy
as a prudent management of interest rate sensitivity. In
addition, the Company utilizes derivative contracts to minimize
the economic impact of changes in foreign currency exchange
rates on certain debt obligations that are denominated in
foreign currencies. As foreign currency exchange rates
fluctuate, these liabilities will appreciate and depreciate in
value. These fluctuations, to the extent the hedge relationship
is effective, are offset by changes in the value of the
cross-currency interest rate swaps executed to hedge these
instruments. Management believes certain derivative transactions
entered into as hedges, primarily Floor Income Contracts, basis
swaps and Eurodollar futures contracts, are economically
effective; however, those transactions generally do not qualify
for hedge accounting under ASC 815 (as discussed below) and thus
may adversely impact earnings.
Although the Company uses derivatives to offset (or minimize)
the risk of interest rate and foreign currency changes, the use
of derivatives does expose the Company to both market and credit
risk. Market risk is the chance of financial loss resulting from
changes in interest rates, foreign exchange rates and market
liquidity. Credit risk is the risk that a counterparty will not
perform its obligations under a contract and it is limited to
the loss of the fair value gain in a derivative that the
counterparty owes the Company. When the fair value of a
derivative contract is negative, the Company owes the
counterparty and, therefore, has no credit risk exposure to the
counterparty; however, the counterparty has exposure to the
Company. The Company minimizes the credit risk in derivative
instruments by entering into transactions with highly rated
counterparties that are reviewed regularly by the Company’s
Credit Department. The Company also maintains a policy of
requiring that all derivative contracts be governed by an
International Swaps and Derivative Association Master Agreement.
Depending on the nature of the derivative transaction, bilateral
collateral arrangements generally are required as well. When the
Company has more than one outstanding derivative transaction
with the counterparty, and there exists legally enforceable
netting provisions with the counterparty (i.e., a legal right to
offset receivable and payable derivative contracts), the
“net”
mark-to-market
exposure represents the netting of the positive and negative
exposures with the same counterparty. When there is a net
negative exposure, the Company considers its exposure to the
counterparty to be zero. At December 31, 2009 and 2008, the
Company had a net positive exposure (derivative gain positions
to the Company less collateral which has been posted by
counterparties to the Company) related to corporate derivatives
of $246 million and $234 million, respectively.
The Company’s on-balance sheet securitization trusts have
$10.4 billion of Euro and British Pound Sterling
denominated bonds outstanding as of December 31, 2009. To
convert these
non-U.S. dollar
denominated bonds into U.S. dollar liabilities, the trusts
have entered into foreign-currency swaps with highly-rated
counterparties. As of December 31, 2009, the net positive
exposure on these swaps is $1.2 billion. As previously
discussed, the Company’s corporate derivatives contain
provisions which require collateral to be posted on a regular
basis for changes in market values. The on-balance sheet
trusts’ derivatives are structured such that swap
counterparties are required to post collateral if their credit
rating has been withdrawn or is
F-62
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 9. | Derivative Financial Instruments (Continued) |
below a certain level. If the swap counterparty does not post
the required collateral or is downgraded further, the
counterparty must find a suitable replacement counterparty or
provide the trust with a letter of credit or a guaranty from an
entity that has the required credit ratings. In addition to the
credit rating requirement, trusts issued after November 2005
require the counterparty to post collateral due to a net
positive exposure on cross-currency interest rate swaps,
irrespective of their counterparty rating. The trusts, however,
are not required to post collateral to the counterparty.
ASC
815
Derivative instruments that are used as part of the
Company’s interest rate and foreign currency risk
management strategy include interest rate swaps, basis swaps,
cross-currency interest rate swaps, interest rate futures
contracts, and interest rate floor and cap contracts with
indices that relate to the pricing of specific balance sheet
assets and liabilities, including the Residual Interests from
off-balance sheet securitizations. In addition, prior to 2008,
the Company used equity forward contracts based on the
Company’s stock. The Company accounts for its derivatives
under ASC 815 which requires that every derivative instrument,
including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset
or liability measured at its fair value. As more fully described
below, if certain criteria are met, derivative instruments are
classified and accounted for by the Company as either fair value
or cash flow hedges. If these criteria are not met, the
derivative financial instruments are accounted for as trading.
Fair
Value Hedges
Fair value hedges are generally used by the Company to hedge the
exposure to changes in fair value of a recognized fixed rate
asset or liability. The Company enters into interest rate swaps
to convert fixed rate assets into variable rate assets and fixed
rate debt into variable rate debt. The Company also enters into
cross-currency interest rate swaps to convert foreign currency
denominated fixed and floating debt to U.S. dollar
denominated variable debt. For fair value hedges, the Company
generally considers all components of the derivative’s gain
and/or
loss
when assessing hedge effectiveness (in some cases the Company
excludes time-value components) and generally hedges changes in
fair value due to interest rates or interest rates and foreign
currency exchange rates or the total change in fair value.
Cash Flow
Hedges
Cash flow hedges are used by the Company to hedge the exposure
to variability in cash flows for a forecasted debt issuance and
for exposure to variability in cash flows of floating rate debt.
This strategy is used primarily to minimize the exposure to
volatility from future changes in interest rates. Gains and
losses on the effective portion of a qualifying hedge are
accumulated in other comprehensive income and ineffectiveness is
recorded immediately to earnings. In the case of a forecasted
debt issuance, gains and losses are reclassified to earnings
over the period which the stated hedged transaction impacts
earnings. If the stated transaction is deemed probable not to
occur, gains and losses are reclassified immediately to
earnings. In assessing hedge effectiveness, generally all
components of each derivative’s gains or losses are
included in the assessment. The Company generally hedges
exposure to changes in cash flows due to changes in interest
rates or total changes in cash flow.
Trading
Activities
When instruments do not qualify as hedges, they are accounted
for as trading where all changes in fair value of the
derivatives are recorded through earnings. The Company sells
interest rate floors (Floor Income Contracts) to hedge the
Embedded Floor Income options in student loan assets. The Floor
Income Contracts
F-63
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 9. | Derivative Financial Instruments (Continued) |
are written options which under ASC 815 have a more stringent
effectiveness hurdle to meet. Therefore, these relationships do
not satisfy hedging qualifications under ASC 815, but are
considered economic hedges for risk management purposes. The
Company uses this strategy to minimize its exposure to changes
in interest rates.
The Company uses basis swaps to minimize earnings variability
caused by having different reset characteristics on the
Company’s interest-earning assets and interest-bearing
liabilities. These swaps possess a term of up to 14 years
with a pay rate indexed to
91-day
Treasury bill,
3-month
commercial paper, 52-week Treasury bill, LIBOR, Prime, or
1-year
constant maturity Treasury rates. The specific terms and
notional amounts of the swaps are determined based on
management’s review of its asset/liability structure, its
assessment of future interest rate relationships, and on other
factors such as short-term strategic initiatives. ASC 815
requires that when using basis swaps, the change in the cash
flows of the hedge effectively offset both the change in the
cash flows of the asset and the change in the cash flows of the
liability. The Company’s basis swaps hedge variable
interest rate risk; however, they generally do not meet this
effectiveness test because the index of the swap does not
exactly match the index of the hedged assets as required by ASC
815. Additionally, some of the Company’s FFELP loans can
earn at either a variable or a fixed interest rate depending on
market interest rates. The Company also has basis swaps that do
not meet the ASC 815 effectiveness test that economically hedge
off-balance sheet instruments. As a result, under GAAP these
swaps are recorded at fair value with changes in fair value
reflected currently in the statement of income.
Prior to 2008, the Company entered into equity forward contracts
(see Note 11, “Stockholders’ Equity,” for a
further discussion of equity forward contracts and the
settlement of all equity forward contracts in January 2008). The
Company utilized the strategy to lock in the purchase price of
the Company’s stock to better manage the cost of its share
repurchases program. In order to qualify as a hedge under ASC
815, the hedged item must impact net income. In this case, the
repurchase of the Company’s shares did not impact net
income; therefore, the equity forwards did not qualify as a ASC
815 hedge. Prior to December 31, 2007, the Company’s
equity forward contracts provided for physical, net share or net
cash settlement options. On December 31, 2007, the terms of
the contracts were changed to allow for physical settlement
only. This effectively changed the characteristics of the
contracts so they no longer were derivatives accounted for under
ASC 815 and ASC 480 and instead were accounted for as a
liability (recorded at the present value of the repurchase
price) under ASC 480. The Company has not had any outstanding
contracts since January 2008.
F-64
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 9. | Derivative Financial Instruments (Continued) |
Summary
of Derivative Financial Statement Impact
The following tables summarize the fair values and notional
amounts or number of contracts of all derivative instruments at
December 31, 2009 and 2008, and their impact on other
comprehensive income and earnings for the years ended
December 31, 2009, 2008 and 2007.
Impact of
Derivatives on Consolidated Balance Sheet
| Cash Flow | Fair Value | Trading | Total | |||||||||||||||||||||||||||||||
|
Hedged Risk
|
Dec. 31,
|
Dec. 31,
|
Dec. 31,
|
Dec. 31,
|
Dec. 31,
|
Dec. 31,
|
Dec. 31,
|
Dec. 31,
|
||||||||||||||||||||||||||
|
(Dollars in millions)
|
Exposure | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||
|
Fair
Values
(1)
|
||||||||||||||||||||||||||||||||||
|
Derivative Assets
|
||||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
Interest rate | $ | — | $ | — | $ | 684 | $ | 1,529 | $ | 133 | $ | 323 | $ | 817 | $ | 1,852 | |||||||||||||||||
|
Cross currency interest rate swaps
|
Foreign
currency and interest rate |
— | — | 2,932 | 2,743 | 44 | 13 | 2,976 | 2,756 | |||||||||||||||||||||||||
|
Total derivative
assets
(3)
|
— | — | 3,616 | 4,272 | 177 | 336 | 3,793 | 4,608 | ||||||||||||||||||||||||||
|
Derivative Liabilities
|
||||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
Interest rate | (78 | ) | (146 | ) | (6 | ) | — | (639 | ) | (332 | ) | (723 | ) | (478 | ) | ||||||||||||||||||
|
Floor/Cap contracts
|
Interest rate | — | — | — | — | (1,234 | ) | (1,466 | ) | (1,234 | ) | (1,466 | ) | |||||||||||||||||||||
|
Futures
|
Interest rate | — | — | — | — | (2 | ) | (3 | ) | (2 | ) | (3 | ) | |||||||||||||||||||||
|
Cross currency interest rate swaps
|
Foreign
currency and interest rate |
— | — | (192 | ) | (640 | ) | (1 | ) | — | (193 | ) | (640 | ) | ||||||||||||||||||||
|
Other
(2)
|
Interest rate | — | — | — | — | (18 | ) | — | (18 | ) | — | |||||||||||||||||||||||
|
Total derivative
liabilities
(3)
|
(78 | ) | (146 | ) | (198 | ) | (640 | ) | (1,894 | ) | (1,801 | ) | (2,170 | ) | (2,587 | ) | ||||||||||||||||||
|
Net total derivatives
|
$ | (78 | ) | $ | (146 | ) | $ | 3,418 | $ | 3,632 | $ | (1,717 | ) | $ | (1,465 | ) | $ | 1,623 | $ | 2,021 | ||||||||||||||
| (1) | Fair values reported are exclusive of collateral held and pledged and accrued interest. Assets and liabilities are presented without consideration of master netting agreements. Derivatives are carried on the balance sheet based on net position by counterparty under master netting agreements, and classified in other assets or other liabilities depending on whether in a net positive or negative position. | |
| (2) | “Other” includes the fair value of the embedded derivatives in asset-backed financings. The embedded derivatives are required to be accounted for as derivatives. | |
| (3) | The following table reconciles gross positions without the impact of master netting agreements to the balance sheet classification: |
| Other Assets | Other Liabilities | |||||||||||||||
|
December 31,
|
December 31,
|
December 31,
|
December 31,
|
|||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Gross position
|
$ | 3,793 | $ | 4,608 | $ | (2,170 | ) | $ | (2,587 | ) | ||||||
|
Impact of master netting agreements
|
(1,009 | ) | (1,594 | ) | 1,009 | 1,594 | ||||||||||
|
Derivative values with impact of master netting agreements
|
2,784 | 3,014 | (1,161 | ) | (993 | ) | ||||||||||
|
Cash collateral
|
(1,268 | ) | (1,624 | ) | 636 | — | ||||||||||
|
Net position
|
$ | 1,516 | $ | 1,390 | $ | (525 | ) | $ | (993 | ) | ||||||
F-65
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 9. | Derivative Financial Instruments (Continued) |
| Cash Flow | Fair Value | Trading | Total | |||||||||||||||||||||||||||||
|
Dec. 31,
|
Dec. 31,
|
Dec. 31,
|
Dec. 31,
|
Dec. 31,
|
Dec. 31,
|
Dec. 31,
|
Dec. 31,
|
|||||||||||||||||||||||||
|
(Dollars in billions)
|
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | ||||||||||||||||||||||||
|
Notional Values
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
$ | 1.7 | $ | 4.8 | $ | 12.4 | $ | 13.4 | $ | 148.2 | $ | 159.3 | $ | 162.3 | $ | 177.5 | ||||||||||||||||
|
Floor/Cap contracts
|
— | — | — | — | 47.1 | 32.4 | 47.1 | 32.4 | ||||||||||||||||||||||||
|
Futures
|
— | — | — | — | .1 | .2 | .1 | .2 | ||||||||||||||||||||||||
|
Cross currency interest rate swaps
|
— | — | 19.3 | 23.1 | .3 | .1 | 19.6 | 23.2 | ||||||||||||||||||||||||
|
Other
(1)
|
— | — | — | — | 1.0 | .7 | 1.0 | .7 | ||||||||||||||||||||||||
|
Total derivatives
|
$ | 1.7 | $ | 4.8 | $ | 31.7 | $ | 36.5 | $ | 196.7 | $ | 192.7 | $ | 230.1 | $ | 234.0 | ||||||||||||||||
| (1) | “Other” includes embedded derivatives bifurcated from on-balance sheet securitization debt, as well as embedded derivatives in the asset-backed financings discussed in footnote 2 to the table above. |
Impact of
Derivatives on Consolidated Statements of Income
|
Unrealized Gain
|
Realized Gain
|
Unrealized Gain
|
||||||||||||||||||||||||||||||||||||||||||||||
|
(Loss) on
|
(Loss) on
|
(Loss) on
|
||||||||||||||||||||||||||||||||||||||||||||||
| Derivatives (1)(2) | Derivatives (3) | Hedged Item (1) | Total Gain (Loss) | |||||||||||||||||||||||||||||||||||||||||||||
|
(Dollars in millions)
|
2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||||
|
Fair Value Hedges
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
$ | (801 | ) | $ | 1,427 | $ | 458 | $ | 403 | $ | 157 | $ | (155 | ) | $ | 850 | $ | (1,532 | ) | $ | (468 | ) | $ | 452 | $ | 52 | $ | (165 | ) | |||||||||||||||||||
|
Cross currency interest rate swaps
|
692 | (1,537 | ) | 2,200 | 440 | 67 | (139 | ) | (934 | ) | 1,864 | (2,129 | ) | 198 | 394 | (68 | ) | |||||||||||||||||||||||||||||||
|
Total fair value derivatives
|
(109 | ) | (110 | ) | 2,658 | 843 | 224 | (294 | ) | (84 | ) | 332 | (2,597 | ) | 650 | 446 | (233 | ) | ||||||||||||||||||||||||||||||
|
Cash Flow Hedges
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
2 | — | — | (75 | ) | (37 | ) | (1 | ) | — | — | — | (73 | ) | (37 | ) | (1 | ) | ||||||||||||||||||||||||||||||
|
Total cash flow derivatives
|
2 | — | — | (75 | ) | (37 | ) | (1 | ) | — | — | — | (73 | ) | (37 | ) | (1 | ) | ||||||||||||||||||||||||||||||
|
Trading
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
(526 | ) | (261 | ) | 360 | 433 | 584 | 51 | — | — | — | (93 | ) | 323 | 411 | |||||||||||||||||||||||||||||||||
|
Floor/Cap contracts
|
483 | (529 | ) | (209 | ) | (717 | ) | (488 | ) | (68 | ) | — | — | — | (234 | ) | (1,017 | ) | (277 | ) | ||||||||||||||||||||||||||||
|
Futures
|
1 | (3 | ) | — | (1 | ) | 3 | (1 | ) | — | — | — | — | — | (1 | ) | ||||||||||||||||||||||||||||||||
|
Cross currency interest rate swaps
|
(26 | ) | 11 | 3 | 4 | 16 | — | — | — | — | (22 | ) | 27 | 3 | ||||||||||||||||||||||||||||||||||
|
Equity forward contracts
|
— | — | (1,558 | ) | — | — | — | — | — | — | — | — | (1,558 | ) | ||||||||||||||||||||||||||||||||||
|
Other
|
(65 | ) | — | — | 1 | — | — | — | — | — | (64 | ) | — | — | ||||||||||||||||||||||||||||||||||
|
Total trading derivatives
|
(133 | ) | (782 | ) | (1,404 | ) | (280 | ) | 115 | (18 | ) | — | — | — | (413 | ) | (667 | ) | (1,422 | ) | ||||||||||||||||||||||||||||
|
Total
|
(240 | ) | (892 | ) | 1,254 | 488 | 302 | (313 | ) | (84 | ) | 332 | (2,597 | ) | 164 | (258 | ) | (1,656 | ) | |||||||||||||||||||||||||||||
|
Less: realized gains (losses) recorded in interest expense
|
— | — | — | 768 | 187 | (295 | ) | — | — | — | 768 | 187 | (295 | ) | ||||||||||||||||||||||||||||||||||
|
Gains (losses) on derivative and hedging activities, net
|
$ | (240 | ) | $ | (892 | ) | $ | 1,254 | $ | (280 | ) | $ | 115 | $ | (18 | ) | $ | (84 | ) | $ | 332 | $ | (2,597 | ) | $ | (604 | ) | $ | (445 | ) | $ | (1,361 | ) | |||||||||||||||
| (1) | Recorded in “Gains (losses) on derivative and hedging activities, net” in the consolidated statements of income. | |
| (2) | Represents ineffectiveness related to cash flow hedges. | |
| (3) | For fair value and cash flow hedges, recorded in interest expense. For trading derivatives, recorded in “Gains (losses) on derivative and hedging activities, net.” |
F-66
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 9. | Derivative Financial Instruments (Continued) |
Impact of
Derivatives on Consolidated Statements of Changes in
Stockholders’ Equity (net of tax)
|
Years Ended
|
||||||||||||
| December 31, | ||||||||||||
|
(Dollars in millions)
|
2009 | 2008 | 2007 | |||||||||
|
Total gains (losses) on cash flow hedges
|
$ | (22 | ) | $ | (95 | ) | $ | (17 | ) | |||
|
Realized (gains) losses recognized in interest
expense
(1)(2)(3)
|
63 | 24 | 2 | |||||||||
|
Hedge ineffectiveness reclassified to
earnings
(1)(4)
|
(1 | ) | — | — | ||||||||
|
Total change in stockholders’ equity for unrealized gains
(losses) on derivatives
|
$ | 40 | $ | (71 | ) | $ | (15 | ) | ||||
| (1) | Amounts included in “Realized gain (loss) on derivatives” in the “Impact of Derivatives on Consolidated Statements of Income” table above. | |
| (2) | Includes net settlement income/expense. | |
| (3) | The Company expects to reclassify $3 million of after-tax net losses from accumulated other comprehensive income to earnings during the next 12 months related to net settlement accruals on interest rate swaps. | |
| (4) | Recorded in “Gains (losses) derivatives and hedging activities, net” in the consolidated statements of income. |
Collateral
Collateral held and pledged at December 31, 2009 and 2008
related to derivative exposures between the Company and its
derivative counterparties are detailed in the following table:
|
December 31,
|
December 31,
|
|||||||
|
(Dollars in millions)
|
2009 | 2008 | ||||||
|
Collateral held:
|
||||||||
|
Cash (obligation to return cash collateral is recorded in
short-term
borrowings)
(1)
|
$ | 1,268 | $ | 1,624 | ||||
|
Securities at fair value — corporate derivatives (not
recorded in financial
statements)
(2)
|
112 | 689 | ||||||
|
Securities at fair value — on-balance sheet
securitization derivatives (not recorded in financial
statements)
(3)
|
717 | 688 | ||||||
|
Total collateral held
|
$ | 2,097 | $ | 3,001 | ||||
|
Derivative asset at fair value including accrued interest
|
$ | 3,119 | $ | 3,741 | ||||
|
Collateral pledged to others:
|
||||||||
|
Cash (right to receive return of cash collateral is recorded in
investments)
|
$ | 636 | $ | — | ||||
|
Securities at fair value (recorded in
investments)
(4)
|
25 | 26 | ||||||
|
Securities at fair value (recorded in restricted
investments)
(5)
|
25 | — | ||||||
|
Securities at fair value re-pledged (not recorded in financial
statements)
(5)(6)
|
87 | 191 | ||||||
|
Total collateral pledged
|
$ | 773 | $ | 217 | ||||
|
Derivative liability at fair value including accrued interest
and premium receivable
|
$ | 758 | $ | 677 | ||||
| (1) | At December 31, 2009 and 2008, $447 million and $0, respectively, was held in restricted cash accounts. | |
| (2) | Effective with the downgrade in the Company’s unsecured credit ratings on May 13, 2009, certain counterparties do not allow the Company to sell or re-pledge securities it holds as collateral. | |
| (3) | The trusts do not have the ability to sell or re-pledge securities they hold as collateral. | |
| (4) | Counterparty does not have the right to sell or re-pledge securities. | |
| (5) | Counterparty has the right to sell or re-pledge securities. | |
| (6) | Represents securities the Company holds as collateral that have been pledged to other counterparties. |
F-67
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 9. | Derivative Financial Instruments (Continued) |
The Company’s corporate derivatives contain credit
contingent features. At the Company’s current unsecured
credit rating, it has fully collateralized its corporate
derivative liability position of $1.1 billion with its
counterparties. Further downgrades would not result in any
additional collateral requirements, except to provide for more
frequent collateral calls. Two counterparties have the right to
terminate the contracts with further downgrades, however, these
counterparties are currently in an asset position and would be
required to deliver assets to the Company in order to terminate.
Trust related derivatives do not contain credit contingent
features related to the Company’s or trust’s credit
ratings.
Additionally, as of December 31, 2009 and 2008,
$381 million and $340 million, respectively, in
collateral related to off-balance sheet trust derivatives were
held by these off-balance sheet trusts. Collateral posted by
third parties to the off-balance sheet trusts cannot be sold or
re-pledged by the trusts.
| 10. | Other Assets |
The following table provides the detail of the Company’s
other assets at December 31, 2009 and 2008.
| December 31, 2009 | December 31, 2008 | |||||||||||||||
|
Ending
|
% of
|
Ending
|
% of
|
|||||||||||||
| Balance | Balance | Balance | Balance | |||||||||||||
|
Derivatives at fair value
|
$ | 2,783,696 | 29 | % | $ | 3,013,644 | 27 | % | ||||||||
|
Accrued interest receivable
|
2,566,984 | 27 | 3,466,404 | 31 | ||||||||||||
|
Income tax asset, net current and deferred
|
1,750,424 | 18 | 1,661,039 | 15 | ||||||||||||
|
APG purchased paper related receivables and real estate owned
|
286,108 | 3 | 1,222,345 | 11 | ||||||||||||
|
Benefit and insurance-related investments
|
472,079 | 5 | 472,899 | 4 | ||||||||||||
|
Fixed assets, net
|
322,481 | 3 | 313,059 | 3 | ||||||||||||
|
Accounts receivable — general
|
807,086 | 9 | 712,854 | 6 | ||||||||||||
|
Other
|
511,500 | 6 | 278,533 | 3 | ||||||||||||
|
Total
|
$ | 9,500,358 | 100 | % | $ | 11,140,777 | 100 | % | ||||||||
The “Derivatives at fair value” line in the above
table represents the fair value of the Company’s
derivatives in a gain position by counterparty, exclusive of
accrued interest and collateral. At December 31, 2009 and
2008, these balances included $3.4 billion and
$3.6 billion, respectively, of cross-currency interest rate
swaps and interest rate swaps designated as fair value hedges
that were offset by an increase in interest-bearing liabilities
related to the hedged debt. As of December 31, 2009 and
2008, the cumulative
mark-to-market
adjustment to the hedged debt was $(3.4) billion and
$(3.4) billion, respectively.
| 11. | Stockholders’ Equity |
Preferred
Stock
At December 31, 2009, the Company had outstanding
3.3 million shares of 6.97 percent Cumulative
Redeemable Preferred Stock, Series A (the
“Series A Preferred Stock”) and 4.0 million
shares of Floating-Rate Non-Cumulative Preferred Stock,
Series B (the “Series B Preferred Stock”).
Neither series has a maturity date but can be redeemed at the
Company’s option beginning November 16, 2009 for
Series A Preferred Stock, and on any dividend payment date
on or after June 15, 2010 for Series B Preferred
Stock. Redemption would include any accrued and unpaid dividends
up to the redemption date. The shares have no preemptive or
conversion rights and are not convertible into or exchangeable
for any of the Company’s other securities or
F-68
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 11. | Stockholders’ Equity (Continued) |
property. Dividends on both series are not mandatory and are
paid quarterly, when, as, and if declared by the Board of
Directors. Holders of Series A Preferred Stock are entitled
to receive cumulative, quarterly cash dividends at the annual
rate of $3.485 per share. Holders of Series B Preferred
Stock are entitled to receive quarterly dividends based on
3-month
LIBOR plus 70 basis points per annum in arrears, on and
until June 15, 2011, increasing to
3-month
LIBOR plus 170 basis points per annum in arrears after and
including the period beginning on June 15, 2011. Upon
liquidation or dissolution of the Company, holders of the
Series A and Series B Preferred Stock are entitled to
receive $50 and $100 per share, respectively, plus an amount
equal to accrued and unpaid dividends for the then current
quarterly dividend period, if any, pro rata, and before any
distribution of assets are made to holders of the Company’s
common stock.
On December 31, 2009, the Company had outstanding 810,000
shares of 7.25 percent Mandatory Convertible Preferred
Stock, Series C (the “Series C Preferred
Stock”). The Series C Preferred Stock was issued on
December 31, 2007, and resulted in net proceeds of
approximately $1.0 billion. An additional
150,000 shares were issued on January 9, 2008, as a
result of the underwriters exercising their over-allotment
option, and resulted in net proceeds of $145.5 million.
Each share of Series C Preferred Stock has a $1,000
liquidation preference and is subject to mandatory conversion on
December 15, 2010. On the mandatory conversion date, each
share of the Series C Preferred Stock will automatically
convert into shares of the Company’s common stock based on
a conversion rate calculated using the average of the closing
prices per share of the Company’s common stock during the
20 consecutive trading day period ending on the third trading
day immediately preceding the mandatory conversion date. If the
applicable market value on the mandatory conversion date is
(i) greater than $23.97, the conversion rate is
41.7188 shares of the Company’s common stock per share
of Series C Preferred Stock, (ii) less than $19.65,
the conversion rate is 50.8906 shares of the Company’s
common stock per share of Series C Preferred Stock, or
(iii) equal to or less than $23.97 but greater than or
equal to $19.65, the conversion rate is $1,000 divided by the
applicable market value, which is between 41.7188 shares
and 50.8906 shares of the Company’s common stock per
share of Series C Preferred Stock. At any time prior to
December 15, 2010, the holder may elect optional conversion
in whole or in part at the minimum conversion rate of
41.7188 shares of the Company’s common stock per share
of Series C Preferred Stock. Series C Preferred Stock
is not redeemable. Dividends are not mandatory and are paid
quarterly, when, as, and if declared by the Board of Directors.
Holders of Series C Preferred Stock are entitled to receive
cumulative, quarterly cash dividends at the annual rate of
7.25 percent per share.
During 2009, the Company converted $339 million of its
Series C Preferred Stock to common stock. As part of this
conversion, the Company delivered to the holders of the
preferred stock: (1) approximately 17 million shares
(the number of common shares they would most likely receive if
the preferred stock they held mandatorily converted to common
shares in the fourth quarter of 2010) plus (2) a
discounted amount of the preferred stock dividends the holders
of the preferred stock would have received if they held the
preferred stock through the mandatory conversion date. The
accounting treatment for this conversion resulted in additional
expense recorded as part of preferred stock dividends for the
year of approximately $53 million.
Common
Stock
The Company’s shareholders have authorized the issuance of
1.1 billion shares of common stock (par value of $.20). At
December 31, 2009, 485 million shares were issued and
outstanding and 77 million shares were unissued but
encumbered for outstanding Series C Preferred Stock,
outstanding stock options for employee compensation, and
remaining authority for stock-based compensation plans. The
stock-based compensation plans are described in Note 13,
“Stock-Based Compensation Plans and Arrangements.”
On December 31, 2007, the Company issued
101,781,170 shares of its common stock at a price of $19.65
per share. Net proceeds from the sale were approximately
$1.9 billion. The Company used
F-69
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 11. | Stockholders’ Equity (Continued) |
approximately $2.0 billion of the net proceeds from the
sale of Series C Preferred Stock and the sale of its common
stock to settle its outstanding equity forward contract (see
“
Common Stock Repurchase Program and Equity Forward
Contracts
” below). The remaining proceeds were used for
general corporate purposes. The Company issued
9,781,170 shares of the 102 million share offering
from its treasury stock. These shares were removed from treasury
stock at an average cost of $43.13, resulting in a
$422 million decrease to the balance of treasury stock with
an offsetting $235 million decrease to retained earnings.
Common
Stock Repurchase Program and Equity Forward
Contracts
The Company has historically repurchased its common stock
through both open market purchases and settlement of equity
forward contracts. Beginning on November 29, 2007, the
Company amended or closed out certain equity forward contracts.
On December 19, 2007, the Company entered into a series of
transactions with its equity forward counterparties and
Citibank, N.A. (“Citibank”) to assign all of its
remaining equity forward contracts, covering
44,039,890 shares, to Citibank. In connection with the
assignment of the equity forward contracts, the Company and
Citibank amended the terms of the equity forward contract to
eliminate all stock price triggers (which had previously allowed
the counterparty to terminate the contracts prior to their
scheduled maturity date) and termination events based on the
Company’s credit ratings. The strike price of the equity
forward contract on December 19, 2007, was $45.25 with a
maturity date of February 22, 2008. The new Citibank equity
forward contract was 100 percent collateralized with cash.
On December 31, 2007, the Company and Citibank agreed to
physically settle the contract and the Company paid Citibank
approximately $1.1 billion, the difference between the
contract purchase price and the previous market closing price on
the 44,039,890 shares. This effectively changed the
characteristics of the contract so it no longer was a derivative
accounted for under ASC 815 and instead was a liability
(recorded at the present value of the repurchase price) under
ASC 480. Consequently, the common shares outstanding and
shareholders’ equity on the Company’s year-end balance
sheet reflect the shares issued in the public offerings and the
physical settlement of the equity forward contract. As of
December 31, 2007, the 44 million shares under this
equity forward contract are reflected in treasury stock. The
Company paid Citibank the remaining balance of approximately
$0.9 billion due under the contract on January 9,
2008. The Company has no outstanding equity forward positions
outstanding after the contract settlement on January 9,
2008.
F-70
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 11. | Stockholders’ Equity (Continued) |
The following table summarizes the Company’s common share
repurchases and issuances for the years ended December 31,
2009, 2008 and 2007. Equity forward activity for the year ended
December 31, 2007 is also reported.
| Years Ended December 31, | ||||||||||||
|
(Shares in millions)
|
2009 | 2008 | 2007 | |||||||||
|
Common shares repurchased:
|
||||||||||||
|
Open market
|
— | — | 1.8 | |||||||||
|
Equity forward contracts
|
— | — | 4.2 | |||||||||
|
Equity forward contracts agreed to be
settled
(1)
|
— | — | 44.0 | |||||||||
|
Benefit
plans
(2)
|
.3 | 1.0 | 3.3 | |||||||||
|
Total shares repurchased
|
.3 | 1.0 | 53.3 | |||||||||
|
Average purchase price per share
|
$ | 20.29 | $ | 24.51 | $ | 44.59 | ||||||
|
Common shares issued
|
17.8 | 1.9 | 109.2 | |||||||||
|
Equity forward contracts:
|
||||||||||||
|
Outstanding at beginning of period
|
— | — | 48.2 | |||||||||
|
New contracts
|
— | — | — | |||||||||
|
Settlements
|
— | — | (4.2 | ) | ||||||||
|
Agreed to be
settled
(1)
|
— | — | (44.0 | ) | ||||||||
|
Outstanding at end of period
|
— | — | — | |||||||||
|
Authority remaining at end of period for repurchases
|
38.8 | 38.8 | 38.8 | |||||||||
| (1) | On December 31, 2007, the Company and Citibank agreed to physically settle the contract as detailed above. Consequently, the common shares outstanding and shareholders’ equity on the Company’s year-end balance sheet reflect the physical settlement of the equity forward contract. At December 31, 2007, the 44 million shares under this equity forward contract were reflected in treasury stock. | |
| (2) | Shares withheld from stock option exercises and vesting of restricted stock for employees’ tax withholding obligations and shares tendered by employees to satisfy option exercise costs. |
The closing price of the Company’s common stock on
December 31, 2009 was $11.27.
F-71
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 11. | Stockholders’ Equity (Continued) |
Accumulated
Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes the
after-tax change in unrealized gains and losses on investments,
unrealized gains and losses on derivatives, and defined benefit
pension plans. The following table presents the cumulative
balances of the components of other comprehensive income for the
years ended December 31, 2009, 2008 and 2007.
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Net unrealized gains (losses) on
investments
(1)
|
$ | 1,629 | $ | (1,243 | ) | $ | 238,772 | |||||
|
Net unrealized (losses) on
derivatives
(2)
|
(53,899 | ) | (93,986 | ) | (22,574 | ) | ||||||
|
Defined benefit pension plans:
|
||||||||||||
|
Net gain
|
11,445 | 18,753 | 20,166 | |||||||||
|
Total defined benefit pension
plans
(3)
|
11,445 | 18,753 | 20,166 | |||||||||
|
Total accumulated other comprehensive income
|
$ | (40,825 | ) | $ | (76,476 | ) | $ | 236,364 | ||||
| (1) | Net of tax expense of $901 as of December 31, 2009, tax benefit of $750 as of December 31, 2008, and tax expense of $125,473 as of December 31, 2007. | |
| (2) | Net of tax benefit of $31,129, $53,419 and $12,682 as of December 31, 2009, 2008 and 2007, respectively. | |
| (3) | Net of tax expense of $6,780, $10,967 and $11,677 as of December 31, 2009, 2008 and 2007, respectively. |
F-72
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 12. | Earnings (Loss) per Common Share |
Basic earnings (loss) per common share (“EPS”) are
calculated using the weighted average number of shares of common
stock outstanding during each period. A reconciliation of the
numerators and denominators of the basic and diluted EPS
calculations follows for the years ended December 31, 2009,
2008 and 2007.
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Numerator:
|
||||||||||||
|
Net income (loss) from continuing operations attributable to
common stock
|
$ | 335,992 | $ | (180,613 | ) | $ | (939,815 | ) | ||||
|
Adjusted for dividends of Series C Preferred
Stock
(1)
|
— | — | — | |||||||||
|
Net income (loss) from continuing operations attributable to
common stock, adjusted
|
335,992 | (180,613 | ) | (939,815 | ) | |||||||
|
Net income (loss) from discontinued operations
|
(157,690 | ) | (143,219 | ) | 6,276 | |||||||
|
Net income (loss) attributable to common stock
|
$ | 178,302 | $ | (323,832 | ) | $ | (933,539 | ) | ||||
|
Denominator
(shares in thousands):
|
||||||||||||
|
Weighted average shares used to compute basic EPS
|
470,858 | 466,642 | 412,233 | |||||||||
|
Effect of dilutive securities:
|
||||||||||||
|
Dilutive effect of Series C Preferred
Stock
(1)
|
— | — | — | |||||||||
|
Dilutive effect of stock options, non-vested deferred
compensation and restricted stock, restricted stock units,
Employee Stock Purchase Plan (“ESPP”) and equity
forwards
(2)
|
726 | — | — | |||||||||
|
Dilutive potential common
shares
(3)
|
726 | — | — | |||||||||
|
Weighted average shares used to compute diluted EPS
|
471,584 | 466,642 | 412,233 | |||||||||
|
Basic earnings (loss) per common share:
|
||||||||||||
|
Continuing operations
|
$ | .71 | $ | (.39 | ) | $ | (2.28 | ) | ||||
|
Discontinued operations
|
(.33 | ) | (.30 | ) | .02 | |||||||
|
Total
|
$ | .38 | $ | (.69 | ) | $ | (2.26 | ) | ||||
|
Diluted earnings (loss) per common share:
|
||||||||||||
|
Continuing operations
|
$ | .71 | $ | (.39 | ) | $ | (2.28 | ) | ||||
|
Discontinued operations
|
(.33 | ) | (.30 | ) | .02 | |||||||
|
Total
|
$ | .38 | $ | (.69 | ) | $ | (2.26 | ) | ||||
| (1) | The Company’s 7.25 percent Mandatory Convertible Preferred Stock Series C was issued on December 31, 2007. The mandatory convertible preferred stock will automatically convert on December 15, 2010, into between approximately 34 million and 41 million shares of common stock, depending upon the Company’s stock price at that time. These instruments were anti-dilutive for the years ended December 31, 2009, 2008 and 2007. | |
| (2) | Includes the potential dilutive effect of additional common shares that are issuable upon exercise of outstanding stock options, non-vested deferred compensation and restricted stock, restricted stock units, and the outstanding commitment to issue shares under the ESPP, determined by the treasury stock method, and equity forward contracts determined by the reverse treasury stock method. The Company settled all of its outstanding equity forward contracts in January 2008. | |
| (3) | For the years ended December 31, 2009, 2008 and 2007, stock options covering approximately 42 million, 38 million and 37 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive. |
| 13. | Stock-Based Compensation Plans and Arrangements |
As of December 31, 2009, the Company has two active
stock-based compensation plans that provide for grants of stock,
stock options, restricted stock and restricted stock units to
its employees and non-employee directors. The Company also
maintains the Employee Stock Purchase Plan (the
“ESPP”). Shares issued under these stock-based
compensation plans may be either shares reacquired by the
Company or shares that are
F-73
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 13. | Stock-Based Compensation Plans and Arrangements (Continued) |
authorized but unissued. The Company also makes grants of
stock-based awards under individually negotiated arrangements.
The SLM
2009-2012
Incentive Plan was approved by shareholders on May 22,
2009, and expires on May 22, 2012. At December 31,
2009, 12.1 million shares were authorized to be issued from
this plan.
The SLM Corporation Directors Equity Plan, under which stock
options and restricted stock are granted to non-employee members
of the board of directors, was approved on May 22, 2009,
and expires on May 22, 2012. At December 31, 2009,
1 million shares were authorized to be issued from this
plan. The Company’s non-employee directors are considered
employees under the provisions of ASC 718.
From January 1, 2007 through May 21, 2009, the Company
granted stock options and restricted stock to its employees and
non-employee directors under the SLM Corporation Incentive Plan
and the Directors Stock Plan.
The total stock-based compensation cost recognized in the
consolidated statements of income for the years ended
December 31, 2009, 2008 and 2007 was $51 million,
$86 million, and $75 million, respectively. The
related income tax benefit for the years ended December 31,
2009, 2008 and 2007 was $19 million, $32 million and
$28 million, respectively. As of December 31, 2009,
there was $36 million of total unrecognized compensation
cost related to stock-based compensation programs, which is
expected to be recognized over a weighted average period of
2.1 years.
Stock
Options
The maximum term for stock options is 10 years and the
exercise price must be equal to or greater than the market price
of the Company’s common stock on the grant date. The
Company has granted time-vested, price-vested and
performance-vested options to its employees and non-employee
directors. Time-vested options granted to non-management
employees vest one-half in 18 months from grant date and
the second one-half in 36 months from grant date.
Time-vested options granted to management employees vest
one-third per year for three years. Price-vested options granted
to management employees vest upon the Company’s common
stock price reaching a targeted closing price for a set number
of days, with a cliff vesting on the eighth anniversary of their
grant date. Price-vested options granted to non-employee
directors vest upon the Company’s common stock price
reaching a targeted closing price for a set number of days or
the director’s election to the Board, whichever occurs
later, with a cliff vesting on the fifth anniversary of their
grant date. Performance-vested options granted to senior
management employees vest one-third per year for three years
based on earnings-related performance targets.
The fair values of the options granted in the years ended
December 31, 2009, 2008 and 2007 were estimated as of the
grant date using a Black-Scholes option pricing model with the
following weighted average assumptions:
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Risk-free interest rate
|
1.51 | % | 2.50 | % | 4.88 | % | ||||||
|
Expected volatility
|
80 | % | 44 | % | 21 | % | ||||||
|
Expected dividend rate
|
0.00 | % | 0.00 | % | 2.20 | % | ||||||
|
Expected life of the option
|
3.5 years | 3.3 years | 3.2 years | |||||||||
The expected life of the options is based on observed historical
exercise patterns. Groups of employees (including non-employee
directors) that have received similar option grant terms are
considered separately for
F-74
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 13. | Stock-Based Compensation Plans and Arrangements (Continued) |
valuation purposes. The expected volatility is based on implied
volatility from publicly-traded options on the Company’s
stock at the grant date and historical volatility of the
Company’s stock consistent with the expected life of the
option. The risk-free interest rate is based on the
U.S. Treasury spot rate at the grant date consistent with
the expected life of the option. The dividend yield is based on
the projected annual dividend payment per share based on the
dividend amount at the grant date, divided by the stock price at
the grant date.
As of December 31, 2009, there was $32 million of
unrecognized compensation cost related to stock options, which
is expected to be recognized over a weighted average period of
2.1 years.
The following table summarizes stock option activity for the
year ended December 31, 2009.
|
Weighted
|
Weighted
|
|||||||||||||||
|
Average
|
Average
|
|||||||||||||||
|
Exercise
|
Remaining
|
Aggregate
|
||||||||||||||
|
Number of
|
Price per
|
Contractual
|
Intrinsic
|
|||||||||||||
| Options | Share | Term | Value | |||||||||||||
|
Outstanding at December 31, 2008
|
38,804,704 | $ | 33.90 | |||||||||||||
|
Granted
|
9,312,700 | 10.59 | ||||||||||||||
|
Exercised
|
(62,600 | ) | 10.60 | |||||||||||||
|
Canceled
|
(4,760,084 | ) | 31.47 | |||||||||||||
|
Outstanding at December 31,
2009
(1)
|
43,294,720 | $ | 28.77 | 6.13 yrs | $ | — | ||||||||||
|
Exercisable at December 31, 2009
|
24,225,317 | $ | 34.60 | 4.59 yrs | $ | — | ||||||||||
| (1) | Includes gross number of net-settled options awarded. Options granted in 2009 were granted as net-settled options. Upon exercise of a net-settled option, employees are entitled to receive the after-tax spread shares only. The spread shares equal the gross number of options granted less shares for the option cost. Shares for the option cost equal the option price multiplied by the number of gross options exercised divided by the fair market value of SLM common stock at the time of exercise. |
The weighted average fair value of options granted was $5.82,
$6.93 and $7.89 for the years ended December 31, 2009, 2008
and 2007, respectively. The total intrinsic value of options
exercised was $.1 million, $.8 million and
$140 million for the years ended December 31, 2009,
2008 and 2007, respectively.
Cash received from option exercises was $.1 million for the
year ended December 31, 2009. The actual tax benefit
realized for the tax deductions from option exercises totaled
$.02 million for the year ended December 31, 2009.
Restricted
Stock
Restricted stock vests over a minimum of a
12-month
performance period, and generally vests between one and three
years based on earnings-related performance vesting criteria
being met. Non-vested restricted stock granted prior to
January 25, 2007 is entitled to dividend credits;
non-vested restricted stock granted on or after January 25,
2007 is not.
The fair value of restricted stock awards is determined on the
grant date based on the Company’s stock price and is
amortized to compensation cost on a straight-line basis over the
related vesting periods. As of December 31, 2009, there was
$3 million of unrecognized compensation cost related to
restricted stock, which is expected to be recognized over a
weighted average period of 1.6 years.
F-75
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 13. | Stock-Based Compensation Plans and Arrangements (Continued) |
The following table summarizes restricted stock activity for the
year ended December 31, 2009.
|
Weighted
|
||||||||
|
Average Grant
|
||||||||
|
Number of
|
Date
|
|||||||
| Shares | Fair Value | |||||||
|
Non-vested at December 31, 2008
|
754,546 | $ | 26.99 | |||||
|
Granted
|
425,400 | 7.92 | ||||||
|
Vested
|
(300,396 | ) | 28.81 | |||||
|
Canceled
|
(34,970 | ) | 34.05 | |||||
|
Non-vested at December 31, 2009
|
844,580 | $ | 16.45 | |||||
The total fair value of shares that vested during the years
ended December 31, 2009, 2008 and 2007, was
$9 million, $11 million and $8 million,
respectively.
Restricted
Stock Units
Restricted stock units (“RSUs”) are stock awards
granted to employees that entitle the holder to shares of the
Company’s common stock as the award vests. The fair value
of each grant is determined on the grant date based on the
Company’s stock price and is amortized to compensation cost
on a straight-line basis over the related vesting periods, which
are generally between one and three years based on
earnings-related performance vesting criteria being met. As of
December 31, 2009, there was $.3 million of
unrecognized compensation cost related to RSUs, which is
expected to be recognized over a weighted average period of
2.0 years.
The following table summarizes RSU activity for the year ended
December 31, 2009.
|
Weighted
|
||||||||
|
Average Grant
|
||||||||
|
Number of
|
Date
|
|||||||
| RSUs | Fair Value | |||||||
|
Outstanding at December 31, 2008
|
15,500 | $ | 11.58 | |||||
|
Granted
|
64,000 | 11.21 | ||||||
|
Canceled
|
(500 | ) | 11.21 | |||||
|
Vested and converted to common stock
|
(3,250 | ) | 16.22 | |||||
|
Outstanding at December 31, 2009
|
75,750 | $ | 11.07 | |||||
The total fair value of RSUs that vested and converted to common
stock during the year ended December 31, 2009 was
$.1 million. RSUs with a fair value of $26 million
vested during the year ended December 31, 2007 but
weren’t converted to common stock until 2008.
Employee
Stock Purchase Plan
Under the ESPP, employees can purchase shares of the
Company’s common stock at the end of a
12-month
offering period at a price equal to the share price at the
beginning of the
12-month
period, less 15 percent, up to a maximum purchase price of
$7,500 plus accrued interest. The purchase price for each
offering is determined at the beginning of the offering period.
F-76
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 13. | Stock-Based Compensation Plans and Arrangements (Continued) |
The fair values of the stock purchase rights of the ESPP
offerings in the years ended December 31, 2009, 2008 and
2007 were calculated using a Black-Scholes option pricing model
with the following weighted average assumptions.
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Risk-free interest rate
|
.53 | % | 1.91 | % | 4.97 | % | ||||||
|
Expected volatility
|
103 | % | 58 | % | 23 | % | ||||||
|
Expected dividend rate
|
0.00 | % | 0.00 | % | 2.19 | % | ||||||
|
Expected life of the option
|
1 year | 1 year | 2 years | |||||||||
The expected volatility is based on implied volatility from
publicly-traded options on the Company’s stock at the grant
date and historical volatility of the Company’s stock
consistent with the expected life. The risk-free interest rate
is based on the U.S. Treasury spot rate at the grant date
consistent with the expected life. The dividend yield is based
on the projected annual dividend payment per share based on the
current dividend amount at the grant date divided by the stock
price at the grant date.
The weighted average fair value of the stock purchase rights of
the ESPP offerings for the years ended December 31, 2009,
2008 and 2007 was $4.88, $6.57 and $10.41, respectively. The
fair values for 2009 and 2008 were amortized to compensation
cost on a straight-line basis over a one-year vesting period.
The fair value for 2007 was amortized to compensation cost on a
straight-line basis over a two-year vesting period. As of
December 31, 2009, there was $.1 million of
unrecognized compensation cost related to the ESPP, which is
expected to be recognized in January 2010.
During the year ended December 31, 2007, plan participants
purchased 215,058 shares of the Company’s common
stock. No shares were purchased in 2008 or 2009.
| 14. | Other Income |
The following table summarizes the components of “other
income” in the consolidated statements of income for the
years ended December 31, 2009, 2008 and 2007.
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Gains on debt repurchases
|
$ | 536,190 | $ | 64,477 | $ | — | ||||||
|
Late fees and forbearance fees
|
146,038 | 142,958 | 135,627 | |||||||||
|
Asset servicing and other transaction fees
|
112,162 | 108,292 | 110,215 | |||||||||
|
Loan servicing fees
|
53,013 | 26,458 | 26,094 | |||||||||
|
Foreign currency translation gains (losses), net
|
22,956 | (30,793 | ) | (2,952 | ) | |||||||
|
Other
|
58,791 | 80,684 | 116,091 | |||||||||
|
Total other income
|
$ | 929,150 | $ | 392,076 | $ | 385,075 | ||||||
Gains
on Debt Repurchases
The Company began actively repurchasing its outstanding debt in
the second quarter of 2008. The Company repurchased
$3.4 billion and $1.9 billion face amount of its
senior unsecured notes for the years ended December 31,
2009 and 2008, respectively. Since the second quarter of 2008,
the Company repurchased
F-77
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 14. | Other Income (Continued) |
$5.3 billion face amount of its senior unsecured notes in
the aggregate, with maturity dates ranging from 2008 to 2016.
Late
Fees and Forbearance Fees
The Company recognizes late fees and forbearance fees on student
loans when earned according to the contractual provisions of the
promissory notes, as well as the Company’s expectation of
collectability.
Asset
Servicing and Other Transaction Fees
The Company’s Upromise subsidiary has a number of programs
that encourage consumers to save for the cost of college
education. Upromise has established a consumer savings network
which is designed to promote college savings by consumers who
are members of this program by encouraging them to purchase
goods and services from the companies that participate in the
program (“Participating Companies”). Participating
Companies generally pay Upromise transaction fees based on
member purchase volume, either online or in stores depending on
the contractual arrangement with the Participating Company.
Typically, a percentage of the purchase price of the consumer
members’ eligible purchases with Participating Companies is
set aside in an account maintained by Upromise on the behalf of
its members. The Company recognizes transaction fee revenue in
accordance with ASC 605, “Revenue Recognition,” as
marketing services focused on increasing member purchase volume
are rendered based on contractually determined rates and member
purchase volumes.
Upromise, through its wholly owned subsidiaries, UII, a
registered broker-dealer, and UIA, a registered investment
advisor, provides program management, transfer and servicing
agent services, and administration services for various 529
college-savings plans. The fees associated with the provision of
these services are recognized in accordance with ASC 605 based
on contractually determined rates which are a combination of
fees based on the net asset value of the investments within the
529 college-savings plans and the number of accounts for which
UII and UIA provide record-keeping and account servicing
functions.
| 15. | Restructuring Activities |
In response to the College Cost Reduction and Access Act of 2007
(“CCRAA”) and challenges in the capital markets, the
Company initiated a restructuring plan in the fourth quarter of
2007. The plan focused on conforming the Company’s lending
activities to the economic environment, exiting certain customer
relationships and product lines, winding down the Company’s
debt purchased paper businesses, and significantly reducing its
operating expenses. The restructuring plan is essentially
completed and the Company’s objectives have been met.
Restructuring expenses from the fourth quarter of 2007 through
the fourth quarter of 2009 totaled $129 million of which
$120 million was recorded in continuing operations and
$9 million was recorded in discontinued operations. The
majority of these restructuring expenses were severance costs
related to the completed and planned elimination of
approximately 2,900 positions, or approximately 25 percent
of the workforce. The Company estimates approximately
$5 million of additional restructuring expenses associated
with its current cost reduction efforts will be incurred. On
September 17, 2009, the House passed SAFRA which, if signed
into law, would eliminate the FFELP and require that, after
July 1, 2010, all new federal loans be made through the
Direct Loan program. The Senate has yet to take up the
legislation. If this legislation is signed into law, the Company
will undertake another significant restructuring to conform its
infrastructure to the elimination of the FFELP and achieve
additional expense reduction.
F-78
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 15. | Restructuring Activities (Continued) |
The following table summarizes the restructuring expenses
incurred to date.
|
Cumulative Expense
|
||||||||||||||||
| Years Ended December 31, |
as of December 31,
|
|||||||||||||||
| 2009 | 2008 | 2007 | 2009 | |||||||||||||
|
Severance costs
|
$ | 11,196 | $ | 62,599 | $ | 22,505 | $ | 96,300 | ||||||||
|
Lease and other contract termination costs
|
890 | 9,517 | — | 10,407 | ||||||||||||
|
Exit and other costs
|
1,681 | 11,400 | — | 13,081 | ||||||||||||
|
Total restructuring from continuing
operations
(1)
|
13,767 | 83,516 | 22,505 | 119,788 | ||||||||||||
|
Total restructuring from discontinued operations
|
8,462 | 259 | — | 8,721 | ||||||||||||
|
Total
|
$ | 22,229 | $ | 83,775 | $ | 22,505 | $ | 128,509 | ||||||||
| (1) | Aggregate restructuring expenses from continuing operations incurred across the Company’s reportable segments during the years ended December 31, 2009, 2008 and 2007 totaled $10 million, $49 million and $19 million, respectively, in the Company’s Lending reportable segment; $1 million, $11 million and $2 million, respectively, in the Company’s APG reportable segment; and $3 million, $23 million and $2 million, respectively, in the Company’s Corporate and Other reportable segment. |
Since its inception in the fourth quarter of 2007 through
December 31, 2009, cumulative severance costs were incurred
in conjunction with aggregate completed and planned position
eliminations of approximately 2,900 positions. Position
eliminations were across all of the Company’s reportable
segments, ranging from senior executives to servicing center
personnel. Lease and other contract termination costs and exit
and other costs incurred during 2009 and 2008 related primarily
to terminated or abandoned facility leases and consulting costs
incurred in conjunction with various cost reduction and exit
strategies.
The following table summarizes the restructuring liability
balance, which is included in other liabilities in the
accompanying consolidated balance sheet.
|
Lease and
|
||||||||||||||||
|
Other
|
||||||||||||||||
|
Contract
|
||||||||||||||||
|
Severance
|
Termination
|
Exit and
|
||||||||||||||
| Costs | Costs | Other Costs | Total | |||||||||||||
|
Balance at December 31, 2007
|
$ | 18,329 | $ | — | $ | — | $ | 18,329 | ||||||||
|
Net accruals from continuing operations
|
62,599 | 9,517 | 11,400 | 83,516 | ||||||||||||
|
Net accruals from discontinued operations
|
259 | — | — | 259 | ||||||||||||
|
Cash paid
|
(66,063 | ) | (6,719 | ) | (11,340 | ) | (84,122 | ) | ||||||||
|
Balance at December 31, 2008
|
15,124 | 2,798 | 60 | 17,982 | ||||||||||||
|
Net accruals from continuing operations
|
11,196 | 890 | 1,681 | 13,767 | ||||||||||||
|
Net accruals from discontinued operations
|
6,562 | 1,900 | — | 8,462 | ||||||||||||
|
Cash paid
|
(23,687 | ) | (1,807 | ) | (1,741 | ) | (27,235 | ) | ||||||||
|
Balance at December 31, 2009
|
$ | 9,195 | $ | 3,781 | $ | — | $ | 12,976 | ||||||||
F-79
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 15. | Restructuring Activities (Continued) |
| 16. | Fair Value Measurements |
The Company uses estimates of fair value in applying various
accounting standards for its financial statements. Under GAAP,
fair value measurements are used in one of four ways:
| • | In the consolidated balance sheet with changes in fair value recorded in the consolidated statement of income; | |
| • | In the consolidated balance sheet with changes in fair value recorded in the accumulated other comprehensive income section of the consolidated statement of changes in stockholders’ equity; | |
| • | In the consolidated balance sheet for instruments carried at lower of cost or fair value with impairment charges recorded in the consolidated statement of income; and | |
| • | In the notes to the financial statements. |
Fair value is defined as the price to sell an asset or transfer
a liability in an orderly transaction between willing and able
market participants. In general, the Company’s policy in
estimating fair values is to first look at observable market
prices for identical assets and liabilities in active markets,
where available. When these are not available, other inputs are
used to model fair value such as prices of similar instruments,
yield curves, volatilities, prepayment speeds, default rates and
credit spreads (including for the Company’s liabilities),
relying first on observable data from active markets. Additional
adjustments may be made for factors including liquidity, credit,
bid/offer spreads, etc., depending on current market conditions.
Transaction costs are not included in the determination of fair
value. When possible, the Company seeks to validate the
model’s output with market transactions. Depending on the
availability of observable inputs and prices, different
valuation models could produce materially different fair value
estimates. The values presented may not represent future fair
values and may not be realizable.
The Company categorizes its fair value estimates based on a
hierarchical framework associated with three levels of price
transparency utilized in measuring financial instruments at fair
value. Classification is based on the lowest level of input that
is significant to the fair value of the instrument. The three
levels are as follows:
| • | Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. The types of financial instruments included in level 1 are highly liquid instruments with quoted prices. | |
| • | Level 2 — Inputs from active markets, other than quoted prices for identical instruments, are used to determine fair value. Significant inputs are directly observable from active markets for substantially the full term of the asset or liability being valued. | |
| • | Level 3 — Pricing inputs significant to the valuation are unobservable. Inputs are developed based on the best information available; however, significant judgment is required by management in developing the inputs. |
Student
Loans
The Company’s FFELP loans and Private Education Loans are
accounted for at cost or at the lower of cost or market if the
loan is
held-for-sale;
however, the fair value is disclosed in compliance with GAAP.
FFELP loans classified as
held-for-sale
are those which the Company has the ability and intent to sell
under various ED loan purchase programs. In these instances, the
FFELP loans are valued using the committed sales price under the
programs. For all other FFELP loans and Private Education Loans,
fair value was determined by modeling loan cash flows using
stated terms of the assets and internally-developed assumptions
to determine aggregate portfolio yield, net present value and
average life. The significant assumptions used to project cash
flows are prepayment speeds, default rates, cost of funds,
required return on equity, and expected
F-80
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 16. | Fair Value Measurements (Continued) |
Repayment Borrower Benefits to be earned. In addition, the Floor
Income component of the Company’s FFELP loan portfolio is
valued through discounted cash flow and option models using both
observable market inputs and internally developed inputs. A
number of significant inputs into the models are internally
derived and not observable to market participants.
Other
Loans
Facilities financings, and mortgage and consumer loans held for
investment are accounted for at cost with fair values being
disclosed. Mortgage loans held for sale are accounted for at
lower of cost or market. Fair value was determined with
discounted cash flow models using the stated terms of the loans
and observable market yield curves. In addition, adjustments and
assumptions were made for credit spreads, liquidity, prepayment
speeds and defaults. A number of significant inputs into the
models are not observable.
Cash
and Investments (Including “Restricted”)
Cash and cash equivalents are carried at cost. Carrying value
approximated fair value for disclosure purposes. Investments are
classified as trading or
available-for-sale
are carried at fair value in the financial statements.
Investments in U.S. Treasury securities and securities
issued by U.S. government agencies that are traded in
active markets were valued using observable market prices. Other
investments for which observable prices from active markets are
not available were valued through standard bond pricing models
using observable market yield curves adjusted for credit and
liquidity spreads. The fair value of investments in Commercial
Paper, Asset Backed Commercial Paper, or Demand Deposits that
have a remaining term of less than 90 days when purchased
are estimated at cost and, when needed, adjustments for
liquidity and credit spreads are made depending on market
conditions and counterparty credit risks. These investments
consist of mostly overnight/weekly maturity instruments with
highly-rated counterparties.
Borrowings
Borrowings are accounted for at cost in the financial statements
except when denominated in a foreign currency or when designated
as the hedged item in a fair value hedge relationship. When the
hedged risk is the benchmark interest rate and not full fair
value, the cost basis is adjusted for changes in value due to
benchmark interest rates only. Additionally, foreign currency
denominated borrowings are re-measured at current spot rates in
the financial statements. The full fair value of all borrowings
is disclosed. Fair value was determined through standard bond
pricing models and option models (when applicable) using the
stated terms of the borrowings, observable yield curves, foreign
currency exchange rates, volatilities from active markets or
from quotes from broker-dealers. Credit adjustments for
unsecured corporate debt are made based on indicative quotes
from observable trades and spreads on credit default swaps
specific to the Company. Credit adjustments for secured
borrowings are based on indicative quotes from broker-dealers.
These adjustments for both secured and unsecured borrowings are
material to the overall valuation of these items and, currently,
are based on inputs from inactive markets.
Derivative
Financial Instruments
All derivatives are accounted for at fair value in the financial
statements. The fair values of a majority of derivative
financial instruments, including swaps and floors, were
determined by standard derivative pricing and option models
using the stated terms of the contracts and observable yield
curves, forward foreign currency exchange rates and volatilities
from active markets. In some cases, management utilized
internally developed amortization streams to model the fair
value for swaps whose notional amounts contractually amortizes
with securitized asset balances. Complex structured derivatives
or derivatives that trade in less liquid
F-81
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 16. | Fair Value Measurements (Continued) |
markets require significant adjustments and judgment in
determining fair value that cannot be corroborated with market
transactions. When determining the fair value of derivatives,
the Company takes into account counterparty credit risk for
positions where it is exposed to the counterparty on a net basis
by assessing exposure net of collateral held. The net exposures
for each counterparty are adjusted based on market information
available for the specific counterparty, including spreads from
credit default swaps. Additionally, when the counterparty has
exposure to the Company related to SLM Corporation derivatives,
the Company fully collateralizes the exposure, minimizing the
adjustment necessary to the derivative valuations for the
Company’s credit risk. While trusts that contain
derivatives are not required to post collateral to
counterparties, the credit quality and securitized nature of the
trusts minimizes any adjustments for the counterparty’s
exposure to the trusts. It is the Company’s policy to
compare its derivative fair values to those received by its
counterparties in order to validate the model’s outputs.
The carrying value of borrowings designated as the hedged item
in an ASC 815 fair value hedge are adjusted for changes in fair
value due to benchmark interest rates and foreign-currency
exchange rates. These valuations are determined through standard
bond pricing models and option models (when applicable) using
the stated terms of the borrowings, and observable yield curves,
foreign currency exchange rates, and volatilities.
During 2008 and 2009, the bid/ask spread widened significantly
for derivatives indexed to certain interest rate indices as a
result of market inactivity. As such, significant adjustments
for the bid/ask spread and unobservable inputs were used in the
fair value calculation resulting in these instruments being
classified as level 3 in the fair value hierarchy.
Additionally, significant unobservable inputs were used to model
the amortizing notional of some swaps tied to securitized asset
balances and, as such, these derivatives have been classified as
level 3 in the fair value hierarchy. These swaps were
transferred into level 3 during the first quarter of 2009 due to
a change in the assumption regarding successful remarketing and
significant unobservable inputs used to model notional
amortizations.
Residual
Interests
The Residual Interests are carried at fair value in the
financial statements. No active market exists for student loan
Residual Interests; as such, the fair value is calculated using
discounted cash flow models and option models. Observable inputs
from active markets are used where available, including yield
curves and volatilities. Significant unobservable inputs such as
prepayment speeds, default rates, certain bonds’ costs of
funds and discount rates are used in determining the fair value
and require significant judgment. These unobservable inputs are
internally determined based upon analysis of historical data and
expected industry trends. On a quarterly basis the Company back
tests its prepayment speed, default rates and costs of funds
assumptions by comparing those assumptions to actuals
experienced. Additionally, the Company uses non-binding broker
quotes and industry analyst reports which show changes in the
indicative prices of the asset-backed securities tranches
immediately senior to the Residual Interest as an indication of
potential changes in the discount rate used to value the
Residual Interests. Market transactions are not available to
validate the models’ results. An analysis of the impact of
changes to significant inputs is addressed further in
Note 8, “Student Loan Securitization.”
F-82
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 16. | Fair Value Measurements (Continued) |
The following tables summarize the valuation of the
Company’s financial instruments that are
marked-to-market
on a recurring basis in the consolidated financial statements as
of December 31, 2009 and 2008.
|
Fair Value Measurements on a Recurring
|
||||||||||||||||||||||||||||
| Basis as of December 31, 2009 | ||||||||||||||||||||||||||||
|
Counterparty
|
Cash
|
|||||||||||||||||||||||||||
|
(Dollars in millions)
|
Level 1 | Level 2 | Level 3 | Netting | Total (4) | Collateral | Net | |||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||
|
Available for sale investments
|
$ | — | $ | 1,330 | $ | — | $ | — | $ | 1,330 | $ | — | $ | 1,330 | ||||||||||||||
|
Retained Interest in off-balance sheet securitized loans
|
— | — | 1,828 | — | 1,828 | — | 1,828 | |||||||||||||||||||||
|
Derivative
instruments
(1)(2)
|
— | 2,023 | 1,770 | (1,009 | ) | 2,784 | (1,268 | ) | 1,516 | |||||||||||||||||||
|
Total assets
|
$ | — | $ | 3,353 | $ | 3,598 | $ | (1,009 | ) | $ | 5,942 | $ | (1,268 | ) | $ | 4,674 | ||||||||||||
|
Liabilities
(3)
|
||||||||||||||||||||||||||||
|
Derivative
instruments
(1)(2)
|
$ | (2 | ) | $ | (1,650 | ) | $ | (518 | ) | $ | 1,009 | $ | (1,161 | ) | $ | 636 | $ | (525 | ) | |||||||||
|
Total liabilities
|
$ | (2 | ) | $ | (1,650 | ) | $ | (518 | ) | $ | 1,009 | $ | (1,161 | ) | $ | 636 | $ | (525 | ) | |||||||||
|
Fair Value Measurements on a Recurring
|
||||||||||||||||||||||||||||
| Basis as of December 31, 2008 | ||||||||||||||||||||||||||||
|
Counterparty
|
Cash
|
|||||||||||||||||||||||||||
|
(Dollars in millions)
|
Level 1 | Level 2 | Level 3 | Netting | Total (4) | Collateral | Net | |||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||
|
Available for sale investments
|
$ | — | $ | 899 | $ | — | $ | — | $ | 899 | $ | — | $ | 899 | ||||||||||||||
|
Retained Interest in off-balance sheet securitized loans
|
— | — | 2,200 | — | 2,200 | — | 2,200 | |||||||||||||||||||||
|
Derivative
instruments
(1)(2)
|
— | 4,372 | 236 | (1,594 | ) | 3,014 | (1,624 | ) | 1,390 | |||||||||||||||||||
|
Total assets
|
$ | — | $ | 5,271 | $ | 2,436 | $ | (1,594 | ) | $ | 6,113 | $ | (1,624 | ) | $ | 4,489 | ||||||||||||
|
Liabilities
(3)
|
||||||||||||||||||||||||||||
|
Derivative
instruments
(1)(2)
|
$ | (3 | ) | $ | (2,007 | ) | $ | (577 | ) | $ | 1,594 | $ | (993 | ) | $ | — | $ | (993 | ) | |||||||||
|
Total liabilities
|
$ | (3 | ) | $ | (2,007 | ) | $ | (577 | ) | $ | 1,594 | $ | (993 | ) | $ | — | $ | (993 | ) | |||||||||
| (1) | Fair value of derivative instruments is comprised of market value less accrued interest and excludes collateral. | |
| (2) | Level 1 derivatives include euro-dollar futures contracts. Level 2 derivatives include derivatives indexed to interest rate indices and currencies that are considered liquid. Level 3 derivatives include derivatives indexed to illiquid interest rate indices and derivatives for which significant adjustments were made to observable inputs. | |
| (3) | Borrowings which are the hedged items in a fair value hedge relationship and which are adjusted for changes in value due to benchmark interest rates only are not carried at full fair value and are not reflected in this table. | |
| (4) | As carried on the balance sheet. |
At December 31, 2009 and 2008, the Company had $0 and
$462 million (fair value), respectively, of financial
instruments recorded on its balance sheet at fair value on a
non-recurring basis. The 2008 amount related to FFELP Stafford
Loans held-for-sale under one of the ED loan purchase programs.
F-83
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 16. | Fair Value Measurements (Continued) |
The following table summarizes the change in balance sheet
carrying value associated with Level 3 financial
instruments carried at fair value on a recurring basis during
the years ended December 31, 2009 and 2008.
| Years Ended December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | |||||||||||||||||||||||
|
Residual
|
Derivative
|
Residual
|
Derivative
|
|||||||||||||||||||||
|
(Dollars in millions)
|
Interests | Instruments | Total | Interests | Instruments | Total | ||||||||||||||||||
|
Balance, beginning of period
|
$ | 2,200 | $ | (341 | ) | $ | 1,859 | $ | 3,044 | $ | (71 | ) | $ | 2,973 | ||||||||||
|
Total gains/(losses) (realized and unrealized):
|
||||||||||||||||||||||||
|
Included in
earnings
(1)
|
120 | 91 | 211 | 79 | (314 | ) | (235 | ) | ||||||||||||||||
|
Included in other comprehensive income
|
— | — | — | — | — | — | ||||||||||||||||||
|
Purchases, issuances and settlements
|
(492 | ) | 434 | (58 | ) | (923 | ) | 35 | (888 | ) | ||||||||||||||
|
Transfers in and/or out of Level 3
|
— | 1,068 | 1,068 | — | 9 | 9 | ||||||||||||||||||
|
Balance, end of period
|
$ | 1,828 | $ | 1,252 | $ | 3,080 | $ | 2,200 | $ | (341 | ) | $ | 1,859 | |||||||||||
|
Change in unrealized gains/(losses) relating to instruments
still held at the reporting date
|
$ | (330 | ) (2) | $ | 439 (3 | ) | $ | 109 | $ | (424 | ) (2) | $ | (298 | ) (3) | $ | (722 | ) | |||||||
| (1) | “Included in earnings” is comprised of the following amounts recorded in the specified line item in the consolidated statements of income: |
|
Years Ended
|
||||||||
| December 31, | ||||||||
|
(Dollars in millions)
|
2009 | 2008 | ||||||
|
Servicing and securitization revenue
|
$ | 120 | $ | 79 | ||||
|
Gains (losses) on derivative and hedging activities, net
|
298 | (314 | ) | |||||
|
Interest expense
|
(207 | ) | — | |||||
|
Total
|
$ | 211 | $ | (235 | ) | |||
| (2) | Recorded in “servicing and securitization revenue (loss)” in the consolidated statements of income. | |
| (3) | Recorded in “gains (losses) on derivative and hedging activities, net” in the consolidated statements of income. |
F-84
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 16. | Fair Value Measurements (Continued) |
The following table summarizes the fair values of the
Company’s financial assets and liabilities, including
derivative financial instruments, as of December 31, 2009
and 2008.
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||
|
Fair
|
Carrying
|
Fair
|
Carrying
|
|||||||||||||||||||||
|
(Dollars in millions)
|
Value | Value | Difference | Value | Value | Difference | ||||||||||||||||||
|
Earning assets
|
||||||||||||||||||||||||
|
FFELP loans
|
$ | 119,747 | $ | 121,053 | $ | (1,306 | ) | $ | 107,319 | $ | 124,220 | $ | (16,901 | ) | ||||||||||
|
Private Education Loans
|
20,278 | 22,753 | (2,475 | ) | 14,141 | 20,582 | (6,441 | ) | ||||||||||||||||
|
Other loans
|
219 | 420 | (201 | ) | 619 | 729 | (110 | ) | ||||||||||||||||
|
Cash and investments
|
13,253 | 13,253 | — | 8,646 | 8,646 | — | ||||||||||||||||||
|
Total earning assets
|
153,497 | 157,479 | (3,982 | ) | 130,725 | 154,177 | (23,452 | ) | ||||||||||||||||
|
Interest-bearing liabilities
|
||||||||||||||||||||||||
|
Short-term borrowings
|
30,988 | 30,897 | (91 | ) | 41,608 | 41,933 | 325 | |||||||||||||||||
|
Long-term borrowings
|
123,049 | 130,546 | 7,497 | 93,462 | 118,225 | 24,763 | ||||||||||||||||||
|
Total interest-bearing liabilities
|
154,037 | 161,443 | 7,406 | 135,070 | 160,158 | 25,088 | ||||||||||||||||||
|
Derivative financial instruments
|
||||||||||||||||||||||||
|
Floor Income/Cap contracts
|
(1,234 | ) | (1,234 | ) | — | (1,466 | ) | (1,466 | ) | — | ||||||||||||||
|
Interest rate swaps
|
94 | 94 | — | 1,374 | 1,374 | — | ||||||||||||||||||
|
Cross currency interest rate swaps
|
2,783 | 2,783 | — | 2,116 | 2,116 | — | ||||||||||||||||||
|
Futures contracts
|
(2 | ) | (2 | ) | — | (3 | ) | (3 | ) | — | ||||||||||||||
|
Other
|
(18 | ) | (18 | ) | — | — | — | — | ||||||||||||||||
|
Other
|
||||||||||||||||||||||||
|
Residual interest in securitized assets
|
1,828 | 1,828 | — | 2,200 | 2,200 | — | ||||||||||||||||||
|
Excess of net asset fair value over carrying value
|
$ | 3,424 | $ | 1,636 | ||||||||||||||||||||
| 17. | Commitments, Contingencies and Guarantees |
The Company offers a line of credit to certain financial
institutions and other institutions in the higher education
community for the purpose of originating student loans. In
connection with these agreements, the Company also enters into a
participation agreement with the institution to participate in
the loans as they are originated. In the event that a line of
credit is drawn upon, the loan is collateralized by underlying
student loans and is usually participated in on the same day.
The contractual amount of these financial instruments represents
the maximum possible credit risk should the counterparty draw
down the commitment, the Company does not participate in the
loan and the counterparty subsequently fails to perform
according to the terms of its contract with the Company. At
December 31, 2009 and 2008, the contractual amount of these
financial obligations was $850 million and
$1.0 billion, respectively. There were no outstanding draws
at December 31, 2009. All outstanding commitments at
December 31, 2009 mature in 2010.
In addition, the Company maintains forward contracts to purchase
loans from its lending partners at contractual prices. These
contracts typically have a maximum amount the Company is
committed to buy, but
F-85
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 17. | Commitments, Contingencies and Guarantees (Continued) |
lack a fixed or determinable amount as it ultimately is based on
the lending partner’s origination activity. FFELP forward
purchase contracts typically contain language relieving the
Company of most of its responsibilities under the contract due
to, among other things, changes in student loan legislation.
These commitments are not accounted for as derivatives under ASC
815 as they do not meet the definition of a derivative due to
the lack of a fixed and determinable purchase amount. At
December 31, 2009, there were $1.3 billion of
originated loans (FFELP and Private Education Loans) in the
pipeline that the Company is committed to purchase.
Investor
Litigation
On January 31, 2008, a putative class action lawsuit was
filed against the Company and certain officers in the
U.S. District Court for the Southern District of New York.
This case and other actions arising out of the same
circumstances and alleged acts have been consolidated and are
now identified as In Re SLM Corporation Securities Litigation.
The case purports to be brought on behalf of those who acquired
common stock of the Company between January 18, 2007 and
January 23, 2008 (the “Securities
Class Period”). The complaint alleges that the Company
and certain officers violated federal securities laws by issuing
a series of materially false and misleading statements and that
the statements had the effect of artificially inflating the
market price for the Company’s securities. The complaint
alleges that defendants caused the Company’s results for
year-end 2006 and for the first quarter of 2007 to be materially
misstated because the Company failed to adequately provide for
loan losses, which overstated the Company’s net income, and
that the Company failed to adequately disclose allegedly known
trends and uncertainties with respect to its non-traditional
loan portfolio. On July 23, 2008, the court appointed
Westchester Capital Management (“Westchester”) Lead
Plaintiff. On December 8, 2008, Lead Plaintiff filed a
consolidated amended complaint. In addition to the prior
allegations, the consolidated amended complaint alleges that the
Company understated loan delinquencies and loan loss reserves by
promoting loan forbearances. On December 19, 2008, and
December 31, 2008, two rejected lead plaintiffs filed a
challenge to Westchester as Lead Plaintiff. On April 1,
2009, the court named a new Lead Plaintiff, SLM Venture, and
Westchester appealed to the Second Circuit Court of Appeals. On
September 3, 2009, Lead Plaintiffs filed a Second Amended
Consolidated Complaint on largely the same allegations as the
Consolidated Amended Complaint, but dropped one of the three
senior officers as a defendant. On October 1, 2009, the
Second Circuit Court of Appeals denied Westchester’s
Writ of Mandamus
, thereby deciding the Lead Plaintiff
question in favor of SLM Venture. On December 11, 2009,
Defendants filed a Motion to Dismiss the Second Amended
Consolidated Complaint. This Motion is pending. Lead Plaintiff
seeks unspecified compensatory damages, attorneys’ fees,
costs, and equitable and injunctive relief.
A similar case is pending against the Company, certain officers,
retirement plan fiduciaries, and the Board of Directors, In Re
SLM Corporation ERISA Litigation, also in the U.S. District
Court for the Southern District of New York. The proposed class
consists of participants in or beneficiaries of the Sallie Mae
401(K) Retirement Savings Plan (“401K Plan”) between
January 18, 2007 and “the present” whose accounts
included investments in Sallie Mae stock (“401K
Class Period”). The complaint alleges breaches of
fiduciary duties and prohibited transactions in violation of the
Employee Retirement Income Security Act arising out of alleged
false and misleading public statements regarding the
Company’s business made during the 401(K) Class Period
and investments in the Company’s common stock by
participants in the 401(K) Plan. On December 15, 2008,
Plaintiffs filed a Consolidated Class Action Complaint and
a Second Consolidated Amended Complaint on September 10,
2009. On November 10, 2009, Defendants filed a Motion to
Dismiss the matter on all counts. This Motion is pending. The
plaintiffs seek unspecified damages, attorneys’ fees,
costs, and equitable and injunctive relief.
F-86
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 17. | Commitments, Contingencies and Guarantees (Continued) |
OIG
Investigation
On August 3, 2009, the Company received the final audit
report of ED’s Office of the Inspector General
(“OIG”) related to the Company’s billing
practices for special allowance payments. Among other things,
the OIG recommended that ED instruct the Company to return
approximately $22 million in alleged special allowance
overpayments. The Company continues to believe that its
practices were consistent with longstanding ED guidance and all
applicable rules and regulations and intends to continue
disputing these findings. The Company provided its response to
the Secretary on October 2, 2009. The OIG has audited other
industry participants with regard to special allowance payments
for loans funded by tax exempt obligations and, in certain
cases, the Secretary of ED has disagreed with the OIG’s
recommendations.
Contingencies
In the ordinary course of business, the Company and its
subsidiaries are routinely defendants in or parties to pending
and threatened legal actions and proceedings including actions
brought on behalf of various classes of claimants. These actions
and proceedings may be based on alleged violations of consumer
protection, securities, employment and other laws. In certain of
these actions and proceedings, claims for substantial monetary
damage are asserted against the Company and its subsidiaries.
In the ordinary course of business, the Company and its
subsidiaries are subject to regulatory examinations, information
gathering requests, inquiries and investigations. In connection
with formal and informal inquiries in these cases, the Company
and its subsidiaries receive numerous requests, subpoenas and
orders for documents, testimony and information in connection
with various aspects of the Company’s regulated activities.
In view of the inherent difficulty of predicting the outcome of
such litigation and regulatory matters, the Company cannot
predict what the eventual outcome of the pending matters will
be, what the timing or the ultimate resolution of these matters
will be, or what the eventual loss, fines or penalties related
to each pending matter may be.
In accordance with ASC 450, “Contingencies,” the
Company is required to establish reserves for litigation and
regulatory matters when those matters present loss contingencies
that are both probable and estimable. When loss contingencies
are not both probable and estimable, the Company does not
establish reserves.
Based on current knowledge, reserves have not been established
for any pending litigation or regulatory matters. Based on
current knowledge, management does not believe that loss
contingencies, if any, arising from pending investigations,
litigation or regulatory matters will have a material adverse
effect on the consolidated financial position or liquidity of
the Company.
| 18. | Benefit Plans |
Pension
Plans
As of December 31, 2009, the Company’s qualified and
supplemental pension plans (the “Pension Plans”) are
frozen with respect to new entrants and participants with less
than ten years of service on June 30, 2004. No further
benefits will accrue with respect to these participants under
the Pension Plans, other than interest accruals on cash balance
accounts. Participants with less than five years of service as
of June 30, 2004 were fully vested.
For those participants who continued to accrue benefits under
the Pension Plans until July 1, 2009, benefits were
credited using a cash balance formula. Under the formula, each
participant has an account, for
F-87
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 18. | Benefit Plans (Continued) |
record keeping purposes only, to which credits were allocated
each payroll period based on a percentage of the
participant’s compensation for the current pay period. The
applicable percentage was determined by the participant’s
number of years of service with the Company. If an individual
participated in the Company’s prior pension plan as of
September 30, 1999 and met certain age and service
criteria, the participant (“grandfathered
participant”) will receive the greater of the benefits
calculated under the prior plan, which uses a final average pay
plan method, or the current plan under the cash balance formula.
The Company does not provide other postretirement benefits such
as postretirement health care or postretirement life insurance
benefits.
F-88
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 18. | Benefit Plans (Continued) |
Qualified
and Nonqualified Plans
The following tables provide a reconciliation of the changes in
the qualified and nonqualified plan benefit obligations, fair
value of assets, and other comprehensive income for the years
ended December 31, 2009 and 2008, respectively, based on a
December 31 measurement date:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Change in benefit obligation
|
||||||||
|
Projected benefit obligation at beginning of year
|
$ | 206,887 | $ | 227,651 | ||||
|
Service cost
|
3,231 | 6,566 | ||||||
|
Interest cost
|
12,350 | 12,908 | ||||||
|
Actuarial (gain)/loss
|
2,169 | (4,204 | ) | |||||
|
Plan curtailment
|
— | 114 | ||||||
|
Plan settlement
|
— | — | ||||||
|
Special termination benefits
|
— | — | ||||||
|
Benefits paid
|
(23,771 | ) | (36,148 | ) | ||||
|
Projected benefit obligation at end of year
|
$ | 200,866 | $ | 206,887 | ||||
|
Change in plan assets
|
||||||||
|
Fair value of plan assets at beginning of year
|
$ | 211,780 | $ | 230,698 | ||||
|
Actual return on plan assets
|
4,775 | 12,681 | ||||||
|
Employer contribution
|
4,960 | 5,326 | ||||||
|
Settlement loss
|
— | — | ||||||
|
Benefits paid
|
(23,771 | ) | (36,148 | ) | ||||
|
Administrative payments
|
(660 | ) | (777 | ) | ||||
|
Fair value of plan assets at end of year
|
$ | 197,084 | $ | 211,780 | ||||
|
Funded status at end of year
|
$ | (3,782 | ) | $ | 4,893 | |||
|
Amounts recognized in the statement of financial position
consist of:
|
||||||||
|
Noncurrent assets
|
$ | 17,368 | $ | 27,402 | ||||
|
Current liabilities
|
(1,877 | ) | (2,895 | ) | ||||
|
Noncurrent liabilities
|
(19,273 | ) | (19,614 | ) | ||||
|
Net amount recognized in statement of financial position
|
$ | (3,782 | ) | $ | 4,893 | |||
|
Amounts not yet recognized in net periodic pension cost and
included in accumulated other comprehensive income:
|
||||||||
|
Prior service cost
|
$ | — | $ | — | ||||
|
Accumulated gain
|
18,224 | 29,720 | ||||||
|
Accumulated other comprehensive income
|
$ | 18,224 | $ | 29,720 | ||||
|
Amounts expected to be reflected in net periodic pension cost
during the next fiscal year:
|
||||||||
|
Prior service cost
|
$ | — | $ | — | ||||
|
Accumulated gain
|
96 | 1,366 | ||||||
|
Accumulated other comprehensive income
|
$ | 96 | $ | 1,366 | ||||
|
Additional year-end information for plans with accumulated
benefit obligations in excess of plan assets:
|
||||||||
|
Projected benefit obligation
|
$ | 21,149 | $ | 22,509 | ||||
|
Accumulated benefit obligation
|
21,079 | 22,448 | ||||||
|
Fair value of plan assets
|
— | — | ||||||
The accumulated benefit obligations of the qualified and
nonqualified defined benefit plans were $201 million and
$206 million at December 31, 2009 and 2008,
respectively. There are no plan assets in the
F-89
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 18. | Benefit Plans (Continued) |
nonqualified plans due to the nature of the plans; the corporate
assets used to pay these benefits are included above in employer
contributions.
Components
of Net Periodic Pension Cost
Net periodic pension cost included the following components:
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Service cost — benefits earned during the period
|
$ | 3,231 | $ | 6,566 | $ | 7,100 | ||||||
|
Interest cost on project benefit obligations
|
12,350 | 12,908 | 12,337 | |||||||||
|
Expected return on plan assets
|
(10,713 | ) | (11,709 | ) | (17,975 | ) | ||||||
|
Curtailment loss
|
— | 114 | — | |||||||||
|
Settlement (gain)/loss
|
(1,362 | ) | (5,074 | ) | 1,265 | |||||||
|
Special termination benefits
|
— | — | 912 | |||||||||
|
Net amortization and deferral
|
(1,367 | ) | (1,447 | ) | (719 | ) | ||||||
|
Net periodic pension cost (benefit)
|
$ | 2,139 | $ | 1,358 | $ | 2,920 | ||||||
Special accounting is required when lump sum payments exceed the
sum of the service and interest cost components, and when the
average future working lifetime of employees is significantly
curtailed. This special accounting requires an accelerated
recognition of unrecognized gains or losses and unrecognized
prior service costs, creating adjustments to the pension
expense. During the years ended December 31, 2009 and 2008,
the Company recorded net settlement gains associated with
lump-sum distributions from the plans. In 2008, the Company also
recorded a curtailment loss for previously unrecognized losses
associated with executive non-qualified benefits. During the
year ended December 31, 2007, the Company recorded net
settlement losses, including a portion related to employees who
were involuntarily terminated in the fourth quarter, associated
with lump-sum distributions from the supplemental pension plan.
These amounts were recorded in accordance with ASC 715,
“Compensation — Retirement Benefits,” which
requires that settlement losses be recorded once prescribed
payment thresholds have been reached.
Amortization of unrecognized net gains or losses are included as
a component of net periodic pension cost to the extent that the
unrecognized gain or loss exceeds 10 percent of the greater
of the projected benefit obligation or the market value of plan
assets. Gains or losses not yet includible in pension cost are
amortized over the average remaining service life of active
participants, which is approximately 8 years.
Assumptions
The weighted average assumptions used to determine the projected
accumulated benefit obligations are as follows:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Discount rate
|
5.85 | % | 6.25 | % | ||||
|
Expected return on plan assets
|
5.25 | % | 5.25 | % | ||||
|
Rate of compensation increase
|
N/A | 4.00 | % | |||||
F-90
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 18. | Benefit Plans (Continued) |
The weighted average assumptions used to determine the net
periodic pension cost are as follows:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Discount rate
|
6.25 | % | 6.00 | % | ||||
|
Expected return on plan assets
|
5.25 | % | 5.25 | % | ||||
|
Rate of compensation increase
|
4.00 | % | 4.00 | % | ||||
Management is assisted by third party actuaries in measuring the
pension liabilities and expense through the use of various
assumptions including discount rate, expected return on plan
assets, salary increases, employee turnover rates and mortality
assumptions.
The year-end discount rate was selected based on a modeling
process intended to match expected cash flows from the plans to
a yield curve constructed from a portfolio of non-callable Aa
bonds with at least $250 million of outstanding issue.
Bonds are eliminated if they have maturities of less than six
months or are priced more than two standard errors from the
market average.
The return on plan assets is based on the strategic asset
allocation of the plan assets and a conservative investment
policy intended to match plan liability characteristics and
preserve funded status.
There is no rate of compensation assumption at December 31,
2009, for the projected accumulated benefit obligation since
benefits no longer accrue to participants subsequent to
July 1, 2009.
Assumption
Sensitivity
Changes in the discount rate and the expected rate of return on
plan assets inversely impact expense. If the discount rate
increased/decreased by 50 basis points, expense would
decrease/increase $.7 million from the amount recorded at
December 31, 2009. If the expected long-term rate of return
on plan assets increased/decreased by 50 basis points,
expense would decrease/increase by $1 million.
Plan
Assets
The weighted average asset allocations at December 31, 2009
and 2008, by asset category, are as follows:
|
Plan Assets
|
||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Asset Category
|
||||||||
|
Fixed income securities
|
81 | 73 | ||||||
|
Cash equivalents
|
19 | 27 | ||||||
|
Total
|
100 | % | 100 | % | ||||
Investment
Policy and Strategy
The investment strategy was revised during 2007 with the
principle objective of preserving funding status. Based on the
current funded status of the plan and the ceasing of benefit
accruals effective mid-year 2009, the Investment Committee
recommended moving plan assets into fixed income securities with
the goal of removing funded status risk with investments that
better match the plan liability characteristics. At
December 31, 2009, the plan is invested 81 percent in
high quality bonds with an average credit rating of
approximately AA and 19 percent in cash which is invested
in U.S. government securities, the duration of which
closely matches that of the traditional and cash balance nature
of plan liabilities.
F-91
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 18. | Benefit Plans (Continued) |
Fair
Value Measurements
The Plan investments, at fair value at December 31, 2009
and 2008 are as follows:
| Based on | ||||||||||||||||||||
|
Other
|
||||||||||||||||||||
|
Fair value at
|
Quoted prices in
|
Observable
|
Fair value at
|
|||||||||||||||||
|
December 31,
|
active markets
|
Inputs
|
Unobservable
|
December 31,
|
||||||||||||||||
| 2009 | (Level 1) | (Level 2) | Inputs (Level 3) | 2008 | ||||||||||||||||
|
Assets measured at fair value on a recurring basis:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 37,862,392 | $ | — | $ | 37,862,392 | $ | — | $ | 57,206,048 | ||||||||||
|
Mutual funds
|
159,221,849 | — | 159,221,849 | — | 154,573,651 | |||||||||||||||
|
Total investments
|
$ | 197,084,241 | $ | — | $ | 197,084,241 | $ | — | $ | 211,779,699 | ||||||||||
Cash
Flows
The Company did not contribute to its qualified pension plan in
2009 and does not expect to contribute in 2010. There are no
plan assets in the nonqualified plans due to the nature of the
plans, and benefits are paid from corporate assets when due to
the participant. It is estimated that approximately
$2 million will be paid in 2010 for these benefits. No plan
assets are expected to be returned to the employer during 2010.
Estimated
Future Benefit Payments
The following qualified and nonqualified plan benefit payments,
which reflect future interest credits as appropriate, are
expected to be paid:
|
2010
|
$ | 13,007 | ||
|
2011
|
13,441 | |||
|
2012
|
14,706 | |||
|
2013
|
12,033 | |||
|
2014
|
12,308 | |||
|
2015 — 2019
|
66,168 |
401(k)
Plans
The Company maintained two safe harbor 401(k) savings plans as
defined contribution plans intended to qualify under
section 401(k) of the Internal Revenue Code until they were
combined December 31, 2009. The Sallie Mae 401(k) Savings
Plan covers substantially all employees of the Company outside
of Asset Performance Group hired before August 1, 2007.
Effective October 1, 2008, the Company matches up to
100 percent on the first 3 percent of contributions
and 50 percent on the next 2 percent of contributions
after one year of service, and all eligible employees receive a
1 percent core employer contribution. Prior to
October 1, 2008, up to 6 percent of employee
contributions were matched 100 percent by the Company after
one year of service and certain eligible employees received a
2 percent core employer contribution.
The Sallie Mae 401(k) Retirement Savings Plan covers
substantially all employees of Asset Performance Group, and
after August 1, 2007, the Retirement Savings Plan covers
substantially all new hires of the Company. Effective
October 1, 2008, the Company matches up to 100 percent
on the first 3 percent of contributions and 50 percent
on the next 2 percent of contributions after one year of
service, and all eligible
F-92
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 18. | Benefit Plans (Continued) |
employees receive a 1 percent core employer contribution.
Between August 1, 2007 and September 30, 2008, the
match formula was up to 100 percent on the first
5 percent of contributions after one year of service.
The Company also maintains a non-qualified plan to ensure that
designated participants receive benefits not available under the
401(k) Plan due to compensation limits imposed by the Internal
Revenue Code.
Total expenses related to the 401(k) plans were
$15 million, $21 million and $22 million in 2009,
2008 and 2007, respectively.
| 19. | Income Taxes |
Reconciliations of the statutory U.S. federal income tax
rates to the Company’s effective tax rate for continuing
operations follow:
|
Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Statutory rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Equity forward contracts
|
— | — | (110.8 | ) | ||||||||
|
State tax, net of federal benefit
|
(.3 | ) | 3.7 | (4.1 | ) | |||||||
|
Capitalized transaction costs
|
— | 8.6 | (2.5 | ) | ||||||||
|
Unrecognized tax benefits, U.S. federal and state, net of
federal benefit
|
(1.3 | ) | 6.0 | (.2 | ) | |||||||
|
Corporate owned life insurance
|
(.4 | ) | 2.4 | 1.3 | ||||||||
|
Other, net
|
.1 | (1.7 | ) | (1.7 | ) | |||||||
|
Effective tax rate
|
33.1 | % | 54.0 | % | (83.0 | )% | ||||||
The effective tax rates for discontinued operations for the
years ended December 31, 2009, 2008 and 2007 are
27.4 percent, 38.8 percent, and 39.0 percent,
respectively. The effective tax rate varies from the statutory
U.S. federal rate of 35 percent primarily due to the
establishment of a valuation allowance against tax attributes
generated as a result of the sale of the assets in its Purchased
Paper — Mortgage/Properties business for the year
ended December 31, 2009, and due to the impact of state
taxes, net of federal benefit, for the years ended
December 31, 2009, 2008 and 2007.
F-93
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 19. | Income Taxes (Continued) |
Income tax expense for the years ended December 31, 2009,
2008, and 2007 consists of:
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Continuing operations current provision/benefit:
|
||||||||||||
|
Federal
|
$ | 116,323 | $ | 403,294 | $ | 1,013,342 | ||||||
|
State
|
(24,527 | ) | 33,553 | 50,725 | ||||||||
|
Foreign
|
398 | 678 | 1,045 | |||||||||
|
Total continuing operations current provision
|
92,194 | 437,525 | 1,065,112 | |||||||||
|
Continuing operations deferred provision/(benefit):
|
||||||||||||
|
Federal
|
141,038 | (467,919 | ) | (632,029 | ) | |||||||
|
State
|
5,453 | (46,029 | ) | (24,327 | ) | |||||||
|
Foreign
|
(321 | ) | (346 | ) | (481 | ) | ||||||
|
Total continuing operations deferred provision/(benefit)
|
146,170 | (514,294 | ) | (656,837 | ) | |||||||
|
Continuing operations provision for income tax expense/(benefit)
|
$ | 238,364 | $ | (76,769 | ) | $ | 408,275 | |||||
|
Discontinued operations current provision/(benefit):
|
||||||||||||
|
Federal
|
$ | (159,234 | ) | $ | (1,885 | ) | $ | 13,744 | ||||
|
State
|
(8,886 | ) | (817 | ) | 3,140 | |||||||
|
Total discontinued operations current provision/(benefit)
|
(168,120 | ) | (2,702 | ) | 16,884 | |||||||
|
Discontinued operations deferred provision/(benefit):
|
||||||||||||
|
Federal
|
97,908 | (75,232 | ) | (10,363 | ) | |||||||
|
State
|
10,819 | (12,871 | ) | (2,513 | ) | |||||||
|
Total discontinued operations deferred provision/(benefit)
|
108,727 | (88,103 | ) | (12,876 | ) | |||||||
|
Discontinued operations provision for income tax
expense/(benefit)
|
$ | (59,393 | ) | $ | (90,805 | ) | $ | 4,008 | ||||
|
Provision for income tax expense/(benefit)
|
$ | 178,971 | $ | (167,574 | ) | $ | 412,283 | |||||
F-94
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 19. | Income Taxes (Continued) |
At December 31, 2009 and 2008, the tax effect of temporary
differences that give rise to deferred tax assets and
liabilities include the following:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Deferred tax assets:
|
||||||||
|
Loan reserves
|
$ | 737,762 | $ | 1,212,653 | ||||
|
Market value adjustments on student loans, investments and
derivatives
|
496,101 | 174,276 | ||||||
|
Deferred revenue
|
83,042 | 70,172 | ||||||
|
Stock-based compensation plans
|
70,528 | 62,325 | ||||||
|
Accrued expenses not currently deductible
|
47,249 | 38,330 | ||||||
|
Purchased paper impairments
|
42,892 | 111,924 | ||||||
|
Operating loss and credit carryovers
|
36,747 | 28,293 | ||||||
|
Unrealized investment losses
|
25,949 | 42,838 | ||||||
|
Warrants issuance
|
19,716 | 27,160 | ||||||
|
Other
|
32,717 | 87,954 | ||||||
|
Total deferred tax assets
|
1,592,703 | 1,855,925 | ||||||
|
Deferred tax liabilities:
|
||||||||
|
Gains/(losses) on repurchased debt
|
187,505 | — | ||||||
|
Securitization transactions
|
93,254 | 302,049 | ||||||
|
Leases
|
64,246 | 73,570 | ||||||
|
Other
|
37,170 | 12,883 | ||||||
|
Total deferred tax liabilities
|
382,175 | 388,502 | ||||||
|
Net deferred tax assets
|
$ | 1,210,528 | $ | 1,467,423 | ||||
Included in other deferred tax assets is a valuation allowance
of $25,111 and $4,901 as of December 31, 2009 and 2008,
respectively, against a portion of the Company’s federal,
state and international deferred tax assets. The valuation
allowance is primarily attributable to deferred tax assets for
federal and state capital loss carryovers and state net
operating loss carryovers that management believes it is more
likely than not will expire prior to being realized. The change
in the valuation allowance primarily resulted from the sale of
the assets in its Purchased Paper-Mortgage/Properties business.
The ultimate realization of the deferred tax assets is dependent
upon the generation of future taxable income of the appropriate
character (i.e. capital or ordinary) during the period in which
the temporary differences become deductible. Management
considers, among other things, the economic slowdown, any
impacts if SAFRA or the Community Proposal are passed, the
scheduled reversals of deferred tax liabilities, and the history
of positive taxable income available for net operating loss
carrybacks in evaluating the realizability of the deferred tax
assets.
As of December 31, 2009, the Company has federal net
operating loss carryforwards of $21,020 which begin to expire in
2022, apportioned state net operating loss carryforwards of
$89,958 which begin to expire in 2010, federal and state capital
loss carryovers of $44,289 which begin to expire in 2012, and
federal and state credit carryovers of $1,845 which begin to
expire in 2021.
F-95
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 19. | Income Taxes (Continued) |
Accounting
for Uncertainty in Income Taxes
New provisions under ASC 740, “Income Taxes,”
pertaining to the accounting of uncertainty in income taxes,
were adopted on January 1, 2007. As a result of this
implementation, the Company recognized a $6 million
increase in its liability for unrecognized tax benefits, which
was accounted for as a reduction to the January 1, 2007
balance of retained earnings. The total amount of gross
unrecognized tax benefits as of January 1, 2007 was
$113 million.
The following table summarizes changes in unrecognized tax
benefits for the years ended December 31, 2009, 2008 and
2007:
| December 31, | ||||||||||||
|
(Dollars in millions)
|
2009 | 2008 | 2007 | |||||||||
|
Unrecognized tax benefits at beginning of year
|
$ | 86.4 | $ | 174.8 | $ | 113.3 | ||||||
|
Increases resulting from tax positions taken during a prior
period
|
75.2 | 11.3 | 86.5 | |||||||||
|
Decreases resulting from tax positions taken during a prior
period
|
(58.3 | ) | (132.2 | ) | (30.0 | ) | ||||||
|
Increases/(decreases) resulting from tax positions taken during
the current period
|
(22.5 | ) | 36.2 | .3 | ||||||||
|
Decreases related to settlements with taxing authorities
|
(17.9 | ) | (.1 | ) | (30.0 | ) | ||||||
|
Increases related to settlements with taxing authorities
|
44.7 | — | 42.3 | |||||||||
|
Reductions related to the lapse of statute of limitations
|
(3.2 | ) | (3.6 | ) | (7.6 | ) | ||||||
|
Unrecognized tax benefits at end of year
|
$ | 104.4 | $ | 86.4 | $ | 174.8 | ||||||
As of December 31, 2009, the gross unrecognized tax
benefits are $104 million. Included in the
$104 million are $17 million of unrecognized tax
benefits that, if recognized, would favorably impact the
effective tax rate. In addition, unrecognized tax benefits of
$2 million are currently treated as a pending refund claim,
reducing the balance of unrecognized tax benefits that, if
recognized, would impact the effective tax rate. During 2009,
the Company adjusted its unrecognized tax benefits to
incorporate new issues that were identified while completing the
2008 U.S. federal income tax return, as well as adjusting
the
2003-2007
unrecognized tax benefits to incorporate the net impact of IRS
and state tax authority examinations of several of the
Company’s income tax returns. New information was received
from the IRS during the first quarter as part of the IRS
examination of the Company’s 2005 and 2006
U.S. federal income tax returns, and the IRS issued a
Revenue Agent’s Report (“RAR”) during the second
quarter of 2009 ultimately concluding this exam. During the
third quarter of 2009, the IRS concluded the examination of the
2003 and 2004 U.S. federal income tax returns of an entity
in which the Company is an investor, and the Virginia taxing
authority concluded the examination of the Company’s 2005
through 2007 income tax returns. Several other less significant
amounts of uncertain tax benefits were also added during the
year.
The Company recognizes interest costs related to unrecognized
tax benefits in income tax expense, and penalties, if any, in
operating expenses. The Company has accrued interest, net of tax
benefit, of $7 million, $10 million and
$18 million as of December 31, 2009, 2008 and 2007
respectively. The income tax expense for the year ended
December 31, 2009 includes a reduction in the accrual of
interest of $3 million, primarily related to the reduction
of uncertain tax benefits as discussed above. The income tax
expense for the year ended December 31, 2008 includes a
reduction in the accrual of interest of $8 million,
primarily related to the reduction of uncertain tax benefits as
a result of new information received from the IRS as a part of
the
2005-2006
exam cycle for several carryover issues related to the timing of
certain income and deduction items. The income tax expense for
the year ended December 31, 2007 includes an increase in
the accrual of interest of $1 million.
F-96
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 19. | Income Taxes (Continued) |
Reasonably
Possible Significant Increases/Decreases within Twelve
Months
The IRS issued a Revenue Agent’s Report (“RAR”)
during the second quarter of 2007 concluding the primary exam of
the Company’s 2003 and 2004 U.S. federal tax returns.
However, the exam of these years remained open until the third
quarter of 2009 when the IRS concluded the examination of an
entity in which the Company is an investor. In addition, during
the third quarter of 2007, the Company filed an
administrative-level appeal related to one unagreed item
originating from the Company’s 2004 U.S. federal tax
return. It is reasonably possible that there will be a decrease
in the Company’s unrecognized tax benefits as a result of
the resolution of this item. When considering both tax and
interest amounts, the decrease could be approximately
$8 million to $12 million.
The IRS began the examination of the Company’s 2007 and
2008 federal income tax returns during the second quarter of
2009. It is reasonably possible that issues that arise during
the exam may create the need for an increase in unrecognized tax
benefits. Until the exam proceeds further, an estimate of any
such amounts cannot currently be made.
In the event that the Company is not contacted for exam by
additional tax authorities by the end of 2010, it is reasonably
possible that there will be a decrease in the Company’s
unrecognized tax benefits as a result of the lapse of various
statute of limitations periods. When considering both tax and
interest amounts, the decrease could be approximately
$5 million to $9 million.
Tax
Years Remaining Subject to Exam
The Company or one of its subsidiaries files income tax returns
at the U.S. federal level, in most U.S. states, and
various foreign jurisdictions. U.S. federal income tax
returns filed for years prior to 2003 and for years
2005-2006
have been audited and are now resolved. As shown in the table
below, the Company’s primary operating subsidiary has been
audited by the listed states through the year shown, again with
all issues resolved. Other combinations of subsidiaries, tax
years, and jurisdictions remain open for review, subject to
statute of limitations periods (typically 3 to 4 prior years).
|
State
|
Year audited through | |||
|
Florida
|
2000 | |||
|
Indiana
|
2000 | |||
|
Pennsylvania
|
2000 | |||
|
California
|
2002 | |||
|
Missouri
|
2003 | |||
|
New York
|
2004 | |||
|
North Carolina
|
2005 | |||
|
Texas
|
2004 | |||
|
Virginia
|
2007 | |||
| 20. | Segment Reporting |
The Company has two primary operating segments — the
Lending operating segment and the APG, formerly known as DMO,
operating segment. The Lending and APG operating segments meet
the quantitative thresholds for reportable segments.
Accordingly, the results of operations of the Company’s
Lending and APG segments are presented below. The Company has
smaller operating segments including the Guarantor Servicing,
Loan Servicing, and Upromise operating segments, as well as
certain other products and services
F-97
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 20. | Segment Reporting (Continued) |
provided to colleges and universities which do not meet the
required quantitative thresholds. Therefore, the results of
operations for these operating segments and the revenues and
expenses associated with these other products and services are
combined with corporate overhead and other corporate activities
within the Corporate and Other reportable segment.
The management reporting process measures the performance of the
Company’s operating segments based on the management
structure of the Company, as well as the methodology used by
management to evaluate performance and allocate resources.
Management, including the Company’s chief operating
decision makers, evaluates the performance of the Company’s
operating segments based on their profitability. As discussed
further below, management measures the profitability of the
Company’s operating segments based on “Core
Earnings” net income. Accordingly, information regarding
the Company’s reportable segments is provided based on a
“Core Earnings” basis. The Company’s “Core
Earnings” performance measures are not defined terms within
GAAP and may not be comparable to similarly titled measures
reported by other companies. “Core Earnings” net
income reflects only current period adjustments to GAAP net
income as described below. Unlike financial accounting, there is
no comprehensive, authoritative guidance for management
reporting. The management reporting process measures the
performance of the operating segments based on the management
structure of the Company and is not necessarily comparable with
similar information for any other financial institution. The
Company’s operating segments are defined by the products
and services they offer or the types of customers they serve,
and they reflect the manner in which financial information is
currently evaluated by management. Intersegment revenues and
expenses are netted within the appropriate financial statement
line items consistent with the income statement presentation
provided to management. Changes in management structure or
allocation methodologies and procedures may result in changes in
reported segment financial information.
The Company’s principal operations are located in the
United States, and its results of operations and long-lived
assets in geographic regions outside of the United States are
not significant. In the Lending segment, no individual customer
accounted for more than 10 percent of its total revenue
during the years ended December 31, 2009, 2008 and 2007.
United Student Aid Funds, Inc. (“USA Funds”) is the
Company’s largest customer in both the APG and Corporate
and Other segments. During the years ended December 31,
2009, 2008 and 2007, USA Funds accounted for 16 percent,
46 percent and 35 percent, respectively, of the
aggregate revenues generated by the Company’s APG and
Corporate and Other segments. No other customers accounted for
more than 10 percent of total revenues in those segments
for the years mentioned.
Lending
In the Company’s Lending operating segment, the Company
originates and acquires both FFELP loans and Private Education
Loans. As of December 31, 2009, the Company managed
$176.4 billion of student loans, of which
$141.3 billion or 80 percent are federally insured,
and has 10 million student and parent customers. The
Company’s mortgage and other consumer loan portfolio
totaled $363 million at December 31, 2009.
Private Education Loans consist of two general types:
(1) those that are designed to bridge the gap between the
cost of higher education and the amount financed through either
capped federally insured loans or the borrowers’ resources,
and (2) those that are used to meet the needs of students
in alternative learning programs such as career training,
distance learning and lifelong learning programs. Most higher
education Private Education Loans are made in conjunction with a
FFELP loan and as such are marketed through the same channel as
FFELP loans by the same sales force. Unlike FFELP loans, Private
Education Loans are subject to the full credit risk of the
borrower. The Company manages this additional risk through
historical
F-98
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 20. | Segment Reporting (Continued) |
risk-performance underwriting strategies, the addition of
qualified cosigners and a combination of higher interest rates
and loan origination fees that compensate the Company for the
higher risk.
The following table includes asset information for the
Company’s Lending business segment.
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
FFELP Stafford and Other Student Loans, net
|
$ | 42,979 | $ | 44,025 | ||||
|
FFELP Stafford Loans
Held-for-Sale
|
9,696 | 8,451 | ||||||
|
FFELP Consolidation Loans, net
|
68,379 | 71,744 | ||||||
|
Private Education Loans, net
|
22,753 | 20,582 | ||||||
|
Other loans, net
|
420 | 729 | ||||||
|
Cash and
investments
(1)
|
12,387 | 8,445 | ||||||
|
Retained Interest in off-balance sheet securitized loans
|
1,828 | 2,200 | ||||||
|
Other
|
9,398 | 9,947 | ||||||
|
Total assets
|
$ | 167,840 | $ | 166,123 | ||||
| (1) | Includes restricted cash and investments. |
APG
The Company’s APG operating segment provides a wide range
of accounts receivable and collections services including
student loan default aversion services, defaulted student loan
portfolio management services, contingency collections services
for student loans and other asset classes, accounts receivable
management and collection for purchased portfolios of
receivables that are delinquent or have been charged off by
their original creditors, and
sub-performing
and non-performing mortgage loans. The Company’s APG
operating segment serves the student loan marketplace through a
broad array of default management services on a contingency fee
or other
pay-for-performance
basis to 15 FFELP Guarantors and for campus-based programs.
In addition to collecting on its own purchased receivables and
mortgage loans, the APG operating segment provides receivable
management and collection services for federal agencies, credit
card clients and other holders of consumer debt.
In 2008, the Company concluded that its APG purchased paper
businesses were no longer a strategic fit. The Company sold its
international Purchased Paper — Non-Mortgage business
in the first quarter of 2009. A loss of $51 million was
recognized in the fourth quarter of 2008 related to this sale as
the net assets were held for sale and carried at the lower of
its book basis and fair value as of December 31, 2008. The
Company sold all of the assets in its Purchased
Paper — Mortgage/Properties business in the fourth
quarter of 2009 (which is further discussed below), which
resulted in an after-tax loss of $95 million. The Company
continues to wind down the domestic side of its Purchased
Paper — Non-Mortgage business. The Company will
continue to consider opportunities to sell this business at
acceptable prices in the future.
The Company’s domestic Purchased Paper —
Non-Mortgage business had certain forward purchase obligations
under which the Company was committed to buy purchased paper
through April 2009. The Company did not purchase any additional
purchased paper in excess of these obligations. The Company
recognized
F-99
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 20. | Segment Reporting (Continued) |
$79 million, $111 million and $17 million of
impairments in the years ended December 31, 2009, 2008 and
2007, respectively. The impairment is primarily a result of the
impact of the economy on the ability to collect on these assets.
The impairment of $111 million in 2008 includes the
$51 million loss on the sale of the Company’s
international Purchased Paper — Non-Mortgage business
discussed above. Similar to the Purchased Paper —
Mortgage/Properties business discussion below, when the
Purchased Paper — Non-Mortgage business either sells
all of its remaining assets or completely winds down its
operations, its results will be shown as discontinued operations.
Net loss attributable to SLM Corporation from discontinued
operations was $157 million and $140 million for the
years ended December 31, 2009 and 2008, respectively,
compared to net income of $15 million for the year ended
December 31, 2007. The Company sold all of the assets in
its Purchased Paper — Mortgage/Properties business in
the fourth quarter of 2009 for $280 million. Because of the
sale, the Purchased Paper — Mortgage/Properties
business is required to be presented separately as discontinued
operations for all periods presented. This sale of assets in the
fourth quarter of 2009 resulted in an after-tax loss of
$95 million. Total after-tax impairments, including the
loss on sale, for the years ended December 31, 2009, 2008
and 2007 were $154 million, $161 million and
$2 million, respectively.
At December 31, 2009 and 2008, the APG business segment had
total assets of $1.1 billion and $2.0 billion,
respectively.
Corporate
and Other
The Company’s Corporate and Other segment includes the
aggregate activity of its smaller operating segments, primarily
its Guarantor Servicing, Loan Servicing and Upromise operating
segments. Corporate and Other also includes several smaller
products and services, as well as corporate overhead.
In the Guarantor Servicing operating segment, the Company
provides a full complement of administrative services to FFELP
Guarantors including guarantee issuance, account maintenance,
and guarantee fulfillment. In the Loan Servicing operating
segment, the Company provides a full complement of activities
required to service student loans on behalf of lenders who are
unrelated to the Company. Such servicing activities generally
commence once a loan has been fully disbursed and include
sending out payment coupons to borrowers, processing borrower
payments, originating and disbursing FFELP Consolidation Loans
on behalf of the lender, and other administrative activities
required by ED.
Upromise markets and administers a consumer savings network and
also provides program management, transfer and servicing agent
services, and administration services for 529 college-savings
plans. The Company’s other products and services include
comprehensive financing and loan delivery solutions that it
provides to college financial aid offices and students to
streamline the financial aid process. Corporate overhead
includes all of the typical headquarter functions such as
executive management, accounting and finance, human resources
and marketing.
At December 31, 2009 and 2008, the Corporate and Other
business segment had total assets of $1.2 million and
$685 million, respectively.
Measure
of Profitability
The tables below include the condensed operating results for
each of the Company’s reportable segments. Management,
including the chief operating decision makers, evaluates the
Company on certain performance measures that the Company refers
to as “Core Earnings” performance measures for each
operating segment. While “Core Earnings” results are
not a substitute for reported results under GAAP, the Company
relies on
F-100
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 20. | Segment Reporting (Continued) |
“Core Earnings” performance measures to manage each
operating segment because it believes these measures provide
additional information regarding the operational and performance
indicators that are most closely assessed by management.
“Core Earnings” performance measures are the primary
financial performance measures used by management to develop the
Company’s financial plans, track results, and establish
corporate performance targets and incentive compensation.
Management believes this information provides additional insight
into the financial performance of the core business activities
of its operating segments. Accordingly, the tables presented
below reflect “Core Earnings” operating measures
reviewed and utilized by management to manage the business.
Reconciliation of the “Core Earnings” segment totals
to the Company’s consolidated operating results in
accordance with GAAP is also included in the tables below.
F-101
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 20. | Segment Reporting (Continued) |
Segment
Results and Reconciliations to GAAP
| Year Ended December 31, 2009 | ||||||||||||||||||||||||
|
Corporate
|
Total “Core
|
Total
|
||||||||||||||||||||||
|
(Dollars in millions)
|
Lending | APG | and Other | Earnings” | Adjustments (2) | GAAP | ||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||
|
FFELP Stafford and Other Student Loans
|
$ | 1,282 | $ | — | $ | — | $ | 1,282 | $ | (70 | ) | $ | 1,212 | |||||||||||
|
FFELP Consolidation Loans
|
1,645 | — | — | 1,645 | 237 | 1,882 | ||||||||||||||||||
|
Private Education Loans
|
2,254 | — | — | 2,254 | (672 | ) | 1,582 | |||||||||||||||||
|
Other loans
|
56 | — | — | 56 | — | 56 | ||||||||||||||||||
|
Cash and investments
|
9 | — | 20 | 29 | (3 | ) | 26 | |||||||||||||||||
|
Total interest income
|
5,246 | — | 20 | 5,266 | (508 | ) | 4,758 | |||||||||||||||||
|
Total interest expense
|
2,971 | 19 | 15 | 3,005 | 30 | 3,035 | ||||||||||||||||||
|
Net interest income (loss)
|
2,275 | (19 | ) | 5 | 2,261 | (538 | ) | 1,723 | ||||||||||||||||
|
Less: provisions for loan losses
|
1,564 | — | — | 1,564 | (445 | ) | 1,119 | |||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
711 | (19 | ) | 5 | 697 | (93 | ) | 604 | ||||||||||||||||
|
Contingency fee revenue
|
— | 296 | — | 296 | — | 296 | ||||||||||||||||||
|
Collections revenue
|
— | 50 | — | 50 | 1 | 51 | ||||||||||||||||||
|
Guarantor servicing fees
|
— | — | 136 | 136 | — | 136 | ||||||||||||||||||
|
Other income
|
974 | — | 215 | 1,189 | (286 | ) | 903 | |||||||||||||||||
|
Total other income
|
974 | 346 | 351 | 1,671 | (285 | ) | 1,386 | |||||||||||||||||
|
Restructuring expenses
|
10 | 1 | 3 | 14 | — | 14 | ||||||||||||||||||
|
Operating expenses
|
581 | 315 | 284 | 1,180 | 75 | 1,255 | ||||||||||||||||||
|
Total expenses
|
591 | 316 | 287 | 1,194 | 75 | 1,269 | ||||||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
1,094 | 11 | 69 | 1,174 | (453 | ) | 721 | |||||||||||||||||
|
Income tax expense
(benefit)
(1)
|
388 | 7 | 24 | 419 | (181 | ) | 238 | |||||||||||||||||
|
Net income (loss) from continuing operations
|
706 | 4 | 45 | 755 | (272 | ) | 483 | |||||||||||||||||
|
Loss from discontinued operations, net of taxes
|
— | (157 | ) | — | (157 | ) | (1 | ) | (158 | ) | ||||||||||||||
|
Net income (loss)
|
706 | (153 | ) | 45 | 598 | (273 | ) | 325 | ||||||||||||||||
|
Less: net income attributable to noncontrolling interest
|
— | 1 | — | 1 | — | 1 | ||||||||||||||||||
|
Net income (loss) attributable to SLM Corporation
|
$ | 706 | $ | (154 | ) | $ | 45 | $ | 597 | $ | (273 | ) | $ | 324 | ||||||||||
|
Economic Floor Income (net of tax) not included in “Core
Earnings”
|
$ | 205 | $ | — | $ | — | $ | 205 | ||||||||||||||||
| (1) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
| (2) | “Core Earnings” adjustments to GAAP: |
| Year Ended December 31, 2009 | ||||||||||||||||||||
|
Net Impact
|
Net Impact
|
Net Impact
|
||||||||||||||||||
|
of
|
of
|
Net Impact
|
of
|
|||||||||||||||||
|
Securitization
|
Derivative
|
of
|
Acquired
|
|||||||||||||||||
|
(Dollars in millions)
|
Accounting | Accounting | Floor Income | Intangibles | Total | |||||||||||||||
|
Net interest income (loss)
|
$ | (965 | ) | $ | 298 | $ | 129 | $ | — | $ | (538 | ) | ||||||||
|
Less: provisions for loan losses
|
(445 | ) | — | — | — | (445 | ) | |||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
(520 | ) | 298 | 129 | — | (93 | ) | |||||||||||||
|
Contingency fee revenue
|
— | — | — | — | — | |||||||||||||||
|
Collections revenue
|
1 | — | — | — | 1 | |||||||||||||||
|
Guarantor servicing fees
|
— | — | — | — | — | |||||||||||||||
|
Other income
|
318 | (604 | ) | — | — | (286 | ) | |||||||||||||
|
Total other income (loss)
|
319 | (604 | ) | — | — | (285 | ) | |||||||||||||
|
Restructuring expenses
|
— | — | — | — | — | |||||||||||||||
|
Operating expenses
|
— | — | — | 75 | 75 | |||||||||||||||
|
Total expenses
|
— | — | — | 75 | 75 | |||||||||||||||
|
Income (loss) from continuing operations, before income tax
benefit
|
(201 | ) | (306 | ) | 129 | (75 | ) | (453 | ) | |||||||||||
|
Loss from discontinued operations, net of taxes
|
— | — | — | (1 | ) | (1 | ) | |||||||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | (201 | ) | $ | (306 | ) | $ | 129 | $ | (76 | ) | (454 | ) | |||||||
|
Income tax benefit
|
(181 | ) | ||||||||||||||||||
|
Less: net income attributable to noncontrolling interest
|
— | |||||||||||||||||||
|
Net loss attributable to SLM Corporation
|
$ | (273 | ) | |||||||||||||||||
F-102
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 20. | Segment Reporting (Continued) |
| Year Ended December 31, 2008 | ||||||||||||||||||||||||
|
Corporate
|
Total “Core
|
Total
|
||||||||||||||||||||||
| Lending | APG | and Other | Earnings” | Adjustments (2) | GAAP | |||||||||||||||||||
|
(Dollars in millions)
|
||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||
|
FFELP Stafford and Other Student Loans
|
$ | 2,216 | $ | — | $ | — | $ | 2,216 | $ | (221 | ) | $ | 1,995 | |||||||||||
|
FFELP Consolidation Loans
|
3,748 | — | — | 3,748 | (569 | ) | 3,179 | |||||||||||||||||
|
Private Education Loans
|
2,752 | — | — | 2,752 | (1,015 | ) | 1,737 | |||||||||||||||||
|
Other loans
|
83 | — | — | 83 | — | 83 | ||||||||||||||||||
|
Cash and investments
|
304 | — | 25 | 329 | (53 | ) | 276 | |||||||||||||||||
|
Total interest income
|
9,103 | — | 25 | 9,128 | (1,858 | ) | 7,270 | |||||||||||||||||
|
Total interest expense
|
6,665 | 25 | 19 | 6,709 | (804 | ) | 5,905 | |||||||||||||||||
|
Net interest income (loss)
|
2,438 | (25 | ) | 6 | 2,419 | (1,054 | ) | 1,365 | ||||||||||||||||
|
Less: provisions for loan losses
|
1,029 | — | — | 1,029 | (309 | ) | 720 | |||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
1,409 | (25 | ) | 6 | 1,390 | (745 | ) | 645 | ||||||||||||||||
|
Contingency fee revenue
|
— | 340 | — | 340 | — | 340 | ||||||||||||||||||
|
Collections revenue
|
— | 129 | — | 129 | (1 | ) | 128 | |||||||||||||||||
|
Guarantor servicing fees
|
— | — | 121 | 121 | — | 121 | ||||||||||||||||||
|
Other income
|
180 | — | 199 | 379 | (356 | ) | 23 | |||||||||||||||||
|
Total other income
|
180 | 469 | 320 | 969 | (357 | ) | 612 | |||||||||||||||||
|
Restructuring expenses
|
49 | 11 | 23 | 83 | — | 83 | ||||||||||||||||||
|
Operating expenses
|
583 | 389 | 256 | 1,228 | 88 | 1,316 | ||||||||||||||||||
|
Total expenses
|
632 | 400 | 279 | 1,311 | 88 | 1,399 | ||||||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
957 | 44 | 47 | 1,048 | (1,190 | ) | (142 | ) | ||||||||||||||||
|
Income tax expense
(benefit)
(1)
|
338 | 23 | 17 | 378 | (454 | ) | (76 | ) | ||||||||||||||||
|
Net income (loss) from continuing operations
|
619 | 21 | 30 | 670 | (736 | ) | (66 | ) | ||||||||||||||||
|
Loss from discontinued operations, net of taxes
|
— | (140 | ) | — | (140 | ) | (3 | ) | (143 | ) | ||||||||||||||
|
Net income (loss)
|
619 | (119 | ) | 30 | 530 | (739 | ) | (209 | ) | |||||||||||||||
|
Less: net income attributable to noncontrolling interest
|
— | 4 | — | 4 | — | 4 | ||||||||||||||||||
|
Net income (loss) attributable to SLM Corporation
|
$ | 619 | $ | (123 | ) | $ | 30 | $ | 526 | $ | (739 | ) | $ | (213 | ) | |||||||||
|
Economic Floor Income (net of tax) not included in “Core
Earnings”
|
$ | 55 | $ | — | $ | — | $ | 55 | ||||||||||||||||
| (1) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. | |
| (2) | “Core Earnings” adjustments to GAAP: |
| Year Ended December 31, 2008 | ||||||||||||||||||||
|
Net Impact
|
Net Impact
|
Net Impact
|
||||||||||||||||||
|
of
|
of
|
Net Impact
|
of
|
|||||||||||||||||
|
Securitization
|
Derivative
|
of
|
Acquired
|
|||||||||||||||||
|
(Dollars in millions)
|
Accounting | Accounting | Floor Income | Intangibles | Total | |||||||||||||||
|
Net interest income (loss)
|
$ | (837 | ) | $ | (115 | ) | $ | (102 | ) | $ | — | $ | (1,054 | ) | ||||||
|
Less: provisions for loan losses
|
(309 | ) | — | — | — | (309 | ) | |||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
(528 | ) | (115 | ) | (102 | ) | — | (745 | ) | |||||||||||
|
Contingency fee revenue
|
— | — | — | — | — | |||||||||||||||
|
Collections revenue
|
(1 | ) | — | — | — | (1 | ) | |||||||||||||
|
Guarantor servicing fees
|
— | — | — | — | — | |||||||||||||||
|
Other income
|
89 | (445 | ) | — | — | (356 | ) | |||||||||||||
|
Total other income (loss)
|
88 | (445 | ) | — | — | (357 | ) | |||||||||||||
|
Restructuring expenses
|
— | — | — | — | — | |||||||||||||||
|
Operating expenses
|
2 | — | — | 86 | 88 | |||||||||||||||
|
Total expenses
|
2 | — | — | 86 | 88 | |||||||||||||||
|
Income (loss) from continuing operations, before income tax
benefit
|
(442 | ) | (560 | ) | (102 | ) | (86 | ) | (1,190 | ) | ||||||||||
|
Loss from discontinued operations, net of taxes
|
— | — | — | (3 | ) | (3 | ) | |||||||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | (442 | ) | $ | (560 | ) | $ | (102 | ) | $ | (89 | ) | (1,193 | ) | ||||||
|
Income tax benefit
|
(454 | ) | ||||||||||||||||||
|
Less: net income attributable to noncontrolling interest
|
— | |||||||||||||||||||
|
Net loss attributable to SLM Corporation
|
$ | (739 | ) | |||||||||||||||||
F-103
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 20. | Segment Reporting (Continued) |
| Year Ended December 31, 2007 | ||||||||||||||||||||||||
|
Corporate
|
Total “Core
|
Total
|
||||||||||||||||||||||
| Lending | APG | and Other | Earnings” | Adjustments (2) | GAAP | |||||||||||||||||||
|
(Dollars in millions)
|
||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||
|
FFELP Stafford and Other Student Loans
|
$ | 2,848 | $ | — | $ | — | $ | 2,848 | $ | (787 | ) | $ | 2,061 | |||||||||||
|
FFELP Consolidation Loans
|
5,522 | — | — | 5,522 | (1,179 | ) | 4,343 | |||||||||||||||||
|
Private Education Loans
|
2,835 | — | — | 2,835 | (1,379 | ) | 1,456 | |||||||||||||||||
|
Other loans
|
106 | — | — | 106 | — | 106 | ||||||||||||||||||
|
Cash and investments
|
868 | — | 21 | 889 | (181 | ) | 708 | |||||||||||||||||
|
Total interest income
|
12,179 | — | 21 | 12,200 | (3,526 | ) | 8,674 | |||||||||||||||||
|
Total interest expense
|
9,597 | 27 | 21 | 9,645 | (2,559 | ) | 7,086 | |||||||||||||||||
|
Net interest income (loss)
|
2,582 | (27 | ) | — | 2,555 | (967 | ) | 1,588 | ||||||||||||||||
|
Less: provisions for loan losses
|
1,394 | — | 1 | 1,395 | (380 | ) | 1,015 | |||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
1,188 | (27 | ) | (1 | ) | 1,160 | (587 | ) | 573 | |||||||||||||||
|
Contingency fee revenue
|
— | 336 | — | 336 | — | 336 | ||||||||||||||||||
|
Collections revenue
|
— | 217 | — | 217 | 3 | 220 | ||||||||||||||||||
|
Guarantor servicing fees
|
— | — | 156 | 156 | — | 156 | ||||||||||||||||||
|
Other income
|
194 | — | 218 | 412 | (679 | ) | (267 | ) | ||||||||||||||||
|
Total other income
|
194 | 553 | 374 | 1,121 | (676 | ) | 445 | |||||||||||||||||
|
Restructuring expenses
|
19 | 2 | 2 | 23 | — | 23 | ||||||||||||||||||
|
Operating expenses
|
690 | 361 | 339 | 1,390 | 97 | 1,487 | ||||||||||||||||||
|
Total expenses
|
709 | 363 | 341 | 1,413 | 97 | 1,510 | ||||||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
673 | 163 | 32 | 868 | (1,360 | ) | (492 | ) | ||||||||||||||||
|
Income tax expense
(benefit)
(1)
|
249 | 60 | 12 | 321 | 87 | 408 | ||||||||||||||||||
|
Net income (loss) from continuing operations
|
424 | 103 | 20 | 547 | (1,447 | ) | (900 | ) | ||||||||||||||||
|
Income from discontinued operations, net of taxes
|
— | 15 | — | 15 | (9 | ) | 6 | |||||||||||||||||
|
Net income (loss)
|
424 | 118 | 20 | 562 | (1,456 | ) | (894 | ) | ||||||||||||||||
|
Less: net income attributable to noncontrolling interest
|
— | 2 | — | 2 | — | 2 | ||||||||||||||||||
|
Net income (loss) attributable to SLM Corporation
|
$ | 424 | $ | 116 | $ | 20 | $ | 560 | $ | (1,456 | ) | $ | (896 | ) | ||||||||||
|
Economic Floor Income (net of tax) not included in “Core
Earnings”
|
$ | 8 | $ | — | $ | — | $ | 8 | ||||||||||||||||
| (1) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. | |
| (2) | ““Core Earnings” adjustments to GAAP: |
| Year Ended December 31, 2007 | ||||||||||||||||||||
|
Net Impact
|
Net Impact
|
Net Impact
|
||||||||||||||||||
|
of
|
of
|
Net Impact
|
of
|
|||||||||||||||||
|
Securitization
|
Derivative
|
of
|
Acquired
|
|||||||||||||||||
|
(Dollars in millions)
|
Accounting | Accounting | Floor Income | Intangibles | Total | |||||||||||||||
|
Net interest income (loss)
|
$ | (816 | ) | $ | 18 | $ | (169 | ) | $ | — | $ | (967 | ) | |||||||
|
Less: provisions for loan losses
|
(380 | ) | — | — | — | (380 | ) | |||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
(436 | ) | 18 | (169 | ) | — | (587 | ) | ||||||||||||
|
Contingency fee revenue
|
— | — | — | — | — | |||||||||||||||
|
Collections revenue
|
3 | — | — | — | 3 | |||||||||||||||
|
Guarantor servicing fees
|
— | — | — | — | — | |||||||||||||||
|
Other income
|
680 | (1,359 | ) | — | — | (679 | ) | |||||||||||||
|
Total other income (loss)
|
683 | (1,359 | ) | — | — | (676 | ) | |||||||||||||
|
Restructuring expenses
|
— | — | — | — | — | |||||||||||||||
|
Operating expenses
|
— | — | — | 97 | 97 | |||||||||||||||
|
Total expenses
|
— | — | — | 97 | 97 | |||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense
|
247 | (1,341 | ) | (169 | ) | (97 | ) | (1,360 | ) | |||||||||||
|
Loss from discontinued operations, net of taxes
|
— | — | — | (9 | ) | (9 | ) | |||||||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | 247 | $ | (1,341 | ) | $ | (169 | ) | $ | (106 | ) | (1,369 | ) | |||||||
|
Income tax expense
|
87 | |||||||||||||||||||
|
Less: net income attributable to noncontrolling interest
|
— | |||||||||||||||||||
|
Net loss attributable to SLM Corporation
|
$ | (1,456 | ) | |||||||||||||||||
F-104
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 20. | Segment Reporting (Continued) |
Summary
of “Core Earnings” Adjustments to GAAP
The adjustments required to reconcile from the Company’s
“Core Earnings” results to its GAAP results of
operations relate to differing treatments for securitization
transactions, derivatives, Floor Income, and certain other items
that management does not consider in evaluating the
Company’s operating results. The following table reflects
aggregate adjustments associated with these areas for the years
ended December 31, 2009, 2008, and 2007.
| Years Ended December 31, | ||||||||||||
|
(Dollars in millions)
|
2009 | 2008 | 2007 | |||||||||
|
“Core Earnings” adjustments to GAAP:
|
||||||||||||
|
Net impact of securitization
accounting
(1)
|
$ | (201 | ) | $ | (442 | ) | $ | 247 | ||||
|
Net impact of derivative
accounting
(2)
|
(306 | ) | (560 | ) | (1,341 | ) | ||||||
|
Net impact of Floor
Income
(3)
|
129 | (102 | ) | (169 | ) | |||||||
|
Net impact of acquired
intangibles
(4)
|
(76 | ) | (89 | ) | (106 | ) | ||||||
|
Net tax
effect
(5)
|
181 | 454 | (87 | ) | ||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | (273 | ) | $ | (739 | ) | $ | (1,456 | ) | |||
| (1) | Securitization accounting: Under GAAP, certain securitization transactions in the Company’s Lending operating segment are accounted for as sales of assets. Under “Core Earnings” for the Lending operating segment, the Company presents all securitization transactions on a “Core Earnings” basis as long-term non-recourse financings. The upfront “gains” on sale from securitization transactions, as well as ongoing “servicing and securitization revenue” presented in accordance with GAAP, are excluded from “Core Earnings” and are replaced by interest income, provisions for loan losses, and interest expense as earned or incurred on the securitization loans. The Company also excludes transactions with its off-balance sheet trusts from “Core Earnings” as they are considered intercompany transactions on a “Core Earnings” basis. | |
| (2) | Derivative accounting: “Core Earnings” exclude periodic unrealized gains and losses that are caused primarily by the mark-to-market derivative valuations prescribed by ASC 815 on derivatives that do not qualify for “hedge treatment” under GAAP. These unrealized gains and losses occur in the Company’s Lending operating segment. In the Company’s “Core Earnings” presentation, the Company recognizes the economic effect of these hedges, which generally results in any cash paid or received being recognized ratably as an expense or revenue over the hedged item’s life. | |
| (3) | Floor Income: The timing and amount (if any) of Floor Income earned in the Company’s Lending operating segment is uncertain and in excess of expected spreads. Therefore, the Company only includes such income in “Core Earnings” when it is Fixed Rate Floor Income that is economically hedged. The Company employs derivatives, primarily Floor Income Contracts and futures, to economically hedge Floor Income. As discussed above in “Derivative Accounting,” these derivatives do not qualify as effective accounting hedges, and therefore, under GAAP, they are marked-to-market through the “gains (losses) on derivative and hedging activities, net” line in the consolidated statement of income with no offsetting gain or loss recorded for the economically hedged items. For “Core Earnings,” the Company reverses the fair value adjustments on the Floor Income Contracts and futures economically hedging Floor Income and include in income the amortization of net premiums received on contracts economically hedging Fixed Rate Floor Income. | |
| (4) | Acquired Intangibles: The Company excludes goodwill and intangible impairment and amortization of acquired intangibles. | |
| (5) | Net Tax Effect: Such tax effect is based upon the Company’s “Core Earnings” effective tax rate for the year. The net tax effect for the year ended December 31, 2007 includes the impact of the exclusion of the permanent income tax impact of the equity forward contracts. The Company settled all of its equity forward contracts in January 2008. |
F-105
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 20. | Segment Reporting (Continued) |
| 21. | Discontinued Operations |
In the fourth quarter of 2009, the Company sold all of the
assets in its Purchased Paper — Mortgage/Properties
business for $280 million, resulting in an after-tax loss
of $95 million. The Purchased Paper —
Mortgage/Properties business is considered a
“Component” of the Company’s APG reporting unit
in accordance with ASC 360 as the business comprises operations
and cash flows that can be clearly distinguished operationally
and for financial reporting purposes, from the rest of the
Company. In accordance with ASC 205, this Component is presented
as discontinued operations as (1) the operations and cash
flows of the Component have been eliminated from the ongoing
operations of the Company as of December 31, 2009, and
(2) the Company will have no continuing involvement in the
operations of this Component subsequent to the sale.
The following table summarizes the discontinued assets and
liabilities of Purchased Paper — Mortgage/Properties
business at December 31, 2009 and 2008, respectively.
| At December 31, | ||||||||||||
| 2009 | 2008 | |||||||||||
|
Assets:
|
||||||||||||
|
Cash and equivalents
|
$ | 351 | $ | 11,635 | ||||||||
|
Other assets
|
34,072 | 788,163 | ||||||||||
|
Assets of discontinued operations
|
$ | 34,423 | $ | 799,798 | ||||||||
|
Liabilities:
|
||||||||||||
|
Liabilities of discontinued operations
|
$ | 29,796 | $ | 753,638 | ||||||||
At December 31, 2009, other assets of the Company’s
discontinued operations consist of a receivable from SLM
Corporation associated with the 2009 net operating loss
generated by its discontinued operations, which has been
utilized by SLM Corporation and its subsidiaries in its 2009
consolidated U.S. federal income tax return. At
December 31, 2009, liabilities of the Company’s
discontinued operations consist primarily of estimated reserves
associated with certain recourse and buy-back provisions
associated with the asset sale, as well as restructuring
liabilities related to severance and contract termination costs.
The following table summarizes the discontinued operations for
the years ended December 31, 2009, 2008 and 2007,
respectively.
| Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Operations:
|
||||||||||||
|
Income (loss) from discontinued operations before income taxes
|
$ | (217,083 | ) | $ | (234,024 | ) | $ | 10,284 | ||||
|
Income tax expense (benefit)
|
(59,393 | ) | (90,805 | ) | 4,008 | |||||||
|
Income (loss) from discontinued operations, net of taxes
|
$ | (157,690 | ) | $ | (143,219 | ) | $ | 6,276 | ||||
|
Disposal:
|
||||||||||||
|
Loss on disposal before income taxes
|
$ | (118,761 | ) | $ | — | $ | — | |||||
|
Income tax benefit
|
(23,053 | ) | — | — | ||||||||
|
Loss on disposal, net of taxes
|
$ | (95,708 | ) | $ | — | $ | — | |||||
F-106
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 22. | Quarterly Financial Information (unaudited) |
| 2009 | ||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
|
Net interest income
|
$ | 215,063 | $ | 383,701 | $ | 525,176 | $ | 598,786 | ||||||||
|
Less: provisions for loan losses
|
250,279 | 278,112 | 321,127 | 269,442 | ||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
(35,216 | ) | 105,589 | 204,049 | 329,344 | |||||||||||
|
Gains (losses) on derivative and hedging activities, net
|
104,025 | (561,795 | ) | (111,556 | ) | (35,209 | ) | |||||||||
|
Other income
|
249,632 | 608,626 | 469,051 | 663,572 | ||||||||||||
|
Restructuring expenses
|
3,773 | 3,333 | 2,492 | 4,169 | ||||||||||||
|
Operating expenses
|
295,116 | 308,164 | 312,904 | 339,122 | ||||||||||||
|
Income tax expense (benefit)
|
(5,517 | ) | (43,110 | ) | 80,423 | 206,568 | ||||||||||
|
Net income (loss) from continuing operations
|
25,069 | (115,967 | ) | 165,725 | 407,848 | |||||||||||
|
Loss from discontinued operations, net of taxes
|
(46,174 | ) | (6,542 | ) | (6,417 | ) | (98,557 | ) | ||||||||
|
Net income (loss)
|
(21,105 | ) | (122,509 | ) | 159,308 | 309,291 | ||||||||||
|
Less: net income attributable to noncontrolling interest
|
281 | 211 | 198 | 157 | ||||||||||||
|
Net income (loss) attributable to SLM Corporation
|
(21,386 | ) | (122,720 | ) | 159,110 | 309,134 | ||||||||||
|
Preferred stock dividends
|
26,395 | 25,800 | 42,627 | 51,014 | ||||||||||||
|
Net income (loss) attributable to SLM Corporation common stock
|
$ | (47,781 | ) | $ | (148,520 | ) | $ | 116,483 | $ | 258,120 | ||||||
|
Basic earnings (loss) per common share:
|
||||||||||||||||
|
Earnings (loss) from continuing operations
|
$ | — | $ | (.31 | ) | $ | .26 | $ | .74 | |||||||
|
Earnings (loss) from discontinued operations
|
(.10 | ) | (.01 | ) | (.01 | ) | (.20 | ) | ||||||||
|
Earnings (loss) from net income
|
$ | (.10 | ) | $ | (.32 | ) | $ | .25 | $ | .54 | ||||||
|
Diluted earnings (loss) per common share:
|
||||||||||||||||
|
Earnings (loss) from continuing operations
|
$ | — | $ | (.31 | ) | $ | .26 | $ | .71 | |||||||
|
Earnings (loss) from discontinued operations
|
(.10 | ) | (.01 | ) | (.01 | ) | (.19 | ) | ||||||||
|
Earnings (loss) from net income
|
$ | (.10 | ) | $ | (.32 | ) | $ | .25 | $ | .52 | ||||||
F-107
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 22. | Quarterly Financial Information (unaudited) (Continued) |
| 2008 | ||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
|
Net interest income
|
$ | 276,369 | $ | 402,543 | $ | 474,749 | $ | 210,559 | ||||||||
|
Less: provisions for loan losses
|
137,311 | 143,015 | 186,909 | 252,415 | ||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
139,058 | 259,528 | 287,840 | (41,856 | ) | |||||||||||
|
Gains (losses) on derivative and hedging activities, net
|
(272,796 | ) | 362,043 | (241,757 | ) | (292,903 | ) | |||||||||
|
Other income
|
338,859 | 230,390 | 199,895 | 287,922 | ||||||||||||
|
Restructuring expenses
|
20,520 | 46,740 | 10,508 | 5,748 | ||||||||||||
|
Operating expenses
|
346,046 | 344,302 | 353,739 | 270,864 | ||||||||||||
|
Income tax expense (benefit)
|
(60,725 | ) | 167,519 | (51,301 | ) | (132,263 | ) | |||||||||
|
Net income (loss) from continuing operations
|
(100,720 | ) | 293,400 | (66,968 | ) | (191,186 | ) | |||||||||
|
Loss from discontinued operations, net of taxes
|
(3,149 | ) | (24,738 | ) | (91,029 | ) | (24,304 | ) | ||||||||
|
Net income (loss)
|
(103,869 | ) | 268,662 | (157,997 | ) | (215,490 | ) | |||||||||
|
Less: net income attributable to noncontrolling interest
|
(65 | ) | 2,926 | 544 | 527 | |||||||||||
|
Net income (loss) attributable to SLM Corporation
|
(103,804 | ) | 265,736 | (158,541 | ) | (216,017 | ) | |||||||||
|
Preferred stock dividends
|
29,025 | 27,391 | 27,474 | 27,316 | ||||||||||||
|
Net income (loss) attributable to SLM Corporation common stock
|
$ | (132,829 | ) | $ | 238,345 | $ | (186,015 | ) | $ | (243,333 | ) | |||||
|
Basic earnings (loss) per common share:
|
||||||||||||||||
|
Earnings (loss) from continuing operations
|
$ | (.27 | ) | $ | .56 | $ | (.20 | ) | $ | (.47 | ) | |||||
|
Earnings (loss) from discontinued operations
|
(.01 | ) | (.05 | ) | (.20 | ) | (.05 | ) | ||||||||
|
Earnings (loss) from net income
|
$ | (.28 | ) | $ | .51 | $ | (.40 | ) | $ | (.52 | ) | |||||
|
Diluted earnings (loss) per common share:
|
||||||||||||||||
|
Earnings (loss) from continuing operations
|
$ | (.27 | ) | $ | .55 | $ | (.20 | ) | $ | (.47 | ) | |||||
|
Earnings (loss) from discontinued operations
|
(.01 | ) | (.05 | ) | (.20 | ) | (.05 | ) | ||||||||
|
Earnings (loss) from net income
|
$ | (.28 | ) | $ | .50 | $ | (.40 | ) | $ | (.52 | ) | |||||
F-108
APPENDIX A
FEDERAL
FAMILY EDUCATION LOAN PROGRAM
General
The Federal Family Education Loan Program, known as FFELP, under
Title IV of the Higher Education Act (“HEA”),
provides for loans to students who are enrolled in eligible
institutions, or to parents of dependent students who are
enrolled in eligible institutions, to finance their educational
costs. As further described below, payment of principal and
interest on the student loans is guaranteed by a state or
not-for-profit
guarantee agency against:
| • | default of the borrower; | |
| • | the death, bankruptcy or permanent, total disability of the borrower; | |
| • | closing of the student’s school prior to the end of the academic period; | |
| • | false certification of the borrower’s eligibility for the loan by the school; and | |
| • | an unpaid school refund. |
Subject to conditions, a program of federal reinsurance under
the HEA entitles guarantee agencies to reimbursement from the
U.S. Department of Education (“ED”) for between
75 percent and 100 percent of the amount of each
guarantee payment. In addition to the guarantee, the holder of
student loans is entitled to receive interest subsidy payments
and special allowance payments from ED on eligible student
loans. Special allowance payments raise the yield to student
loan lenders when the statutory borrower interest rate is below
an indexed market value.
Four types of FFELP student loans are currently authorized under
the HEA:
| • | Subsidized Federal Stafford Loans to students who demonstrate requisite financial need; | |
| • | Unsubsidized Federal Stafford Loans to students who either do not demonstrate financial need or require additional loans to supplement their Subsidized Stafford Loans; | |
| • | Federal PLUS Loans to graduate or professional students (effective July 1, 2006) or parents of dependent students whose estimated costs of attending school exceed other available financial aid; and | |
| • | FFELP Consolidation Loans, which consolidate into a single loan a borrower’s obligations under various federally authorized student loan programs. |
Before July 1, 1994, the HEA also authorized loans called
“Supplemental Loans to Students” or “SLS
Loans” to independent students and, under some
circumstances, dependent undergraduate students, to supplement
their Subsidized Stafford Loans. The SLS program was replaced by
the Unsubsidized Stafford Loan program.
This appendix describes or summarizes the material provisions of
Title IV of the HEA, the FFELP and related statutes and
regulations. It, however, is not complete and is qualified in
its entirety by reference to each actual statute and regulation.
Both the HEA and the related regulations have been the subject
of extensive amendments over the years. The Company cannot
predict whether future amendments or modifications might
materially change any of the programs described in this appendix
or the statutes and regulations that implement them.
Legislative
Matters
The FFELP is subject to comprehensive reauthorization at least
every 5 years and to frequent statutory and regulatory
changes. The most recent reauthorization was the Higher
Education Opportunity Act of 2008 (“HEOA 2008”),
Public Law
110-315,
which the President signed into law August 14, 2008.
A-1
Other recent amendments since the program was previously
reauthorized by the Higher Education Reconciliation Act of 2005
(“HERA 2005”), which was signed into law
February 8, 2006, as part of the Deficit Reduction Act,
Public Law
109-171,
include the Ensuring Continued Access to Student Loans Act of
2008, Public Law
110-227
(May 7, 2008), and the College Cost Reduction and
Access Act (“CCRAA”), Public Law
110-84
(September 27, 2007), and other ED amendments to the FFELP
regulations on November 1, 2007 and October 23, 2008.
Previous legislation includes the Ticket to Work and Work
Incentives Improvement Act of 1999, by Public Law
106-554
(December 21, 2000), the Consolidated Appropriations Act of
2001, by Public Law
107-139,
(February 8, 2002) by Public Law
108-98
(October 10, 2003), and by Public Law
108-409
(October 30, 2004). Since HERA 2005, the HEA was amended by
the Third Higher Education Extension Act of 2006
(“THEEA”), Public Law
109-292
(September 30, 2006).
In 1993 Congress created the William D. Ford Federal Direct Loan
Program (“DSLP”) under which Stafford, PLUS and
Consolidation Loans are funded directly by the
U.S. Department of Treasury. Each eligible school
determines whether it will participate in the FFELP or DSLP or
both.
The 1998 reauthorization extended the principal provisions of
the FFELP and the DSLP to October 1, 2004. This
legislation, as modified by the 1999 act, lowered both the
borrower interest rate on Stafford Loans to a formula based on
the
91-day
Treasury bill rate plus 2.3 percent (1.7 percent
during in-school, grace and deferment periods) and the
lender’s rate after special allowance payments to the
91-day
Treasury bill rate plus 2.8 percent (2.2 percent
during in-school, grace and deferment periods) for loans
originated on or after October 1, 1998. The borrower
interest rate on PLUS Loans originated during this period is
equal to the
91-day
Treasury bill rate plus 3.1 percent.
The 1999 and 2001 acts changed the financial index on which
special allowance payments are computed on new loans from the
91-day
Treasury bill rate to the three-month commercial paper rate
(financial) for FFELP loans disbursed on or after
January 1, 2000. For these FFELP loans, the special
allowance payments to lenders are based upon the three-month
commercial paper (financial) rate plus 2.34 percent
(1.74 percent during in-school, grace and deferment
periods) for Stafford Loans and 2.64 percent for PLUS and
FFELP Consolidation Loans. The 1999 act did not change the rate
that the borrower pays on FFELP loans.
The 2000 act changed the financial index on which the interest
rate for some borrowers of SLS and PLUS Loans are computed. The
index was changed from the
1-year
Treasury bill rate to the weekly average one-year constant
maturity Treasury yield. The 2002 act changed the interest rate
paid by borrowers beginning in fiscal year 2006 to a fixed rate
of 6.8 percent for Stafford Loans and 7.9 percent for
PLUS Loans, which has since been increased to 8.5 percent
by the HERA 2005.
The 1998 reauthorization and P.L.
107-139
set
the borrower interest rates on FFELP and DSLP Consolidation
Loans for borrowers whose applications are received before
July 1, 2003 at a fixed rate equal to the lesser of the
weighted average of the interest rates of the loans
consolidated, adjusted up to the nearest one-eighth of one
percent, and 8.25 percent. The 1998 legislation, as
modified by the 1999 and 2002 acts, sets the Special Allowance
Payment (“SAP”) rate for FFELP loans at the
three-month commercial paper rate plus 2.64 percent for
loans disbursed on or after January 1, 2000. Lenders of
FFELP Consolidation Loans pay a rebate fee of 1.05 percent
per annum to ED. All other guaranty fees may be passed on to the
borrower.
The 2004 act increased the teacher loan forgiveness level for
certain Stafford Loan borrowers, and modified the special
allowance calculation for loans made with proceeds of tax-exempt
obligations.
The Higher Education Reconciliation Act of 2005 reauthorized the
loan programs of the HEA through September 30, 2012. Major
provisions, which became effective July 1, 2006 (unless
stated otherwise), include:
| • | Change to a fixed 6.8 percent interest rate for Stafford Loans. | |
| • | Increases the scheduled change to a fixed PLUS interest rate from 7.9 percent to 8.5 percent in the FFELP. |
A-2
| • | Permanently modifies the minimum special allowance calculation for loans made with proceeds of tax-exempt obligations. | |
| • | Requires submission of Floor Income to the government on loans made on or after April 1, 2006. | |
| • | Repeals limitations on special allowance for PLUS Loans made on and after January 1, 2000. | |
| • | Increases first and second year Stafford loan limits from $2,625 and $3,500 to $3,500 and $4,500 respectively (effective July 1, 2007). | |
| • | Increases graduate and professional student unsubsidized Stafford Loan limits from $10,000 to $12,000 (effective July 1, 2007). | |
| • | Authorizes graduate and professional students to borrow PLUS Loans. | |
| • | Reduces insurance from 98 percent to 97 percent for new loans beginning July 1, 2006. | |
| • | Phases out the Stafford Loan origination fee by 2010. | |
| • | Reduces insurance for Exceptional Performers from 100 percent to 99 percent. | |
| • | Repeals in-school consolidation, spousal consolidation, reconsolidation, and aligns loan consolidation terms in the FFELP and DSLP. | |
| • | Mandates the deposit of a one percent federal default fee into a guaranty agency’s Federal Fund, which may be deducted from loan proceeds. | |
| • | Repeals the guaranty agency Account Maintenance Fee cap (effective FY 2007). | |
| • | Reduces Guarantor retention of collection fees on defaulted FFELP Consolidation Loans from 18.5 percent to 10 percent (effective October 1, 2006). | |
| • | Provides a discharge for loans that are falsely certified as a result of identity theft. | |
| • | Provides 100 percent insurance on ineligible loans due to false or erroneous information on loans made on or after July 1, 2006. | |
| • | Allows for a 3-year military deferment for a borrower’s loans made on or after July 1, 2001. | |
| • | Reduces the monthly payment remittance needed to rehabilitate defaulted loans from 12 to 9. | |
| • | Increases from 10 percent to 15 percent the amount of disposable pay a guaranty agency may garnish without borrower consent. | |
| • | Streamlines mandatory forbearances to accommodate verbal requests. |
The changes made by THEEA include:
| • | Restrictions on the use of eligible lender trustees by schools that make FFELP loans; | |
| • | New discharge provisions for Title IV loans for the survivors of eligible public servants and certain other eligible victims of the terrorist attacks on the United States on September 11, 2001; and | |
| • | A technical modification to the HEA provision governing account maintenance fees that are paid to guaranty agencies in the FFELP. |
Major changes made by the CCRAA, which were effective
October 1, 2007 (unless stated otherwise), include:
| • | Reduces special allowance payments to for-profit lenders and not-for-profit lenders for both Stafford and Consolidation Loans disbursed on or after October 1, 2007 by 0.55 percentage points and 0.40 percentage points, respectively; |
A-3
| • | Reduces special allowance payments to for-profit lenders and not-for-profit lenders for PLUS Loans disbursed on or after October 1, 2007 by 0.85 percentage points and 0.70 percentage points, respectively; | |
| • | Reduces fixed interest rates on subsidized Stafford Loans to undergraduates from the current 6.8% to 6.0% for loans disbursed beginning July 1, 2008, to 5.6% for loans disbursed beginning July 1, 2009, to 4.5% for loans disbursed beginning July 1, 2010, and to 3.4% for loans disbursed beginning July 1, 2011 through June 30, 2012. Absent any other legislative changes, the rates would revert to 6.8% for loans disbursed on or after July 1, 2012; | |
| • | Increases the lender loan fees on all loan types, from 0.5 percent to 1.0 percent; | |
| • | Reduces default insurance to 95 percent of the unpaid principal and accrued interest for loans first disbursed on or after October 1, 2012; | |
| • | Eliminates Exceptional Performer designation (and the monetary benefit associated with it) effective October 1, 2007. | |
| • | Reduces default collections retention by guaranty agencies from 23 percent to 16 percent. | |
| • | Reduces the guaranty agency account maintenance fee from 0.10 percent to 0.06 percent. | |
| • | Requires ED to develop and implement a pilot auction for participation in the FFELP Parent PLUS Loan program, by state, effective July 1, 2009. | |
| • | Provides loan forgiveness for all DSLP borrowers, and FFELP borrowers that consolidate in the DSLP, in certain public service jobs who make 120 monthly payments. | |
| • | Expands the deferment authority for borrowers due to an economic hardship and military service. | |
| • | Establishes a new income-based repayment program starting July 1, 2009 for all loans except for parent PLUS Loans and Consolidation Loans that discharged such loans, which includes the potential for loan forgiveness after 25 years. |
The ECASLA provisions, which were effective May 5, 2008
(unless stated otherwise), include:
| • | Increases Unsubsidized Stafford Loan limits for undergraduate students for loans first disbursed on or after July 1, 2008 — |
| • | by $2,000 for the annual limit | |
| • | and to $31,000 and $57,500 as the aggregate limits for dependent students and independent students respectively. |
| • | Requires, effective for loans first disbursed on or after July 1, 2008, that repayment of a parent PLUS Loan begin no later than 60 days after the final disbursement with interest accrued prior to the beginning of repayment added to the loan principal, or the day after 6 months from the date the dependent student is no longer enrolled at least half time, in which case interest accrued prior to the beginning of repayment may be paid monthly or quarterly, or capitalized no more frequently than quarterly, if agreed by the borrower and lender. | |
| • | Removes specification that the repayment period of a PLUS Loan begins on the date of the final disbursement and excludes deferment and forbearance periods for loans first disbursed on or after July 1, 2008. | |
| • | Allows extenuating circumstances for credit requirement purposes for a PLUS Loan if the applicant is up to 180 days delinquent on mortgage or medical bill payments or not more than 89 days delinquent on any other debt during the period January 1, 2007, through December 31, 2009. | |
| • | Broadens lender of last resort (LLR) provisions so they include subsidized and unsubsidized Stafford Loans and PLUS Loans, prohibits LLR loans with terms and conditions more favorable than those for |
A-4
| non-LLR loans, and subjects lenders and Guarantors serving as LLRs to prohibitions on inducements and to prohibitions regarding advertising, marketing or promoting LLR loans. |
| • | Gives the Secretary authority until July 1, 2009 (subsequently extended to July 1, 2010 by Public Law 110-350 enacted October 7, 2008), if there is inadequate loan capital, to purchase or enter into forward purchase commitments for Stafford and PLUS Loans first disbursed on or after October 1, 2003 and before July 1, 2009, and makes funds available. Any purchase must be without a net cost to the federal government (including the cost of servicing purchased loans), and funds paid to a lender must be used for the lender’s continued FFELP participations and making of FFELP loans. Authorizes the Secretary to contract for the servicing of purchased FFELP loans, including with selling lenders, as long as the cost is not more than it would be otherwise. |
The Higher Education Opportunity Act of 2008 (HEOA
2008) reauthorized the loan programs of the HEA through
September 30, 2014. Major provisions, which became
effective August 14, 2008 (unless stated otherwise),
include:
| • | Clarifies the repayment period and the terms for commencement of repayment of PLUS Loans made on or after July 1, 2008, (superseding ECASLA provisions) and makes available in-school deferment to parent borrowers when the student beneficiary is enrolled and a 6-month post-enrollment deferment to all PLUS borrowers following any period of enrollment of the borrower or the student beneficiary. | |
| • | Makes Section 207 of the Servicemembers Civil Relief Act applicable to FFELP loans, upon borrower request, reducing the interest rate on such loans to 6% (which encompasses certain fees and other charges), and establishes that as the applicable rate for calculating special allowance payments (for loans made on or after July 1, 2008). | |
| • | Expands the criteria for disability discharge, including qualifying borrowers with a permanent disability rating from the Veterans Administration. | |
| • | Requires a lender to provide information on the impact of interest capitalization when granting deferment on for an unsubsidized Stafford Loan or forbearance for any FFELP loan and, for forbearance, to provide the borrower with specific information about interest and capitalization at least every 180 days during the forbearance. | |
| • | Adds items that the lender must disclose before disbursement and items that the lender must disclose before repayment. | |
| • | Requires a lender to provide a bill or statement that corresponds to each payment installment time period and include specific disclosures (for loans with a first payment due on or after July 1, 2009). | |
| • | Requires a lender to provide specified information to borrowers who notify the lender of difficulty in paying (for loans with a first payment due on or after July 1, 2009) and to borrowers who become 60 days delinquent (for loans that become delinquent on or after July 1, 2009). | |
| • | Eliminates Guarantor and ED obligations for insurance and reinsurance in instances of nondisclosure. | |
| • | Adds income-based repayment to plans the lender must offer (except for parent PLUS Loans and Consolidation Loans that discharged such loans) and adds income-based repayment for FFELP borrowers to repay defaulted loans to ED. | |
| • | Permits borrower eligibility for in-school deferment to be based on National Student Loan Data System information. | |
| • | Adds prohibited inducements that can subject lenders and Guarantors to disqualification from the program and clarifies that both lenders and Guarantors may provide technical assistance comparable to that provided to schools by ED. | |
| • | Allows FFELP borrowers to consolidate directly into the DSLP program to use the zero interest feature available to servicemembers. |
A-5
| • | Requires a consolidation lender to provide disclosures regarding any loss of benefits, availability of repayment plans, and certain other information. | |
| • | Requires the Guarantor to notify a borrower twice of options to remove a loan from default. | |
| • | Limits a borrower to loan rehabilitation once and, upon successful rehabilitation, provides for financial and economic education materials to be available to the borrower and for removal of the default from the borrower’s credit report. | |
| • | Mandates that both the transferor and transferee notify the borrower of certain transfer information when a loan transfer changes the party with which the borrower needs to communicate or send payments. | |
| • | Introduces a forgiveness program to repay FFELP loans and to cancel DSLP (except no parent PLUS Loans) at $2000 per year up to an aggregate of $10,000, for non-defaulted borrowers employed full time in areas of national need (replacing the Child Care Loan Forgiveness Program). Subject to appropriations. | |
| • | Authorizes repayment of FFELP loans (except parent PLUS Loans) at $6,000 per year up to an aggregate of $40,000 for attorneys employed full time as civil legal assistance attorneys. Subject to appropriations. | |
| • | Requires reporting to consumer reporting agencies to indicate that a loan is an education loan and to provide information on repayment status. | |
| • | Requires Guarantors to develop educational programs for budgeting and financial management. | |
| • | Raises to 30% the school cohort default rate for ineligibility effective in 2012. | |
| • | Increases to 15% the maximum cohort default rate for exempting loans from rules that would otherwise require multiple disbursement or delayed disbursement. |
Since the HEOA 2008, technical corrections were made to the HEA
on July 1, 2009 under H.R. 1777, Public Law
111-39,
and
other ED amendments were made to the FFELP regulations on
October 29, 2009.
Eligible
Lenders, Students and Educational Institutions
Lenders eligible to make loans under the FFELP generally include
banks, savings and loan associations, credit unions, pension
funds and, under some conditions, schools and Guarantors. A
student loan may be made to, or on behalf of, a “qualified
student.” A “qualified student” is an individual
who
| • | is a United States citizen, national or permanent resident; | |
| • | has been accepted for enrollment or is enrolled and maintaining satisfactory academic progress at a participating educational institution; and | |
| • | is carrying at least one-half of the normal full-time academic workload for the course of study the student is pursuing. |
A student qualifies for a subsidized Stafford Loan if his family
meets the financial need requirements for the particular loan
program. Only PLUS Loan borrowers have to meet credit standards.
Eligible schools include institutions of higher education,
including proprietary institutions, meeting the standards
provided in the HEA. For a school to participate in the program,
ED must approve its eligibility under standards established by
regulation.
Financial
Need Analysis
Subject to program limits and conditions, student loans
generally are made in amounts sufficient to cover the
student’s estimated costs of attending school, including
tuition and fees, books, supplies, room and board,
transportation and miscellaneous personal expenses as determined
by the institution. Generally, each loan
A-6
applicant (and parents in the case of a dependent child) must
undergo a financial need analysis. This requires the applicant
(and parents in the case of a dependent child) to submit
financial data to a federal processor. The federal processor
evaluates the parents’ and student’s financial
condition under federal guidelines and calculates the amount
that the student and the family are expected to contribute
towards the student’s cost of education. After receiving
information on the family contribution, the institution then
subtracts the family contribution from the student’s
estimated costs of attending to determine the student’s
need for financial aid. Some of this need may be met by grants,
scholarships, institutional loans and work assistance. A
student’s “unmet need” is further reduced by the
amount of loans for which the borrower is eligible.
Special
Allowance Payments (“SAP”)
The HEA provides for quarterly special allowance payments to be
made by ED to holders of student loans to the extent necessary
to ensure that they receive at least specified market interest
rates of return. The rates for special allowance payments depend
on formulas that vary according to the type of loan, the date
the loan was made and the type of funds, tax-exempt or taxable,
used to finance the loan. ED makes a SAP for each calendar
quarter.
The SAP equals the average unpaid principal balance, including
interest which has been capitalized, of all eligible loans held
by a holder during the quarterly period multiplied by the
special allowance percentage.
For student loans disbursed before January 1, 2000, the
special allowance percentage is computed by:
(1) determining the average of the bond equivalent rates of
91-day
Treasury bills auctioned for that quarter;
(2) subtracting the applicable borrower interest rate;
(3) adding the applicable special allowance margin
described in the table below; and
(4) dividing the resultant percentage by 4.
If the result is negative, the SAP is zero.
|
Date of First Disbursement
|
Special Allowance Margin
|
|
|
Before 10/17/86
|
3.50% | |
|
From 10/17/86 through 09/30/92
|
3.25% | |
|
From 10/01/92 through 06/30/95
|
3.10% | |
|
From 07/01/95 through 06/30/98
|
2.50% for Stafford Loans that are in In-School, Grace or Deferment 3.10% for Stafford Loans that are in Repayment and all other loans | |
|
From 07/01/98 through 12/31/99
|
2.20% for Stafford Loans that are in In-School, Grace or Deferment 2.80% for Stafford Loans that are in Repayment 3.10% for PLUS, SLS and FFELP Consolidation Loans |
For student loans disbursed on or after January 1, 2000,
the special allowance percentage is computed by:
(1) determining the average of the bond equivalent rates of
3-month
commercial paper (financial) rates quoted for that quarter;
(2) subtracting the applicable borrower interest rate;
(3) adding the applicable special allowance margin
described in the table below; and
(4) dividing the resultant percentage by 4.
If the result is negative, the SAP is zero.
A-7
|
Date of First Disbursement
|
Special Allowance Margin
|
|
|
From 01/01/00 through 09/30/07
|
1.74% for Stafford Loans that are in In-School, Grace or Deferment | |
| 2.34% for Stafford Loans that are in Repayment | ||
| 2.64% for PLUS and FFELP Consolidation Loans | ||
|
From 10/01/07 and after
|
1.19% for Stafford Loans that are in In-School, Grace or Deferment | |
| 1.79% for Stafford Loans that are in Repayment and PLUS | ||
| 2.09% for FFELP Consolidation Loans | ||
| Note: The margins for loans held by an eligible not-for-profit holder is higher by 15 basis points. |
| • | Special Allowance Payments are available on variable rate PLUS Loans and SLS Loans only if the variable rate, which is reset annually, exceeds the applicable maximum borrower rate. Effective July 1, 2006, this limitation on special allowance for PLUS Loans made on and after January 1, 2000 is repealed. The variable rate is based on the weekly average one-year constant maturity Treasury yield for loans made before July 1, 1998 and based on the 91-day Treasury bill for loans made on or after July 1, 1998. The maximum borrower rate for these loans is between 9 percent and 12 percent. |
Fees
Origination Fee.
An origination fee must be
paid to ED for all Stafford and PLUS Loans originated in the
FFELP. An origination fee is not paid on a Consolidation Loan.
A 3% origination fee must be deducted from the amount of each
PLUS Loan.
An origination fee may be, but is not required to be, deducted
from the amount of a Stafford loan according to the following
table:
|
Date of First Disbursement
|
Maximum Origination Fee | |||
|
Before 07/01/06
|
3 | % | ||
|
From 7/01/06 through 06/30/07
|
2 | % | ||
|
From 7/01/07 through 06/30/08
|
1.5 | % | ||
|
From 7/01/08 through 06/30/09
|
1 | % | ||
|
From 7/01/09 through 06/30/10
|
.5 | % | ||
|
From 7/01/10 and after
|
0 | % | ||
Federal Default Fee.
A federal default fee up
to 1% (previously called an insurance premium) may be, but is
not required to be, deducted from the amount of a Stafford and
PLUS Loan. A federal default fee is not deducted from the amount
of a Consolidation Loan.
Lender Loan Fee.
A lender loan fee is paid to
ED on the amount of each loan disbursement of all FFELP loans.
For loans disbursed from October 1, 1993 to
September 30, 2007, the fee was .50% of the loan amount.
The fee increased to 1.0% of the loan amount for loans disbursed
on or after October 1, 2007.
Loan Rebate Fee.
A loan rebate fee of 1.05% is
paid annually on the unpaid principal and interest of each
Consolidation Loan disbursed on or after October 1, 1993.
This fee was reduced to .62% for loans made from October 1,
1998 to January 31, 1999.
Stafford
Loan Program
For Stafford Loans, the HEA provides for:
| • | federal reinsurance of Stafford Loans made by eligible lenders to qualified students; | |
| • | federal interest subsidy payments on Subsidized Stafford Loans paid by ED to holders of the loans in lieu of the borrowers’ making interest payments during in-school, grace and deferment periods; and |
A-8
| • | special allowance payments representing an additional subsidy paid by ED to the holders of eligible Stafford Loans. |
We refer to all three types of assistance as “federal
assistance.”
Interest.
The borrower’s interest rate on
a Stafford Loan can be fixed or variable. Variable rates are
reset annually each July 1 based on the bond equivalent rate of
91-day
Treasury bills auctioned at the final auction held before the
preceding June 1. Stafford Loan interest rates are
presented below.
|
Maximum
|
||||||
|
Trigger Date
|
Borrower Rate | Borrower Rate | Interest Rate Margin | |||
|
Before 01/01/81
|
7% | 7% | N/A | |||
|
From 01/01/81 through 09/12/83
|
9% | 9% | N/A | |||
|
From 09/13/83 through 06/30/88
|
8% | 8% | N/A | |||
|
From 07/01/88 through 09/30/92
|
8% for 48 months; thereafter, 91-day Treasury + Interest Rate Margin | 8% for 48 months, then 10% | 3.25% for loans made before 7/23/92 and for loans made on or before 10/1/92 to new student borrowers; 3.10% for loans made after 7/23/92 and before 7/1/94 to borrowers with outstanding FFELP loans | |||
|
From 10/01/92 through 06/30/94
|
91-day Treasury + Interest Rate Margin | 9% | 3.10% | |||
|
From 07/01/94 through 06/30/95
|
91-day Treasury + Interest Rate Margin | 8.25% | 3.10% | |||
|
From 07/01/95 through 06/30/98
|
91-day Treasury + Interest Rate Margin | 8.25% | 2.50% (In-School, Grace or Deferment); 3.10% (Repayment) | |||
|
From 07/01/98 through 06/30/06
|
91-day Treasury + Interest Rate Margin | 8.25% | 1.70% (In-School, Grace or Deferment); 2.30% (Repayment) | |||
|
From 07/01/06 through 06/30/08
|
6.8% | 6.8% | N/A | |||
|
From 07/01/08 through 06/30/09
|
6.0% for undergraduate subsidized loans; and 6.8% for unsubsidized loans and graduate subsidized loans. | 6.0%, 6.8% | N/A | |||
|
From 07/01/09 through 06/30/10
|
5.6% for undergraduate subsidized loans; and 6.8% for unsubsidized loans and graduate subsidized loans. | 5.6%, 6.8% | N/A | |||
|
From 07/01/10 through 06/30/11
|
4.5% for undergraduate subsidized loans; and 6.8% for unsubsidized loans and graduate subsidized loans. | 4.5%, 6.8% | N/A | |||
|
From 07/01/11 through 06/30/12
|
3.4% for undergraduate subsidized loans; and 6.8% for unsubsidized loans and graduate subsidized loans. | 3.4%, 6.8% | N/A | |||
|
From 07/01/12 and after
|
6.8% | 6.8% | N/A |
The trigger date for Stafford Loans made before October 1,
1992 is the first day of the enrollment period for which the
borrower’s first Stafford Loan is made. The trigger date
for Stafford Loans made on or after October 1, 1992 is the
date of the disbursement of the borrower’s Stafford Loan.
A-9
Interest Subsidy Payments.
ED is responsible
for paying interest on Subsidized Stafford Loans:
| • | while the borrower is a qualified student, | |
| • | during the grace period, and | |
| • | during prescribed deferral periods. |
ED makes quarterly interest subsidy payments to the owner of a
Subsidized Stafford Loan in an amount equal to the interest that
accrues on the unpaid balance of that loan before repayment
begins or during any deferral periods. The HEA provides that the
owner of an eligible Subsidized Stafford Loan has a contractual
right against the United States to receive interest subsidy and
special allowance payments.
However, receipt of interest subsidy and special allowance
payments is conditioned on compliance with the requirements of
the HEA.
Lenders generally receive interest subsidy and special allowance
payments within 45 days to 60 days after submitting
the applicable data for any given calendar quarter to ED.
However, there can be no assurance that payments will, in fact,
be received from ED within that period.
If the loan is not held by an eligible lender in accordance with
the requirements of the HEA and the applicable guarantee
agreement, the loan may lose its federal assistance.
Loan Limits.
The HEA generally requires that
lenders disburse student loans in at least two equal
disbursements. The HEA limits the amount a student can borrow in
any academic year. The following chart shows loan limits
applicable to loans first disbursed on or after July 1,
2008.
| Dependent Student | Independent Student | |||||||||||||||||||||||
|
Maximum
|
Maximum
|
|||||||||||||||||||||||
|
Subsidized and
|
Additional
|
Annual Total
|
Subsidized and
|
Additional
|
Annual Total
|
|||||||||||||||||||
|
Borrower Academic Level
|
Unsubsidized | Unsubsidized | Amount | Unsubsidized | Unsubsidized | Amount | ||||||||||||||||||
|
Undergraduate (per year)
|
||||||||||||||||||||||||
|
1
(st)
year
|
$ | 3,500 | $ | 2,000 | $ | 5,500 | $ | 3,500 | $ | 6,000 | $ | 9,500 | ||||||||||||
|
2
(nd)
year
|
$ | 4,500 | $ | 2,000 | $ | 6,500 | $ | 4,500 | $ | 6,000 | $ | 10,500 | ||||||||||||
|
3
(rd)
year and above
|
$ | 5,500 | $ | 2,000 | $ | 7,500 | $ | 5,500 | $ | 7,000 | $ | 12,500 | ||||||||||||
|
Aggregate Limit
|
$ | 23,000 | $ | 8,000 | $ | 31,000 | $ | 23,000 | $ | 34,500 | $ | 57,500 | ||||||||||||
|
Graduate (per year)
|
N/A | N/A | N/A | $ | 8,500 | $ | 12,000 | $ | 20,500 | |||||||||||||||
|
Aggregate Limit (includes undergraduate)
|
N/A | N/A | N/A | $ | 65,500 | $ | 73,000 | $ | 138,500 | |||||||||||||||
The following charts show historic loan limits:
|
Dependent Student
|
Independent Student | |||||||||||||||
|
Subsidized and
|
Subsidized and
|
Additional
|
||||||||||||||
|
Unsubsidized
|
Unsubsidized
|
Unsubsidized
|
||||||||||||||
|
On or After
|
On or After
|
On or After
|
Maximum Annual
|
|||||||||||||
|
Borrower Academic Level
|
07/1/07 | 07/1/07 | 07/1/07 | Total Amount | ||||||||||||
|
Undergraduate (per year)
|
||||||||||||||||
|
1
(st)
year
|
$ | 3,500 | $ | 3,500 | $ | 4,000 | $ | 7,500 | ||||||||
|
2
(nd)
year
|
$ | 4,500 | $ | 4,500 | $ | 4,000 | $ | 8,500 | ||||||||
|
3
(rd)
year and above
|
$ | 5,500 | $ | 5,500 | $ | 5,000 | $ | 10,500 | ||||||||
|
Aggregate Limit
|
$ | 23,000 | $ | 23,000 | $ | 23,000 | $ | 46,000 | ||||||||
|
Graduate (per year)
|
N/A | $ | 8,500 | $ | 12,000 | $ | 20,500 | |||||||||
|
Aggregate Limit (includes undergraduate)
|
N/A | $ | 65,500 | $ | 73,000 | $ | 138,500 | |||||||||
A-10
| Independent Students | ||||||||||||||||
|
All Students
|
Additional
|
|||||||||||||||
|
Borrower’s Academic Level Base
|
Subsidized
|
Subsidized and
|
Unsubsidized
|
|||||||||||||
|
Amount Subsidized and Unsubsidized
|
On or After
|
Unsubsidized On
|
Only On or
|
Maximum Annual
|
||||||||||||
|
On or After 10/1/93
|
1/1/87 | or After 10/1/93 | After 7/1/94 | Total Amount | ||||||||||||
|
Undergraduate (per year):
|
||||||||||||||||
|
1st year
|
$ | 2,625 | $ | 2,625 | $ | 4,000 | $ | 6,625 | ||||||||
|
2nd year
|
$ | 2,625 | $ | 3,500 | $ | 4,000 | $ | 7,500 | ||||||||
|
3rd year and above
|
$ | 4,000 | $ | 5,500 | $ | 5,000 | $ | 10,500 | ||||||||
|
Graduate (per year)
|
$ | 7,500 | $ | 8,500 | $ | 10,000 | $ | 18,500 | ||||||||
|
Aggregate Limit:
|
||||||||||||||||
|
Undergraduate
|
$ | 17,250 | $ | 23,000 | $ | 23,000 | $ | 46,000 | ||||||||
|
Graduate (including undergraduate)
|
$ | 54,750 | $ | 65,500 | $ | 73,000 | $ | 138,500 | ||||||||
For the purposes of the tables above:
| • | The loan limits include both FFELP and DSLP loans. | |
| • | The amounts in the columns labeled “Subsidized and Unsubsidized” represent the combined maximum loan amount per year between Subsidized and Unsubsidized Stafford Loans. Accordingly, the maximum amount that a student may borrow under an Unsubsidized Stafford Loan is the difference between the combined maximum loan amount and the amount the student received in the form of a Subsidized Stafford Loan. |
Independent undergraduate students, graduate students and
professional students may borrow the additional amounts shown in
the next to last columns in the charts above. Dependent
undergraduate students may also receive these additional loan
amounts if their parents are unable to provide the family
contribution amount and it is unlikely that they will qualify
for a PLUS Loan.
| • | Students attending certain medical schools are eligible for higher annual and aggregate loan limits. | |
| • | The annual loan limits are sometimes reduced when the student is enrolled in a program of less than one academic year or has less than a full academic year remaining in his program. |
Repayment.
Repayment of a Stafford Loan begins
6 months after the student ceases to be enrolled at least
half time. In general, each loan must be scheduled for repayment
over a period of not more than 10 years after repayment
begins. New borrowers on or after October 7, 1998 who
accumulate outstanding loans under the FFELP totaling more than
$30,000 are entitled to extend repayment for up to
25 years, subject to minimum repayment amounts and FFELP
Consolidation Loan borrowers may be scheduled for repayment up
to 30 years depending on the borrower’s indebtedness.
The HEA currently requires minimum annual payments of $600,
unless the borrower and the lender agree to lower payments,
except that negative amortization is not allowed. The Act and
related regulations require lenders to offer the choice of a
standard, graduated, income-sensitive and extended repayment
schedule, if applicable, to all borrowers entering repayment.
The 2007 legislation introduces an income-based repayment plan
on July 1, 2009 that a student borrower may elect during a
period of partial financial hardship and have annual payments
that do not exceed 15% of the amount by which adjusted gross
income exceeds 150% of the poverty line. The Secretary repays or
cancels any outstanding principal and interest under certain
criteria after 25 years.
Grace Periods, Deferral Periods and Forbearance
Periods.
After the borrower stops pursuing at
least a half-time course of study, he must begin to repay
principal of a Stafford Loan following the grace period.
However, no principal repayments need be made, subject to some
conditions, during deferment and forbearance periods.
A-11
For borrowers whose first loans are disbursed on or after
July 1, 1993, repayment of principal may be deferred while
the borrower returns to school at least half-time. Additional
deferrals are available, when the borrower is:
| • | enrolled in an approved graduate fellowship program or rehabilitation program; or | |
| • | seeking, but unable to find, full-time employment (subject to a maximum deferment of 3 years); or | |
| • | having an economic hardship, as defined in the Act (subject to a maximum deferment of 3 years); or | |
| • | serving on active duty during a war or other military operation or national emergency, or performing qualifying National Guard duty during a war or other military operation or national emergency (subject to a maximum deferment of 3 years, and effective July 1, 2006 on loans made on or after July 1, 2001). |
The HEA also permits, and in some cases requires,
“forbearance” periods from loan collection in some
circumstances. Interest that accrues during forbearance is never
subsidized. Interest that accrues during deferment periods may
be subsidized.
PLUS and
SLS Loan Programs
The HEA authorizes PLUS Loans to be made to graduate or
professional students (effective July 1, 2006) and
parents of eligible dependent students and previously authorized
SLS Loans to be made to the categories of students now served by
the Unsubsidized Stafford Loan program. Borrowers who have no
adverse credit history or who are able to secure an endorser
without an adverse credit history are eligible for PLUS Loans,
as well as some borrowers with extenuating circumstances. The
basic provisions applicable to PLUS and SLS Loans are similar to
those of Stafford Loans for federal insurance and reinsurance.
However, interest subsidy payments are not available under the
PLUS and SLS programs and, in some instances, special allowance
payments are more restricted.
Parent PLUS Loan Auction Pilot Program.
The
2007 legislation creates a pilot program for parent PLUS loans
on July 1, 2009. The Secretary will administer an auction
for each state every two years with two winning eligible
lenders. Competing lenders will bid based on the amount of SAP
the lender is willing to receive from the Secretary, not to
exceed CP plus 1.79%. Winning lenders will originate parent PLUS
loans to institutions in the state. The Secretary will guarantee
99% of principal and interest against losses from default. PLUS
loans will be exempt from lender loan fees. Originating lenders
may consolidate PLUS loans and be exempt from paying a
consolidation rebate fee. This program has not been implemented.
Loan Limits.
PLUS and SLS Loans disbursed
before July 1, 1993 were limited to $4,000 per academic
year with a maximum aggregate amount of $20,000.
The annual and aggregate amounts of PLUS Loans first disbursed
on or after July 1, 1993 are limited only to the difference
between the cost of the student’s education and other
financial aid received, including scholarship, grants and other
student loans.
Interest.
The interest rate for a PLUS or SLS
Loan depends on the date of disbursement and period of
enrollment. The interest rates for PLUS Loans and SLS Loans are
presented in the following chart. Until July 1, 2001, the
1-year
index
was the bond equivalent rate of 52-week Treasury bills auctioned
at the final auction held prior to each June 1. Beginning
July 1, 2001, the
1-year
index
is the weekly average
1-year
constant maturity Treasury yield determined the preceding
June 26.
A-12
|
Interest
|
||||||||
|
Maximum
|
Rate
|
|||||||
|
Trigger Date
|
Borrower Rate
|
Borrower Rate
|
Margin | |||||
|
Before 10/01/81
|
9% | 9% | N/A | |||||
|
From 10/01/81 through 10/30/82
|
14% | 14% | N/A | |||||
|
From 11/01/82 through 06/30/87
|
12% | 12% | N/A | |||||
|
From 07/01/87 through 09/30/92
|
1-year Index + Interest Rate Margin | 12% | 3.25 | % | ||||
|
From 10/01/92 through 06/30/94
|
1-year Index + Interest Rate Margin | PLUS 10%, SLS 11% | 3.10 | % | ||||
|
From 07/01/94 through 06/30/98
|
1-year Index + Interest Rate Margin | 9% | 3.10 | % | ||||
|
From 6/30/98 through 06/30/06
|
91-day Treasury + Interest Rate Margin | 9% | 3.10 | % | ||||
|
From 07/01/06 and after
|
8.5% | 8.5% | N/A | |||||
For PLUS and SLS Loans made before October 1, 1992, the
trigger date is the first day of the enrollment period for which
the loan was made. For PLUS and SLS Loans made on or after
October 1, 1992, the trigger date is the date of the
disbursement of the loan.
A holder of a PLUS or SLS Loan is eligible to receive special
allowance payments during any quarter if:
| • | the borrower rate is set at the maximum borrower rate and | |
| • | the sum of the average of the bond equivalent rates of 3-month Treasury bills auctioned during that quarter and the applicable interest rate margin exceeds the maximum borrower rate. |
Effective July 1, 2006, this limitation on special
allowance for PLUS Loans made on and after January 1, 2000
is repealed.
Repayment, Deferments.
Borrowers begin to
repay principal of their PLUS and SLS Loans no later than
60 days after the final disbursement unless they use
deferment available for the in-school period and the
6-month
post
enrollment period. Deferment and forbearance provisions, maximum
loan repayment periods, repayment plans and minimum payment
amounts for PLUS and SLS Loans are generally the same as those
for Stafford Loans.
Consolidation
Loan Program
The HEA also authorizes a program under which borrowers may
consolidate one or more of their student loans into a single
FFELP Consolidation Loan that is insured and reinsured on a
basis similar to Stafford and PLUS Loans. FFELP Consolidation
Loans are made in an amount sufficient to pay outstanding
principal, unpaid interest, late charges and collection costs on
all federally reinsured student loans incurred under the FFELP
that the borrower selects for consolidation, as well as loans
made under various other federal student loan programs and loans
made by different lenders. In general, a borrower’s
eligibility to consolidate FFELP student loans ends upon receipt
of a FFELP Consolidation Loan. Under certain circumstances, a
FFELP borrower may obtain a Consolidation Loan under the DSLP.
FFELP Consolidation Loans made on or after July 1, 1994
have no minimum loan amount, although FFELP Consolidation Loans
for less than $7,500 do not enjoy an extended repayment period.
Applications for FFELP Consolidation Loans received on or after
January 1, 1993 but before July 1, 1994 were available
only to borrowers who had aggregate outstanding student loan
balances of at least $7,500. For applications received before
January 1, 1993, FFELP Consolidation Loans were available
only to borrowers who had aggregate outstanding student loan
balances of at least $5,000.
To obtain a FFELP Consolidation Loan, the borrower must be
either in repayment status or in a grace period before repayment
begins. In addition, for applications received before
January 1, 1993, the borrower must not have been delinquent
by more than 90 days on any student loan payment. Prior to
July 1, 2006, married couples who were eligible to
consolidate agreed to be jointly and severally liable and were
treated as one borrower for purposes of loan consolidation
eligibility.
A-13
FFELP Consolidation Loans bear interest at a fixed rate equal to
the greater of the weighted average of the interest rates on the
unpaid principal balances of the consolidated loans and
9 percent for loans originated before July 1, 1994.
For FFELP Consolidation Loans made on or after July 1, 1994
and for which applications were received before
November 13, 1997, the weighted average interest rate is
rounded up to the nearest whole percent. FFELP Consolidation
Loans made on or after July 1, 1994 for which applications
were received on or after November 13, 1997 through
September 30, 1998 bear interest at the annual variable
rate applicable to Stafford Loans subject to a cap of
8.25 percent. FFELP Consolidation Loans for which the
application is received on or after October 1, 1998 bear
interest at a fixed rate equal to the weighted average interest
rate of the loans being consolidated rounded up to the nearest
one-eighth of one percent, subject to a cap of 8.25 percent.
Interest on FFELP Consolidation Loans accrues and, for
applications received before January 1, 1993, is paid
without interest subsidy by ED. For FFELP Consolidation Loans
for which applications were received between January 1 and
August 10, 1993, all interest of the borrower is paid
during deferral periods. FFELP Consolidation Loans for which
applications were received on or after August 10, 1993 are
only subsidized if all of the underlying loans being
consolidated were Subsidized Stafford Loans. In the case of
FFELP Consolidation Loans made on or after November 13,
1997, the portion of a Consolidation Loan that is comprised of
Subsidized FFELP Loans and Subsidized DSLP Loans retains subsidy
benefits during deferral periods.
No insurance premium is charged to a borrower or a lender in
connection with a Consolidation Loan. However, lenders must pay
a monthly rebate fee to ED at an annualized rate of
1.05 percent on principal and interest on FFELP
Consolidation Loans for loans disbursed on or after
October 1, 1993, and at an annualized rate of
0.62 percent for Consolidation Loan applications received
between October 1, 1998 and January 31, 1999. The rate
for special allowance payments for FFELP Consolidation Loans is
determined in the same manner as for other FFELP loans.
A borrower must begin to repay his Consolidation Loan within
60 days after his consolidated loans have been discharged.
For applications received on or after January 1, 1993,
repayment schedule options include standard, graduated,
income-sensitive, extended (for new borrowers on or after
October 7, 1998), and income-based (effective July 1,
2009) repayment plans, and loans are repaid over periods
determined by the sum of the Consolidation Loan and the amount
of the borrower’s other eligible student loans outstanding.
The maximum maturity schedule is 30 years for indebtedness
of $60,000 or more.
Guarantee
Agencies under the FFELP
Under the FFELP, guarantee agencies guarantee (or insure) loans
made by eligible lending institutions. Student loans are
guaranteed as to 100 percent of principal and accrued
interest against death or discharge. Guarantee agencies also
guarantee lenders against default. For loans that were made
before October 1, 1993, lenders are insured for
100 percent of the principal and unpaid accrued interest.
From October 1, 1993 to June 30, 2006, lenders are
insured for 98 percent of principal and all unpaid accrued
interest or 100 percent of principal and all unpaid accrued
interest if it receives an Exceptional Performance designation
by ED. Insurance for loans made on or after July 1, 2006
was reduced from 98 percent to 97 percent, and
insurance for claim requests on or after July 1, 2006 under
an Exceptional Performance designation was reduced from
100 percent to 99 percent. The Exceptional Performance
designation was eliminated (and the monetary benefit associated
with it) effective October 1, 2007. Default insurance will
be reduced to 95 percent of the unpaid principal and
accrued interest for loans first disbursed on or after
October 1, 2012.
ED reinsures Guarantors for amounts paid to lenders on loans
that are discharged or defaulted. The reimbursement on
discharged loans is for 100 percent of the amount paid to
the holder. The reimbursement rate for defaulted loans decreases
as a Guarantor’s default rate increases. The first trigger
for a lower reinsurance rate is when the amount of defaulted
loan reimbursements exceeds 5 percent of the amount of all
loans guaranteed by the agency in repayment status at the
beginning of the federal fiscal year. The second
A-14
trigger is when the amount of defaults exceeds 9 percent of
the loans in repayment. Guarantee agency reinsurance rates are
presented in the table below.
|
Claims Paid Date
|
Maximum | 5% Trigger | 9% Trigger | |||||||||
|
Before October 1, 1993
|
100 | % | 90 | % | 80 | % | ||||||
|
October 1, 1993 – September 30, 1998
|
98 | % | 88 | % | 78 | % | ||||||
|
On or after October 1, 1998
|
95 | % | 85 | % | 75 | % | ||||||
After ED reimburses a Guarantor for a default claim, the
Guarantor attempts to collect the loan from the borrower.
However, ED requires that the defaulted guaranteed loans be
assigned to it when the Guarantor is not successful. A Guarantor
also refers defaulted guaranteed loans to ED to
“offset” any federal income tax refunds or other
federal reimbursement which may be due the borrowers. Some
states have similar offset programs.
To be eligible for federal reinsurance, guaranteed loans must
meet the requirements of the HEA and regulations issued under
the HEA. Generally, these regulations require that lenders
determine whether the applicant is an eligible borrower
attending an eligible institution, explain to borrowers their
responsibilities under the loan, ensure that the promissory
notes evidencing the loan are executed by the borrower; and
disburse the loan proceeds as required. After the loan is made,
the lender must establish repayment terms with the borrower,
properly administer deferrals and forbearances, credit the
borrower for payments made, and report the loan’s status to
credit reporting agencies. If a borrower becomes delinquent in
repaying a loan, a lender must perform collection procedures
that vary depending upon the length of time a loan is
delinquent. The collection procedures consist of telephone
calls, demand letters, skiptracing procedures and requesting
assistance from the Guarantor.
A lender may submit a default claim to the Guarantor after a
student loan has been delinquent for at least 270 days. The
Guarantor must review and pay the claim within 90 days
after the lender filed it. The Guarantor will pay the lender
interest accrued on the loan for up to 450 days after
delinquency. The guarantor must file a reimbursement claim with
ED within 45 days (reduced to 30 days July 1,
2006) after the guarantor paid the lender for the default
claim. Following payment of claims, the Guarantor endeavors to
collect the loan. Guarantors also must meet statutory and
regulatory requirements for collecting loans.
Student
Loan Discharges
FFELP loans are not generally dischargeable in bankruptcy. Under
the United States Bankruptcy Code, before a student loan may be
discharged, the borrower must demonstrate that repaying it would
cause the borrower or his family undue hardship. When a FFELP
borrower files for bankruptcy, collection of the loan is
suspended during the time of the proceeding. If the borrower
files under the “wage earner” provisions of the
Bankruptcy Code or files a petition for discharge on the ground
of undue hardship, then the lender transfers the loan to the
guarantee agency which then participates in the bankruptcy
proceeding. When the proceeding is complete, unless there was a
finding of undue hardship, the loan is transferred back to the
lender and collection resumes.
Student loans are discharged if the borrower died or becomes
totally and permanently disabled. A physician must certify
eligibility for a total and permanent disability discharge.
Effective January 29, 2007, discharge eligibility was
extended to survivors of eligible public servants and certain
other eligible victims of the terrorist attacks on the United
States on September 11, 2001.
If a school closes while a student is enrolled, or within
90 days after the student withdrew, loans made for that
enrollment period are discharged. If a school falsely certifies
that a borrower is eligible for the loan, the loan may be
discharged. And if a school fails to make a refund to which a
student is entitled, the loan is discharged to the extent of the
unpaid refund.
Rehabilitation
of Defaulted Loans
ED is authorized to enter into agreements with the Guarantor
under which the Guarantor may sell defaulted loans that are
eligible for rehabilitation to an eligible lender. For a loan to
be eligible for rehabilitation, the Guarantor must have received
reasonable and affordable payments for 12 months (reduced
to 9 payments in 10 months effective July 1, 2006),
then the borrower may request that the loan be
A-15
rehabilitated. Because monthly payments are usually greater
after rehabilitation, not all borrowers opt for rehabilitation.
Upon rehabilitation, a borrower is again eligible for all the
benefits under the HEA for which he or she is not eligible as a
default, such as new federal aid, and the negative credit record
is expunged. No student loan may be rehabilitated more than once.
The July 1, 2009 technical corrections made to the HEA
under H.R. 1777, Public Law
111-39,
provide authority between July 1, 2009 through
September 30, 2011, for a guaranty agency to assign a
defaulted loan to ED depending on market conditions.
Guarantor
Funding
In addition to providing the primary guarantee on FFELP loans,
guarantee agencies are charged with responsibility for
maintaining records on all loans on which they have issued a
guarantee (“account maintenance”), assisting lenders
to prevent default by delinquent borrowers (“default
aversion”), post-default loan administration and
collections and program awareness and oversight. These
activities are funded by revenues from the following statutorily
prescribed sources plus earnings on investments.
|
Source
|
Basis
|
|
|
Insurance Premium (Changed to Federal Default Fee July 1,
2006)
|
Up to 1% of the principal amount guaranteed, withheld from the proceeds of each loan disbursement. | |
|
Loan Processing and Issuance Fee
|
.4% of the principal amount guaranteed in each fiscal year, paid by ED | |
|
Account Maintenance Fee
|
.10% (reduced to .06% on October 1, 2007) of the original principal amount of loans outstanding, paid by ED. | |
|
Default Aversion Fee
|
1% of the outstanding amount of loans submitted by a lender for default aversion assistance, minus 1% of the unpaid principal and interest paid on default claims, which is, paid once per loan by transfers out of the Student Loan Reserve Fund. | |
|
Collection Retention
|
23% (reduced to 16% on October 1, 2007) of the amount collected on loans on which reinsurance has been paid (18.5% collected for a defaulted loan that is purchased by a lender for rehabilitation or consolidation), withheld from gross receipts. Guarantor retention of collection fees on defaulted FFELP Consolidation Loans is reduced from 18.5% to 10% (effective October 1, 2006), and reduced to zero beginning October 1, 2009 on default consolidations that exceed 45 percent of an agency’s total collections on defaulted loans. |
The Act requires guaranty agencies to establish two funds: a
Student Loan Reserve Fund and an Agency Operating Fund. The
Student Loan Reserve Fund contains the reinsurance payments
received from ED, Insurance Premiums and the complement of the
reinsurance on recoveries. The fund is federal property and its
assets may only be used to pay insurance claims and to pay
Default Aversion Fees. Recoveries on defaulted loans are
deposited into the Agency Operating Fund. The Agency Operating
Fund is the Guarantor’s property and is not subject to as
strict limitations on its use.
If ED determines that a Guarantor is unable to meet its
insurance obligations, the holders of loans guaranteed by that
Guarantor may submit claims directly to ED and ED is required to
pay the full guarantee payments due, in accordance with
guarantee claim processing standards no more stringent than
those applied by the terminated Guarantor. However, ED’s
obligation to pay guarantee claims directly in this fashion is
contingent upon its making the determination referred to above.
A-16
GLOSSARY
Listed below are definitions of key terms that are used
throughout this document. See also APPENDIX A,
“FEDERAL FAMILY EDUCATION LOAN PROGRAM,” for a further
discussion of the FFELP.
Consolidation Loan Rebate Fee
— All holders of
FFELP Consolidation Loans are required to pay to the
U.S. Department of Education (“ED”) an annual
105 basis point Consolidation Loan Rebate Fee on all
outstanding principal and accrued interest balances of FFELP
Consolidation Loans purchased or originated after
October 1, 1993, except for loans for which consolidation
applications were received between October 1, 1998 and
January 31, 1999, where the Consolidation Loan Rebate Fee
is 62 basis points.
Constant Prepayment Rate (“CPR”)
— A
variable in
life-of-loan
estimates that measures the rate at which loans in the portfolio
prepay before their stated maturity. The CPR is directly
correlated to the average life of the portfolio. CPR equals the
percentage of loans that prepay annually as a percentage of the
beginning of period balance.
“Core Earnings”
— The Company
prepares financial statements in accordance with generally
accepted accounting principles in the United States of America
(“GAAP”). In addition to evaluating the Company’s
GAAP-based financial information, management evaluates the
Company’s business segments on a basis that, as allowed
under the Financial Accounting Standards Board’s
(“FASB”) Accounting Standards Codification
(“ASC”) 280, “Segment Reporting,” differs
from GAAP. The Company refers to management’s basis of
evaluating its segment results as “Core Earnings”
presentations for each business segment and refers to these
performance measures in its presentations with credit rating
agencies and lenders. While “Core Earnings” results
are not a substitute for reported results under GAAP, the
Company relies on “Core Earnings” performance measures
in operating each business segment because it believes these
measures provide additional information regarding the
operational and performance indicators that are most closely
assessed by management.
“Core Earnings” performance measures are the primary
financial performance measures used by management to evaluate
performance and to allocate resources. Accordingly, financial
information is reported to management on a “Core
Earnings” basis by reportable segment, as these are the
measures used regularly by the Company’s chief operating
decision makers. “Core Earnings” performance measures
are used in developing the Company’s financial plans,
tracking results, and establishing corporate performance targets
and incentive compensation. Management believes this information
provides additional insight into the financial performance of
the Company’s core business activities. “Core
Earnings” performance measures are not defined terms within
GAAP and may not be comparable to similarly titled measures
reported by other companies. “Core Earnings” net
income reflects only current period adjustments to GAAP net
income. Accordingly, the Company’s ‘Core
Earnings” presentation does not represent another
comprehensive basis of accounting.
See Note 20, “Segment Reporting,” to the
consolidated financial statements and “MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — BUSINESS SEGMENTS — Limitations
of ‘Core Earnings’ —
Pre-tax
Differences between ‘Core Earnings’ and GAAP by
Business Segment”
for further discussion of the
differences between “Core Earnings” and GAAP, as well
as reconciliations between “Core Earnings” and GAAP.
In prior filings with the SEC of SLM Corporation’s annual
reports on
Form 10-K
and quarterly reports on
Form 10-Q,
“Core Earnings” has been labeled as “
‘Core’ net income” or “Managed net
income” in certain instances.
Direct Lending; Direct Loans
— Educational
loans provided by the DSLP (see definition, below) to students
and parent borrowers directly through ED (see definition below)
rather than through a bank or other lender.
DSLP
— The William D. Ford Federal Direct Loan
Program.
Economic Floor Income
— Economic Floor Income
equals Gross Floor Income earned on Managed loans, minus the
payments on Floor Income Contracts, plus the amortization of net
premiums on both Fixed Rate and Variable Rate Floor Income
Contracts (see definitions for capitalized terms, below).
G-1
ED
— The U.S. Department of Education.
Embedded Floor Income
— Embedded Floor Income
is Floor Income (see definition below) that is earned on
off-balance sheet student loans that are in securitization
trusts sponsored by the Company. At the time of the
securitization, the value of Embedded Fixed Rate Floor Income is
included in the initial valuation of the Residual Interest (see
definition below) and the gain or loss on sale of the student
loans. Embedded Floor Income is also included in the quarterly
fair value adjustments of the Residual Interest.
Exceptional Performer (“EP”)
— The EP
designation is determined by ED in recognition of a servicer
meeting certain performance standards set by ED in servicing
FFELP Loans. Upon receiving the EP designation, the EP servicer
receives reimbursement on default claims higher than the
legislated Risk Sharing (see definition below) levels on
federally guaranteed student loans for all loans serviced for a
period of at least 270 days before the date of default. The
EP servicer is entitled to receive this benefit as long as it
remains in compliance with the required servicing standards,
which are assessed on an annual and quarterly basis through
compliance audits and other criteria. The annual assessment is
in part based upon subjective factors which alone may form the
basis for an ED determination to withdraw the designation. If
the designation is withdrawn, Risk Sharing may be applied
retroactively to the date of the occurrence that resulted in
noncompliance. The College Cost Reduction Act of 2007
(“CCRAA”) eliminated the EP designation effective
October 1, 2007. See also Appendix A, “FEDERAL
FAMILY EDUCATION LOAN PROGRAM.”
FFELP
— The Federal Family Education Loan
Program, formerly the Guaranteed Student Loan Program.
FFELP Consolidation Loans
— Under the FFELP,
borrowers with multiple eligible student loans may consolidate
them into a single student loan with one lender at a fixed rate
for the life of the loan. The new loan is considered a FFELP
Consolidation Loan. Typically a borrower may consolidate his
student loans only once unless the borrower has another eligible
loan to consolidate with the existing FFELP Consolidation Loan.
The borrower rate on a FFELP Consolidation Loan is fixed for the
term of the loan and is set by the weighted average interest
rate of the loans being consolidated, rounded up to the nearest
1/8th of a percent, not to exceed 8.25 percent. In low
interest rate environments, FFELP Consolidation Loans provide an
attractive refinancing opportunity to certain borrowers because
they allow borrowers to consolidate variable rate loans into a
long-term fixed rate loan. Holders of FFELP Consolidation Loans
are eligible to earn interest under the Special Allowance
Payment (“SAP”) formula (see definition below). In
April 2008, the Company suspended originating new FFELP
Consolidation Loans.
FFELP Stafford and Other Student Loans
—
Education loans to students or parents of students that are
guaranteed or reinsured under FFELP. The loans are primarily
Stafford loans but also include PLUS and HEAL loans.
Fixed Rate Floor Income
— Fixed Rate Floor
Income is Floor Income (see definition below) associated with
student loans with borrower rates that are fixed to term
(primarily FFELP Consolidation Loans and Stafford Loans
originated on or after July 1, 2006).
Floor Income
— FFELP loans generally earn
interest at the higher of either the borrower rate, which is
fixed over a period of time, or a floating rate based on the SAP
formula (see definition below). The Company generally finances
its student loan portfolio with floating rate debt whose
interest is matched closely to the floating nature of the
applicable SAP formula. If interest rates decline to a level at
which the borrower rate exceeds the SAP formula rate, the
Company continues to earn interest on the loan at the fixed
borrower rate while the floating rate interest on our debt
continues to decline. In these interest rate environments, the
Company refers to the additional spread it earns between the
fixed borrower rate and the SAP formula rate as Floor Income.
Depending on the type of student loan and when it was
originated, the borrower rate is either fixed to term or is
reset to a market rate each July 1. As a result, for loans
where the borrower rate is fixed to term, the Company may earn
Floor Income for an extended period of time, and for those loans
where the borrower interest rate is reset annually on
July 1, the Company may earn Floor Income to the next reset
date. In accordance with legislation enacted in 2006, lenders
are required to rebate Floor Income to ED for all FFELP loans
disbursed on or after April 1, 2006.
G-2
The following example shows the mechanics of Floor Income for a
typical fixed rate FFELP Consolidation Loan (with a commercial
paper-based SAP spread of 2.64 percent):
|
Fixed Borrower Rate
|
7.25 | % | ||
|
SAP Spread over Commercial Paper Rate
|
(2.64 | )% | ||
|
Floor Strike
Rate
(1)
|
4.61 | % | ||
| (1) | The interest rate at which the underlying index (Treasury bill or commercial paper) plus the fixed SAP spread equals the fixed borrower rate. Floor Income is earned anytime the interest rate of the underlying index declines below this rate. |
Based on this example, if the quarterly average commercial paper
rate is over 4.61 percent, the holder of the student loan
will earn at a floating rate based on the SAP formula, which in
this example is a fixed spread to commercial paper of
2.64 percent. On the other hand, if the quarterly average
commercial paper rate is below 4.61 percent, the SAP
formula will produce a rate below the fixed borrower rate of
7.25 percent and the loan holder earns at the borrower rate
of 7.25 percent.
Graphic
Depiction of Floor Income:
Floor Income Contracts
— The Company enters
into contracts with counterparties under which, in exchange for
an upfront fee representing the present value of the Floor
Income that the Company expects to earn on a notional amount of
underlying student loans being economically hedged, the Company
will pay the counterparties the Floor Income earned on that
notional amount over the life of the Floor Income Contract.
Specifically, the Company agrees to pay the counterparty the
difference, if positive, between the fixed borrower rate less
the SAP (see definition below) spread and the average of the
applicable interest rate index on that notional amount,
regardless of the actual balance of underlying student loans,
over the life of the contract. The contracts generally do not
extend over the life of the underlying student loans. This
contract effectively locks in the amount of Floor Income the
Company will earn over the period of the contract. Floor Income
Contracts are not considered effective hedges under ASC 815,
“Derivatives and Hedging,” and each quarter the
Company must record the change in fair value of these contracts
through income.
Gross Floor Income
— Floor Income earned before
payments on Floor Income Contracts.
Guarantor(s)
— State agencies or non-profit
companies that guarantee (or insure) FFELP loans made by
eligible lenders under The Higher Education Act of 1965
(“HEA”), as amended.
G-3
Lender Partners
— Lender Partners are lenders
who originate loans under forward purchase commitments under
which the Company owns the loans from inception or, in most
cases, acquires the loans soon after origination.
Managed Basis
— The Company generally analyzes
the performance of its student loan portfolio on a Managed
Basis. The Company views both on-balance sheet student loans and
off-balance sheet student loans owned by the securitization
trusts as a single portfolio, and the related on-balance sheet
financings are combined with off-balance sheet debt. When the
term Managed is capitalized in this document, it is referring to
Managed Basis.
Private Education Loans
— Education loans to
students or parents of students that are not guaranteed under
the FFELP. Private Education Loans include loans for higher
education (undergraduate and graduate degrees) and for
alternative education, such as career training, private
kindergarten through secondary education schools and tutorial
schools. Higher education loans have repayment terms similar to
FFELP loans, whereby repayments begin after the borrower leaves
school. The Company’s higher education Private Education
Loans are not dischargeable in bankruptcy, except in certain
limited circumstances. Repayment for alternative education
generally begins immediately.
In the context of the Company’s Private Education Loan
business, the Company uses the term “non-traditional
loans” to describe education loans made to certain
borrowers that have or are expected to have a high default rate
as a result of a number of factors, including having a lower
tier credit rating, low program completion and graduation rates
or, where the borrower is expected to graduate, a low expected
income relative to the borrower’s cost of attendance.
Proposed Merger
— On April 16, 2007, the
Company announced that a buyer group (“Buyer Group”)
led by J.C. Flowers & Co. (“J.C. Flowers”),
Bank of America, N.A. and JPMorgan Chase, N.A. (the
“Merger”) had signed a definitive agreement
(“Merger Agreement”) to acquire the Company for
approximately $25.3 billion or $60.00 per share of common
stock. (See also “Merger Agreement” filed with the SEC
on the Company’s Current Report on
Form 8-K,
dated April 18, 2007.) On January 25, 2008, the
Company, Mustang Holding Company Inc. (“Mustang
Holding”), Mustang Merger Sub, Inc. (“Mustang
Sub”), J.C. Flowers, Bank of America, N.A. and JPMorgan
Chase Bank, N.A. entered into a Settlement, Termination and
Release Agreement (the “Agreement”). Under the
Agreement, a lawsuit filed by the Company related to the Merger,
as well as all counterclaims, was dismissed.
Repayment Borrower Benefits
— Financial
incentives offered to borrowers based on pre-determined
qualifying factors, which are generally tied directly to making
on-time monthly payments. The impact of Repayment Borrower
Benefits is dependent on the estimate of the number of borrowers
who will eventually qualify for these benefits and the amount of
the financial benefit offered to the borrower. The Company
occasionally changes Repayment Borrower Benefits programs in
both amount and qualification factors. These programmatic
changes must be reflected in the estimate of the Repayment
Borrower Benefits discount when made.
Residual Interest
— When the Company
securitizes student loans, it retains the right to receive cash
flows from the student loans sold to trusts that it sponsors in
excess of amounts needed to pay servicing, derivative costs (if
any), other fees, and the principal and interest on the bonds
backed by the student loans. The Residual Interest, which may
also include reserve and other cash accounts, is the present
value of these future expected cash flows, which includes the
present value of any Embedded Fixed Rate Floor Income described
above. The Company values the Residual Interest at the time of
sale of the student loans to the trust and as of the end of each
subsequent quarter.
Retained Interest
— The Retained Interest
includes the Residual Interest (defined above) and servicing
rights (as the Company retains the servicing responsibilities)
for our securitization transactions accounted for as sales.
Risk Sharing
— When a FFELP loan first
disbursed on and after July 1, 2006 defaults, the federal
government guarantees 97 percent of the principal balance
plus accrued interest (98 percent on loans disbursed before
July 1, 2006) and the holder of the loan is at risk
for the remaining amount not guaranteed as a Risk
G-4
Sharing loss on the loan. FFELP loans originated after
October 1, 1993 are subject to Risk Sharing on loan default
claim payments unless the default results from the
borrower’s death, disability or bankruptcy. FFELP loans
serviced by a servicer that has Exceptional Performer
designation from ED were subject to one-percent Risk Sharing for
claims filed on or after July 1, 2006 and before
October 1, 2007. The CCRAA reduces default insurance to
95 percent of the unpaid principal and accrued interest for
loans first disbursed on or after October 1, 2012.
Special Allowance Payment (“SAP”)
—
FFELP loans disbursed prior to April 1, 2006 (with the
exception of certain PLUS and SLS loans discussed below)
generally earn interest at the greater of the borrower rate or a
floating rate determined by reference to the average of the
applicable floating rates
(91-day
Treasury bill rate or commercial paper) in a calendar quarter,
plus a fixed spread that is dependent upon when the loan was
originated and the loan’s repayment status. If the
resulting floating rate exceeds the borrower rate, ED pays the
difference directly to the Company. This payment is referred to
as the Special Allowance Payment or SAP and the formula used to
determine the floating rate is the SAP formula. The Company
refers to the fixed spread to the underlying index as the SAP
spread. For loans disbursed after April 1, 2006, FFELP
loans effectively only earn at the SAP rate, as the excess
interest earned when the borrower rate exceeds the SAP rate
(Floor Income) must be refunded to ED.
Variable rate PLUS Loans and SLS Loans earn SAP only if the
variable rate, which is reset annually, exceeds the applicable
maximum borrower rate. For PLUS loans disbursed on or after
January 1, 2000, this limitation on SAP was repealed
effective April 1, 2006.
A schedule of SAP rates is set forth on pages
A-7
and
A-8
of the
Company’s 2009 Annual Report on
Form 10-K.
Variable Rate Floor Income
— Variable Rate
Floor Income is Floor Income that is earned only through the
next reset date. For FFELP Stafford loans whose borrower
interest rate resets annually on July 1, the Company may
earn Floor Income or Embedded Floor Income based on a
calculation of the difference between the borrower rate and the
then current interest rate (see definitions for capitalized
terms, above).
G-5
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GuidanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules