SLM CORP
10-Ks and 10-Qs
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
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, 2010 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)
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.
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, 2010 was
$5.0 billion (based on closing sale price of $10.39 per
share as reported for the New York Stock Exchange —
Composite Transactions).
As of January 31, 2011, there were 526,909,601 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 19, 2011 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, the risks and uncertainties set
forth in Item 1A “Risk Factors” and elsewhere in
this Annual Report on
Form 10-K;
increases in financing costs; limits on liquidity; increases in
costs associated with compliance with laws and regulations; any
adverse outcomes in any significant litigation to which we are a
party; credit risk associated with our exposure to third
parties, including counterparties to our derivative
transactions; and changes in the terms of student loans and the
educational credit marketplace (including changes resulting from
new laws and the implementation of existing laws). We could also
be affected by, among other things: changes in our funding costs
and availability; reductions to our credit ratings; failures of
our operating systems or infrastructure, including those of
third-party vendors; damage to our reputation; failures to
successfully implement cost-cutting and restructuring
initiatives and adverse effects of such initiatives on our
business; changes in the demand for educational financing or in
financing preferences of lenders, educational institutions,
students and their families; changes in law and regulations with
respect to the student lending business and financial
institutions generally; increased competition from banks and
other consumer lenders; the creditworthiness of our customers;
changes in the general interest rate environment, including the
rate relationships among relevant money-market instruments and
those of our earning assets versus our funding arrangements;
changes in general economic conditions; and changes in the
demand for debt management services. 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. We
do not undertake any obligation to update or revise these
forward-looking statements to conform the statement to actual
results or changes in our expectations.
Definitions for capitalized terms used in this document can be
found in the “Glossary” at the end of this document.
AVAILABLE
INFORMATION
The Securities and Exchange Commission (“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 2010, we submitted the annual certification of our Chief
Executive Officer regarding our 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 our annual reports on
Form 10-K
for the years ended December 31, 2008 and 2009 and to this
Annual Report on
Form 10-K,
the certifications required under Section 302 of the
Sarbanes-Oxley Act of 2002.
1
| Item 1. | Business |
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 “we,” “us,” “our” and
“the Company,” refer to SLM Corporation and its
subsidiaries, except as otherwise indicated or unless the
context otherwise requires. 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 dissolution 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 non-federally guaranteed Private
Education Loan programs and as a servicer and collector of loans
for the Department of Education (“ED”). In addition we
are the largest holder, servicer and collector of loans made
under the Federal Family Education Loan Program
(“FFELP”), a program that was recently discontinued.
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 products 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.
We also earn fee income by providing student loan-related
services including student loan servicing, loan default aversion
and defaulted loan collections, processing capabilities and
information technology to educational institutions, and 529
college-savings
plan program management services and a consumer savings network.
At December 31, 2010, we had approximately
7,600 employees.
We are in the process of relocating our headquarters from
Reston, Virginia to Newark, Delaware, and expect to complete the
move by March 31, 2011.
Recent
Developments and Expected Future Trends
On March 30, 2010, President Obama signed into law H.R.
4872, the Health Care and Education Reconciliation Act of 2010
(“HCERA”) which included the SAFRA Act. Effective
July 1, 2010, all federal loans to students are now made
through the Direct Student Loan Program (“DSLP”). The
FFELP, through which we historically generated the majority of
our net income, was eliminated. However, HCERA does not alter or
affect the terms and conditions of existing FFELP Loans. The
$1.37 billion net interest income we earned on our FFELP
Loan portfolio in 2010 will decline as the portfolio amortizes.
In addition, SAFRA eliminates the Guarantor function and the
services we provide to Guarantors. We earned an origination fee
when we processed a loan guarantee for a Guarantor client and a
maintenance fee for the life of the loan for servicing the
Guarantor’s portfolio of loans. Since FFELP Loans are no
longer originated, we will no longer earn the origination fee
paid by the Guarantor. The portfolio that generates the
maintenance fee is now in run off, and the maintenance fees we
earn will decline as the portfolio amortizes. In 2010, we earned
Guarantor origination fees of $34 million and maintenance
fees of $56 million.
Our student loan contingent collection business is also affected
by HCERA. We currently have 13 Guarantors and ED as
clients. We earn revenue from Guarantors for collecting
defaulted loans as well as for managing their portfolios of
defaulted loans. In 2010, contingency collection revenue from
Guarantor clients totaled $245 million. We anticipate that
revenue from Guarantors will be relatively stable through 2012
and then begin to steadily decline as the portfolio of defaulted
loans we manage is resolved and amortizes.
2
We have been collecting defaulted student loans on behalf of ED
since 1997. The contract is merit based and accounts are awarded
on collection performance. We have consistently ranked number
one or two among the ED collectors. In anticipation of a surge
in volume as more loans switch to DSLP, ED added five new
collection companies bringing the total to 22. This led to a
decline in account placements, which we believe is temporary. We
expect that as the DSLP grows, increased revenue under the ED
contract will partially offset the decline in revenue from our
Guarantor clients.
As a result of HCERA, our FFELP Loans segment is now a runoff
business. Our Consumer Lending and components of Business
Services segments are ongoing businesses with growth
opportunities. We are currently restructuring our operations to
reflect the impact of the legislation which has resulted in
significant restructuring expenses. In 2010 most of our
$85 million of restructuring expenses related to HCERA.
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. Due to an increase in federal loan
limits that took effect in 2007 and 2008, we have seen a
substantial increase in borrowing from federal loan programs in
recent years. In the Academic Year (“AY”) that ended
on June 30, 2010, according to the College Board, borrowing
from federal loan programs increased 14 percent from the
prior year to $96.8 billion and has a five-year compound
annual growth rate of 9.9 percent. Borrowing from Private
Education Loan programs decreased 24 percent to
$7.7 billion and is down significantly from the peak of
$21.8 billion in the AY
2007-2008.
The College Board also reported that federal grants increased
64 percent to $41.2 billion from $25.2 billion in
the most recent year. We believe the drop in borrowing from
private loan programs was caused by an increase in federal loans
and consumer deleveraging.
Federal
Family Education Loan Program (“FFELP”)
Prior to its elimination on July 1, 2010 by HCERA, the
FFELP was the source of the vast majority of federal loans to
students. (For a full description of FFELP, see Appendix A
“Federal Family Education Loan Program.”) As of
September 30, 2010, there were $759 billion in federal
student loans outstanding, $529 billion of which were
originated under the FFELP. Private entities held
$390 billion of FFELP Loans as of September 30, 2010,
with the remaining amount held by ED. We were the largest
originator of loans under the FFELP and had $148.6 billion
of loans outstanding at December 31, 2010. See Item 7
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Segment Earnings
Summary — ‘Core Earnings’ Basis —
FFELP Loans Segment” for a full discussion of our FFELP
business and related loan portfolio.
The Higher Education Act (the “HEA”) regulates every
aspect of the FFELP, including communications with borrowers and
default aversion requirements. Failure to service a FFELP Loan
properly jeopardizes the guarantee on the loan. This guarantee
generally covers 98 or 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 guarantees on our existing loans were not affected
by HCERA.
FFELP Loans are guaranteed by state agencies or not-for-profit
companies designated as Guarantors, with ED providing
reinsurance to the Guarantors. Guarantors are responsible for
performing certain functions necessary to ensure the
program’s soundness and accountability. Generally, the
Guarantor is responsible for ensuring that loans are serviced in
compliance with the requirements of the HEA. When a borrower
defaults, we submit a claim to the Guarantor who provides
reimbursements of principal and accrued interest subject to Risk
Sharing. (See Appendix A “Federal Family Education Loan
Program” for a description of the role of Guarantors.)
Private
Education Loan Products
We offer Private Education Loan products to bridge the gap
between family resources, federal loans, grants, student aid,
scholarships, and the cost of a college education. Historically,
the majority of our Private Education Loans were made in
conjunction with a FFELP Stafford Loan and were marketed to
schools
3
through the same marketing channels and by the same sales force
as FFELP Loans. We also originated Private Education Loans at
DSLP schools. While we continue to actively maintain our
presence in school marketing channels, changes in the student
loan industry, school practices and the marketing of consumer
lending products in general require us to continue to develop
and evolve our marketing efforts through various other direct
and indirect marketing channels, such as direct mailings,
internet channels and marketing alliances with various banks and
financial institutions. As a result of the credit market
dislocation of 2008 and 2009, a large number of lenders have
exited the Private Education Loan business and only a few of the
country’s largest banks and specialty finance companies
continue to originate the product in any significant volumes.
Growth
in the Student Loan Industry
Growth in our “Core Earnings” basis student loan
portfolio and our servicing and collections businesses is driven
by the growth in the overall market for student loans, as well
as by market share gains. Rising enrollment and college costs
and increases in borrowing limits have caused the federal
student loan market to grow at a 10-year annual growth rate of
8.6 percent.
According to the College Board, tuition and fees at four-year
public institutions and four-year private institutions have
increased at a compound annual growth rate of 11.4 percent
and 7.1 percent, respectively, since AY
2000-2001, well
in excess of the 2.3 percent compound annual growth rate of
the consumer price index. The first federal loan limit increases
since 1992 were implemented July 1, 2007. In response to
the credit crisis, Congress significantly increased loan limits
again on July 1, 2008. Borrowers using DSLP are expected to
increase 4 percent per year over the next three years.
If the cost of education continues to increase at a pace that
exceeds income and savings growth, we expect more students to
borrow from private loan programs.
The National Center for Education Statistics predicts that
college-enrollment will increase 14 percent from 2010 to
2019. Demand for education credit is expected to increase with
enrollment over the next decade.
Federal
Direct Student Loan Programs
Students and their families can borrow money directly from the
federal government to pay for a college education under the
DSLP. The loans can be used to cover the cost of tuition, room
and board. A dependent undergraduate student can borrow up to
$5,500 as a freshman and $7,500 as a senior. An independent
undergraduate student can borrow $9,500 as a freshman and up to
$12,500 as a senior. A graduate student can borrow up to the
full cost of attendance. Students apply directly to the federal
government for a Direct Loan and the funds are dispersed
directly to the school he or she is attending. The DSLP is
serviced by four private sector institutions, including Sallie
Mae. Defaulted Direct Loans are collected by 22 private sector
companies, including Sallie Mae.
4
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 2009 onward.
Cost of
Attendance
(1)
Cumulative % Increase from AY 2000-2001
Cumulative % Increase from AY 2000-2001
Source: The College Board
| (1) | Cost of attendance is in current dollars and includes tuition, fees and on-campus room and board. |
Business
Segments
We have three primary business segments — the FFELP
Loans segment, Consumer Lending segment and the Business
Services segment. A fourth segment — Other, primarily
consists of the financial results related to the repurchase of
debt, the corporate liquidity portfolio and all overhead. We
also include results from smaller wind-down and discontinued
operations within this segment.
FFELP
Loans Segment
Our FFELP Loans business segment consists of our FFELP Loan
portfolio and the underlying debt and capital funding the loans.
These FFELP Loans are financed through various types of secured
non-recourse
5
financing vehicles and unsecured debt. At December 31,
2010, we held $148.6 billion of FFELP Loans, of which
77 percent were funded to term by securitization trusts,
16 percent were funded through the ED Conduit Program which
terminates on January 19, 2014, and 5 percent were
funded in our multi-year
asset-backed
commercial paper (“ABCP”) facility and Federal Home
Loan Bank in Des Moines facility (“FHLB-DM”). The
remainder was funded with unsecured debt. As a result of the
long-term funding used in the FFELP Loan portfolio and the
government guarantees provided on the loans, the net interest
margin recorded in the FFELP Loans segment tends to be
relatively stable. In addition to the net interest margin, we
earn other fee income which is primarily generated by late fees
on the loans in the portfolio. For a more detailed description
of these various funding facilities, see Item 7
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and
Capital Resources.”
FFELP Loans segment operating expenses primarily represent an
intercompany charge from the Business Services segment which
performs the servicing of these loans. Servicing is charged at
rates paid by the trusts which own the loans. These servicing
rates exceed the actual cost of servicing the loans.
Our FFELP Loan portfolio will amortize over approximately
25 years. Our goal is to maximize the cash flow generated
by the portfolio. We will seek to acquire third-party FFELP Loan
portfolios to add spread income and servicing revenue as
portfolios are converted onto our platforms to generate
incremental earnings and cash flow. We expect owners of runoff
portfolios to sell them in the future.
Consumer
Lending Segment
In this segment, we originate, acquire, finance and service
Private Education Loans. 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 federal 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. Private
Education Loans bear the full credit risk of the borrower. We
manage this risk by underwriting and pricing according to credit
risk based upon customized credit scoring criteria and the
addition of qualified cosigners.
In 2010 we originated $2.3 billion of Private Education
Loans. As of December 31, 2010 and 2009, we had
$35.7 billion and $35.1 billion of total “Core
Earnings” basis Private Education Loans outstanding,
respectively. For a more detailed description of these amounts,
see Item 7 “Management’s Discussion and Analysis
of Financial Condition and Results of Operations —
Segment Earnings Summary — ‘Core Earnings’
Basis — Consumer Lending Segment.” At
December 31, 2010, 68 percent of our Private Education
Loans were funded to term in securitization trusts and the
remainder was funded with term unsecured debt and bank deposits.
In this segment, we earn net interest income on the loan
portfolio (after provision for loan losses) as well as account
fees, primarily late payment and forbearance fees. Operating
expenses for this segment include costs incurred to acquire and
to service our loans.
In early 2011, we will launch a pilot Sallie Mae credit card
that is tailored to meet the financial needs of the
college-educated consumer. We will market this card to college
students and their parents and to customers who have completed
their education. We will focus on customers who have a strong
credit profile. We have a customer base of more than
20 million. Successfully cross-selling the Sallie Mae
credit card could lead to an expanded product mix on a
stand-alone and partnership basis.
Sallie Mae Bank (“the Bank”), a Utah industrial bank
subsidiary, plays an integral role in this segment. We received
our Utah State charter approval order effective October 12,
2005 and approval for our insurance from the Federal Deposit
Insurance Corporation (“FDIC”) on October 26,
2005. Since the beginning of 2006, nearly all Private Education
Loans have been originated and initially funded by the Bank. At
December 31, 2010, the Bank had total assets of
$7.6 billion including $4.4 billion in Private
Education Loans and total deposits of $5.9 billion.
Historically, the Bank focused on raising brokered deposits with
an average life in excess of two years. In 2010 we began to
gather retail deposits targeting our core customer base. We
raised more than $1 billion in retail deposits. We are now
fully developing our banking products and services to offer
6
education finance products to colleges. As a result of recent
changes in the student loan marketplace, we have broadened our
marketing activities to include Direct to Consumer initiatives
and referral lending relationships. We also intend to create
loan volume through our “Planning, Paying and Saving”
for college activities.
We face competition for Private Education Loans from a group of
the nation’s larger banks and specialty finance companies.
However, in recent years this sector has seen a significant
departure of market participants as a result of the
nation’s financial challenges as well as the recent
significant changes in the FFELP.
Business
Services Segment
The Business Services segment generates its revenue from
servicing our FFELP Loan portfolio as well as servicing FFELP
and other loans for other financial institutions, Guarantors and
ED. The segment also performs default aversion work and
contingency collections on behalf of Guarantors and ED, Campus
Payment Solutions, account asset servicing and transaction
processing activities. We are the largest servicer of student
loans, the largest collector of defaulted student loans, the
largest administrator of 529 college-savings plans and saving
for college loyalty programs, and we have a growing Campus
Payment Solutions platform.
The segment generates revenue from servicing FFELP Loans owned
and managed by us. These revenues are intercompany charges to
the FFELP Loans segment and are primarily charged at rates paid
by the trusts where the loans reside. The fees are contractually
designated as the first payment from the trust cash flows. These
fees are high quality in terms of both their priority and
predictability and exceed the actual cost of servicing the
loans. Revenue is also generated by servicing third-party loans
for other financial institutions and ED.
We generate revenue by servicing FFELP Loans for Guarantors. We
earn an account maintenance fee on a portfolio of
$99 billion of FFELP Loans for nine Guarantors. We provide
a full complement of default aversion and default collection
services on a contingency or pay for performance basis to 13
Guarantors, campus-based programs and ED. We have performed
default collections work for over ten years and have
consistently been a top performer.
Through Upromise we generate revenue by providing program
management services for 529 college-savings plans with assets of
$34.5 billion in 32 college-savings plans in
16 states. We also generate revenue in the form of
transaction fees generated by our consumer savings network,
through which members have earned $600 million in rewards
by purchasing products at hundreds of online retailers, booking
travel, purchasing a home, dining out, buying gas and groceries,
using the Upromise World Master Card and completing qualified
transactions. We earn a fee for the marketing and administrative
services we provide to companies that participate in Upromise
savings network.
Finally, our Campus Payment Solutions business offers a suite
of solutions designed to help campus business offices increase
their services to students and families. The product suite
includes electronic billing, collection, payment and refund
services plus full tuition payment plan administration. In 2010,
we generated servicing revenue from over 1,100 schools.
Operating expenses for this segment include the cost incurred to
perform the services described above.
We expect that FFELP-related servicing and Guarantor servicing
and contingency revenue will decline over time as the FFELP Loan
portfolios amortize. We expect that revenues under the
ED collections contract will increase as the Direct Lending
program expands. Between 2004 and 2008, less than
25 percent of student loans were originated under the
Direct Lending program. Effective July 1, 2010, all
government guaranteed student loans are originated through the
Direct Lending program. This growth will create revenue
opportunity under the ED collections contract as the volume of
defaults of Direct Loans surges in the coming years. We expect
revenue to increase under our ED Direct Loan servicing contract,
as discussed below, as that program grows. We also expect growth
in our 529 college-savings plan programs and Campus Payment
Solutions businesses.
7
The Bank is also a key component of our Campus Payment Solutions
and college savings products. We utilize the Bank to warehouse
funds from our Campus Payment Solutions and refund services
business. In addition, the Upromise rewards earned by members
are held at the Bank.
FFELP and Guarantor servicing is a runoff business and therefore
we face very little competition. In the second quarter of 2009,
ED named Sallie Mae as one of four servicers awarded a servicing
contract (the “ED Servicing Contract”) to service all
federal loans owned by ED. The contract will span five years
with one, five-year renewal at the option of ED. We compete for
Direct Loan servicing volume from ED with the three other
servicing companies with whom we share the contract. The
contract has four years remaining. Account allocations are
awarded annually based on each company’s performance on
five different metrics: defaulted borrower count, defaulted
borrower dollar amount, a survey of borrowers, a survey of
schools and a survey of federal personnel. We are focused on
improving our performance as measured by these metrics to
increase our market share and allocation of accounts under the
ED Servicing Contract.
The private sector collections industry is highly fragmented
with a few large companies and a large number of small scale
companies. The 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 account asset servicing and transaction processing
businesses are also highly competitive. We compete for Campus
Payment Solutions business and 529 college-savings plan and
transaction services business with banks, financial services and
other processing companies.
The scale, diversification and performance of our Business
Services segment have been, and we expect them to remain, a
competitive advantage for us.
Other
Segment
The Other segment primarily consists of the financial results
related to the repurchase of debt, the corporate liquidity
portfolio and all overhead. We also include results from smaller
wind-down and discontinued operations within this segment. These
are the Purchased Paper businesses and mortgage and other loan
businesses. The Other segment includes our remaining businesses
that do not pertain directly to the primary segments identified
above. Overhead expenses include costs related to executive
management, the board of directors, accounting, finance, legal,
human resources, stock option expense and certain information
technology costs related to infrastructure and operations.
Recent
Legislation
The passage of H.R. 4872, including SAFRA, and its impact on our
business has previously been discussed in Item 1
“Business — Recent Developments and Expected
Future Trends.”
Dodd-Frank
Wall Street Reform and Consumer Protection Act of
2010).
On July 21, 2010, President Obama signed into law the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act” or “the Act”), legislation
to reform and strengthen supervision of the U.S. financial
services industry. The Dodd-Frank Act represents a comprehensive
change to banking laws, imposing significant new regulation on
almost every aspect of the U.S. financial services industry.
The Dodd-Frank Act will result in significant new regulation in
key areas of our business and the markets in which we operate.
The Act mandates changes in regulation and compliance of
financial institutions and systemically important nonbank
financial companies, securities regulation, executive
compensation, regulation of derivatives, corporate governance,
transactions with affiliates, deposit insurance assessments and
consumer protection. Pursuant to the Act, we and many of our
subsidiaries, including the Bank, will be subject to regulations
promulgated by a new consumer protection bureau housed within
the Federal Reserve System, known as the Bureau of Consumer
Financial Protection (the “Bureau”). The Bureau will
have substantial
8
power to define the rights of consumers and responsibilities of
lending institutions, including our Private Education lending
and retail banking businesses. The Bureau will not examine the
Bank, and the Bank’s primary regulators will remain the
FDIC and the Utah Department of Financial Institutions. The
U.S. Treasury Department has designated July 21, 2011
as the date upon which the Bureau will begin to exercise its
authority.
The Act also supplements the Federal Trade Commission Act’s
prohibitions against practices that are unfair or deceptive by
also prohibiting practices that are “abusive.” After
this term is defined by implementing regulations, we will
evaluate our consumer financial products and services to confirm
they are in compliance with this provision.
More specific to our core business the Dodd-Frank Act provides
for the designation of a private education loan ombudsman within
the Bureau, whose functions will include the informal resolution
of complaints from private education loan borrowers, a process
similar to and to be coordinated with the ombudsman structure
currently in place for federally guaranteed student loans. The
Act also requires the Bureau’s director and the Secretary
of Education to submit a report to Congress on the second
anniversary of enactment on private education loans and private
education lenders. In addition, the act mandates the
U.S. Secretary of Education to examine the private
education loan market in the U.S. and provide a report to
Congress by July 20, 2012.
The Act also provides that the newly established Financial
Services Oversight Council (the “FSOC”) may designate
that certain nonbank financial companies must be supervised by
the Board of Governors of the Federal Reserve System (the
“Federal Reserve Board”) and be subject to enhanced
prudential supervision and regulatory standards to be developed
by the Federal Reserve Board. The FSOC may designate a nonbank
financial company as systemically important if they find that
material financial distress at the company — or its
nature, scope, size, scale, concentration, interconnectedness,
or mix of activities — could pose a threat to the
financial stability of the United States. Such enhanced
standards will include among other things, risk-based capital
and liquidity requirements, special regulatory and insolvency
regimes, production of a resolution plan to cover potential
insolvencies and may include such additional requirements on
matters such as credit exposure concentrations.
Finally, the Dodd-Frank Act creates a comprehensive new
regulatory framework for oversight of derivatives transactions
by the Commodity Futures Trading Commission (the
“CFTC”) and the SEC. This new framework, among other
things, subjects certain swap participants to new capital and
margin requirements, recordkeeping and business conduct
standards and imposes registration and regulation of swap
dealers and major swap participants. The scope of potential
exemptions remains to be further defined through agency
rulemakings. Moreover, while we may or may not qualify for
exemptions, many of our derivatives counterparties are likely to
be subject to the new capital, margin and business conduct
requirements.
Most of the component parts of the Dodd-Frank Act will be
subject to intensive rulemaking and public comment over the
coming months and we cannot predict the ultimate effect the Act
or required examinations of the private education loan market
could have on our operations or those of our subsidiaries, such
as the Bank, at this time. It is likely, however, that
operational expenses will increase if new or additional
compliance requirements are imposed on our operations and our
competitiveness could be significantly affected if we are
subjected to supervision and regulatory standards not otherwise
applicable to our competitors.
Other
Significant Sources of Regulation
Many aspects of our businesses are subject to regulation by
federal and state regulation and administrative oversight. The
most significant of these are described below.
We are subject to the HEA and, from time to time, our student
loan operations are reviewed by ED and guarantee agencies. As a
servicer of federal student loans, we are 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, we must comply with, on behalf of our
Guarantor clients, certain ED regulations that govern Guarantor
activities as well as agreements for
9
reimbursement between ED and our Guarantor clients. As a
third-party service provider to financial institutions, we are
also subject to examination by the Federal Financial
Institutions Examination Council (“FFIEC”).
Our originating or servicing of federal and Private Education
Loans also subjects us 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 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. |
Our Business Services segment’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 statutes are
the Fair Debt Collection Practices Act and additional provisions
of the acts listed above, as well as the HEA and under the
various laws and regulations that govern government contractors.
These activities are also subject to state laws and regulations
similar to the federal laws and regulations listed above.
The Bank is subject to Utah banking regulations as well as
regulations issued by the FDIC, and undergoes periodic
regulatory examinations by the FDIC and the Utah Department of
Financial Institutions.
Our Upromise activities 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 SEC, as well as various state
regulatory authorities.
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 capital
markets 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 and repricing risk.
The capital markets have experienced and continue to experience
a prolonged period of volatility. This volatility has had
varying degrees of impact on most financial organizations,
including us. These conditions have affected our access to and
cost of capital necessary to manage and effectively operate our
business. Additional factors that could make financing
difficult, more expensive or unavailable on any terms include,
but are not limited to, our financial results and losses,
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. If financing becomes more difficult, expensive or
unavailable, our business, financial condition and results of
operations could be materially and adversely affected.
In recent years, the ongoing volatility and illiquidity of the
capital markets has caused the U.S. Federal government to
intervene and provide various forms of financial assistance and
liquidity programs to numerous industries, including the student
loan industry. Our participation in these programs provided
significant liquidity for us at times when capital market
alternatives were of limited availability or borrowing costs
were otherwise excessive. Given current Federal budgetary
constraints and recent congressional actions that have affected
the student loan industry, there can be no assurance that these
types of financial assistance and liquidity programs will again
be made available if volatility and illiquidity of the capital
markets were to increase or continue for a prolonged period of
time.
During 2010, we funded Private Education Loan originations
primarily through term brokered and retail deposits raised by
the 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. For
additional discussion on regulatory and compliance risks
relating to the Bank, see below at Item 1A “Risk
Factors — Regulatory and Compliance.” If we were
unable to obtain funds from which to make new Private Education
Loans our business, financial condition and results of
operations would be materially and adversely affected.
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.
Moreover, it may not always be possible to hedge all of our
exposure to such basis risks. 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. In such circumstances,
our earnings could be adversely affected, possibly to a material
extent. For instance, as a result of the turmoil in the capital
markets, the historically tight spread between CP (the index
used for many of our assets) and LIBOR (the index used for much
of our debt) began to widen dramatically in the fourth quarter
of 2008 resulting in substantial increases in our cost of funds.
The spread subsequently returned to historical levels beginning
in the third quarter of 2009 and has been stable since then.
11
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.
Further deterioration in the economy could result in a decrease
in demand for consumer credit and credit quality could adversely
be affected. Higher credit-related losses and weaker credit
quality could negatively affect our business, financial
condition and results of operations and limit funding options,
including capital markets activity, which could also adversely
impact our liquidity position.
Operations.
A
failure of our operating 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 operating 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
large numbers of daily transactions in compliance with legal and
regulatory standards and our product specifications, which we
change to reflect our business needs. As processing demands
change and our loan portfolios grow in both volume and differing
terms and conditions, developing and maintaining our operating
systems and infrastructure becomes increasingly challenging and
there is no assurance that we can adequately or efficiently
develop and maintain such systems.
Our loan originations and conversions and the servicing,
financial, accounting, data processing or other operating
systems and facilities that support them 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 affected 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 adversely affect our business,
financial condition and results of operations.
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 also 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. In the event
personal, confidential or other information is jeopardized,
intercepted, misused or mishandled, 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 fines, penalties,
litigation costs and settlements and financial losses that are
either not insured against or not fully covered through any
insurance maintained by us. If one or more of such events occur,
our business, financial condition or results of operations could
be significantly and adversely affected.
12
We
continue to undertake numerous cost-cutting initiatives to
realign and restructure our business in light of significant
legislative changes in the past several years. Our business,
results of operations and financial condition could be adversely
affected if we do not effectively align our cost structure with
our current business operations and future business
prospects.
In response to significant legislative changes in the past
several years, we have undertaken and continue to undertake
cost-cutting initiatives, including workforce reductions,
servicing center closures, restructuring and transfers of
business functions to new locations, enhancements to our
web-based customer services, adoption of new procurement
strategies and investments in operational efficiencies. Our
business and financial condition could be adversely affected by
these cost-cutting initiatives if cost reductions taken are so
dramatic as to cause disruptions in our business or reductions
in the quality of the services we provide. We may be unable to
successfully execute on certain growth and other business
strategies or achieve certain business goals or objectives if
cost reductions are too dramatic. Alternatively, we may not be
able to achieve our desired cost savings, and if that is the
case our results of operations could be adversely affected.
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 Item 7
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Critical
Accounting Policies and Estimates” and in
“Note 2 — Significant Accounting
Policies.” If we make incorrect assumptions or estimates,
we may under- or overstate reported financial results, which
could materially and adversely affect our business, financial
condition and results of operations.
Political
and Reputational.
The
scope and profitability of our lending businesses remain subject
to risks arising from legislative and administrative
actions.
Through the HCERA, the U.S. Congress mandated that all
future federally guaranteed student loans be made through the
DSLP, eliminating the FFELP. Further legislative action by
Congress could adversely affect our business, financial
condition and results of operations. For instance, the
President’s Fiscal 2012 Budget includes a provision that
would, for a limited period of time, incent borrowers that have
loans with the FFELP and DSLP to move their FFELP Loans to ED.
While such consolidations have been permitted for some time,
incentives such as these, if such a proposal were to be
approved, could incrementally increase the rate at which
borrowers might otherwise have moved certain FFELP Loans to ED
and our future estimated cash flows and profitability from our
FFELP Loan portfolios could be detrimentally affected. Likewise,
additional restrictions or requirements imposed on private
student lending could increase our costs, affect our ability to
recover loans and materially and adversely impact our business,
financial condition and results of operations.
Changes
in laws and regulations that affect the financial services
industries generally have the potential to negatively impact our
business and results of operations.
As a non-bank financial institution we are often subject to laws
and regulations related to the broader financial services
industry. For instance, the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 has the potential to
significantly increase our costs of doing business or affect our
relative competitiveness within our industry. For a more
detailed description of the implications of this act, see below
at Item 1A
13
“Risk Factors — Regulatory and Compliance.”
In 2010, we were anticipating the introduction of the Troubled
Asset Relief Program (“TARP”) tax, which had the
potential to significantly reduce our net income. The
President’s Fiscal 2012 Budget resubmits such a tax for
Congress’ consideration. The passage of sweeping changes to
the legal and regulatory environments in which we operate,
including increases in taxation or fees charged on our business,
have the potential to materially and adversely impact our
business, financial condition and results of operations.
Our
ability to continue to grow our businesses related to
contracting with state and federal governments is partly reliant
on our ability to remain compliant with the laws and regulations
applicable to those contracts.
We are subject to a variety of laws and regulations related to
our government contracting businesses, including our contracts
with ED. In addition, these government contracts are subject to
termination rights, audits and investigations. If we were found
in noncompliance with the contract provisions or applicable laws
or regulations, or the government exercised its termination or
other rights for that or other reasons, our reputation could be
negatively affected, and our ability to compete for new
contracts could be diminished. If this were to occur, the future
prospects, revenues and results of operations of this portion of
our business could be negatively affected.
Competition.
We
operate in a competitive environment, and our product offerings
are primarily concentrated in loan and savings products for
higher education.
We compete in 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, we could
lose market share to them or subject our existing loans to
refinancing risk. In addition, there is a risk that any new
education or loan products that we introduce will not be
accepted in the marketplace. Our product offerings may not prove
to be profitable and may fail to offset the loss of business in
the education credit market.
We are a leading provider of saving- and
paying-for-college
products and programs. This concentration gives us a competitive
advantage in the marketplace. This concentration also creates
risks in our business, particularly in light of our
concentration as a private credit lender and servicer for the
FFELP and DSLP. 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 resistance to higher education costs
increases, or if the demand for higher education loans
decreases, our private credit lending business could be
negatively affected. In addition, the federal government,
through the DSLP, poses significant competition to our private
credit loan products. If loan limits under the DSLP increase, as
they did in late 2007 and 2008, DSLP loans could be more widely
available to students and parents and DSLP loan limits could
increase, resulting in a decrease in the size of the private
credit education loan market and lessened demand for our private
credit education loan products.
Credit
and Counterparty.
Unexpected
and sharp changes in the overall economic environment may
negatively impact the performance of our loan and credit
portfolios.
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 considers 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.
14
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 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 could, 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. Our counterparty exposure is more fully
discussed in Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Liquidity and Capital
Resources — Counterparty Exposure.” If our
counterparties are unable to perform their obligations, our
business, financial condition and results of operations could
suffer.
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,
litigation or the loss of federal guarantees on affected FFELP
Loans.
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. In addition, changes to such laws and
regulations could adversely impact our business and results of
operations if we are not able to adequately mitigate the impact
of such changes.
Our private credit lending and debt collection businesses are
subject to regulation and oversight by various state and federal
agencies, particularly in the area of consumer protection. Some
state attorneys general have been active in this area of
consumer protection regulation. 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.
The Bank is subject to state and FDIC regulation, oversight and
regular examination. The FDIC and state regulators have the
authority to impose fines, penalties or other limitations on the
Bank’s operations should they conclude that its operations
are not compliant with applicable laws and regulations. At the
time of this filing, the 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,
and limitations on our ability to fund our Private Education
Loans, which are currently funded by deposits raised by the
Bank, or restrictions on the operations of the Bank. The
imposition of fines, penalties or other limitations on the
Bank’s business could negatively impact our business,
financial condition and results of operations.
Loans serviced under the FFELP are subject to the HEA and
related regulations. Our servicing operations are designed and
monitored to comply with the HEA, related regulations and
program guidance; however ED could determine that we are not in
compliance for a variety of reasons, including that we
misinterpreted ED guidance or incorrectly applied the HEA and
its related regulations or policies. Failure to comply could
result in fines, the loss of the federal guarantees on affected
FFELP Loans, expenses required to cure servicing deficiencies,
suspension or termination of our right to participate as a
servicer, negative publicity and potential legal claims. A
summary of the FFELP, which indicates its complexity and
frequent changes, may be found in Appendix A “Federal
Family Education Loan Program.” The imposition of
significant fines, the loss of federal guarantees on a material
number of FFELP Loans, the incurrence of additional expenses
and/or
the
loss of our ability to participate as a FFELP servicer could
individually or in the aggregate have a material, negative
impact on our business, financial condition or results of
operations.
Dodd-Frank
Wall Street Reform and Consumer Protection Act of
2010
On July 21, 2010, President Obama signed into law the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act” or the “Act”), legislation
to reform and strengthen supervision of the
15
U.S. financial services industry. The Dodd-Frank Act
represents a comprehensive change to banking laws, imposing
significant new regulation on almost every aspect of the
U.S. financial services industry.
The Dodd-Frank Act will result in significant new regulation in
key areas of our business and the markets in which we operate.
Pursuant to the Act, we and many of our subsidiaries, including
the Bank, will be subject to regulations promulgated by a new
consumer protection bureau housed within the Federal Reserve
System, known as the Bureau of Consumer Financial Protection
(the “Bureau”). The Bureau will have substantial power
to define the rights of consumers and responsibilities of
lending institutions, including our Private Education lending
and retail banking businesses. The Bureau will not examine the
Bank, and the Bank’s primary regulator will remain the FDIC
and the Utah Department of Financial Institutions. The
U.S. Treasury Department has designated July 21, 2011
as the date upon which the Bureau will begin to exercise its
authority. In addition, the act mandates the U.S. Secretary
of Education to examine the private education loan market in the
U.S. and provide a report to Congress by July 20, 2012.
The Dodd-Frank Act also provides that the newly established
Financial Services Oversight Council (the “FSOC”) may
designate that certain nonbank financial companies must be
supervised by the Board of Governors of the Federal Reserve
System (the “Federal Reserve Board”) and be subject to
enhanced prudential supervision and regulatory standards to be
developed by the Federal Reserve Board. The FSOC may designate a
nonbank financial company as systemically important if they find
that material financial distress at the company — or
its nature, scope, size, scale, concentration,
interconnectedness, or mix of activities — could pose
a threat to the financial stability of the United States. Such
enhanced standards will include, among other things, risk-based
capital and liquidity requirements, special regulatory and
insolvency regimes, production of a resolution plan to cover
potential insolvencies and may include such additional
requirements on matters such as credit exposure concentrations.
Most of the component parts of the Dodd-Frank Act will be
subject to intensive rulemaking and public comment over the
coming months and we cannot predict the ultimate effect the Act
or required examinations of the private education loan market
could have on our operations or those of our subsidiaries, such
as the Bank, at this time. It is likely, however, that
operational expenses will increase if new or additional
compliance requirements are imposed on our operations and our
competitiveness could be significantly affected if we are
subjected to supervision and regulatory standards not otherwise
applicable to our competitors.
| Item 1B. | Unresolved Staff Comments |
None.
16
| Item 2. | Properties |
The following table lists the principal facilities owned by us
as of December 31, 2010:
|
Approximate
|
||||||||
| Location | Function | Business Segment(s) | Square Feet | |||||
|
Fishers, IN
|
Loan Servicing and Data Center | FFELP Loans; Consumer Lending; Business Services | 450,000 | |||||
|
Newark, DE
|
Credit and Collections Center | Consumer Lending; Business Services | 160,000 | |||||
|
Wilkes-Barre, PA
|
Loan Servicing Center | FFELP Loans; Consumer Lending; Business Services | 133,000 | |||||
|
Indianapolis, IN
|
Loan Servicing Center | Business Services | 100,000 | |||||
|
Big Flats, NY
|
GRC — Collections Center | Business Services | 60,000 | |||||
|
Arcade,
NY
(1)
|
Pioneer Credit Recovery — Collections Center | Business Services | 46,000 | |||||
|
Perry,
NY
(1)
|
Pioneer Credit Recovery — Collections Center | Business Services | 45,000 | |||||
|
Swansea, MA
|
AMS Headquarters | Business Services | 36,000 | |||||
| (1) | In the first quarter of 2003, we entered into a ten year lease with the Wyoming County Industrial Development Authority with a right of reversion to us for the Arcade and Perry, New York facilities. |
The following table lists the principal facilities leased by us
as of December 31, 2010:
|
Approximate
|
||||||||
| Location | Function | Business Segment(s) | Square Feet | |||||
|
Reston, VA
|
Headquarters | FFELP Loans; Consumer Lending; Business Services; Other | 240,000 | |||||
|
Reston, VA
|
Administrative Offices | FFELP Loans; Consumer Lending; Business Services; Other | 90,000 | |||||
|
Newark, DE
|
Sallie Mae — Operations Center | Consumer Lending; Business Services; Other | 86,000 | |||||
|
Niles, IL
|
Collections Center | Other | 84,000 | |||||
|
Newton, MA
|
Upromise | Business Services | 78,000 | |||||
|
Cincinnati, OH
|
GRC Headquarters and Collections Center | Business Services | 59,000 | |||||
|
Muncie, IN
|
Collections Center | Consumer Lending; Business Services | 54,000 | |||||
|
Moorestown, NJ
|
Pioneer Credit Recovery — Collections Center | Business Services | 30,000 | |||||
|
White Plains,
NY
(1)
|
N/A | N/A | 26,000 | |||||
|
Kansas City, MO
|
Upromise and Campus Payment Solutions | Business Services | 21,000 | |||||
|
Whitewater,
WI
(2)
|
N/A | N/A | 16,000 | |||||
|
Seattle, WA
|
NELA | Business Services | 10,000 | |||||
| (1) | Space vacated in December 2009; we are actively searching for subtenants. | |
| (2) | Space vacated in September 2010; we are actively searching for subtenants or tenants. |
None of the facilities that we own is encumbered by a mortgage.
We believe that our headquarters, loan servicing centers, data
center,
back-up
facility and data management and collections centers are
generally adequate to meet our long-term student loan and
business goals. Our headquarters are currently in leased space
at 12061 Bluemont Way, Reston, Virginia, 20190. We are
relocating our headquarters to Newark, Delaware from Reston,
Virginia by March 31, 2011.
17
| Item 3. | Legal Proceedings |
Investor
Litigation
On January 31, 2008, a putative class action lawsuit was
filed against us and certain officers in the United States
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 our
common stock 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 our securities.
The complaint alleges that Defendants caused our results for
year-end 2006 and for the first quarter of 2007 to be materially
misstated because we failed to adequately provide for loan
losses, which overstated our net income, and that we failed to
adequately disclose allegedly known trends and uncertainties
with respect to our non-traditional loan portfolio. On
September 24, 2010, the court denied our motion to dismiss
Mr. Albert Lord and the Company, but dismissed
Mr. C.E. Andrews as a defendant in the action. The matter
is now in the discovery phase. 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
, formerly in the
U.S. District Court for the Southern District of New York
and now before the United States Court of Appeals for the Second
Circuit. The case was originally filed on May 8, 2008 and
the purported class consists of participants in or beneficiaries
of the Sallie Mae 401(K) Retirement Savings Plan and Sallie Mae
401(k) Savings Plan (“401K Plans”) between
January 18, 2007 and “the present” whose accounts
included investments in our common 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 our business
made during the 401K Class Period and investments in our
common stock by participants in the 401K Plans. On
September 24, 2010, this case was dismissed; however, the
Plaintiffs appealed. The appeal is pending. The
Plaintiffs/Appellants seek unspecified damages, attorneys’
fees, costs, and equitable and injunctive relief.
Lending
and Collection Litigation and Investigations
On July 15, 2009, the United States 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 we violated the False Claims Act by our
“systemic failure to service loans and abide by forbearance
regulations” and our “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.
Defendants filed their Motion to Dismiss on September 21,
2009. On September 24, 2010, the United States District
Court for the District of Columbia granted our Motion to Dismiss
in its entirety. On October 25, 2010, Plaintiff/Relator
filed a Notice of Appeal with the United States Court of Appeals
for the District of Columbia Circuit. The appeal is pending.
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 we allegedly contacted
“tens of thousands” of consumers on their cellular
telephones via autodialer without their prior express consent in
violation of the Telephone Consumer Protection Act, 47 U.S.C.
§ 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. On April 5, 2010, Plaintiffs filed a
First Amended Class Action Complaint changing the defendant
from SLM Corporation to Sallie Mae, Inc. The parties in this
matter have reached a tentative settlement which is subject to
court approval and other conditions. On September 14, 2010,
the United States District Court for the Western District of
Washington agreed to Plaintiff’s Motion for Preliminary
Approval of Settlement Agreement. We have vigorously denied all
claims asserted against us, but agreed to the settlement to
avoid the burden and expense of
18
continued litigation. If the settlement receives final approval
from the Court, settlement awards will be made to eligible class
members on a claims-made basis from a settlement fund of
$19.5 million, and class members may opt out of certain
calls to their cellular telephones. On January 21, 2011,
and February 7, 2011, the Company filed submissions with
the Court to advise that approximately 1.76 million
individuals had been omitted from the original notice list for a
total of approximately 6.6 million class members. In
response, Class Counsel asked the Company to contribute
additional unspecified amounts to the settlement fund. On
February 10, 2011, the Court granted a Consented Motion to
Stay Implementation of Settlement and Certain Deadlines. The
Court ordered Class Counsel to file a status report on
March 18, 2011. On February 10, 2011, Judith Harper
filed a Motion to Intervene as Party Plaintiff, which the Court
terminated on February 11, 2011 based upon the Court’s
February 10, 2011 Stay. On February 9, 2011,
Ms. Harper filed a similar Class Action Complaint
regarding the TCPA against Arrow Financial Services, LLC, in the
U.S. District Court for the Northern District of Illinois
(the “Harper case”). On February 22, 2011, Arrow
Financial Services, LLC filed a Motion to Stay Proceedings in
the Harper case. That Motion is pending.
On December 17, 2007, plaintiffs filed a complaint against
us in Rodriguez v. SLM Corporation et al., in the
U.S. District Court for the District of Connecticut
alleging that we 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 complaint does not identify the relief plaintiffs
seek. The court denied our 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. The matter is now in the discovery phase.
ED’s Office of the Inspector General (“OIG”)
commenced an audit regarding Special Allowance Payments on
September 10, 2007. On August 3, 2009, we received the
final audit report of the OIG related to our billing practices
for Special Allowance Payments. Among other things, the OIG
recommended that ED instruct us to return approximately
$22 million in alleged special allowance overpayments. We
continue to believe that our practices were consistent with
longstanding ED guidance and all applicable rules and
regulations and intend to continue disputing these findings. We
provided our response to the Secretary on October 2, 2009
and we provided additional information to ED in 2010.
The Company and its subsidiaries and affiliates also are 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, our collections subsidiaries are routinely named in
individual plaintiff or class action lawsuits in which the
plaintiffs allege that those subsidiaries have violated a
federal or state law in the process of collecting their
accounts. We believe that these claims, lawsuits and other
actions will not have a material adverse effect on our business,
financial condition or results of operations. Finally, from time
to time, the Company receives information and document requests
from state attorneys general and Congressional committees
concerning certain business practices. Our practice has been and
continues to be to cooperate with the state attorneys general
and Congressional committees 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, 2010.
19
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock is listed and traded on the New York Stock
Exchange under the symbol SLM. The number of holders of record
of our common stock as of January 31, 2011 was 494. Because
many shares of our common stock are held by brokers and other
institutions on behalf of shareholders, we are unable to
estimate the total number of beneficial owners represented by
these record holders. The following table sets forth the high
and low sales prices for our 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 | |||||||||||||||||
|
2010
|
High | $ | 13.32 | $ | 13.96 | $ | 12.40 | $ | 13.14 | |||||||||||
| Low | 10.01 | 9.85 | 10.05 | 10.92 | ||||||||||||||||
|
2009
|
High | $ | 12.43 | $ | 10.47 | $ | 10.39 | $ | 12.11 | |||||||||||
| Low | 3.11 | 4.02 | 8.12 | 8.01 | ||||||||||||||||
There were no dividends paid in 2008, 2009 or 2010.
Issuer
Purchases of Equity Securities
The following table summarizes our common share repurchases
during 2010. The only repurchases conducted by us 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 1.1 million shares for 2010) and not in
connection with any authorized buyback program. See
“Note 11 — Stockholders’ Equity.”
|
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:
|
||||||||||||||||
|
October 1 – October 31, 2010
|
— | $ | — | — | 38.8 | |||||||||||
|
November 1 – November 30, 2010
|
.1 | 12.17 | — | 38.8 | ||||||||||||
|
December 1 – December 31, 2010
|
.2 | 12.58 | — | 38.8 | ||||||||||||
|
Total fourth quarter
|
.3 | $ | 12.46 | — | 38.8 | |||||||||||
20
Stock
Performance
The following graph compares the yearly percentage change in our
cumulative total shareholder return on our 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, 2005 and
reinvestment of dividends through December 31, 2010.
Five Year
Cumulative Total Shareholder Return
| Company/Index | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | 12/31/10 | ||||||||||||||||||
|
SLM Corporation
|
$ | 100.0 | $ | 90.3 | $ | 37.7 | $ | 16.7 | $ | 21.1 | $ | 23.6 | ||||||||||||
|
S&P 500 Financials
|
100.0 | 118.9 | 97.3 | 44.6 | 52.0 | 58.3 | ||||||||||||||||||
|
S&P Index
|
100.0 | 115.6 | 121.9 | 77.4 | 97.4 | 111.9 | ||||||||||||||||||
Source: Bloomberg Total Return
Analysis
21
| Item 6. | Selected Financial Data |
Selected
Financial Data
2006-2010
(Dollars in millions, except per share amounts)
(Dollars in millions, except per share amounts)
The following table sets forth our selected financial and other
operating information prepared in accordance with GAAP. The
selected financial data in the table is derived from our
consolidated financial statements. The data should be read in
conjunction with the consolidated financial statements, related
notes, and Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
|
Operating Data:
|
||||||||||||||||||||
|
Net interest income
|
$ | 3,479 | $ | 1,723 | $ | 1,365 | $ | 1,588 | $ | 1,454 | ||||||||||
|
Net income (loss):
|
||||||||||||||||||||
|
Continuing operations, net of tax
|
$ | 597 | $ | 544 | $ | 2 | $ | (938 | ) | $ | 1,103 | |||||||||
|
Discontinued operations, net of tax
|
(67 | ) | (220 | ) | (215 | ) | 42 | 54 | ||||||||||||
|
Net income (loss)
|
$ | 530 | $ | 324 | $ | (213 | ) | $ | (896 | ) | $ | 1,157 | ||||||||
|
Basic earnings (loss) per common share:
|
||||||||||||||||||||
|
Continuing operations
|
$ | 1.08 | $ | .85 | $ | (.23 | ) | $ | (2.36 | ) | $ | 2.60 | ||||||||
|
Discontinued operations
|
(.14 | ) | (.47 | ) | (.46 | ) | .10 | .13 | ||||||||||||
|
Total
|
$ | .94 | $ | .38 | $ | (.69 | ) | $ | (2.26 | ) | $ | 2.73 | ||||||||
|
Diluted earnings (loss) per common share:
|
||||||||||||||||||||
|
Continuing operations
|
$ | 1.08 | $ | .85 | $ | (.23 | ) | $ | (2.36 | ) | $ | 2.51 | ||||||||
|
Discontinued operations
|
(.14 | ) | (.47 | ) | (.46 | ) | .10 | .12 | ||||||||||||
|
Total
|
$ | .94 | $ | .38 | $ | (.69 | ) | $ | (2.26 | ) | $ | 2.63 | ||||||||
|
Dividends per common share
|
$ | — | $ | — | $ | — | $ | .25 | $ | .97 | ||||||||||
|
Return on common stockholders’ equity
|
13 | % | 5 | % | (9 | )% | (22 | )% | 32 | % | ||||||||||
|
Net interest margin
|
1.82 | 1.05 | .93 | 1.26 | 1.54 | |||||||||||||||
|
Return on assets
|
.28 | .20 | (.14 | ) | (.71 | ) | 1.22 | |||||||||||||
|
Dividend payout ratio
|
— | — | — | (11 | ) | 37 | ||||||||||||||
|
Average equity/average assets
|
2.47 | 2.96 | 3.45 | 3.51 | 3.98 | |||||||||||||||
|
Balance Sheet Data:
|
||||||||||||||||||||
|
Student loans, net
|
$ | 184,305 | $ | 143,807 | $ | 144,802 | $ | 124,153 | $ | 95,920 | ||||||||||
|
Total assets
|
205,307 | 169,985 | 168,768 | 155,565 | 116,136 | |||||||||||||||
|
Total borrowings
|
197,159 | 161,443 | 160,158 | 147,046 | 108,087 | |||||||||||||||
|
Total stockholders’ equity
|
5,012 | 5,279 | 4,999 | 5,224 | 4,360 | |||||||||||||||
|
Book value per common share
|
8.44 | 8.05 | 7.03 | 7.84 | 9.24 | |||||||||||||||
|
Other Data:
|
||||||||||||||||||||
|
Off-balance sheet securitized student loans, net
|
$ | — | $ | 32,638 | $ | 35,591 | $ | 39,423 | $ | 46,172 | ||||||||||
22
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis should be read in
conjunction with our Consolidated Financial Statements and
related Notes included elsewhere in this Annual Report on
Form 10-K.
This discussion and analysis also contains forward-looking
statements and should also be read in conjunction with the
disclosures and information contained in “Forward-Looking
and Cautionary Statements” and Item 1A “Risk
Factors” in this Annual Report on
Form 10-K.
Through this discussion and analysis, we intend to provide
the reader with some narrative context for how our management
views our consolidated financial statements, additional context
within which to assess our operating results, and information on
the quality and variability of our earnings, liquidity and cash
flows.
Overview
We provide Private Education Loans that help students and their
families bridge the gap between family resources, federal loans,
grants, student aid, scholarships, and the cost of a college
education. We also provide savings products to help save for a
college education. In addition we provide servicing and
collection services on federal loans. We also offer servicing,
collection and transaction support directly to colleges and
universities in addition to the saving for college industry.
Finally, we are the largest private owner of FFELP Loans.
Effective July 1, 2010, HCERA legislation eliminated the
authority to originate new loans under FFELP. Consequently, we
no longer originate FFELP Loans. As a result, in the fourth
quarter of 2010 we changed the way we regularly monitor and
assess our ongoing operations and results by realigning our
business segments into four reportable segments: (1) FFELP
Loans, (2) Consumer Lending, (3) Business Services and
(4) Other. Management now views our business as consisting
of three primary segments comprised of one runoff business
(FFELP Loans) and two continuing growth businesses (Consumer
Lending and Business Services).
FFELP
Loans Segment
Our FFELP Loans segment consists of our $148.6 billion
FFELP Loan portfolio and underlying debt and capital funding
these loans. This includes the acquisition of loans from the
Student Loan Corporation on December 31, 2010 (see
“Segment Earnings Summary —
‘Core-Earnings’ Basis — FFELP Loans
Segment” of this Item 7 for further discussion).
Because we no longer originate FFELP Loans the portfolio is in
runoff and is expected to amortize over approximately the next
25 years with a weighted average remaining life of
7.7 years. We actively seek to acquire FFELP Loan
portfolios to leverage our servicing scale and expertise to
generate incremental earnings and cash flow to create additional
shareholder value. Of our total FFELP Loan portfolio,
77 percent was funded to term through securitization
trusts, 16 percent was funded through the ED Conduit
Program which terminates on January 19, 2014,
5 percent was funded in our multi-year ABCP facility and
FHLB-DM
facility, and the remainder was funded with unsecured debt. It
is expected to generate a stable net interest margin and
significant amounts of cash as the portfolio amortizes.
Consumer
Lending Segment
In our Consumer Lending segment we originate, acquire, finance
and service Private Education Loans. As of December 31,
2010 we had $35.7 billion of Private Education Loans
outstanding. In 2010 we originated $2.3 billion of Private
Education Loans, down from $3.2 billion in the prior year.
We provide Private Education Loans to students and their
families to help them pay for a college education. We provide
loans through the financial aid office,
direct-to-consumer
and through referral and partner lenders. We also provide
savings products, primarily in the form of retail deposits, to
help customers save for a college education (we refer to this as
our Direct Banking business line).
Business
Services Segment
In our Business Services segment we provide loan servicing to
our FFELP Loans segment, ED and other third parties. We provide
default aversion work and contingency collections on behalf of
Guarantors, colleges and ED. We also perform Campus Payment
Solutions, account asset servicing and transaction processing
activities.
Other
Our Other segment primarily consists of the financial results
related to the repurchase of debt, the corporate liquidity
portfolio and all overhead. We also include results from smaller
wind-down and discontinued operations within this segment.
23
The following table shows how we realigned our old reportable
segments existing prior to the fourth quarter of 2010 into our
new business lines as part of the change in business segments
discussed above.
| Business Lines/Activities | New Business Segment | Prior Business Segment | ||
|
FFELP Loan business
|
FFELP Loans | Lending | ||
|
Private Education Loan business
|
Consumer Lending | Lending | ||
|
Direct Banking
|
Consumer Lending | Lending | ||
|
Intercompany servicing of FFELP Loans
|
Business Services | Lending | ||
|
FFELP Loan default aversion services
|
Business Services | APG | ||
|
FFELP defaulted loan portfolio management services
|
Business Services | APG | ||
|
FFELP Guarantor servicing
|
Business Services | Other | ||
|
Contingency collections
|
Business Services | APG | ||
|
Third-party loan servicing
|
Business Services | Other | ||
|
ED loan servicing
|
Business Services | Other | ||
|
Upromise
|
Business Services | Other | ||
|
Campus Payment Solutions
|
Business Services | Other | ||
|
Purchased Paper — Non-Mortgage
|
Other | APG | ||
|
Purchased Paper — Mortgage/Properties
|
Other | APG | ||
|
Mortgage and other loans
|
Other | Lending | ||
|
Debt repurchase gains
|
Other | Lending | ||
|
Corporate liquidity portfolio
|
Other | Lending | ||
|
Overhead expenses
|
Other | Lending, APG and Other |
Key
Financial Measures
Our operating results are primarily driven by net interest
income from our student loan portfolios, provision for loan
losses, financing costs, costs necessary to generate new assets,
the revenues and expenses generated by our service businesses
and gains and losses on loan sales, debt repurchases and
derivatives. We manage and assess the performance of each
business segment separately as each is focused on different
customer bases and derive their revenue from different
activities and services. A brief summary of our key financial
measures are listed below.
Net
Interest Income
The most significant portion of our earnings are generated by
the spread earned between the interest revenue we receive on
assets in our student loan portfolios and the interest cost of
funding these loans. We report these earnings as net interest
income. Net interest income in our FFELP Loans and Consumer
Lending segments are driven by significantly different factors.
FFELP
Loans Segment
Net interest income will be the primary source of cash flow
generated by this segment as the portfolio runs off and we will
no longer generate revenues from new originations. We may
continue to acquire existing portfolios of FFELP Loans from
third parties. We would expect any acquisitions to be accretive.
The FFELP Loans segment’s net interest margin was
93 basis points in 2010 compared with 67 basis points
in 2009. The major sources of variability in net interest margin
are expected to be the CP/LIBOR spread and Floor Income.
| • | We refer to the spread between the Federal Reserve’s 3-month financial commercial paper index (“CP”) and 3-month LIBOR as the “CP/LIBOR spread”. Interest earned on our FFELP Loan assets are indexed primarily to CP and interest paid on their related funding liabilities are primarily indexed to 3-month LIBOR. Movements in the CP and 3-month LIBOR rates expand or contract the CP/LIBOR spread and our net interest income decreases or increases as a result. During the capital markets turmoil of recent years, the CP/LIBOR spread has suffered dramatic fluctuations that have negatively affected net interest income significantly. For 2010, the average CP/LIBOR spread returned to historical levels. | |
| • | Pursuant to the terms of the FFELP, certain FFELP Loans, in certain situations, continue to earn interest at the stated fixed rate of interest even if underlying debt costs decrease. We refer to this additional spread |
24
| income as “Floor Income”. This Floor Income can be volatile as rates on underlying debt move up and down. We will generally hedge this risk by selling Floor Income Contracts which lock in the value of the Floor Income over the term of the contract. |
Additional cash flow should be generated within this segment as
many of our secured financing vehicles are over-collateralized,
creating the potential for additional cash flow to be
distributed to us over time as the loans amortize.
Consumer
Lending Segment
We expect to grow our Private Education Loan portfolio primarily
through our school and
direct-to-consumer
channels. Net interest income in this segment is determined by
the Private Education Loan asset yields, which are determined by
interest rates established by us based upon the credit of the
borrower and any co-borrower, the level of price competition in
the Private Education Loan market and our cost of funds. Our
cost of funds can be influenced by a number of factors including
the quality of the loans in our portfolio, our corporate credit
rating, general economic conditions, investor demand for ABS and
corporate unsecured debt and competition in the deposit market.
Loans are priced to anticipate our cost of funds and expected
charge-off rate over the life of the loans. Our Private
Education Loans earn variable rate interest and are funded
primarily with variable rate liabilities. The Consumer Lending
segment’s net interest margin was 3.85 percent in 2010 and
2009.
Provision
For Loan Losses
Management estimates and maintains an allowance for loan losses
equal to charge-offs expected over the next two years. The
provision is an income statement item that reduces segment
revenues. Generally the allowance rises when charge-offs are
expected to increase and falls when charge-offs are expected to
decline. Our loss exposure and resulting provision for losses is
smaller for FFELP Loans than for Private Education Loans because
we bear a maximum of 3 percent loss exposure on FFELP
Loans. Our provision for losses in our FFELP Loans segment was
$98 million in 2010 compared with $119 million in
2009. Our loss exposure and resulting provision in our Consumer
Lending segment is much greater than our FFELP Loans segment.
Losses in our Consumer Lending segment are primarily driven by
risk characteristics such as loan program type, school type,
loan status (in-school, grace, forbearance, repayment and
delinquency), seasoning (number of months in active repayment
for which a scheduled payment was due), underwriting criteria
(e.g., credit scores), existence or absence of a cosigner
and the current economic environment. Our provision for loan
losses in our Consumer Lending segment was $1.298 billion
in 2010 compared with $1.399 billion in 2009.
Charge-Offs
and Delinquencies
When we conclude a loan is uncollectable (from the borrower or
Guarantor), the unrecoverable portion of the loan is charged
against the allowance for loan losses in the relevant lending
segment. Information regarding charge-offs provides relevant
information over time with respect to the actual performance of
our loan portfolios as compared against the provisions for loan
losses on those portfolios. The Consumer Lending segment’s
charge off-rate was 5 percent of loans in 2010 compared with 6
percent in 2009. Delinquencies are a very important indicator of
the potential future credit performance. Management focuses on
the overall level of delinquencies as well as the progression of
loans from early to late stage delinquency. “Core
Earnings” basis Private Education Loan delinquencies as a
percentage of Private Education Loans in repayment decreased
from 12.1 percent at December 31, 2009 to
10.6 percent at December 31, 2010.
Servicing
and Contingency Revenues
We earn servicing revenues from servicing student loans, Campus
Payment Solutions, and from account asset servicing related to
529 college-savings plans. We earn contingency revenue related
to default aversion and contingency collections work we do
primarily on federal loans. The fees we recognize are primarily
driven by our success in collecting or rehabilitating defaulted
loans, the number of transactions processed and the underlying
volume of loans we are servicing on behalf of others.
25
Other
Income/(Loss)
In managing our loan portfolios and funding sources we
periodically engage in sales of loans and the repurchase of our
outstanding debt. In each case, depending on market conditions,
we may incur gains or losses from these transactions that affect
our results from operations. We also recognize gains and losses
in accordance with GAAP on our derivative and hedging activities
from the changes in the fair value of derivatives that do not
qualify for hedge accounting treatment and ineffectiveness on
derivatives that do qualify for hedge accounting.
Operating
Expenses
The operating expenses reported for our Consumer Lending and
Business Services segments are those that are directly
attributable to the generation of revenues by those segments.
The operating expenses for the FFELP Loans segment primarily
represent an intercompany servicing charge from the Business
Services segment and do not reflect our actual underlying costs
incurred to service the loans. We have included corporate
overhead expenses and certain information technology costs
(together referred to as “Overhead”) in our Other
segment rather than allocate those expenses by segment. These
overhead expenses include costs related to executive management,
the board of directors, accounting, finance, legal, human
resources, stock option expense and certain information
technology costs related to infrastructure and operations.
Core
Earnings
Management uses “Core Earnings” as the primary
financial performance measure to evaluate performance and to
allocate resources. “Core Earnings” is the basis in
which we prepare our segment disclosures as required by GAAP
under ASC 280 “Segment Reporting” (see
“Note 19—Segment Reporting”). For a full
explanation of the contents and limitations of “Core
Earnings” see ‘‘‘Core
Earnings’—Definition and Limitations” of this
Item 7.
2010
Summary
We overcame considerable challenges and achieved significant
accomplishments in 2010. We continue to operate in an extremely
challenging macroeconomic environment marked by high
unemployment and periods of extreme illiquidity in the capital
markets.
Effective July 1, 2010, HCERA eliminated FFELP Loan
originations, a major source of our net income. As a result, we
will no longer have revenue related to FFELP Loan originations
and will have declining net income related to our portfolio of
FFELP Loans and related FFELP Loan servicing and collections
activities. HCERA does not alter or affect the terms and
conditions of our existing FFELP Loans. Net interest income we
earn on our FFELP Loan portfolio will decline over time as the
portfolio amortizes. We will no longer earn any origination fees
for originating FFELP Loans (which was $34 million in 2010)
and the Guarantor maintenance fees (which was $56 million
in 2010) will decline as the portfolio pays down. In addition,
we earned $245 million in FFELP contingency revenue in
2010, which we expect to remain relatively stable through 2012
and then steadily decline as the portfolio of defaulted FFELP
Loans we manage is resolved and amortizes.
In response to these legislative and economic challenges we
explored splitting the Company into two publicly traded
companies, representing our runoff and growth businesses. We
also explored selling our residual interests in our securitized
FFELP Loans to effectively remove the securitized loans from our
balance sheet. After evaluating both strategies we determined
that neither strategy currently provides better economic returns
to investors than our current operating structure.
On December 31, 2010, we closed on our agreement to
purchase the $26.1 billion of securitized federal loans and
related assets from the Student Loan Corporation. This
transaction will be accretive to 2011 earnings and beyond. We
continue to seek to acquire FFELP Loan portfolios.
Despite the economic environment, we saw significant
improvements in the quality of our lending business segments.
26
| • | At the end of the year, our FFELP Loan portfolio was 93 percent funded to term with long-term liabilities including the ED-sponsored Straight A conduit. We also completed $2 billion of FFELP Loan asset-backed securitization transactions in 2010. The net interest margin in our FFELP Loans segment improved to 93 basis points in 2010 from 67 basis points in 2009 as the CP/LIBOR spread returned to historical levels. In addition, we sold $20.4 billion of loans to ED in 2010 resulting in gains of $321 million. | |
| • | In our Private Education Loan portfolio, delinquencies greater than 90 days trended lower throughout the year to 5.3 percent of loans in repayment at year-end compared to 6.4 percent of loans in repayment at the end of the first quarter of the year. The quarterly provision for loan losses ended the year at $294 million, down from the second-quarter 2010 peak of $349 million. Private Education Loan originations improved over the course of 2010 as well. After falling more than 40 percent in each of the first two quarters of the year compared with the year-ago quarters they fell just 6 percent in the third quarter and increased 8 percent in the fourth quarter. We completed $4.1 billion of Private Education Loan asset-backed securitization transactions in 2010. The Consumer Lending segment returned to profitability in 2010 after posting a loss in the prior year. |
In our Business Services segment, we saw increased revenue in
our third-party servicing, contingency collections and account
asset servicing lines of business. We decided to discontinue our
Purchased Paper collection business at the end of 2010.
In response to the elimination of FFELP, in 2010 we expanded an
ongoing operating expense reduction initiative, including
closing our Florida and Texas servicing centers and relocating
our headquarters to Newark, Delaware by March 31, 2011.
“Core Earnings” improved significantly to
$1 billion from $807 million in the prior year. This
was due to a number of factors including lower provision for
loan losses, and a higher net interest margin. In 2010 we issued
$1.5 billion of 10-year unsecured debt and repurchased
$4.9 billion of unsecured debt. Combined with our
asset-backed securitization transactions, these actions
significantly improved the overall maturity profile of our
outstanding debt.
2011
Outlook
We do not expect the economic environment to improve
significantly in 2011. A high unemployment rate is expected to
result in a challenging environment for financial services
companies such as ours. We expect our “Core Earnings”
business results to improve principally due to the significant
improvement in the quality of our Private Education Loan
portfolio. Increases in the cost of attaining a higher education
and enrollments should drive increased volume in our consumer
lending, servicing and collection businesses. “Core
Earnings” are expected to be lower in 2011 than in 2010;
however, this is principally due to a sharp decline in gains on
debt repurchases and the absence of revenue generated from the
sale of FFELP Loans to ED.
In 2008 we significantly tightened our underwriting criteria and
exited certain lending segments. In addition, each successive
repayment cohort, i.e., a group of loans that enter their
initial repayment status in the same calendar year upon exiting
their grace period following graduation/separation from school,
has been of higher quality. In 2009 we began to offer Smart
Option Student Loans, which require students to make interest
payments while they are in school, a departure from past
practices where all required payments were deferred until the
student graduated. In 2010, we began offering the Fixed Pay
repayment option, which requires a payment during school that is
less than a full interest payment. The loans that entered
repayment in the fourth quarter of 2010 will influence
delinquency trends in the first half of 2011 and charge-offs in
the second half. This cohort of loans is significantly smaller
and of higher quality than previous repay cohorts, it has a
higher average credit score and is comprised of significantly
smaller amounts of higher risk non-traditional and non-cosigned
loans on a percentage basis and in total volume.
On January 11, 2011 we issued $2 billion, five-year
6.25 percent fixed rate unsecured notes. The rate on the
notes was swapped from a fixed rate to a floating rate equal to
an all-in cost of one month LIBOR plus 4.46 percent.
Investor demand was the highest ever for a Sallie Mae issue,
which we believe reflects investors’ views that our
financial condition has strengthened. In 2011, we expect to
access the unsecured debt market
27
and the term
asset-backed
securities market to
re-finance
both FFELP and Private Education Loans. We believe that
conditions in these markets have improved as compared to last
year and are conducive to funding at more favorable spreads and
advance rates. Retail Bank deposits are also expected to
continue to be a source of funding at favorable rates. We
currently expect our net interest margins in the coming year to
be stable in both our FFELP Loans and Consumer Lending segments.
2011
Management Objectives
In 2011 we have set out five major goals to create shareholder
value. They are: (1) Reduce our operating expenses;
(2) Maximize cash flows from FFELP Loans;
(3) Prudently grow Consumer Lending segment assets and
revenue; (4) Increase Business Services segment revenue;
and (5) Reinstate dividends
and/or
share
repurchases. Here is how we plan to achieve these objectives.
Reduce
Operating Expenses
The elimination of FFELP by HCERA greatly reduced the scope of
our historical revenue generating capabilities. In 2010 we
originated $14 billion of loans, 84 percent of them
FFELP Loans; in 2011 we expect to originate $2.5 billion of
new loans, all of them Private Education Loans. Our FFELP
related revenues will decline over the coming years. As a
result, we must effectively match our cost structure to our
ongoing business. Operating expenses will be reduced company
wide. We have set a goal of getting to an annualized operating
expense quarterly run rate of $250 million by the fourth
quarter of 2011.
Maximize
Cash Flows from FFELP Loans
We have a $148.6 billion portfolio of FFELP Loans that is
expected to generate significant amounts of cash flow and
earnings in the coming years. We plan to reduce related costs,
minimize income volatility and opportunistically purchase other
FFELP Loan portfolios like we did with SLC.
Grow
Consumer Lending Segment Assets and Revenue
Successfully growing Private Education Loan lending is the key
component of our long-term plan to grow shareholder value. We
must originate increasing numbers of high quality Private
Education Loans, increase net interest margins and further
reduce charge-offs and provision for loan losses. To manage our
borrowing costs, we must achieve more attractive term
asset-backed securities market access and prices in the coming
year.
Increase
Business Services Segment Revenue
Our Business Services segment is comprised of several businesses
with customers related to FFELP that will experience revenue
declines and several businesses with customers that provide
growth opportunities. Our growth businesses are ED servicing, ED
collections, other school-based asset type servicing and
collections, Campus Payment Solutions, transaction processing
and 529 college-savings plan account asset servicing. We
currently have a 22 percent market share of the ED
Servicing Contract. This volume will grow organically as more
loans are originated under DL. Our goal is to further expand our
market share and broaden the services we provide to ED and other
third party servicing clients. The ED collection contract will
also grow organically as more loans are originated under DL. We
also seek to increase our market share through improved
performance. Campus Payment Solutions is a business line that we
expect to grow by expanding our product offerings and leveraging
our deep relationships with colleges and universities. Assets
under management in 529 college-savings plans total
$34.5 billion and have been growing at a rate of
21 percent over the last three years. Our goal is to
service additional 529 plans.
Reinstate
Dividends and/or Share Repurchases
We suspended our dividend and share repurchase programs in April
2007 and have not since reinstated these programs. We now
believe that our cash flow and capital positions have
strengthened sufficiently that by
28
the second half of 2011, we will be able to recommend to our
board of directors that we either reinstate a dividend, begin to
repurchase shares or do a combination of both.
Results
of Operations
We present the results of operations first on a consolidated
basis in accordance with GAAP. As discussed earlier, we have
four business segments, FFELP Loans, Consumer Lending, Business
Services and Other segments. Since these segments operate in
distinct business environments, the discussion following the
Consolidated Earnings Summary is presented on a segment basis
and is shown on a “Core Earnings” basis. See
Item 1 “Business — Business Segments”
for further discussion on the components of each segment.
29
| Increase (Decrease) | ||||||||||||||||||||||||||||
| Years Ended December 31, | 2010 vs. 2009 | 2009 vs. 2008 | ||||||||||||||||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | $ | % | $ | % | |||||||||||||||||||||
|
Interest income
|
||||||||||||||||||||||||||||
|
FFELP Loans
|
$ | 3,345 | $ | 3,094 | $ | 5,173 | $ | 251 | 8 | % | $ | (2,079 | ) | (40 | )% | |||||||||||||
|
Private Education Loans
|
2,353 | 1,582 | 1,738 | 771 | 49 | (156 | ) | (9 | ) | |||||||||||||||||||
|
Other loans
|
30 | 56 | 83 | (26 | ) | (46 | ) | (27 | ) | (33 | ) | |||||||||||||||||
|
Cash and investments
|
26 | 26 | 276 | — | — | (250 | ) | (91 | ) | |||||||||||||||||||
|
Total interest income
|
5,754 | 4,758 | 7,270 | 996 | 21 | (2,512 | ) | (35 | ) | |||||||||||||||||||
|
Total interest expense
|
2,275 | 3,035 | 5,905 | (760 | ) | (25 | ) | (2,870 | ) | (49 | ) | |||||||||||||||||
|
Net interest income
|
3,479 | 1,723 | 1,365 | 1,756 | 102 | 358 | 26 | |||||||||||||||||||||
|
Less: provisions for loan losses
|
1,419 | 1,119 | 720 | 300 | 27 | 399 | 55 | |||||||||||||||||||||
|
Net interest income after provisions for loan losses
|
2,060 | 604 | 645 | 1,456 | 241 | (41 | ) | (6 | ) | |||||||||||||||||||
|
Other income (loss):
|
||||||||||||||||||||||||||||
|
Securitization servicing and Residual Interest revenue
|
— | 295 | 262 | (295 | ) | (100 | ) | 33 | 13 | |||||||||||||||||||
|
Gains (losses) on sales of loans and securities, net
|
325 | 284 | (186 | ) | 41 | 14 | 470 | 253 | ||||||||||||||||||||
|
Losses on derivative and hedging activities, net
|
(361 | ) | (604 | ) | (445 | ) | 243 | (40 | ) | (159 | ) | 36 | ||||||||||||||||
|
Servicing revenue
|
405 | 440 | 408 | (35 | ) | (8 | ) | 32 | 8 | |||||||||||||||||||
|
Contingency revenue
|
330 | 294 | 330 | 36 | 12 | (36 | ) | (11 | ) | |||||||||||||||||||
|
Gains on debt repurchases
|
317 | 536 | 64 | (219 | ) | (41 | ) | 472 | 738 | |||||||||||||||||||
|
Other income
|
6 | 88 | 39 | (82 | ) | (93 | ) | 49 | 126 | |||||||||||||||||||
|
Total other income
|
1,022 | 1,333 | 472 | (311 | ) | (23 | ) | 861 | 182 | |||||||||||||||||||
|
Expenses:
|
||||||||||||||||||||||||||||
|
Operating expenses
|
1,208 | 1,043 | 1,029 | 165 | 16 | 14 | 1 | |||||||||||||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization expense
|
699 | 76 | 50 | 623 | 820 | 26 | 52 | |||||||||||||||||||||
|
Restructuring expenses
|
85 | 10 | 72 | 75 | 750 | (62 | ) | (86 | ) | |||||||||||||||||||
|
Total expenses
|
1,992 | 1,129 | 1,151 | 863 | 76 | (22 | ) | (2 | ) | |||||||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
1,090 | 808 | (34 | ) | 282 | 35 | 842 | 2,476 | ||||||||||||||||||||
|
Income tax expense (benefit)
|
493 | 264 | (36 | ) | 229 | 87 | 300 | 833 | ||||||||||||||||||||
|
Net income from continuing operations
|
597 | 544 | 2 | 53 | 10 | 542 | 27,100 | |||||||||||||||||||||
|
Loss from discontinued operations, net of tax
|
(67 | ) | (220 | ) | (215 | ) | 153 | (70 | ) | (5 | ) | 2 | ||||||||||||||||
|
Net income (loss)
|
530 | 324 | (213 | ) | 206 | 64 | 537 | 252 | ||||||||||||||||||||
|
Preferred stock dividends
|
72 | 146 | 111 | (74 | ) | (51 | ) | 35 | 32 | |||||||||||||||||||
|
Net income (loss) attributable to common stock
|
$ | 458 | $ | 178 | $ | (324 | ) | $ | 280 | 157 | % | $ | 502 | 155 | % | |||||||||||||
|
Basic earnings (loss) per common share:
|
||||||||||||||||||||||||||||
|
Continuing operations
|
$ | 1.08 | $ | .85 | $ | (.23 | ) | $ | .23 | 27 | % | $ | 1.08 | 470 | % | |||||||||||||
|
Discontinued operations
|
$ | (.14 | ) | $ | (.47 | ) | $ | (.46 | ) | $ | .33 | (70 | )% | $ | (.01 | ) | 2 | % | ||||||||||
|
Total
|
$ | .94 | $ | .38 | $ | (.69 | ) | $ | .56 | 147 | % | $ | 1.07 | 155 | % | |||||||||||||
|
Diluted earnings (loss) per common share:
|
||||||||||||||||||||||||||||
|
Continuing operations
|
$ | 1.08 | $ | .85 | $ | (.23 | ) | $ | .23 | 27 | % | $ | 1.08 | 470 | % | |||||||||||||
|
Discontinued operations
|
$ | (.14 | ) | $ | (.47 | ) | $ | (.46 | ) | $ | .33 | (70 | )% | $ | (.01 | ) | 2 | % | ||||||||||
|
Total
|
$ | .94 | $ | .38 | $ | (.69 | ) | $ | .56 | 147 | % | $ | 1.07 | 155 | % | |||||||||||||
|
Dividends per common share
|
$ | — | $ | — | $ | — | $ | — | — | % | $ | — | — | % | ||||||||||||||
30
Consolidated
Earnings Summary — GAAP-basis
Year
Ended December 31, 2010 Compared with Year Ended
December 31, 2009
For the years ended December 31, 2010 and 2009, net income
was $530 million, or $.94 diluted earnings per common
share, and $324 million, or $.38 diluted earnings per
common share, respectively. For the year ended December 31,
2010 and 2009, net income from continuing operations was
$597 million, or $1.08 diluted earnings per common share,
and $544 million, or $.85 diluted earnings per common
share, respectively. For the year ended December 31, 2010
and 2009, net loss from discontinued operations was
$67 million, or $.14 diluted loss per common share, and
$220 million, or $.47 diluted loss per common share from
discontinued operations per common share, respectively.
Income
from Continuing Operations before Income Tax Expense
Income from continuing operations before income tax expenses
increased for the year ended December 31, 2010, by
$282 million as compared with the prior year primarily due
to a $1.5 billion increase in net interest income after
provisions for loan losses and a $243 million decrease in
net losses on derivative and hedging activities. These
improvements were partially offset by a $660 million
goodwill and intangible asset impairment charge, a
$165 million increase in operating expenses, a
$219 million decrease in gains on debt repurchases and a
decrease in securitization servicing and Residual Interest
revenue of $295 million.
The primary contributors to each of the identified drivers of
changes in income from continuing operations before income tax
expense for the
year-over-year
period are as follows:
| • | Net interest income after provisions for loan losses increased by $1.5 billion in the year ended December 31, 2010 from the year ended December 31, 2009. The increase in net interest income and provisions for loan losses was partially due to the adoption as of January 1, 2010 of the new consolidation accounting guidance which resulted in the consolidation of $35.0 billion of assets and $34.4 billion of liabilities in certain securitizations trusts. (See “Note 2 — Significant Accounting Policies” for a further discussion of the effect of adopting the new consolidation accounting guidance). The consolidation of these securitization trusts as of January 1, 2010 resulted in $998 million of additional net interest income and $355 million of additional provisions for loan losses for the year ended December 31, 2010. Excluding the effect of the trusts being consolidated as of January 1, 2010, net interest income increased $758 million from the year ended 2009 and provisions for loan losses decreased $55 million from the year ended 2009. The increase in net interest income, excluding the effect of the new consolidation accounting guidance, was primarily the result of an increase in the FFELP Loans net interest margin primarily due to an improvement in our funding costs, a 24 basis point tightening of the CP/LIBOR spread and the effect of not receiving hedge accounting treatment for derivatives used to economically hedge risk affecting net interest income. The decrease in the provisions for loan losses relates to the Private Education Loan loss provision, which decreased as a result of the improving performance of the portfolio. | |
| • | Securitization servicing and Residual Interest revenue was no longer recorded in fiscal year 2010 due to the adoption of the new consolidation accounting guidance; however, we recognized $295 million in the prior year. | |
| • | Gains on sales of loans and securities increased $41 million from the prior year primarily related to the gains on sales of additional FFELP Loans to ED as part of ED’s Loan Purchase Commitment Program (the “Purchase Program”). These gains will not occur in the future as the Purchase Program ended in 2010. | |
| • | Losses on derivatives and hedging activities, net, declined by $243 million in 2010 compared with 2009. The primary factor affecting the change in losses in 2010 was interest rates. Valuations of derivative instruments vary based upon many factors including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, we expect gains and (losses) on derivatives and hedging activities, net, to vary significantly in future periods. |
31
| • | Servicing revenue decreased by $35 million primarily due to HCERA becoming effective as of July 1, 2010, thereby eliminating our ability to earn additional guarantor issuance fees on new FFELP Loans, as well as to a decline in outstanding FFELP Loans for which we were earning additional fees. | |
| • | Contingency revenue increased $36 million primarily from increased collections on defaulted FFELP Loans. | |
| • | Gains on debt repurchases decreased $219 million year-over-year while the principal amount of debt repurchased increased to $4.9 billion, as compared with the $3.4 billion repurchased in fiscal year 2009. We expect to continue to repurchase debt in the future and the amount of gains in the future will be dependent on market conditions and available liquidity. | |
| • | Other income declined by $82 million primarily due to a $71 million decrease in foreign currency translation gains. The foreign currency translation gains relate to a portion of our foreign currency denominated debt that does not receive hedge accounting treatment. These gains were partially offset by the “losses on derivative and hedging activities, net” line item on the income statement related to the derivatives used to economically hedge these debt instruments. | |
| • | Operating expenses, excluding restructuring-related asset impairments of $19 million in 2010, increased $146 million year-over-year primarily due to an increase in legal contingency expense, costs related to the ED Servicing Contract, higher collection and servicing costs from a higher number of loans in repayment and in delinquent status, and higher marketing and technology enhancement costs related to Private Education Loans. | |
| • | Goodwill and intangible asset impairment and amortization increased $623 million for the year ended December 31, 2010, primarily due to the $660 million of impairment recognized as a result of the passage of HCERA and its negative effects on the anticipated cash flows for certain of our reporting units and the reduced market values of these units. The amortization of acquired intangibles for continuing operations and for discontinued operations each remained relatively unchanged for the years ended December 31, 2010 and 2009, respectively. For additional discussion regarding the impairment of goodwill and intangible assets see “Note 6 — Goodwill and Acquired Intangible Assets.” | |
| • | Restructuring expenses increased $69 million in the year ended December 31, 2010, which is a result of a $75 million increase in restructuring expenses in continuing operations partially offset by a $6 million decrease in restructuring expenses attributable to discontinued operations. The following details our ongoing restructuring efforts: |
| • | On March 30, 2010, President Obama signed into law H.R. 4872, HCERA, which included the SAFRA Act. Effective July 1, 2010, this legislation eliminated FFELP and requires all new federal loans to be made through the DSLP. Restructuring our operations in response to this change in law requires a significant reduction of operating costs from the elimination of positions and facilities associated with the origination of FFELP Loans. Expenses associated with continuing operations under this restructuring plan were $83 million in fiscal year 2010. We are currently finalizing this restructuring plan and expect to incur an estimated $11 million of additional restructuring costs in 2011. The majority of these expenses are severance costs related to the partially completed and planned elimination of approximately 2,500 positions, approximately 30 percent of our workforce that existed as of the first quarter 2010. | |
| • | In response to the College Cost Reduction and Access Act of 2007 (“CCRAA”) and challenges in the capital markets, we also initiated a restructuring plan in the fourth quarter of 2007. Under this ongoing plan, restructuring expenses associated with continuing operations of $2 million and $10 million were recognized in the years ended December 31, 2010 and 2009, respectively. The majority of these restructuring expenses were also severance costs related to the elimination of approximately 3,000 positions, or approximately 25 percent of our workforce that existed as of the fourth quarter 2007. |
32
| • | Income tax expense from continuing operations increased $229 million for the year ended December 31, 2010 as compared with the prior year. The effective tax rates for fiscal years 2010 and 2009 were 45 percent and 33 percent, respectively. The change in the effective tax rate for the year ended December 31, 2010 was primarily driven by the impact of non-deductible goodwill impairments recorded in 2010 and state tax rate changes recorded in both periods. |
Net Loss from Discontinued Operations.
Net loss from discontinued operations in the year ended
December 31, 2010 was $67 million compared with a net
loss from discontinued operations of $220 million for the
year ended December 31, 2009. In the fourth quarter of
2009, we sold our Purchased Paper —
Mortgage/Properties business for $280 million which
resulted in an after-tax loss of $95 million. As a result
of this sale, the results of operations of this business were
presented in discontinued operations in the fourth quarter of
2009. In the fourth quarter of 2010, we began actively marketing
our Purchased Paper — Non Mortgage business for sale
and have concluded it is probable this business will be sold
within one year at which time we would exit the business. As a
result, the results of operations of this business were also
required to be presented in discontinued operations beginning in
the fourth quarter of 2010. In connection with this
presentation, we are required to carry this business at the
lower of fair value or historical cost basis. As a result, we
recorded an after-tax loss of $52 million from discontinued
operations in the fourth quarter of 2010, primarily due to
adjusting the value of this business to its estimated fair
value. Our Purchased Paper businesses are presented in
discontinued operations for the current and prior periods. The
additional losses for both years that are more than the losses
discussed above relate to ongoing impairment recorded as a
result of the weakened economy’s effect on our ability to
collect the receivables.
Year
Ended December 31, 2009 Compared with Year Ended
December 31, 2008
For the years ended December 31, 2009 and 2008, net income
was $324 million, or $.38 diluted earnings per common
share, and a net loss of $213 million, or $.69 diluted loss
per common share, respectively. For the years ended
December 31, 2009 and 2008, net income from continuing
operations was $544 million, or $.85 diluted earnings per
common share, and $2 million, or $.23 diluted loss per
common share, respectively. For the years ended
December 31, 2009 and 2008, net loss from discontinued
operations was $220 million, or $.47 diluted loss per
common share, and $215 million, or $.46 diluted loss from
discontinued operations per common share, respectively.
Income from Continuing Operations before Income Tax
Expense.
Income from continuing operations before income tax expense for
the year ended December 31, 2009 increased
$842 million from the prior year. The $842 million
increase 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 primary contributors to each of the identified drivers of
changes in income from continuing operations before income tax
expense for the
year-over-year
period are as follows:
| • | 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 partially offset by a $358 million increase in net interest income. The increase in net interest income was primarily due to an increase in the FFELP Loans net interest margin primarily due to an increase in Gross Floor Income and the impact of derivative accounting and a $15 billion increase in the average balance of GAAP-basis student loans. 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. | |
| • | Securitization servicing and Residual Interest revenue increased by $33 million from the prior year primarily due to a $95 million decrease in the current-year unrealized mark-to-market loss on our Residual Interests compared with the prior year, partially offset by a decrease in net Embedded Floor value. |
33
| • | Gains on sales of loans and securities increased $470 million from the prior year. The increase is primarily attributable to a $284 million gain on our sale of approximately $18.5 billion of FFELP Loans to ED as part of the ED Purchase Program and the $186 million loss incurred in fiscal year 2008. The 2008 loss resulted from our repurchase of delinquent Private Education Loans from our off-balance sheet securitization trusts and the sale of approximately $1.0 billion FFELP Loans to the ED under ECASLA, which resulted in a $53 million loss. | |
| • | Losses on derivatives and hedging activities, net, increased by $159 million in 2009 compared with 2008. The primary factors affecting the change in losses in 2009 were interest rates and foreign currency exchange rates. Valuations of derivative instruments vary based upon many factors, including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, we expect gains and (losses) on derivatives and hedging activities, net, to vary significantly in future periods. | |
| • | Servicing Revenue increased $32 million when compared with the prior year. This increase was primarily due to the initiation of Direct Lending servicing in 2009. | |
| • | Contingency revenue decreased $36 million when compared with the prior year primarily as a result of less Guarantor collections revenue from rehabilitating delinquent FFELP Loans. | |
| • | Gains on debt repurchases increased $472 million when compared with the prior year. We repurchased $3.4 billion of our unsecured corporate debt as compared with $1.9 billion in the prior year. | |
| • | Other income increased by $49 million primarily due to a $54 million increase in foreign currency translation gains. These gains were partially offset by the “losses on derivative and hedging activities, net” line item on the income statement related to the derivatives used to economically hedge these debt instruments. | |
| • | For the years ended December 31, 2009 and 2008, operating expenses, excluding restructuring-related asset impairments of $0 and $6 million, respectively, were $1,043 million compared with $1,023 million, respectively. The $20 million increase from the prior year relates to increased marketing expense related to our direct to consumer marketing activities, increased technology costs as well as increased collections costs. | |
| • | Goodwill and intangible asset impairment for continuing operations increased by $35 million in 2009 and the goodwill and intangible asset impairment for discontinued operations decreased by like amount as compared with the prior year. For additional discussion regarding the impairment of goodwill and intangible assets see “Note 6 — Goodwill and Acquired Intangible Assets.” The amortization of acquired intangibles for continuing operations totaled $38 million and $48 million for the years ended December 31, 2009 and 2008, respectively, and the amortization of acquired intangibles for discontinued operations totaled $1 million and $6 million for the years ended December 31, 2009 and 2008, respectively. | |
| • | Restructuring expenses of $22 million and $84 million were recognized in the years ended December 31, 2009 and 2008, respectively, of which $10 million and $72 million were in continuing operations and $12 million and $12 million were in discontinued operations, respectively. | |
| • | Income tax expense from continuing operations was $264 million in 2009 compared with an income tax benefit of $36 million in 2008, resulting in effective tax rates of 33 percent and 106 percent, respectively. 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 2008. Also contributing to the higher effective tax rate in 2008 was the effect 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 18 — Income Taxes.” |
34
Net
Loss from Discontinued Operations.
Net loss from discontinued operations in the year ended
December 31, 2009 increased $5 million from the prior
year. Our Purchased Paper businesses are presented in
discontinued operations for the current and prior years.
Preferred
Stock Dividend Expense
During 2009, we converted $339 million of our Series C
Preferred Stock to common stock. As part of this conversion, we
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.
“Core
Earnings” — Definition and Limitations
We prepare financial statements in accordance with GAAP.
However, we also evaluate our business segments on a basis that
differs from GAAP. We refer to this different basis of
presentation as “Core Earnings”. We provide this
“Core Earnings” basis of presentation on a
consolidated basis for each business segment because this is
what we internally review when making management decisions
regarding our performance and how we allocate resources. We also
refer to this information in our presentations with credit
rating agencies, lenders and investors. Because our “Core
Earnings” basis of presentation corresponds to our segment
financial presentations, we are required by GAAP to provide
“Core Earnings” disclosure in the notes to our
consolidated financial statements for our business segments. For
additional information, see “Note 19 —
Segment Reporting.”
“Core Earnings” are not a substitute for reported
results under GAAP. We use “Core Earnings” to manage
each business segment because “Core Earnings” reflect
adjustments to GAAP financial results for three items, discussed
below, that create significant volatility mostly due to timing
factors generally beyond the control of management. Accordingly,
we believe that “Core Earnings” provide management
with a useful basis from which to better evaluate results from
ongoing operations against the business plan or against results
from prior periods. Consequently, we disclose this information
as we believe it provides investors with additional information
regarding the operational and performance indicators that are
most closely assessed by management. The three items adjusted
for in our “Core Earnings” presentations are
(1) the off-balance sheet treatment of certain
securitization transactions, (2) our use of derivatives
instruments to hedge our economic risks that do not qualify for
hedge accounting treatment or do qualify for hedge accounting
treatment but result in ineffectiveness and (3) the
accounting for goodwill and acquired intangible assets.
While GAAP provides a uniform, comprehensive basis of
accounting, for the reasons described above, our “Core
Earnings” basis of presentation does not. “Core
Earnings” are subject to certain general and specific
limitations that investors should carefully consider. For
example, 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. Accordingly, our
“Core Earnings” presentation does not represent a
comprehensive basis of accounting. Investors, therefore, may not
be able to compare our 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, our board of directors, rating agencies,
lenders and investors to assess performance.
Specific adjustments that management makes to GAAP results to
derive our “Core Earnings” basis of presentation are
described in detail in the section entitled “‘Core
Earnings’ — Definition and
Limitations — Differences between ‘Core
Earnings’ and GAAP” of this Item 7.
35
The following tables show “Core Earnings” for each
business segment and our business as a whole along with the
adjustments made to the income/expense items to reconcile the
amounts to our reported GAAP results as required by GAAP and
reported in “Note 19 — Segment
Reporting.”
| Year Ended December 31, 2010 | ||||||||||||||||||||||||||||||||
|
FFELP
|
Consumer
|
Business
|
Total “Core
|
Total
|
||||||||||||||||||||||||||||
| (Dollars in millions) | Loans | Lending | Services | Other | Eliminations (1) | Earnings” | Adjustments (2) | GAAP | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||||||||||
|
Student loans
|
$ | 2,766 | $ | 2,353 | $ | — | $ | — | $ | — | $ | 5,119 | $ | 579 | $ | 5,698 | ||||||||||||||||
|
Other loans
|
— | — | — | 30 | — | 30 | — | 30 | ||||||||||||||||||||||||
|
Cash and investments
|
9 | 14 | 17 | 3 | (17 | ) | 26 | — | 26 | |||||||||||||||||||||||
|
Total interest income
|
2,775 | 2,367 | 17 | 33 | (17 | ) | 5,175 | 579 | 5,754 | |||||||||||||||||||||||
|
Total interest expense
|
1,407 | 758 | — | 45 | (17 | ) | 2,193 | 82 | 2,275 | |||||||||||||||||||||||
|
Net interest income
|
1,368 | 1,609 | 17 | (12 | ) | — | 2,982 | 497 | 3,479 | |||||||||||||||||||||||
|
Less: provisions for loan losses
|
98 | 1,298 | — | 23 | — | 1,419 | — | 1,419 | ||||||||||||||||||||||||
|
Net interest income after provisions for loan losses
|
1,270 | 311 | 17 | (35 | ) | — | 1,563 | 497 | 2,060 | |||||||||||||||||||||||
|
Servicing revenue
|
68 | 72 | 912 | 1 | (648 | ) | 405 | — | 405 | |||||||||||||||||||||||
|
Contingency revenue
|
— | — | 330 | — | — | 330 | — | 330 | ||||||||||||||||||||||||
|
Gains on debt repurchases
|
— | — | — | 317 | — | 317 | — | 317 | ||||||||||||||||||||||||
|
Other income
|
320 | — | 51 | 13 | — | 384 | (414 | ) | (30 | ) | ||||||||||||||||||||||
|
Total other income
|
388 | 72 | 1,293 | 331 | (648 | ) | 1,436 | (414 | ) | 1,022 | ||||||||||||||||||||||
|
Expenses:
|
||||||||||||||||||||||||||||||||
|
Direct operating expenses
|
736 | 350 | 500 | 12 | (648 | ) | 950 | — | 950 | |||||||||||||||||||||||
|
Overhead expenses
|
— | — | — | 258 | — | 258 | — | 258 | ||||||||||||||||||||||||
|
Operating expenses
|
736 | 350 | 500 | 270 | (648 | ) | 1,208 | — | 1,208 | |||||||||||||||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | — | — | — | — | — | 699 | 699 | ||||||||||||||||||||||||
|
Restructuring expenses
|
54 | 12 | 7 | 12 | — | 85 | — | 85 | ||||||||||||||||||||||||
|
Total expenses
|
790 | 362 | 507 | 282 | (648 | ) | 1,293 | 699 | 1,992 | |||||||||||||||||||||||
|
Income from continuing operations, before income tax expense
|
868 | 21 | 803 | 14 | — | 1,706 | (616 | ) | 1,090 | |||||||||||||||||||||||
|
Income tax
expense
(3)
|
311 | 8 | 288 | 4 | — | 611 | (118 | ) | 493 | |||||||||||||||||||||||
|
Net income from continuing operations
|
557 | 13 | 515 | 10 | — | 1,095 | (498 | ) | 597 | |||||||||||||||||||||||
|
Loss from discontinued operations, net of taxes
|
— | — | — | (67 | ) | — | (67 | ) | — | (67 | ) | |||||||||||||||||||||
|
Net income (loss)
|
$ | 557 | $ | 13 | $ | 515 | $ | (57 | ) | $ | — | $ | 1,028 | $ | (498 | ) | $ | 530 | ||||||||||||||
| (1) | The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment. | |
| (2) | “Core Earnings” adjustments to GAAP: |
| Year Ended December 31, 2010 | ||||||||||||
|
Net Impact of
|
||||||||||||
|
Net Impact of
|
Goodwill and
|
|||||||||||
|
Derivative
|
Acquired
|
|||||||||||
| (Dollars in millions) | Accounting | Intangibles | Total | |||||||||
|
Net interest income after provisions for loan losses
|
$ | 497 | $ | — | $ | 497 | ||||||
|
Total other income (loss)
|
(414 | ) | — | (414 | ) | |||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | 699 | 699 | |||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | 83 | $ | (699 | ) | (616 | ) | |||||
|
Income tax benefit
|
(118 | ) | ||||||||||
|
Net loss
|
$ | (498 | ) | |||||||||
| (3) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
36
| Year Ended December 31, 2009 | ||||||||||||||||||||||||||||||||
|
FFELP
|
Consumer
|
Business
|
Total “Core
|
Total
|
||||||||||||||||||||||||||||
| (Dollars in millions) | Loans | Lending | Services | Other | Eliminations (1) | Earnings” | Adjustments (2) | GAAP | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||||||||||
|
Student loans
|
$ | 3,252 | $ | 2,254 | $ | — | $ | — | $ | — | $ | 5,506 | $ | (830 | ) | $ | 4,676 | |||||||||||||||
|
Other loans
|
— | — | — | 56 | — | 56 | — | 56 | ||||||||||||||||||||||||
|
Cash and investments
|
26 | 13 | 20 | (10 | ) | (20 | ) | 29 | (3 | ) | 26 | |||||||||||||||||||||
|
Total interest income
|
3,278 | 2,267 | 20 | 46 | (20 | ) | 5,591 | (833 | ) | 4,758 | ||||||||||||||||||||||
|
Total interest expense
|
2,238 | 721 | — | 66 | (20 | ) | 3,005 | 30 | 3,035 | |||||||||||||||||||||||
|
Net interest income (loss)
|
1,040 | 1,546 | 20 | (20 | ) | — | 2,586 | (863 | ) | 1,723 | ||||||||||||||||||||||
|
Less: provisions for loan losses
|
119 | 1,399 | — | 46 | — | 1,564 | (445 | ) | 1,119 | |||||||||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
921 | 147 | 20 | (66 | ) | — | 1,022 | (418 | ) | 604 | ||||||||||||||||||||||
|
Servicing revenue
|
75 | 70 | 954 | — | (659 | ) | 440 | — | 440 | |||||||||||||||||||||||
|
Contingency revenue
|
— | — | 294 | — | — | 294 | — | 294 | ||||||||||||||||||||||||
|
Gains on debt repurchases
|
— | — | — | 536 | — | 536 | — | 536 | ||||||||||||||||||||||||
|
Other income
|
292 | — | 55 | 1 | — | 348 | (285 | ) | 63 | |||||||||||||||||||||||
|
Total other income
|
367 | 70 | 1,303 | 537 | (659 | ) | 1,618 | (285 | ) | 1,333 | ||||||||||||||||||||||
|
Expenses:
|
||||||||||||||||||||||||||||||||
|
Direct operating expenses
|
754 | 265 | 440 | 6 | (659 | ) | 806 | — | 806 | |||||||||||||||||||||||
|
Overhead expenses
|
— | — | — | 237 | — | 237 | — | 237 | ||||||||||||||||||||||||
|
Operating expenses
|
754 | 265 | 440 | 243 | (659 | ) | 1,043 | — | 1,043 | |||||||||||||||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | — | — | — | — | — | 76 | 76 | ||||||||||||||||||||||||
|
Restructuring expenses
|
8 | 2 | 2 | (2 | ) | — | 10 | — | 10 | |||||||||||||||||||||||
|
Total expenses
|
762 | 267 | 442 | 241 | (659 | ) | 1,053 | 76 | 1,129 | |||||||||||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
526 | (50 | ) | 881 | 230 | — | 1,587 | (779 | ) | 808 | ||||||||||||||||||||||
|
Income tax expense
(benefit)
(3)
|
186 | (18 | ) | 311 | 81 | — | 560 | (296 | ) | 264 | ||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
340 | (32 | ) | 570 | 149 | — | 1,027 | (483 | ) | 544 | ||||||||||||||||||||||
|
Loss from discontinued operations, net of taxes
|
— | — | — | (220 | ) | — | (220 | ) | — | (220 | ) | |||||||||||||||||||||
|
Net income (loss)
|
$ | 340 | $ | (32 | ) | $ | 570 | $ | (71 | ) | $ | — | $ | 807 | $ | (483 | ) | $ | 324 | |||||||||||||
| (1) | The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment. | |
| (2) | “Core Earnings” adjustments to GAAP: |
| Year Ended December 31, 2009 | ||||||||||||||||
|
Net Impact of
|
||||||||||||||||
|
Net Impact of
|
Net Impact of
|
Goodwill and
|
||||||||||||||
|
Securitization
|
Derivative
|
Acquired
|
||||||||||||||
| (Dollars in millions) | Accounting | Accounting | Intangibles | Total | ||||||||||||
|
Net interest income (loss)
|
$ | (941 | ) | $ | 78 | $ | — | $ | (863 | ) | ||||||
|
Less: provisions for loan losses
|
(445 | ) | — | — | (445 | ) | ||||||||||
|
Net interest income (loss) after provisions for loan losses
|
(496 | ) | 78 | — | (418 | ) | ||||||||||
|
Total other income (loss)
|
295 | (580 | ) | — | (285 | ) | ||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | — | 76 | 76 | ||||||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | (201 | ) | $ | (502 | ) | $ | (76 | ) | (779 | ) | |||||
|
Income tax benefit
|
(296 | ) | ||||||||||||||
|
Net loss
|
$ | (483 | ) | |||||||||||||
| (3) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
37
| Year Ended December 31, 2008 | ||||||||||||||||||||||||||||||||
|
FFELP
|
Consumer
|
Business
|
Total “Core
|
Total
|
||||||||||||||||||||||||||||
| (Dollars in millions) | Loans | Lending | Services | Other | Eliminations (1) | Earnings” | Adjustments (2) | GAAP | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||||||||||
|
Student loans
|
$ | 6,052 | $ | 2,752 | $ | — | $ | — | $ | — | $ | 8,804 | $ | (1,893 | ) | $ | 6,911 | |||||||||||||||
|
Other loans
|
— | — | — | 83 | — | 83 | — | 83 | ||||||||||||||||||||||||
|
Cash and investments
|
156 | 79 | 26 | 95 | (26 | ) | 330 | (54 | ) | 276 | ||||||||||||||||||||||
|
Total interest income
|
6,208 | 2,831 | 26 | 178 | (26 | ) | 9,217 | (1,947 | ) | 7,270 | ||||||||||||||||||||||
|
Total interest expense
|
5,294 | 1,280 | — | 161 | (26 | ) | 6,709 | (804 | ) | 5,905 | ||||||||||||||||||||||
|
Net interest income (loss)
|
914 | 1,551 | 26 | 17 | — | 2,508 | (1,143 | ) | 1,365 | |||||||||||||||||||||||
|
Less: provisions for loan losses
|
127 | 874 | — | 28 | — | 1,029 | (309 | ) | 720 | |||||||||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
787 | 677 | 26 | (11 | ) | — | 1,479 | (834 | ) | 645 | ||||||||||||||||||||||
|
Servicing revenue
|
77 | 65 | 897 | 1 | (632 | ) | 408 | — | 408 | |||||||||||||||||||||||
|
Contingency revenue
|
— | — | 330 | — | — | 330 | — | 330 | ||||||||||||||||||||||||
|
Gains on debt repurchases
|
— | — | — | 64 | — | 64 | — | 64 | ||||||||||||||||||||||||
|
Other income
|
(42 | ) | 1 | 52 | 14 | — | 25 | (355 | ) | (330 | ) | |||||||||||||||||||||
|
Total other income
|
35 | 66 | 1,279 | 79 | (632 | ) | 827 | (355 | ) | 472 | ||||||||||||||||||||||
|
Expenses:
|
||||||||||||||||||||||||||||||||
|
Direct operating expenses
|
745 | 201 | 462 | 17 | (632 | ) | 793 | — | 793 | |||||||||||||||||||||||
|
Overhead expenses
|
— | — | — | 236 | — | 236 | — | 236 | ||||||||||||||||||||||||
|
Operating expenses
|
745 | 201 | 462 | 253 | (632 | ) | 1,029 | — | 1,029 | |||||||||||||||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | — | — | — | — | — | 50 | 50 | ||||||||||||||||||||||||
|
Restructuring expenses
|
42 | 25 | 10 | (5 | ) | — | 72 | — | 72 | |||||||||||||||||||||||
|
Total expenses
|
787 | 226 | 472 | 248 | (632 | ) | 1,101 | 50 | 1,151 | |||||||||||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
35 | 517 | 833 | (180 | ) | — | 1,205 | (1,239 | ) | (34 | ) | |||||||||||||||||||||
|
Income tax expense
(benefit)
(3)
|
13 | 186 | 300 | (65 | ) | — | 434 | (470 | ) | (36 | ) | |||||||||||||||||||||
|
Net income (loss) from continuing operations
|
22 | 331 | 533 | (115 | ) | — | 771 | (769 | ) | 2 | ||||||||||||||||||||||
|
Loss from discontinued operations, net of taxes
|
— | — | — | (188 | ) | — | (188 | ) | (27 | ) | (215 | ) | ||||||||||||||||||||
|
Net income (loss)
|
$ | 22 | $ | 331 | $ | 533 | $ | (303 | ) | $ | — | $ | 583 | $ | (796 | ) | $ | (213 | ) | |||||||||||||
| (1) | The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment. | |
| (2) | “Core Earnings” adjustments to GAAP: |
| Year Ended December 31, 2008 | ||||||||||||||||
|
Net Impact of
|
||||||||||||||||
|
Net Impact of
|
Net Impact of
|
Goodwill and
|
||||||||||||||
|
Securitization
|
Derivative
|
Acquired
|
||||||||||||||
| (Dollars in millions) | Accounting | Accounting | Intangibles | Total | ||||||||||||
|
Net interest income (loss)
|
$ | (872 | ) | $ | (271 | ) | $ | — | $ | (1,143 | ) | |||||
|
Less: provisions for loan losses
|
(309 | ) | — | — | (309 | ) | ||||||||||
|
Net interest income (loss) after provisions for loan losses
|
(563 | ) | (271 | ) | — | (834 | ) | |||||||||
|
Total other income (loss)
|
121 | (476 | ) | — | (355 | ) | ||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | — | 50 | 50 | ||||||||||||
|
Loss from continuing operations, before income tax expense
|
(442 | ) | (747 | ) | (50 | ) | (1,239 | ) | ||||||||
|
Loss from discontinued operations, net of taxes
|
— | (4 | ) | (23 | ) | (27 | ) | |||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | (442 | ) | $ | (751 | ) | $ | (73 | ) | (1,266 | ) | |||||
|
Income tax benefit
|
(470 | ) | ||||||||||||||
|
Net loss
|
$ | (796 | ) | |||||||||||||
| (3) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
38
Differences
between “Core Earnings” and GAAP
The following discussion summarizes the differences between
“Core Earnings” and GAAP net income, and details each
specific adjustment required to reconcile our “Core
Earnings” segment presentation to our GAAP earnings.
| Years Ended December 31, | ||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
“Core Earnings”
|
$ | 1,028 | $ | 807 | $ | 583 | ||||||
|
“Core Earnings” adjustments:
|
||||||||||||
|
Net impact of derivative accounting
|
83 | (502 | ) | (751 | ) | |||||||
|
Net impact of goodwill and acquired intangibles
|
(699 | ) | (76 | ) | (73 | ) | ||||||
|
Net impact of securitization accounting
|
— | (201 | ) | (442 | ) | |||||||
|
Total “Core Earnings” adjustments before income tax
effect
|
(616 | ) | (779 | ) | (1,266 | ) | ||||||
|
Net income tax effect
|
118 | 296 | 470 | |||||||||
|
Total “Core Earnings” adjustments
|
(498 | ) | (483 | ) | (796 | ) | ||||||
|
GAAP net income (loss)
|
$ | 530 | $ | 324 | $ | (213 | ) | |||||
1)
Derivative Accounting:
“Core
Earnings” exclude periodic unrealized gains and losses that
are caused primarily by the
mark-to-market
valuations on derivatives that do not qualify for hedge
accounting treatment under GAAP. To a lesser extent, these
periodic unrealized gains and losses are also a result of
ineffectiveness recognized related to effective hedges. These
unrealized gains and losses occur in our FFELP Loans, Consumer
Lending and Other business segments. Under GAAP, for derivatives
we generally use that are held to maturity, the cumulative net
unrealized gain or loss at the time of maturity will equal $0
except for Floor Income Contracts where the cumulative
unrealized gain will equal the amount for which we sold the
contract. 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.
The accounting for derivatives requires that changes in the fair
value of derivative instruments be recognized currently in
earnings, with no fair value adjustment of the hedged item,
unless specific hedge accounting criteria are met. We believe
that our derivatives are effective economic hedges, and as such,
are a critical element of our interest rate and foreign currency
risk management strategy. However, some of our derivatives,
primarily Floor Income Contracts and certain basis swaps, do not
qualify for hedge accounting treatment 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. These
gains and losses recorded 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 accounting treatment.
Our Floor Income Contracts are written options that must meet
more stringent requirements than other hedging relationships to
achieve hedge effectiveness. 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 derivatives accounting treatment, 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 earning Floor
Income but that offsetting change in value is not recognized. 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. Therefore, for purposes of “Core Earnings”, we
have removed the unrealized gains and losses related to these
contracts and added back the amortization of the net premiums
received on the Floor Income Contracts. The amortization of the
net premiums received on the Floor Income Contracts for
“Core Earnings” is reflected in student loan interest
income. Under GAAP accounting, the premium received on the Floor
Income Contracts is recorded as revenue in the “gains
(losses) on derivatives and hedging activities, net” line
item by the end of the contracts’ life.
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
39
hedge 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 LIBOR debt. The accounting for derivatives
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 for hedge accounting treatment.
Additionally, some of our FFELP Loans can earn at either a
variable or a fixed interest rate depending on market interest
rates and therefore swaps written on the FFELP Loans do not meet
the criteria for hedge accounting treatment. 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 on our net income for the years ended
December 31, 2010, 2009 and 2008 when compared with the
accounting principles employed in all years prior to the
adoption of ASC 815 related to accounting for derivative
financial instruments.
| Years Ended December 31, | ||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
“Core Earnings” derivative adjustments:
|
||||||||||||
|
Gains (losses) on derivative and hedging activities, net,
included in other
income
(1)
|
$ | (361 | ) | $ | (604 | ) | $ | (445 | ) | |||
|
Less: Realized (gains) losses on derivative and hedging
activities,
net
(1)
|
815 | 322 | (107 | ) | ||||||||
|
Unrealized gains (losses) on derivative and hedging activities,
net
|
454 | (282 | ) | (552 | ) | |||||||
|
Amortization of net premiums on Floor Income Contracts in net
interest income
|
(317 | ) | (197 | ) | (191 | ) | ||||||
|
Other pre-change in derivatives accounting adjustments
|
(54 | ) | (23 | ) | (8 | ) | ||||||
|
Total net impact derivative
accounting
(2)
|
$ | 83 | $ | (502 | ) | $ | (751 | ) | ||||
| (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” to arrive at GAAP net income and positive amounts are added to “Core Earnings” to arrive at GAAP net income. |
Reclassification
of Realized Gains (Losses) on Derivative and Hedging
Activities
The accounting for derivative instruments 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 to be
recorded in a separate income statement line item below net
interest income. Under our “Core Earnings”
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 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. 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, 2010, 2009 and 2008.
| Years Ended December 31, | ||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
Reclassification of realized gains (losses) on derivative and
hedging activities:
|
||||||||||||
|
Net settlement expense on Floor Income Contracts reclassified to
net interest income
|
$ | (888 | ) | $ | (717 | ) | $ | (488 | ) | |||
|
Net settlement income (expense) on interest rate swaps
reclassified to net interest income
|
69 | 412 | 563 | |||||||||
|
Foreign exchange derivatives gains/(losses) reclassified to
other income
|
— | (15 | ) | 11 | ||||||||
|
Net realized gains (losses) on terminated derivative contracts
reclassified to other income
|
4 | (2 | ) | 21 | ||||||||
|
Total reclassifications of realized (gains)losses on
derivative and hedging activities
|
(815 | ) | (322 | ) | 107 | |||||||
|
Add: Unrealized gains (losses) on derivative and hedging
activities,
net
(1)
|
454 | (282 | ) | (552 | ) | |||||||
|
Gains (losses) on derivative and hedging activities, net
|
$ | (361 | ) | $ | (604 | ) | $ | (445 | ) | |||
40
| (1) | “Unrealized gains (losses) on derivative and hedging activities, net” comprises the following unrealized mark-to-market gains (losses): |
| Years Ended December 31, | ||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
Floor Income Contracts
|
$ | 156 | $ | 483 | $ | (529 | ) | |||||
|
Basis swaps
|
341 | (413 | ) | (239 | ) | |||||||
|
Foreign currency hedges
|
(83 | ) | (255 | ) | 328 | |||||||
|
Other
|
40 | (97 | ) | (112 | ) | |||||||
|
Total unrealized gains (losses) on derivative and hedging
activities, net
|
$ | 454 | $ | (282 | ) | $ | (552 | ) | ||||
2)
Goodwill and 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, 2010, 2009 and
2008.
| Years Ended December 31, | ||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
“Core Earnings” goodwill and acquired intangibles
adjustments:
|
||||||||||||
|
Goodwill and intangible impairment of acquired intangibles from
continuing operations
|
$ | (660 | ) | $ | (36 | ) | $ | (1 | ) | |||
|
Goodwill and intangible impairment of acquired intangibles from
discontinued operations, net of tax
|
— | (1 | ) | (20 | ) | |||||||
|
Amortization of acquired intangibles from continuing operations
|
(39 | ) | (38 | ) | (48 | ) | ||||||
|
Amortization of acquired intangibles from discontinued
operations, net of tax
|
— | (1 | ) | (4 | ) | |||||||
|
Total “Core Earnings” goodwill and acquired
intangibles
adjustments
(1)
|
$ | (699 | ) | $ | (76 | ) | $ | (73 | ) | |||
| (1) | Negative amounts are subtracted from “Core Earnings” to arrive at GAAP net income and positive amounts are added to “Core Earnings” to arrive at GAAP net income. |
3)
Securitization Accounting:
On
January 1, 2010, we adopted the new consolidation
accounting guidance which now consolidates our off-balance sheet
securitization trusts. As a result, going forward, there will no
longer be differences between our GAAP and “Core
Earnings” presentation for securitization accounting. (See
“Note 2 — Significant Accounting
Policies” for further detail). Prior to the adoption of the
new consolidation accounting guidance on January 1, 2010,
certain securitization transactions in our FFELP Loans and
Consumer Lending business segments were accounted for as sales
of assets. Under “Core Earnings” for the FFELP Loans
and Consumer Lending business segments, we presented all
securitization transactions as long-term non-recourse
financings. The upfront “gains” on sale from
securitization transactions, as well as ongoing
“securitization servicing and Residual Interest revenue
(loss)” presented in accordance with GAAP, were excluded
from “Core Earnings” and were replaced by interest
income, provisions for loan losses, and interest expense as
earned or incurred on the securitization loans. This additional
net interest margin included for “Core Earnings”
contains any related fees or costs such as Consolidation Loan
Rebate Fees, premium and discount amortization as well as any
Repayment Borrower Benefit yield adjustments. We also excluded
transactions with our off-balance sheet trusts from “Core
Earnings” as they were considered intercompany transactions
on a “Core Earnings” basis. While we believe that our
“Core Earnings” presentation presents the economic
substance of results from our loan portfolios, when compared to
GAAP results, it understates earnings volatility from
securitization gains, securitization servicing income and
Residual Interest income.
41
The following table summarizes “Core Earnings”
securitization adjustments for the FFELP Loans and Consumer
Lending business segments for the years ended December 31,
2009 and 2008.
| Years Ended December 31, | ||||||||
| (Dollars in millions) | 2009 | 2008 | ||||||
|
“Core Earnings” securitization adjustments:
|
||||||||
|
Net interest income on securitized loans, before provisions for
loan losses and before intercompany transactions
|
$ | (942 | ) | $ | (872 | ) | ||
|
Provisions for loan losses
|
445 | 309 | ||||||
|
Net interest income on securitized loans, after provisions for
loan losses, before intercompany transactions
|
(497 | ) | (563 | ) | ||||
|
Intercompany transactions with off-balance sheet trusts
|
1 | (141 | ) | |||||
|
Net interest income on securitized loans, after provisions for
loan losses
|
(496 | ) | (704 | ) | ||||
|
Securitization servicing and Residual Interest revenue
|
295 | 262 | ||||||
|
Total “Core Earnings” securitization
adjustments
(1)
|
$ | (201 | ) | $ | (442 | ) | ||
| (1) | Negative amounts are subtracted from “Core Earnings” to arrive at GAAP net income and positive amounts are added to “Core Earnings” 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, we decided to no
longer exercise our contingent call option.
Business
Segments
As a result of the change in segment reporting that occurred in
the fourth quarter 2010, past periods have been recast for
comparison purposes. In connection with changing the reportable
segments the following lists other significant changes we made
related to the new segment presentation:
| • | The operating expenses reported for each segment are directly attributable to the generation of revenues by that segment. We have included corporate overhead and certain information technology costs (together referred to as “Overhead”) in our Other segment rather than allocate those expenses by segment. | |
| • | The creation of the FFELP Loans and Business Services segments has resulted in our accounting for the significant servicing revenue we earn on FFELP Loans we own in the Business Services segment. This bifurcates the FFELP interest income between the FFELP Loans and Business Services segment, with an intercompany servicing fee charge from the Business Services segment. The intercompany amounts are the contractual rates for encumbered loans within a financing facility or a similar market rate if the loan is not in a financing facility and accordingly exceed our costs. | |
| • | In our GAAP-basis financial presentation we allocated existing goodwill to the new reporting units within the reportable segments based upon relative fair value. During the fourth quarter 2010, we also evaluated our goodwill for impairment using both the old reporting and new reporting unit framework and there was no impairment under either analysis. | |
| • | Similar to prior periods, capital is assigned to each segment based on internally determined risk-adjusted weightings for the assets in each segment. These weightings have been updated and differ depending on the relative risk of each asset type and represent management’s view of the level of capital needed to support different assets. Unsecured debt is allocated based on the remaining funding needed for each segment after direct funding and the capital allocation has been considered. |
42
As part of the change in the reportable segments in the fourth
quarter of 2010, we also changed our calculation of “Core
Earnings.” When our FFELP Loan portfolio was growing,
management and our investors valued it based on recurring income
streams. Given the uncertain and volatile nature of unhedged
Floor Income, little future value was attributed to it by the
financial markets; therefore, we excluded unhedged Floor Income
from “Core Earnings.” Now that our FFELP Loan
portfolio is amortizing down, management and investors are
focused on the total amount of cash the FFELP Loan portfolio
generates, including unhedged Floor Income. As a result, we now
include unhedged Floor Income in “Core Earnings” and
have recast past “Core Earnings” financial results to
reflect this change.
The effect of including unhedged Floor Income, net of tax, on
“Core Earnings” was an increase of $21 million,
$210 million and $57 million for the years ending
December 31, 2010, 2009 and 2008, respectively.
Segment
Earnings Summary — “Core Earnings”
Basis
FFELP
Loans Segment
The following table includes “Core Earnings” results
for our FFELP Loans segment.
| Years Ended December 31, | % Increase (Decrease) | |||||||||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||
|
“Core Earnings” interest income:
|
||||||||||||||||||||
|
FFELP Loans
|
$ | 2,766 | $ | 3,252 | $ | 6,052 | (15 | )% | (46 | )% | ||||||||||
|
Cash and investments
|
9 | 26 | 156 | (65 | ) | (83 | ) | |||||||||||||
|
Total “Core Earnings” interest income
|
2,775 | 3,278 | 6,208 | (15 | ) | (47 | ) | |||||||||||||
|
Total “Core Earnings” interest expense
|
1,407 | 2,238 | 5,294 | (37 | ) | (58 | ) | |||||||||||||
|
Net “Core Earnings” interest income
|
1,368 | 1,040 | 914 | 32 | 14 | |||||||||||||||
|
Less: provisions for loan losses
|
98 | 119 | 127 | (18 | ) | (6 | ) | |||||||||||||
|
Net “Core Earnings” interest income after provisions
for loan losses
|
1,270 | 921 | 787 | 38 | 17 | |||||||||||||||
|
Servicing revenue
|
68 | 75 | 77 | (9 | ) | (3 | ) | |||||||||||||
|
Other income (loss)
|
320 | 292 | (42 | ) | 10 | 795 | ||||||||||||||
|
Total other income
|
388 | 367 | 35 | 6 | 949 | |||||||||||||||
|
Direct operating expenses:
|
||||||||||||||||||||
|
Sales and origination
|
23 | 56 | 57 | (59 | ) | (2 | ) | |||||||||||||
|
Servicing
|
679 | 691 | 662 | (2 | ) | 4 | ||||||||||||||
|
Information technology
|
3 | 7 | 23 | (57 | ) | (70 | ) | |||||||||||||
|
Other
|
31 | — | 3 | 100 | (100 | ) | ||||||||||||||
|
Total direct operating expense
|
736 | 754 | 745 | (2 | ) | 1 | ||||||||||||||
|
Restructuring expenses
|
54 | 8 | 42 | 575 | (81 | ) | ||||||||||||||
|
Total expenses
|
790 | 762 | 787 | 4 | (3 | ) | ||||||||||||||
|
Income from continuing operations, before income tax expense
|
868 | 526 | 35 | 65 | 1,403 | |||||||||||||||
|
Income tax expense
|
311 | 186 | 13 | 67 | 1,331 | |||||||||||||||
|
“Core Earnings”
|
$ | 557 | $ | 340 | $ | 22 | 64 | % | 1,445 | % | ||||||||||
43
FFELP
Loans “Core Earnings” Net Interest
Margin
The following table shows the FFELP Loans “Core
Earnings” net interest margin along with a reconciliation
to the GAAP-basis FFELP Loans net interest margin.
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
“Core Earnings” basis FFELP student loan yield
|
2.57 | % | 2.68 | % | 5.09 | % | ||||||
|
Hedged Floor Income
|
.23 | .14 | .15 | |||||||||
|
Unhedged Floor Income
|
.02 | .22 | .06 | |||||||||
|
Consolidation Loan Rebate Fees
|
(.59 | ) | (.59 | ) | (.65 | ) | ||||||
|
Repayment Borrower Benefits
|
(.10 | ) | (.11 | ) | (.13 | ) | ||||||
|
Premium amortization
|
(.18 | ) | (.17 | ) | (.25 | ) | ||||||
|
“Core Earnings” basis FFELP student loan net yield
|
1.95 | 2.17 | 4.27 | |||||||||
|
“Core Earnings” basis FFELP student loan cost of funds
|
(.93 | ) | (1.44 | ) | (3.59 | ) | ||||||
|
“Core Earnings” basis FFELP student loan spread
|
1.02 | .73 | .68 | |||||||||
|
“Core Earnings” basis FFELP other asset spread impact
|
(.09 | ) | (.06 | ) | (.06 | ) | ||||||
|
“Core Earnings” basis FFELP Loans net interest
margin
(1)
|
.93 | % | .67 | % | .62 | % | ||||||
|
|
||||||||||||
|
“Core Earnings” basis FFELP Loans net interest
margin
(1)
|
.93 | % | .67 | % | .62 | % | ||||||
|
Adjustment for GAAP accounting treatment
|
.33 | (.08 | ) | (.28 | ) | |||||||
|
GAAP-basis FFELP Loans net interest margin
|
1.26 | % | .59 | % | .34 | % | ||||||
| (1) | The average balances of our FFELP “Core Earnings” basis interest-earning assets for the respective periods are: |
| (Dollars in millions) | ||||||||||||
|
FFELP Loans
|
$ | 142,043 | $ | 150,059 | $ | 141,647 | ||||||
|
Other interest-earning assets
|
5,562 | 5,126 | 5,501 | |||||||||
|
Total FFELP “Core Earnings” basis interest-earning
assets
|
$ | 147,605 | $ | 155,185 | $ | 147,148 | ||||||
The “Core Earnings” basis FFELP Loans net interest
margin for the year ended December 31, 2010 increased by
26 basis points from the prior year. This was primarily the
result of a significant reduction in the cost of our ABCP
Facility, a 24 basis point improvement in the CP/LIBOR Spread
and a significantly higher margin on the loans within the
ED’s Loan Participation Purchase Program (the
“Participation Program”) facility compared to the
prior year.
As of December 31, 2010, our FFELP Loan portfolio totaled
approximately $149 billion, comprised of $56 billion
of FFELP Stafford and $93 billion of FFELP Consolidation
Loans. The weighted average life of these portfolios is
4.9 years and 9.4 years, respectively, assuming a CPR
of 6 percent and 3 percent, respectively.
On December 31, 2010, we closed on our agreement to
purchase an interest in $26.1 billion of securitized
federal student loans and related assets from the Student Loan
Corporation (“SLC”), a subsidiary of Citibank, N.A.
The purchase price was approximately $1.1 billion. The
assets purchased include the residual interest in 13 of
SLC’s 14 FFELP loan securitizations and its interest in SLC
Funding Note Issuer related to the U.S. Department of
Education’s Straight-A Funding asset-backed commercial
paper conduit. We will also service these assets and administer
the securitization trusts. However, SLC will subservice these
trusts on our behalf in 2011 until we transition these functions
to our own servicing platform during the latter part of 2011.
Because we have determined that we are the primary beneficiary
of these trusts we have consolidated these trusts onto our
balance sheet. In addition, we contracted the right to service
approximately $0.8 billion of additional FFELP securitized
assets from SLC. (We did not consolidate this underlying trust
because we are not the primary beneficiary of this trust.) The
purchase was funded by a
5-year
term
loan provided by Citibank in an amount equal to the purchase
price. See “Note 3 — Student
Loans” and
“Note 7 — Borrowings” for
additional details regarding assets and terms of funding.
44
Floor
Income — “Core Earnings” Basis
The following table analyzes the ability of the FFELP Loans in
our “Core Earnings” portfolio to earn Floor Income
after December 31, 2010 and 2009, based on interest rates
as of those dates.
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
|
Fixed
|
Variable
|
Fixed
|
Variable
|
|||||||||||||||||||||
|
Borrower
|
Borrower
|
Borrower
|
Borrower
|
|||||||||||||||||||||
| (Dollars in billions) | Rate | Rate | Total | Rate | Rate | Total | ||||||||||||||||||
|
Student loans eligible to earn Floor Income:
|
||||||||||||||||||||||||
|
GAAP-basis student loans
|
$ | 123.6 | $ | 21.9 | $ | 145.5 | $ | 103.3 | $ | 14.9 | $ | 118.2 | ||||||||||||
|
Off-balance sheet student loans
|
— | — | — | 14.3 | 5.4 | 19.7 | ||||||||||||||||||
|
“Core Earnings” basis student loans eligible to earn
Floor Income
|
123.6 | 21.9 | 145.5 | 117.6 | 20.3 | 137.9 | ||||||||||||||||||
|
Less: post-March 31, 2006 disbursed loans required to
rebate Floor Income
|
(65.2 | ) | (2.3 | ) | (67.5 | ) | (64.9 | ) | (1.2 | ) | (66.1 | ) | ||||||||||||
|
Less: economically hedged Floor Income Contracts
|
(39.2 | ) | — | (39.2 | ) | (39.6 | ) | — | (39.6 | ) | ||||||||||||||
|
Net “Core Earnings” basis student loans eligible to
earn Floor Income
|
$ | 19.2 | $ | 19.6 | $ | 38.8 | $ | 13.1 | $ | 19.1 | $ | 32.2 | ||||||||||||
|
Net “Core Earnings” basis student loans earning Floor
Income as of December 31,
|
$ | 18.0 | $ | 1.2 | $ | 19.2 | $ | 13.1 | $ | 3.0 | $ | 16.1 | ||||||||||||
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
“Core Earnings” basis balance of FFELP Consolidation
Loans for which Fixed Rate Floor Income has been economically
hedged through Floor Income Contracts for the period
January 1, 2011 to March 31, 2014. The hedges related
to these loans do not qualify as effective hedges.
| Years Ended December 31, | ||||||||||||||||
| (Dollars in billions) | 2011 | 2012 | 2013 | 2014 | ||||||||||||
|
Average balance of FFELP Consolidation Loans whose Floor Income
is economically hedged
|
$ | 28.8 | $ | 20.6 | $ | 5.6 | $ | .2 | ||||||||
FFELP
Provisions for Loan Losses and Loan Charge-Offs
The following tables summarize the total FFELP provisions for
loan losses and FFELP Loan charge-offs on both a GAAP-basis and
a “Core Earnings” basis for the years ended
December 31, 2010, 2009 and 2008.
| Years Ended December 31, | ||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
FFELP provisions for loan losses:
|
||||||||||||
|
Total GAAP-basis
|
$ | 98 | $ | 106 | $ | 106 | ||||||
|
Total “Core Earnings” basis
|
98 | 119 | 127 | |||||||||
|
FFELP loan charge-offs:
|
||||||||||||
|
Total GAAP-basis
|
$ | 87 | $ | 79 | $ | 58 | ||||||
|
Total “Core Earnings” basis
|
87 | 94 | 79 | |||||||||
45
Servicing
Revenue and Other Income — FFELP Loans
Segment
The following table summarizes the components of “Core
Earnings” other income for our FFELP Loans segment for the
years ended December 31, 2010, 2009, and 2008.
| Years Ended December 31, | ||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
Servicing revenue
|
$ | 68 | $ | 75 | $ | 77 | ||||||
|
Gains (losses) on sales of loans and securities, net
|
325 | 284 | (51 | ) | ||||||||
|
Other
|
(5 | ) | 8 | 9 | ||||||||
|
Total other income, net
|
$ | 388 | $ | 367 | $ | 35 | ||||||
Servicing revenue for our FFELP Loans segment primarily consists
of borrower late fees.
The gains on sales of loans and securities in the years ended
December 31, 2010 and 2009, related primarily to the sale
of $20.4 billion and $18.5 billion loans,
respectively, of FFELP Loans to ED as part of the ED Purchase
Program. The loss in 2008 primarily relates to the sale of
approximately $1.0 billion of FFELP Loans to the ED under
ECASLA, which resulted in a $53 million loss.
Operating
Expenses — FFELP Loans Segment
Operating expenses for our FFELP Loans segment primarily include
the contractual rates we are paid to service loans in term
asset-backed securitization trusts or a similar rate if a loan
is not in a term financing facility, the fees we pay for third
party loan servicing and costs incurred to acquire loans. For
the years ended December 31, 2010, 2009 and 2008, operating
expenses for our FFELP Loans segment totaled $736 million,
$754 million and $745 million, respectively. The
intercompany revenue charged from the Business Services segment
and included in those amounts was $648 million,
$659 million and $632 million for the years ended
December 31, 2010, 2009 and 2008, respectively. These
amounts exceed the actual cost of servicing the loans.
2010
versus 2009
Operating expenses decreased $18 million from the prior
year, primarily due to the effect of our cost cutting initiative
in connection with the passage of HCERA. This was partially
offset by a one-time fee paid to acquire the SLC portfolio, an
increase in legal contingency expenses and costs related to
closing and selling two loan originations centers in 2010.
Operating expenses, excluding restructuring-related asset
impairments, were 51 basis points and 50 basis points
of average “Core Earnings” basis FFELP Loans in the
years ended December 31, 2010 and 2009, respectively.
2009
versus 2008
Operating expenses for the year ended December 31, 2009,
increased $9 million from the prior year primarily due to
an increase in our servicing expense as a result of an
$8 billion increase in the average balance of our FFELP
Loan portfolio.
46
Consumer
Lending Segment
The following table includes “Core Earnings” results
for our Consumer Lending segment.
| Years Ended December 31, | % Increase (Decrease) | |||||||||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||
|
“Core Earnings” interest income:
|
||||||||||||||||||||
|
Private Education Loans
|
$ | 2,353 | $ | 2,254 | $ | 2,752 | 4 | % | (18 | )% | ||||||||||
|
Cash and investments
|
14 | 13 | 79 | 8 | (84 | ) | ||||||||||||||
|
Total “Core Earnings” interest income
|
2,367 | 2,267 | 2,831 | 4 | (20 | ) | ||||||||||||||
|
Total “Core Earnings” interest expense
|
758 | 721 | 1,280 | 5 | (44 | ) | ||||||||||||||
|
Net “Core Earnings” interest income
|
1,609 | 1,546 | 1,551 | 4 | — | |||||||||||||||
|
Less: provisions for loan losses
|
1,298 | 1,399 | 874 | (7 | ) | 60 | ||||||||||||||
|
Net “Core Earnings” interest income after provisions
for loan losses
|
311 | 147 | 677 | 112 | (78 | ) | ||||||||||||||
|
Servicing revenue
|
72 | 70 | 65 | 3 | 8 | |||||||||||||||
|
Other income
|
— | — | 1 | — | (100 | ) | ||||||||||||||
|
Direct operating expenses:
|
||||||||||||||||||||
|
Sales and origination
|
125 | 81 | 67 | 54 | 21 | |||||||||||||||
|
Servicing
|
60 | 47 | 36 | 28 | 31 | |||||||||||||||
|
Collections
|
94 | 90 | 67 | 4 | 34 | |||||||||||||||
|
Information technology
|
68 | 52 | 23 | 31 | 126 | |||||||||||||||
|
Other
|
3 | (5 | ) | 8 | 160 | (163 | ) | |||||||||||||
|
Total direct operating expenses
|
350 | 265 | 201 | 32 | 32 | |||||||||||||||
|
Restructuring expenses
|
12 | 2 | 25 | 500 | (92 | ) | ||||||||||||||
|
Total expenses
|
362 | 267 | 226 | 36 | 18 | |||||||||||||||
|
Income (loss) before income tax expense (benefit)
|
21 | (50 | ) | 517 | 142 | (110 | ) | |||||||||||||
|
Income tax expense (benefit)
|
8 | (18 | ) | 186 | 144 | (110 | ) | |||||||||||||
|
“Core Earnings” (loss)
|
$ | 13 | $ | (32 | ) | $ | 331 | (141 | )% | (110 | )% | |||||||||
47
Consumer
Lending “Core Earnings” Net Interest
Margin
The following table shows the Consumer Lending “Core
Earnings” net interest margin along with a reconciliation
to the GAAP-basis Consumer Lending net interest margin before
provisions for loan losses.
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
“Core Earnings” basis Private Education Student Loan
yield
|
6.15 | % | 5.99 | % | 8.16 | % | ||||||
|
Discount amortization
|
.29 | .26 | .28 | |||||||||
|
“Core Earnings” basis Private Education Loan net yield
|
6.44 | 6.25 | 8.44 | |||||||||
|
“Core Earnings” basis Private Education Loan cost of
funds
|
(1.79 | ) | (1.78 | ) | (3.52 | ) | ||||||
|
“Core Earnings” basis Private Education Loan spread
|
4.65 | 4.47 | 4.92 | |||||||||
|
“Core Earnings” basis other asset spread impact
|
(.80 | ) | (.62 | ) | (.54 | ) | ||||||
|
“Core Earnings” basis Consumer Lending net interest
margin
(1)
|
3.85 | % | 3.85 | % | 4.38 | % | ||||||
|
|
||||||||||||
|
“Core Earnings” basis Consumer Lending net interest
margin
(1)
|
3.85 | % | 3.85 | % | 4.38 | % | ||||||
|
Adjustment for GAAP accounting treatment
|
.02 | (.16 | ) | (.02 | ) | |||||||
|
GAAP-basis Consumer Lending net interest
margin
(1)
|
3.87 | % | 3.69 | % | 4.36 | % | ||||||
| (1) | The average balances of our Consumer Lending “Core Earnings” basis interest-earning assets for the respective periods are: |
| (Dollars in millions) | ||||||||||||
|
Private Education Loans
|
$ | 36,534 | $ | 36,046 | $ | 32,597 | ||||||
|
Other interest-earning assets
|
5,204 | 4,072 | 2,806 | |||||||||
|
Total Consumer Lending “Core Earnings” basis
interest-earning assets
|
$ | 41,738 | $ | 40,118 | $ | 35,403 | ||||||
The Consumer Lending net interest margin for the year ended
December 31, 2010 remained unchanged from the prior year.
The decrease in the net interest margin from 2008 to 2009 was
primarily a result of a higher costs of funds due to the extreme
turmoil in the capital markets.
Private
Education Loans Provisions for Loan Losses and Loan
Charge-Offs
The following tables summarize the total Private Education Loans
provisions for loan losses and charge-offs on both a GAAP-basis
and a “Core Earnings” basis for the years ended
December 31, 2010, 2009 and 2008.
| Years Ended December 31, | ||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
Private Education Loans provision for loan losses:
|
||||||||||||
|
Total GAAP-basis
|
$ | 1,298 | $ | 967 | $ | 586 | ||||||
|
Total “Core Earnings” basis
|
1,298 | 1,399 | 874 | |||||||||
|
Private Education Loans charge-offs:
|
||||||||||||
|
Total GAAP-basis
|
$ | 1,291 | $ | 876 | $ | 320 | ||||||
|
Total “Core Earnings” basis
|
1,291 | 1,299 | 473 | |||||||||
The 2010 “Core Earnings” basis provision expense and
charge-offs are down from 2009 as the portfolio’s credit
performance continued to improve since the weakening in the
U.S. economy that began in 2008. The Private Education Loan
portfolio experienced a significant increase in delinquencies
through the first quarter of 2009 (delinquencies as a percentage
of loans in repayment were 13.4 percent at March 31, 2009);
however, delinquencies as a percentage of loans in repayment
have now declined to 10.6 percent at December 31,
2010. “Core Earnings” basis Private Education Loan
delinquencies as a percentage of loans in repayment decreased
from 12.1 percent to 10.6 percent from
December 31, 2009 to December 31, 2010. “Core
Earnings” Private Education Loans in forbearance as a
percentage of loans in repayment and forbearance decreased from
5.5 percent at December 31, 2009 to 4.6 percent
at December 31, 2010. The “Core Earnings” basis
Private
48
Education Loan allowance coverage of annual charge-offs ratio
was 1.6 at December 31, 2010 compared with 1.5 at
December 31, 2009. The allowance for loan losses as a
percentage of ending Private Education Loans in repayment
decreased from 8.1 percent at December 31, 2009 to
7.3 percent at December 31, 2010. We analyzed changes
in the key ratios disclosed in the tables above when determining
the appropriate Private Education Loan allowance for loan losses.
Servicing
Revenue and Other Income — Consumer Lending
Segment
Servicing revenue for our Consumer Lending segment primarily
includes late fees and forbearance fees. For the years ended
December 31, 2010, 2009 and 2008, servicing revenue for our
Consumer Lending segment totaled $72 million,
$70 million and $65 million, respectively.
Operating
Expenses — Consumer Lending Segment
Operating expenses for our Consumer Lending segment include
costs incurred to originate Private Education Loans and to
service and collect on our “Core Earnings” basis
Private Education Loan portfolio. For the years ended
December 31, 2010, 2009 and 2008, operating expenses for
our Consumer Lending segment totaled $350 million,
$265 million and $201 million, respectively.
2010
versus 2009
Operating expenses increased $85 million from 2009,
primarily as the result of a non-recurring $11 million
benefit in 2009 related to reversing a contingency reserve, an
increase in collection and servicing costs from a higher number
of loans in repayment and delinquency status and higher
marketing and technology enhancement costs related to Private
Education Loans in 2010. Operating expenses, excluding
restructuring-related asset impairments, were 96 basis
points and 74 basis points, respectively, of average
“Core Earnings” basis Private Education Loans in the
years ended December 31, 2010 and 2009.
2009
versus 2008
Operating expenses increased $64 million from 2008,
primarily as a result of an increase in collection and servicing
costs from a higher number of loans in repayment and delinquency
status and higher marketing and technology enhancement costs
related to Private Education Loans in 2009. Operating expenses,
excluding restructuring-related asset impairments, were
74 basis points and 61 basis points, respectively, of
average “Core Earnings” basis Private Education Loans
in the years ended December 31, 2009 and 2008.
49
Business
Services Segment
The following tables include “Core Earnings” results
for our Business Services segment.
| Years Ended December 31, | % Increase (Decrease) | |||||||||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||
|
Net interest income after provision
|
$ | 17 | $ | 20 | $ | 26 | (15 | )% | (23 | )% | ||||||||||
|
Servicing revenue:
|
||||||||||||||||||||
|
Intercompany loan servicing
|
648 | 659 | 632 | (2 | ) | 4 | ||||||||||||||
|
Third-party loan servicing
|
77 | 53 | 26 | 45 | 104 | |||||||||||||||
|
Account asset servicing
|
68 | 62 | 61 | 10 | 2 | |||||||||||||||
|
Campus Payment Solutions
|
26 | 28 | 26 | (7 | ) | 8 | ||||||||||||||
|
Guarantor servicing
|
93 | 152 | 152 | (39 | ) | — | ||||||||||||||
|
Total servicing revenue
|
912 | 954 | 897 | (4 | ) | 6 | ||||||||||||||
|
Contingency revenue
|
330 | 294 | 330 | 12 | (11 | ) | ||||||||||||||
|
Transaction fees
|
48 | 50 | 48 | (4 | ) | 4 | ||||||||||||||
|
Other
|
3 | 5 | 4 | (40 | ) | 25 | ||||||||||||||
|
Total other income
|
1,293 | 1,303 | 1,279 | (1 | ) | 2 | ||||||||||||||
|
Direct operating expenses:
|
||||||||||||||||||||
|
Sales and originations
|
22 | 36 | 47 | (39 | ) | (23 | ) | |||||||||||||
|
Servicing
|
191 | 162 | 158 | 18 | 3 | |||||||||||||||
|
Collections
|
183 | 157 | 197 | 17 | (20 | ) | ||||||||||||||
|
Information technology
|
81 | 85 | 60 | (5 | ) | 42 | ||||||||||||||
|
Other
|
23 | — | — | 100 | — | |||||||||||||||
|
Total direct operating expenses
|
500 | 440 | 462 | 14 | (5 | ) | ||||||||||||||
|
Restructuring expenses
|
7 | 2 | 10 | 250 | (80 | ) | ||||||||||||||
|
Total expenses
|
507 | 442 | 472 | 15 | (6 | ) | ||||||||||||||
|
Income from continuing operations, before income tax expense
|
803 | 881 | 833 | (9 | ) | 6 | ||||||||||||||
|
Income tax expense
|
288 | 311 | 300 | (7 | ) | 4 | ||||||||||||||
|
“Core Earnings”
|
$ | 515 | $ | 570 | $ | 533 | (10 | )% | 7 | % | ||||||||||
Our Business Services segment earns intercompany loan servicing
fees from servicing the FFELP Loans in our FFELP Loans segment.
The average balance of this portfolio was $127 billion,
$135 billion and $125 billion for the years ended
December 31, 2010, 2009 and 2008, respectively. The
decrease from 2009 to 2010 is primarily the result of the
amortization of the underlying portfolio as well as the
$20.4 billion of FFELP Loans sold to ED in October 2010.
We are servicing approximately 3.3 million accounts under
the ED Servicing Contract as of December 31, 2010. The
increase in third-party loan servicing revenue in 2010 is the
result of the increase in the loans we are servicing under the
ED Servicing Contract. Loan servicing fees in 2010 and 2009
included $44 million and $9 million, respectively, of
servicing revenue related to the loans we are servicing under
the ED Servicing Contract.
Account asset servicing revenue represents fees earned on
program management, transfer and servicing agent services and
administration services for our various 529 college-savings
plans.
Campus Payment Solutions revenue is earned from our Campus
Payment Solutions business whose services include comprehensive
financing and transaction processing solutions that we provide
to college financial aid offices and students to streamline the
financial aid process.
50
The decrease in Guarantor servicing revenue compared with the
year-ago period was primarily due to HCERA being effective as of
July 1, 2010, our no longer earning Guarantor issuance fees
and the lower balance of outstanding FFELP Loans on which we
earn other fees.
In 2010, contingency revenue increased $36 million from
2009 due to an increase in collections on defaulted FFELP Loans.
Contingency revenue decreased in 2009 from 2008 as the 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. We earn a rehabilitation fee only when the
Guarantor sells the rehabilitated loan. The disruption in the
credit markets limited the sale of rehabilitated loans.
The following table presents the outstanding inventory of
contingent collections receivables that our Business Services
segment will collect on behalf of others.
| As of December 31, | ||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
Contingency:
|
||||||||||||
|
Student loans
|
$ | 10,362 | $ | 8,762 | $ | 9,852 | ||||||
|
Other
|
1,730 | 1,262 | 1,726 | |||||||||
|
Total
|
$ | 12,092 | $ | 10,024 | $ | 11,578 | ||||||
Transaction fees are earned in conjunction with our rewards
program from participating companies based on member purchase
activity, 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 us on behalf of our
members.
Revenues related to services performed on FFELP Loans accounted
for 78 percent, 79 percent and 79 percent,
respectively, of total segment revenues for the years ended
December 31, 2010, 2009 and 2008.
Operating
Expenses — Business Services Segment
For the years ended December 31, 2010, 2009 and 2008,
operating expenses for the Business Services segment totaled
$500 million, $440 million and $462 million,
respectively.
2010
versus 2009
Operating expenses increased $60 million from 2009 to 2010
primarily due to higher technology and other expenses related to
preparation for higher volumes for the ED Servicing Contract as
well as an increase in legal contingency expenses.
2009
versus 2008
Operating expenses decreased $22 million in 2009 compared
with 2008 primarily due to our cost reduction initiatives.
Other
Segment
The Other segment primarily consists of the financial results
related to the repurchase of debt, the corporate liquidity
portfolio and all overhead. We also include results from smaller
wind-down and discontinued operations within this segment. These
are the Purchased Paper businesses and mortgage and other loan
businesses. The Other segment includes our remaining businesses
that do not pertain directly to the primary segments identified
above. Overhead expenses include costs related to executive
management, the board of directors, accounting, finance, legal,
human resources, stock option expense and certain information
technology costs related to infrastructure and operations.
51
The following table includes “Core Earnings” results
for our Other segment.
|
Years Ended
|
||||||||||||||||||||
| December 31, | % Increase (Decrease) | |||||||||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||
|
Net interest loss after provision
|
$ | (35 | ) | $ | (66 | ) | $ | (11 | ) | (47 | )% | 500 | % | |||||||
|
Gains on debt repurchases
|
317 | 536 | 64 | (41 | ) | 738 | ||||||||||||||
|
Other
|
14 | 1 | 15 | 1,300 | (93 | ) | ||||||||||||||
|
Total income
|
331 | 537 | 79 | (38 | ) | 580 | ||||||||||||||
|
Direct operating expenses:
|
||||||||||||||||||||
|
Servicing
|
9 | 6 | 17 | 50 | (65 | ) | ||||||||||||||
|
Other
|
3 | — | — | 100 | — | |||||||||||||||
|
Total direct operating expenses
|
12 | 6 | 17 | 100 | (65 | ) | ||||||||||||||
|
Overhead expenses:
|
||||||||||||||||||||
|
Corporate overhead
|
128 | 138 | 150 | (7 | ) | (8 | ) | |||||||||||||
|
Unallocated information technology costs
|
130 | 99 | 86 | 31 | 15 | |||||||||||||||
|
Total overhead expenses
|
258 | 237 | 236 | 9 | — | |||||||||||||||
|
Total operating expenses
|
270 | 243 | 253 | 11 | (4 | ) | ||||||||||||||
|
Restructuring expenses
|
12 | (2 | ) | (5 | ) | 700 | 60 | |||||||||||||
|
Total expenses
|
282 | 241 | 248 | 17 | (3 | ) | ||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
14 | 230 | (180 | ) | (94 | ) | 228 | |||||||||||||
|
Income tax expense (benefit)
|
4 | 81 | (65 | ) | (95 | ) | 225 | |||||||||||||
|
Net income (loss) from continuing operations
|
10 | 149 | (115 | ) | (93 | ) | 230 | |||||||||||||
|
Loss from discontinued operations, net of tax
|
(67 | ) | (220 | ) | (188 | ) | (70 | ) | 17 | |||||||||||
|
“Core Earnings” net loss
|
$ | (57 | ) | $ | (71 | ) | $ | (303 | ) | (20 | )% | (77 | )% | |||||||
Purchased
Paper Business
In 2008, we concluded that our Purchased Paper businesses were
no longer a strategic fit. The businesses are presented in
discontinued operations for the current and prior periods. In
the fourth quarter of 2009, we sold our Purchased
Paper — Mortgage/Properties business for
$280 million, which resulted in an after-tax loss of
$95 million. In the fourth quarter of 2010 we began
actively marketing our Purchased Paper — Non Mortgage
business for sale. We have concluded it is probable this
business will be sold within one year and, as a result, the
results of operations of this business were presented in
discontinued operations beginning in the fourth quarter of 2010.
In connection with this classification, we are required to carry
this business at the lower of fair value or historical cost
basis. This resulted in us recording an after-tax loss of
$52 million from discontinued operations in the fourth
quarter of 2010, primarily due to adjusting the value of this
business to its estimated fair value.
The following table summarizes the carrying value of the
Purchased Paper — Non-Mortgage portfolio:
|
December 31,
|
December 31,
|
December 31,
|
||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
Carrying value of purchased paper
|
$ | 95 | $ | 285 | $ | 544 | ||||||
52
We began repurchasing our outstanding debt in the second quarter
of 2008. We repurchased $4.9 billion, $3.4 billion and
$1.9 billion face amount of our senior unsecured notes for
the years ended December 31, 2010, 2009 and 2008,
respectively. Since the second quarter of 2008, we repurchased
$10.2 billion face amount of our senior unsecured notes in
the aggregate, with maturity dates ranging from 2008 to 2016.
Mortgage
and Other Loans
Also included in this segment are our mortgage and other loan
portfolios, which totaled $271 million at December 31,
2010. We are no longer originating mortgage and other loans.
Overhead
Corporate overhead is comprised of costs related to executive
management, the board of directors, accounting, finance, legal,
human resources and stock option expense. Information technology
costs are related to infrastructure and operations.
For the years ended December 31, 2010, 2009 and 2008,
operating expenses for the Other segment totaled
$270 million, $243 million and $253 million,
respectively.
2010
versus 2009
Operating expenses increased $27 million from 2009 to 2010.
This increase in corporate overhead was primarily attributable
to increased technology costs associated with disaster recovery
modernization, enterprise architecture and information security
upgrades.
53
Financial
Condition
This section provides additional information regarding the
changes related to our loan portfolio assets and related
liabilities as well as credit performance indicators related to
our loan portfolio. Many of these disclosures will show both
GAAP-basis as well as “Core Earnings” basis
disclosures. Because certain trusts were not consolidated prior
to the adoption of the new consolidation accounting guidance on
January 1, 2010, these trusts were treated as off-balance
sheet for GAAP purposes but we considered them on-balance sheet
for “Core Earnings” purposes. Subsequent to the
adoption of the new consolidation accounting guidance on
January 1, 2010, this difference no longer exists because
all of our trusts are treated as on-balance sheet for GAAP
purposes. Below and elsewhere in the document, “Core
Earnings” basis disclosures include all historically
(pre-January 1, 2010) off-balance sheet trusts as
though they were on-balance sheet. We believe that providing
“Core Earnings” basis disclosures is meaningful
because when we evaluate the performance and risk
characteristics of the Company we have always considered the
effect of any off-balance sheet trusts as though they were
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, 2010, 2009 and 2008. This
table reflects our net interest margin on a consolidated basis.
| Years Ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| (Dollars in millions) | Balance | Rate | Balance | Rate | Balance | Rate | ||||||||||||||||||
|
Average Assets
|
||||||||||||||||||||||||
|
FFELP Loans
|
$ | 142,043 | 2.36 | % | $ | 128,538 | 2.41 | % | $ | 117,382 | 4.41 | % | ||||||||||||
|
Private Education Loans
|
36,534 | 6.44 | 23,154 | 6.83 | 19,276 | 9.01 | ||||||||||||||||||
|
Other loans
|
323 | 9.20 | 561 | 9.98 | 955 | 8.66 | ||||||||||||||||||
|
Cash and investments
|
12,729 | .20 | 11,046 | .24 | 9,279 | 2.98 | ||||||||||||||||||
|
Total interest-earning assets
|
191,629 | 3.00 | % | 163,299 | 2.91 | % | 146,892 | 4.95 | % | |||||||||||||||
|
Non-interest-earning assets
|
5,931 | 8,693 | 9,999 | |||||||||||||||||||||
|
Total assets
|
$ | 197,560 | $ | 171,992 | $ | 156,891 | ||||||||||||||||||
|
Average Liabilities and Stockholders’ Equity
|
||||||||||||||||||||||||
|
Short-term borrowings
|
$ | 38,634 | .86 | % | $ | 44,485 | 1.84 | % | $ | 36,059 | 4.73 | % | ||||||||||||
|
Long-term borrowings
|
150,768 | 1.29 | 118,699 | 1.87 | 111,625 | 3.76 | ||||||||||||||||||
|
Total interest-bearing liabilities
|
189,402 | 1.20 | % | 163,184 | 1.86 | % | 147,684 | 4.00 | % | |||||||||||||||
|
Non-interest-bearing liabilities
|
3,280 | 3,719 | 3,797 | |||||||||||||||||||||
|
Stockholders’ equity
|
4,878 | 5,089 | 5,410 | |||||||||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 197,560 | $ | 171,992 | $ | 156,891 | ||||||||||||||||||
|
Net interest margin
|
1.82 | % | 1.05 | % | .93 | % | ||||||||||||||||||
54
Rate/Volume
Analysis — GAAP
The following rate/volume analysis shows the relative
contribution of changes in interest rates and asset volumes.
|
Increase
|
Change Due To (1) | |||||||||||
| (Dollars in millions) | (Decrease) | Rate | Volume | |||||||||
|
2010 vs. 2009
|
||||||||||||
|
Interest income
|
$ | 996 | $ | 149 | $ | 847 | ||||||
|
Interest expense
|
(760 | ) | (1,194 | ) | 434 | |||||||
|
Net interest income
|
$ | 1,756 | $ | 1,416 | $ | 340 | ||||||
|
2009 vs. 2008
|
||||||||||||
|
Interest income
|
$ | (2,512 | ) | $ | (3,252 | ) | $ | 740 | ||||
|
Interest expense
|
(2,870 | ) | (3,435 | ) | 565 | |||||||
|
Net interest income
|
$ | 358 | $ | 197 | $ | 161 | ||||||
| (1) | Changes in income and expense due to both rate and volume have been allocated in proportion to the relationship of the absolute dollar amounts of the change in each. The changes in income and expense are calculated independently for each line in the table. The totals for the rate and volume columns are not the sum of the individual lines. |
Summary
of our “Core Earnings” Basis Student Loan
Portfolio
The following tables summarize the components of our “Core
Earnings” basis student loan portfolios and show the
changing composition of each portfolio.
Ending
“Core Earnings” Basis Student Loan Balances,
net
| December 31, 2010 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Private
|
||||||||||||||||||
|
Stafford and
|
Consolidation
|
Total
|
Education
|
|||||||||||||||||
| (Dollars in millions) | Other | Loans | FFELP | Loans | Total | |||||||||||||||
|
GAAP-basis and “Core Earnings” basis
portfolio
(1)
:
|
||||||||||||||||||||
|
In-school
|
$ | 6,333 | $ | — | $ | 6,333 | $ | 3,752 | $ | 10,085 | ||||||||||
|
Grace and repayment
|
49,068 | 91,537 | 140,605 | 33,780 | 174,385 | |||||||||||||||
|
Total, gross
|
55,401 | 91,537 | 146,938 | 37,532 | 184,470 | |||||||||||||||
|
Unamortized premium/(discount)
|
971 | 929 | 1,900 | (894 | ) | 1,006 | ||||||||||||||
|
Receivable for partially charged-off loans
|
— | — | — | 1,039 | 1,039 | |||||||||||||||
|
Allowance for losses
|
(120 | ) | (69 | ) | (189 | ) | (2,021 | ) | (2,210 | ) | ||||||||||
|
Total GAAP-basis and “Core Earnings” basis portfolio
|
$ | 56,252 | $ | 92,397 | $ | 148,649 | $ | 35,656 | $ | 184,305 | ||||||||||
|
% of GAAP-basis and “Core Earnings” basis FFELP
|
38 | % | 62 | % | 100 | % | ||||||||||||||
|
% of total
|
31 | % | 50 | % | 81 | % | 19 | % | 100 | % | ||||||||||
| (1) | Upon the adoption of the new consolidation accounting on January 1, 2010, we consolidated all of our off-balance sheet securitization trusts. |
55
| December 31, 2009 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Private
|
||||||||||||||||||
|
Stafford and
|
Consolidation
|
Total
|
Education
|
|||||||||||||||||
| (Dollars in millions) | Other | Loans | FFELP | Loans | Total | |||||||||||||||
|
GAAP-basis:
|
||||||||||||||||||||
|
In-school
|
$ | 15,250 | $ | — | $ | 15,250 | $ | 6,058 | $ | 21,308 | ||||||||||
|
Grace and repayment
|
36,543 | 67,235 | 103,778 | 18,198 | 121,976 | |||||||||||||||
|
Total GAAP-basis, gross
|
51,793 | 67,235 | 119,028 | 24,256 | 143,284 | |||||||||||||||
|
GAAP-basis unamortized premium/(discount)
|
986 | 1,201 | 2,187 | (559 | ) | 1,628 | ||||||||||||||
|
GAAP-basis receivable for partially charged-off loans
|
— | — | — | 499 | 499 | |||||||||||||||
|
GAAP-basis allowance for losses
|
(104 | ) | (57 | ) | (161 | ) | (1,443 | ) | (1,604 | ) | ||||||||||
|
Total GAAP-basis, 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 “Core Earnings” basis
|
$ | 58,174 | $ | 83,176 | $ | 141,350 | $ | 35,095 | $ | 176,445 | ||||||||||
|
% of GAAP-basis FFELP
|
44 | % | 56 | % | 100 | % | ||||||||||||||
|
% of “Core Earnings” basis FFELP
|
41 | % | 59 | % | 100 | % | ||||||||||||||
|
% of total
|
33 | % | 47 | % | 80 | % | 20 | % | 100 | % | ||||||||||
56
Average
“Core Earnings” Basis Student Loan Balances (net of
unamortized premium/discount)
The following tables summarize the components of our “Core
Earnings” basis student loan portfolios and show the
changing composition of each portfolio.
| Year Ended December 31, 2010 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Private
|
||||||||||||||||||
|
Stafford and
|
Consolidation
|
Education
|
||||||||||||||||||
| (Dollars in millions) | Other | Loans | Total FFELP | Loans | Total | |||||||||||||||
|
Total GAAP-basis and “Core Earnings”
basis
(1)
|
$ | 61,034 | $ | 81,009 | $ | 142,043 | $ | 36,534 | $ | 178,577 | ||||||||||
|
% of GAAP-basis and “Core
Earnings” basis FFELP
|
43 | % | 57 | % | 100 | % | ||||||||||||||
|
% of total
|
34 | % | 46 | % | 80 | % | 20 | % | 100 | % | ||||||||||
| Year Ended December 31, 2009 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Private
|
||||||||||||||||||
|
Stafford and
|
Consolidation
|
Education
|
||||||||||||||||||
| (Dollars in millions) | Other | Loans | Total FFELP | Loans | Total | |||||||||||||||
|
GAAP-basis
|
$ | 58,492 | $ | 70,046 | $ | 128,538 | $ | 23,154 | $ | 151,692 | ||||||||||
|
Off-balance sheet
|
6,365 | 15,156 | 21,521 | 12,892 | 34,413 | |||||||||||||||
|
Total “Core Earnings” basis
|
$ | 64,857 | $ | 85,202 | $ | 150,059 | $ | 36,046 | $ | 186,105 | ||||||||||
|
% of GAAP-basis FFELP
|
46 | % | 54 | % | 100 | % | ||||||||||||||
|
% of “Core Earnings”
basis FFELP
|
43 | % | 57 | % | 100 | % | ||||||||||||||
|
% of total
|
35 | % | 46 | % | 81 | % | 19 | % | 100 | % | ||||||||||
| Year Ended December 31, 2008 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Private
|
||||||||||||||||||
|
Stafford and
|
Consolidation
|
Education
|
||||||||||||||||||
| (Dollars in millions) | Other | Loans | Total FFELP | Loans | Total | |||||||||||||||
|
GAAP-basis
|
$ | 44,291 | $ | 73,091 | $ | 117,382 | $ | 19,276 | $ | 136,658 | ||||||||||
|
Off-balance sheet
|
8,299 | 15,966 | 24,265 | 13,321 | 37,586 | |||||||||||||||
|
Total “Core Earnings” basis
|
$ | 52,590 | $ | 89,057 | $ | 141,647 | $ | 32,597 | $ | 174,244 | ||||||||||
|
% of GAAP-basis FFELP
|
38 | % | 62 | % | 100 | % | ||||||||||||||
|
% of “Core Earnings”
basis FFELP
|
37 | % | 63 | % | 100 | % | ||||||||||||||
|
% of total
|
30 | % | 51 | % | 81 | % | 19 | % | 100 | % | ||||||||||
| (1) | Upon the adoption of the new consolidation accounting guidance, we consolidated all of our off-balance sheet securitization trusts. |
57
Student
Loan Activity
The following tables summarize the activity in our student loan
portfolios and show the changing composition of each portfolio.
|
GAAP-Basis
|
||||||||||||||||||||
| Year Ended December 31, 2010 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total Private
|
Total On-
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
Total
|
Education
|
Balance Sheet
|
||||||||||||||||
| (Dollars in millions) | Other | Loans | FFELP | Loans | Portfolio | |||||||||||||||
|
Beginning balance
|
$ | 52,675 | $ | 68,379 | $ | 121,054 | $ | 22,753 | $ | 143,807 | ||||||||||
|
Consolidations to third parties
|
(2,092 | ) | (793 | ) | (2,885 | ) | (46 | ) | (2,931 | ) | ||||||||||
|
Acquisitions and
originations
(1)
|
15,672 | 1,434 | 17,106 | 3,896 | 21,002 | |||||||||||||||
|
SLC acquisition
|
11,237 | 13,652 | 24,889 | — | 24,889 | |||||||||||||||
|
Net acquisitions and originations
|
24,817 | 14,293 | 39,110 | 3,850 | 42,960 | |||||||||||||||
|
Securitization-related
(2)
|
5,500 | 14,797 | 20,297 | 12,341 | 32,638 | |||||||||||||||
|
Sales
|
(21,054 | ) | (71 | ) | (21,125 | ) | — | (21,125 | ) | |||||||||||
|
Repayments/defaults/resales/other
|
(5,686 | ) | (5,001 | ) | (10,687 | ) | (3,288 | ) | (13,975 | ) | ||||||||||
|
Ending balance
|
$ | 56,252 | $ | 92,397 | $ | 148,649 | $ | 35,656 | $ | 184,305 | ||||||||||
|
Off-Balance Sheet
|
||||||||||||||||||||
| Year Ended December 31, 2010 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total Private
|
Total Off-
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
Total
|
Education
|
Balance Sheet
|
||||||||||||||||
| Other | Loans | FFELP | Loans | Portfolio | ||||||||||||||||
|
Beginning balance
|
$ | 5,500 | $ | 14,797 | $ | 20,297 | $ | 12,341 | $ | 32,638 | ||||||||||
|
Consolidations to third parties
|
— | — | — | — | — | |||||||||||||||
|
Acquisitions and
originations
(1)
|
— | — | — | — | — | |||||||||||||||
|
Net acquisitions and originations
|
— | — | — | — | — | |||||||||||||||
|
Securitization-related
(2)
|
(5,500 | ) | (14,797 | ) | (20,297 | ) | (12,341 | ) | (32,638 | ) | ||||||||||
|
Sales
|
— | — | — | — | — | |||||||||||||||
|
Repayments/defaults/resales/other
|
— | — | — | — | — | |||||||||||||||
|
Ending balance
|
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
GAAP-Basis/‘‘Core Earnings” basis Portfolio
|
||||||||||||||||||||
| Year Ended December 31, 2010 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total Private
|
Total “Core
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
Total
|
Education
|
Earnings” Basis
|
||||||||||||||||
| Other | Loans | FFELP | Loans | Portfolio | ||||||||||||||||
|
Beginning balance
|
$ | 58,175 | $ | 83,176 | $ | 141,351 | $ | 35,094 | $ | 176,445 | ||||||||||
|
Consolidations to third parties
|
(2,092 | ) | (793 | ) | (2,885 | ) | (46 | ) | (2,931 | ) | ||||||||||
|
Acquisitions and
originations
(1)
|
15,672 | 1,434 | 17,106 | 3,896 | 21,002 | |||||||||||||||
|
SLC acquisition
|
11,237 | 13,652 | 24,889 | — | 24,889 | |||||||||||||||
|
Net acquisitions and originations
|
24,817 | 14,293 | 39,110 | 3,850 | 42,960 | |||||||||||||||
|
Securitization-related
(2)
|
— | — | — | — | — | |||||||||||||||
|
Sales
|
(21,054 | ) | (71 | ) | (21,125 | ) | — | (21,125 | ) | |||||||||||
|
Repayments/defaults/resales/other
|
(5,686 | ) | (5,001 | ) | (10,687 | ) | (3,288 | ) | (13,975 | ) | ||||||||||
|
Ending balance
|
$ | 56,252 | $ | 92,397 | $ | 148,649 | $ | 35,656 | $ | 184,305 | ||||||||||
| (1) | Includes accrued interest receivable capitalized to principal during the period. | |
| (2) | Represents loans within securitization trusts that we are required to consolidate under GAAP upon the adoption of the new consolidation accounting guidance on January 1, 2010. |
58
|
GAAP-Basis
|
||||||||||||||||||||
| Year Ended December 31, 2009 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total Private
|
Total On-
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
Total
|
Education
|
Balance Sheet
|
||||||||||||||||
| (Dollars in millions) | Other | Loans | FFELP | Loans | Portfolio | |||||||||||||||
|
Beginning balance
|
$ | 52,476 | $ | 71,744 | $ | 124,220 | $ | 20,582 | $ | 144,802 | ||||||||||
|
Consolidations to third parties
|
(1,113 | ) | (518 | ) | (1,631 | ) | (8 | ) | (1,639 | ) | ||||||||||
|
Acquisitions and
originations
(1)
|
25,677 | 1,150 | 26,827 | 4,343 | 31,170 | |||||||||||||||
|
Net acquisitions and originations
|
24,564 | 632 | 25,196 | 4,335 | 29,531 | |||||||||||||||
|
Securitization-related
(2)
|
645 | — | 645 | — | 645 | |||||||||||||||
|
Sales
|
(19,300 | ) | — | (19,300 | ) | — | (19,300 | ) | ||||||||||||
|
Repayments/defaults/resales/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
|
||||||||||||||||||||
| Year Ended December 31, 2009 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total Private
|
Total Off-
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
Total
|
Education
|
Balance Sheet
|
||||||||||||||||
| Other | Loans | FFELP | Loans | Portfolio | ||||||||||||||||
|
Beginning balance
|
$ | 7,143 | $ | 15,531 | $ | 22,674 | $ | 12,917 | $ | 35,591 | ||||||||||
|
Consolidations to third parties
|
(413 | ) | (138 | ) | (551 | ) | (18 | ) | (569 | ) | ||||||||||
|
Acquisitions and
originations
(1)
|
135 | 208 | 343 | 498 | 841 | |||||||||||||||
|
Net acquisitions and originations
|
(278 | ) | 70 | (208 | ) | 480 | 272 | |||||||||||||
|
Securitization-related
(2)
|
(645 | ) | — | (645 | ) | — | (645 | ) | ||||||||||||
|
Repayments/defaults/resales/other
|
(720 | ) | (804 | ) | (1,524 | ) | (1,056 | ) | (2,580 | ) | ||||||||||
|
Ending balance
|
$ | 5,500 | $ | 14,797 | $ | 20,297 | $ | 12,341 | $ | 32,638 | ||||||||||
|
“Core Earnings” Basis Portfolio
|
||||||||||||||||||||
| Year Ended December 31, 2009 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total Private
|
Total “Core
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
Total
|
Education
|
Earnings” Basis
|
||||||||||||||||
| Other | Loans | FFELP | Loans | Portfolio | ||||||||||||||||
|
Beginning balance
|
$ | 59,619 | $ | 87,275 | $ | 146,894 | $ | 33,499 | $ | 180,393 | ||||||||||
|
Consolidations to third parties
|
(1,526 | ) | (656 | ) | (2,182 | ) | (26 | ) | (2,208 | ) | ||||||||||
|
Acquisitions and
originations
(1)
|
25,812 | 1,358 | 27,170 | 4,841 | 32,011 | |||||||||||||||
|
Net acquisitions and originations
|
24,286 | 702 | 24,988 | 4,815 | 29,803 | |||||||||||||||
|
Securitization-related
(2)
|
— | — | — | — | — | |||||||||||||||
|
Sales
|
(19,300 | ) | — | (19,300 | ) | — | (19,300 | ) | ||||||||||||
|
Repayments/defaults/resales/other
|
(6,430 | ) | (4,801 | ) | (11,231 | ) | (3,220 | ) | (14,451 | ) | ||||||||||
|
Ending balance
|
$ | 58,175 | $ | 83,176 | $ | 141,351 | $ | 35,094 | $ | 176,445 | ||||||||||
| (1) | Includes accrued interest receivable capitalized to principal during the period. | |
| (2) | 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. |
59
|
GAAP-Basis
|
||||||||||||||||||||
| Year Ended December 31, 2008 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total Private
|
Total On-
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
Total
|
Education
|
Balance Sheet
|
||||||||||||||||
| (Dollars in millions) | Other | 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 to third parties
|
(703 | ) | 70 | (633 | ) | 108 | (525 | ) | ||||||||||||
|
Acquisitions and
originations
(1)
|
21,889 | 1,358 | 23,247 | 7,357 | 30,604 | |||||||||||||||
|
Net acquisitions and originations
|
21,186 | 1,428 | 22,614 | 7,465 | 30,079 | |||||||||||||||
|
Internal
consolidations
(2)
|
(409 | ) | 529 | 120 | 228 | 348 | ||||||||||||||
|
Sales
|
(522 | ) | (26 | ) | (548 | ) | — | (548 | ) | |||||||||||
|
Repayments/defaults/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 | 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 to third parties
|
(311 | ) | (83 | ) | (394 | ) | (57 | ) | (451 | ) | ||||||||||
|
Acquisitions and
originations
(1)
|
246 | 211 | 457 | 742 | 1,199 | |||||||||||||||
|
Net acquisitions and originations
|
(65 | ) | 128 | 63 | 685 | 748 | ||||||||||||||
|
Internal
consolidations
(2)
|
(84 | ) | (36 | ) | (120 | ) | (228 | ) | (348 | ) | ||||||||||
|
Sales
|
— | — | — | — | — | |||||||||||||||
|
Repayments/defaults/other
|
(2,180 | ) | (1,002 | ) | (3,182 | ) | (1,050 | ) | (4,232 | ) | ||||||||||
|
Ending balance
|
$ | 7,143 | $ | 15,531 | $ | 22,674 | $ | 12,917 | $ | 35,591 | ||||||||||
|
‘‘Core Earnings” Basis Portfolio
|
||||||||||||||||||||
| Year Ended December 31, 2008 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total Private
|
Total “Core
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
Total
|
Education
|
Earnings” Basis
|
||||||||||||||||
| Other | 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 to third parties
|
(1,014 | ) | (13 | ) | (1,027 | ) | 51 | (976 | ) | |||||||||||
|
Acquisitions and
originations
(1)
|
22,135 | 1,569 | 23,704 | 8,099 | 31,803 | |||||||||||||||
|
Net acquisitions and originations
|
21,121 | 1,556 | 22,677 | 8,150 | 30,827 | |||||||||||||||
|
Internal
consolidations
(2)
|
(493 | ) | 493 | — | — | — | ||||||||||||||
|
Sales
|
(522 | ) | (26 | ) | (548 | ) | — | (548 | ) | |||||||||||
|
Repayments/defaults/other
|
(5,685 | ) | (4,798 | ) | (10,483 | ) | (2,979 | ) | (13,462 | ) | ||||||||||
|
Ending balance
|
$ | 59,619 | $ | 87,275 | $ | 146,894 | $ | 33,499 | $ | 180,393 | ||||||||||
| (1) | Includes accrued interest receivable capitalized to principal during the period. | |
| (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 included in GAAP-basis. |
60
FFELP
Loan Acquisitions
The following table summarizes the components of our FFELP Loan
acquisition activity for the years ended December 31, 2010,
2009 and 2008.
| Years Ended December 31 | ||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
Internal lending brands and Lender Partners
|
$ | 12,282 | $ | 22,375 | $ | 19,894 | ||||||
|
Acquisition from SLC
|
24,889 | — | — | |||||||||
|
Spot purchases
|
2,516 | 1,870 | 907 | |||||||||
|
Consolidations from third parties
|
— | — | 462 | |||||||||
|
Consolidations and
clean-up
calls of off-balance sheet securitized loans
|
— | 3,376 | 986 | |||||||||
|
Capitalized interest, premiums and discounts
|
2,309 | 2,583 | 2,446 | |||||||||
|
Total GAAP-basis FFELP Loan acquisitions
|
41,996 | 30,204 | 24,695 | |||||||||
|
Consolidations and
clean-up
calls of off-balance sheet securitized loans
|
— | (3,376 | ) | (986 | ) | |||||||
|
Capitalized interest, premiums and discounts —
off-balance sheet securitized loans
|
— | 342 | 457 | |||||||||
|
Total “Core Earnings” basis FFELP Loan acquisitions
|
$ | 41,996 | $ | 27,170 | $ | 24,166 | ||||||
FFELP
Loan Originations
Total FFELP Loan originations declined 46 percent from 2009
to $11.7 million in the year ended December 31, 2010.
This decline was a result of the discontinuation of the FFELP.
The following table summarizes our FFELP Loan originations.
| Years Ended December 31, | ||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
Total FFELP Loan originations
|
$ | 11,720 | $ | 21,746 | $ | 17,907 | ||||||
Private
Education Loan Acquisitions
The following table summarizes the components of our Private
Education Loan acquisition activity for the years ended
December 31, 2010, 2009 and 2008.
| Years Ended December 31 | ||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
Internal lending brands and Lender Partners
|
$ | 2,510 | $ | 3,394 | $ | 6,437 | ||||||
|
Consolidations from third parties
|
— | — | 149 | |||||||||
|
Consolidations and
clean-up
calls of off-balance sheet securitized loans
|
— | 797 | 280 | |||||||||
|
Capitalized interest, premiums and discounts
|
1,386 | 949 | 921 | |||||||||
|
Total GAAP-basis Private Education Loan acquisitions
|
3,896 | 5,140 | 7,787 | |||||||||
|
Consolidations and
clean-up
calls of off-balance sheet securitized loans
|
— | (797 | ) | (280 | ) | |||||||
|
Capitalized interest, premiums and discounts —
off-balance sheet securitized loans
|
— | 498 | 741 | |||||||||
|
Total “Core Earnings” basis Private Education Loan
acquisitions
|
$ | 3,896 | $ | 4,841 | $ | 8,248 | ||||||
Private
Education Loan Originations
Total Private Education Loan originations declined
27 percent from 2009 to $2.3 billion in the year ended
December 31, 2010. We believe this decline was a result of
a variety of factors, including an overall increase in the use
of federal financial aid and consumer deleveraging.
61
The following table summarizes our Private Education Loan
originations.
| Years Ended December 31, | ||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
Total Private Education Loan Originations
|
$ | 2,307 | $ | 3,176 | $ | 6,336 | ||||||
FFELP
Loan Portfolio Performance
FFELP
Delinquencies and Forbearance
The tables below present our FFELP Loan delinquency trends as of
December 31, 2010, 2009 and 2008. 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.
|
GAAP-Basis FFELP
|
||||||||||||||||||||||||
| Loan Delinquencies | ||||||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| (Dollars in millions) | Balance | % | Balance | % | Balance | % | ||||||||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 28,214 | $ | 35,079 | $ | 39,270 | ||||||||||||||||||
|
Loans in
forbearance
(2)
|
22,028 | 14,121 | 12,483 | |||||||||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||||||||||
|
Loans current
|
80,026 | 82.8 | % | 57,528 | 82.4 | % | 58,811 | 83.8 | % | |||||||||||||||
|
Loans delinquent
31-60 days
(3)
|
5,500 | 5.7 | 4,250 | 6.1 | 4,044 | 5.8 | ||||||||||||||||||
|
Loans delinquent
61-90 days
(3)
|
3,178 | 3.3 | 2,205 | 3.1 | 2,064 | 2.9 | ||||||||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
7,992 | 8.2 | 5,844 | 8.4 | 5,255 | 7.5 | ||||||||||||||||||
|
Total FFELP Loans in repayment
|
96,696 | 100 | % | 69,827 | 100 | % | 70,174 | 100 | % | |||||||||||||||
|
Total FFELP Loans, gross
|
146,938 | 119,027 | 121,927 | |||||||||||||||||||||
|
FFELP Loan unamortized premium
|
1,900 | 2,187 | 2,431 | |||||||||||||||||||||
|
Total FFELP Loans
|
148,838 | 121,214 | 124,358 | |||||||||||||||||||||
|
FFELP Loan allowance for losses
|
(189 | ) | (161 | ) | (138 | ) | ||||||||||||||||||
|
FFELP Loans, net
|
$ | 148,649 | $ | 121,053 | $ | 124,220 | ||||||||||||||||||
|
Percentage of FFELP Loans in repayment
|
65.8 | % | 58.7 | % | 57.6 | % | ||||||||||||||||||
|
Delinquencies as a percentage of FFELP Loans in repayment
|
17.2 | % | 17.6 | % | 16.2 | % | ||||||||||||||||||
|
FFELP Loans in forbearance as a percentage of loans in repayment
and forbearance
|
18.6 | % | 16.8 | % | 15.1 | % | ||||||||||||||||||
| (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. |
62
|
Off-Balance Sheet FFELP
|
||||||||||||||||
| Loan Delinquencies (4) | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2009 | 2008 | |||||||||||||||
| (Dollars in millions) | Balance | % | Balance | % | ||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 3,312 | $ | 4,115 | ||||||||||||
|
Loans in
forbearance
(2)
|
2,726 | 2,821 | ||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||
|
Loans current
|
11,304 | 82.5 | % | 12,441 | 81.9 | % | ||||||||||
|
Loans delinquent
31-60 days
(3)
|
804 | 5.9 | 881 | 5.8 | ||||||||||||
|
Loans delinquent
61-90 days
(3)
|
439 | 3.2 | 484 | 3.2 | ||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
1,160 | 8.4 | 1,392 | 9.1 | ||||||||||||
|
Total FFELP Loans in repayment
|
13,707 | 100 | % | 15,198 | 100 | % | ||||||||||
|
Total FFELP Loans, gross
|
19,745 | 22,134 | ||||||||||||||
|
FFELP Loan unamortized premium
|
577 | 567 | ||||||||||||||
|
Total FFELP Loans
|
20,322 | 22,701 | ||||||||||||||
|
FFELP Loan allowance for losses
|
(25 | ) | (27 | ) | ||||||||||||
|
FFELP Loans, net
|
$ | 20,297 | $ | 22,674 | ||||||||||||
|
Percentage of FFELP Loans in repayment
|
69.4 | % | 68.7 | % | ||||||||||||
|
Delinquencies as a percentage of FFELP Loans in repayment
|
17.5 | % | 18.1 | % | ||||||||||||
|
FFELP Loans in forbearance as a percentage of loans in repayment
and forbearance
|
16.6 | % | 15.7 | % | ||||||||||||
| (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. | |
| (4) | On January 1, 2010, upon the adoption of the new consolidation accounting guidance, all off-balance sheet loans are included in GAAP-basis. |
63
|
“Core Earnings” Basis FFELP
|
||||||||||||||||||||||||
| Loan Delinquencies | ||||||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| (Dollars in millions) | Balance | % | Balance | % | Balance | % | ||||||||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 28,214 | $ | 38,391 | $ | 43,385 | ||||||||||||||||||
|
Loans in
forbearance
(2)
|
22,028 | 16,847 | 15,304 | |||||||||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||||||||||
|
Loans current
|
80,026 | 82.8 | % | 68,832 | 82.4 | % | 71,252 | 83.5 | % | |||||||||||||||
|
Loans delinquent
31-60 days
(3)
|
5,500 | 5.7 | 5,054 | 6.0 | 4,925 | 5.8 | ||||||||||||||||||
|
Loans delinquent
61-90 days
(3)
|
3,178 | 3.3 | 2,644 | 3.2 | 2,548 | 2.9 | ||||||||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
7,992 | 8.2 | 7,004 | 8.4 | 6,647 | 7.8 | ||||||||||||||||||
|
Total FFELP Loans in repayment
|
96,696 | 100 | % | 83,534 | 100 | % | 85,372 | 100 | % | |||||||||||||||
|
Total FFELP Loans, gross
|
146,938 | 138,772 | 144,061 | |||||||||||||||||||||
|
FFELP Loan unamortized premium
|
1,900 | 2,764 | 2,998 | |||||||||||||||||||||
|
Total FFELP Loans
|
148,838 | 141,536 | 147,059 | |||||||||||||||||||||
|
FFELP Loan allowance for losses
|
(189 | ) | (186 | ) | (165 | ) | ||||||||||||||||||
|
FFELP Loans, net
|
$ | 148,649 | $ | 141,350 | $ | 146,894 | ||||||||||||||||||
|
Percentage of FFELP Loans in repayment
|
65.8 | % | 60.2 | % | 59.3 | % | ||||||||||||||||||
|
Delinquencies as a percentage of FFELP Loans in repayment
|
17.2 | % | 17.6 | % | 16.5 | % | ||||||||||||||||||
|
FFELP Loans in forbearance as a percentage of loans in repayment
and forbearance
|
18.6 | % | 16.8 | % | 15.2 | % | ||||||||||||||||||
| (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. |
64
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, 2010,
2009 and 2008.
| Activity in Allowance for FFELP Loans | ||||||||||||||||||||||||||||||||||||
|
GAAP-Basis
|
Off-Balance Sheet
|
“Core Earnings” Basis
|
||||||||||||||||||||||||||||||||||
| Years Ended December 31, | Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | 2010 (1) | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||
|
Allowance at beginning of period
|
$ | 161 | $ | 138 | $ | 89 | $ | 25 | $ | 27 | $ | 29 | $ | 186 | $ | 165 | $ | 118 | ||||||||||||||||||
|
Provision for FFELP Loan losses
|
98 | 106 | 106 | — | 13 | 21 | 98 | 119 | 127 | |||||||||||||||||||||||||||
|
Charge-offs
|
(87 | ) | (79 | ) | (58 | ) | — | (15 | ) | (21 | ) | (87 | ) | (94 | ) | (79 | ) | |||||||||||||||||||
|
Student loan sales and securitization activity
|
(8 | ) | (4 | ) | 1 | — | — | (2 | ) | (8 | ) | (4 | ) | (1 | ) | |||||||||||||||||||||
|
Consolidation of securitization
trusts
(1)
|
25 | — | — | (25 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
|
Allowance at end of period
|
$ | 189 | $ | 161 | $ | 138 | $ | — | $ | 25 | $ | 27 | $ | 189 | $ | 186 | $ | 165 | ||||||||||||||||||
|
Charge-offs as a percentage of average loans in repayment
|
.11 | % | .11 | % | .09 | % | — | % | .10 | % | .13 | % | .11 | % | .11 | % | .10 | % | ||||||||||||||||||
|
Charge-offs as a percentage of average loans in repayment and
forbearance
|
.09 | % | .10 | % | .07 | % | — | % | .09 | % | .11 | % | .09 | % | .09 | % | .08 | % | ||||||||||||||||||
|
Allowance as a percentage of the ending total loans, gross
|
.13 | % | .14 | % | .11 | % | — | % | .13 | % | .12 | % | .13 | % | .13 | % | .11 | % | ||||||||||||||||||
|
Allowance as a percentage of ending loans in repayment
|
.20 | % | .23 | % | .20 | % | — | % | .18 | % | .18 | % | .20 | % | .22 | % | .19 | % | ||||||||||||||||||
|
Allowance coverage of charge-offs
|
2.2 | 2.0 | 2.4 | — | 1.7 | 1.3 | 2.2 | 2.0 | 2.1 | |||||||||||||||||||||||||||
|
Ending total loans, gross
|
$ | 146,938 | $ | 119,027 | $ | 121,927 | $ | — | $ | 19,745 | $ | 22,134 | $ | 146,938 | $ | 138,772 | $ | 144,061 | ||||||||||||||||||
|
Average loans in repayment
|
$ | 82,255 | $ | 69,020 | $ | 66,392 | $ | — | $ | 14,293 | $ | 16,086 | $ | 82,255 | $ | 83,313 | $ | 82,478 | ||||||||||||||||||
|
Ending loans in repayment
|
$ | 96,696 | $ | 69,827 | $ | 70,174 | $ | — | $ | 13,707 | $ | 15,198 | $ | 96,696 | $ | 83,534 | $ | 85,372 | ||||||||||||||||||
| (1) | Upon the adoption of the new consolidation accounting guidance on January 1, 2010, we consolidated all of our off-balance sheet securitization trusts. |
65
Consumer
Lending Portfolio Performance
Private
Education Loan Delinquencies and Forbearance
The table below presents our Private Education Loan delinquency
trends as of December 31, 2010, 2009 and 2008.
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.
|
GAAP-Basis Private Education
|
||||||||||||||||||||||||
| Loan Delinquencies | ||||||||||||||||||||||||
|
December 31,
|
December 31,
|
December 31,
|
||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| (Dollars in millions) | Balance | % | Balance | % | Balance | % | ||||||||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 8,340 | $ | 8,910 | $ | 10,159 | ||||||||||||||||||
|
Loans in
forbearance
(2)
|
1,340 | 967 | 862 | |||||||||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||||||||||
|
Loans current
|
24,888 | 89.4 | % | 12,421 | 86.4 | % | 9,748 | 87.2 | % | |||||||||||||||
|
Loans delinquent
31-60 days
(3)
|
1,011 | 3.6 | 647 | 4.5 | 551 | 4.9 | ||||||||||||||||||
|
Loans delinquent
61-90 days
(3)
|
471 | 1.7 | 340 | 2.4 | 296 | 2.6 | ||||||||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
1,482 | 5.3 | 971 | 6.7 | 587 | 5.3 | ||||||||||||||||||
|
Total Private Education Loans in repayment
|
27,852 | 100 | % | 14,379 | 100 | % | 11,182 | 100 | % | |||||||||||||||
|
Total Private Education Loans, gross
|
37,532 | 24,256 | 22,203 | |||||||||||||||||||||
|
Private Education Loan unamortized discount
|
(894 | ) | (559 | ) | (535 | ) | ||||||||||||||||||
|
Total Private Education Loans
|
36,638 | 23,697 | 21,668 | |||||||||||||||||||||
|
Private Education Loan receivable for partially charged-off loans
|
1,039 | 499 | 222 | |||||||||||||||||||||
|
Private Education Loan allowance for losses
|
(2,021 | ) | (1,443 | ) | (1,308 | ) | ||||||||||||||||||
|
Private Education Loans, net
|
$ | 35,656 | $ | 22,753 | $ | 20,582 | ||||||||||||||||||
|
Percentage of Private Education Loans in repayment
|
74.2 | % | 59.3 | % | 50.4 | % | ||||||||||||||||||
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
10.6 | % | 13.6 | % | 12.8 | % | ||||||||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
4.6 | % | 6.3 | % | 7.2 | % | ||||||||||||||||||
| (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. | |
| (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
|
Off-Balance Sheet Private Education
|
||||||||||||||||
| Loan Delinquencies (4) | ||||||||||||||||
|
December 31,
|
December 31,
|
|||||||||||||||
| 2009 | 2008 | |||||||||||||||
| (Dollars in millions) | Balance | % | Balance | % | ||||||||||||
|
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
(3)
|
151 | 1.5 | 121 | 1.3 | ||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
517 | 5.2 | 251 | 2.6 | ||||||||||||
|
Total Private Education Loans in repayment
|
9,987 | 100 | % | 9,530 | 100 | % | ||||||||||
|
Total Private Education Loans, gross
|
12,986 | 13,691 | ||||||||||||||
|
Private Education Loan unamortized discount
|
(349 | ) | (361 | ) | ||||||||||||
|
Total Private Education Loans
|
12,637 | 13,330 | ||||||||||||||
|
Private Education Loan receivable for partially charged-off loans
|
229 | 92 | ||||||||||||||
|
Private Education Loan allowance for losses
|
(524 | ) | (505 | ) | ||||||||||||
|
Private Education Loans, net
|
$ | 12,342 | $ | 12,917 | ||||||||||||
|
Percentage of Private Education Loans in repayment
|
76.9 | % | 69.6 | % | ||||||||||||
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
10.0 | % | 7.2 | % | ||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
4.3 | % | 6.8 | % | ||||||||||||
| (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. | |
| (4) | On January 1, 2010, upon adoption of the new consolidation accounting guidance, all off-balance sheet loans are included in GAAP-basis. |
67
|
‘‘Core Earnings” Basis Private Education
|
||||||||||||||||||||||||
| Loan Delinquencies | ||||||||||||||||||||||||
|
December 31,
|
December 31,
|
December 31,
|
||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| (Dollars in millions) | Balance | % | Balance | % | Balance | % | ||||||||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 8,340 | $ | 11,456 | $ | 13,620 | ||||||||||||||||||
|
Loans in
forbearance
(2)
|
1,340 | 1,420 | 1,562 | |||||||||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||||||||||
|
Loans current
|
24,888 | 89.4 | % | 21,408 | 87.9 | % | 18,591 | 89.8 | % | |||||||||||||||
|
Loans delinquent
31-60 days
(3)
|
1,011 | 3.6 | 979 | 4.0 | 866 | 4.2 | ||||||||||||||||||
|
Loans delinquent
61-90 days
(3)
|
471 | 1.7 | 491 | 2.0 | 417 | 2.0 | ||||||||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
1,482 | 5.3 | 1,488 | 6.1 | 838 | 4.0 | ||||||||||||||||||
|
Total Private Education Loans in repayment
|
27,852 | 100 | % | 24,366 | 100 | % | 20,712 | 100 | % | |||||||||||||||
|
Total Private Education Loans, gross
|
37,532 | 37,242 | 35,894 | |||||||||||||||||||||
|
Private Education Loan unamortized discount
|
(894 | ) | (908 | ) | (896 | ) | ||||||||||||||||||
|
Total Private Education Loans
|
36,638 | 36,334 | 34,998 | |||||||||||||||||||||
|
Private Education Loan receivable for partially charged-off loans
|
1,039 | 728 | 314 | |||||||||||||||||||||
|
Private Education Loan allowance for losses
|
(2,021 | ) | (1,967 | ) | (1,813 | ) | ||||||||||||||||||
|
Private Education Loans, net
|
$ | 35,656 | $ | 35,095 | $ | 33,499 | ||||||||||||||||||
|
Percentage of Private Education Loans in repayment
|
74.2 | % | 65.4 | % | 57.7 | % | ||||||||||||||||||
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
10.6 | % | 12.1 | % | 10.2 | % | ||||||||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
4.6 | % | 5.5 | % | 7.0 | % | ||||||||||||||||||
| (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. |
68
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, 2010, 2009 and 2008.
| Activity in Allowance for Private Education Loans | ||||||||||||||||||||||||||||||||||||
|
GAAP-Basis
|
Off-Balance Sheet
|
“Core Earnings” Basis
|
||||||||||||||||||||||||||||||||||
| Years Ended December 31, | Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | 2010 (1) | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||
|
Allowance at beginning of period
|
$ | 1,443 | $ | 1,308 | $ | 1,004 | $ | 524 | $ | 505 | $ | 362 | $ | 1,967 | $ | 1,813 | $ | 1,366 | ||||||||||||||||||
|
Provision for Private Education Loan losses
|
1,298 | 967 | 586 | — | 432 | 288 | 1,298 | 1,399 | 874 | |||||||||||||||||||||||||||
|
Charge-offs
|
(1,291 | ) | (876 | ) | (320 | ) | — | (423 | ) | (153 | ) | (1,291 | ) | (1,299 | ) | (473 | ) | |||||||||||||||||||
|
Reclassification of interest
reserve
(2)
|
47 | 44 | 38 | — | 10 | 8 | 47 | 54 | 46 | |||||||||||||||||||||||||||
|
Consolidation of securitization
trusts
(1)
|
524 | — | — | (524 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
|
Allowance at end of period
|
$ | 2,021 | $ | 1,443 | $ | 1,308 | $ | — | $ | 524 | $ | 505 | $ | 2,021 | $ | 1,967 | $ | 1,813 | ||||||||||||||||||
|
Charge-offs as a percentage of average loans in repayment
|
5.0 | % | 7.2 | % | 3.8 | % | — | % | 4.4 | % | 1.9 | % | 5.0 | % | 6.0 | % | 2.9 | % | ||||||||||||||||||
|
Charge-offs as a percentage of average loans in repayment and
forbearance
|
4.8 | % | 6.7 | % | 3.3 | % | — | % | 4.2 | % | 1.6 | % | 4.8 | % | 5.6 | % | 2.5 | % | ||||||||||||||||||
|
Allowance as a percentage of the ending total loan
balance
(3)
|
5.2 | % | 5.8 | % | 5.8 | % | — | % | 4.0 | % | 3.7 | % | 5.2 | % | 5.2 | % | 5.0 | % | ||||||||||||||||||
|
Allowance as a percentage of ending loans in repayment
|
7.3 | % | 10.0 | % | 11.7 | % | — | % | 5.2 | % | 5.3 | % | 7.3 | % | 8.1 | % | 8.8 | % | ||||||||||||||||||
|
Allowance coverage of charge-offs
|
1.6 | 1.6 | 4.1 | — | 1.2 | 3.3 | 1.6 | 1.5 | 3.8 | |||||||||||||||||||||||||||
|
Ending total
loans
(3)
|
$ | 38,572 | $ | 24,755 | $ | 22,426 | $ | — | $ | 13,215 | $ | 13,782 | $ | 38,572 | $ | 37,970 | $ | 36,208 | ||||||||||||||||||
|
Average loans in repayment
|
$ | 25,596 | $ | 12,137 | $ | 8,533 | $ | — | $ | 9,597 | $ | 8,088 | $ | 25,596 | $ | 21,734 | $ | 16,621 | ||||||||||||||||||
|
Ending loans in repayment
|
$ | 27,852 | $ | 14,379 | $ | 11,182 | $ | — | $ | 9,987 | $ | 9,530 | $ | 27,852 | $ | 24,366 | $ | 20,712 | ||||||||||||||||||
| (1) | Upon the adoption of the new consolidation accounting guidance on January 1, 2010, we consolidated all of our off-balance sheet securitization trusts. | |
| (2) | 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. | |
| (3) | Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans. |
69
The following table provides the detail for our traditional and
non-traditional “Core Earnings” basis Private
Education Loans at December 31, 2010, 2009 and 2008.
| December 31, 2010 | December 31, 2009 | December 31, 2008 | ||||||||||||||||||||||||||||||||||
|
Non-
|
Non-
|
Non-
|
||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Traditional | Traditional | Total | Traditional | Traditional | Total | Traditional | Traditional | Total | |||||||||||||||||||||||||||
|
Ending total
loans
(1)
|
$ | 34,177 | $ | 4,395 | $ | 38,572 | $ | 33,223 | $ | 4,747 | $ | 37,970 | $ | 31,101 | $ | 5,107 | $ | 36,208 | ||||||||||||||||||
|
Ending loans in repayment
|
25,043 | 2,809 | 27,852 | 21,453 | 2,913 | 24,366 | 17,715 | 2,997 | 20,712 | |||||||||||||||||||||||||||
|
Private Education Loan allowance for losses
|
1,231 | 790 | 2,021 | 1,056 | 911 | 1,967 | 859 | 954 | 1,813 | |||||||||||||||||||||||||||
|
Charge-offs as a percentage of average loans in repayment
|
3.6 | % | 16.8 | % | 5.0 | % | 3.6 | % | 21.4 | % | 6.0 | % | 1.4 | % | 11.1 | % | 2.9 | % | ||||||||||||||||||
|
Allowance as a percentage of ending total loan
balance
(1)
|
3.6 | % | 18.0 | % | 5.2 | % | 3.2 | % | 19.2 | % | 5.2 | % | 2.8 | % | 18.7 | % | 5.0 | % | ||||||||||||||||||
|
Allowance as a percentage of ending loans in repayment
|
4.9 | % | 28.2 | % | 7.3 | % | 4.9 | % | 31.3 | % | 8.1 | % | 4.8 | % | 31.8 | % | 8.8 | % | ||||||||||||||||||
|
Allowance coverage of charge-offs
|
1.5 | 1.7 | 1.6 | 1.6 | 1.5 | 1.5 | 4.2 | 3.5 | 3.8 | |||||||||||||||||||||||||||
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
8.8 | % | 27.4 | % | 10.6 | % | 9.5 | % | 31.4 | % | 12.1 | % | 7.1 | % | 28.9 | % | 10.2 | % | ||||||||||||||||||
|
Delinquencies greater than 90 days as a percentage of
Private Education Loans in repayment
|
4.2 | % | 15.0 | % | 5.3 | % | 4.6 | % | 17.5 | % | 6.1 | % | 2.6 | % | 12.7 | % | 4.0 | % | ||||||||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
4.4 | % | 6.1 | % | 4.6 | % | 5.3 | % | 7.1 | % | 5.5 | % | 6.7 | % | 9.0 | % | 7.0 | % | ||||||||||||||||||
|
Percentage of Private Education Loans with a cosigner
|
63 | % | 28 | % | 59 | % | 61 | % | 28 | % | 57 | % | 59 | % | 26 | % | 55 | % | ||||||||||||||||||
|
Average FICO at origination
|
725 | 623 | 715 | 725 | 623 | 713 | 723 | 622 | 710 | |||||||||||||||||||||||||||
| (1) | Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans. |
Use of
Forbearance as a Private Education Loan Collection
Tool
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
extends the original term of the loan. Forbearance does not
grant any reduction in the total repayment obligation (principal
or interest). While 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 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 leverage updated borrower
information and other decision support tools to best determine
who will be granted forbearance based on our 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
70
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 since 2008. In addition, the monthly
average number of loans granted forbearance as a percentage of
loans in repayment and forbearance declined to 5.3 percent
in the fourth quarter of 2010 compared with the year-ago quarter
of 5.6 percent. As of December 31, 2010,
2.4 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 as of December 31, 2010 (borrowers
made payments on approximately 20 percent of these loans
prior to being granted forbearance).
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, 68 percent of
the loans are current, paid in full, or receiving an in-school
grace or deferment, and 17 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
|
9.2 | % | 8.5 | % | 4.1 | % | ||||||
|
Current
|
50.2 | 57.4 | 64.1 | |||||||||
|
Delinquent
31-60 days
|
3.1 | 2.0 | 0.4 | |||||||||
|
Delinquent
61-90 days
|
1.9 | 1.1 | 0.2 | |||||||||
|
Delinquent greater than 90 days
|
4.8 | 2.7 | 0.3 | |||||||||
|
Forbearance
|
4.7 | 3.5 | — | |||||||||
|
Defaulted
|
17.4 | 9.1 | 4.8 | |||||||||
|
Paid
|
8.7 | 15.7 | 26.1 | |||||||||
|
Total
|
100 | % | 100 | % | 100 | % | ||||||
71
The tables below show the composition and status of the
“Core Earnings” basis 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, 2010, loans in forbearance status as a
percentage of loans in repayment and forbearance were
6.2 percent for loans that have been in active repayment
status for less than 25 months. The percentage drops to
1.9 percent for loans that have been in active repayment
status for more than 48 months. Approximately
79 percent of our “Core Earnings” basis Private
Education Loans in forbearance status has been in active
repayment status less than 25 months.
|
(Dollars in millions)
|
Monthly Scheduled Payments Due |
Not Yet in
|
||||||||||||||||||||||||||
| December 31, 2010 | 1 to 12 | 13 to 24 | 25 to 36 | 37 to 48 | More than 48 | Repayment | Total | |||||||||||||||||||||
|
Loans in-school/grace/deferment
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | 8,340 | $ | 8,340 | ||||||||||||||
|
Loans in forbearance
|
845 | 211 | 127 | 70 | 87 | — | 1,340 | |||||||||||||||||||||
|
Loans in repayment — current
|
7,716 | 5,976 | 4,181 | 2,764 | 4,251 | — | 24,888 | |||||||||||||||||||||
|
Loans in repayment — delinquent
31-60 days
|
476 | 247 | 127 | 68 | 93 | — | 1,011 | |||||||||||||||||||||
|
Loans in repayment — delinquent
61-90 days
|
232 | 106 | 60 | 31 | 42 | — | 471 | |||||||||||||||||||||
|
Loans in repayment — delinquent greater than
90 days
|
694 | 411 | 180 | 86 | 111 | — | 1,482 | |||||||||||||||||||||
|
Total
|
$ | 9,963 | $ | 6,951 | $ | 4,675 | $ | 3,019 | $ | 4,584 | $ | 8,340 | 37,532 | |||||||||||||||
|
Unamortized discount
|
(894 | ) | ||||||||||||||||||||||||||
|
Receivable for partially charged-off loans
|
1,039 | |||||||||||||||||||||||||||
|
Allowance for loan losses
|
(2,021 | ) | ||||||||||||||||||||||||||
|
Total “Core Earnings” basis Private Education Loans,
net
|
$ | 35,656 | ||||||||||||||||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
8.5 | % | 3.0 | % | 2.7 | % | 2.3 | % | 1.9 | % | — | % | 4.6 | % | ||||||||||||||
|
(Dollars in millions)
|
Monthly Scheduled Payments Due |
Not Yet in
|
||||||||||||||||||||||||||
| December 31, 2009 | 1 to 12 | 13 to 24 | 25 to 36 | 37 to 48 | More than 48 | Repayment | Total | |||||||||||||||||||||
|
Loans in-school/grace/deferment
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | 11,456 | $ | 11,456 | ||||||||||||||
|
Loans in forbearance
|
1,041 | 183 | 92 | 44 | 60 | — | 1,420 | |||||||||||||||||||||
|
Loans in repayment — current
|
8,153 | 4,969 | 3,235 | 1,959 | 3,092 | — | 21,408 | |||||||||||||||||||||
|
Loans in repayment — delinquent
31-60 days
|
584 | 195 | 91 | 44 | 65 | — | 979 | |||||||||||||||||||||
|
Loans in repayment — delinquent
61-90 days
|
284 | 102 | 46 | 25 | 34 | — | 491 | |||||||||||||||||||||
|
Loans in repayment — delinquent greater than
90 days
|
879 | 331 | 130 | 63 | 85 | — | 1,488 | |||||||||||||||||||||
|
Total
|
$ | 10,941 | $ | 5,780 | $ | 3,594 | $ | 2,135 | $ | 3,336 | $ | 11,456 | 37,242 | |||||||||||||||
|
Unamortized discount
|
(908 | ) | ||||||||||||||||||||||||||
|
Receivable for partially charged-off loans
|
728 | |||||||||||||||||||||||||||
|
Allowance for loan losses
|
(1,967 | ) | ||||||||||||||||||||||||||
|
Total “Core Earnings” basis Private Education Loans,
net
|
$ | 35,095 | ||||||||||||||||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
9.5 | % | 3.2 | % | 2.6 | % | 2.1 | % | 1.8 | % | — | % | 5.5 | % | ||||||||||||||
72
|
(Dollars in millions)
|
Monthly Scheduled Payments Due |
Not Yet in
|
||||||||||||||||||||||||||
| December 31, 2008 | 1 to 12 | 13 to 24 | 25 to 36 | 37 to 48 | More than 48 | Repayment | Total | |||||||||||||||||||||
|
Loans in-school/grace/deferment
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | 13,620 | $ | 13,620 | ||||||||||||||
|
Loans in forbearance
|
1,255 | 151 | 70 | 36 | 50 | — | 1,562 | |||||||||||||||||||||
|
Loans in repayment — current
|
8,674 | 3,877 | 2,329 | 1,469 | 2,242 | — | 18,591 | |||||||||||||||||||||
|
Loans in repayment — delinquent
31-60 days
|
596 | 132 | 61 | 32 | 45 | — | 866 | |||||||||||||||||||||
|
Loans in repayment — delinquent
61-90 days
|
286 | 65 | 30 | 14 | 22 | — | 417 | |||||||||||||||||||||
|
Loans in repayment — delinquent greater than
90 days
|
543 | 148 | 64 | 33 | 50 | — | 838 | |||||||||||||||||||||
|
Total
|
$ | 11,354 | $ | 4,373 | $ | 2,554 | $ | 1,584 | $ | 2,409 | $ | 13,620 | 35,894 | |||||||||||||||
|
Unamortized discount
|
(896 | ) | ||||||||||||||||||||||||||
|
Receivable for partially charged-off loans
|
314 | |||||||||||||||||||||||||||
|
Allowance for loan losses
|
(1,813 | ) | ||||||||||||||||||||||||||
|
Total “Core Earnings” basis Private Education Loans,
net
|
$ | 33,499 | ||||||||||||||||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
11.1 | % | 3.5 | % | 2.8 | % | 2.3 | % | 2.1 | % | — | % | 7.0 | % | ||||||||||||||
The table below stratifies the portfolio of “Core
Earnings” basis 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,
|
||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
|
Forbearance
|
% of
|
Forbearance
|
% of
|
Forbearance
|
% of
|
|||||||||||||||||||
| (Dollars in millions) | Balance | Total | Balance | Total | Balance | Total | ||||||||||||||||||
|
Cumulative number of months borrower has used forbearance
|
||||||||||||||||||||||||
|
Up to 12 months
|
$ | 958 | 71 | % | $ | 1,050 | 74 | % | $ | 1,075 | 69 | % | ||||||||||||
|
13 to 24 months
|
343 | 26 | 332 | 23 | 368 | 23 | ||||||||||||||||||
|
More than 24 months
|
39 | 3 | 38 | 3 | 119 | 8 | ||||||||||||||||||
|
Total
|
$ | 1,340 | 100 | % | $ | 1,420 | 100 | % | $ | 1,562 | 100 | % | ||||||||||||
Receivable
for Partially Charged-Off Private Education Loans
At the end of each month, for loans that are 212 days past due,
we charge 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.
73
The following tables summarize the activity in the receivable
for partially charged-off loans for the years ended
December 31, 2010, 2009 and 2008.
| Activity in Receivable for Partially Charged-Off Loans | ||||||||||||||||||||||||||||||||||||
| GAAP-Basis | Off-Balance Sheet | “Core Earnings” Basis | ||||||||||||||||||||||||||||||||||
|
Years Ended
|
Years Ended
|
Years Ended
|
||||||||||||||||||||||||||||||||||
| December 31, | December 31, | December 31, | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | 2010(2) | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||
|
Receivable at beginning of period
|
$ | 499 | $ | 222 | $ | 118 | $ | 229 | $ | 92 | $ | 28 | $ | 728 | $ | 314 | $ | 146 | ||||||||||||||||||
|
Expected future recoveries of current period
defaults
(1)
|
415 | 320 | 140 | — | 154 | 72 | 415 | 474 | 212 | |||||||||||||||||||||||||||
|
Recoveries
|
(104 | ) | (43 | ) | (36 | ) | — | (17 | ) | (8 | ) | (104 | ) | (60 | ) | (44 | ) | |||||||||||||||||||
|
Consolidation of securitization
trusts
(2)
|
229 | — | — | (229 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
|
Receivable at end of period
|
$ | 1,039 | $ | 499 | $ | 222 | $ | — | $ | 229 | $ | 92 | $ | 1,039 | $ | 728 | $ | 314 | ||||||||||||||||||
| (1) | Net of any current period recoveries that were less than expected. | |
| (2) | Upon the adoption of the new consolidation accounting guidance on January 1, 2010, we consolidated all of our off-balance sheet securitization trusts. |
Private
Education Loan Repayment Options
Certain loan programs allow borrowers to select from a variety
of repayment options depending on their loan type and their
enrollment/loan status, which include the ability to extend
their repayment term or change their monthly payment. The chart
below provides the optional repayment offerings in addition to
the standard level principal and interest payments as of
December 31, 2010.
| Loan Program | ||||||||||
|
Signature and
|
Career
|
|||||||||
| (Dollars in millions) | Other | Smart Option | Training | Total | ||||||
|
$ in Repayment
|
$23,179 | $2,532 | $2,141 | $ | 27,852 | |||||
|
$ in Total
|
32,779 | 2,536 | 2,217 | 37,532 | ||||||
|
Payment method by enrollment status:
|
||||||||||
|
In-school/Grace
|
Deferred (1) |
Interest-only or
fixed $25/month |
Interest-only or
fixed $25/month |
|||||||
|
Repayment
|
Level principal
and interest or graduated |
Level principal
and interest |
Level principal
and interest |
|||||||
| (1) | “Deferred” includes loans for which no payments are required and interest charges are capitalized into the loan balance. |
The graduated repayment program that is part of Signature and
Other Loans includes an interest-only payment option. This
program is available to borrowers in repayment, after their
grace period, who would like a temporary lower payment from the
required principal and interest payment amount. Borrowers
participating in this program pay monthly interest with no
amortization of their principal balance for up to 48 payments
after entering repayment (dependent on the loan product type).
The maturity date of the loan is not extended when a borrower
participates in this program. As of December 31, 2010 and
2009, borrowers in repayment owing approximately
$7.5 billion (27 percent of loans in repayment) and
$7.0 billion (29 percent of loans in repayment),
respectively, were enrolled in the interest-only program.
74
Liquidity
and Capital Resources
Funding
and Liquidity Risk Management
The following “Liquidity and Capital Resources”
discussion concentrates on our FFELP Loans and Consumer Lending
segments. Our Business Services and Other segments need little
capital.
We define liquidity risk as the potential inability to meet our
contractual and contingent financial obligations, on- or
off-balance sheet, as they come due, as well as the potential
inability to originate Private Education Loans. Our primary
liquidity objective is to ensure our ongoing ability to meet our
funding needs for our businesses throughout market cycles,
including during periods of financial stress. Our two primary
liquidity needs are funding the originations of Private
Education Loans and retiring unsecured debt when it matures. To
achieve that objective we analyze and monitor our liquidity
needs, maintain excess liquidity and access diverse funding
sources including the issuance of unsecured debt, the issuance
of secured debt primarily through asset backed securitizations
and/or
financing facilities and through deposits at Sallie Mae Bank
(“the Bank”), our Utah industrial bank subsidiary.
We define liquidity as readily available assets, limited to cash
and high-quality liquid unencumbered securities, that we can use
to meet our funding requirements as those obligations arise. Our
primary liquidity risk relates to our ability to fund new
originations and raise replacement funding at a reasonable cost
as our unsecured debt matures. In addition, we must continue to
obtain funding at reasonable rates to meet our other business
obligations and to continue to grow our business. Key risks
associated with our liquidity relates to our ability to access
the capital markets and access them at reasonable rates. This
ability may be affected by our credit ratings. In addition,
credit ratings may be important to customers or counterparties
when we compete in certain markets and when we seek to engage in
certain transactions, including
over-the-counter
derivatives.
Credit ratings and outlooks are opinions subject to ongoing
review by the ratings agencies and may change from time to time
based on our financial performance, industry dynamics and other
factors. Other factors that influence our credit ratings include
the ratings agencies’ assessment of the general operating
environment, our relative positions in the markets in which we
compete, reputation, liquidity position, the level and
volatility of earnings, corporate governance and risk management
policies, capital position and capital management practices. A
negative change in our credit rating could have a negative
effect on our liquidity because it would raise the cost and
availability of funding and potentially require additional cash
collateral or restrict cash currently held as collateral on
existing borrowings or derivative collateral arrangements. It is
our objective to improve our credit ratings so that we can
continue to access the capital markets even in difficult
economic and market conditions.
We expect to fund our ongoing liquidity needs, including the
origination of new Private Education Loans and the repayment of
$4.4 billion of senior unsecured notes to mature in the
next twelve months, primarily through our current cash and
investment position and very predictable operating cash flows
provided by earnings and repayment of principal on unencumbered
student loan assets, distributions from our securitization
trusts (including servicing fees which are priority payments
within the trusts), as well as drawdowns under the 2010 ABCP
Facility, the issuance of term ABS, the collection of additional
term bank deposits and the issuance of unsecured debt.
We primarily fund our student loan originations at the Bank.
Currently, new Private Education Loan originations are initially
funded through deposits. We plan to subsequently securitize
these loans to term on a programmatic basis. We currently have
$2 billion of cash at the Bank available to fund future
originations.
We no longer originate FFELP Loans and therefore no longer have
liquidity requirements for new FFELP Loan originations. In 2009,
we began using the ED Conduit Program (see “ED Funding
Programs” of this Item 7 for a discussion of this
program) to fund older FFELP Stafford and PLUS Loans. In
addition, in 2008 we began funding new FFELP Stafford and PLUS
Loan originations for AY
2008-2009
pursuant to ED’s Loan Purchase Commitment Program (the
“Purchase Program”) and Loan Participation Purchase
Program (the “Participation Program”).We discuss these
liquidity sources below.
75
We continued to use ED’s Purchase and Participation
Programs to fund FFELP Stafford and PLUS Loans disbursed
through September 30, 2010 (see Item 1
“Business — Recent Legislation” for a
further discussion regarding the end of new FFELP Loan
originations as of July 1, 2010).
Primary
Sources of Liquidity and Available Capacity
The following table details our main sources of primary
liquidity and the available capacity at December 31, 2010
and 2009.
|
December 31, 2010
|
December 31, 2009
|
|||||||
| (Dollars in millions) | Available Capacity | Available Capacity | ||||||
|
Sources of primary liquidity for general corporate purposes:
|
||||||||
|
Unrestricted cash and liquid investments:
|
||||||||
|
Cash and cash equivalents
|
$ | 4,342 | $ | 6,070 | ||||
|
Commercial paper and asset-backed commercial paper
|
— | 1,150 | ||||||
|
Other
|
85 | 131 | ||||||
|
Total unrestricted cash and liquid
investments
(1)(2)(3)
|
4,427 | 7,351 | ||||||
|
Unused commercial paper and bank lines of
credit
(4)
|
— | 3,485 | ||||||
|
Available borrowings to the extent collateral exists:
|
||||||||
|
FFELP ABCP
facilities
(5)
|
3,937 | 1,703 | ||||||
|
FHLB-DM
facility
(5)
|
8,664 | — | ||||||
|
Total sources of primary liquidity for general corporate
purposes
(6)
|
$ | 17,028 | $ | 12,539 | ||||
| (1) | At December 31, 2010 and 2009, excludes $0 and $25 million, respectively, of investments pledged as collateral related to certain derivative positions and $872 million and $708 million, respectively, of other non-liquid investments, classified as investments on our balance sheet in accordance with GAAP. | |
| (2) | At December 31, 2010 and 2009, includes $684 million and $821 million, respectively, of cash collateral pledged by derivative counterparties and held in our unrestricted cash. | |
| (3) | At December 31, 2010 and 2009, includes $2.0 billion and $2.4 billion, respectively, of cash and liquid investments at the Bank. This cash will be used primarily to originate or acquire student loans. | |
| (4) | On November 24, 2010, our remaining bank line of credit was retired. | |
| (5) | Borrowing capacity is subject to availability of collateral. As of December 31, 2010 and 2009, we had $1.5 billion and $2.1 billion, respectively, of outstanding unencumbered FFELP Loans, net, available for use in either the FFELP ABCP facilities or FHLB-DM facility. | |
| (6) | 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 a
number of other unencumbered assets, consisting primarily of
Private Education Loans and other assets. At December 31,
2010, we had a total of $22.3 billion of unencumbered
assets, excluding goodwill and acquired intangibles. Total
student loans, net, comprised $12.6 billion of this
unencumbered asset total, of which $11.1 billion are
Private Education Loans, net, and $1.5 billion are FFELP
Loans, net.
76
The following table reconciles encumbered and unencumbered
assets and their net impact on total tangible equity.
|
December 31,
|
December 31,
|
|||||||
| (Dollars in billions) | 2010 | 2009 | ||||||
|
Net assets of consolidated variable interest entities
|
$ | 13.1 | $ | 12.7 | ||||
|
Tangible unencumbered
assets
(2)
|
22.3 | 30.1 | ||||||
|
Unsecured debt
|
(26.9 | ) | (35.1 | ) | ||||
|
Mark-to-market
on unsecured hedged
debt
(1)
|
(1.4 | ) | (1.9 | ) | ||||
|
Other liabilities, net
|
(2.6 | ) | (1.7 | ) | ||||
|
Total tangible equity
|
$ | 4.5 | $ | 4.1 | ||||
| (1) | At December 31, 2010 and December 31, 2009, there were $1.4 billion and $1.9 billion, respectively, of net gains on derivatives hedging this debt in unencumbered assets, which partially offset these losses. | |
| (2) | Excludes goodwill and acquired intangible assets. |
ED
Funding Programs
Pursuant to ECASLA, in 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 in May 2009 and accepted eligible loans through
July 1, 2010. The ED Conduit Program expires on
January 19, 2014. Funding for the ED Conduit Program is
provided by the capital markets at a cost based on market rates,
with advance rates of 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 a put
agreement at a price of 97 percent of the face amount of
the loans. As of December 31, 2010, approximately
$24.2 billion face amount of our Stafford and PLUS Loans
were funded through the ED Conduit Program. Our intent is to
term securitize the loans that are in this facility before the
facility expires on January 19, 2014. We are exposed to the risk
associated with this program ending in 2014. The amount of loans
exposed to this refinance risk will decline over time as the
loans pay down. If we are not able to successfully refinance the
loans before the facility expires, we will sell them to ED at a
price of 97 percent of face value.
In 2008, ED implemented the Participation Program pursuant to
ECASLA. In October 2010, we sold $20.4 billion of loans to
ED and paid off $20.3 billion of advances outstanding under
the Participation Program. This program is no longer in effect
and is not available as a funding source.
Sallie
Mae Bank
In 2008, the Bank began expanding its deposit base to fund new
Private Education Loan originations. The Bank raises deposits
through intermediaries in the retail brokered Certificate of
Deposit (“CD”) market and through direct retail
deposit channels. As of December 31, 2010, total bank
deposits were $5.9 billion, of which $4.5 billion were
brokered deposits and $1.4 billion were retail and other
deposits. Cash and liquid investments totaled $2.0 billion.
In addition to its deposit base, the Bank has borrowing capacity
with the Federal Reserve Bank (“FRB”) through a
collateralized lending facility. Borrowing capacity is limited
by the availability of acceptable collateral. As of
December 31, 2010, borrowing capacity was approximately
$650 million and there were no outstanding borrowings.
77
ABS
Transactions
In early 2009, the Federal Reserve Bank of New York initiated a
program, The Term Asset-Backed Securities Loan Facility
(“TALF”), to facilitate renewed issuance of eligible
consumer and small business ABS with a term of up to five years.
For student loan collateral, TALF expired on March 31,
2010. During the program, we completed five transactions
totaling $7.5 billion which were TALF-eligible. Under this
program we have $5.3 billion of ABS outstanding where we
have the option to call the bonds at a discount between 2011 and
2014.
In 2010, we completed three Private Education Loan ABS
transactions totaling $4.1 billion.
In 2010, we completed two FFELP long-term ABS transactions
totaling $2.0 billion.
Although we have demonstrated our continued access to the ABS
market and we expect ABS financing to remain a primary source of
funding over the long term, we also 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.
Asset-Backed
Financing (“ABCP”) Facilities
In early 2008, we entered into two new asset-backed financing
facilities (the “2008 Asset-Backed Financing
Facilities”) to fund FFELP Loans. In 2009, the FFELP
facilities were subsequently amended and reduced and in early
2010 we terminated these facilities and entered into new
multi-year ABCP facilities (the “2010 Facility”) which
will continue to provide funding for our 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. 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.
Borrowings under the 2010 Facility are non-recourse and the
maximum amount we 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. The 2010 Facility
is subject to termination under certain circumstances. The
principal financial covenants in this facility require us 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
$3.1 billion as of December 31, 2010. The covenants
also require us 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. We were compliant with both of the
minimum interest coverage ratio and the minimum net adjusted
revenue tests as of the quarter ended December 31, 2010.
Increases in the borrowing rate of up to LIBOR plus
4.50 percent 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 2.00 percent to LIBOR plus
3.00 percent 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. As of December 31, 2010,
there was approximately $5.9 billion outstanding in this
facility. The book basis of the assets securing this facility at
December 31, 2010 was $6.4 billion.
On January 14, 2011, we amended the 2010 Asset Backed Financing
Facility, which will continue to provide funding for our
federally-guaranteed student loans, expanding the size and
extending the maturity. The facility amount is now
$7.5 billion, reflecting an increase of $2.5 billion
over the previously scheduled facility reduction. The facility
size will decrease by $2.5 billion annually with a
scheduled maturity date of January 10, 2014.
Federal
Home Loan Bank in Des Moines (“FHLB-DM”)
In early 2010, HICA Education Loan Corporation
(“HICA”), a subsidiary of the Company, entered into a
lending agreement with the FHLB-DM. Under the agreement, the
FHLB-DM will provide advances backed by Federal Housing Finance
Agency approved collateral which includes federally-guaranteed
student loans (but does not include Private Education Loans).
The amount, price and tenor of future advances will vary and be
subject to the agreement’s borrowing conditions as then in
effect determined at the time of each borrowing. The maximum
amount that can be borrowed, as of December 31, 2010,
subject to available collateral, is approximately
$9.6 billion. As of December 31, 2010, borrowing under
the facility totaled $900 million and was secured by
$1.2 billion of
78
FFELP Loans. We have provided a guarantee to the FHLB-DM for the
performance and payment of HICA’s obligations.
Senior
Unsecured Debt
We issue unsecured debt in a variety of maturities and
currencies to achieve cost-efficient funding and to maintain an
appropriate maturity profile. While the cost and availability of
unsecured funding may be negatively affected by general market
conditions or by matters specific to the financial services
industry or Sallie Mae, we seek to mitigate refinancing risk by
actively managing the amount of our borrowings that we
anticipate will mature within any month, quarter or year.
Substantially all of our senior and subordinated debt
obligations contain no provisions (other than a change in
control would allow $4 billion of these obligations as of
December 31, 2010, to be put at 101 percent) that could
trigger a requirement for an early repayment, require additional
collateral support, result in changes to terms, accelerate
maturity, or create additional financial obligations upon an
adverse change in our credit ratings, financial ratios,
earnings, cash flows or stock price.
We issue unsecured debt when the pricing for the term of the
debt is favorable relative to our other funding options and our
overall liquidity position. In 2010 we issued $1.5 billion
of unsecured debt maturing in 2020 and an all in cost of LIBOR
plus 4.65 percent. On January 11, 2011, we announced
and priced a $2 billion five-year 6.25 percent fixed
rate unsecured bond. The bond was issued to yield
6.50 percent before underwriting fees. The rate on the bond
was swapped from a fixed rate to a floating rate equal to an
all-in cost of one-month LIBOR plus 4.46 percent. The
proceeds of this bond will be used for general corporate
purposes.
We also repurchase our outstanding unsecured debt in both
open-market repurchases and public tender offers. Repurchasing
debt helps us better manage our short-term and long-term funding
needs. In 2010 we repurchased $4.9 billion face amount of
our senior unsecured notes in the aggregate, with maturity dates
ranging from 2010 to 2014, which resulted in a total gain of
$317 million.
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 us.
Risks associated with our lending portfolio are discussed in
Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Financial Condition — FFELP Loan Portfolio
Performance” and “— Consumer Lending Portfolio
Performance.”
Our investment portfolio is composed of very short-term
securities issued by highly rated issuers limiting our
counterparty exposure. Additionally, our investing activity is
governed by Board approved limits on the amount that is allowed
to be invested with any one issuer based on the credit rating of
the issuer, further minimizing our counterparty exposure.
Counterparty credit risk is considered when valuing investments
and considering impairment.
Related to derivative transactions, protection against
counterparty risk 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. All derivative contracts entered into by SLM
Corporation and the Bank are covered under such agreements and
require collateral to be exchanged based on the net fair value
of derivatives with each counterparty. Our securitization trusts
require collateral in all cases if the counterparty’s
credit rating is withdrawn or downgraded below a certain level.
Additionally, 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 collateral to the counterparties. In all cases,
our exposure is limited to the value of the derivative contracts
in a gain position net of any collateral we are holding. We
consider counterparties’ credit risk when determining the
fair value of derivative positions on our exposure net of
collateral.
79
We have liquidity exposure related to collateral movements
between us and our derivative counterparties. Movements in the
value of the derivatives, which are primarily affected by
changes in interest rate and foreign exchange rates, may require
us to return cash collateral held or may require us to access
primary liquidity to post collateral to counterparties. If our
credit ratings are downgraded from current levels, we may be
required to segregate unrestricted cash collateral into
restricted accounts.
The table below highlights exposure related to our derivative
counterparties at December 31, 2010.
|
SLM Corporation
|
||||||||
|
and Sallie Mae Bank
|
Securitization Trust
|
|||||||
| (Dollars in millions) | Contracts | Contracts | ||||||
|
Exposure, net of collateral
|
$ | 296 | $ | 1,167 | ||||
|
Percent of exposure to counterparties with credit ratings below
S&P AA- or Moody’s Aa3
|
65 | % | 31 | % | ||||
|
Percent of exposure to counterparties with credit ratings below
S&P A- or Moody’s A3
|
0 | % | 0 | % | ||||
“Core
Earnings” Basis Borrowings
The following tables present the ending balances of our
“Core Earnings” basis borrowings at December 31,
2010, 2009 and 2008, and average balances and average interest
rates of our “Core Earnings” basis borrowings for the
years ended December 31, 2010, 2009 and 2008. The average
interest rates include derivatives that are economically hedging
the underlying debt but do not qualify for hedge accounting
treatment. (See “‘Core
Earnings’ — Definition and
Limitations — Differences between ‘Core
Earnings’ and GAAP — Reclassification of
Realized Gains (Losses) on Derivative and Hedging
Activities” of this Item 7.
Ending
Balances
| As of December 31, | ||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
| Ending Balance | Ending Balance | Ending Balance | ||||||||||||||||||||||||||||||||||
|
Total
|
Total
|
Total
|
||||||||||||||||||||||||||||||||||
|
“Core
|
“Core
|
“Core
|
||||||||||||||||||||||||||||||||||
|
Short
|
Long
|
Earnings”
|
Short
|
Long
|
Earnings”
|
Short
|
Long
|
Earnings”
|
||||||||||||||||||||||||||||
| (Dollars in millions) | Term | Term | Basis | Term | Term | Basis | Term | Term | Basis | |||||||||||||||||||||||||||
|
Unsecured borrowings
|
$ | 4,361 | $ | 15,742 | $ | 20,103 | $ | 5,185 | $ | 22,797 | $ | 27,982 | $ | 6,794 | $ | 31,182 | $ | 37,976 | ||||||||||||||||||
|
Unsecured term bank deposits
|
1,387 | 3,160 | 4,547 | 842 | 4,795 | 5,637 | 1,148 | 1,108 | 2,256 | |||||||||||||||||||||||||||
|
FHLB-DM facility
|
900 | — | 900 | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
ED Participation Program facility (on-balance sheet)
|
— | — | — | 9,006 | — | 9,006 | 7,365 | — | 7,365 | |||||||||||||||||||||||||||
|
ED Conduit Program facility (on-balance sheet)
|
24,484 | — | 24,484 | 14,314 | — | 14,314 | — | — | — | |||||||||||||||||||||||||||
|
ABCP borrowings (on-balance sheet)
|
— | 5,853 | 5,853 | — | 8,801 | 8,801 | 24,768 | — | 24,768 | |||||||||||||||||||||||||||
|
SLC acquisition financing (on-balance sheet)
|
— | 1,064 | 1,064 | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
FFELP Loan securitizations (on-balance sheet)
|
— | 112,425 | 112,425 | — | 81,923 | 81,923 | — | 80,601 | 80,601 | |||||||||||||||||||||||||||
|
Private Education Loan securitizations (on-balance sheet)
|
— | 21,409 | 21,409 | — | 7,277 | 7,277 | — | — | — | |||||||||||||||||||||||||||
|
FFELP Loan securitizations (off-balance sheet)
|
— | — | — | — | 20,268 | 20,268 | — | 22,716 | 22,716 | |||||||||||||||||||||||||||
|
Private Education Loan securitizations (off-balance sheet)
|
— | — | — | — | 13,347 | 13,347 | — | 14,443 | 14,443 | |||||||||||||||||||||||||||
|
Indentured trusts (on-balance sheet)
|
— | 1,246 | 1,246 | 64 | 1,533 | 1,597 | 31 | 1,972 | 2,003 | |||||||||||||||||||||||||||
|
Other
(1)
|
2,257 | — | 2,257 | 1,472 | — | 1,472 | 1,827 | — | 1,827 | |||||||||||||||||||||||||||
|
Total
|
$ | 33,389 | $ | 160,899 | $ | 194,288 | $ | 30,883 | $ | 160,741 | $ | 191,624 | $ | 41,933 | $ | 152,022 | $ | 193,955 | ||||||||||||||||||
| (1) | At December 31, 2010, “other” primarily consisted of $0.9 billion of cash collateral held related to derivative exposures that are recorded as a short-term debt obligation, as well as $1.4 billion of unsecured other bank deposits. At December 31, 2009 and 2008, “other” primarily consisted of cash collateral held related to derivative exposures that are recorded as short-term debt obligations. |
80
Secured borrowings, including securitizations, asset-backed
commercial paper (“ABCP”) borrowings,
ED financing facilities and indentured trusts, comprised
85 percent of our “Core Earnings” basis debt
outstanding at December 31, 2010 versus 82 percent at
December 31, 2009.
Average
Balances
| Years Ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||
| (Dollars in millions) | Balance | Rate | Balance | Rate | Balance | Rate | ||||||||||||||||||
|
Unsecured borrowings
|
$ | 24,480 | 2.15 | % | $ | 31,863 | 1.93 | % | $ | 39,794 | 3.65 | % | ||||||||||||
|
Unsecured term bank deposits
|
5,123 | 2.65 | 4,754 | 3.50 | 854 | 4.07 | ||||||||||||||||||
|
FHLB-DM facility
|
403 | .35 | — | — | — | — | ||||||||||||||||||
|
ED Participation Program facility (on-balance sheet)
|
13,537 | .81 | 14,174 | 1.43 | 1,727 | 3.43 | ||||||||||||||||||
|
ED Conduit Program facility (on-balance sheet)
|
15,096 | .70 | 7,340 | .75 | — | — | ||||||||||||||||||
|
ABCP borrowings (on-balance
sheet)
(1)
|
6,623 | 1.24 | 16,239 | 2.93 | 24,855 | 5.27 | ||||||||||||||||||
|
Securitizations (on-balance sheet)
|
120,880 | 1.00 | 85,612 | 1.38 | 76,028 | 3.26 | ||||||||||||||||||
|
Securitizations (off-balance sheet)
|
— | — | 35,377 | .82 | 39,625 | 3.11 | ||||||||||||||||||
|
Indentured trusts (on-balance sheet)
|
1,454 | .69 | 1,811 | 1.07 | 2,363 | 3.90 | ||||||||||||||||||
|
Other
|
1,806 | .55 | 1,391 | .31 | 2,063 | 2.35 | ||||||||||||||||||
|
Total
|
$ | 189,402 | 1.16 | % | $ | 198,561 | 1.51 | % | $ | 187,309 | 3.58 | % | ||||||||||||
| (1) | Included the 2008 Asset-Backed Loan Facility through April 2009. |
Contractual
Cash Obligations
The following table provides a summary of our obligations
associated with long-term notes at December 31, 2010. For
further discussion of these obligations, see
“Note 7 — Borrowings.”
|
1 Year
|
2 to 3
|
4 to 5
|
Over
|
|||||||||||||||||
| (Dollars in millions) | or Less | Years | Years | 5 Years | Total | |||||||||||||||
|
Long-term notes:
|
||||||||||||||||||||
|
Unsecured borrowings
|
$ | — | $ | 4,137 | $ | 4,552 | $ | 7,053 | $ | 15,742 | ||||||||||
|
Unsecured term bank deposits
|
— | 2,290 | 811 | 59 | 3,160 | |||||||||||||||
|
Secured
borrowings
(1)
|
16,255 | 25,818 | 19,100 | 80,824 | 141,997 | |||||||||||||||
|
Total contractual cash
obligations
(2)
|
$ | 16,255 | $ | 32,245 | $ | 24,463 | $ | 87,936 | $ | 160,899 | ||||||||||
| (1) | Includes long-term beneficial interests of $133.8 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 our current projection of prepayment speeds of the securitized assets. | |
| (2) | The aggregate principal amount of debt that matures in each period is $16.3 billion, $32.4 billion, $24.6 billion and $88.7 billion, respectively. Specifically excludes derivative market value adjustments of $2.6 billion for long-term notes. Interest obligations on notes are predominantly variable in nature, resetting quarterly based on 3-month LIBOR. |
Unrecognized tax benefits were $39 million and
$101 million for the years ended December 31, 2010 and
2009, respectively. For additional information, see
“Note 18 — Income Taxes.”
81
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, we
also enter 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,
$50 million at December 31, 2010, represents the
maximum possible credit risk should the counterparty draw down
the commitment, we do 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
$50 million. All commitments mature in 2011. 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, 2010, there were no
outstanding draws on lines of credit.
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 —
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
When calculating the allowance for loan loss for Private
Education Loans we estimate the amount of our customers who will
default over the next two years and how much we will recover
over time related to the defaulted amount. Our historical
experience indicates that, on average, the time between the date
that a borrower experiences a default causing event (e.g., the
loss trigger event) and the date that we charge-off the
unrecoverable portion of that loan is two years. In estimating
the amount of defaults we expect to have over the next two years
we divide the portfolio into categories of similar risk
characteristics based on loan program type, school type, loan
status (in-school, grace, forbearance, repayment and
delinquency), seasoning (number of months in active repayment
for which a scheduled payment was due), underwriting criteria
(credit scores), and existence or absence of a cosigner. The
primary characteristics we use are school type, credit scores,
cosigner status, loan status and seasoning. We start with
historical experience of customer default behavior. We make
judgments about which historical period to start with and then
make further judgments about whether that historical experience
is representative of future expectations and whether additional
adjustment may be needed to those historical default rates. We
also take into account the current and future economic
environment when calculating the allowance for loan loss. We
analyze key economic statistics and the effect they will have on
future defaults. Key economic statistics analyzed as part of the
allowance for loan loss are unemployment rates (total and
specific to college graduates) and other asset type delinquency
rates (credit cards, mortgages). Significantly more judgment has
been required over the last three years, compared with years
prior, in light of the U.S. economy and its effect on our
customer’s ability to pay their obligations. In addition to
making judgments about the amount of defaults that will occur
over the next two years we also make judgments about how much we
will subsequently recover from a defaulted customer and when
that recovery will occur. Similar to estimating defaults, we
begin with historical recovery performance when projecting
future recoveries and use judgment in determining whether
historical performance is representative of what we expect to
recover in the future.
82
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, we
receive 98 percent reimbursement on all qualifying default
claims. For loans disbursed on or after July 1, 2006, we
receive 97 percent reimbursement. For loans disbursed prior
to October 1, 1993, we receive 100 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 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, we review the
adequacy of the allowance for loan losses and determine if
qualitative adjustments need to be considered.
Premium
and Discount Amortization
The most judgmental estimate for premium and discount
amortization on student loans is the Constant Prepayment Rate
(“CPR”), which measures the rate at which loans in the
portfolio pay down principal compared to their stated terms.
Loan consolidation, default, term extension and other prepayment
factors affecting our CPR estimates are affected by changes in
our business strategy, changes in our competitor’s business
strategies, FFELP legislative changes, interest rates and
changes to the current economic and credit environment. When we
determine the CPR we begin with historical prepayment rates due
to consolidation activity, defaults, payoffs and term extensions
from the utilization of forbearance. We make judgments about
which historical period to start with and then make further
judgments about whether that historical experience is
representative of future expectations and whether additional
adjustment may be needed to those historical prepayment rates.
In the past the consolidation of FFELP Loans and Private
Education Loans significantly affected our CPRs and updating
those assumptions often resulted in material adjustments to our
amortization expense. 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 Loans
consolidation program and Private Education Loans consolidation
program. We do not expect to consolidate FFELP Loans in the
future and do not currently expect others to actively
consolidate our FFELP Loans. As a result, we expect CPRs related
to our FFELP Loans to remain relatively stable over time. We
expect that in the future both we and our competitors will begin
to consolidate Private Education Loans. This is built into the
CPR assumption we use for Private Education Loans. However, it
is difficult to accurately project the timing and level at which
this consolidation activity will begin and our assumption may
need to be updated by a material amount in the future based on
changes in the economy and marketplace. The level of defaults is
a significant component of our FFELP Loan and Private Education
Loan CPR. This component of the FFELP Loan and Private Education
Loan CPR is estimated in the same manner as discussed in
“Critical Accounting Policies and Estimates —
Allowance for Loan Loss” of this Item 7 —
the only difference is for premium and discount amortization
purposes the estimate of defaults is a life of loan estimate
whereas for allowance for loan loss it is a two-year estimate.
Fair
Value Measurement
The most 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 consider credit and liquidity risk involving specific instruments in determining their fair value and, when appropriate, have adjusted the fair value of these instruments for the effect of credit and liquidity risk. These assumptions have further been validated by the successful maturity of these investments in the period immediately following the end of the reporting period. | |
| 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 exposure for each counterparty is adjusted based on market |
83
| information available for that specific counterparty, including spreads from credit default swaps. Additionally, when the counterparty has exposure to us related to our derivatives, we fully collateralize the exposure, minimizing the adjustment necessary to the derivative valuations for our own 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 $72 million as of December 31, 2010. 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 $129 million to take into account a significant reduction in liquidity as of December 31, 2010, 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 our 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. |
| 3. | Student Loans — Our FFELP Loans and Private Education Loans are accounted for at cost or at the lower of cost or fair value if the loan is held-for-sale. The fair values of our student loans are disclosed in “Note 15 — Fair Value Measurements.” 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 effect of our use of fair
values on our results of operations, see
“Note 15 — Fair Value
Measurements.”
Transfers
of Financial Assets and the Variable Interest Entity
(“VIE”) Consolidation Model — Changes in
Accounting Principles effective January 1,
2010
The new consolidation accounting adopted on January 1, 2010
significantly changed the consolidation model for Variable
Interest Entities (“VIEs”). This new rule, among other
things, (1) eliminated the exemption for QSPEs,
(2) provided a new approach for determining who should
consolidate a VIE that is more focused on control rather than
economic interest, (3) changed when it is necessary to
reassess who should consolidate a VIE and (4) required
additional disclosure.
Under these new rules, if we have a variable interest in a VIE
and we have determined that we are the primary beneficiary of
the VIE then we will consolidate the VIE. We are the considered
the primary beneficiary if we have 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. There is considerable
judgment that has to be used as it relates to determining who is
the primary beneficiary of the VIEs with which we are
associated. There are no “bright line” tests. Rather,
the assessment of who has the power to direct the activities of
the VIE that most
84
significantly affects the VIE’s economic performance and
who has the obligation to absorb losses or receive benefits of
the entity that could potentially be significant to the VIE is
very qualitative and judgmental in nature. However, based on our
current relationship with our securitization trusts and other
financing vehicles which are considered VIEs, we believe the
assessment is more straightforward. As it relates to our
securitized assets, we are the servicer of those securitized
assets (which means we “have the power” to direct the
activities of the trust) and we own the Residual Interest (which
means we “have the loss and gain obligation that could
potentially be significant to the VIE”) of the
securitization trusts. As a result we are the primary
beneficiary of our securitization trusts and other financing
vehicles. See “Note 2 — Significant
Accounting Policies” for further details regarding the
adoption of these new rules on January 1, 2010.
Derivative
Accounting
The most significant judgments related to derivative accounting
are: (1) concluding the derivative is an effective hedge
and qualifies for hedge accounting and (2) determining the
fair value of certain derivatives and hedged items. To qualify
for hedge accounting a derivative must be concluded to be a
highly effective hedge upon designation and on an ongoing basis.
There are no “bright line” tests on what is considered
a highly effective hedge. We use a historical regression
analysis to prove ongoing and prospective hedge effectiveness.
See previous discussion under “Critical Accounting Policies
and Estimates — Fair Value Measurement” of
this Item 7 for significant judgments related to the
valuation of derivatives. Although some of our valuations are
more judgmental than others, we compare the fair values of our
derivatives that we calculate to those provided by our
counterparties on a monthly basis. We view this as a critical
control which helps validate these judgments. Any significant
differences with our counterparties are identified and resolved
appropriately.
Goodwill
and Intangible Assets
In determining annually (or more frequently if required) whether
goodwill is impaired, we determine whether an event has occurred
that would indicate to us that there is the potential for the
fair value of the business unit to fall below the book basis of
the equity of that business unit. If we determine that this
event has occurred, we perform an analysis to determine the fair
value of the business unit. There are significant judgments
involved in determining the fair value of a business unit,
including assumptions regarding estimates of future cash flows
from existing and new business activities, customer
relationships, the value of existing customer contracts, the
value of other tangible and intangible assets, as well as
assumptions regarding what we believe a third party willing to
pay for all of the assets and liabilities of the business unit.
This calculation requires us to estimate the appropriate
discount and growth rates to apply to those projected cash flows
and the appropriate control premium to apply to arrive at the
final fair value. The business units for which we must estimate
the fair value are not publically traded and often there is not
comparable market data available for that individual business to
aid in its valuation. We use a third party appraisal firm to
provide an opinion on the fair values we conclude upon.
Risk
Management Processes
Our
Approach
The monitoring, assessment and oversight of risk are shared
responsibilities throughout the Company. Each business division
is primarily responsible and accountable for managing risks
specific to its area. Our executive management team and
centralized support functions, including compliance, credit
risk, human resources, legal, information technology, finance
and accounting, are responsible for providing our business
divisions with the training, systems and specialized expertise
necessary to properly perform their risk management duties.
Executive management, individually and through participation in
various committees, are ultimately responsible for the
management of risk across our businesses. Our Risk Assessment
Department regularly monitors and reports to the Audit Committee
of our Board of Director on the effectiveness of various aspects
of our risk management activities.
Our Code of Business Conduct and the on-going training our
employees receive in many compliance areas provide a framework
for our employees to conduct themselves with the highest
integrity. We instill a risk-conscious culture through
communications, training, policies and procedures. We have
strengthened the
85
linkage between the management performance process and
individual compensation to encourage employees to work toward
corporate-wide compliance goals.
Our Risk Assessment Department monitors our various risk
management and compliance efforts, identifies areas that require
increased focus and resources, and reports significant control
issues to executive management and the Audit Committee of our
Board of Directors. At least annually, the Risk Assessment
Department performs a risk assessment to identify our top risks,
to develop the internal audit plan. Risks are rated on
significance and likelihood of occurrence and communicated to
our management team members who allocate appropriate attention
and resources. Results of the assessment, including survey
results, identified risks and recommendations, are reported to
the Audit Committee of our Board of Directors.
Our Board of Directors and its various committees oversee our
overall strategic direction and provide direction to management
as to its tolerance levels of various significant risks. Through
its committees, our Board of Directors regularly reviews our
risk management practices.
Our
Significant Risks
Significant risks may be grouped into the following categories:
(1) funding and liquidity; (2) operations;
(3) political/reputation; (4) competition;
(5) credit; and (6) regulatory and compliance. More
specific descriptions of the particular risks of each type we
currently face are discussed in Item 1A “Risk
Factors”.
Funding
and Liquidity Risk Management
Funding and liquidity risk is the potential inability to fund
liability maturities and deposit withdrawals, fund asset growth
and business operations, and meet contractual obligations at
reasonable market rates. Our primary liquidity objective is to
ensure our ongoing ability to meet our funding needs for our
businesses throughout market cycles, including during periods of
financial stress. Our two primary liquidity needs are
originating Private Education Loans and retiring secured and
unsecured debt when it matures.
We define excess liquidity as readily available assets, limited
to cash and high-quality liquid unencumbered securities, that we
can use to meet our funding requirements as those obligations
arise. Our primary liquidity risk relates to our ability to
raise replacement funding and raise that funding at a reasonable
cost as our secured and unsecured debt matures. In addition, we
must continue to obtain funding at reasonable rates to meet our
other business obligations and to continue to grow our business.
Key risks associated with our liquidity relates to our ability
to access the capital markets and access them at reasonable
rates. This ability is directly affected by our credit ratings.
In addition, credit ratings may be important to customers or
counterparties when we compete in certain markets and when we
seek to engage in certain transactions, including
over-the-counter
derivatives. A negative change in our credit rating would have a
negative effect on our liquidity because it would raise the
cost, diminish the availability of funding and potentially
require additional cash collateral or restrict cash currently
held as collateral on existing borrowings or derivative
collateral arrangements.
Our funding and liquidity risk management activities are
centralized within our Corporate Finance Department, which is
responsible for planning and executing our funding activities
and strategies. We analyze and monitor our liquidity risk,
maintain excess liquidity and access diverse funding. Funding
and liquidity risk are overseen and recommendations approved via
one or more management committees that manage market, interest
rate and balance sheet risk.
The Finance Committee of the Board of Directors is responsible
for approving our Asset and Liability Management Policy. The
Finance Committee of the Board, and in some cases the full
Board, monitor our liquidity on an ongoing basis. Our liquidity
risk management activities are centralized within the Corporate
Finance Department, which is responsible for planning and
executing our funding activities and strategies.
Operations
Risk Management
Operations risk arises from problems with service or product
delivery or from nonconformance with internal policies and
procedures. The Company is exposed to transaction risk when
products, services or
86
delivery channels do not fit with our operational capacity,
customer demands or strategic objectives. Operations risk can
increase with the implementation of new information technology
to support a new, expanded or modified product or service.
Failed or flawed technology, either from error, inadequate
capacity or fraud, may result in the inability to deliver
products or services.
Operations risk is managed by our managers with assistance and
training provided by our centralized support functions.
Additionally, the operations risks associated with new products
and services, the security and confidentiality of information,
the effectiveness of our technology infrastructure, the
emergency loss of technology and other infrastructure resources,
the monitoring of internal controls and compliance with internal
control standards, and the monitoring and dissemination of
changes in regulations affecting the business are each the
subject of executive management review through committees
established for these particular purposes.
The Finance and Operations Committee of our Board of Directors
has oversight responsibility for significant operational risks
and receives periodic reports from executive management
regarding the effectiveness of our risk management efforts in
this area.
Political
and Reputation Risk Management
Political and reputation risk is the risk that changes in laws
and regulations or actions negatively impacting our reputation
could affect the profitability and sustainability of our
business.
Management proactively assesses and manages political and
reputation risk. Our government relations team of employees
manages our review and response to all formal inquiries from
members of Congress, state legislators, and their staff,
including providing targeted messaging that reinforces our
public policy goals. We review and consider political and
reputational risks on an integrated basis in connection with the
risk management oversight activities conducted in the various
aspects of our business on matters as diverse as the launch of
new products and services, our credit underwriting activities
and how we fund our operations.
Significant political and reputation risks are reported to and
monitored by the Finance and Operations Committee of our Board
of Directors.
Competition
Risk Management
Competition risk is the risk of losing market share or the lack
of market acceptance of our products due to our competitors
competing more effectively. Management closely monitors
competitors and conditions. We follow changes in product pricing
and features and track marketing activity across a variety of
distribution channels. In addition, we measure category
participants’ brand recognition among key consumer groups.
We continuously evaluate the size of the market and analyze
market developments and trends that may impact future demand for
student loans.
Significant market competition risks are reported to and
monitored by the Finance and Operations Committee of our Board
of Directors.
Credit
and Counterparty Risk Management
Credit and counterparty risk is the risk of loss stemming from
one party’s failure to repay a loan or otherwise meet a
contractual obligation. We have credit or counterparty risk
exposure with borrowers and co-borrowers with whom we have made
Private Education Loans, the various counterparties with whom we
have entered into derivative contracts, the various issuers with
whom we make investments, and with several higher education
institutions related to academic facilities loans secured by
real estate.
The credit risk related to Private Education Loans are 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 for loan losses that
covers estimated losses based upon
87
portfolio and economic analysis. This infrastructure is overseen
by our Chief Credit Officer and the executive management
committee that he chairs.
Credit and counterparty risk related to derivative contracts is
managed by reviewing counterparties for credit strength on an
ongoing basis and via our credit policies, which 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 and counterparty 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. The credit and counterparty
risk in our investment portfolio is minimized by only investing
in paper with highly rated issuers and setting limits on our
exposure per issuer. Credit and counterparty risk related to
derivative contracts and our investment portfolio are approved
and managed by our Credit Risk Management group overseen by our
Chief Credit Officer.
Significant credit and counterparty risks related to derivative
contracts or our investment portfolio are reported to the
Finance Committee of the Board of Directors. Additionally, our
Chief Credit Officer reports, on a regular basis, to the Board
and the Audit Committee of the Board regarding the asset quality
of our Private Education Loans.
Regulatory
and Compliance Risk Management
Regulatory and compliance risk is the risk to earnings or
capital arising from violations of laws, rules, or regulations.
The Company is exposed to regulatory and compliance risk when
key areas such as our private education lending, collections or
government loan servicing businesses are not properly monitored
for compliance with legal and regulatory requirements and when
an oversight program does not include appropriate audit and
control features. We also face regulatory and compliance risk
when new, expanded or modified products or services are not
properly monitored for compliance with legal and regulatory
requirements.
Primary ownership and responsibility for regulatory and
compliance risk is placed with the business areas to manage
their specific regulatory and compliance risks. Our Compliance
Department supports these activities through providing extensive
training and monitoring of our Code of Business Conduct,
maintaining consumer lending regulatory and information security
policies and procedures, and working in close coordination with
our other centralized support functions such as our Legal
department. Compliance risks associated with new products and
services, SEC disclosure obligations, security and
confidentiality of information and effectiveness of our
technology infrastructure, internal controls and compliance with
internal control standards, dissemination of changes in
regulations affecting the business, and enforcement of credit
lending policies and practices are each the subject of specific
review by existing management committees.
The Audit Committee of our Board of Directors has oversight with
respect to establishing standards with respect to our monitoring
and control of regulatory and compliance risks and the
qualification of employees overseeing these risk management
functions. The Audit Committee receives periodic reports from
executive management team members responsible for the regulatory
and compliance risk management functions.
88
Common
Stock
The following table summarizes our common share repurchases and
issuances for the years ended December 31, 2010, 2009 and
2008.
| Years Ended December 31, | ||||||||||||
| (Shares in millions) | 2010 | 2009 | 2008 | |||||||||
|
Common shares repurchased:
|
||||||||||||
|
Open market
|
— | — | — | |||||||||
|
Benefit
plans
(1)
|
1.1 | .3 | 1.0 | |||||||||
|
Total shares repurchased
|
1.1 | .3 | 1.0 | |||||||||
|
Average purchase price per share
|
$ | 13.44 | $ | 20.29 | $ | 24.51 | ||||||
|
Common shares issued
|
1.8 | 17.8 | 1.9 | |||||||||
|
Authority remaining at end of period for repurchases
|
38.8 | 38.8 | 38.8 | |||||||||
| (1) | 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. |
During 2009, we converted $339 million of our Series C
Preferred Stock to common stock. As part of this conversion, we
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 dividends recorded as
part of preferred stock dividends for the year of approximately
$53 million.
On December 15, 2010, the mandatory conversion date, the
remaining 810,370 shares of our Series C Preferred
Stock were converted into 41 million shares of common stock.
The closing price of our common stock on December 31, 2010
was $12.59
89
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Interest
Rate Sensitivity Analysis
Our 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, 2010 and 2009 and the effect on fair values at
December 31, 2010 and 2009, 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
mark-to-market
losses that may occur related to our Residual Interests (prior
to the adoption of topic updates on ASC 810 on
January 1, 2010) 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.
| Year Ended December 31, 2010 | ||||||||||||||||||||||||
|
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
|
$ | 3 | 1 | % | $ | 33 | 5 | % | $ | (372 | ) | (61 | )% | |||||||||||
|
Unrealized gains (losses) on derivative and hedging activities
|
131 | 27 | 82 | 17 | (28 | ) | (6 | ) | ||||||||||||||||
|
Increase in net income before taxes
|
$ | 134 | 12 | % | $ | 115 | 11 | % | $ | (400 | ) | (37 | )% | |||||||||||
|
Increase in diluted earnings per common share
|
$ | .270 | 29 | % | $ | .235 | 25 | % | $ | (.819 | ) | (87 | )% | |||||||||||
| 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 | )% | ||||||||||
| (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. |
90
| At December 31, 2010 | ||||||||||||||||||||
| 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
|
$ | 147,163 | $ | (649 | ) | — | % | $ | (1,318 | ) | (1 | )% | ||||||||
|
Private Education Loans
|
30,949 | — | — | — | — | |||||||||||||||
|
Other earning assets
|
11,641 | (1 | ) | — | (2 | ) | — | |||||||||||||
|
Other assets
|
9,449 | (565 | ) | (6 | ) | (996 | ) | (11 | )% | |||||||||||
|
Total assets
|
$ | 199,202 | $ | (1,215 | ) | (1 | )% | $ | (2,316 | ) | (1 | )% | ||||||||
|
Liabilities
|
||||||||||||||||||||
|
Interest bearing liabilities
|
$ | 187,959 | $ | (704 | ) | — | % | $ | (1,938 | ) | (1 | )% | ||||||||
|
Other liabilities
|
3,136 | (217 | ) | (7 | ) | 257 | 8 | |||||||||||||
|
Total liabilities
|
$ | 191,095 | $ | (921 | ) | — | % | $ | (1,681 | ) | (1 | )% | ||||||||
| 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 | )% | ||||||||
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 in Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Segment Earnings Summary —
‘Core Earnings’ Basis — FFELP Loans
Segment — Floor Income — ‘Core
Earnings’ 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 (including the frequency of
reset) of floating rate debt versus floating rate assets.
During the years ended December 31, 2010 and 2009, certain
FFELP Loans were earning Floor Income and we locked in a portion
of that Floor Income through the use of 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.
91
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, 2010, the increase in income
resulted from item (ii) having a greater impact than item
(i). In the prior year period, item (i) resulted in a
decrease to income in the 100 and 300 basis point scenarios.
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 “Asset and Liability
Funding Gap” of this Item 7A 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 losses of $(204) million and $(102) million
for the years ended December 31, 2010 and 2009,
respectively. Offsetting this unrealized loss are basis swaps
that economically hedge our Private Education Loan
securitization trusts. Unrealized gains for these basis swaps
totaled $176 million and $208 million for the years
ended December 31, 2010 and 2009, respectively. The change
from a net gain in the prior year period to a net loss in the
current year period was the impact of basis swap hedges in
securitization trusts that were previously off-balance sheet
prior to new consolidation accounting adopted on January 1,
2010 (see Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Critical Accounting Policies and
Estimates — Transfers of Financial Assets and the VIE
Consolidation Model” for further discussion).
In addition to interest rate risk addressed in the preceding
tables, we are 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 us. As it
relates to our corporate unsecured and securitization debt
programs used to fund our business, our 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.
92
Asset and
Liability Funding Gap
The tables below present our assets and liabilities (funding)
arranged by underlying indices as of December 31, 2010. In
the following GAAP presentation, the funding gap only includes
derivatives that qualify as effective 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 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 and in doing so includes
all derivatives that are economically hedging our debt whether
they qualify as effective hedges or not (“Core
Earnings” basis). Accordingly, we are also presenting the
asset and liability funding gap on a “Core Earnings”
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
|
daily | $ | 139.2 | $ | .1 | $ | 139.1 | |||||||
|
3-month
Treasury bill
|
weekly | 8.2 | — | 8.2 | ||||||||||
|
Prime
|
annual | .8 | — | .8 | ||||||||||
|
Prime
|
quarterly | 5.4 | — | 5.4 | ||||||||||
|
Prime
|
monthly | 23.1 | — | 23.1 | ||||||||||
|
Prime
|
daily | — | 3.0 | (3.0 | ) | |||||||||
|
PLUS Index
|
annual | .5 | — | .5 | ||||||||||
|
3-month
LIBOR
|
daily | — | — | — | ||||||||||
|
3-month
LIBOR
|
quarterly | — | 132.1 | (132.1 | ) | |||||||||
|
1-month
LIBOR
|
monthly | 7.3 | 15.3 | (8.0 | ) | |||||||||
|
CMT/CPI Index
|
monthly/quarterly | — | 2.0 | (2.0 | ) | |||||||||
|
Non Discrete
reset
(2)
|
monthly | — | 34.6 | (34.6 | ) | |||||||||
|
Non Discrete
reset
(3)
|
daily/weekly | 11.5 | 2.3 | 9.2 | ||||||||||
|
Fixed
Rate
(4)
|
9.3 | 15.9 | (6.6 | ) | ||||||||||
|
Total
|
$ | 205.3 | $ | 205.3 | $ | — | ||||||||
| (1) | Funding includes all derivatives that qualify as hedges. | |
| (2) | Funding consists of auction rate securities, the ABCP Facilities and the ED Conduit Program facility. | |
| (3) | Assets include restricted and unrestricted cash equivalents and other overnight type instruments. Funding includes retail and other deposits and cash collateral held related to derivatives exposures that are recorded as a short-term debt obligation. | |
| (4) | Assets include receivables and other assets (including goodwill and acquired intangibles). Funding includes other liabilities and stockholders’ equity (excluding series B Preferred Stock). |
93
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 reset
three-month LIBOR to other indices that are more correlated to
our asset indices. These basis swaps do not qualify as effective
hedges 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.
“Core
Earnings” Basis
|
Index
|
Frequency of
|
Funding
|
||||||||||||
| (Dollars in billions) | Variable Resets | Assets | Funding (1) | Gap | ||||||||||
|
3-month
Commercial paper
|
daily | $ | 139.2 | $ | .1 | $ | 139.1 | |||||||
|
3-month
Treasury bill
|
weekly | 8.2 | 2.0 | 6.2 | ||||||||||
|
Prime
|
annual | .8 | — | .8 | ||||||||||
|
Prime
|
quarterly | 5.4 | 1.5 | 3.9 | ||||||||||
|
Prime
|
monthly | 23.1 | 8.6 | 14.5 | ||||||||||
|
Prime
|
daily | — | 3.0 | (3.0 | ) | |||||||||
|
PLUS Index
|
annual | .5 | — | .5 | ||||||||||
|
3-month
LIBOR
|
daily | — | 55.5 | (55.5 | ) | |||||||||
|
3-month
LIBOR
|
quarterly | — | 54.6 | (54.6 | ) | |||||||||
|
1-month
LIBOR
|
monthly | 7.3 | 20.1 | (12.8 | ) | |||||||||
|
1-month
LIBOR
|
daily | — | 9.0 | (9.0 | ) | |||||||||
|
Non Discrete
reset
(2)
|
monthly | — | 34.6 | (34.6 | ) | |||||||||
|
Non Discrete
reset
(3)
|
daily/weekly | 11.5 | 2.3 | 9.2 | ||||||||||
|
Fixed
Rate
(4)
|
6.6 | 11.3 | (4.7 | ) | ||||||||||
|
Total
|
$ | 202.6 | $ | 202.6 | $ | — | ||||||||
| (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 consists of auction rate securities, the ABCP Facilities and the ED Conduit Program facility. | |
| (3) | Assets include restricted and unrestricted cash equivalents and other overnight type instruments. Funding includes retail and other deposits and cash collateral held related to derivatives exposures that are recorded as a short-term debt obligation. | |
| (4) | Assets include receivables and other assets (including 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,
2010, we have approximately $92.6 billion of FFELP Loans
indexed to three-month commercial paper (“3M CP”) that
are funded with debt indexed to 3M LIBOR.
94
Weighted
Average Life
The following table reflects the weighted average life for our
earning assets and liabilities at December 31, 2010.
|
Weighted Average
|
||||
| (Averages in Years) | Life | |||
|
Earning assets
|
||||
|
Student loans
|
7.7 | |||
|
Other loans
|
6.2 | |||
|
Cash and investments
|
.1 | |||
|
Total earning assets
|
7.3 | |||
|
Borrowings
|
||||
|
Short-term borrowings
|
.3 | |||
|
Long-term borrowings
|
7.2 | |||
|
Total borrowings
|
6.0 | |||
| 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, 2010. Based
on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of December 31, 2010,
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, 2010 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
| Item 9B. | Other Information |
Nothing to report.
95
| Item 10. | Directors, Executive Officers and Corporate Governance |
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 our
Annual Meeting of Stockholders scheduled to be held on
May 19, 2011 (the “2011 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 2011 Proxy Statement is incorporated by
reference in this section.
The information regarding our Code of Business Conduct set forth
under the caption “Code of Business Conduct” of our
2011 Proxy Statement is incorporated by reference in this
section.
The information regarding our 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 2011 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 2011 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 2011 Proxy Statement is incorporated by
reference in this section. There are no arrangements known to
us, 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 2011
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 2011 Proxy Statement is incorporated by
reference in this section.
96
| 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, 2010 and 2009
|
F-4 | |||
|
Consolidated Statements of Income for the years ended
December 31, 2010, 2009 and 2008
|
F-5 | |||
|
Consolidated Statements of Changes in Stockholders’ Equity
for the years ended December 31, 2010, 2009 and 2008
|
F-6 | |||
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2010, 2009 and 2008
|
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.
We 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 |
|
Exhibit
|
Incorporated by Reference | |||||||
| Number | Exhibit Description | Form | Filing Date | |||||
| 3 | .1 | Amended and Restated Certificate of Incorporation of the Company | S-8 | 5/22/09 | ||||
| 3 | .2 | By-Laws of the Company | 8-K | 8/6/08 | ||||
| 10 | .1 | SLM Holding Corporation Directors Stock Plan† | DEF14-A | 4/10/98 | ||||
| 10 | .2 | SLM Holding Corporation Management Incentive Plan† | DEF14-A | 4/10/98 | ||||
| 10 | .3 | Stock Option Agreement, SLM Corporation Incentive Plan, Incentive, Price-Vested with Replacement-2004† | 10-Q | 11/9/04 | ||||
| 10 | .4 | Stock Option Agreement, SLM Corporation Incentive Plan, Non-Qualified, Price-Vested Options-2004† | 10-Q | 11/9/04 | ||||
| 10 | .5 | SLM Corporation Incentive Plan, Amended and Restated May 19, 2005† | 8-K | 5/25/05 | ||||
| 10 | .6 | SLM Corporation Directors Stock Plan† | 8-K | 5/25/05 | ||||
| 10 | .7 | Stock Option Agreement SLM Corporation Incentive Plan Net-Settled, Price-Vested Options — 1 Year Minimum — 2006† | 10-K | 3/9/06 | ||||
| 10 | .8 | Retainer Agreement between Anthony P. Terracciano and the Company† | 10-Q | 5/9/08 | ||||
97
|
Exhibit
|
Incorporated by Reference | |||||||
| Number | Exhibit Description | Form | Filing Date | |||||
| 10 | .9 | Employment Agreement between Albert L. Lord and the Company† | 10-Q | 5/9/08 | ||||
| 10 | .10 | Note Purchase and Security Agreement by and among Phoenix Fundings I, Sallie Mae, Inc., The Bank of New York Trust Company, N.A., Deutsche Bank Trust Company Americas, UBS Real Estate Securities Inc., and UBS Securities LLC | 10-Q | 5/9/08 | ||||
| 10 | .11 | Note Purchase and Security Agreement by and among Rendezvous Funding I, Bank of America, N.A., JPMorgan Chase Bank, N.A., Bank of America Securities LLC, J.P. Morgan Securities Inc., Barclays Bank PLC, The Royal Bank of Scotland PLC, Deutsche Bank Securities Inc., Credit Suisse New York Branch, The Bank of New York Trust Company, N.A., Sallie Mae, Inc. and certain other parties thereto | 10-Q | 5/9/08 | ||||
| 10 | .12 | Note Purchase and Security Agreement by and among Bluemont Funding I, Bank of America, N.A., JPMorgan Chase Bank, N.A., Bank of America Securities LLC, J.P. Morgan Securities Inc., Barclays Bank PLC, The Royal Bank of Scotland PLC, Deutsche Bank Securities Inc., Credit Suisse New York Branch, The Bank of New York Trust Company, N.A., Sallie, Inc. and certain other parties thereto | 10-Q | 5/9/08 | ||||
| 10 | .13 | Schedule of Contracts Substantially Identical to Exhibit 10.34 of the Company’s Quarterly Report on Form 10-Q, filed on May 9, 2008 in all Material Respects: between Town Center Funding I and Town Hall Funding I | 10-Q | 5/9/08 | ||||
| 10 | .14 | Employment Agreement between John F. Remondi and the Company as amended as described in Form 8-K filed on 2/1/11 | 10-Q | 8/7/08 | ||||
| 10 | .15 | Sallie Mae Deferred Compensation Plan for Key Employees Restatement Effective January 1, 2009† | 10-K | 3/2/09 | ||||
| 10 | .16 | Sallie Mae Supplemental 401(k) Savings Plan† | 10-K | 3/2/09 | ||||
| 10 | .17 | Sallie Mae Supplemental Cash Account Retirement Plan† | 10-K | 3/2/09 | ||||
| 10 | .18 | Amendment to the Note Purchase and Security Agreement by and among Phoenix Fundings I, Sallie Mae, Inc., The Bank of New York Trust Company, N.A., Deutsche Bank Trust Company Americas, UBS Real Estate Securities Inc., and UBS Securities LLC | 10-K | 3/2/09 | ||||
| 10 | .19 | Amendment to the Note Purchase and Security by and among Rendezvous Funding I, Bank of America, N.A., JPMorgan Chase Bank, N.A., Bank of America Securities LLC, J.P. Morgan Securities Inc., Barclays Bank PLC, The Royal Bank of Scotland PLC, Deutsche Bank Securities Inc., Credit Suisse New York Branch, The Bank of New York Trust Company, N.A., Sallie Mae, Inc. and certain other parties thereto | 10-K | 3/2/09 | ||||
| 10 | .20 | Amendment to the Note of Purchase and Security Agreement by and among Bluemont Funding I, Bank of America, N.A., JPMorgan Chase Bank, N.A., Bank of America Securities LLC, J.P. Morgan Securities Inc., Barclays Bank PLC, The Royal Bank of Scotland PLC, Deutsche Bank Securities Inc., Credit Suisse New York Branch, The Bank of New York Trust Company, N.A., Sallie Mae, Inc. and certain other parties thereto | 10-K | 3/2/09 | ||||
98
|
Exhibit
|
Incorporated by Reference | |||||||
| Number | Exhibit Description | Form | Filing Date | |||||
| 10 | .21 | Amendment to the Note Purchase Agreement by Town Hall Funding I, Sallie Mae, Inc., the Bank of New York Mellon Trust Company, National Association, JPMorgan Chase Bank, N.A., Bank of America, NA, Barclays Bank PLC, The Royal Bank of Scotland PLC, Deutsche Bank AG, New York Branch., Credit Suisse New York Branch, Royal Bank of Canada, Lloyds TSB Bank plc, Merrill Lynch Bank USA, DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt Am Main, New York Branch, Natixis Financial Products Inc., BNP Paribas, New York Branch, Bank of America, N.A., and certain other parties thereto. | 10-K | 3/2/09 | ||||
| 10 | .22 | SLM Corporation Incentive Stock Plan Stock Option Agreement, Net-Settled, Performance Vested Options, 2009† | 10-K | 3/2/09 | ||||
| 10 | .23 | SLM Corporation Incentive Plan Performance Stock Term Sheet, “Core Earnings” Net Income Target-Sustained Performance-2009† | 10-K | 3/2/09 | ||||
| 10 | .24 | SLM Corporation Directors Equity Plan† | S-8 | 5/22/09 | ||||
| 10 | .25 | SLM Corporation 2009-2012 Incentive Plan† | S-8 | 5/22/09 | ||||
| 10 | .26 | Confidential Agreement and Release of C.E. Andrews† | 10-Q | 8/5/09 | ||||
| 10 | .27 | Confidential Agreement and Release of Robert Autor† | 10-Q | 8/5/09 | ||||
| 10 | .28 | Amended and Restated Note Purchase and Security Agreement by and among Bluemont Funding I, 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, Sallie Mae, Inc. and certain other parties thereto | 10-Q | 8/5/09 | ||||
| 10 | .29 | Schedule of Contracts Substantially Identical to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q, filed on August 5, 2009 in all Material Respects: Town Center Funding I LLC and Town Hall Funding I LLC | 10-Q | 8/5/09 | ||||
| 10 | .30 | SLM Corporation Directors Equity Plan, Non-Employee Director Restricted Stock Agreement 2009† | 10-Q | 11/5/09 | ||||
| 10 | .31 | SLM Corporation Directors Equity Plan, Non-Employee Director Stock Option Agreement 2009† | 10-Q | 11/5/09 | ||||
| 10 | .32 | Confidential Agreement and Release of Barry Feierstein† | 10-K | 2/26/10 | ||||
| 10 | .33 | Amendment to Retainer Agreement Anthony Terracciano and SLM Corporation† | 10-K | 2/26/10 | ||||
| 10 | .34 | Affiliate Collateral Pledge and Security Agreement by and among SLM Education Credit Finance Corporation, HICA Education Loan Corporation and the Federal Home Loan Bank of Des Moines | 10-K | 2/26/10 | ||||
| 10 | .35 | Advances, Pledge and Security Agreement between HICA Education Loan Corporation and the Federal Home Loan Bank of Des Moines | 10-K | 2/26/10 | ||||
| 10 | .36 | Note Purchase and Security Agreement by and among Bluemont Funding 1, 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. and certain other parties thereto | 10-K | 2/26/10 | ||||
| 10 | .37 | Schedule of Contracts Substantially Identical to Exhibit 10.40 to the Company’s Annual Report on Form 10-K, filed on February 26, 2010 in all Material Respects: between Town Center Funding 1 LLC and Town Hall Funding I LLC | 10-K | 2/26/10 | ||||
| 10 | .38 | SLM Corporation 2009-2012 Incentive Plan Stock Option Agreement† | 10-Q | 5/6/10 | ||||
| 10 | .39 | SLM Corporation 2009-2012 Incentive Plan Performance Stock Award Term Sheet† | 10-Q | 5/6/10 | ||||
99
|
Exhibit
|
Incorporated by Reference | |||||||
| Number | Exhibit Description | Form | Filing Date | |||||
| 10 | .40 | Employment Agreement between Joseph DePaulo and the Company† | 10-Q | 5/6/10 | ||||
| 10 | .41 | Offer to Exchange Certain Outstanding Stock Options for Replacement Options | SC-TO-I | 5/14/10 | ||||
| 10 | .42 | Offer to Exchange Certain Outstanding Stock Options for Replacement Options — Final Amendments | SC-TO-I/A | 6/10/10 | ||||
| 10 | .43 | Asset Purchase Agreement by and among The Student Loan Corporation; Citibank, N.A., Citibank (South Dakota) National Association, SLC Student Loan Receivables I, Inc., SLM Corporation, Bull Run 1 LLC, SLM Education Credit Finance Corporation and Sallie Mae, Inc. | 10-Q | 11/8/10 | ||||
| 10 | .44 | Amendment to Retainer Agreement between Anthony P. Terracciano and the Company, dated September 29, 2010†* | ||||||
| 10 | .45 | SLM Corporation Executive Severance Plan for Senior Officers†* | ||||||
| 10 | .46 | SLM Corporation Change in Control Severance Plan for Senior Officers†* | ||||||
| 10 | .47 | Employment Agreement between Laurent C. Lutz and the Company†* | ||||||
| 10 | .48 | Confidential Agreement and Release of John (Jack) Hewes†* | ||||||
| 10 | .49 | Amendment to Stock Option and Restricted/Performance Stock Terms†* | ||||||
| 10 | .50 | SLM Corporation 2009—2012 Incentive Plan Stock Option Agreement, Net Settled, Time Vested Options — 2011†* | ||||||
| 10 | .51 | SLM Corporation 2009—2012 Incentive Plan Restricted Stock and Restricted Stock Unit Term Sheet Time Vested — 2011†* | ||||||
| 21 | .1 | List of Subsidiaries* | ||||||
| 23 | Consent of PricewaterhouseCoopers LLP* | |||||||
| 31 | .1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2003* | ||||||
| 31 | .2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2003* | ||||||
| 32 | .1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2003* | ||||||
| 32 | .2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2003* | ||||||
| 101 | .INS | XBRL Instance Document. | ||||||
| 101 | .SCH | XBRL Taxonomy Extension Schema Document. | ||||||
| 101 | .CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | ||||||
| 101 | .DEF | XBRL Taxonomy Extension Definition Linkbase Document. | ||||||
| 101 | .LAB | XBRL Taxonomy Extension Label Linkbase Document. | ||||||
| 101 | .PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | ||||||
| † | Management Contract or Compensatory Plan or Arrangement | |
| * | Filed herewith |
100
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 28, 2011
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 28, 2011 | ||||
|
/s/
Jonathan
C. Clark
|
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | February 28, 2011 | ||||
|
/s/
Anthony
P. Terracciano
|
Chairman of the Board of Directors | February 28, 2011 | ||||
|
/s/
Ann
Torre Bates
|
Director | February 28, 2011 | ||||
|
/s/
William
M. Diefenderfer, III
|
Director | February 28, 2011 | ||||
|
/s/
Diane
Suitt Gilleland
|
Director | February 28, 2011 | ||||
|
/s/
Earl
A. Goode
|
Director | February 28, 2011 | ||||
|
/s/
Ronald
F. Hunt
|
Director | February 28, 2011 | ||||
|
/s/
Michael
E. Martin
|
Director | February 28, 2011 | ||||
|
/s/
Barry
A. Munitz
|
Director | February 28, 2011 | ||||
101
| Signature | Title | Date | ||||
|
/s/
Howard
H. Newman
|
Director | February 28, 2011 | ||||
|
/s/
A.
Alexander Porter, Jr.
|
Director | February 28, 2011 | ||||
|
/s/
Frank
C. Puleo
|
Director | February 28, 2011 | ||||
|
/s/
Wolfgang
Schoellkopf
|
Director | February 28, 2011 | ||||
|
/s/
Steven
L. Shapiro
|
Director | February 28, 2011 | ||||
|
/s/
J.
Terry Strange
|
Director | February 28, 2011 | ||||
|
/s/
Barry
L. Williams
|
Director | February 28, 2011 | ||||
102
CONSOLIDATED
FINANCIAL STATEMENTS
INDEX
INDEX
| Page | ||||
|
Management’s Annual Report on Internal Control over
Financial Reporting
|
F-2 | |||
|
Report of Independent Registered Public Accounting Firm
|
F-3 | |||
|
Consolidated Balance Sheets
|
F-4 | |||
|
Consolidated Statements of Income
|
F-5 | |||
|
Consolidated Statements of Changes in Stockholders’ Equity
|
F-6 | |||
|
Consolidated Statements of Cash Flows
|
F-9 | |||
|
Notes to Consolidated Financial Statements
|
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, 2010. 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, 2010, 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, 2010, 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, 2010 and 2009, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2010 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, 2010, 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 transfers and servicing of financial assets and
consolidations of variable interest entities in 2010.
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 28, 2011
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,
|
|||||||
| 2010 | 2009 | |||||||
|
Assets
|
||||||||
|
FFELP Loans (net of allowance for losses of $188,858 and
$161,168, respectively)
|
$ | 148,649,400 | $ | 111,357,434 | ||||
|
FFELP Stafford Loans
Held-For-Sale
|
— | 9,695,714 | ||||||
|
Private Education Loans (net of allowance for losses of
$2,021,580 and $1,443,440, respectively)
|
35,655,724 | 22,753,462 | ||||||
|
Investments
|
||||||||
|
Available-for-sale
|
83,048 | 1,273,275 | ||||||
|
Other
|
873,376 | 740,553 | ||||||
|
Total investments
|
956,424 | 2,013,828 | ||||||
|
Cash and cash equivalents
|
4,342,327 | 6,070,013 | ||||||
|
Restricted cash and investments
|
6,254,493 | 5,168,871 | ||||||
|
Retained Interest in off-balance sheet securitized loans
|
— | 1,828,075 | ||||||
|
Goodwill and acquired intangible assets, net
|
478,409 | 1,177,310 | ||||||
|
Other assets
|
8,970,272 | 9,920,591 | ||||||
|
Total assets
|
$ | 205,307,049 | $ | 169,985,298 | ||||
|
Liabilities
|
||||||||
|
Short-term borrowings
|
$ | 33,615,856 | $ | 30,896,811 | ||||
|
Long-term borrowings
|
163,543,504 | 130,546,272 | ||||||
|
Other liabilities
|
3,136,111 | 3,263,593 | ||||||
|
Total liabilities
|
200,295,471 | 164,706,676 | ||||||
|
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; 0
and 810 shares, respectively, issued at liquidation
preference of $1,000 per share
|
— | 810,370 | ||||||
|
Common stock, par value $.20 per share, 1,125,000 shares
authorized: 595,263 and 552,220 shares issued, respectively
|
119,053 | 110,444 | ||||||
|
Additional paid-in capital
|
5,939,838 | 5,090,891 | ||||||
|
Accumulated other comprehensive loss (net of tax benefit of
$25,758 and $23,448, respectively)
|
(44,664 | ) | (40,825 | ) | ||||
|
Retained earnings
|
308,839 | 604,467 | ||||||
|
Total SLM Corporation stockholders’ equity before treasury
stock
|
6,888,066 | 7,140,347 | ||||||
|
Common stock held in treasury at cost: 68,320 and
67,222 shares, respectively
|
1,876,488 | 1,861,738 | ||||||
|
Total SLM Corporation stockholders’ equity
|
5,011,578 | 5,278,609 | ||||||
|
Noncontrolling interest
|
— | 13 | ||||||
|
Total equity
|
5,011,578 | 5,278,622 | ||||||
|
Total liabilities and equity
|
$ | 205,307,049 | $ | 169,985,298 | ||||
Supplemental
information — assets and liabilities of consolidated
variable interest entities:
|
December 31,
|
December 31,
|
|||||||
| 2010 | 2009 | |||||||
|
FFELP Loans
|
$ | 145,750,016 | $ | 118,731,699 | ||||
|
Private Education Loans
|
24,355,683 | 10,107,298 | ||||||
|
Restricted cash and investments
|
5,983,080 | 4,596,147 | ||||||
|
Other assets
|
3,705,716 | 3,639,918 | ||||||
|
Short-term borrowings
|
24,484,353 | 23,384,051 | ||||||
|
Long-term borrowings
|
142,243,771 | 101,012,628 | ||||||
|
Net assets of consolidated variable interest entities
|
$ | 13,066,371 | $ | 12,678,383 | ||||
See accompanying notes to consolidated financial statements.
F-4
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Interest income:
|
||||||||||||
|
FFELP Loans
|
$ | 3,345,175 | $ | 3,093,782 | $ | 5,173,086 | ||||||
|
Private Education Loans
|
2,353,134 | 1,582,514 | 1,737,554 | |||||||||
|
Other loans
|
29,707 | 56,005 | 82,734 | |||||||||
|
Cash and investments
|
25,899 | 26,064 | 276,264 | |||||||||
|
Total interest income
|
5,753,915 | 4,758,365 | 7,269,638 | |||||||||
|
Total interest expense
|
2,274,771 | 3,035,639 | 5,905,418 | |||||||||
|
Net interest income
|
3,479,144 | 1,722,726 | 1,364,220 | |||||||||
|
Less: provisions for loan losses
|
1,419,413 | 1,118,960 | 719,650 | |||||||||
|
Net interest income after provisions for loan losses
|
2,059,731 | 603,766 | 644,570 | |||||||||
|
Other income (loss):
|
||||||||||||
|
Securitization servicing and Residual Interest revenue
|
— | 295,297 | 261,819 | |||||||||
|
Gains (losses) on sales of loans and securities, net
|
324,780 | 283,836 | (186,155 | ) | ||||||||
|
Losses on derivative and hedging activities, net
|
(360,999 | ) | (604,535 | ) | (445,413 | ) | ||||||
|
Servicing revenue
|
404,927 | 440,098 | 407,575 | |||||||||
|
Contingency revenue
|
330,390 | 294,177 | 329,745 | |||||||||
|
Gains on debt repurchases
|
316,941 | 536,190 | 64,477 | |||||||||
|
Other
|
6,369 | 88,016 | 39,979 | |||||||||
|
Total other income
|
1,022,408 | 1,333,079 | 472,027 | |||||||||
|
Expenses:
|
||||||||||||
|
Salaries and benefits
|
561,128 | 539,423 | 570,430 | |||||||||
|
Other operating expenses
|
646,574 | 503,013 | 459,047 | |||||||||
|
Total operating expenses
|
1,207,702 | 1,042,436 | 1,029,477 | |||||||||
|
Goodwill and acquired intangible assets impairment and
amortization expense
|
698,902 | 75,960 | 49,674 | |||||||||
|
Restructuring expenses
|
85,236 | 10,571 | 71,659 | |||||||||
|
Total expenses
|
1,991,840 | 1,128,967 | 1,150,810 | |||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
1,090,299 | 807,878 | (34,213 | ) | ||||||||
|
Income tax expense (benefit)
|
492,769 | 263,868 | (36,693 | ) | ||||||||
|
Net income from continuing operations
|
597,530 | 544,010 | 2,480 | |||||||||
|
Loss from discontinued operations, net of tax benefit
|
(67,148 | ) | (219,872 | ) | (215,106 | ) | ||||||
|
Net income (loss)
|
530,382 | 324,138 | (212,626 | ) | ||||||||
|
Preferred stock dividends
|
72,143 | 145,836 | 111,206 | |||||||||
|
Net income (loss) attributable to SLM Corporation common stock
|
$ | 458,239 | $ | 178,302 | $ | (323,832 | ) | |||||
|
Basic earnings (loss) per common share:
|
||||||||||||
|
Continuing operations
|
$ | 1.08 | $ | .85 | $ | (.23 | ) | |||||
|
Discontinued operations
|
$ | (.14 | ) | $ | (.47 | ) | $ | (.46 | ) | |||
|
Total
|
$ | .94 | $ | .38 | $ | (.69 | ) | |||||
|
Average common shares outstanding
|
486,673 | 470,858 | 466,642 | |||||||||
|
Diluted earnings (loss) per common share:
|
||||||||||||
|
Continuing operations
|
$ | 1.08 | $ | .85 | $ | (.23 | ) | |||||
|
Discontinued operations
|
$ | (.14 | ) | $ | (.47 | ) | $ | (.46 | ) | |||
|
Total
|
$ | .94 | $ | .38 | $ | (.69 | ) | |||||
|
Average common and common equivalent shares outstanding
|
488,485 | 471,584 | 466,642 | |||||||||
|
Dividends per common share
|
$ | — | $ | — | $ | — | ||||||
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)
(Unaudited)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share and per share amounts)
(Unaudited)
|
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 | ) | (212,626 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Other comprehensive income (loss), 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 (loss)
|
(330,811 | ) | (330,811 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
|
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 | (4,655 | ) | 145,345 | 145,345 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock issuance costs and related amortization
|
650 | (650 | ) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
|
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
|
— | 265 | 265 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
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-6
SLM
CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share and per share amounts)
(Unaudited)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share and per share amounts)
(Unaudited)
|
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
|
324,138 | 324,138 | 324,138 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
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 | 359,789 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
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 | ||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock issuance costs and related amortization
|
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
|
— | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
|
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-7
SLM
CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share and per share amounts)
(Unaudited)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share and per share amounts)
(Unaudited)
|
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, 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 | ||||||||||||||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net income
|
530,382 | 530,382 | 530,382 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Other comprehensive income, net of tax:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Change in unrealized gains (losses) on investments, net of tax
|
593 | 593 | 593 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Change in unrealized gains (losses) on derivatives, net of tax
|
5,110 | 5,110 | 5,110 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Defined benefit pension plans adjustment
|
(9,542 | ) | (9,542 | ) | (9,542 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Comprehensive income
|
526,543 | 526,543 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
Cash dividends:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, series A ($3.49 per share)
|
(11,500 | ) | (11,500 | ) | (11,500 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, series B ($1.05 per share)
|
(4,208 | ) | (4,208 | ) | (4,208 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, series C ($72.50 per share)
|
(56,141 | ) | (56,141 | ) | (56,141 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Restricted stock dividend
|
(11 | ) | (11 | ) | (11 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Issuance of common shares
|
1,803,683 | 1,803,683 | 361 | 16,184 | 16,545 | 16,545 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock issuance costs and related amortization
|
294 | (294 | ) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
|
Conversion of preferred shares
|
(810,370 | ) | 41,240,215 | 41,240,215 | (810,370 | ) | 8,248 | 802,122 | — | — | ||||||||||||||||||||||||||||||||||||||||||
|
Tax benefit related to employee stock option and purchase plans
|
(9,145 | ) | (9,145 | ) | (9,145 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Stock-based compensation cost
|
39,492 | 39,492 | 39,492 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Cumulative effect of accounting change
|
(753,856 | ) | (753,856 | ) | (753,856 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Repurchase of common shares:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Benefit plans
|
(1,097,647 | ) | (1,097,647 | ) | (14,750 | ) | (14,750 | ) | (14,750 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Noncontrolling interest — other
|
— | (13 | ) | (13 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
|
Balance at December 31, 2010
|
7,300,000 | 595,263,474 | (68,319,589 | ) | 526,943,885 | $565,000 | $ | 119,053 | $ | 5,939,838 | $ | (44,664 | ) | $ | 308,839 | $ | (1,876,488 | ) | $ | 5,011,578 | $ | — | $ | 5,011,578 | ||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
F-8
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Operating activities
|
||||||||||||
|
Net income (loss)
|
$ | 530,382 | $ | 324,138 | $ | (212,626 | ) | |||||
|
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
|
||||||||||||
|
Loss from discontinued operations, net of tax
|
67,148 | 219,872 | 215,106 | |||||||||
|
(Gains) losses on loans and securities, net
|
(5,987 | ) | 580 | 186,155 | ||||||||
|
Goodwill and acquired intangible assets impairment and
amortization expense
|
698,902 | 75,960 | 49,674 | |||||||||
|
Stock-based compensation cost
|
39,750 | 51,065 | 86,271 | |||||||||
|
Unrealized (gains)/losses on derivative and hedging activities
|
(478,446 | ) | 324,443 | 559,895 | ||||||||
|
Provisions for loan losses
|
1,419,413 | 1,118,960 | 719,650 | |||||||||
|
Student loans originated for sale, net
|
(9,647,617 | ) | (19,099,583 | ) | (7,787,869 | ) | ||||||
|
(Increase) decrease in restricted cash — other
|
(2,327 | ) | 40,051 | 96,617 | ||||||||
|
(Increase) decrease in accrued interest receivable
|
(3,928 | ) | 893,516 | (279,082 | ) | |||||||
|
(Decrease) in accrued interest payable
|
(77,180 | ) | (517,401 | ) | (200,501 | ) | ||||||
|
Adjustment for non-cash (income)/loss related to Retained
Interest
|
— | 329,953 | 425,462 | |||||||||
|
Decrease (increase) in other assets
|
888,951 | (160,700 | ) | 304,038 | ||||||||
|
(Decrease) in other liabilities
|
(121,555 | ) | (29,276 | ) | (155,768 | ) | ||||||
|
Cash (used in) operating activities — continuing
operations
|
(6,692,494 | ) | (16,428,422 | ) | (5,992,978 | ) | ||||||
|
Cash provided by operating activities — discontinued
operations
|
— | 514,713 | 301,234 | |||||||||
|
Total net cash (used in) operating activities
|
(6,692,494 | ) | (15,913,709 | ) | (5,691,744 | ) | ||||||
|
Investing activities
|
||||||||||||
|
Student loans acquired
|
(8,818,775 | ) | (9,403,093 | ) | (23,337,946 | ) | ||||||
|
Loans purchased from securitized trusts
|
— | (5,978 | ) | (1,243,671 | ) | |||||||
|
Reduction of student loans:
|
||||||||||||
|
Installment payments, claims and other
|
14,019,904 | 10,749,227 | 10,333,901 | |||||||||
|
Proceeds from sales of student loans
|
587,540 | 788,221 | 496,183 | |||||||||
|
Other loans — originated
|
(15 | ) | (2,823 | ) | (1,138,355 | ) | ||||||
|
Other loans — repaid
|
131,991 | 261,491 | 1,542,307 | |||||||||
|
Other investing activities, net
|
(227,644 | ) | (703,758 | ) | (60,483 | ) | ||||||
|
Purchases of
available-for-sale
securities
|
(38,303,181 | ) | (128,478,198 | ) | (101,140,587 | ) | ||||||
|
Proceeds from sales of
available-for-sale
securities
|
— | 100,056 | 328,530 | |||||||||
|
Proceeds from maturities of
available-for-sale
securities
|
39,465,282 | 127,951,879 | 102,436,912 | |||||||||
|
Purchases of
held-to-maturity
and other securities
|
(141,783 | ) | (889 | ) | (500,255 | ) | ||||||
|
Proceeds from maturities of
held-to-maturity
securities and other securities
|
135,936 | 79,171 | 407,180 | |||||||||
|
Decrease (increase) in restricted cash — on-balance
sheet trusts
|
426,224 | (1,181,275 | ) | 918,403 | ||||||||
|
Return of investment from Retained Interest
|
— | 26,513 | 403,020 | |||||||||
|
Purchase of subsidiaries, net of cash acquired
|
— | — | (37,868 | ) | ||||||||
|
Cash provided by (used in) investing activities —
continuing operations
|
7,275,479 | 180,544 | (10,592,729 | ) | ||||||||
|
Cash provided by (used in) investing activities —
discontinued operations
|
138,631 | 130,507 | (74,558 | ) | ||||||||
|
Total net cash provided by (used in) investing activities
|
7,414,110 | 311,051 | (10,667,287 | ) | ||||||||
|
Financing activities
|
||||||||||||
|
Borrowings collateralized by loans in trust — issued
|
5,917,192 | 12,997,915 | 17,986,955 | |||||||||
|
Borrowings collateralized by loans in trust — repaid
|
(10,635,667 | ) | (5,689,713 | ) | (6,299,483 | ) | ||||||
|
Asset-backed commercial paper conduits, net
|
(2,060,387 | ) | (16,138,186 | ) | (1,649,287 | ) | ||||||
|
ED Participation Program, net
|
11,251,560 | 19,301,929 | 7,364,969 | |||||||||
|
ED Conduit Program facility, net
|
663,707 | 14,313,837 | — | |||||||||
|
Other short-term borrowings issued
|
— | 298,294 | 2,592,429 | |||||||||
|
Other short-term borrowings repaid
|
(167,849 | ) | (1,434,538 | ) | (1,512,031 | ) | ||||||
|
Other long-term borrowings issued
|
1,463,549 | 4,333,181 | 3,563,003 | |||||||||
|
Other long-term borrowings repaid
|
(9,954,538 | ) | (9,504,267 | ) | (9,518,655 | ) | ||||||
|
Other financing activities, net
|
1,145,046 | (751,087 | ) | 284,659 | ||||||||
|
Excess tax benefit from the exercise of stock-based awards
|
373 | — | 281 | |||||||||
|
Common stock issued
|
195 | 664 | 5,979 | |||||||||
|
Preferred stock issued
|
— | — | 145,345 | |||||||||
|
Preferred dividends paid
|
(71,849 | ) | (115,775 | ) | (110,556 | ) | ||||||
|
Noncontrolling interest, net
|
(634 | ) | (9,585 | ) | (6,606 | ) | ||||||
|
Net cash (used in) provided by financing activities
|
(2,449,302 | ) | 17,602,669 | 12,847,002 | ||||||||
|
Net (decrease) increase in cash and cash equivalents
|
(1,727,686 | ) | 2,000,011 | (3,512,029 | ) | |||||||
|
Cash and cash equivalents at beginning of year
|
6,070,013 | 4,070,002 | 7,582,031 | |||||||||
|
Cash and cash equivalents at end of year
|
$ | 4,342,327 | $ | 6,070,013 | $ | 4,070,002 | ||||||
|
Cash disbursements made (refunds received) for:
|
||||||||||||
|
Interest
|
$ | 2,372,182 | $ | 3,656,545 | $ | 6,157,096 | ||||||
|
Income taxes, net
|
$ | (428,200 | ) | $ | 298,285 | $ | 699,364 | |||||
|
Noncash activity:
|
||||||||||||
|
Investing activity — Student loans acquired from the
Student Loan Corporation
|
$ | 25,638,570 | $ | — | $ | — | ||||||
|
Financing activity — Borrowings assumed in acquisition
from the Student Loan Corporation
|
$ | 26,014,125 | $ | — | $ | — | ||||||
See accompanying notes to consolidated financial statements.
F-9
SLM
CORPORATION
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 1. | Organization and Business |
SLM Corporation (“we”, “us”,
“our”, or the “Company”) is a holding
company that operates through a number of subsidiaries. We were
formed 38 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, we completed our transformation to a
private company through our 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.
We provide Private Education Loans that help students and their
families bridge the gap between family resources, federal loans,
grants, student aid, scholarships and the cost of a college
education. We also provide savings products to help save for a
college education. In addition we provide servicing and
collection services on federal loans. We also offer servicing,
collection and transaction support directly to colleges and
universities in addition to the saving for college industry.
Finally, we are the largest private owner of Federal Family
Education Loan Program (“FFELP”) Loans.
On March 30, 2010, President Obama signed into law H.R.
4872, the Health Care and Education Reconciliation Act of 2010
(“HCERA”), which included the SAFRA Act. Effective
July 1, 2010, legislation eliminated the authority to
originate new loans under FFELP and required that all new
federal loans be made through the Direct Student Loan Program
(“DSLP”). Consequently, we no longer originate FFELP
Loans. Net interest income from our FFELP Loan portfolio and
fees associated with servicing FFELP Loans and collecting on
delinquent and defaulted FFELP Loans on behalf of Guarantors has
been our largest source of income. The new law does not alter or
affect the terms and conditions of existing FFELP Loans.
| 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 we are the primary beneficiary,
after eliminating the effects of intercompany accounts and
transactions.
On January 1, 2010, we adopted the new consolidation
accounting guidance. Under the new consolidation accounting
guidance, 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 our
securitized assets, we are the servicer of the securitized
assets and own the Residual Interest of the securitization
trusts. As a result, we are the primary beneficiary of our
securitization trusts and consolidated those trusts that were
previously 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. The new guidance did not
change the accounting of any other VIEs we had a variable
interest in as of January 1, 2010.
After the adoption of the new accounting guidance, our results
of operations no longer reflect securitization, servicing and
Residual Interest revenue related to these securitization
trusts, but 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, consistent with our accounting
treatment of prior on-balance securitization trusts.
F-10
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 2. | Significant Accounting Policies (Continued) |
The following table summarizes the change in the consolidated
balance sheet resulting from the consolidation of the
off-balance sheet securitization trusts upon the adoption of the
new consolidation accounting guidance.
|
At January 1,
|
||||
| (Dollars in millions) | 2010 | |||
|
FFELP Stafford Loans (net of allowance of $15)
|
$ | 5,500 | ||
|
FFELP Consolidation Loans (net of allowance of $10)
|
14,797 | |||
|
Private Education Loans (net of allowance of $524)
|
12,341 | |||
|
Total student loans
|
32,638 | |||
|
Restricted cash and investments
|
1,041 | |||
|
Other assets
|
1,370 | |||
|
Total assets consolidated
|
35,049 | |||
|
Long-term borrowings
|
34,403 | |||
|
Other liabilities
|
6 | |||
|
Total liabilities consolidated
|
34,409 | |||
|
Net assets consolidated on balance sheet
|
640 | |||
|
Less: Residual Interest removed from balance sheet
|
1,828 | |||
|
Cumulative effect of accounting change before taxes
|
(1,188 | ) | ||
|
Tax effect
|
434 | |||
|
Cumulative effect of accounting change after taxes recorded to
retained earnings
|
$ | (754 | ) | |
Use of
Estimates
Our 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 and debt premiums and discounts), fair value
measurements, goodwill and acquired intangible asset impairment
assessments, and derivative accounting.
Fair
Value Measurement
We use estimates of fair value in applying various accounting
standards for our financial statements. 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; |
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) |
| • | 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, our 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 our 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, we seek 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.
We categorize our 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 we have 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 us in developing the inputs. |
Loans
Loans, consisting primarily of federally insured student loans
and Private Education Loans, that we have 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 we
have not classified as
held-for-investment
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, we may securitize loans as a source
of financing for those loans. If we elect to use a
securitization program to finance loans, loans are selected
based on the required characteristics to structure the desired
transaction at the most favorable financing terms (e.g., type of
loan, mix of interim vs. repayment status, credit rating,
maturity dates, etc.). Due to some of the structuring terms,
certain transactions may qualify for sale treatment while others
do not qualify for sale treatment and are recorded as
financings.
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) |
All our student loans, except for those which were sold under
the ED’s Purchase Program, as discussed below, are
initially categorized as held for investment until there is
certainty as to each specific loan’s ultimate financing
because we do not securitize all loans and most of our
securitizations do not qualify for sales treatment. It is only
when we have selected the loans to securitize and that
securitization transaction qualifies as a sale do we transfer
the loan into the
held-for-sale
classification and carry them at the lower of cost or fair
value. If we anticipate 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 recorded.
Under The Ensuring Continued Access to Student Loans Act of 2008
(“ECASLA”), ED has implemented the Loan Purchase
Commitment Program (the “Purchase Program”) and Loan
Participation Purchase Program (the “Participation
Program”). Under the Purchase Program, ED agreed to
purchase eligible FFELP Loans at a set price by
September 30, 2010 at our option. Because we have the
intent to sell such loans to ED we have classified all loans
eligible to be sold to ED under the Purchase Program as
held-for-sale.
These loans are included in the “FFELP Stafford
Held-for-Sale
Loans” line on our consolidated balance sheets.
Student
Loan Income
For loans classified as held for investment we recognize student
loan interest income as earned, adjusted for the amortization of
premiums and capitalized direct origination costs, accretion of
discounts, and Repayment Borrower Benefits. These adjustments
result in income being 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. The estimate of the prepayment speed includes the
effect of consolidations, voluntary prepayments and student loan
defaults, all of which shorten the life of loan. Prepayment
speed estimates also consider the utilization of deferment and
forbearance, which lengthen the life of loan. 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. If our
expectation is that the utilization of Repayment Borrower
Benefits were to increase in future periods, it would reduce our
current student loan yield. We regularly evaluate the
assumptions used to estimate the prepayment speeds 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. We also pay an annual
105 basis point Consolidation Loan Rebate Fee on FFELP
Consolidation Loans which is netted against student loan
interest income. Additionally, interest earned on student loans
reflects potential non-payment adjustments in accordance with
our uncollectible interest recognition policy as discussed
further in “
Allowance for Student Loan Losses
”
below. We do not amortize any premiums, discounts or other
adjustments to the basis of student loans when they are
classified as held for sale.
Allowance
for Loan Losses
We consider a loan to be impaired when, based on current
information, it is probable that we will not receive all
contractual amounts due. When making our assessment as to
whether a loan is impaired, we also take into account more than
insignificant delays in payment. We generally evaluate impaired
loans on an aggregate basis by grouping similar loans. Impaired
loans also include those loans which are individually assessed
and measured for impairment, such as in a troubled debt
restructuring. We maintain an allowance for loan losses at an
amount sufficient to absorb losses incurred in our portfolios at
the reporting date based on a projection of estimated probable
credit losses incurred in the portfolio.
When calculating the allowance for loan loss we estimate the
amount of loans which will default over the next two years and
how much we will recover over time related to the defaulted
amount. Our historical experience indicates that, on average,
the time between the date that a borrower experiences a default
causing
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) |
event (e.g., the loss trigger event) and the date that we
charge-off the unrecoverable portion of that loan is two years.
We start with historical experience of customer default
behavior. We make judgments about which historical period to
start with and then make further judgments about whether that
historical experience is representative of future expectations
and whether additional adjustment may be needed to those
historical default rates. We also take into account the current
and future economic environment when calculating the allowance
for loan loss. We analyze key economic statistics and the effect
they will have on future defaults. Key economic statistics
analyzed as part of the allowance for loan loss are unemployment
rates (total and specific to college graduates) and other asset
type delinquency rates (credit cards, mortgages). Significantly
more judgment has been required over the last three years,
compared with years prior, in light of the U.S. economy and its
effect on our customer’s ability to pay their obligations.
We estimate the allowance for loan losses for our loan portfolio
using an analysis of delinquent and current accounts. Our model
is used to estimate the likelihood that a loan receivable may
progress through the various delinquency stages and ultimately
charge off. 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 two years (i.e., our
allowance for loan loss covers the next two years of expected
charge-offs). The two-year estimate for 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.
Below we describe in further detail our policies and procedures
for the allowance for loan losses as they relate to our Private
Education Loan and FFELP Loan portfolios.
Allowance
for Private Education Loan Losses
We determine the collectability of our Private Education Loan
portfolio by evaluating risk characteristics such as school
type, credit scores, existence of a cosigner, loan type, loan
status, loan seasoning (number of months in repayment for which
a scheduled payment was due) and the current economic
environment. We have identified school type, credit score, the
existence of a cosigner, loan status and loan seasoning as the
key credit quality indicators because they have the most
significant effect on our determination of the adequacy of our
allowance for loan losses. The type of school borrowers attend
can have an impact on their job prospects after graduation and
therefore affects their ability to make payments. Credit scores
are an indicator of the credit worthiness of a borrower and the
lower the credit score the more likely it is the borrower will
be unable to make all of their contractual payments. Loan status
affects the credit risk because a past due loan is more likely
to result in a credit loss than a current loan and because loans
in the grace/deferment periods have different credit risk
profiles compared with those in current pay status. Loan
seasoning affects credit risk because a loan with a history of
making payments generally has a lower incidence of default than
a loan with no history of making payments. The existence of a
cosignor lowers the likelihood of default. We monitor and update
these credit qualities in the analysis of the adequacy of our
allowance for loan losses on a quarterly basis.
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.
Similar to estimating defaults, 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 rate projections to each category of loans. Once the
quantitative calculation is performed, we review the adequacy of
the allowance for loan losses and determine if qualitative
adjustments need to be considered. In deciding whether to make a
qualitative adjustment, one technique we use is projection
modeling 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
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) |
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, we consider changes in laws and
regulations that could potentially impact the allowance for loan
losses.
As part of concluding on the adequacy of the allowance for loan
loss, we review 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, we 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 previous effective interest rate. This
calculation contains estimates which are inherently subjective
and are evaluated on a quarterly basis.
The majority of our Private Education Loans originated prior to
July 2009, do not require borrowers to 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, 2010, 22 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 this population of loans age,
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
nonpayment.
We consider a loan to be delinquent 31 days after the last
payment was contractually due. We use a model to estimate the
amount of uncollectible accrued interest on Private Education
Loans and reserve for that amount against current period
interest income.
In general, Private Education Loan principal is charged off
against the allowance when at the end of the month the loan
exceeds 212 days past due. 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.
Previously, when Private Education Loans in our off-balance
sheet securitized trusts settled before September 30, 2005
became 180 days delinquent, we exercised our contingent
call option (we do not hold the contingent call option for any
trusts settling after September 30, 2005) to
repurchase these loans at par value 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. Beginning in October 2008, we
decided to no longer exercise our contingent call option. The
losses recorded upon repurchase of loans under the contingent
call option, for the years ended December 31, 2010, 2009
and 2008 were $0, $0, and $141 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, we account for these loans in
the same manner as discussed under “Discontinued
Operations” for our purchased paper portfolio. The initial
valuation at buyback uses a discount rate similar to that used
in valuing the Private
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) |
Education Loan Residual Interests, as that rate takes into
account the credit and liquidity risks inherent in loans being
repurchased. Interest income recognized was recorded as part of
student loan interest income. Upon the adoption of new
consolidation accounting guidance on January 1, 2010, this
buyback treatment no longer exists.
Allowance
for FFELP Loan Losses
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, we
receive 98 percent reimbursement on all qualifying default
claims. For loans disbursed on or after July 1, 2006, we
receive 97 percent reimbursement. For loans disbursed prior
to October 1, 1993, we receive 100 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 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, we review the
adequacy of the allowance for loan losses and determine if
qualitative adjustments need to be considered.
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 held in on-balance
sheet student loan securitization trusts 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 our tuition payment plan product, we receive
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 (“the Bank”), our Utah industrial bank
subsidiary, 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/or
the
terms of the Upromise service. Upromise, which acts as the
trustee for the trust, has deposited a majority of the cash with
the Bank pursuant to a money market deposit account agreement
between the 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 the 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 our consolidated financial statements, as
there is no restriction surrounding our use of the funds.
Securities pledged as collateral related to our 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 us to
be segregated and held in restricted cash accounts. Cash
balances that our indentured trusts deposit in guaranteed
investment contracts that are held in trust for the related note
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) |
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 our investments are classified
as
available-for-sale
and carried at fair value, with the temporary changes in fair
value carried as a separate component of stockholders’
equity, net of taxes. Changes in fair value for
available-for-sale
securities that have been designated as the hedged item in a
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, net of taxes.
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 to allow for an anticipated recovery in fair
value. The entire fair value loss on a security that is
other-than-temporary
impairment is recorded in earnings if we intend to sell the
security or if it is more likely than not that we will be
required to sell the security before the expected recovery of
the loss. However, if the impairment is
other-than-temporary,
and those two conditions don’t exist, 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 we have 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.
We also have other investments, including a receivable for cash
collateral posted to derivative counterparties and our remaining
investment in 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. Our 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. 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.
In addition, certain TALF eligible Private Education Loan
securitizations issued in 2009 are callable at a discount of 93
or 94 percent of the outstanding principal (depending on
the terms of the note) in the future. The first call date occurs
between two and one-half to four years from the original issue
date (depending on the terms of the note) and the note is
eligible to be called until the end of the call period which
lasts six to twelve months. We have concluded that it is
probable we will call these bonds at the call date at the
respective discount. Probability is based on the our 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, we are accreting this call discount as a
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) |
reduction to interest expense through the first call date using
the effective interest rate method. If it becomes less than
probable we will call these bonds at a future date, it will
result in us reversing this prior accretion as a cumulative
catch up adjustment. We have accreted approximately
$172 million as a reduction of interest expense through
December 31, 2010.
Transfer
of Financial Assets and Extinguishments of
Liabilities
We account for loan sales and debt repurchases in accordance
with the applicable accounting guidance. Our indentured trust
debt, ABCP borrowings, ED Conduit and ED Participation Program
facility were accounted for as on-balance sheet secured
borrowings. See
“Securitization Accounting”
below for further discussion on the criteria assessed to
determine whether a transfer of financial assets is a sale or a
secured borrowing. If a transfer of loans qualifies as a sale we
derecognize the loan and recognize a gain or loss as the
difference between the carry basis of the loan sold and
liabilities retained and the compensation received.
We periodically repurchase our outstanding debt in the open
market or through public tender offers. We record a gain or loss
on the early extinguishment of debt based upon the difference
between the carrying cost of the debt and the amount paid to the
third party and is net of hedging gains and losses, where the
debt is in a qualifying hedge relationship.
We recognize the results of a transfer of loans and the
extinguishment of debt based upon the settlement date of the
transaction.
Securitization
Accounting
Our securitizations use a two-step structure with a special
purpose entity that legally isolates the transferred assets from
us, even in the event of bankruptcy. Transactions receiving sale
treatment are also structured to ensure that the holders of the
beneficial interests issued are not constrained from pledging or
exchanging their interests, and that we do 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. In all cases, irrespective
of whether they qualify as accounting sales our securitizations
are structured such that legally they are sales of assets that
isolate the transferred assets from us.
We assess the financial structure of each securitization to
determine whether the trust or other securitization vehicle
meets the sale criteria and account for the transaction
accordingly. Prior to January 1, 2010 (when the new
accounting guidance for transfers of financial instruments was
implemented which eliminated the concept of a QSPE) certain
trusts would qualify as a QSPE and be accounted for as
off-balance sheet trusts if they met all of the applicable
criteria.
Prior to the adoption on January 1, 2010 of the new
accounting guidance that eliminated the concept of QSPEs, in
certain securitizations there were terms present within the deal
structure that resulted in such securitizations not qualifying
for sale treatment by failing to meet the criteria required for
the securitization entity (trust) to be a QSPE. Accordingly,
these securitization trusts were accounted for as VIEs. Because
we were considered the primary beneficiary in such VIEs, the
transfer is deemed a financing and the trust was consolidated in
our financial statements. The terms present in these structures
that prevent sale treatment were: (1) we hold 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) we hold an
unconditional call option related to a certain percentage of
trust assets.
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) |
Subsequent to the adoption of the new accounting guidance
regarding consolidations and the transfers of financial
instruments on January 1, 2010, all of our securitizations
trusts that had previously been accounted for off-balance sheet
were consolidated. In addition, regardless of our ability to
qualify for sales treatment related to our 2010 securitization
trusts, we consolidated all of our 2010 securitization trusts
pursuant to the new consolidation accounting guidance. See
“
Consolidations
,” for additional information
regarding the accounting rules for consolidation and the effect
of the application of the new guidance as we are the primary
beneficiary of these trusts.
Irrespective of whether a securitization receives sales or
on-balance
sheet treatment, our continuing involvement with our
securitization trusts is generally limited to:
| • | Owning the equity certificates of certain trusts. | |
| • | The servicing of the student loan assets within the securitization trusts, on both a pre- and post-default basis. | |
| • | Our acting as administrator for the securitization transactions we sponsored, which includes remarketing certain bonds at future dates. | |
| • | Our responsibilities relative to representation and warranty violations and the reimbursement of borrower benefits. | |
| • | The reimbursement to the trust of borrower benefits afforded the borrowers of student loans that have been securitized. | |
| • | Certain back-to-back derivatives entered into by us contemporaneously with the execution of derivatives by certain Private Education Loan securitization trusts. | |
| • | The option held by us 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
our other assets should there be a failure of the trusts to pay
when due. Generally, the only arrangements under which we have
to provide financial support to the trusts are:
| • | representation and warranty violations requiring the buyback of loans; | |
| • | funding specific cash accounts within certain trusts related to the remarketing of certain bonds. |
Under the terms of the transaction documents of certain trusts,
we have, from time to time, exercised our 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. We have not provided any financial support to the
securitization trusts that we were 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 any Residual Interest.
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) |
Retained
Interest in off-balance sheet securitized loans
Prior to the adoption of the new consolidation accounting rules
on January 1, 2010, certain of our securitization
transactions qualified as sales and we retained the Residual
Interests in the trusts as well as servicing rights (all of
which are referred to as our Retained Interest in off-balance
sheet securitized loans. The following accounting policies were
applied prior to the January 1, 2010 adoption of the new
consolidation accounting guidance which required us to
consolidate all of our previously off-balance sheet trusts and
therefore eliminated any accounting for Residual Interests.
When our securitization transactions qualified for sale
treatment we recognized the resulting gain on student loan
securitizations in the consolidated statements of income. This
gain was 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 of the Residual Interest. We estimated the fair value
of the Residual Interest, both initially and each subsequent
quarter, based on the present value of future expected cash
flows using our best estimates of the following key
assumptions — credit losses, prepayment speeds and
discount rates commensurate with the risks involved. Quoted
market prices were not available. When we adopted the new
financial instruments accounting guidance on January 1,
2008, we elected to carry all Residual Interests at fair value
with subsequent changes in fair value recorded in earnings. We
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 was determined initially
at the time of the sale of the student loans and during each
subsequent quarter. This estimate was based on an option
valuation and a discounted cash flow calculation that considered
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 was recorded as earned in securitization
servicing and Residual Interest revenue.
We also receive income for servicing the loans in our
securitization trusts which was recognized as earned. We
assessed the amounts received as compensation for these
activities at inception and on an ongoing basis to determine if
the amounts received are adequate compensation. To the extent
such compensation was determined to be no more or less than
adequate compensation, no servicing asset or obligation was
recorded at the time of securitization. Servicing rights are
subsequently carried at the lower of cost or market. At
December 31, 2010 and 2009, we did not have servicing
assets or liabilities recorded on the balance sheet.
Derivative
Accounting
The accounting guidance for our derivative instruments, which
includes interest rate swaps, cross-currency interest rate
swaps, interest rate futures contracts, interest rate cap
contracts and Floor Income Contracts, 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.
Many of our derivatives, mainly interest rate swaps hedging the
fair value of fixed-rate assets and liabilities, and
cross-currency interest rate swaps, qualify as effective hedges.
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 strategy for undertaking various hedge
transactions at the inception of the hedging relationship, is
documented. Each derivative is designated to either
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) |
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 our exposure to
changes in fair value of a fixed rate or foreign denominated
asset or liability, while cash flow hedges are designed to hedge
our 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, we
discontinue the hedge accounting prospectively, cease recording
changes in the fair value of the hedged item, and begin
amortization of any basis adjustments that exist related to the
hedged item.
We also have derivatives, primarily Floor Income Contracts and
certain basis swaps, that we believe are effective economic
hedges but do not qualify for hedge accounting treatment. These
derivatives are classified as “trading” and as a
result they are
marked-to-market
through earnings with no consideration for the fair value
fluctuation of the economically hedged item.
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 our
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 are included with the income
or expense of the hedged item (mainly interest expense).
Servicing
Revenue
Servicing revenue includes third-party loan servicing, account
asset servicing, Campus Payment Solutions and Guarantor
servicing revenue.
We perform loan servicing functions for third-parties in return
for a servicing fee. Our compensation is typically based on a
per-unit
fee
arrangement or a percentage of the loans outstanding. We
recognize servicing revenues associated with these activities
based upon the contractual arrangements as the services are
rendered. We recognize late fees and forbearance fees on third
party serviced loans as well as on loans in our portfolio
according to the contractual provisions of the promissory notes,
as well as our expectation of collectability.
Our Upromise subsidiary has a number of programs that encourage
consumers to save for the cost of college education. We have
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 fees based on member purchase volume,
either online or in stores depending on the contractual
arrangement with the Participating Company. We recognize revenue
as marketing and administrative services are rendered based upon
contractually determined rates and member purchase volumes.
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) |
We earn fees in our Campus Payment Solutions business for
processing tuition and other payments for our college and
university partners. We recognize this fee income based on
contractual arrangements in the period in which the services are
provided which generally occurs when the transaction is
processed.
We provide a full complement of administrative services to FFELP
Guarantors including guarantee issuance and account maintenance
for Guarantor agencies. The fees associated with these services
are recognized as earned based on contractually determined rates.
Contingency
Revenue
We receive fees for collections of delinquent debt on behalf of
clients performed on a contingency basis. Revenue is earned and
recognized upon receipt of the delinquent borrower funds.
We 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 us
and we are obligated to provide such services for the remaining
life of the loan for no additional fee. In the event that the
loan defaults, we are obligated to rebate a portion of the fee
to the Guarantor agency in proportion to the principal and
interest outstanding when the loan defaults. We recognize fees
received, net of actual rebates for defaults, over the service
period which is estimated to be the life of the loan.
Goodwill
and Acquired Intangible Assets
We account for goodwill and acquired intangible assets in
accordance with the applicable accounting guidance. Under this
guidance goodwill is not amortized but is tested periodically
for impairment. We test goodwill for impairment annually as of
October 1 at the reporting unit level, which is the same as or
one level below a business segment. Goodwill is also tested at
interim periods if an event occurs or circumstances change that
would indicate the carrying amount may be impaired. We tested
our goodwill and intangible assets on July 1, 2010 for
impairment because of our assessment of possible changes to our
business following the passage of HCERA. This analysis showed
that there was possible impairment of goodwill and certain
intangible assets in several reporting units. See Note 6,
“Goodwill and Acquired Intangible Assets”, for further
discussion and results of the impairment testing.
Step 1 of the goodwill impairment analysis consists of a
comparison of the fair value of the reporting unit to our
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 include but are not limited to
tradenames, customer and other relationships, and non-compete
agreements. 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. If the
carrying amount of the asset or asset groups exceeds the
undiscounted cash flows, the fair value of the asset or asset
group is determined using an acceptable valuation technique. An
impairment loss would be recognized if the carrying amount of
the asset (or asset group) exceeds 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
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) |
amortized. They are tested for impairment annually as of October
1 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.
Restructuring
Activities
From time to time we implement plans to restructure our
business. In conjunction with these restructuring plans,
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 our restructuring plans, are classified as
restructuring expenses in the accompanying consolidated
statements of income.
We sponsor the SLM Corporation Employee Severance Plan (the
“Severance Plan”) which provides severance benefits in
the event of termination of our full-time employees (with the
exception of certain specified levels of management) and
part-time employees who work at least 24 hours per week.
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, we
recognize severance costs to be paid pursuant to the Severance
Plan when payment of such benefits is probable and reasonably
estimable. Such benefits, including severance pay calculated
based on the Severance Plan, medical and dental benefits,
outplacement services and continuation pay, have been incurred
during the years ended December 31, 2010, 2009 and 2008, as
a direct result of our restructuring initiatives. Accordingly,
such costs are classified as restructuring expenses in the
accompanying consolidated statements of income. See
Note 14, “Restructuring Activities,” for further
information regarding our restructuring activities.
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 our consummation of the related 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, 2010, 2009 and 2008, we
capitalized $14 million, $16 million and
$23 million, respectively, in costs related to software
development, and expensed $154 million, $138 million
and $120 million, respectively, related to routine
maintenance, betterments and amortization. At December 31,
2010 and 2009, the unamortized balance of capitalized internally
developed software included in other assets was $44 million
and $53 million, respectively. We amortize software
development costs over three to five years.
Accounting
for Stock-Based Compensation
We recognize share-based compensation cost in our consolidated
statements of income using the fair value based method. Under
this method we determine the fair value of the share based
compensation at the
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) |
time of the grant and recognize the resulting compensation
expense over the vesting period of the share-based grant.
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 is classified
as cash inflows from financing activities in the consolidated
statement of cash flows. The excess tax benefit for the year
ended December 31, 2010 was $.4 million.
Income
Taxes
We account for income taxes under the asset and liability
approach which 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 our 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.
If we have an uncertain tax position, then that 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. We recognize interest related to
unrecognized tax benefits in income tax expense/(benefit), and
penalties, if any, in operating expenses.
Earnings
(Loss) per Common Share
We compute earnings (loss) per common share (“EPS”) by
dividing net income allocated to common shareholders by the
weighted average common shares outstanding. Net income allocated
to common shareholders represents net income applicable to
common shareholders (net income adjusted for preferred stock
dividends including dividends declared, accretion of discounts
on preferred stock including accelerated accretion when
preferred stock is repaid early, and cumulative dividends
related to the current dividend period that have not been
declared as of period end). Diluted earnings per common share is
computed by dividing income allocated to common shareholders by
the weighted average common shares outstanding plus amounts
representing the dilutive effect of stock options outstanding,
restricted stock, restricted stock units, and the dilution
resulting from the conversion of convertible preferred stock, if
applicable. 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 we determine that a Component of our business has been
disposed of or has met the criteria to be classified as held for
sale such Component is presented separately as discontinued
operations if the operations of the Component have been or will
be eliminated from our ongoing operations and we will have no
continuing involvement with the Component after the disposal
transaction is complete. See Note 20, “Discontinued
Operations,” for further discussion. If a component is
classified as “held-for-sale,” then it is carried at
the lower of its cost basis or fair value.
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) |
Included within discontinued operations are the accounting
results related to our purchasing 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 (Purchased Paper businesses).
Prior to the reclassification of these loans to held for sale
where they are carried at the lower of historical cost or fair
value, we accounted for these investments in charged-off
receivables and
sub-performing
and non-performing mortgage loans by establishing static pools
of each quarter’s purchases and aggregating them based on
common risk characteristics. The pools when formed were
initially recorded at fair value, based on each pool’s
estimated future cash flows and internal rate of return. We
recognized income each month based on each static pool’s
effective interest rate. The static pools were tested quarterly
for impairment by re-estimating the future cash flows to be
received from the pools. If the new estimated cash flows
resulted in a pool’s effective interest rate increasing,
then this new yield was used prospectively over the remaining
life of the static pool. If the new estimated cash flows
resulted in a pool’s effective interest rate decreasing,
the pool was considered impaired and written down through a
valuation allowance to maintain the effective interest rate. We
recognized $79 million and $111 million of impairments
for the years ended December 31, 2009 and 2008,
respectively.
Foreign
Currency Transactions
We 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.
Statement
of Cash Flows
Included in our financial statements is the consolidated
statement of cash flows. It is our policy 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,”
our 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, 2009 and 2008, to be
consistent with classifications adopted for 2010, which had no
impact on net income, total assets or total liabilities.
| 3. | Student Loans |
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
F-25
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 3. | Student Loans (Continued) |
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
when the loan was originated and the loan type. We earn 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, we can earn additional spread income
that we refer 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) is required to be paid 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, we
receive 98 percent reimbursement on all qualifying default
claims. For loans disbursed on or after July 1, 2006, we
receive 97 percent reimbursement.
In December 2008, we 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, we 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”.
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 2009, we 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 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
one-percent payment made to ED plus a $75 fee per loan.
In 2010, we sold to ED approximately $20.4 billion face
amount of loans as part of the Purchase Program. These loan
sales resulted in a $321 million gain. Outstanding debt of
$20.3 billion has been paid down related to the
Participation Program in connection with these loan sales.
On December 31, 2010, we closed on our agreement to
purchase an interest in $26.1 billion of securitized
federal student loans and related assets and $25.0 billion
of liabilities from the Student Loan Corporation
(“SLC”), a subsidiary of Citibank, N.A. The purchase
price was approximately $1.1 billion. The assets purchased
include the residual interest in 13 of SLC’s 14 FFELP loan
securitizations and its interest in SLC Funding Note Issuer
related to the U.S. Department of Education’s
Straight-A Funding asset-backed commercial paper conduit. We
will also service these assets and administer the securitization
trusts. We expect to convert all of the underlying loans to our
servicing platform in 2011, with an interim subservicing
agreement for Citibank to service the loans while they are
converted to our platform. Because we have determined that we
are the primary beneficiary of these trusts we have consolidated
these trusts onto our balance sheet. In addition, we contracted
the right to service approximately $0.8 billion of
additional FFELP securitized assets from SLC. We did not
consolidate this underlying trust because we are not the primary
beneficiary of this
F-26
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 3. | Student Loans (Continued) |
trust. The transaction was funded by a
5-year
term
loan provided by Citibank in an amount equal to the purchase
price.
The following table shows the assets and liabilities that were
acquired and consolidated on our balance sheet at fair value on
December 31, 2010.
|
Acquisition on
|
||||
| December 31, 2010 | ||||
|
FFELP Stafford Loans
|
$ | 11,121,349 | ||
|
FFELP Consolidation Loans
|
14,261,989 | |||
|
Loan fair value discount
|
(493,907 | ) | ||
|
FFELP Loans
|
24,889,431 | |||
|
Restricted cash
|
749,139 | |||
|
Other assets
|
445,517 | |||
|
Total assets
|
$ | 26,084,087 | ||
|
Long-term borrowings — FFELP trusts
|
$ | 25,608,941 | ||
|
Long-term borrowings — acquisition financing
|
1,064,244 | |||
|
Long-term borrowings fair value discount
|
(659,060 | ) | ||
|
Long-term borrowings
|
26,014,125 | |||
|
Other liabilities
|
69,962 | |||
|
Total liabilities
|
$ | 26,084,087 | ||
We offer a variety of Private Education Loans. Private Education
Loans can be subdivided into two general categories: those that
are designed to bridge the gap between the cost of higher
education and the amount financed through either federal loans
or the borrowers’ resources and loans for career training.
For the majority of the Private Education Loan portfolio, we
bear 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. 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 leverage updated borrower
information and other decision support tools to best determine
who will be granted forbearance based on our 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
F-27
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 3. | Student Loans (Continued) |
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.
During 2009, we 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 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.
We 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, 2010 and 2009, 68 percent and
59 percent, respectively, of our on-balance sheet student
loan portfolio was in repayment.
The estimated weighted average life of student loans in our
portfolio was approximately 7.7 years and 7.9 years at
December 31, 2010 and 2009, respectively. The following
table reflects the distribution of our student loan portfolio by
program.
|
December 31,
|
Year Ended
|
|||||||||||||||
| 2010 | December 31, 2010 | |||||||||||||||
|
Average
|
||||||||||||||||
|
Effective
|
||||||||||||||||
|
Ending
|
% of
|
Average
|
Interest
|
|||||||||||||
| Balance | Balance | Balance | Rate | |||||||||||||
|
FFELP Stafford and Other Student Loans,
net
(1)
|
$ | 56,252,860 | 31 | % | $ | 61,034,317 | 1.93 | % | ||||||||
|
FFELP Consolidation Loans, net
|
92,396,540 | 50 | 81,008,682 | 2.67 | ||||||||||||
|
Private Education Loans, net
|
35,655,724 | 19 | 36,534,158 | 6.44 | ||||||||||||
|
Total student loans,
net
(2)
|
$ | 184,305,124 | 100 | % | $ | 178,577,157 | 3.19 | % | ||||||||
F-28
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 3. | Student Loans (Continued) |
|
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 | % | ||||||||
| (1) | The FFELP category is primarily Stafford Loans, but also includes federally guaranteed PLUS and HEAL Loans along with $9.7 billion of Stafford Loans held-for-sale at December 31, 2009. There were no Stafford Loans held-for-sale at December 31, 2010. | |
| (2) | The total student loan ending balance includes net unamortized premiums of $1,006,039 and $1,628,693 as of December 31, 2010 and 2009, respectively. |
| 4. | Allowance for Loan Losses |
Our 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. We
believe that the allowance for student loan losses is
appropriate to cover probable losses incurred in the loan
portfolios. We segregate our Private Education Loan portfolio
into two classes of loans — traditional and
non-traditional. Non-traditional loans are loans to borrowers
attending for-profit schools with an original FICO score of less
than 670 and borrowers attending not-for-profit schools with an
original FICO score of less than 640. The FICO score used in
determining whether a loan is non-traditional is the greater of
the borrower or co-borrower FICO score at origination.
Traditional loans are defined as all other Private Education
Loans that are not classified as non-traditional.
F-29
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 Loan Losses
|
||||||||||||||||
| Year Ended December 31, 2010 | ||||||||||||||||
|
Private Education
|
Other
|
|||||||||||||||
| FFELP Loans | Loans | Loans | Total | |||||||||||||
|
Allowance for Loan Losses
|
||||||||||||||||
|
Beginning balance
|
$ | 161,168 | $ | 1,443,440 | $ | 76,261 | $ | 1,680,869 | ||||||||
|
Total provision
|
98,507 | 1,298,018 | 22,888 | 1,419,413 | ||||||||||||
|
Charge-offs
|
(87,669 | ) | (1,291,181 | ) | (26,633 | ) | (1,405,483 | ) | ||||||||
|
Student loan sales
|
(8,297 | ) | — | — | (8,297 | ) | ||||||||||
|
Reclassification of interest
reserve
(1)
|
— | 47,253 | — | 47,253 | ||||||||||||
|
Consolidation of securitization
trusts
(2)
|
25,149 | 524,050 | — | 549,199 | ||||||||||||
|
Ending Balance
|
$ | 188,858 | $ | 2,021,580 | $ | 72,516 | $ | 2,282,954 | ||||||||
|
Allowance:
|
||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | — | $ | 55,626 | $ | 58,725 | $ | 114,351 | ||||||||
|
Ending balance: collectively evaluated for impairment
|
$ | 188,858 | $ | 1,965,954 | $ | 13,791 | $ | 2,168,603 | ||||||||
|
Ending balance: loans acquired with deteriorated credit quality
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Loans:
|
||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | — | $ | 257,140 | $ | 114,186 | $ | 371,326 | ||||||||
|
Ending balance: collectively evaluated for impairment
|
$ | 146,937,742 | $ | 38,314,641 | $ | 228,160 | $ | 185,480,543 | ||||||||
|
Ending balance: loans acquired with deteriorated credit quality
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Charge-offs as a percentage of average loans in repayment and
forbearance
|
.11 | % | 5.0 | % | — | % | ||||||||||
|
Allowance as a percentage of the ending total loan balance
|
.13 | % | 5.2 | % | 21.2 | % | ||||||||||
|
Allowance as a percentage of the ending loans in repayment
|
.20 | % | 7.3 | % | — | % | ||||||||||
|
Allowance coverage of charge-offs
|
2.2 | 1.6 | 2.7 | |||||||||||||
|
Ending total
loans
(3)
|
$ | 146,937,742 | $ | 38,571,781 | $ | 342,346 | ||||||||||
|
Average loans in repayment
|
$ | 82,255,169 | $ | 25,595,600 | $ | — | ||||||||||
|
Ending loans in repayment
|
$ | 96,695,618 | $ | 27,852,843 | $ | — | ||||||||||
| (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. | |
| (2) | Upon the adoption of the new consolidation accounting guidance on January 1, 2010, we consolidated all of our previously off-balance sheet securitization trusts. (See Note 2, “Significant Accounting Policies — Consolidation”.) | |
| (3) | Ending total loans for Private Education Loans includes the receivable for partially charged-off loans. |
F-30
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 Loan Losses
|
||||||||||||||||
| Year Ended December 31, 2009 | ||||||||||||||||
|
Private Education
|
Other
|
|||||||||||||||
| FFELP Loans | Loans | Loans | Total | |||||||||||||
|
Allowance for Loan Losses
|
||||||||||||||||
|
Beginning balance
|
$ | 137,543 | $ | 1,308,043 | $ | 61,325 | $ | 1,506,911 | ||||||||
|
Total provision
|
106,221 | 966,591 | 46,148 | 1,118,960 | ||||||||||||
|
Charge-offs
|
(78,861 | ) | (875,667 | ) | (31,212 | ) | (985,740 | ) | ||||||||
|
Student loan sales and securitization activity
|
(3,735 | ) | — | — | (3,735 | ) | ||||||||||
|
Reclassification of interest
reserve
(1)
|
— | 44,473 | — | 44,473 | ||||||||||||
|
Ending Balance
|
$ | 161,168 | $ | 1,443,440 | $ | 76,261 | $ | 1,680,869 | ||||||||
|
Allowance:
|
||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | — | $ | 32,473 | $ | 56,760 | $ | 89,233 | ||||||||
|
Ending balance: collectively evaluated for impairment
|
$ | 161,168 | $ | 1,410,967 | $ | 19,501 | $ | 1,591,636 | ||||||||
|
Ending balance: loans acquired with deteriorated credit quality
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Loans:
|
||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | — | $ | 181,254 | $ | 128,080 | $ | 309,334 | ||||||||
|
Ending balance: collectively evaluated for impairment
|
$ | 119,026,931 | $ | 24,574,344 | $ | 310,176 | $ | 143,911,451 | ||||||||
|
Ending balance: loans acquired with deteriorated credit quality
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Charge-offs as a percentage of average loans in repayment and
forbearance
|
.11 | % | 7.2 | % | — | % | ||||||||||
|
Allowance as a percentage of the ending total loan balance
|
.14 | % | 5.8 | % | 17.4 | % | ||||||||||
|
Allowance as a percentage of the ending loans in repayment
|
.23 | % | 10.0 | % | — | % | ||||||||||
|
Allowance coverage of charge-offs
|
2.0 | 1.6 | 2.4 | |||||||||||||
|
Ending total
loans
(2)
|
$ | 119,026,931 | $ | 24,755,598 | $ | 438,256 | ||||||||||
|
Average loans in repayment
|
$ | 69,020,295 | $ | 12,137,430 | $ | — | ||||||||||
|
Ending loans in repayment
|
$ | 69,826,790 | $ | 14,379,102 | $ | — | ||||||||||
| (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. | |
| (2) | Ending total loans for Private Education Loans includes the receivable for partially charged-off loans. |
F-31
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 Loan Losses
|
||||||||||||||||
| Year Ended December 31, 2008 | ||||||||||||||||
|
Private Education
|
Other
|
|||||||||||||||
| FFELP Loans | Loans | Loans | Total | |||||||||||||
|
Allowance for Loan Losses
|
||||||||||||||||
|
Beginning balance
|
$ | 88,729 | $ | 1,003,963 | $ | 47,003 | $ | 1,139,695 | ||||||||
|
Total provision
|
105,568 | 586,169 | 27,913 | 719,650 | ||||||||||||
|
Charge-offs
|
(57,510 | ) | (320,240 | ) | (13,591 | ) | (391,341 | ) | ||||||||
|
Student loan sales and securitization activity
|
756 | — | — | 756 | ||||||||||||
|
Reclassification of interest
reserve
(1)
|
— | 38,151 | — | 38,151 | ||||||||||||
|
Ending Balance
|
$ | 137,543 | $ | 1,308,043 | $ | 61,325 | $ | 1,506,911 | ||||||||
|
Allowance:
|
||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | — | $ | — | $ | 35,981 | $ | 35,981 | ||||||||
|
Ending balance: collectively evaluated for impairment
|
$ | 137,543 | $ | 1,308,043 | $ | 25,344 | $ | 1,470,930 | ||||||||
|
Ending balance: loans acquired with deteriorated credit quality
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Loans:
|
||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | — | $ | — | $ | 98,608 | $ | 98,608 | ||||||||
|
Ending balance: collectively evaluated for impairment
|
$ | 121,926,798 | $ | 22,425,640 | $ | 462,520 | $ | 144,814,958 | ||||||||
|
Ending balance: loans acquired with deteriorated credit quality
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Charge-offs as a percentage of average loans in repayment and
forbearance
|
.09 | % | 3.8 | % | — | % | ||||||||||
|
Allowance as a percentage of the ending total loan balance
|
.11 | % | 5.8 | % | 10.9 | % | ||||||||||
|
Allowance as a percentage of the ending loans in repayment
|
.20 | % | 11.7 | % | — | % | ||||||||||
|
Allowance coverage of charge-offs
|
2.4 | 4.1 | 4.5 | |||||||||||||
|
Ending total
loans
(2)
|
$ | 121,926,798 | $ | 22,425,640 | $ | 561,128 | ||||||||||
|
Average loans in repayment
|
$ | 66,392,120 | $ | 8,533,356 | $ | — | ||||||||||
|
Ending loans in repayment
|
$ | 70,174,192 | $ | 11,182,053 | $ | — | ||||||||||
| (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. | |
| (2) | Ending total loans for Private Education Loans includes the receivable for partially charged-off loans. |
Within our Private Education Loan portfolio, we consider loans
greater than 90 days past due to be nonperforming. FFELP
Loans are guaranteed as to their principal and accrued interest
by the federal government in the event of default subject to no
less than 97 percent and therefore we do not deem FFELP
Loans as nonperforming from a credit risk standpoint at any
point in their life cycle prior to claim payment, and continue
to accrue interest through the date of claim.
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) |
The following tables provide information regarding the loan
status and aging of past due loans for the years ended
December 31, 2010, 2009 and 2008.
| FFELP Loan Delinquencies | ||||||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| (Dollars in millions) | Balance | % | Balance | % | Balance | % | ||||||||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 28,214 | $ | 35,079 | $ | 39,270 | ||||||||||||||||||
|
Loans in
forbearance
(2)
|
22,028 | 14,121 | 12,483 | |||||||||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||||||||||
|
Loans current
|
80,026 | 82.8 | % | 57,528 | 82.4 | % | 58,811 | 83.8 | % | |||||||||||||||
|
Loans delinquent
31-60 days
(3)
|
5,500 | 5.7 | 4,250 | 6.1 | 4,044 | 5.8 | ||||||||||||||||||
|
Loans delinquent
61-90 days
(3)
|
3,178 | 3.3 | 2,205 | 3.1 | 2,064 | 2.9 | ||||||||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
7,992 | 8.2 | 5,844 | 8.4 | 5,255 | 7.5 | ||||||||||||||||||
|
Total FFELP Loans in repayment
|
96,696 | 100 | % | 69,827 | 100 | % | 70,174 | 100 | % | |||||||||||||||
|
Total FFELP Loans, gross
|
146,938 | 119,027 | 121,927 | |||||||||||||||||||||
|
FFELP Loan unamortized premium
|
1,900 | 2,187 | 2,431 | |||||||||||||||||||||
|
Total FFELP Loans
|
148,838 | 121,214 | 124,358 | |||||||||||||||||||||
|
FFELP Loan allowance for losses
|
(189 | ) | (161 | ) | (138 | ) | ||||||||||||||||||
|
FFELP Loans, net
|
$ | 148,649 | $ | 121,053 | $ | 124,220 | ||||||||||||||||||
|
Percentage of FFELP Loans in repayment
|
65.8 | % | 58.7 | % | 57.6 | % | ||||||||||||||||||
|
Delinquencies as a percentage of FFELP Loans in repayment
|
17.2 | % | 17.6 | % | 16.2 | % | ||||||||||||||||||
|
FFELP Loans in forbearance as a percentage of loans in repayment
and forbearance
|
18.6 | % | 16.8 | % | 15.1 | % | ||||||||||||||||||
| (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. | |
| (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-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) |
| Private Education Traditional Loan Delinquencies | ||||||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| (Dollars in millions) | Balance | % | Balance | % | Balance | % | ||||||||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 7,419 | $ | 7,812 | $ | 8,694 | ||||||||||||||||||
|
Loans in
forbearance
(2)
|
1,156 | 784 | 625 | |||||||||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||||||||||
|
Loans current
|
22,850 | 91.2 | % | 10,844 | 90.2 | % | 8,074 | 92.2 | % | |||||||||||||||
|
Loans delinquent
31-60 days
(3)
|
794 | 3.2 | 437 | 3.6 | 302 | 3.4 | ||||||||||||||||||
|
Loans delinquent
61-90 days
(3)
|
340 | 1.4 | 204 | 1.7 | 128 | 1.5 | ||||||||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
1,060 | 4.2 | 543 | 4.5 | 257 | 2.9 | ||||||||||||||||||
|
Total traditional loans in repayment
|
25,044 | 100 | % | 12,028 | 100 | % | 8,761 | 100 | % | |||||||||||||||
|
Total traditional loans, gross
|
33,619 | 20,624 | 18,080 | |||||||||||||||||||||
|
Traditional loans unamortized discount
|
(801 | ) | (475 | ) | (436 | ) | ||||||||||||||||||
|
Total traditional loans
|
32,818 | 20,149 | 17,644 | |||||||||||||||||||||
|
Traditional loans receivable for partially charged-off loans
|
558 | 193 | 82 | |||||||||||||||||||||
|
Traditional loans allowance for losses
|
(1,231 | ) | (664 | ) | (485 | ) | ||||||||||||||||||
|
Traditional loans, net
|
$ | 32,145 | $ | 19,678 | $ | 17,241 | ||||||||||||||||||
|
Percentage of traditional loans in repayment
|
74.5 | % | 58.3 | % | 48.5 | % | ||||||||||||||||||
|
Delinquencies as a percentage of traditional loans in repayment
|
8.8 | % | 9.8 | % | 7.8 | % | ||||||||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
4.4 | % | 6.1 | % | 6.7 | % | ||||||||||||||||||
| (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. |
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) |
| Private Education Non-Traditional Loan Delinquencies | ||||||||||||||||||||||||
| December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| (Dollars in millions) | Balance | % | Balance | % | Balance | % | ||||||||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 921 | $ | 1,097 | $ | 1,465 | ||||||||||||||||||
|
Loans in
forbearance
(2)
|
184 | 184 | 237 | |||||||||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||||||||||
|
Loans current
|
2,038 | 72.6 | % | 1,578 | 67.1 | % | 1,673 | 69.1 | % | |||||||||||||||
|
Loans delinquent
31-60 days
(3)
|
217 | 7.7 | 209 | 8.9 | 250 | 10.3 | ||||||||||||||||||
|
Loans delinquent
61-90 days
(3)
|
131 | 4.7 | 136 | 5.8 | 168 | 6.9 | ||||||||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
422 | 15.0 | 429 | 18.2 | 330 | 13.7 | ||||||||||||||||||
|
Total non-traditional loans in repayment
|
2,808 | 100 | % | 2,352 | 100 | % | 2,421 | 100 | % | |||||||||||||||
|
Total non-traditional loans, gross
|
3,913 | 3,633 | 4,123 | |||||||||||||||||||||
|
Non-traditional loans unamortized discount
|
(93 | ) | (84 | ) | (99 | ) | ||||||||||||||||||
|
Total non-traditional loans
|
3,820 | 3,549 | 4,024 | |||||||||||||||||||||
|
Non-traditional loans receivable for partially charged-off loans
|
482 | 306 | 141 | |||||||||||||||||||||
|
Non-traditional loans allowance for losses
|
(791 | ) | (779 | ) | (823 | ) | ||||||||||||||||||
|
Non-traditional loans, net
|
$ | 3,511 | $ | 3,076 | $ | 3,342 | ||||||||||||||||||
|
Percentage of non-traditional loans in repayment
|
71.8 | % | 64.7 | % | 58.7 | % | ||||||||||||||||||
|
Delinquencies as a percentage of non-traditional loans in
repayment
|
27.4 | % | 32.9 | % | 30.9 | % | ||||||||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
6.1 | % | 7.3 | % | 8.9 | % | ||||||||||||||||||
| (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. |
The following table provides information regarding accrued
interest receivable on our Private Education Loans for the years
ended December 31, 2010, 2009 and 2008. The table also
discloses the amount of accrued interest on loans greater than
90 days past due as compared to our allowance for
uncollectible interest. The allowance for uncollectible interest
exceeds the amount of accrued interest on our 90 days past
due portfolio for all periods presented.
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) |
|
Accrued Interest Receivable
|
||||||||||||
| As of December 31, | ||||||||||||
|
Greater than
|
||||||||||||
|
90 days
|
Allowance for
|
|||||||||||
| Total | Past Due | Uncollectible Interest | ||||||||||
|
2010
|
||||||||||||
|
Private Education Loans — Traditional
|
$ | 1,062,289 | $ | 34,644 | $ | 56,755 | ||||||
|
Private Education Loans — Non-Traditional
|
208,587 | 20,270 | 37,057 | |||||||||
|
Total
|
$ | 1,270,876 | $ | 54,914 | $ | 93,812 | ||||||
|
2009
|
||||||||||||
|
Private Education Loans — Traditional
|
$ | 917,025 | $ | 19,272 | $ | 30,898 | ||||||
|
Private Education Loans — Non-Traditional
|
247,924 | 22,293 | 64,939 | |||||||||
|
Total
|
$ | 1,164,949 | $ | 41,565 | $ | 95,837 | ||||||
|
2008
|
||||||||||||
|
Private Education Loans — Traditional
|
$ | 836,736 | $ | 9,312 | $ | 25,655 | ||||||
|
Private Education Loans — Non-Traditional
|
298,669 | 19,213 | 80,783 | |||||||||
|
Total
|
$ | 1,135,405 | $ | 28,525 | $ | 106,438 | ||||||
FFELP Loans are substantially guaranteed as to their principal
and accrued interest in the event of default, therefore, the key
credit quality indicators for this portfolio are loan status.
The impact of changes in loan status are incorporated quarterly
into the allowance for loan losses calculation. For Private
Education Loans, the key credit quality indicators are the
school type/FICO scores, the existence of a cosigner, the loan
status and loan seasoning. The school type/FICO score are
assessed at origination and maintained through the
traditional/non-traditional loan designation. The other Private
Education Loan key quality indicators can change and are
incorporated quarterly into the allowance for loan losses
calculation. The following table
F-36
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 4. | Allowance for Loan Losses (Continued) |
highlights the principal balance (excluding the receivable for
partially charged-off loans) of our Private Education Loan
portfolio stratified by the key credit quality indicators.
|
Private Education Loans
|
||||||||||||
|
Credit Quality Indicators
|
||||||||||||
| For The Years Ended December 31, | ||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
Credit Quality Indicators
|
||||||||||||
|
School Type/FICO Scores:
|
||||||||||||
|
Traditional
|
$ | 33,619 | $ | 20,623 | $ | 18,080 | ||||||
|
Non-Traditional
(1)
|
3,913 | 3,633 | 4,123 | |||||||||
|
Total School Type/FICO Scores
|
$ | 37,532 | $ | 24,256 | $ | 22,203 | ||||||
|
Cosigners:
|
||||||||||||
|
With cosigner
|
$ | 22,259 | $ | 14,322 | $ | 12,334 | ||||||
|
Without cosigner
|
15,273 | 9,934 | 9,869 | |||||||||
|
Total
|
$ | 37,532 | $ | 24,256 | $ | 22,203 | ||||||
|
Seasoning
(2)
:
|
||||||||||||
|
1-12 payments
|
$ | 9,963 | $ | 6,596 | $ | 6,203 | ||||||
|
13-24
payments
|
6,951 | 3,423 | 2,350 | |||||||||
|
25-36
payments
|
4,675 | 2,116 | 1,365 | |||||||||
|
37-48
payments
|
3,019 | 1,254 | 844 | |||||||||
|
More than 48 payments
|
4,584 | 1,957 | 1,282 | |||||||||
|
Not yet in repayment
|
8,340 | 8,910 | 10,159 | |||||||||
|
Total
|
$ | 37,532 | $ | 24,256 | $ | 22,203 | ||||||
| (1) | Defined as loans to borrowers attending for-profit schools (with a FICO score of less than 670 at origination) and borrowers attending not-for-profit schools (with a FICO score of less than 640 at origination). | |
| (2) | Number of months in active repayment for which a scheduled payment was due. |
We began offering interest rate reductions to borrowers for
their Private Education Loans in 2009 with $185 million
qualifying for the program in 2009 and an additional
$287 million qualifying for the program in 2010. The
allowance associated with these loans was $32 million and
$56 million at December 31, 2009 and 2010,
respectively. Subsequent to modification, no loans defaulted in
2009 and $53 million defaulted in 2010. At
December 31, 2010 and 2009, approximately $257 million
and $181 million, respectively, had qualified for the
program and were currently receiving a reduction in their
interest rate.
F-37
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, 2010 and 2009 follows:
| December 31, 2010 | ||||||||||||||||
|
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
|
$ | 2,595 | $ | — | $ | — | $ | 2,595 | ||||||||
|
Other securities:
|
||||||||||||||||
|
Asset-backed securities
|
66,952 | 903 | (47 | ) | 67,808 | |||||||||||
|
Municipal bonds
|
9,168 | 1,862 | — | 11,030 | ||||||||||||
|
Other
|
1,630 | — | (15 | ) | 1,615 | |||||||||||
|
Total investment securities
available-for-sale
|
$ | 80,345 | $ | 2,765 | $ | (62 | ) | $ | 83,048 | |||||||
|
Restricted Investments
|
||||||||||||||||
|
Available-for sale
|
||||||||||||||||
|
U.S. Treasury securities and other U.S. government agency
obligations
|
$ | 36,400 | $ | 1 | $ | — | $ | 36,401 | ||||||||
|
Guaranteed investment contracts
|
19,946 | — | — | 19,946 | ||||||||||||
|
Total restricted investments
available-for-sale
|
$ | 56,346 | $ | 1 | $ | — | $ | 56,347 | ||||||||
|
Held-to-maturity
|
||||||||||||||||
|
Guaranteed investment contracts
|
$ | 2,788 | $ | — | $ | — | $ | 2,788 | ||||||||
|
Total restricted investments
held-to-maturity
|
$ | 2,788 | $ | — | $ | — | $ | 2,788 | ||||||||
F-38
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 5. | Investments (Continued) |
| 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 | ||||||||
As of December 31, 2010 and 2009, $2 million and
$1 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, 2010 and 2009, $36 million
(all of which is in restricted cash and investments on the
balance sheet) and $50 million ($25 million of which
is in restricted cash and investments on the balance sheet),
respectively, of
available-for-sale
investment securities were pledged as collateral.
There were no
available-for-sale
securities sold in 2010. We sold
available-for-sale
securities with a fair value of $100 million and
$457 million for the years ended December 31, 2009 and
2008, respectively. There were no realized gains/(losses) for
the years ended December 31, 2010 and 2009. 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-39
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, 2010, the stated maturities for the
investments (including restricted investments) are shown in the
following table:
| December 31, 2010 | ||||||||||||
|
Held-to-
|
Available-for-
|
|||||||||||
| Maturity | Sale (1) | Other | ||||||||||
|
Year of Maturity
|
||||||||||||
|
2011
|
$ | — | $ | 40,611 | $ | 854,804 | ||||||
|
2012
|
— | — | — | |||||||||
|
2013
|
— | 479 | — | |||||||||
|
2014
|
— | — | — | |||||||||
|
2015
|
— | — | 23,655 | |||||||||
|
2016-2020
|
— | 11,030 | 34,966 | |||||||||
|
After 2020
|
2,788 | 87,275 | 546 | |||||||||
|
Total
|
$ | 2,788 | $ | 139,395 | $ | 913,971 | ||||||
(1)
Available-for-sale
securities are stated at fair value.
At December 31, 2010 and 2009, we also had other
investments of $914 million and $741 million,
respectively. At December 31, 2010 and 2009, other
investments included $809 million and $636 million,
respectively, of receivables for cash collateral posted with
derivative counterparties. Other investments also included
leveraged leases which at December 31, 2010 and 2009,
totaled $58 million and $66 million, respectively,
that are general obligations of American Airlines and Federal
Express Corporation. At December 31, 2010, $41 million
of FHLB membership stock in connection with our borrowing
agreement was also included in other investments.
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 |
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. In connection with changes to our business,
we redefined our operating segments and reporting units and
revised our reportable segments presentation beginning on
October 1, 2010 (See Note 19, “Segments”).
The following table summarizes our allocation of goodwill,
accumulated impairments and net goodwill for our redefined
reporting units and reportable segments (which was allocated
based upon the relative fair values of the reporting units).
| As of December 31, 2010 | As of December 31, 2009 | |||||||||||||||||||||||
|
Accumulated
|
Accumulated
|
|||||||||||||||||||||||
| (Dollars in millions) | Gross | Impairments | Net | Gross | Impairments | Net | ||||||||||||||||||
|
Total FFELP Loans reportable segment
|
$ | 194 | $ | (4 | ) | $ | 190 | $ | 194 | $ | (4 | ) | $ | 190 | ||||||||||
|
Total Consumer Lending reportable segment
|
147 | — | 147 | 147 | — | 147 | ||||||||||||||||||
|
Business Services reportable segment
|
||||||||||||||||||||||||
|
Servicing
|
50 | — | 50 | 50 | — | 50 | ||||||||||||||||||
|
Contingency
|
129 | (129 | ) | — | 129 | — | 129 | |||||||||||||||||
|
Wind-down Guarantor Servicing
|
256 | (256 | ) | — | 256 | — | 256 | |||||||||||||||||
|
Upromise
|
140 | (140 | ) | — | 140 | — | 140 | |||||||||||||||||
|
Total Business Services reportable segment
|
575 | (525 | ) | 50 | 575 | — | 575 | |||||||||||||||||
|
Other reportable segment
|
||||||||||||||||||||||||
|
Mortgage and Consumer Lending
|
20 | (20 | ) | — | 20 | (20 | ) | — | ||||||||||||||||
|
Purchased Paper
|
79 | (79 | ) | — | 79 | — | 79 | |||||||||||||||||
|
Other
|
1 | (1 | ) | — | 1 | (1 | ) | — | ||||||||||||||||
|
Total Other reportable segment
|
100 | (100 | ) | — | 100 | (21 | ) | 79 | ||||||||||||||||
|
Total
|
$ | 1,016 | $ | (629 | ) | $ | 387 | $ | 1,016 | $ | (25 | ) | $ | 991 | ||||||||||
Goodwill
Impairment Testing — Post October 1, 2010
Reporting Unit Structure
As discussed above, we revised our segment presentation and
reporting unit structure as of October 1, 2010. We perform
our goodwill impairment testing annually in the fourth quarter
as of October 1. As part of the annual impairment testing,
we retained a third-party appraisal firm to perform Step 1
impairment testing. 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’s future economic benefit determined by its discounted
cash flows derived from our projections plus an assumed terminal
growth rate adjusted for what it believes a market participant
would assume in an acquisition. These projections are generally
five-year projections that reflect the inherent risk a willing
buyer would consider when valuing these businesses. 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.
Under our guidance, the third-party 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 the risk free rate, a market
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) |
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.
We 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 for the
FFELP Loans, Servicing, and Private Education Loans reporting
units were:
| Fourth Quarter 2010 | ||||||||
| Discount Rate | Growth Rate | |||||||
|
FFELP
Loans
(1)
|
10 | % | 0 | % | ||||
|
Servicing
(2)
|
14 | % | 2.5 | % | ||||
|
Private Education
Loans
(1)
|
19 | % | 0.5 | % | ||||
| (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 our 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. We reviewed and approved the
discount rates provided by the third-party appraiser including
the factors incorporated to develop the discount rates for each
reporting unit. For the valuations assuming 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 was also considered for
our FFELP Loans and Private Education Loans reporting units. 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.
The following table illustrates the carrying value of equity for
each reporting unit with remaining goodwill as of
December 31, 2010, and the estimated fair value determined
in conjunction with Step 1 impairment testing in the fourth
quarter of 2010.
|
Carrying Value
|
Fair Value
|
|||||||||||||||
| (Dollars in millions) | of Equity | of Equity | $ Difference | % Difference | ||||||||||||
|
FFELP Loans
|
$ | 1,777 | $ | 3,766 | $ | 1,989 | 112 | % | ||||||||
|
Servicing
|
123 | 1,290 | 1,167 | 949 | ||||||||||||
|
Private Education Loans
|
1,920 | 2,914 | 994 | 52 | ||||||||||||
Our estimated fair value resulting from our 2010 annual
impairment test was 53 percent higher than our market
capitalization as of the valuation date. We view this as a
reasonable “control premium.” We 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
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) |
premiums, as applicable, for each reporting unit. We 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 annual Step 1
impairment testing and these stress tests, there was no
indicated impairment for the FFELP Loans, Servicing and Private
Education Loans reporting units.
We acknowledge that continued weakness in the economy coupled
with changes in the industry resulting from HCERA or other
legislation could adversely affect the operating results of our
reporting units. If the forecasted performance of our reporting
units is not achieved, or if our stock price declines to a
depressed level resulting in deterioration in our total market
capitalization, the fair value of the FFELP Loans, Servicing and
Private Education Loans reporting units could be significantly
reduced, and we may be required to record a charge, which could
be material, for an impairment of goodwill.
Goodwill
Impairment Testing — Pre-October 1, 2010
Reporting Unit Structure
As discussed above, we revised our segment presentation and
reporting unit structure as of October 1, 2010. As such,
2010 interim impairment assessments and testing during interim
periods as well as 2009 annual impairment testing were completed
based on the reporting unit structure in place during these
periods. The following table summarizes our allocation of
goodwill to our reporting units, accumulated impairments and net
goodwill for each reporting unit, based on our reporting unit
structure in place prior to October 1, 2010.
| As of September 30, 2010 | As of December 31, 2009 | |||||||||||||||||||||||
|
Accumulated
|
Accumulated
|
|||||||||||||||||||||||
| (Dollars in millions) | Gross | Impairments | Net | Gross | Impairments | Net | ||||||||||||||||||
|
Total Lending reportable segment
|
$ | 411 | $ | (24 | ) | $ | 387 | $ | 411 | $ | (24 | ) | $ | 387 | ||||||||||
|
Total APG reportable segment
|
402 | (402 | ) | — | 402 | — | 402 | |||||||||||||||||
|
Other reportable segment
|
||||||||||||||||||||||||
|
Guarantor Servicing
|
62 | (62 | ) | — | 62 | — | 62 | |||||||||||||||||
|
Upromise
|
140 | (140 | ) | — | 140 | — | 140 | |||||||||||||||||
|
Other
|
1 | (1 | ) | — | 1 | (1 | ) | — | ||||||||||||||||
|
Total Other reportable segment
|
203 | (203 | ) | — | 203 | (1 | ) | 202 | ||||||||||||||||
|
Total
|
$ | 1,016 | $ | (629 | ) | $ | 387 | $ | 1,016 | $ | (25 | ) | $ | 991 | ||||||||||
On March 30, 2010, President Obama signed into law HCERA,
which included the SAFRA Act. Effective July 1, 2010, this
legislation eliminated the authority to provide new loans under
FFELP and requires that all new federal loans are to be made
through the DSLP. The new law did not alter or affect the terms
and conditions of existing FFELP Loans. This new law will result
in a restructuring that will result in both a significant amount
of restructuring expenses incurred as well as a significant
reduction of on-going operating costs once the restructuring is
complete. See Note 14, “Restructuring Activities”
for further details.
When we performed our annual impairment assessment in the fourth
quarter of 2009, the cash flow projections for our reporting
units were valued assuming the proposed HCERA legislation was
passed. There was no indicated impairment for any of the
reporting units in the fourth quarter of 2009.
In connection with HCERA becoming law on March 30, 2010, a
triggering event occurred for the Lending, APG and Guarantor
Servicing reporting units which required us to assess potential
goodwill impairment as of March 31, 2010. As part of the
impairment assessment, we considered the implications of the
HCERA legislation to these reporting units as well as continued
uncertainty in the economy and the tight
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) |
credit markets during the first quarter of 2010. The impairment
assessment methodology utilized either a market approach
and/or
a
discounted cash flow analysis for each reporting unit affected
by the new HCERA legislation. This assessment resulted in
estimated fair values of our reporting units in excess of their
carrying values at March 31, 2010. Accordingly, there was
no indicated impairment for these reporting units in the first
quarter of 2010.
During the second quarter of 2010, no triggering event occurred
to warrant an interim impairment assessment.
During the third quarter of 2010, as part of a broad-based
assessment of possible changes to our business following the
passage of HCERA, we performed certain preliminary valuations
which indicated there was possible impairment of goodwill and
certain intangible assets in our reporting units. We identified
certain events that occurred during third quarter 2010 that we
determined were triggering events because they either resulted
in lower expected future cash flows or because they provided
indications that market participants would value our reporting
units below previous estimates of fair value. The triggering
events that occurred in the third quarter included:
| • | FFELP asset pricing information indicating market participants assume a greater uncertainty related to future cash flows and require a higher return on investment; | |
| • | market bids related to the sale of a non-affiliated Guarantor business indicated a higher discount rate and greater uncertainty of future cash flows assumed; | |
| • | the acquisition of FFELP assets by us indicated a higher discount rate applied to future cash flows than previously estimated; | |
| • | Upromise sale of a business line provided an indication of how market participants view risks associated with future cash flows; | |
| • | pricing pressures associated with new and existing business at the Upromise reporting unit; and | |
| • | uncertainties related to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) legislation. |
Because of the triggering events that occurred during the third
quarter and our preliminary assessment, we retained a
third-party appraisal firm to perform Step 1 impairment testing.
The fair value of each reporting unit was determined by
weighting different valuation approaches, as applicable, with
the primary approach being the income approach.
As a result of new information regarding how market participants
view the risks and uncertainties associated with future cash
flows, we adjusted down our forecasted cash flows and increased
the discount rates associated with these cash flows for the APG
and Guarantor Servicing operating segments, resulting in a
decline in value associated with these reporting units. With
regard to Upromise, we determined that pricing pressures and
certain risks associated with growing the business as well as
the likelihood that a market participant would demand a higher
discount rate and assume lower future expected cash flows than
our own assumptions resulted in a decline in the fair value of
this reporting unit.
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) |
Resulting discount rates and growth rates used for our reporting
units were:
| Third Quarter 2010 | Fourth Quarter 2009 | |||||||||||||||
| Discount Rate | Growth Rate | Discount Rate | Growth Rate | |||||||||||||
|
Lending
(1)
|
13 | % | 0.5 | % | 11 | % | 3 | % | ||||||||
|
APG
(2)
|
14 | % | 2.5 | % | 10 | % | 4 | % | ||||||||
|
Guarantor
Servicing
(2)
|
13 | % | 0 | % | 10 | % | 0 | % | ||||||||
|
Upromise
(2)
|
17 | % | 2.5 | % | 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 are higher than the ones used in the 2009
annual impairment test primarily due to new information received
in the third quarter of 2010 related to implied discount rates
of similar transactions that priced or settled in the third
quarter of 2010. In addition, the Dodd-Frank Act, which became
law in the third quarter of 2010, creates uncertainty over
particular parts of the business. In addition, the Upromise
reporting unit had a significant reduction in future revenue
expectations during the third quarter of 2010 related to
contract negotiations.
The following table illustrates the carrying value of equity for
each reporting unit and the estimated fair value determined in
conjunction with Step 1 impairment testing in the third quarter
of 2010.
|
Carrying Value
|
Fair Value
|
|||||||||||||||
| (Dollars in millions) | of Equity | of Equity | $ Difference | % Difference | ||||||||||||
|
Lending
|
$ | 3,530 | $ | 6,201 | $ | 2,671 | 76 | % | ||||||||
|
APG
|
641 | 405 | (236 | ) | (36 | ) | ||||||||||
|
Guarantor Servicing
|
97 | 91 | (6 | ) | (6 | ) | ||||||||||
|
Upromise
|
221 | 110 | (111 | ) | (50 | ) | ||||||||||
We 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. We 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 the Lending reporting unit and there
was indicated impairment for the APG, Guarantor Services and
Upromise reporting units in the third quarter testing.
Under the second step of the analysis, determining the implied
fair value of goodwill requires valuation of a reporting
unit’s identifiable tangible and intangible assets and
liabilities in a manner similar to the allocation of purchase
price in a business combination. If the carrying value of a
reporting unit’s goodwill exceeds its implied fair value,
goodwill is deemed impaired and is written down to the extent of
the difference. As a result, we impaired the value of our
goodwill by $402 million in our APG reporting unit,
$140 million in our Upromise reporting unit and
$62 million in our Guarantor Servicing reporting unit,
which has been recorded as a charge in the third quarter of 2010.
F-45
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 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 in the fourth quarter
of 2009.
|
Carrying Value
|
Fair Value
|
|||||||||||||||
| (Dollars in millions) | of Equity | of Equity | $ Difference | % Difference | ||||||||||||
|
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 | ||||||||||||
We reviewed and approved the valuation prepared by the appraisal
firm for each reporting unit in the fourth quarter of 2009,
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. We 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 October 1, 2009,
Acquired
Intangible Assets
Acquired intangible assets include the following:
| As of December 31, 2010 | ||||||||||||||||
|
Average
|
Accumulated
|
|||||||||||||||
|
Amortization
|
Cost
|
Impairment and
|
||||||||||||||
| (Dollars in millions) | Period | Basis (1) | Amortization (1) | Net | ||||||||||||
|
Intangible assets subject to amortization:
|
||||||||||||||||
|
Customer, services and lending relationships
|
12 years | $ | 307 | $ | (240 | ) | $ | 67 | ||||||||
|
Software and technology
|
7 years | 93 | (91 | ) | 2 | |||||||||||
|
Total intangible assets subject to amortization
|
400 | (331 | ) | 69 | ||||||||||||
|
Intangible assets not subject to amortization:
|
||||||||||||||||
|
Trade names and trademarks
|
Indefinite | 23 | — | 23 | ||||||||||||
|
Total acquired intangible assets
|
$ | 423 | $ | (331 | ) | $ | 92 | |||||||||
| As of December 31, 2009 | ||||||||||||||||
|
Average
|
Accumulated
|
|||||||||||||||
|
Amortization
|
Cost
|
Impairment and
|
||||||||||||||
| (Dollars in millions) | Period | Basis (1) | Amortization (1) | Net | ||||||||||||
|
Intangible assets subject to amortization:
|
||||||||||||||||
|
Customer, services, and lending relationships
|
12 years | $ | 332 | $ | (208 | ) | $ | 124 | ||||||||
|
Software and technology
|
7 years | 98 | (89 | ) | 9 | |||||||||||
|
Total intangible assets subject to amortization
|
430 | (297 | ) | 133 | ||||||||||||
|
Intangible assets not subject to amortization:
|
||||||||||||||||
|
Trade names and trademarks
|
Indefinite | 54 | — | 54 | ||||||||||||
|
Total acquired intangible assets
|
$ | 484 | $ | (297 | ) | $ | 187 | |||||||||
| (1) | Includes impairment amounts only if portion of the acquired intangible asset has been deemed impaired. When an acquired intangible asset is considered fully impaired, the cost basis and any accumulated amortization related to the asset is written off. |
F-46
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) |
We recorded amortization of acquired intangible assets from
continuing operations totaling $39 million,
$38 million, and $48 million for the years ended
December 31, 2010, 2009 and 2008, respectively. We recorded
amortization of acquired intangible assets from discontinued
operations totaling $0, $1 million, and $6 million for
the years ended December 31, 2010, 2009 and 2008,
respectively. We will continue to amortize our intangible assets
with definite useful lives over their remaining estimated useful
lives. We estimate amortization expense associated with these
intangible assets will be $23 million, $16 million,
$11 million, $9 million and $6 million for the
years ended December 31, 2011, 2012, 2013, 2014 and 2015,
respectively.
As discussed in Note 2, “Significant Accounting
Policies,” we test our indefinite life intangible assets
annually as of October 1 or during the course of the year if an
event occurs or circumstances change which indicate potential
impairment of these assets. We also assess whether an event or
circumstance has occurred which may indicate impairment of its
definite life (amortizing) intangible assets quarterly.
We recorded impairment of certain acquired intangible assets
from continuing operations of $56 million, $36 million
and $1 million, respectively, for the years ended
December 31, 2010, 2009 and 2008. We recorded impairment of
certain acquired intangible assets from discontinued operations
of $0, $1 million and $36 million, respectively, for
the years ended December 31, 2010, 2009 and 2008.
In the third quarter of 2010, we recognized intangible
impairments of $53 million related to Upromise and
$3 million related to the Consumer Lending businesses, (see
previous discussion of interim goodwill impairment testing).
In the fourth quarter of 2009, we recognized intangible
impairments of $34 million related to our 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 Business Services reportable
segment. We also recognized intangible impairments of
$3 million related to certain tradenames and relationships
in the FFELP Loans reporting segment.
In 2008, we decided to wind down our Purchased Paper businesses.
As a result, in the third quarter of 2008, we recorded an
aggregate amount of $36 million of impairment of acquired
intangible assets in discontinued operations, of which
$28 million related to the impairment of two trade names
and $8 million related to certain banking customer
relationships associated with discontinued operations.
| 7. | Borrowings |
Borrowings consist of secured borrowings issued through our
securitization program, borrowings through secured facilities
and participation programs, unsecured notes issued by us, term
and other deposits at the Bank, and other interest-bearing
liabilities related primarily to obligations to return cash
collateral held. To match the interest rate and currency
characteristics of our borrowings with the interest rate and
currency characteristics of our assets, we enter into interest
rate and foreign currency swaps with independent parties. Under
these agreements, we make 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 our
F-47
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 7. | Borrowings (Continued) |
interest obligations on fixed or variable rate notes (see
Note 9, “Derivative Financial Instruments”).
Payments and receipts on our interest rate and currency swaps
are not reflected in the following tables.
The following table summarizes our borrowings as of
December 31, 2010 and 2009.
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
|
Short
|
Long
|
Short
|
Long
|
|||||||||||||||||||||
| (Dollars in millions) | Term | Term | Total | Term | Term | Total | ||||||||||||||||||
|
Unsecured borrowings
|
$ | 4,361 | $ | 15,742 | $ | 20,103 | $ | 5,185 | $ | 22,797 | $ | 27,982 | ||||||||||||
|
Unsecured term bank deposits
|
1,387 | 3,160 | 4,547 | 842 | 4,795 | 5,637 | ||||||||||||||||||
|
FHLB-DM facility
|
900 | — | 900 | — | — | — | ||||||||||||||||||
|
ED Participation Program facility
|
— | — | — | 9,006 | — | 9,006 | ||||||||||||||||||
|
ED Conduit Program facility
|
24,484 | — | 24,484 | 14,314 | — | 14,314 | ||||||||||||||||||
|
ABCP borrowings
|
— | 5,853 | 5,853 | — | 8,801 | 8,801 | ||||||||||||||||||
|
SLC acquisition financing
|
— | 1,064 | 1,064 | — | — | — | ||||||||||||||||||
|
FFELP Loans securitizations
|
— | 112,425 | 112,425 | — | 81,923 | 81,923 | ||||||||||||||||||
|
Private Education Loans securitizations
|
— | 21,409 | 21,409 | — | 7,277 | 7,277 | ||||||||||||||||||
|
Indentured trusts
|
— | 1,246 | 1,246 | 64 | 1,533 | 1,597 | ||||||||||||||||||
|
Other
(1)
|
2,257 | — | 2,257 | 1,472 | — | 1,472 | ||||||||||||||||||
|
Total before hedge accounting adjustments
|
33,389 | 160,899 | 194,288 | 30,883 | 127,126 | 158,009 | ||||||||||||||||||
|
Hedge accounting adjustments
|
227 | 2,644 | 2,871 | 14 | 3,420 | 3,434 | ||||||||||||||||||
|
Total
|
$ | 33,616 | $ | 163,543 | $ | 197,159 | $ | 30,897 | $ | 130,546 | $ | 161,443 | ||||||||||||
| (1) | At December 31, 2010, “other” primarily consists of $0.9 billion of cash collateral held related to derivative exposures that are recorded as a short-term debt obligation, as well as $1.4 billion of unsecured other bank deposits. At December 31, 2009, “other” primarily consisted of cash collateral held related to derivative exposures that are recorded as short-term debt obligation. |
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, 2010 and 2009, the weighted average interest
rates at the end of each period, and the related average
balances and weighted
F-48
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 7. | Borrowings (Continued) |
average interest rates during the periods. Rates reflect stated
interest of borrowings and related discounts and premiums.
| December 31, 2010 | Year Ended December 31, 2010 | |||||||||||||||
|
Weighted Average
|
Weighted Average
|
|||||||||||||||
| Ending Balance | Interest Rate | Average Balance | Interest Rate | |||||||||||||
|
Unsecured term bank deposits
|
$ | 1,387,360 | 2.57 | % | $ | 1,424,073 | 2.75 | % | ||||||||
|
FHLB-DM Facility
|
900,000 | .30 | 402,644 | .34 | ||||||||||||
|
ED Participation Program Facility
|
— | — | 13,536,795 | .80 | ||||||||||||
|
ED Conduit Program facility
|
24,484,353 | .55 | 15,095,905 | .67 | ||||||||||||
|
ABCP borrowings
|
— | — | 1,767,085 | .95 | ||||||||||||
|
Unsecured borrowings
|
4,585,120 | 2.28 | 4,603,252 | 2.76 | ||||||||||||
|
Other interest bearing liabilities
|
2,259,023 | .83 | 1,804,587 | .54 | ||||||||||||
|
Total short-term borrowings
|
$ | 33,615,856 | .88 | % | $ | 38,634,341 | 1.05 | % | ||||||||
|
Maximum outstanding at any month end
|
$ | 46,472,435 | ||||||||||||||
| 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 | % | ||||||||
|
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 | ||||||||||||
|
ABCP borrowings
|
— | — | 16,238,782 | 1.64 | ||||||||||||
|
Unsecured 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 | ||||||||||||||
F-49
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 7. | Borrowings (Continued) |
Long-term
Borrowings
The following tables summarize outstanding long-term borrowings
(secured and unsecured) at December 31, 2010 and 2009, the
weighted average interest rates at the end of the periods, and
the related average balances during the periods. Rates reflect
stated interest rate of borrowings and related discounts and
premiums.
| December 31, 2010 |
Year Ended
|
|||||||||||
|
Weighted
|
December 31,
|
|||||||||||
|
Average
|
2010 | |||||||||||
|
Ending
|
Interest
|
Average
|
||||||||||
| Balance (1) | Rate (2) | Balance | ||||||||||
|
Floating rate notes:
|
||||||||||||
|
U.S. dollar-denominated:
|
||||||||||||
|
Interest bearing, due
2012-2047
|
$ | 124,053,229 | 1.12 | % | $ | 112,909,791 | ||||||
|
Non-U.S.
dollar-denominated:
|
||||||||||||
|
Interest bearing, due
2012-2041
|
11,999,260 | 1.26 | 12,125,425 | |||||||||
|
Total floating rate notes
|
136,052,489 | 1.13 | 125,035,216 | |||||||||
|
Fixed rate notes:
|
||||||||||||
|
U.S. dollar-denominated:
|
||||||||||||
|
Interest bearing, due
2012-2043
|
11,873,404 | 5.87 | 10,917,945 | |||||||||
|
Non-U.S.-dollar
denominated:
|
||||||||||||
|
Interest bearing, due
2012-2039
|
5,484,681 | 3.35 | 6,256,958 | |||||||||
|
Total fixed rate notes
|
17,358,085 | 5.06 | 17,174,903 | |||||||||
|
Unsecured term bank deposits — U.S.
dollar-denominated, due
2012-2019
|
3,216,165 | 3.40 | 3,698,888 | |||||||||
|
ABCP borrowings
|
5,852,521 | .81 | 4,855,478 | |||||||||
|
SLC acquisition financing
|
1,064,244 | 4.76 | 2,916 | |||||||||
|
Total long-term borrowings
|
$ | 163,543,504 | 1.60 | % | $ | 150,767,401 | ||||||
| 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:
|
||||||||||||
|
Interest bearing, due
2011-2041
|
9,368,402 | .96 | 10,589,114 | |||||||||
|
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:
|
||||||||||||
|
Interest bearing, due
2011-2039
|
10,382,384 | 3.34 | 9,727,213 | |||||||||
|
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, 2010 and 2009, respectively, 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-50
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 7. | Borrowings (Continued) |
At December 31, 2010, we had outstanding long-term
borrowings with call features totaling $2.9 billion.
Generally, these instruments are callable at the par amount. As
of December 31, 2010, the stated maturities and maturities
if accelerated to the call dates are shown in the following
table:
| December 31, 2010 | ||||||||||||||||||||||||||||||||
| Stated Maturity (1) | Maturity to Call Date (1) | |||||||||||||||||||||||||||||||
|
Unsecured
|
Unsecured
|
|||||||||||||||||||||||||||||||
|
Unsecured
|
Term Bank
|
Secured
|
Unsecured
|
Term Bank
|
Secured
|
|||||||||||||||||||||||||||
| Borrowings | Deposits | Borrowings | Total (2) | Borrowings | Deposits | Borrowings | Total | |||||||||||||||||||||||||
|
Year of Maturity
|
||||||||||||||||||||||||||||||||
|
2011
|
$ | — | $ | — | $ | 16,254,625 | $ | 16,254,625 | $ | 1,586,390 | $ | 58,728 | $ | 20,958,756 | $ | 22,603,874 | ||||||||||||||||
|
2012
|
1,801,338 | 1,531,860 | 13,614,267 | 16,947,465 | 1,846,786 | 1,531,860 | 11,450,578 | 14,829,224 | ||||||||||||||||||||||||
|
2013
|
2,335,616 | 758,730 | 12,203,644 | 15,297,990 | 2,309,194 | 758,730 | 11,015,375 | 14,083,299 | ||||||||||||||||||||||||
|
2014
|
3,841,274 | 810,807 | 9,893,645 | 14,545,726 | 3,938,632 | 810,807 | 9,680,796 | 14,430,235 | ||||||||||||||||||||||||
|
2015
|
710,418 | — | 9,206,628 | 9,917,046 | 799,296 | — | 8,993,780 | 9,793,076 | ||||||||||||||||||||||||
|
2016-2047
|
7,053,269 | 58,728 | 80,824,530 | 87,936,527 | 5,261,617 | — | 79,898,054 | 85,159,671 | ||||||||||||||||||||||||
| 15,741,915 | 3,160,125 | 141,997,339 | 160,899,379 | 15,741,915 | 3,160,125 | 141,997,339 | 160,899,379 | |||||||||||||||||||||||||
|
Hedge accounting adjustments
|
1,277,865 | 56,040 | 1,310,220 | 2,644,125 | 1,277,865 | 56,040 | 1,310,220 | 2,644,125 | ||||||||||||||||||||||||
|
Total
|
$ | 17,019,780 | $ | 3,216,165 | $ | 143,307,559 | $ | 163,543,504 | $ | 17,019,780 | $ | 3,216,165 | $ | 143,307,559 | $ | 163,543,504 | ||||||||||||||||
| (1) | We view our on-balance sheet securitization trust debt as long-term based on the contractual maturity dates and projects the expected principal paydowns based on our current estimates regarding loan prepayment speeds. The projected principal paydowns in year 2011 include $16.3 billion related to the on-balance sheet securitization trust debt. | |
| (2) | The aggregate principal amount of debt that matures in each period is $16.3 billion in 2011, $17.0 billion in 2012, $15.4 billion in 2013, $14.6 billion in 2014, $10.0 billion in 2015, and $88.7 billion in 2016-2047. |
Secured
Borrowings
VIEs are required to be consolidated by their primary
beneficiaries. The criteria to be considered the primary
beneficiary changed on January 1, 2010 (see Note 2,
“Significant Accounting Policies —
Consolidation
” for further discussion).
F-51
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 7. | Borrowings (Continued) |
We currently consolidate all of our 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. We consolidate the following financing
VIEs as of December 31, 2010 and 2009:
| December 31, 2010 | ||||||||||||||||||||||||||||
| (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 Conduit Program Facility
|
$ | 24,484 | $ | — | $ | 24,484 | $ | 24,511 | $ | 819 | $ | 634 | $ | 25,964 | ||||||||||||||
|
ABCP borrowings
|
— | 5,853 | 5,853 | 6,290 | 94 | 53 | 6,437 | |||||||||||||||||||||
|
Securitizations — FFELP Loans
|
— | 112,425 | 112,425 | 113,400 | 3,728 | 966 | 118,094 | |||||||||||||||||||||
|
Securitizations — Private Education Loans
|
— | 21,409 | 21,409 | 24,355 | 1,213 | 690 | 26,258 | |||||||||||||||||||||
|
Indentured trusts
|
— | 1,246 | 1,246 | 1,549 | 129 | 15 | 1,693 | |||||||||||||||||||||
|
Total before hedge accounting adjustments
|
24,484 | 140,933 | 165,417 | 170,105 | 5,983 | 2,358 | 178,446 | |||||||||||||||||||||
|
Hedge accounting adjustments
|
— | 1,311 | 1,311 | — | — | 1,348 | 1,348 | |||||||||||||||||||||
|
Total
|
$ | 24,484 | $ | 142,244 | $ | 166,728 | $ | 170,105 | $ | 5,983 | $ | 3,706 | $ | 179,794 | ||||||||||||||
| 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 | |||||||||||||||||||||
|
ABCP borrowings
|
— | 8,801 | 8,801 | 9,929 | 204 | 100 | 10,233 | |||||||||||||||||||||
|
Securitizations — FFELP Loans
|
— | 81,923 | 81,923 | 82,913 | 2,693 | 686 | 86,292 | |||||||||||||||||||||
|
Securitizations — Private Education Loans
|
— | 7,277 | 7,277 | 10,108 | 934 | 763 | 11,805 | |||||||||||||||||||||
|
Indentured trusts
|
64 | 1,533 | 1,597 | 1,898 | 172 | 24 | 2,094 | |||||||||||||||||||||
|
Total before hedge accounting adjustments
|
23,384 | 99,534 | 122,918 | 128,839 | 4,596 | 2,006 | 135,441 | |||||||||||||||||||||
|
Hedge accounting adjustments
|
— | 1,479 | 1,479 | — | — | 1,634 | 1,634 | |||||||||||||||||||||
|
Total
|
$ | 23,384 | $ | 101,013 | $ | 124,397 | $ | 128,839 | $ | 4,596 | $ | 3,640 | $ | 137,075 | ||||||||||||||
The
Department of Education (“ED”) Funding
Programs
In August 2008, ED implemented the Purchase Program and 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. 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. In
October 2010, we sold $20.4 billion of loans to ED and paid
off $20.3 billion of advances outstanding under the
Participation Program. This program is no longer in effect and
is not available as a source of funding.
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
F-52
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 7. | Borrowings (Continued) |
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 accepted eligible loans
through July 1, 2010. The ED Conduit Program expires on
January 19, 2014. Funding for the ED Conduit Program is
provided by the capital markets at a cost based on market rates,
with us 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 a put
agreement at a price of 97 percent of the face amount of
the loans. Our intent is to term securitize the loans in the
facility before the facility expires. Any loans that remain in
the facility as of the expiration date will be sold to ED at a
price of 97 percent of the face amount of the loans. As of
December 31, 2010, approximately $24.2 billion face
amount of our Stafford and PLUS Loans were funded through the ED
Conduit Program, including $9.3 billion of loans acquired
through the Student Loan Corporation acquisition and funded in
this program (see
“SLC Acquisition Funding”
below).
Asset-Backed
Financing Facilities
During the first quarter of 2008, we entered into two new
asset-backed financing facilities (the “2008 Asset-Backed
Financing Facilities”) to fund FFELP and Private
Education Loans. In 2009, the FFELP facilities were subsequently
amended and reduced and the Private Education facility was
retired.
On January 15, 2010, we terminated the 2008 Asset-Backed
Financing Facilities for FFELP and entered into new multi-year
ABCP facilities (the “2010 Facility”) which will
continue to provide funding for our 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.
Borrowings under the facility are expected to be commercial
paper issue cost plus 0.50 percent.
Our borrowings under the 2010 Facility are non-recourse. The
maximum amount we 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. In addition to the
funding limits described above, funding under the 2010 Facility
is subject to usual and customary conditions. The 2010 Facility
is subject to termination under certain circumstances. The
principal financial covenants in this facility require us 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
$3.1 billion as of December 31, 2010. The covenants
also require us 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. We were compliant with both of the
minimum interest coverage ratio and the minimum net adjusted
revenue tests as of the quarter ended December 31, 2010.
Increases in the borrowing rate of up to LIBOR plus
4.50 percent 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 2.00 percent to LIBOR plus
3.00 percent 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. As of December 31,
2010, there was approximately $5.9 billion outstanding in
this facility. The book basis of the assets securing this
facility at December 31, 2010 was $6.4 billion.
On January 14, 2011, we amended the 2010 Facility extending
the step-down dates and final term of the facility, which will
continue to provide funding for our federally-guaranteed student
loans. The facility amount
F-53
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 7. | Borrowings (Continued) |
is now $7.5 billion, reflecting an increase of
$2.5 billion over the previously scheduled facility
reduction. The scheduled maturity date of the facility is
January 10, 2014. We paid an extension fee of
$2 million. The usage fee for the 2010 Facility remains
unchanged at 0.50 percent over the applicable funding rate.
The amended facility features two contractual reductions over
the term. The first reduction is on January 13, 2012, to
$5.0 billion. The second reduction is on January 11,
2013, to $2.5 billion. If we fail to reduce the facility at
either trigger point, the usage fee increases to a maximum of
2.00 percent over the applicable funding rate. If liquidity
agreements are not renewed on the trigger dates, the usage fee
increases to 1.00 percent over the applicable funding rate
on January 13, 2012 and 1.50 percent over the
applicable funding rate on January 11, 2013. All other
terms are consistent with the original 2010 Facility described
above.
SLC
Acquisition Financing
On December 31, 2010, we closed on our agreement to
purchase an interest in $26.1 billion of securitized
federal student loans and related assets from the Student Loan
Corporation (“SLC”), a subsidiary of Citibank, N.A.
The purchase price was approximately $1.1 billion. The
transaction was funded by a
5-year
term
loan provided by Citibank in an amount equal to the purchase
price. The loan is secured by the purchased assets and
guaranteed by us. The loan bears interest at a rate of LIBOR
plus 4.50 percent, and is subject to scheduled quarterly
principal payments of the lesser of (i) 2.5 percent of
the original principal amount of the term loan or (ii) the
residual cash flow derived from the assets securing the loan.
Residual cash flow in excess of that needed to make quarterly
principal payments is restricted but we are permitted, at our
option, to prepay the obligation, in whole or in part, at any
time without penalty.
Securitizations
In early 2009, the Federal Reserve Bank of New York initiated a
program, The Term Asset-Backed Securities Loan Facility
(“TALF”), to facilitate renewed issuance of eligible
consumer and small business ABS with a term of up to five years.
For student loan collateral, TALF expired on March 31,
2010. During the program, we completed five transactions
totaling $7.5 billion which were TALF eligible.
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 TALF. During 2009, we
completed $7.5 billion of Private Education Loan term ABS
transactions, all of which were private placement transactions
and some were TALF eligible. On January 6, 2009, we closed
a $1.5 billion 12.5 year ABS based facility
(“Total Return Swap Facility”).
In March, 2010, we issued a $1.6 billion Private Education
Loan term ABS transaction which was
TALF-eligible.
The issuance included one $149 million tranche bearing a
coupon of Prime minus 0.05 percent and a second
$1.401 billion tranche bearing a coupon of
1-month
LIBOR plus 3.25 percent.
In April, 2010, we issued a $1.2 billion FFELP long-term
ABS transaction. The issuance included $1.2 billion A Notes
bearing a coupon of
1-month
LIBOR plus 0.40 percent and $37 million B Notes
bearing a coupon of
1-month
LIBOR plus 0.90 percent. The B Notes were purchased by us
in their entirety on the settlement date. This transaction was
composed primarily of FFELP Stafford and PLUS loans.
In July 2010, we redeemed our $1.5 billion SLM Private
Education Loan
Trust 2009-A
ABS issue and closed new offerings of our $869 million SLM
2010-B and $1.7 billion SLM 2010-C Private Education Loan
Trust ABS issues. Approximately $875 million of the
2010-B and 2010-C bonds were issued at a weighted average coupon
of
1-month
LIBOR plus 2.23 percent; the remaining $1.7 billion of
bonds were financed under our Total Return Swap Facility. We
raised approximately $1.0 billion of net additional cash on
these concurrent transactions.
F-54
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 7. | Borrowings (Continued) |
In August, 2010, we issued a $760 million FFELP ABS
transaction. This issuance included $738 million A Notes
bearing a coupon of
1-month
LIBOR plus 0.50 percent and $22 million B Notes
bearing a coupon of
1-month
LIBOR plus 0.90 percent. We purchased the B Notes in their
entirety on the settlement date. This transaction was composed
primarily of FFELP Stafford and PLUS loans.
We have $5.3 billion Private Education Loan securitization
bonds outstanding at December 31, 2010, where we have the
ability to call the bonds at a discount to par between 2011 and
2014. We have concluded that it is probable we will call these
bonds at the call date at the respective discount. Probability
is based on our 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, we are accreting
this call discount as a reduction to interest expense through
the call date. If it becomes less than probable that we will
call these bonds at a future date, it will result in our
reversing this prior accretion as a cumulative
catch-up
adjustment. We have accreted approximately $172 million,
cumulatively, and $112 million in the year ended
December 31, 2010 as a reduction of interest expense.
Auction
Rate Securities
At December 31, 2010, we had $3.3 billion of taxable
and $0.9 billion of tax-exempt auction rate securities
outstanding in 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 our auction rate securities’
interest rates are set. As a result, $3.4 billion of our
auction rate securities as of December 31, 2010 bore
interest at the maximum rate allowable under their terms. The
maximum allowable interest rate on our taxable auction rate
securities is generally LIBOR plus 1.50 percent to
3.50 percent, dependant on the security’s credit
rating. The maximum allowable interest rate on many of our
tax-exempt auction rate securities is a formula driven rate,
which produced various maximum rates up to 0.84 percent
during the fourth quarter of 2010. As of December 31, 2010,
$0.8 billion of auction rate securities with shorter
weighted average terms to maturity have had successful auctions,
resulting in an average rate of 1.67 percent.
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. We also have 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 the 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. Our repurchase of a reset rate note
requires additional funding, the availability and pricing of
which may be less favorable to us 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, 2010,
$4.3 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 these and additional reset rate notes will experience
failed remarketings. As of December 31, 2010, we had
$2.0 billion and $0.8 billion of reset rate notes due
to be newly remarketed in 2011 and 2012, respectively, and an
additional $5.7 billion to be newly remarked thereafter.
Indentured
Trusts
We have 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
F-55
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 7. | Borrowings (Continued) |
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 of Des Moines (“FHLB-DM”)
On January 15, 2010, HICA Education Loan Corporation
(“HICA”), our subsidiary, entered into a lending
agreement with the FHLB-DM. Under the agreement, the FHLB-DM
will provide advances backed by Federal Housing Finance Agency
approved collateral which includes federally-guaranteed student
loans (but does not include Private Education Loans). The
amount, price and tenor of future advances will vary and be
subject to the agreement’s borrowing conditions as then in
effect determined at the time of each borrowing. The maximum
amount that can be borrowed, as of December 31, 2010,
subject to available collateral, is approximately
$9.6 billion. As of December 31, 2010, borrowing under
the facility totaled $900 million and was secured by $1.2
billion of FFELP Loans. We have provided a guarantee to the
FHLB-DM for the performance and payment of HICA’s
obligations.
Other
Funding Sources
Sallie
Mae Bank
During the fourth quarter of 2008, the Bank, our Utah industrial
bank subsidiary, began expanding its deposit base to fund new
Private Education Loan originations. The Bank raises deposits
through intermediaries in the brokered Certificate of Deposit
(“CD”) market and through direct retail deposit
channels. As of December 31, 2010, bank deposits totaled
$5.9 billion of which $4.5 billion were brokered term
deposits, $1.4 billion were retail and other deposits. In
addition, the Bank had deposits from affiliates totaling
$440 million that eliminate in our consolidated balance
sheet. Cash and liquid investments totaled $2.0 billion as
of December 31, 2010.
In addition to its deposit base, the Bank has borrowing capacity
with the Federal Reserve Bank (“FRB”) through a
collateralized lending facility. Borrowing capacity is limited
by the availability of acceptable collateral. As of
December 31, 2010, borrowing capacity was approximately
$650 million and there were no outstanding borrowings.
Senior
Unsecured Debt
During the year, we issued $1.5 billion of senior unsecured
notes that bear a coupon of 8.00 percent. The notes were
swapped to LIBOR with an all-in cost of LIBOR plus
4.65 percent. On January 11, 2011, we announced and
priced a $2 billion five-year 6.25 percent fixed rate
unsecured bond. The bond was issued to yield 6.50 percent
before underwriting fees. The rate on the bond was swapped from
a fixed rate to a floating rate equal to an all-in cost of
one-month LIBOR plus 4.46 percent.
The following table summarizes activity related to the senior
unsecured debt repurchases for the years ended December 31,
2010, 2009 and 2008. “Gains on debt repurchases” is
shown net of hedging-related gains and losses.
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Unsecured debt principal repurchased
|
$ | 4,868,201 | $ | 3,447,245 | $ | 1,910,326 | ||||||
|
Gains on debt repurchases
|
316,941 | 536,190 | 64,477 | |||||||||
Unsecured
Revolving Credit Facility
In 2010 we terminated our $1.6 billion revolving credit
facility that was scheduled to mature in October 2011.
F-56
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 8. | Student Loan Securitization |
We securitize our FFELP Loan and Private Education Loan assets.
Prior to the adoption of new consolidation accounting guidance
on January 1, 2010, for transactions qualifying as sales,
we retained a Residual Interest and the underlying servicing
rights (as we retained the servicing responsibilities), all of
which were referred to as our 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. As a result of adopting
new consolidation accounting guidance, we removed the
$1.8 billion of Residual Interests (associated with our
previously off-balance sheet securitization trusts as of
December 31, 2009) from the consolidated balance sheet
(see Note 2, “Significant Accounting
Policies — Consolidation” for further details).
While this accounting has changed, our economic interest in
these assets remains unchanged.
Securitization
Activity
The following table summarizes our securitization activity for
the years ended December 31, 2010, 2009 and 2008. The
securitizations in the periods presented below were accounted
for as financings.
| Years Ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
|
Loan
|
Loan
|
Loan
|
||||||||||||||||||||||
|
No. of
|
Amount
|
No. of
|
Amount
|
No. of
|
Amount
|
|||||||||||||||||||
| (Dollars in millions) | Transactions | Securitized | Transactions | Securitized | Transactions | Securitized | ||||||||||||||||||
|
Securitizations:
|
||||||||||||||||||||||||
|
FFELP Stafford/PLUS Loans
|
2 | $ | 1,965 | — | $ | — | 9 | $ | 18,546 | |||||||||||||||
|
FFELP Consolidation Loans
|
— | — | 3 | 5,339 | — | — | ||||||||||||||||||
|
Private Education Loans
|
3 | 6,186 | 5 | 11,122 | — | — | ||||||||||||||||||
|
Total securitizations
|
5 | $ | 8,151 | 8 | $ | 16,461 | 9 | $ | 18,546 | |||||||||||||||
The following table summarizes cash flows received from or paid
to the previously off-balance sheet securitization trusts during
the years ended December 31, 2009 and 2008.
| Years Ended December 31, | ||||||||
| (Dollars in millions) | 2009 | 2008 | ||||||
|
Cash distributions from trusts related to Residual Interests
|
$ | 477 | $ | 909 | ||||
|
Servicing fees
received
(1)
|
225 | 246 | ||||||
|
Purchases of previously transferred financial assets for
representation and warranty violations
|
(7 | ) | (37 | ) | ||||
|
Reimbursements of borrower
benefits
(2)
|
(36 | ) | (29 | ) | ||||
|
Purchases of delinquent Private Education Loans from
securitization trusts using delinquent loan call option
|
— | (172 | ) | |||||
|
Purchases of loans using
clean-up
call option
|
— | (697 | ) | |||||
| (1) | We received annual servicing fees of 90 basis points, 50 basis points and 70 basis points of the outstanding securitized loan balance related to our FFELP Stafford, FFELP Consolidation Loan and Private Education Loan securitizations, respectively. | |
| (2) | Under the terms of the securitizations, the transaction documents require that we 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) |
Retained
Interest in Securitized Receivables
The following tables summarize the fair value of our Residual
Interests, included in our 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. As noted previously, the Residual
Interest was removed from the balance sheet on January 1,
2010.
| 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 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 | % | ||||||||||
| (1) | Includes $569 million related to the fair value of the Embedded Floor Income as of December 31, 2009. | |
| (2) | We used Constant Prepayment Rate (“CPR”) curves for Residual Interest valuations that were based on seasoning (the number of months since entering repayment). Under this methodology, a different CPR was applied to each year of a loan’s seasoning. Repayment status CPR used was 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 at December 31, 2009. These estimated defaults do not include recoveries related to defaults but do include prior purchases of loans at par by us when loans reached 180 days delinquent (prior to default) under a contingent call option. Although these loan purchases do not result in a realized loss to the trust, we have included them here. Not including these purchases in the disclosure would result in estimated defaults of 9.3 percent at December 31, 2009. |
We recorded net unrealized
mark-to-market
losses of $330 million and $425 million in the years
ended December 31, 2009 and 2008, respectively, related to
the Residual Interest.
As of December 31, 2009, we changed the following
significant assumptions used to determine the fair value of the
Residual Interests compared with those used as of
December 31, 2008:
| • | 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 we expect 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. |
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) |
The table below shows our off-balance sheet Private Education
Loan delinquency trends as of December 31, 2009.
|
December 31,
|
||||||||
| 2009 | ||||||||
| Balance | % | |||||||
| (Dollars in millions) | ||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 2,546 | ||||||
|
Loans in
forbearance
(2)
|
453 | |||||||
|
Loans in repayment and percentage of each status:
|
||||||||
|
Loans current
|
8,987 | 90.0 | % | |||||
|
Loans delinquent
31-60 days
(3)
|
332 | 3.3 | ||||||
|
Loans delinquent
61-90 days
(3)
|
151 | 1.5 | ||||||
|
Loans delinquent greater than
90 days
(3)
|
517 | 5.2 | ||||||
|
Total off-balance sheet Private Education Loans in repayment
|
9,987 | 100 | % | |||||
|
Total off-balance sheet Private Education Loans, gross
|
$ | 12,986 | ||||||
| (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 and 2008.
| Year Ended December 31, | ||||||||
| 2009 | 2008 | |||||||
| (Dollars in millions) | ||||||||
|
Charge-offs
|
$ | (423 | ) | $ | (153 | ) | ||
|
Charge-offs as a percentage of average loans in repayment
|
4.4 | % | 1.9 | % | ||||
|
Charge-offs as a percentage of average loans in repayment and
forbearance
|
4.2 | % | 1.6 | % | ||||
|
Ending off-balance sheet total Private Education
Loans
(1)
|
$ | 13,215 | $ | 13,782 | ||||
|
Average off-balance sheet Private Education Loans in repayment
|
$ | 9,597 | $ | 8,088 | ||||
|
Ending off-balance sheet Private Education Loans in repayment
|
$ | 9,987 | $ | 9,530 | ||||
| (1) | Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans (see Note 4, “Allowance for Loan Losses”). |
| 9. | Derivative Financial Instruments |
Risk
Management Strategy
We maintain an overall interest rate risk management strategy
that incorporates the use of derivative instruments to minimize
the economic effect of interest rate changes. Our goal is to
manage interest rate
F-59
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 9. | Derivative Financial Instruments (Continued) |
sensitivity by modifying the repricing frequency and underlying
index characteristics of certain balance sheet assets and
liabilities so the net interest margin is not, on a material
basis, adversely affected by movements in interest rates. We do
not use derivative instruments to hedge credit risk associated
with debt we issued. 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. We view
this strategy as a prudent management of interest rate
sensitivity. In addition, we utilize 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 we use derivatives to offset (or minimize) the risk of
interest rate and foreign currency changes, the use of
derivatives does expose us 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 us. When the fair value of a derivative
contract is negative, we owe the counterparty and, therefore,
have no credit risk exposure to the counterparty; however, the
counterparty has exposure to us. We minimize the credit risk in
derivative instruments by entering into transactions with highly
rated counterparties that are reviewed regularly by our Credit
Department. We also maintain 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 we have 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, less collateral the counterparty has posted to us,
represents exposure with the counterparty. When there is a net
negative exposure, we consider our exposure to the counterparty
to be zero. At December 31, 2010 and 2009, we had a net
positive exposure (derivative gain positions to us less
collateral which has been posted by counterparties to us)
related to SLM Corporation and the Bank derivatives of
$296 million and $246 million, respectively.
Our on-balance sheet securitization trusts have
$13.8 billion of Euro and British Pound Sterling
denominated bonds outstanding as of December 31, 2010. 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. At December 31, 2010, the net positive
exposure on these swaps is $920 million. As previously
discussed, our 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
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.
F-60
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 9. | Derivative Financial Instruments (Continued) |
Accounting
for Derivative Instruments
Derivative instruments that are used as part of our 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 (prior
to the adoption of topic updates to new consolidation accounting
guidance adopted on January 1, 2010, see Note 2,
“Significant Accounting Policies —
Consolidation”). The accounting for derivative instruments
requires that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded
on 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 us 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 us to hedge the exposure
to changes in fair value of a recognized fixed rate asset or
liability. We enter into interest rate swaps to economically
convert fixed rate assets into variable rate assets and fixed
rate debt into variable rate debt. We also enter into
cross-currency interest rate swaps to economically convert
foreign currency denominated fixed and floating debt to
U.S. dollar denominated variable debt. For fair value
hedges, we generally consider all components of the
derivative’s gain
and/or
loss
when assessing hedge effectiveness (in some cases we exclude
time-value components) and generally hedge changes in fair
values due to interest rates or interest rates and foreign
currency exchange rates or the total change in fair values.
Cash
Flow Hedges
We use cash flow hedges 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 recorded in
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 affects
earnings. If we determine it is not probable that the
anticipated transaction will 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. We generally hedge exposure to changes in cash flows
due to changes in interest rates or total changes in cash flow.
Trading
Activities
When derivative instruments do not qualify as hedges, they are
accounted for as trading instruments where all changes in fair
value are recorded through earnings. We sell interest rate
floors (Floor Income Contracts) to hedge the Embedded Floor
Income options in student loan assets. The Floor Income
Contracts are written options which have a more stringent hedge
effectiveness hurdle to meet. Therefore, Floor Income Contracts
do not qualify for hedge accounting treatment, and are recorded
as trading instruments. Regardless of the accounting treatment,
we consider these contracts to be economic hedges for risk
management purposes. We use this strategy to minimize our
exposure to changes in interest rates.
F-61
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 9. | Derivative Financial Instruments (Continued) |
We use basis swaps to minimize earnings variability caused by
having different reset characteristics on our 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, Consumer
Price Index or
1-year
constant maturity Treasury rates. The specific terms and
notional amounts of the swaps are determined based on a review
of our asset/liability structure, our assessment of future
interest rate relationships, and on other factors such as
short-term strategic initiatives. Hedge accounting 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 criterion because the
index of the swap does not exactly match the index of the hedged
assets. Additionally, some of our FFELP Loans can earn at either
a variable or a fixed interest rate depending on market interest
rates. Prior to the adoption of new consolidation accounting
guidance, we also had basis swaps that did not meet the
effectiveness test that economically hedge off-balance sheet
instruments. As a result, these swaps were recorded at fair
value with changes in fair value reflected currently in the
statement of income.
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) |
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, 2010 and 2009, and their impact on other
comprehensive income and earnings for the years ended
December 31, 2010, 2009 and 2008.
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 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||
|
Fair
Values
(1)
|
||||||||||||||||||||||||||||||||||
|
Derivative Assets:
|
||||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
Interest rate | $ | — | $ | — | $ | 967 | $ | 684 | $ | 200 | $ | 133 | $ | 1,167 | $ | 817 | |||||||||||||||||
|
Cross currency interest rate swaps
|
Foreign
currency and interest rate |
— | — | 1,925 | 2,932 | 101 | 44 | 2,026 | 2,976 | |||||||||||||||||||||||||
|
Other
|
Interest rate | — | — | — | — | 26 | — | 26 | — | |||||||||||||||||||||||||
|
Total derivative
assets
(3)
|
— | — | 2,892 | 3,616 | 327 | 177 | 3,219 | 3,793 | ||||||||||||||||||||||||||
|
Derivative Liabilities:
|
||||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
Interest rate | (75 | ) | (78 | ) | — | (6 | ) | (348 | ) | (639 | ) | (423 | ) | (723 | ) | ||||||||||||||||||
|
Floor Income Contracts
|
Interest rate | — | — | — | — | (1,315 | ) | (1,234 | ) | (1,315 | ) | (1,234 | ) | |||||||||||||||||||||
|
Cross currency interest rate swaps
|
Foreign
currency and interest rate |
— | — | (215 | ) | (192 | ) | — | (1 | ) | (215 | ) | (193 | ) | ||||||||||||||||||||
|
Other
(2)
|
Interest rate | — | — | — | — | (1 | ) | (20 | ) | (1 | ) | (20 | ) | |||||||||||||||||||||
|
Total derivative
liabilities
(3)
|
(75 | ) | (78 | ) | (215 | ) | (198 | ) | (1,664 | ) | (1,894 | ) | (1,954 | ) | (2,170 | ) | ||||||||||||||||||
|
Net total derivatives
|
$ | (75 | ) | $ | (78 | ) | $ | 2,677 | $ | 3,418 | $ | (1,337 | ) | $ | (1,717 | ) | $ | 1,265 | $ | 1,623 | ||||||||||||||
| (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 Euro-dollar futures contracts, the embedded derivatives in asset-backed financings, and derivatives related to the our Total Return Swap Facility. 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,
|
|||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Gross position
|
$ | 3,219 | $ | 3,793 | $ | (1,954 | ) | $ | (2,170 | ) | ||||||
|
Impact of master netting agreements
|
(782 | ) | (1,009 | ) | 782 | 1,009 | ||||||||||
|
Derivative values with impact of master netting agreements (as
carried on balance sheet)
|
2,437 | 2,784 | (1,172 | ) | (1,161 | ) | ||||||||||
|
Cash collateral (held) pledged
|
(886 | ) | (1,268 | ) | 809 | 636 | ||||||||||
|
Net position
|
$ | 1,551 | $ | 1,516 | $ | (363 | ) | $ | (525 | ) | ||||||
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) |
| 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) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||
|
Notional Values:
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
$ | 1.6 | $ | 1.7 | $ | 13.5 | $ | 12.4 | $ | 118.9 | $ | 148.2 | $ | 134.0 | $ | 162.3 | ||||||||||||||||
|
Floor Income Contracts
|
— | — | — | — | 39.3 | 47.1 | 39.3 | 47.1 | ||||||||||||||||||||||||
|
Cross currency interest rate swaps
|
— | — | 17.5 | 19.3 | .3 | .3 | 17.8 | 19.6 | ||||||||||||||||||||||||
|
Other
(1)
|
— | — | — | — | 1.0 | 1.1 | 1.0 | 1.1 | ||||||||||||||||||||||||
|
Total derivatives
|
$ | 1.6 | $ | 1.7 | $ | 31.0 | $ | 31.7 | $ | 159.5 | $ | 196.7 | $ | 192.1 | $ | 230.1 | ||||||||||||||||
| (1) | “Other” includes Euro-dollar futures contracts, embedded derivatives bifurcated from securitization debt, as well as derivatives related to our Total Return Swap Facility. |
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) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||||
|
Fair Value Hedges:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
$ | 289 | $ | (801 | ) | $ | 1,427 | $ | 487 | $ | 403 | $ | 157 | $ | (334 | ) | $ | 850 | $ | (1,532 | ) | $ | 442 | $ | 452 | $ | 52 | |||||||||||||||||||||
|
Cross currency interest rate swaps
|
(1,871 | ) | 692 | (1,537 | ) | 348 | 440 | 67 | 1,732 | (934 | ) | 1,864 | 209 | 198 | 394 | |||||||||||||||||||||||||||||||||
|
Total fair value derivatives
|
(1,582 | ) | (109 | ) | (110 | ) | 835 | 843 | 224 | 1,398 | (84 | ) | 332 | 651 | 650 | 446 | ||||||||||||||||||||||||||||||||
|
Cash Flow Hedges:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
— | 2 | — | (58 | ) | (75 | ) | (37 | ) | — | — | — | (58 | ) | (73 | ) | (37 | ) | ||||||||||||||||||||||||||||||
|
Total cash flow derivatives
|
— | 2 | — | (58 | ) | (75 | ) | (37 | ) | — | — | — | (58 | ) | (73 | ) | (37 | ) | ||||||||||||||||||||||||||||||
|
Trading:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
412 | (526 | ) | (261 | ) | 11 | 433 | 584 | — | — | — | 423 | (93 | ) | 323 | |||||||||||||||||||||||||||||||||
|
Floor Income Contracts
|
156 | 483 | (529 | ) | (888 | ) | (717 | ) | (488 | ) | — | — | — | (732 | ) | (234 | ) | (1,017 | ) | |||||||||||||||||||||||||||||
|
Cross currency interest rate swaps
|
57 | (26 | ) | 11 | 7 | 4 | 16 | — | — | — | 64 | (22 | ) | 27 | ||||||||||||||||||||||||||||||||||
|
Other
|
37 | (64 | ) | (3 | ) | 31 | — | 3 | — | — | — | 68 | (64 | ) | — | |||||||||||||||||||||||||||||||||
|
Total trading derivatives
|
662 | (133 | ) | (782 | ) | (839 | ) | (280 | ) | 115 | — | — | — | (177 | ) | (413 | ) | (667 | ) | |||||||||||||||||||||||||||||
|
Total
|
(920 | ) | (240 | ) | (892 | ) | (62 | ) | 488 | 302 | 1,398 | (84 | ) | 332 | 416 | 164 | (258 | ) | ||||||||||||||||||||||||||||||
|
Less: realized gains (losses) recorded in interest expense
|
— | — | — | 777 | 768 | 187 | — | — | — | 777 | 768 | 187 | ||||||||||||||||||||||||||||||||||||
|
Gains (losses) on derivative and hedging activities, net
|
$ | (920 | ) | $ | (240 | ) | $ | (892 | ) | $ | (839 | ) | $ | (280 | ) | $ | 115 | $ | 1,398 | $ | (84 | ) | $ | 332 | $ | (361 | ) | $ | (604 | ) | $ | (445 | ) | |||||||||||||||
| (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-64
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) | 2010 | 2009 | 2008 | |||||||||
|
Total losses on cash flow hedges
|
$ | (35 | ) | $ | (22 | ) | $ | (95 | ) | |||
|
Realized losses recognized in interest
expense
(1)(2)(3)
|
40 | 63 | 24 | |||||||||
|
Hedge ineffectiveness reclassified to
earnings
(1)(4)
|
— | (1 | ) | — | ||||||||
|
Total change in stockholders’ equity for unrealized gains
(losses) on derivatives
|
$ | 5 | $ | 40 | $ | (71 | ) | |||||
| (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) | We expect to reclassify $.1 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, 2010 and 2009
related to derivative exposures between us and our derivative
counterparties are detailed in the following table:
|
December 31,
|
December 31,
|
|||||||
| (Dollars in millions) | 2010 | 2009 | ||||||
|
Collateral held:
|
||||||||
|
Cash (obligation to return cash collateral is recorded in
short-term
borrowings)
(1)
|
$ | 886 | $ | 1,268 | ||||
|
Securities at fair value — corporate derivatives (not
recorded in financial
statements)
(2)
|
— | 112 | ||||||
|
Securities at fair value — on-balance sheet
securitization derivatives (not recorded in financial
statements)
(3)
|
585 | 717 | ||||||
|
Total collateral held
|
$ | 1,471 | $ | 2,097 | ||||
|
Derivative asset at fair value including accrued interest
|
$ | 2,540 | $ | 3,119 | ||||
|
Collateral pledged to others:
|
||||||||
|
Cash (right to receive return of cash collateral is recorded in
investments)
|
$ | 809 | $ | 636 | ||||
|
Securities at fair value (recorded in
investments)
(4)
|
— | 25 | ||||||
|
Securities at fair value (recorded in restricted
investments)
(5)
|
36 | 25 | ||||||
|
Securities at fair value re-pledged (not recorded in financial
statements)
(5)(6)
|
— | 87 | ||||||
|
Total collateral pledged
|
$ | 845 | $ | 773 | ||||
|
Derivative liability at fair value including accrued interest
and premium receivable
|
$ | 747 | $ | 758 | ||||
| (1) | At December 31, 2010 and 2009, $108 million and $447 million, respectively, was held in restricted cash accounts. | |
| (2) | Effective with the downgrade in our unsecured credit ratings on May 13, 2009, certain counterparties do not allow us 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 we hold as collateral that have been pledged to other counterparties. |
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) |
Our corporate derivatives contain credit contingent features. At
our current unsecured credit rating, we have fully
collateralized our corporate derivative liability position
(including accrued interest and net of premiums receivable) of
$711 million with our counterparties. Further downgrades
would not result in any additional collateral requirements,
except to increase the frequency of collateral calls. Two
counterparties have the right to terminate the contracts with
further downgrades. We currently have a liability position with
these derivative counterparties (including accrued interest and
net of premiums receivable) of $92 million and have posted
$95 million of collateral to these counterparties. If the
credit contingent feature was triggered for these two
counterparties and the counterparties exercised their right to
terminate, we would not be required to deliver additional assets
to settle the contracts. Trust related derivatives do not
contain credit contingent features related to our or the
trusts’ credit ratings.
At December 31, 2009, $381 million in collateral
related to off-balance sheet trust derivatives were held by
previously off-balance sheet trusts. Collateral posted by third
parties to the off-balance sheet trusts cannot be sold or
re-pledged by the trusts. As of January 1, 2010, the
off-balance sheet trusts were consolidated with the adoption of
topic updates to ASC 810. (See Note 2,
“Significant Accounting Policies —
Consolidations.”)
| 10. | Other Assets |
The following table provides the detail of our other assets at
December 31, 2010 and 2009.
| December 31, 2010 | December 31, 2009 | |||||||||||||||
|
Ending
|
% of
|
Ending
|
% of
|
|||||||||||||
| Balance | Balance | Balance | Balance | |||||||||||||
|
Derivatives at fair value
|
$ | 2,436,911 | 27 | % | $ | 2,783,696 | 28 | % | ||||||||
|
Accrued interest receivable
|
2,927,292 | 33 | 2,566,984 | 26 | ||||||||||||
|
Income tax asset, net current and deferred
|
1,283,344 | 14 | 1,750,424 | 18 | ||||||||||||
|
Purchased Paper-related receivables and real estate owned
|
95,907 | 1 | 286,108 | 3 | ||||||||||||
|
Benefit and insurance-related investments
|
462,131 | 5 | 472,079 | 5 | ||||||||||||
|
Fixed assets, net
|
290,705 | 4 | 322,481 | 3 | ||||||||||||
|
Accounts receivable — general
|
729,592 | 8 | 807,086 | 8 | ||||||||||||
|
Other loans
|
271,241 | 3 | 420,233 | 4 | ||||||||||||
|
Other
|
473,149 | 5 | 511,500 | 5 | ||||||||||||
|
Total
|
$ | 8,970,272 | 100 | % | $ | 9,920,591 | 100 | % | ||||||||
The “Derivatives at fair value” line in the above
table represents the fair value of our derivatives in a gain
position by counterparty, exclusive of accrued interest and
collateral. At December 31, 2010 and 2009, these balances
included $2.7 billion and $3.4 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, 2010 and 2009, the cumulative
mark-to-market
adjustment to the hedged debt was $(2.7) billion and
$(3.4) billion, respectively.
| 11. | Stockholders’ Equity |
Preferred
Stock
At December 31, 2010, we 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-
F-66
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 11. | Stockholders’ Equity (Continued) |
Cumulative Preferred Stock, Series B (the
“Series B Preferred Stock”). Neither series has a
maturity date but can be redeemed at our 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 our other securities
or 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 our common stock.
The remaining 810,370 shares of our 7.25 percent
Mandatory Convertible Preferred Stock, Series C (the
“Series C Preferred Stock”) were converted on
December 15, 2010, the mandatory conversion date, into
41 million shares of common stock. This conversion was
based on a conversion rate calculated using the average of the
closing prices per share of our common stock during the 20
consecutive trading day period ending on the third trading day
immediately preceding the mandatory conversion date. Pursuant to
the terms of the Series C Preferred Stock, each share of
preferred stock was converted into 50.8906 shares of common
stock. During 2009, we converted $339 million of our
Series C Preferred Stock to common stock. As part of this
conversion, we 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
Our shareholders have authorized the issuance of
1.125 billion shares of common stock (par value of $.20).
At December 31, 2010, 526.9 million shares were issued
and outstanding and 34.5 million shares were unissued but
encumbered for 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.” Voting shares outstanding stated in our
Proxy Statement and on the cover pages of our
Form 10-Qs
and
Form 10-Ks,
and used for voting and dividend paying purposes, excludes
non-voting shares reserved for our deferred compensation plan.
Shares outstanding stated in our Statement of Stockholders’
Equity and used for calculating earnings per common share,
includes these non-voting shares. These non-voting shares
totaled 87,880 shares as of December 31, 2010.
Common
Stock Repurchase Program and Equity Forward
Contracts
In the past, we repurchased our common stock through both open
market purchases and settlement of equity forward contracts.
However, since January 2008, we have repurchased our common
stock only in connection with our benefit plans, including
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.
F-67
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 our common share repurchases and
issuances for the years ended December 31, 2010, 2009 and
2008.
| Years Ended December 31, | ||||||||||||
| (Shares in millions) | 2010 | 2009 | 2008 | |||||||||
|
Common shares repurchased:
|
||||||||||||
|
Benefit
plans
(1)
|
1.1 | .3 | 1.0 | |||||||||
|
Total shares repurchased
|
1.1 | .3 | 1.0 | |||||||||
|
Average purchase price per share
|
$ | 13.44 | $ | 20.29 | $ | 24.51 | ||||||
|
Common shares issued
|
43.0 | 17.8 | 1.9 | |||||||||
|
Authority remaining at end of period for repurchases
|
38.8 | 38.8 | 38.8 | |||||||||
| (1) | 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 our common stock on December 31, 2010
was $12.59.
Accumulated
Other Comprehensive Income (Loss)
Accumulated other comprehensive loss includes the after-tax
change in unrealized gains and losses on
available-for-sale
investments, unrealized gains and losses on derivatives, and the
defined benefit pension plans adjustment. The following table
presents the cumulative balances of the components of other
comprehensive loss as of December 31, 2010, 2009 and 2008.
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Net unrealized gains (losses) on
investments
(1)(2)
|
$ | 2,222 | $ | 1,629 | $ | (1,243 | ) | |||||
|
Net unrealized (losses) on
derivatives
(3)
|
(48,789 | ) | (53,899 | ) | (93,986 | ) | ||||||
|
Net gain on defined benefit pension
plans
(4)
|
1,903 | 11,445 | 18,753 | |||||||||
|
Total accumulated other comprehensive loss
|
$ | (44,664 | ) | $ | (40,825 | ) | $ | (76,476 | ) | |||
| (1) | Net of tax expense of $1.3 million and $.9 million as of December 31, 2010 and 2009, respectively, and tax benefit of $.8 million as of December 31, 2008. | |
| (2) | Net unrealized gains (losses) on investments include currency translation gains of $.5 million, $.8 million and $.4 million as of December 31, 2010, 2009 and 2008, respectively. | |
| (3) | Net of tax benefit of $28 million, $31 million and $53 million as of December 31, 2010, 2009 and 2008, respectively. | |
| (4) | Net of tax expense of $1 million, $7 million and $11 million as of December 31, 2010, 2009 and 2008, respectively. |
| 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, 2010,
2009 and 2008.
F-68
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 12. | Earnings (Loss) per Common Share (Continued) |
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Numerator:
|
||||||||||||
|
Net income from continuing operations
|
$ | 597,530 | $ | 544,010 | $ | 2,480 | ||||||
|
Preferred stock dividends
|
72,143 | 145,836 | 111,206 | |||||||||
|
Net income (loss) from continuing operations attributable to
common stock
|
525,387 | 398,174 | (108,726 | ) | ||||||||
|
Adjusted for dividends of Series C Preferred
Stock
(1)
|
— | — | — | |||||||||
|
Net income (loss) from continuing operations attributable to
common stock, adjusted
|
525,387 | 398,174 | (108,726 | ) | ||||||||
|
Loss from discontinued operations
|
(67,148 | ) | (219,872 | ) | (215,106 | ) | ||||||
|
Net income (loss) attributable to common stock
|
$ | 458,239 | $ | 178,302 | $ | (323,832 | ) | |||||
|
Denominator
(shares in thousands):
|
||||||||||||
|
Weighted average shares used to compute basic EPS
|
486,673 | 470,858 | 466,642 | |||||||||
|
Effect of dilutive securities:
|
||||||||||||
|
Dilutive effect of stock options, non-vested deferred
compensation and restricted stock, restricted stock units and
Employee Stock Purchase Plan
(“ESPP”)
(1)
|
1,812 | 726 | — | |||||||||
|
Dilutive potential common
shares
(2)
|
1,812 | 726 | — | |||||||||
|
Weighted average shares used to compute diluted EPS
|
488,485 | 471,584 | 466,642 | |||||||||
|
Basic earnings (loss) per common share:
|
||||||||||||
|
Continuing operations
|
$ | 1.08 | $ | .85 | $ | (.23 | ) | |||||
|
Discontinued operations
|
(.14 | ) | (.47 | ) | (.46 | ) | ||||||
|
Total
|
$ | .94 | $ | .38 | $ | (.69 | ) | |||||
|
Diluted earnings (loss) per common share:
|
||||||||||||
|
Continuing operations
|
$ | 1.08 | $ | .85 | $ | (.23 | ) | |||||
|
Discontinued operations
|
(.14 | ) | (.47 | ) | (.46 | ) | ||||||
|
Total
|
$ | .94 | $ | .38 | $ | (.69 | ) | |||||
| (1) | 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. | |
| (2) | For the years ended December 31, 2010, 2009 and 2008, stock options covering approximately 15 million, 42 million and 38 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, 2010, we have two active stock-based
compensation plans that provide for grants of equity awards to
our employees and non-employee directors. We also maintain an
Employee Stock Purchase Plan (the “ESPP”). Shares
issued under these stock-based compensation plans may be either
shares reacquired by us or shares that are authorized but
unissued. We also make grants of stock-based awards under
individually negotiated agreements.
Our
2009-2012
Incentive Plan was approved by shareholders on May 22,
2009, and expires on May 22, 2012. At December 31,
2010, 21.7 million shares were authorized to be issued from
this plan.
F-69
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) |
Our 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, 2010,
1 million shares were authorized to be issued from this
plan.
From January 1, 2007 through May 21, 2009, we granted
stock options and restricted stock to our 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, 2010, 2009 and 2008 was $40 million,
$51 million, and $86 million, respectively. The
related income tax benefit for the years ended December 31,
2010, 2009 and 2008 was $15 million, $19 million and
$32 million, respectively. As of December 31, 2010,
there was $25 million of total unrecognized compensation
cost related to stock-based compensation programs, which is
expected to be recognized over a weighted average period of
1.9 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 our common stock on the grant date. We have granted
time-vested, price-vested and performance-vested options to our
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
our 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 our 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, 2010, 2009 and 2008 were estimated as of the
grant date using a Black-Scholes option pricing model with the
following weighted average assumptions:
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Risk-free interest rate
|
1.60 | % | 1.51 | % | 2.50 | % | ||||||
|
Expected volatility
|
60 | % | 80 | % | 44 | % | ||||||
|
Expected dividend rate
|
0.00 | % | 0.00 | % | 0.00 | % | ||||||
|
Expected life of the option
|
3.3 years | 3.5 years | 3.3 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 valuation purposes. The expected
volatility is based on implied volatility from publicly-traded
options on our stock at the grant date and historical volatility
of our 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, 2010, there was $22 million of
unrecognized compensation cost related to stock options, which
is expected to be recognized over a weighted average period of
1.9 years.
F-70
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) |
On May 17, 2010, we launched a one-time stock option
exchange program to allow certain eligible employees (excluding
our named executive officers and members of our Board of
Directors) to exchange certain
out-of-the-money
options for new options with an exercise price equal to the fair
market value of our stock as of the grant date. To be eligible
for the exchange, the options had to have been granted on or
before January 31, 2008, had an exercise price that was
greater than or equal to $20.94 per share, had a remaining term
that expired after January 1, 2011 and were outstanding as
of the start date of the offer and at the time the offer
expired. The offering period closed on June 14, 2010. On
that date, 15.1 million options were tendered and exchanged
for 8.0 million new options with an exercise price of
$11.39. None of the replacement options were vested on the date
of grant. Replacement options will vest in six months, twelve
months or two annual installments following the grant date,
depending on the original vesting status and vesting terms of
the eligible options, and will maintain the original contractual
term of the eligible options for which they were exchanged. The
exchange program was designed so that the fair market value of
the new options would not be greater than the fair market value
of the options exchanged, and as a result, this stock option
exchange did not result in incremental compensation expense to
us.
The following table summarizes stock option activity for the
year ended December 31, 2010.
|
Weighted
|
Weighted
|
|||||||||||||||
|
Average
|
Average
|
|||||||||||||||
|
Exercise
|
Remaining
|
Aggregate
|
||||||||||||||
|
Number of
|
Price per
|
Contractual
|
Intrinsic
|
|||||||||||||
| Options | Share | Term | Value | |||||||||||||
|
Outstanding at December 31, 2009
|
43,294,720 | $ | 28.77 | |||||||||||||
|
Granted
|
7,264,800 | 10.34 | ||||||||||||||
|
Granted in stock option exchange
|
7,962,176 | 11.39 | ||||||||||||||
|
Exercised
|
(964,380 | ) | 11.06 | |||||||||||||
|
Canceled
|
(6,365,241 | ) | 24.77 | |||||||||||||
|
Canceled in stock option exchange
|
(15,106,197 | ) | 35.87 | |||||||||||||
|
Outstanding at December 31,
2010
(1)
|
36,085,878 | $ | 19.88 | 6.1 yrs | $ | — | ||||||||||
|
Exercisable at December 31, 2010
|
19,307,142 | $ | 26.69 | 4.6 yrs | $ | — | ||||||||||
| (1) | Includes gross number of net-settled options awarded. Options granted in 2010 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 our common stock at the time of exercise. |
The weighted average fair value of options granted was $4.40,
$5.82 and $6.93 for the years ended December 31, 2010, 2009
and 2008, respectively. The total intrinsic value of options
exercised was $1.3 million, $.1 million and
$.8 million for the years ended December 31, 2010,
2009 and 2008, respectively.
Cash received from option exercises was $.2 million for the
year ended December 31, 2010. The actual tax benefit
realized for the tax deductions from option exercises totaled
$.4 million for the year ended December 31, 2010.
Restricted
Stock
Restricted stock awards vest over a minimum twelve-month
performance period and generally vests over three years. Vesting
is contingent upon service, corporate earnings-related
performance or some combination
F-71
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) |
of those vesting criteria being met. Non-vested restricted stock
is entitled to dividend equivalent units that vest subject to
the same vesting requirements as the underlying restricted stock
award.
The fair value of restricted stock awards is determined on the
grant date based on our stock price and is amortized to
compensation cost on a straight-line basis over the related
vesting periods. As of December 31, 2010, there was
$3 million of unrecognized compensation cost related to
restricted stock, which is expected to be recognized over a
weighted average period of 1.8 years.
The following table summarizes restricted stock activity for the
year ended December 31, 2010.
|
Weighted
|
||||||||
|
Average Grant
|
||||||||
|
Number of
|
Date
|
|||||||
| Shares | Fair Value | |||||||
|
Non-vested at December 31, 2009
|
844,580 | $ | 16.45 | |||||
|
Granted
|
526,900 | 10.31 | ||||||
|
Vested
|
(536,263 | ) | 16.80 | |||||
|
Canceled
|
(133,480 | ) | 18.13 | |||||
|
Non-vested at December 31, 2010
|
701,737 | $ | 11.98 | |||||
The total fair value of shares that vested during the years
ended December 31, 2010, 2009 and 2008, was
$9 million, $9 million and $11 million,
respectively.
Restricted
Stock Units
Restricted stock units (“RSUs”) are equity awards
granted to employees that entitle the holder to shares of our
common stock when the award vests. The fair value of each grant
is determined on the grant date based on our stock price and is
amortized to compensation cost on a straight-line basis over the
related vesting periods. RSUs vest over a minimum twelve-month
performance period and generally vest over three years. Vesting
is contingent upon service, corporate earnings-related
performance or some combination of those vesting criteria being
met. Non-vested RSUs are entitled to dividend equivalent units
that vest subject to the same vesting requirements as the
underlying RSU award.
As of December 31, 2010, there was $.3 million of
unrecognized compensation cost related to RSUs, which is
expected to be recognized over a weighted average period of
1.9 years.
The following table summarizes RSU activity for the year ended
December 31, 2010.
|
Weighted
|
||||||||
|
Average Grant
|
||||||||
|
Number of
|
Date
|
|||||||
| RSUs | Fair Value | |||||||
|
Outstanding at December 31, 2009
|
75,750 | $ | 11.07 | |||||
|
Granted
|
75,800 | 10.31 | ||||||
|
Canceled
|
(37,854 | ) | 11.29 | |||||
|
Vested and converted to common stock
|
(17,015 | ) | 10.44 | |||||
|
Outstanding at December 31, 2010
|
96,681 | $ | 10.50 | |||||
The total fair value of RSUs that vested and converted to common
stock during the years ended December 31, 2010, 2009 and
2008 was $.4 million, $.1 million and $0, respectively.
F-72
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) |
Employee
Stock Purchase Plan
Under the ESPP, employees can purchase shares of our 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.
The fair values of the stock purchase rights of the ESPP
offerings in the years ended December 31, 2010, 2009 and
2008 were calculated using a Black-Scholes option pricing model
with the following weighted average assumptions.
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Risk-free interest rate
|
.33 | % | .53 | % | 1.91 | % | ||||||
|
Expected volatility
|
61 | % | 103 | % | 58 | % | ||||||
|
Expected dividend rate
|
0.00 | % | 0.00 | % | 0.00 | % | ||||||
|
Expected life of the option
|
1 year | 1 year | 1 year | |||||||||
The expected volatility is based on implied volatility from
publicly-traded options on our stock at the grant date and
historical volatility of our 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, 2010,
2009 and 2008 was $3.30, $4.88 and $6.57, respectively. The fair
values were amortized to compensation cost on a straight-line
basis over a one-year vesting period. As of December 31,
2010, there was $.1 million of unrecognized compensation
cost related to the ESPP, which is expected to be recognized in
January 2011.
During the year ended December 31, 2010, plan participants
purchased 205,528 shares of our common stock. No shares
were purchased in 2008 or 2009.
| 14. | Restructuring Activities |
Restructuring expenses of $91 million, $22 million and
$84 million were recorded in the years ended
December 31, 2010, 2009 and 2008, respectively. Of these
amounts, $85 million, $10 million and $72 million
was recognized in continuing operations and $6 million,
$12 million and $12 million was recognized in
discontinued operations, respectively. The following details our
restructuring efforts:
| • | On March 30, 2010, President Obama signed into law H.R. 4872, HCERA, which included the SAFRA Act. Effective July 1, 2010, the legislation eliminated the authority to provide new loans under FFELP and requires all new federal loans to be made through the DSLP. The new law did not alter or affect the terms and conditions of existing FFELP Loans. We continue to restructure our operations in response to this change in law which will result in a significant reduction of operating costs due to the elimination of positions and facilities associated with the origination of FFELP Loans. |
Restructuring expenses associated with this plan for the year
ended December 31, 2010 were $84 million, of which
$83 million was recorded in continuing operations and
$1 million was recorded in discontinued operations. In
connection with the HCERA restructuring effort, on July 1,
2010, we
F-73
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 14. | Restructuring Activities (Continued) |
announced our corporate headquarters will be moving from Reston,
VA to Newark, DE by March 31, 2011.
We are currently finalizing this restructuring plan and expect
to incur an estimated $11 million of additional
restructuring costs. The majority of these restructuring
expenses incurred through December 31, 2010 and expected to
be incurred in future periods are severance costs related to the
partially completed and planned elimination of approximately
2,500 positions, or approximately 30 percent of the
workforce that existed as of the first quarter of 2010.
| • | In response to the College Cost Reduction and Access Act of 2007 (“CCRAA”) and challenges in the capital markets, we initiated a restructuring plan in the fourth quarter of 2007. This plan focused on conforming our lending activities to the economic environment, exiting certain customer relationships and product lines, winding down or otherwise disposing of our debt Purchased Paper businesses, and significantly reducing our operating expenses. This restructuring plan was essentially completed in the fourth quarter of 2009. Under this plan, restructuring expenses for the years ended December 31, 2010, 2009 and 2008 were $7 million, $22 million, and $84 million, respectively. Restructuring expenses from the fourth quarter of 2007 through the fourth quarter of 2010 totaled $136 million, of which $107 million was recorded in continuing operations and $29 million was recorded in discontinued operations. The majority of these restructuring expenses were severance costs related to the elimination of approximately 3,000 positions, or approximately 25 percent of the workforce that existed as of the fourth quarter of 2007. We estimate approximately $1 million of additional restructuring expenses will be incurred in the future related to this restructuring plan. |
The following table summarizes the restructuring expenses
incurred to date.
|
Cumulative Expense
|
||||||||||||||||
| Years Ended December 31, |
as of December 31,
|
|||||||||||||||
| 2010 | 2009 | 2008 | 2010 | |||||||||||||
|
Severance costs
|
$ | 80,536 | $ | 8,402 | $ | 51,357 | $ | 162,800 | ||||||||
|
Lease and other contract termination costs
|
1,430 | 597 | 8,902 | 10,929 | ||||||||||||
|
Exit and other costs
|
3,270 | 1,572 | 11,400 | 16,242 | ||||||||||||
|
Total restructuring expenses from continuing
operations
(1)
|
85,236 | 10,571 | 71,659 | 189,971 | ||||||||||||
|
Total restructuring expenses from discontinued operations
|
5,562 | 11,658 | 12,116 | 29,336 | ||||||||||||
|
Total
|
$ | 90,798 | $ | 22,229 | $ | 83,775 | $ | 219,307 | ||||||||
| (1) | Aggregate restructuring expenses from continuing operations incurred across our reportable segments during the years ended December 31, 2010, 2009 and 2008 totaled $54 million, $8 million and $42 million, respectively, in our FFELP Loans reportable segment; $12 million, $2 million and $25 million, respectively, in our Consumer Lending reportable segment; $7 million, $2 million and $10 million, respectively, in our Business Services reportable segment; and $12 million, $(2) million and $(5) million, respectively, in our Other reportable segment. |
Since the fourth quarter of 2007 through December 31, 2010,
cumulative severance costs were incurred in conjunction with
aggregate completed and planned position eliminations of
approximately 5,500 positions. Position eliminations were across
all of our reportable segments, ranging from senior executives
to servicing center personnel. Lease and other contract
termination costs and exit and other costs incurred during 2010,
2009 and 2008 related primarily to terminated or abandoned
facility leases and consulting costs incurred in conjunction
with various cost reduction and exit strategies.
F-74
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 14. | Restructuring Activities (Continued) |
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, 2008
|
$ | 15,124 | $ | 2,798 | $ | 60 | $ | 17,982 | ||||||||
|
Net accruals from continuing operations
|
8,402 | 597 | 1,572 | 10,571 | ||||||||||||
|
Net accruals from discontinued operations
|
9,356 | 2,193 | 109 | 11,658 | ||||||||||||
|
Cash paid
|
(23,687 | ) | (1,807 | ) | (1,741 | ) | (27,235 | ) | ||||||||
|
Balance at December 31, 2009
|
$ | 9,195 | $ | 3,781 | $ | — | $ | 12,976 | ||||||||
|
Net accruals from continuing operations
|
80,536 | 1,430 | 3,270 | 85,236 | ||||||||||||
|
Net accruals from discontinued operations
|
3,108 | 2,384 | 70 | 5,562 | ||||||||||||
|
Cash paid
|
(45,235 | ) | (3,440 | ) | (1,678 | ) | (50,353 | ) | ||||||||
|
Balance at December 31, 2010
|
$ | 47,604 | $ | 4,155 | $ | 1,662 | $ | 53,421 | ||||||||
| 15. | Fair Value Measurements |
We use estimates of fair value in applying various accounting
standards for our financial statements.
We categorize our fair value estimates based on a hierarchical
framework associated with three levels of price transparency
utilized in measuring financial instruments at fair value. For
additional information regarding our policies for determining
fair value and the hierarchical framework see Note 2,
“Significant Accounting Policies — Fair Value
Measurement.”
During the year ended December 31, 2010, there were no
significant transfers of financial instruments between levels.
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.
FFELP Loans classified as
held-for-sale
are those which we have 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 values were 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 Repayment Borrower
Benefits to be earned. In addition, the Floor Income component
of our FFELP Loan portfolio is valued with 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. Certain model
assumptions were calibrated based upon pricing information
related to our acquisition of the Student Loan Corporation FFELP
trusts on December 31, 2010.
Other
Loans
Facilities financings, and mortgage and consumer loans held for
investment are accounted for at cost with fair values being
disclosed. Fair value was determined primarily by looking to the
value of the underlying
F-75
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 15. | Fair Value Measurements (Continued) |
collateral. 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
Investments”)
Cash and cash equivalents are carried at cost. Carrying value
approximated fair value for disclosure purposes. Investments
classified as trading or
available-for-sale
are carried at fair value in the financial statements.
Investments in U.S. Treasury securities consisted of
T-bills that trade in active markets. The fair value was
determined using observable market prices. Investments in
mortgage-backed securities are valued using observable market
prices. These securities are primarily collateralized by real
estate properties in Utah and are guaranteed by either a
government sponsored enterprise or the U.S. government.
Other investments (primarily municipal bonds) 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.
These valuations are immaterial to the overall investment
portfolio. 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. No additional adjustments were deemed
necessary.
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. 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. Fair value adjustments for
unsecured corporate debt are made based on indicative quotes
from observable trades and spreads on credit default swaps
specific to the Company. Fair value 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 value of a majority of derivative financial
instruments was determined by standard derivative pricing and
option models using the stated terms of the contracts and
observable market inputs. In some cases, we utilized internally
developed inputs that are not observable in the market, and as
such, classified these instruments as level 3 fair values.
Complex structured derivatives or derivatives that trade in less
liquid markets require significant adjustments and judgment in
determining fair value that cannot be corroborated with market
transactions. It is our policy to compare our derivative fair
values to those received by our counterparties in order to
validate the model’s outputs. Any significant differences
are identified and resolved appropriately.
When determining the fair value of derivatives, we take 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. When the counterparty has exposure to us under
derivatives
F-76
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 15. | Fair Value Measurements (Continued) |
with us, we fully collateralize the exposure, minimizing the
adjustment necessary to the derivative valuations for our credit
risk. While trusts that contain derivatives are not required to
post collateral, when the counterparty is exposed to the trust
the credit quality and securitized nature of the trusts
minimizes any adjustments for the counterparty’s exposure
to the trusts. The net credit risk adjustment (adjustments for
our exposure to counterparties net of adjustments for the
counterparties’ exposure to us) decreased the valuations by
$72 million at December 31, 2010.
Inputs specific to each class of derivatives disclosed in the
table below are as follows:
| • | Interest rate swaps — Derivatives are valued using standard derivative cash flow models. Derivatives that swap fixed interest payments for LIBOR interest payments (or vice versa) and derivatives swapping quarterly reset LIBOR for daily reset LIBOR were valued using the LIBOR swap yield curve which is an observable input from an active market. These derivatives are level 2 fair value estimates in the hierarchy. Other derivatives swapping LIBOR interest payments for another variable interest payment (primarily T-Bill or Prime) or swapping interest payments based on the Consumer Price Index for LIBOR interest payments are valued using the LIBOR swap yield curve and observable market spreads for the specified index. The markets for these swaps are generally illiquid as indicated by a wide bid/ask spread. The adjustment made for liquidity decreased the valuations by $129 million at December 31, 2010. These derivatives are level 3 fair value estimates. | |
| • | Cross-currency interest rate swaps — Derivatives are valued using standard derivative cash flow models. Derivatives hedging foreign-denominated bonds are valued using the LIBOR swap yield curve (for both USD and the respective currency), cross-currency basis spreads, and forward foreign currency exchange rates. The derivatives are primarily British Pound Sterling and Euro denominated. These inputs are observable inputs from active markets. Therefore, the resulting valuation is a level 2 fair value estimate. Amortizing notional derivatives (derivatives whose notional amounts change based on changes in the balance of, or pool of assets or debt) hedging trust debt use internally derived assumptions for the trust assets’ prepayment speeds and default rates to model the notional amortization. Management makes assumptions concerning the extension features of derivatives hedging rate-reset notes denominated in a foreign currency. These inputs are not market observable; therefore, these derivatives are level 3 fair value estimates. | |
| • | Floor Income Contracts — Derivatives are valued using an option pricing model. Inputs to the model include the LIBOR swap yield curve and LIBOR interest rate volatilities. The inputs are observable inputs in active markets and these derivatives are level 2 fair value estimates. |
The carrying value of borrowings designated as the hedged item
in a 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 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.
F-77
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 15. | Fair Value Measurements (Continued) |
Residual
Interests
Prior to the adoption the new consolidation accounting guidance
on January 1, 2010 (see Note 2, “Significant
Accounting Policies —
Consolidations
), the
Residual Interests were carried at fair value in the financial
statements. No active market exists for student loan Residual
Interests; as such, the fair value was calculated using
discounted cash flow models and option models. Observable inputs
from active markets were 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 were used in determining the fair value
and required significant judgment. These unobservable inputs
were internally determined based upon analysis of historical
data and expected industry trends. On a quarterly basis we
back-tested our prepayment speeds, default rates and costs of
funds assumptions by comparing those assumptions to actual
results experienced. We used 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 were not available to validate
the models’ results.
F-78
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 15. | Fair Value Measurements (Continued) |
The following tables summarize the valuation of our financial
instruments that are
marked-to-market
on a recurring basis in the consolidated financial statements as
of December 31, 2010 and 2009.
|
Fair Value Measurements on a Recurring
|
||||||||||||||||
| Basis as of December 31, 2010 | ||||||||||||||||
| (Dollars in millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
Assets
|
||||||||||||||||
|
Available-for-sale
investments:
|
||||||||||||||||
|
U.S. Treasury securities
|
$ | 39 | $ | — | $ | — | $ | 39 | ||||||||
|
Asset-backed securities
|
— | 68 | — | 68 | ||||||||||||
|
Guaranteed investment contracts
|
— | 20 | — | 20 | ||||||||||||
|
Other
|
— | 12 | — | 12 | ||||||||||||
|
Total
available-for-sale
investments
|
39 | 100 | — | 139 | ||||||||||||
|
Derivative
instruments:
(1)
|
||||||||||||||||
|
Interest rate swaps
|
— | 1,017 | 150 | 1,167 | ||||||||||||
|
Cross currency interest rate swaps
|
— | 427 | 1,599 | 2,026 | ||||||||||||
|
Other
|
— | — | 26 | 26 | ||||||||||||
|
Total derivative assets
|
— | 1,444 | 1,775 | 3,219 | ||||||||||||
|
Counterparty netting
|
(782 | ) | ||||||||||||||
|
Subtotal
(3)
|
2,437 | |||||||||||||||
|
Cash collateral held
|
(886 | ) | ||||||||||||||
|
Net derivative assets
|
1,551 | |||||||||||||||
|
Total
|
$ | 39 | $ | 1,544 | $ | 1,775 | $ | 1,690 | ||||||||
|
Liabilities
(2)
|
||||||||||||||||
|
Derivative
instruments:
(1)
|
||||||||||||||||
|
Interest rate swaps
|
$ | — | $ | (183 | ) | $ | (240 | ) | $ | (423 | ) | |||||
|
Floor Income Contracts
|
— | (1,315 | ) | — | (1,315 | ) | ||||||||||
|
Cross currency interest rate swaps
|
— | (43 | ) | (172 | ) | (215 | ) | |||||||||
|
Other
|
(1 | ) | — | — | (1 | ) | ||||||||||
|
Total derivative instruments
|
(1 | ) | (1,541 | ) | (412 | ) | (1,954 | ) | ||||||||
|
Counterparty netting
|
782 | |||||||||||||||
|
Subtotal
(3)
|
(1,172 | ) | ||||||||||||||
|
Cash collateral pledged
|
809 | |||||||||||||||
|
Net derivative liabilities
|
(363 | ) | ||||||||||||||
|
Total
|
$ | (1 | ) | $ | (1,541 | ) | $ | (412 | ) | $ | (363 | ) | ||||
| (1) | Fair value of derivative instruments is comprised of market value less accrued interest and excludes collateral. | |
| (2) | 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. | |
| (3) | As carried on the balance sheet. |
F-79
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 15. | Fair Value Measurements (Continued) |
|
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 | ) | |||||||||
| (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. |
F-80
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 15. | 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, 2010 and 2009.
| Year Ended December 31, 2010 | ||||||||||||||||||||||||||||
| Derivative instruments | ||||||||||||||||||||||||||||
|
Cross
|
||||||||||||||||||||||||||||
|
Currency
|
Total
|
|||||||||||||||||||||||||||
|
Residual
|
Interest
|
Floor Income
|
Interest
|
Derivative
|
||||||||||||||||||||||||
| (Dollars in millions) | Interests | Rate Swaps | Contracts | Rate Swaps | Other | Instruments | Total | |||||||||||||||||||||
|
Balance, beginning of period
|
$ | 1,828 | $ | (272 | ) | $ | (54 | ) | $ | 1,596 | $ | (18 | ) | $ | 1,252 | $ | 3,080 | |||||||||||
|
Total gains/(losses) (realized and unrealized):
|
||||||||||||||||||||||||||||
|
Included in
earnings
(1)
|
— | 234 | 3 | (834 | ) | 34 | (563 | ) | (563 | ) | ||||||||||||||||||
|
Included in other comprehensive income
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Purchases, issuances and settlements
|
— | (52 | ) | 51 | 665 | 10 | 674 | 674 | ||||||||||||||||||||
|
Removal of Residual
Interests
(2)
|
(1,828 | ) | — | — | — | — | — | (1,828 | ) | |||||||||||||||||||
|
Transfers in and/or out of level 3
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Balance, end of period
|
$ | — | $ | (90 | ) | $ | — | $ | 1,427 | $ | 26 | $ | 1,363 | $ | 1,363 | |||||||||||||
|
Change in unrealized gains/(losses) relating to instruments
still held at the reporting
date
(3)
|
$ | — | $ | 111 | $ | — | $ | (1,010 | ) | $ | 36 | $ | (863 | ) | $ | (863 | ) | |||||||||||
| 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 | ) (4) | $ | 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) | 2010 | 2009 | 2008 | |||||||||
|
Servicing and securitization revenue
|
$ | — | $ | 120 | $ | 79 | ||||||
|
Gains (losses) on derivative and hedging activities, net
|
(732 | ) | 298 | (314 | ) | |||||||
|
Interest expense
|
169 | (207 | ) | — | ||||||||
|
Total
|
$ | (563 | ) | $ | 211 | $ | (235 | ) | ||||
| (2) | Upon adoption of new consolidation accounting guidance on January 1, 2010, we consolidated all of our previously off-balance sheet securitization trusts (see Note 2, “Significant Accounting Policies — Consolidation”). | |
| (3) | Recorded in “gains (losses) on derivative and hedging activities, net” in the consolidated statements of income. | |
| (4) | Recorded in “servicing and securitization revenue (loss)” in the consolidated statements of income. |
F-81
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 15. | Fair Value Measurements (Continued) |
The following table summarizes the fair values of our financial
assets and liabilities, including derivative financial
instruments, as of December 31, 2010 and 2009.
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
|
Fair
|
Carrying
|
Fair
|
Carrying
|
|||||||||||||||||||||
| (Dollars in millions) | Value | Value | Difference | Value | Value | Difference | ||||||||||||||||||
|
Earning assets
|
||||||||||||||||||||||||
|
FFELP Loans
|
$ | 147,163 | $ | 148,649 | $ | (1,486 | ) | $ | 119,747 | $ | 121,053 | $ | (1,306 | ) | ||||||||||
|
Private Education Loans
|
30,949 | 35,656 | (4,707 | ) | 20,278 | 22,753 | (2,475 | ) | ||||||||||||||||
|
Other loans
|
88 | 270 | (182 | ) | 219 | 420 | (201 | ) | ||||||||||||||||
|
Cash and investments
|
11,553 | 11,553 | — | 13,253 | 13,253 | — | ||||||||||||||||||
|
Total earning assets
|
189,753 | 196,128 | (6,375 | ) | 153,497 | 157,479 | (3,982 | ) | ||||||||||||||||
|
Interest-bearing liabilities
|
||||||||||||||||||||||||
|
Short-term borrowings
|
33,604 | 33,616 | 12 | 30,988 | 30,897 | (91 | ) | |||||||||||||||||
|
Long-term borrowings
|
154,355 | 163,544 | 9,189 | 123,049 | 130,546 | 7,497 | ||||||||||||||||||
|
Total interest-bearing liabilities
|
187,959 | 197,160 | 9,201 | 154,037 | 161,443 | 7,406 | ||||||||||||||||||
|
Derivative financial instruments
|
||||||||||||||||||||||||
|
Floor Income/Cap contracts
|
(1,315 | ) | (1,315 | ) | — | (1,234 | ) | (1,234 | ) | — | ||||||||||||||
|
Interest rate swaps
|
744 | 744 | — | 94 | 94 | — | ||||||||||||||||||
|
Cross currency interest rate swaps
|
1,811 | 1,811 | — | 2,783 | 2,783 | — | ||||||||||||||||||
|
Other
|
25 | 25 | — | (20 | ) | (20 | ) | — | ||||||||||||||||
|
Other
|
||||||||||||||||||||||||
|
Residual interest in securitized assets
|
— | 1,828 | 1,828 | — | ||||||||||||||||||||
|
Excess of net asset fair value over carrying value
|
$ | 2,826 | $ | 3,424 | ||||||||||||||||||||
| 16. | Commitments, Contingencies and Guarantees |
We offer 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, we also enter 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, we
do not participate in the loan and the counterparty subsequently
fails to perform according to the terms of its contract with us.
At December 31, 2010 and 2009, the contractual amount of
these financial obligations was $50 million and
$850 million, respectively. There were no outstanding draws
at December 31, 2010.
In addition, we maintain 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
F-82
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 16. | Commitments, Contingencies and Guarantees (Continued) |
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, 2010, there
were $364 million of originated loans (FFELP and Private
Education Loans) in the pipeline that we are committed to
purchase.
On January 31, 2008, a putative class action lawsuit was
filed against us and certain officers in the United States
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 our
common stock 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 our securities.
The complaint alleges that Defendants caused our results for
year-end 2006 and for the first quarter of 2007 to be materially
misstated because we failed to adequately provide for loan
losses, which overstated our net income, and that we failed to
adequately disclose allegedly known trends and uncertainties
with respect to our non-traditional loan portfolio. On
September 24, 2010, the court denied our motion to dismiss
Mr. Albert Lord and the Company. but dismissed
Mr. C.E. Andrews as a defendant in the action. The
matter is now in the discovery phase. Lead Plaintiff seeks
unspecified compensatory damages, attorneys’ fees, costs,
and equitable and injunctive relief. At this time we do not
believe it is possible to estimate a range of exposure.
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 we allegedly contacted
“tens of thousands” of consumers on their cellular
telephones via autodialer without their prior express consent in
violation of the Telephone Consumer Protection Act, 47 U.S.C.
§ 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. On April 5, 2010, Plaintiffs filed a
First Amended Class Action Complaint changing the defendant
from SLM Corporation to Sallie Mae, Inc. The parties in this
matter have reached a tentative settlement which is subject to
court approval and other conditions. On September 14, 2010,
the United States District Court for the Western District of
Washington agreed to Plaintiff’s Motion for Preliminary
Approval of Settlement Agreement. We have vigorously denied all
claims asserted against us, but agreed to the settlement to
avoid the burden and expense of continued litigation. If the
settlement receives final approval from the Court, settlement
awards will be made to eligible class members on a claims-made
basis from a settlement fund of $19.5 million, and class
members may opt out of certain calls to their cellular
telephones. On January 21, 2011, and February 7, 2011,
the Company filed submissions with the Court to advise that
approximately 1.76 million individuals had been omitted
from the original notice list for a total of approximately
6.6 million class members. In response, Class Counsel
asked the Company to contribute additional unspecified amounts
to the settlement fund. On February 10, 2011, the Court
granted a Consented Motion to Stay Implementation of Settlement
and Certain Deadlines. The Court ordered Class Counsel to
file a status report on March 18, 2011. On
February 10, 2011, Judith Harper filed a Motion to
Intervene as Party Plaintiff, which the court terminated on
February 11, 2011 based upon the court’s
February 10, 2011 Stay. On February 9, 2011,
Ms. Harper filed a similar Class Action Complaint
regarding the TCPA against Arrow Financial Services, LLC, in the
U.S. District Court for the Northern District of Illinois
(the “Harper case”). On February 22, 2011, Arrow
Financial Services, LLC filed a Motion to Stay Proceedings in
the Harper case. That Motion is pending. We recorded $19.5
million of contingency expense in 2010 related to this matter.
In
U.S. ex rel. Oberg v. Nelnet, et al.
, the
United States District Court for the Eastern District of
Virginia entered a Stipulation of Dismissal on October 25,
2010. The Company was voluntarily dismissed from the case.
Southwest Student Services Corporation vigorously denied all
claims asserted against it, but agreed to a
F-83
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 16. | Commitments, Contingencies and Guarantees (Continued) |
$6 million settlement to avoid the burden and expense of
continued litigation. We recorded $6 million of contingency
expense in 2010 related to this matter.
ED’s Office of the Inspector General (“OIG”)
commenced an audit regarding Special Allowance Payments on
September 10, 2007. On August 3, 2009, we received the
final audit report of the OIG related to our billing practices
for Special Allowance Payments. Among other things, the OIG
recommended that ED instruct us to return approximately
$22 million in alleged special allowance overpayments. We
continue to believe that our practices were consistent with
longstanding ED guidance and all applicable rules and
regulations and intend to continue disputing these findings. We
provided our response to the Secretary on October 2, 2009
and we provided additional information to ED in 2010. At this
time we estimate the range of potential exposure is $0 to
$22 million.
Contingencies
In the ordinary course of business, we and our 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 us and our subsidiaries.
In the ordinary course of business, we and our subsidiaries are
subject to regulatory examinations, information gathering
requests, inquiries and investigations. In connection with
formal and informal inquiries in these cases, we and our
subsidiaries receive numerous requests, subpoenas and orders for
documents, testimony and information in connection with various
aspects of our regulated activities.
In view of the inherent difficulty of predicting the outcome of
such litigation and regulatory matters, we 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.
We are required to establish reserves for litigation and
regulatory matters where those matters present loss
contingencies that are both probable and estimable. When loss
contingencies are not both probable and estimable, we do not
establish reserves.
Based on current knowledge, reserves have been established for
certain litigation or regulatory matters where the loss is both
probable and estimable. 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 our consolidated financial
position, liquidity, results of operations or cash flows.
| 17. | Benefit Plans |
In 2010 we began the formal process with the Pension Benefit
Guaranty Corporation and the IRS to terminate the qualified
pension plan. As of this filing, we are waiting on approval from
the IRS in order to proceed. In conjunction with the termination
of the qualified plan, we are also terminating the non-qualified
supplemental pension plan. A portion of these non-qualified
benefits were distributed in December 2010 with the remaining
benefits payable in 2011. Subject to the receipt of a favorable
determination letter from the IRS, we intend to complete the
termination and settlement of all pension plan benefits during
2011. This termination will not have a material effect on future
financial results.
F-84
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 17. | Benefit Plans (Continued) |
| 18. | Income Taxes |
Reconciliations of the statutory U.S. federal income tax
rates to our effective tax rate for continuing operations follow:
|
Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Statutory rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State tax, net of federal benefit
|
1.7 | (.1 | ) | 3.5 | ||||||||
|
Non-deductible goodwill
|
9.2 | — | (.6 | ) | ||||||||
|
Capitalized transaction costs
|
— | — | 35.9 | |||||||||
|
Unrecognized tax benefits, U.S. federal and state, net of
federal benefit
|
(.5 | ) | (1.1 | ) | 28.4 | |||||||
|
Corporate owned life insurance
|
(.3 | ) | (.4 | ) | 9.9 | |||||||
|
Other, net
|
.1 | (.7 | ) | (4.8 | ) | |||||||
|
Effective tax rate
|
45.2 | % | 32.7 | % | 107.3 | % | ||||||
The effective tax rates for discontinued operations for the
years ended December 31, 2010, 2009 and 2008 are
26.7 percent, 27.9 percent, and 38.3 percent,
respectively. The effective tax rate varies from the statutory
U.S. federal rate of 35 percent primarily due to the
establishment of valuation allowances against capital loss
carryforwards for the years ended December 31, 2010 and
2009, and due to the impact of state taxes, net of federal
benefit, for the years ended December 31, 2010, 2009 and
2008.
F-85
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 18. | Income Taxes (Continued) |
Income tax expense for the years ended December 31, 2010,
2009, and 2008 consists of:
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Continuing operations current provision/(benefit):
|
||||||||||||
|
Federal
|
$ | 252,380 | $ | 156,395 | $ | 391,770 | ||||||
|
State
|
36,777 | (19,895 | ) | 31,535 | ||||||||
|
Foreign
|
(2 | ) | 27 | 86 | ||||||||
|
Total continuing operations current provision/(benefit)
|
289,155 | 136,527 | 423,391 | |||||||||
|
Continuing operations deferred provision/(benefit):
|
||||||||||||
|
Federal
|
214,440 | 124,180 | (422,261 | ) | ||||||||
|
State
|
(10,826 | ) | 3,161 | (37,823 | ) | |||||||
|
Foreign
|
— | — | — | |||||||||
|
Total continuing operations deferred provision/(benefit)
|
203,614 | 127,341 | (460,084 | ) | ||||||||
|
Continuing operations provision for income tax expense/(benefit)
|
492,769 | 263,868 | (36,693 | ) | ||||||||
|
Discontinued operations current provision/(benefit):
|
||||||||||||
|
Federal
|
$ | 29,276 | $ | (199,306 | ) | $ | 9,639 | |||||
|
State
|
7,254 | (13,518 | ) | 1,201 | ||||||||
|
Foreign
|
49 | 370 | 592 | |||||||||
|
Total discontinued operations current provision/(benefit)
|
36,579 | (212,454 | ) | 11,432 | ||||||||
|
Discontinued operations deferred provision/(benefit):
|
||||||||||||
|
Federal
|
(55,842 | ) | 114,766 | (120,890 | ) | |||||||
|
State
|
(5,105 | ) | 13,112 | (21,077 | ) | |||||||
|
Foreign
|
— | (321 | ) | (346 | ) | |||||||
|
Total discontinued operations deferred provision/(benefit)
|
(60,947 | ) | 127,557 | (142,313 | ) | |||||||
|
Discontinued operations provision for income tax
expense/(benefit)
|
(24,368 | ) | (84,897 | ) | (130,881 | ) | ||||||
|
Provision for income tax expense/(benefit)
|
$ | 468,401 | $ | 178,971 | $ | (167,574 | ) | |||||
F-86
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 18. | Income Taxes (Continued) |
At December 31, 2010 and 2009, the tax effect of temporary
differences that give rise to deferred tax assets and
liabilities include the following:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Deferred tax assets:
|
||||||||
|
Loan reserves
|
$ | 908,781 | $ | 737,762 | ||||
|
Market value adjustments on student loans, investments and
derivatives
|
480,292 | 496,101 | ||||||
|
Intangible assets
|
79,960 | — | ||||||
|
Stock-based compensation plans
|
73,182 | 70,528 | ||||||
|
Deferred revenue
|
70,830 | 83,042 | ||||||
|
Accrued expenses not currently deductible
|
53,010 | 47,249 | ||||||
|
Purchased paper impairments
|
51,081 | 42,892 | ||||||
|
Student loan premiums and discounts, net
|
47,205 | 55,918 | ||||||
|
Unrealized investment losses
|
25,302 | 25,949 | ||||||
|
Operating loss and credit carryovers
|
21,775 | 36,747 | ||||||
|
Other
|
5,721 | 50,962 | ||||||
|
Total deferred tax assets
|
1,817,139 | 1,647,150 | ||||||
|
Deferred tax liabilities:
|
||||||||
|
Gains/(losses) on repurchased debt
|
299,634 | 187,505 | ||||||
|
Securitization transactions
|
— | 93,254 | ||||||
|
Leases
|
53,267 | 64,246 | ||||||
|
Intangible assets
|
— | 52,971 | ||||||
|
Other
|
26,053 | 38,646 | ||||||
|
Total deferred tax liabilities
|
378,954 | 436,622 | ||||||
|
Net deferred tax assets
|
$ | 1,438,185 | $ | 1,210,528 | ||||
Included in other deferred tax assets is a valuation allowance
of $33,488 and $25,111 as of December 31, 2010 and 2009,
respectively, against a portion of our 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 capital losses associated with
our Purchased Paper 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, 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, 2010, we have apportioned state net
operating loss carryforwards of $374,230 which begin to expire
in 2011, state capital loss carryovers of $5,425 which begin to
expire in 2012, and federal and state credit carryovers of $441
which begin to expire in 2021.
F-87
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 18. | Income Taxes (Continued) |
Accounting
for Uncertainty in Income Taxes
The following table summarizes changes in unrecognized tax
benefits for the years ended December 31, 2010, 2009 and
2008:
| December 31, | ||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
Unrecognized tax benefits at beginning of year
|
$ | 104.4 | $ | 86.4 | $ | 174.8 | ||||||
|
Increases resulting from tax positions taken during a prior
period
|
71.0 | 75.2 | 11.3 | |||||||||
|
Decreases resulting from tax positions taken during a prior
period
|
(92.6 | ) | (58.3 | ) | (132.2 | ) | ||||||
|
Increases/(decreases) resulting from tax positions taken during
the current period
|
(2.5 | ) | (22.5 | ) | 36.2 | |||||||
|
Decreases related to settlements with taxing authorities
|
(42.5 | ) | (17.9 | ) | (.1 | ) | ||||||
|
Increases related to settlements with taxing authorities
|
11.2 | 44.7 | — | |||||||||
|
Reductions related to the lapse of statute of limitations
|
(7.3 | ) | (3.2 | ) | (3.6 | ) | ||||||
|
Unrecognized tax benefits at end of year
|
$ | 41.7 | $ | 104.4 | $ | 86.4 | ||||||
Total unrecognized tax benefits, if recognized, would not have a
material effect on the effective tax rate.
The IRS began the examination of our 2009 U.S. federal income
tax returns during the fourth quarter of 2010. 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.
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 2006 and prior and 2008 have been
audited and are now resolved. Various combinations of
subsidiaries, tax years, and jurisdictions remain open for
review, subject to statute of limitations periods (typically 3
to 4 prior years).
| 19. | Segment Reporting |
Effective July 1, 2010, legislation eliminated the
authority to originate new loans under the FFELP. Consequently,
we no longer originate FFELP Loans. Net interest income from our
FFELP Loan portfolio and fees associated with servicing FFELP
Loans and collecting on delinquent and defaulted FFELP Loans on
behalf of Guarantors has been our largest source of income. In
response, we conducted a broad-based assessment of the effect
the legislation would have on our business. As a result, we
changed the way we regularly monitor and assess our ongoing
operations and results during the fourth quarter of 2010 by
realigning our business segments into four reportable segments:
(1) FFELP Loans, (2) Consumer Lending,
(3) Business Services and (4) Other. Prior to this
change we had three reportable segments —
(1) Lending (2) APG and (3) Other.
F-88
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 19. | Segment Reporting (Continued) |
The following table shows the realignment of our business lines
from the old reportable segments to the new reportable segments:
| Business Lines/Activities | New Business Segment | Prior Business Segment | ||
|
FFELP Loan business
|
FFELP Loans | Lending | ||
|
Private Education Loan business
|
Consumer Lending | Lending | ||
|
Direct Banking
|
Consumer Lending | Lending | ||
|
Intercompany servicing of FFELP Loans
|
Business Services | Lending | ||
|
FFELP Loan default aversion services
|
Business Services | APG | ||
|
FFELP defaulted loan portfolio management services
|
Business Services | APG | ||
|
FFELP Guarantor servicing
|
Business Services | Other | ||
|
Contingency collections
|
Business Services | APG | ||
|
Third-party loan servicing
|
Business Services | Other | ||
|
ED loan servicing
|
Business Services | Other | ||
|
Upromise
|
Business Services | Other | ||
|
Campus Payment Solutions
|
Business Services | Other | ||
|
Purchased Paper — Non-Mortgage
|
Other | APG | ||
|
Purchased Paper — Mortgage/Properties
|
Other | APG | ||
|
Mortgage and other loans
|
Other | Lending | ||
|
Debt repurchase gains
|
Other | Lending | ||
|
Corporate liquidity portfolio
|
Other | Lending | ||
|
Overhead expenses
|
Other | Lending, APG and Other |
Management views the Company as consisting of three primary
segments comprised of one amortizing business and two ongoing
businesses that have the potential to grow in the future. As a
result of the legislation discussed above, our FFELP Loan
business is now viewed as an amortizing business. Consumer
Lending (primarily our Private Education Loan business) and
Business Services (primarily our
fee-for-services
businesses) are viewed by management as ongoing businesses with
growth opportunities. Our Other segment primarily consists of
the financial results related to the repurchase of debt, the
corporate liquidity portfolio and all overhead. We also include
results from smaller wind-down and discontinued operations
within this segment. This change in reporting allows us to
separately evaluate our four operating segments.
We have three primary operating segments — the FFELP
Loan operating segment, Consumer Lending operating segment and
the Business Services operating segment. These three operating
segments meet the quantitative thresholds for reportable
segments. Accordingly, the results of operations of our FFELP
Loans, Consumer Lending and Business Services segments are
presented separately. We have smaller operating segments that
consist of business operations that have either been
discontinued or are winding down. These operating segments do
not meet the quantitative thresholds to be considered reportable
segments. As a result, the results of operations for these
operating segments (Purchased Paper business and mortgage and
other loan business) are combined with gains/losses from the
repurchase of debt, the financial results of our corporate
liquidity portfolio and all overhead within the Other reportable
segment. The management reporting process measures the
performance of our operating segments based on our management
structure, as well as the methodology we used to evaluate
performance and allocate resources. Management, including our
chief operating decision makers, evaluates the performance of
our operating segments based on their profitability. As
discussed further below, we measure the profitability of our
operating segments based on “Core Earnings.”
Accordingly, information regarding our reportable segments is
provided based on a “Core Earnings” basis.
F-89
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 19. | Segment Reporting (Continued) |
As a result of the change in segment reporting that occurred in
the fourth quarter 2010, past periods have been recast for
comparison purposes. In connection with changing the reportable
segments the following lists other significant changes we made
related to the new segment presentation:
| • | The operating expenses reported for each segment are directly attributable to the generation of revenues by that segment. We have included corporate overhead and certain information technology costs (together referred to as “Overhead”) in our Other segment rather than allocate those expenses by segment. | |
| • | The creation of the FFELP Loans and Business Services segments has resulted in our accounting for the significant servicing revenue we earn on FFELP Loans we own in the Business Services segment. This bifurcates the FFELP interest income between the FFELP Loans and Business Services segment, with an intercompany servicing fee charge from the Business Services segment. The intercompany amounts are the contractual rates for encumbered loans within a financing facility or a similar market rate if the loan is not in a financing facility and accordingly exceed our costs. | |
| • | In our GAAP-basis financial presentation we allocated existing goodwill to the new reporting units within the reportable segments based upon relative fair value. During the fourth quarter 2010, we also evaluated our goodwill for impairment using both the old reporting and new reporting unit framework and there was no impairment under either analysis. | |
| • | Similar to prior periods, capital is assigned to each segment based on internally determined risk adjusted weightings for the assets in each segment. These weightings have been updated and differ depending on the relative risk of each asset type and represent management’s view of the level of capital needed to support different assets. Unsecured debt is allocated based on the remaining funding needed for each segment after direct funding and the capital allocation has been considered. |
As part of the change in the reportable segments in the fourth
quarter of 2010, we also changed our calculation of “Core
Earnings.” When our FFELP Loan portfolio was growing,
management and investors in the Company valued it based on
recurring income streams. Given the uncertain and volatile
nature of unhedged Floor Income, little value was attributed to
it by the financial markets; therefore we excluded unhedged
Floor Income from “Core Earnings.” Now that our FFELP
Loan portfolio is amortizing down, management and investors are
focused on the total amount of cash the FFELP Loan portfolio
generates including unhedged Floor Income. As a result, we now
include unhedged Floor Income in “Core Earnings” and
have recast past “Core Earnings” financial results to
reflect this change.
The effect of including unhedged Floor Income, net of tax, on
“Core Earnings” was an increase of $21 million,
$210 million and $57 million for the years ending
December 31, 2010, 2009 and 2008, respectively.
FFELP
Loans Segment
Our FFELP Loans segment consists of our FFELP Loan portfolio and
the underlying debt and capital funding the loans. These FFELP
Loans are either financed through various types of secured
non-recourse financing vehicles or unsecured debt. At
December 31, 2010, we held $148.6 billion of total
FFELP Loans, of which 77 percent were funded to term by
securitization trusts, 16 percent were funded through the
ED Conduit Program which terminates on January 19, 2014,
5 percent were funded in our multi-year ABCP facility and
FHLB-DM facility. The remainder was funded with unsecured debt.
While we may acquire third-party FFELP loan portfolios in the
future, our existing FFELP Loan portfolio will amortize over
approximately 25 years.
F-90
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 19. | Segment Reporting (Continued) |
FFELP Loans segment operating expenses primarily represent an
intercompany charge from the Business Services segment which
performs the servicing of the majority of these loans. Servicing
is primarily charged at rates paid by the trusts where the loan
resides. These servicing rates exceed the actual cost of
servicing the loans.
As a result of the long-term funding used in the FFELP portfolio
and the government guarantee provided on the loans, the net
interest margin recorded in the FFELP Loans segment tends to be
relatively stable. In addition to the net interest margin, we
earn other fee income which is primarily generated by late fees
on the loans in the portfolio.
The following table includes asset information for our FFELP
Loans segment.
| December 31, | ||||||||
| 2010 | 2009 | |||||||
|
FFELP Loans, net
|
$ | 148,649 | $ | 121,053 | ||||
|
Cash and
investments
(1)
|
5,963 | 4,812 | ||||||
|
Retained Interest in off-balance sheet securitized loans
|
— | 1,034 | ||||||
|
Other
|
3,911 | 4,484 | ||||||
|
Total assets
|
$ | 158,523 | $ | 131,383 | ||||
| (1) | Includes restricted cash and investments. |
Consumer
Lending Segment
In this segment, we originate, acquire, finance and service
Private Education Loans. 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 federal 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. Private
Education Loans bear the full credit risk of the borrower. We
manage this additional risk through historical risk-performance
underwriting strategies and the addition of qualified cosigners.
In 2010 we originated $2.3 billion of Private Education
Loans. As of December 31, 2010 and 2009, we had
$35.7 billion and $35.1 billion of total “Core
Earnings” basis Private Education Loans outstanding,
respectively. At December 31, 2010, 68 percent of our
Private Education Loans were funded to term in securitization
trusts and the remainder were funded with term unsecured debt
and bank deposits.
In this segment, we earn net interest income on the loan
portfolio (after provision for loan losses) as well as servicing
fees which are primarily late payment and forbearance fees.
Operating expenses for this segment include costs incurred to
acquire and to service our loans.
The Bank plays an integral role in this segment. We received our
Utah State charter approval order effective October 12,
2005 and approval for our insurance from the FDIC on
October 26, 2005. Since the beginning of 2006, nearly all
Private Education Loans have been originated and initially
funded by the Bank. At December 31, 2010, the Bank had
total assets of $7.6 billion including $4.4 billion in
Private Education Loans and total deposits of $5.9 billion.
Historically, the Bank focused on raising brokered deposits with
an average life in excess of two years. In 2010 we began to
gather retail deposits targeting our core customer base. We
raised more than $1 billion in retail deposits. We are now
more fully developing our banking products and services to offer
such capabilities as mobile bill payment and remote deposit
capture to increase our appeal to our college-educated customer
base and enhance our deposit gathering capabilities.
F-91
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 19. | Segment Reporting (Continued) |
The following table includes asset information for our Consumer
Lending segment.
| December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Private Education Loans, net
|
$ | 35,656 | $ | 22,753 | ||||
|
Cash and
investments
(1)
|
3,372 | 3,459 | ||||||
|
Retained Interest in off-balance sheet securitized loans
|
— | 794 | ||||||
|
Other
|
4,004 | 3,729 | ||||||
|
Total assets
|
$ | 43,032 | $ | 30,735 | ||||
| (1) | Includes restricted cash and investments. |
The significant increase in assets is primarily the result of
the new consolidation accounting guidance which required us to
consolidate
off-balance
sheet trust assets onto the balance sheet.
Business
Services Segment
The Business Services segment generates its revenue from
servicing our FFELP Loan portfolio as well as servicing FFELP
and other loans for other financial institutions, guarantors and
ED. The segment also performs default aversion work and
contingency collections on behalf of Guarantors and ED, Campus
Payment Solutions, account asset servicing and transaction
processing activities. We are the largest servicer of student
loans, the largest collector of defaulted student loans, the
largest administrator of 529
college-savings
plans and saving for college loyalty programs, and we have a
growing Campus Payment Solutions platform.
The segment generates revenue from servicing FFELP Loans owned
and managed by us. These revenues are intercompany charges to
the FFELP Loans segment and are primarily charged at rates paid
by the trusts where the loans reside. These fees are
contractually designated as the first payment from the trust
cash flows. These fees are high quality in terms of both their
priority and predictability and exceed the actual cost of
servicing the loans. Revenue is also generated by servicing
third-party loans for other financial institutions and ED.
We generate revenue by servicing FFELP Loans for Guarantors. We
earn an account maintenance fee on a portfolio of
$99 billion of FFELP Loans for 9 Guarantors. We provide a
full complement of default aversion and default collection
services on a contingency or pay for performance basis to 13
Guarantors, campus-based programs and ED. We have performed
default collection work for over ten years and have consistently
been a top performer.
Our Upromise Investments subsidiary generates revenue by
providing program management services for 529
college-savings
plans with assets of $34.5 billion in 32 college savings
plans in 16 states. We also generate revenue in the form of
transaction fees generated by our consumer savings network,
through which members have earned $600 million in rewards
by purchasing products at hundreds of online retailers, booking
travel, purchasing a home, dining out, buying gas and groceries,
by using the Upromise World Master Card and completing qualified
transactions. We earn a fee for providing the marketing and
administrative services we provide to companies that participate
in the Upromise savings network.
Finally, our Campus Payment Solutions business offers a suite of
solutions designed to help campus business offices increase
their services to students and families. The product suite
includes electronic billing, collection, payment and refund
services plus full tuition payment plan administration. In 2010,
we generated servicing revenue from over 1,100 schools.
F-92
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 19. | Segment Reporting (Continued) |
Operating expenses for this segment include the cost incurred to
perform the services described above.
We expect that FFELP servicing revenue and Guarantor servicing
and contingency revenue will decline over time as the FFELP Loan
portfolios amortize. We expect that revenues under the ED
collections contract will increase as the Direct Lending program
expands. Between 2004 and 2008, less than 25 percent of
loans were originated under the Direct Lending program.
Effective July 1, 2010, all government guaranteed student
loans are originated through the Direct Lending program. This
growth will create revenue opportunity under the ED collections
contract as the volume of defaults of Direct Loans surges in the
coming years.
FFELP and Guarantor servicing is a runoff business and therefore
we face very little competition. In the second quarter of 2009,
ED named Sallie Mae as one of four servicers awarded a servicing
contract (the “ED Servicing Contract”) to service all
federal loans owned by ED. The contract will span five years
with one, five-year renewal at the option of ED. We compete for
Direct Loan servicing volume from ED with the three other
servicing companies with whom we share the contract. The
contract has four years remaining. Account allocations are
awarded annually based on each company’s performance on
five different metrics: defaulted borrower count, defaulted
borrower dollar amount, a survey of borrowers, a survey of
schools and a survey of federal personnel. We are focused on
improving our performance as measured by these metrics to
increase our market share and allocation of accounts under the
ED Servicing Contract.
The Bank is also a key component of our Campus Payment Solutions
and college savings products. We utilize the Bank to warehouse
funds from our Campus Payment Solutions and refund services
business. In addition, the Upromise rewards earned by members
are held at the Bank.
At December 31, 2010 and 2009, the Business Services
segment had total assets of $930 million and
$1.8 billion, respectively.
Other
Segment
The Other segment primarily consists of the financial results
related to the repurchase of debt, the corporate liquidity
portfolio and all overhead. We also include results from smaller
wind-down and discontinued operations within this segment. These
are the Purchased Paper businesses and mortgage and other loan
businesses. The Other segment includes our remaining businesses
that do not pertain directly to the primary segments identified
above. Overhead expenses include costs related to executive
management, the board of directors, accounting, finance, legal,
human resources, stock option expense and information technology
costs related to infrastructure and operations.
At December 31, 2010 and 2009, the Other segment had total
assets of $2.8 billion and $6.1 billion, respectively.
Measure
of Profitability
The tables below include the condensed operating results for
each of our reportable segments. Management, including the chief
operating decision makers, evaluates the Company on certain
performance measures that we refer to as “Core
Earnings” performance measures for each operating segment.
We use “Core Earnings” to manage each business segment
because “Core Earnings” reflect adjustments to GAAP
financial results for three items, discussed below, that create
significant volatility mostly due to timing factors generally
beyond the control of management. Accordingly, we believe that
“Core Earnings” provide management with a useful basis
from which to better evaluate results from ongoing operations
against the business plan or against results from prior periods.
Consequently, we disclose this information as we believe it
provides investors with additional information regarding the
operational and performance indicators that are most closely
assessed by
F-93
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 19. | Segment Reporting (Continued) |
management. The three items adjusted for in our “Core
Earnings” presentations are (1) the off-balance sheet
treatment of certain securitization transactions, (2) our
use of derivatives instruments to hedge our economic risks that
do not qualify for hedge accounting treatment or do qualify for
hedge accounting treatment but result in ineffectiveness and
(3) the accounting for goodwill and acquired intangible
assets. 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 our consolidated
operating results in accordance with GAAP is also included in
the tables below.
Our “Core Earnings” performance measures are not
defined terms within GAAP and may not be comparable to similarly
titled measures reported by other companies. 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. Our 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.
F-94
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 19. | Segment Reporting (Continued) |
Segment
Results and Reconciliations to GAAP
| Year Ended December 31, 2010 | ||||||||||||||||||||||||||||||||
|
FFELP
|
Consumer
|
Business
|
Total “Core
|
Total
|
||||||||||||||||||||||||||||
| (Dollars in millions) | Loans | Lending | Services | Other | Eliminations | Earnings” | Adjustments (2) | GAAP | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||||||||||
|
Student loans
|
$ | 2,766 | $ | 2,353 | $ | — | $ | — | $ | — | $ | 5,119 | $ | 579 | $ | 5,698 | ||||||||||||||||
|
Other loans
|
— | — | — | 30 | — | 30 | — | 30 | ||||||||||||||||||||||||
|
Cash and investments
|
9 | 14 | 17 | 3 | (17 | ) | 26 | — | 26 | |||||||||||||||||||||||
|
Total interest income
|
2,775 | 2,367 | 17 | 33 | (17 | ) | 5,175 | 579 | 5,754 | |||||||||||||||||||||||
|
Total interest expense
|
1,407 | 758 | — | 45 | (17 | ) | 2,193 | 82 | 2,275 | |||||||||||||||||||||||
|
Net interest income
|
1,368 | 1,609 | 17 | (12 | ) | — | 2,982 | 497 | 3,479 | |||||||||||||||||||||||
|
Less: provisions for loan losses
|
98 | 1,298 | — | 23 | — | 1,419 | — | 1,419 | ||||||||||||||||||||||||
|
Net interest income after provisions for loan losses
|
1,270 | 311 | 17 | (35 | ) | — | 1,563 | 497 | 2,060 | |||||||||||||||||||||||
|
Servicing revenue
|
68 | 72 | 912 | 1 | (648 | ) | 405 | — | 405 | |||||||||||||||||||||||
|
Contingency revenue
|
— | — | 330 | — | — | 330 | — | 330 | ||||||||||||||||||||||||
|
Gains on debt repurchases
|
— | — | — | 317 | — | 317 | — | 317 | ||||||||||||||||||||||||
|
Other income
|
320 | — | 51 | 13 | — | 384 | (414 | ) | (30 | ) | ||||||||||||||||||||||
|
Total other income
|
388 | 72 | 1,293 | 331 | (648 | ) | 1,436 | (414 | ) | 1,022 | ||||||||||||||||||||||
|
Expenses:
|
||||||||||||||||||||||||||||||||
|
Direct operating expenses
|
736 | 350 | 500 | 12 | (648 | ) | 950 | — | 950 | |||||||||||||||||||||||
|
Overhead expenses
|
— | — | — | 258 | — | 258 | — | 258 | ||||||||||||||||||||||||
|
Operating expenses
|
736 | 350 | 500 | 270 | (648 | ) | 1,208 | — | 1,208 | |||||||||||||||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | — | — | — | — | — | 699 | 699 | ||||||||||||||||||||||||
|
Restructuring expenses
|
54 | 12 | 7 | 12 | — | 85 | — | 85 | ||||||||||||||||||||||||
|
Total expenses
|
790 | 362 | 507 | 282 | (648 | ) | 1,293 | 699 | 1,992 | |||||||||||||||||||||||
|
Income from continuing operations, before income tax expense
|
868 | 21 | 803 | 14 | — | 1,706 | (616 | ) | 1,090 | |||||||||||||||||||||||
|
Income tax
expense
(1)
|
311 | 8 | 288 | 4 | — | 611 | (118 | ) | 493 | |||||||||||||||||||||||
|
Net income from continuing operations
|
557 | 13 | 515 | 10 | — | 1,095 | (498 | ) | 597 | |||||||||||||||||||||||
|
Loss from discontinued operations, net of taxes
|
— | — | — | (67 | ) | — | (67 | ) | — | (67 | ) | |||||||||||||||||||||
|
Net income (loss)
|
$ | 557 | $ | 13 | $ | 515 | $ | (57 | ) | $ | — | $ | 1,028 | $ | (498 | ) | $ | 530 | ||||||||||||||
| (1) | The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment. |
.
| (2) | “Core Earnings” adjustments to GAAP: |
| Year Ended December 31, 2010 | ||||||||||||
|
Net Impact
|
Net Impact of
|
|||||||||||
|
of
|
Goodwill and
|
|||||||||||
|
Derivative
|
Acquired
|
|||||||||||
| (Dollars in millions) | Accounting | Intangibles | Total | |||||||||
|
Net interest income after provisions for loan losses
|
$ | 497 | $ | — | $ | 497 | ||||||
|
Total other income (loss)
|
(414 | ) | — | (414 | ) | |||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | 699 | 699 | |||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | 83 | $ | (699 | ) | (616 | ) | |||||
|
Income tax benefit
|
(118 | ) | ||||||||||
|
Net loss
|
$ | (498 | ) | |||||||||
| (3) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
F-95
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 19. | Segment Reporting (Continued) |
| Year Ended December 31, 2009 | ||||||||||||||||||||||||||||||||
|
FFELP
|
Consumer
|
Business
|
Total “Core
|
Total
|
||||||||||||||||||||||||||||
| (Dollars in millions) | Loans | Lending | Services | Other | Eliminations (1) | Earnings” | Adjustments (2) | GAAP | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||||||||||
|
Student loans
|
$ | 3,252 | $ | 2,254 | $ | — | $ | — | $ | — | $ | 5,506 | $ | (830 | ) | $ | 4,676 | |||||||||||||||
|
Other loans
|
— | — | — | 56 | — | 56 | — | 56 | ||||||||||||||||||||||||
|
Cash and investments
|
26 | 13 | 20 | (10 | ) | (20 | ) | 29 | (3 | ) | 26 | |||||||||||||||||||||
|
Total interest income
|
3,278 | 2,267 | 20 | 46 | (20 | ) | 5,591 | (833 | ) | 4,758 | ||||||||||||||||||||||
|
Total interest expense
|
2,238 | 721 | — | 66 | (20 | ) | 3,005 | 30 | 3,035 | |||||||||||||||||||||||
|
Net interest income (loss)
|
1,040 | 1,546 | 20 | (20 | ) | — | 2,586 | (863 | ) | 1,723 | ||||||||||||||||||||||
|
Less: provisions for loan losses
|
119 | 1,399 | — | 46 | — | 1,564 | (445 | ) | 1,119 | |||||||||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
921 | 147 | 20 | (66 | ) | — | 1,022 | (418 | ) | 604 | ||||||||||||||||||||||
|
Servicing revenue
|
75 | 70 | 954 | — | (659 | ) | 440 | — | 440 | |||||||||||||||||||||||
|
Contingency revenue
|
— | — | 294 | — | — | 294 | — | 294 | ||||||||||||||||||||||||
|
Gains on debt repurchases
|
— | — | — | 536 | — | 536 | — | 536 | ||||||||||||||||||||||||
|
Other income
|
292 | — | 55 | 1 | — | 348 | (285 | ) | 63 | |||||||||||||||||||||||
|
Total other income
|
367 | 70 | 1,303 | 537 | (659 | ) | 1,618 | (285 | ) | 1,333 | ||||||||||||||||||||||
|
Expenses:
|
||||||||||||||||||||||||||||||||
|
Direct operating expenses
|
754 | 265 | 440 | 6 | (659 | ) | 806 | — | 806 | |||||||||||||||||||||||
|
Overhead expenses
|
— | — | — | 237 | — | 237 | — | 237 | ||||||||||||||||||||||||
|
Operating expenses
|
754 | 265 | 440 | 243 | (659 | ) | 1,043 | — | 1,043 | |||||||||||||||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | — | — | — | — | — | 76 | 76 | ||||||||||||||||||||||||
|
Restructuring expenses
|
8 | 2 | 2 | (2 | ) | — | 10 | — | 10 | |||||||||||||||||||||||
|
Total expenses
|
762 | 267 | 442 | 241 | (659 | ) | 1,053 | 76 | 1,129 | |||||||||||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense benefit
|
526 | (50 | ) | 881 | 230 | — | 1,587 | (779 | ) | 808 | ||||||||||||||||||||||
|
Income tax expense
benefit
(3)
|
186 | (18 | ) | 311 | 81 | — | 560 | (296 | ) | 264 | ||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
340 | (32 | ) | 570 | 149 | — | 1,027 | (483 | ) | 544 | ||||||||||||||||||||||
|
Loss from discontinued operations, net of taxes
|
— | — | — | (220 | ) | — | (220 | ) | — | (220 | ) | |||||||||||||||||||||
|
Net income (loss)
|
$ | 340 | $ | (32 | ) | $ | 570 | $ | (71 | ) | $ | — | $ | 807 | $ | (483 | ) | $ | 324 | |||||||||||||
| (1) | The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment. |
.
| (2) | “Core Earnings” adjustments to GAAP: |
| Year Ended December 31, 2009 | ||||||||||||||||
|
Net Impact
|
Net Impact of
|
Net Impact
|
||||||||||||||
|
of
|
Goodwill and
|
of
|
||||||||||||||
|
Derivative
|
Acquired
|
Securitization
|
||||||||||||||
| (Dollars in millions) | Accounting | Intangibles | Accounting | Total | ||||||||||||
|
Net interest income (loss)
|
$ | 78 | $ | — | $ | (941 | ) | $ | (863 | ) | ||||||
|
Less: provisions for loan losses
|
— | — | (445 | ) | (445 | ) | ||||||||||
|
Net interest income (loss) after provisions for loan losses
|
78 | — | (496 | ) | (418 | ) | ||||||||||
|
Total other income (loss)
|
(580 | ) | — | 295 | (285 | ) | ||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | 76 | — | 76 | ||||||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | (502 | ) | $ | (76 | ) | $ | (201 | ) | (779 | ) | |||||
|
Income tax benefit
|
(296 | ) | ||||||||||||||
|
Net loss
|
$ | (483 | ) | |||||||||||||
| (3) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
F-96
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 19. | Segment Reporting (Continued) |
| Year Ended December 31, 2008 | ||||||||||||||||||||||||||||||||
|
FFELP
|
Consumer
|
Business
|
Total “Core
|
Total
|
||||||||||||||||||||||||||||
| (Dollars in millions) | Loans | Lending | Services | Other | Eliminations (1) | Earnings” | Adjustments (2) | GAAP | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||||||||||
|
Student loans
|
$ | 6,052 | $ | 2,752 | $ | — | $ | — | $ | — | $ | 8,804 | $ | (1,893 | ) | $ | 6,911 | |||||||||||||||
|
Other loans
|
— | — | — | 83 | — | 83 | — | 83 | ||||||||||||||||||||||||
|
Cash and investments
|
156 | 79 | 26 | 95 | (26 | ) | 330 | (54 | ) | 276 | ||||||||||||||||||||||
|
Total interest income
|
6,208 | 2,831 | 26 | 178 | (26 | ) | 9,217 | (1,947 | ) | 7,270 | ||||||||||||||||||||||
|
Total interest expense
|
5,294 | 1,280 | — | 161 | (26 | ) | 6,709 | (804 | ) | 5,905 | ||||||||||||||||||||||
|
Net interest income (loss)
|
914 | 1,551 | 26 | 17 | — | 2,508 | (1,143 | ) | 1,365 | |||||||||||||||||||||||
|
Less: provisions for loan losses
|
127 | 874 | — | 28 | — | 1,029 | (309 | ) | 720 | |||||||||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
787 | 677 | 26 | (11 | ) | — | 1,479 | (834 | ) | 645 | ||||||||||||||||||||||
|
Servicing revenue
|
77 | 65 | 897 | 1 | (632 | ) | 408 | — | 408 | |||||||||||||||||||||||
|
Contingency revenue
|
— | — | 330 | — | — | 330 | — | 330 | ||||||||||||||||||||||||
|
Gains on debt repurchases
|
— | — | — | 64 | — | 64 | — | 64 | ||||||||||||||||||||||||
|
Other income
|
(42 | ) | 1 | 52 | 14 | — | 25 | (355 | ) | (330 | ) | |||||||||||||||||||||
|
Total other income
|
35 | 66 | 1,279 | 79 | (632 | ) | 827 | (355 | ) | 472 | ||||||||||||||||||||||
|
Expenses:
|
||||||||||||||||||||||||||||||||
|
Direct operating expenses
|
745 | 201 | 462 | 17 | (632 | ) | 793 | — | 793 | |||||||||||||||||||||||
|
Overhead expenses
|
— | — | — | 236 | — | 236 | — | 236 | ||||||||||||||||||||||||
|
Operating expenses
|
745 | 201 | 462 | 253 | (632 | ) | 1,029 | — | 1,029 | |||||||||||||||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | — | — | — | — | — | 50 | 50 | ||||||||||||||||||||||||
|
Restructuring expenses
|
42 | 25 | 10 | (5 | ) | — | 72 | — | 72 | |||||||||||||||||||||||
|
Total expenses
|
787 | 226 | 472 | 248 | (632 | ) | 1,101 | 50 | 1,151 | |||||||||||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
35 | 517 | 833 | (180 | ) | — | 1,205 | (1,239 | ) | (34 | ) | |||||||||||||||||||||
|
Income tax expense
(benefit)
(3)
|
13 | 186 | 300 | (65 | ) | — | 434 | (470 | ) | (36 | ) | |||||||||||||||||||||
|
Net income (loss) from continuing operations
|
22 | 331 | 533 | (115 | ) | — | 771 | (769 | ) | 2 | ||||||||||||||||||||||
|
Loss from discontinued operations, net of taxes
|
— | — | — | (188 | ) | — | (188 | ) | (27 | ) | (215 | ) | ||||||||||||||||||||
|
Net income (loss)
|
$ | 22 | $ | 331 | $ | 533 | $ | (303 | ) | $ | — | $ | 583 | $ | (796 | ) | $ | (213 | ) | |||||||||||||
| (1) | The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment. |
.
| (2) | “Core Earnings” adjustments to GAAP: |
| Year Ended December 31, 2008 | ||||||||||||||||
|
Net Impact
|
Net Impact of
|
Net Impact
|
||||||||||||||
|
of
|
Goodwill and
|
of
|
||||||||||||||
|
Derivative
|
Acquired
|
Securitization
|
||||||||||||||
| Accounting | Intangibles | Accounting | Total | |||||||||||||
|
Net interest income (loss)
|
$ | (271 | ) | $ | — | $ | (872 | ) | $ | (1,143 | ) | |||||
|
Less: provisions for loan losses
|
— | — | (309 | ) | (309 | ) | ||||||||||
|
Net interest income (loss) after provisions for loan losses
|
(271 | ) | — | (563 | ) | (834 | ) | |||||||||
|
Total other income (loss)
|
(476 | ) | — | 121 | (355 | ) | ||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | 50 | — | 50 | ||||||||||||
|
Loss from continuing operations, before income tax expense
|
(747 | ) | (50 | ) | (442 | ) | (1,239 | ) | ||||||||
|
Loss from discontinued operations, net of taxes
|
(4 | ) | (23 | ) | — | (27 | ) | |||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | (751 | ) | $ | (73 | ) | $ | (442 | ) | (1,266 | ) | |||||
|
Income tax benefit
|
(470 | ) | ||||||||||||||
|
Net loss
|
$ | (796 | ) | |||||||||||||
| (3) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
Summary
of “Core Earnings” Adjustments to GAAP
The adjustments required to reconcile from our “Core
Earnings” results to our GAAP results of operations relate
to differing treatments for securitization transactions,
derivatives, Floor Income, and certain
F-97
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 19. | Segment Reporting (Continued) |
other items that management does not consider in evaluating our
operating results. The following table reflects aggregate
adjustments associated with these areas for the years ended
December 31, 2010, 2009, and 2008.
| Years Ended December 31, | ||||||||||||
| (Dollars in millions) | 2010 | 2009 | 2008 | |||||||||
|
“Core Earnings” adjustments to GAAP:
|
||||||||||||
|
Net impact of derivative
accounting
(1)
|
$ | 83 | $ | (502 | ) | $ | (751 | ) | ||||
|
Net impact of acquired
intangibles
(2)
|
(699 | ) | (76 | ) | (73 | ) | ||||||
|
Net impact of securitization
accounting
(3)
|
— | (201 | ) | (442 | ) | |||||||
|
Net tax
effect
(4)
|
118 | 296 | 470 | |||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | (498 | ) | $ | (483 | ) | $ | (796 | ) | |||
| (1) | Derivative accounting: “Core Earnings” exclude periodic unrealized gains and losses that are caused primarily by the mark-to-market derivative valuations on derivatives that do not qualify for hedge accounting treatment under GAAP. These unrealized gains and losses occur in our FFELP Loans and Consumer Lending operating segments. In our “Core Earnings” presentation, we recognized 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. | |
| (2) | Goodwill and Acquired Intangibles: We exclude goodwill and intangible impairment and amortization of acquired intangibles. | |
| (3) | Securitization accounting: Under GAAP, prior to the adoption of the new consolidation accounting guidance on January 1, 2010, certain securitization transactions in our FFELP Loans operating segment were accounted for as sales of assets. Under “Core Earnings” for the FFELP Loans operating segment, we presented all securitization transactions as long-term non-recourse financings. The upfront “gains” on sale from securitization transactions, as well as ongoing “securitization servicing and Residual Interest revenue (loss)” presented in accordance with GAAP, were excluded from “Core Earnings” and were replaced by interest income, provisions for loan losses, and interest expense as earned or incurred on the securitization loans. We also excluded transactions with our off-balance sheet trusts from “Core Earnings” as they were considered intercompany transactions on a “Core Earnings” basis. On January 1, 2010, upon the adoption of the new consolidation accounting guidance, which resulted in the consolidation of these previously off-balance sheet securitization trusts, there are no longer differences between our GAAP and “Core Earnings” presentation for securitization accounting. | |
| (4) | Net Tax Effect: Such tax effect is based upon our “Core Earnings” effective tax rate for the year. |
| 20. | Discontinued Operations |
Our Purchased Paper businesses are presented in discontinued
operations for the current and prior periods. In the fourth
quarter of 2009, we sold our Purchased Paper —
Mortgage/Properties business for $280 million which
resulted in an after-tax loss of $95 million. As a result
of this sale, the results of operations of this business were
required to be presented in discontinued operations beginning in
the fourth quarter of 2009. In the fourth quarter of 2010, we
began actively marketing our Purchased Paper — Non
Mortgage business for sale and have concluded it is probable
this business will be sold within one year and that we would
have no continuing involvement in this business after the sale.
As a result, we have classified the business as held for sale,
and, as such, the results of operations of this business were
required to be presented in discontinued operations beginning in
the fourth quarter of 2010. In connection with this
classification, we are required to carry this business at the
lower of fair value or historical cost basis. This resulted in
us recording an after-tax loss of $52 million from
discontinued operations in the fourth quarter of 2010, primarily
due to adjusting the value of this business to its estimated
fair value.
The Purchased Paper — Mortgage/Properties business and
the Purchased Paper — Non Mortgage business comprises
operations and cash flows that can be clearly distinguished
operationally and for financial reporting purposes, from the
rest of the Company. Accordingly, this Component is presented as
discontinued operations as (1) the operations and cash
flows of the Component have been eliminated from our ongoing
operations as of December 31, 2010, and (2) we will
have no continuing involvement in the operations of this
Component subsequent to the sale of the Purchased Paper-Non
Mortgage business.
F-98
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 20. | Discontinued Operations (Continued) |
The following table summarizes the discontinued assets and
liabilities of Purchased Paper — Mortgage/Properties
business held for sale at December 31, 2010 and 2009,
respectively.
| At December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Assets:
|
||||||||
|
Cash and equivalents
|
$ | 3,848 | $ | 11,570 | ||||
|
Other assets
|
176,916 | 450,410 | ||||||
|
Assets of discontinued operations
|
$ | 180,764 | $ | 461,980 | ||||
|
Liabilities:
|
||||||||
|
Liabilities of discontinued operations
|
$ | 6,300 | $ | 31,500 | ||||
At December 31, 2010, other assets of our discontinued
operations consist primarily of the Purchased Paper —
Non Mortgage loan portfolio and a deferred tax asset for
intangibles that will be realized upon the sale of our Purchased
Paper — Non Mortgage business. At December 31,
2009, other assets of our discontinued operations consist of the
Purchased Paper — Non Mortgage loan portfolio and a
receivable from SLM Corporation associated with the
2009 net operating loss generated by the sale of our
Purchased Paper — Mortgage/Properties business. This
receivable was settled in the third quarter of 2010. At
December 31, 2010, liabilities of our 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, 2010, 2009 and 2008,
respectively.
| Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Operations:
|
||||||||||||
|
Loss from discontinued operations before income taxes
|
$ | (91,516 | ) | $ | (304,769 | ) | $ | (345,987 | ) | |||
|
Income tax benefit
|
(24,368 | ) | (84,897 | ) | (130,881 | ) | ||||||
|
Loss from discontinued operations, net of taxes
|
$ | (67,148 | ) | $ | (219,872 | ) | $ | (215,106 | ) | |||
|
Disposal:
|
||||||||||||
|
Loss on disposal before income taxes
|
$ | — | $ | (118,761 | ) | $ | — | |||||
|
Income tax benefit
|
— | (23,053 | ) | — | ||||||||
|
Loss on disposal, net of taxes
|
$ | — | $ | (95,708 | ) | $ | — | |||||
| 21. | Concentrations of Risk |
Our business is primarily focused in loan and savings products
for higher education. We primarily 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 non-federally guaranteed Private
Education Loan programs and as a servicer and collector of loans
for ED. In addition we are the largest holder, servicer and
collector of loans under FFELP, a program that was recently
discontinued. Because of this concentration in one industry, we
are exposed to credit, legislative, operational, regulatory, and
liquidity risks associated with the student loan industry.
F-99
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 21. | Concentrations of Risk — (Continued) |
Concentration
Risk in the Revenues Associated with FFELP Loans
Effective July 1, 2010, the HCERA legislation required that
all new federal loans are to be made through the DSLP and
eliminated the FFELP through which we currently generate the
majority of our net income. The new law did not alter or affect
the terms and conditions of existing FFELP Loans. We will no
longer originate FFELP Loans and therefore will no longer earn
revenue on newly originated FFELP Loan volume after 2010. In
2010 we earned revenue of $321 million related to selling
FFELP Loans to ED as part of the Loan Purchase Commitment
Program and also earned $110 million in net interest income
on the loans before selling them to ED. The net interest margin
we earn on our FFELP Loans portfolio, which totaled
$1.9 billion in 2010, will decline over time as the
portfolio amortizes.
In addition, the legislation eliminates the need for the
Guarantors and the services we provide to the sector. We earned
an origination fee when we processed a loan guarantee for a
Guarantor client and a maintenance fee for the life of the loan
for servicing the Guarantor’s portfolio of loans. We are no
longer originating FFELP Loans; therefore we will no longer earn
the origination fee paid by the Guarantor. The portfolio that
generates the maintenance fee is now in runoff, and the
maintenance fees we earn will decline ratably with the
portfolio. In 2010, we earned guarantor origination fees of
$34 million and maintenance fees of $56 million.
Our student loan contingent collection business is also affected
by HCERA. We currently have 12 Guarantors as clients. We earn
revenue from Guarantors for collecting defaulted loans as well
as for managing their portfolios of defaulted loans. In 2010,
collection revenue from Guarantor clients totaled
$245 million. We anticipate that revenue from Guarantors
will be relatively stable through 2012 and then begin to
steadily decline as the portfolio of defaulted loans we manage
is resolved and amortizes.
Concentration
Risk in the Servicing of Direct Loans
The DSLP is serviced by four private sector institutions,
including Sallie Mae. Defaulted Direct Loans are collected by 22
private sector companies, including Sallie Mae. Because of the
concentration of our business in servicing and collecting on
Direct Loans, we are exposed to risks associated with ED
reducing the amount of new loan servicing and collections
allocated to us or the termination of our servicing or
collections contracts.
Concentration
Risk in the Revenues Associated with Private Education
Loans
We are the leader in the origination of Private Education Loans.
As such, we are exposed to the risk that students and their
families have greater access to FFELP Loans or grants for
education which, in turn, would reduce our opportunity to
originate and service Private Education Loans. 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. Due to an increase in federal loan limits that took
effect in 2007 and 2008, we have seen a substantial increase in
borrowing from federal loan programs in recent years. In
addition to the risk associated with reduced Private Education
Loan volumes, we are exposed to credit risk from economic
conditions, particularly as they relate to the ability of recent
graduates to find jobs in their fields of study, thereby
increasing our risk of loss.
F-100
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 22. | Quarterly Financial Information (unaudited) |
| 2010 | ||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
|
Net interest income
|
$ | 854,477 | $ | 895,922 | $ | 871,934 | $ | 856,811 | ||||||||
|
Less: provisions for loan losses
|
359,120 | 382,239 | 358,110 | 319,944 | ||||||||||||
|
Net interest income after provisions for loan losses
|
495,357 | 513,683 | 513,824 | 536,867 | ||||||||||||
|
Gains (losses) on derivative and hedging activities, net
|
(82,410 | ) | 95,316 | (344,458 | ) | (29,447 | ) | |||||||||
|
Other income
|
315,118 | 271,998 | 192,321 | 603,969 | ||||||||||||
|
Restructuring expenses
|
24,804 | 17,808 | 9,980 | 32,644 | ||||||||||||
|
Operating expenses
|
297,347 | 319,439 | 971,430 | 318,388 | ||||||||||||
|
Income tax expense (benefit)
|
159,160 | 198,978 | (126,055 | ) | 260,687 | |||||||||||
|
Net income (loss) from continuing operations
|
246,754 | 344,772 | (493,668 | ) | 499,670 | |||||||||||
|
Loss from discontinued operations, net of taxes
|
(6,614 | ) | (6,954 | ) | (1,279 | ) | (52,299 | ) | ||||||||
|
Net income (loss)
|
240,140 | 337,818 | (494,947 | ) | 447,371 | |||||||||||
|
Preferred stock dividends
|
18,677 | 18,711 | 18,787 | 15,967 | ||||||||||||
|
Net income (loss) attributable to common stock
|
$ | 221,463 | $ | 319,107 | $ | (513,734 | ) | $ | 431,404 | |||||||
|
Basic earnings (loss) per common share:
|
||||||||||||||||
|
Earnings (loss) from continuing operations
|
$ | .47 | $ | .67 | $ | (1.06 | ) | $ | .99 | |||||||
|
Earnings (loss) from discontinued operations
|
(.01 | ) | (.01 | ) | — | (.11 | ) | |||||||||
|
Earnings (loss) from net income
|
$ | .46 | $ | .66 | $ | (1.06 | ) | $ | .88 | |||||||
|
Diluted earnings (loss) per common share:
|
||||||||||||||||
|
Earnings (loss) from continuing operations
|
$ | .46 | $ | .64 | $ | (1.06 | ) | $ | .94 | |||||||
|
Earnings (loss) from discontinued operations
|
(.01 | ) | (.01 | ) | — | (.10 | ) | |||||||||
|
Earnings (loss) from net income
|
$ | .45 | $ | .63 | $ | (1.06 | ) | $ | .84 | |||||||
F-101
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
| 22. | Quarterly Financial Information (unaudited) (Continued) |
| 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
|
204,684 | 584,339 | 447,659 | 700,932 | ||||||||||||
|
Restructuring expenses
|
3,773 | 3,158 | 2,451 | 1,189 | ||||||||||||
|
Operating expenses
|
253,114 | 273,464 | 281,518 | 310,300 | ||||||||||||
|
Income tax expense (benefit)
|
(6,507 | ) | (39,260 | ) | 83,916 | 225,720 | ||||||||||
|
Net income (loss) from continuing operations
|
23,113 | (109,229 | ) | 172,267 | 457,858 | |||||||||||
|
Loss from discontinued operations, net of taxes
|
(44,499 | ) | (13,491 | ) | (13,157 | ) | (148,724 | ) | ||||||||
|
Net income (loss)
|
(21,386 | ) | (122,720 | ) | 159,110 | 309,134 | ||||||||||
|
Preferred stock dividends
|
26,395 | 25,800 | 42,627 | 51,014 | ||||||||||||
|
Net income (loss) attributable to common stock
|
$ | (47,781 | ) | $ | (148,520 | ) | $ | 116,483 | $ | 258,120 | ||||||
|
Basic earnings (loss) per common share:
|
||||||||||||||||
|
Earnings (loss) from continuing operations
|
$ | (.01 | ) | $ | (.29 | ) | $ | .28 | $ | .85 | ||||||
|
Earnings (loss) from discontinued operations
|
(.09 | ) | (.03 | ) | (.03 | ) | (.31 | ) | ||||||||
|
Earnings (loss) from net income
|
$ | (.10 | ) | $ | (.32 | ) | $ | .25 | $ | .54 | ||||||
|
Diluted earnings (loss) per common share:
|
||||||||||||||||
|
Earnings (loss) from continuing operations
|
$ | (.01 | ) | $ | (.29 | ) | $ | .28 | $ | .81 | ||||||
|
Earnings (loss) from discontinued operations
|
(.09 | ) | (.03 | ) | (.03 | ) | (.29 | ) | ||||||||
|
Earnings (loss) from net income
|
$ | (.10 | ) | $ | (.32 | ) | $ | .25 | $ | .52 | ||||||
F-102
APPENDIX A
FEDERAL
FAMILY EDUCATION LOAN PROGRAM (“FFELP”)
Note:
On March 30, 2010, President Obama
signed into law the Health Care and Education Reconciliation Act
of 2010 (“HCERA”) which prohibits new loan
originations under the FFELP as of July 1, 2010. This
appendix presents a summary of the program prior to the
termination date. The new law does not alter or affect the terms
and conditions of existing FFELP Loans made before July 1,
2010.
General
The 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 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. We 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.
A-1
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.
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.
A-2
The Higher Education Reconciliation Act of 2005 reauthorized the
loan programs of the HEA. 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. | |
| • | 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. |
A-3
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; | |
| • | 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. |
A-4
| • | 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 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. |
A-5
| • | 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 to use the zero interest feature available to servicemembers. | |
| • | 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.
The Health Care and Education Reconciliation Act of 2010 (HCERA,
H.R. 4872), including the SAFRA Act, was signed into law by the
President on March 30, 2010, under Public Law
111-152.
The
law, in part, terminated the authority to make new FFELP Loans
effective July 1, 2010, and provided temporary authority
for certain borrowers with a combination of FFELP, Direct and
PUT loans to consolidate in the Direct Loan program until
June 30, 2011.
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 |
A-6
| • | 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 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 |
A-7
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.
| 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 are 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 | % | ||
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.
A-8
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 | |
| • | 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 |
A-9
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.
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.
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.
A-15
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 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
|
16% of the amount collected on loans on which reinsurance has been paid (10% or 18.5% of the amount collected for a defaulted loan that is purchased by a lender for consolidation or rehabilitation, respectively), withheld from gross receipts. |
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”
— We prepare
financial statements in accordance with generally accepted
accounting principles in the United States of America
(“GAAP”). In addition to evaluating our GAAP-based
financial information, management evaluates the 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. We refer to
management’s basis of evaluating its segment results as
“Core Earnings” presentations for each business
segment and refer 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, we rely on “Core
Earnings” performance measures in operating each business
segment because we 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 our chief operating decision makers.
“Core Earnings” performance measures are used in
developing our financial plans, tracking results, and
establishing corporate performance targets and incentive
compensation. Management believes this information provides
additional insight into the financial performance of our 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. Our ‘Core Earnings” presentation does not
represent another comprehensive basis of accounting.
“Note 19 — Segment Reporting” and
Item 7 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
‘Core Earnings’ — Definition and
Limitations — Differences between ‘Core
Earnings’ and GAAP” 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).
ED
— The U.S. Department of Education.
G-1
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 we sponsor. 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
— The exceptional
performer designation is determined by ED in recognition of a
servicer meeting certain performance standards set by ED in
servicing FFELP Loans. Upon receiving the designation, the
servicer receives reimbursement on default claims higher than
the legislated Risk Sharing levels on federally guaranteed
student loans for all loans serviced for a period of at least
270 days before the date of default. The 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 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. In April 2008, we 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 the 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 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. We generally finance our 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, we continue 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, we
refer 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, we 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, we
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
— We enter into
contracts with counterparties under which, in exchange for an
upfront fee representing the present value of the Floor Income
that we expect to earn on a notional amount of underlying
student loans being economically hedged, we will pay the
counterparties the Floor Income earned on that notional amount
over the life of the Floor Income Contract. Specifically, we
agree 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 we 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 we must record the change in fair value of
these contracts through income.
Gross Floor Income
— Floor Income earned before
payments on Floor Income Contracts.
G-3
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.
Lender Partners
— Lender Partners are lenders
who originate loans under forward purchase commitments under
which we own the loans from inception or, in most cases,
acquires the loans soon after origination.
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. Our 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 our Private Education Loan business, we use
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. Non-traditional loans are
loans to borrowers attending for-profit schools with an original
FICO score of less than 670 and borrowers attending
not-for-profit schools with an original FICO score of less than
640. The FICO score used in determining whether a loan is
non-traditional is the greater of the borrower or co-borrower
FICO score at origination.
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. We occasionally
change 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 we securitize student
loans, we retain the right to receive cash flows from the
student loans sold to trusts that we sponsor 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.
We value 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 we retain 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 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
G-4
rate, ED pays the difference directly to us. 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.
We refer 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.
Variable Rate Floor Income
— Variable Rate
Floor Income is Floor Income that is earned only through the
next date at which the borrower interest rate is reset to a
market rate. For FFELP Stafford loans whose borrower interest
rate resets annually on July 1, we 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.
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 GovernanceItem 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