SLM CORP
10-Ks and 10-Qs
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Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-Q
| (Mark One) | ||
|
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended June 30, 2011 | ||
|
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 Number:
001-13251
SLM Corporation
(Exact name of registrant as
specified in its charter)
| Delaware | 52-2013874 | |
|
(State or other jurisdiction
of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
|
| 300 Continental Drive, Newark, Delaware | 19713 | |
| (Address of principal executive offices) | (Zip Code) |
(302) 283-8000
(Registrant’s telephone
number, including area code)
(Former name, former address and
former fiscal year, if changed since last report)
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 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 | Smaller reporting company o |
(Do not check if a smaller reporting company)
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 whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
o
No
þ
Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest
practicable date:
| Class | Outstanding at July 31, 2011 | |
| Voting common stock, $.20 par value | 514,297,170 shares |
SLM
CORPORATION
FORM 10-Q
INDEX
June 30, 2011
FORM 10-Q
INDEX
June 30, 2011
| (1) | Definitions for capitalized terms used in this document can be found in the “Glossary” at the end of this document. |
1
Table of Contents
| Item 1. | Financial Statements |
SLM
CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
|
June 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
|
Assets
|
||||||||
|
FFELP Loans (net of allowance for losses of $189,024 and
$188,858, respectively)
|
$ | 142,634,378 | $ | 148,649,400 | ||||
|
Private Education Loans (net of allowance for losses of
$2,042,603 and $2,021,580, respectively)
|
35,753,327 | 35,655,724 | ||||||
|
Investments
|
||||||||
|
Available-for-sale
|
82,647 | 83,048 | ||||||
|
Other
|
1,056,762 | 873,376 | ||||||
|
Total investments
|
1,139,409 | 956,424 | ||||||
|
Cash and cash equivalents
|
4,144,734 | 4,342,327 | ||||||
|
Restricted cash and investments
|
6,074,901 | 6,254,493 | ||||||
|
Goodwill and acquired intangible assets, net
|
479,917 | 478,409 | ||||||
|
Other assets
|
10,129,933 | 8,970,272 | ||||||
|
Total assets
|
$ | 200,356,599 | $ | 205,307,049 | ||||
|
Liabilities
|
||||||||
|
Short-term borrowings
|
$ | 30,765,693 | $ | 33,615,856 | ||||
|
Long-term borrowings
|
160,765,277 | 163,543,504 | ||||||
|
Other liabilities
|
3,814,390 | 3,136,111 | ||||||
|
Total liabilities
|
195,345,360 | 200,295,471 | ||||||
|
Commitments and contingencies
|
||||||||
|
Equity
|
||||||||
|
Preferred stock, par value $.20 per share, 20,000 shares
authorized:
|
||||||||
|
Series A: 3,300 and 3,300 shares, respectively, issued
at stated value of $50 per share
|
165,000 | 165,000 | ||||||
|
Series B: 4,000 and 4,000 shares, respectively, issued
at stated value of $100 per share
|
400,000 | 400,000 | ||||||
|
Common stock, par value $.20 per share, 1,125,000 shares
authorized: 528,623 and 595,263 shares issued, respectively
|
105,725 | 119,053 | ||||||
|
Additional paid-in capital
|
4,114,266 | 5,939,838 | ||||||
|
Accumulated other comprehensive loss (net of tax benefit of
$17,079 and $25,758, respectively)
|
(29,636 | ) | (44,664 | ) | ||||
|
Retained earnings
|
417,702 | 308,839 | ||||||
|
Total SLM Corporation stockholders’ equity before treasury
stock
|
5,173,057 | 6,888,066 | ||||||
|
Common stock held in treasury at cost: 10,474 and
68,320 shares, respectively
|
170,496 | 1,876,488 | ||||||
|
Total SLM Corporation stockholders’ equity
|
5,002,561 | 5,011,578 | ||||||
|
Noncontrolling interest
|
8,678 | — | ||||||
|
Total equity
|
5,011,239 | 5,011,578 | ||||||
|
Total liabilities and equity
|
$ | 200,356,599 | $ | 205,307,049 | ||||
Supplemental information — assets and liabilities
of consolidated variable interest entities:
|
June 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
|
FFELP Loans, net
|
$ | 140,338,134 | $ | 145,750,016 | ||||
|
Private Education Loans, net
|
25,084,114 | 24,355,683 | ||||||
|
Restricted cash and investments
|
5,846,002 | 5,983,080 | ||||||
|
Other assets
|
4,122,981 | 3,705,716 | ||||||
|
Short-term borrowings
|
23,069,956 | 24,484,353 | ||||||
|
Long-term borrowings
|
139,877,694 | 142,243,771 | ||||||
|
Net assets of consolidated variable interest entities
|
$ | 12,443,581 | $ | 13,066,371 | ||||
See accompanying notes to consolidated financial statements.
2
Table of Contents
SLM
CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
|
Six Months Ended
|
||||||||||||||||
| Three Months Ended June 30, | June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Interest income:
|
||||||||||||||||
|
FFELP Loans
|
$ | 849,275 | $ | 875,962 | $ | 1,726,653 | $ | 1,682,724 | ||||||||
|
Private Education Loans
|
600,423 | 575,340 | 1,204,356 | 1,140,494 | ||||||||||||
|
Other loans
|
5,393 | 7,254 | 11,304 | 16,250 | ||||||||||||
|
Cash and investments
|
4,743 | 6,299 | 10,082 | 11,248 | ||||||||||||
|
Total interest income
|
1,459,834 | 1,464,855 | 2,952,395 | 2,850,716 | ||||||||||||
|
Total interest expense
|
591,427 | 568,933 | 1,186,022 | 1,100,317 | ||||||||||||
|
Net interest income
|
868,407 | 895,922 | 1,766,373 | 1,750,399 | ||||||||||||
|
Less: provisions for loan losses
|
290,686 | 382,239 | 594,091 | 741,359 | ||||||||||||
|
Net interest income after provisions for loan losses
|
577,721 | 513,683 | 1,172,282 | 1,009,040 | ||||||||||||
|
Other income (loss):
|
||||||||||||||||
|
Gains (losses) on sales of loans and securities, net
|
— | (3,515 | ) | — | 5,138 | |||||||||||
|
Gains (losses) on derivative and hedging activities, net
|
(509,788 | ) | 95,316 | (751,670 | ) | 12,906 | ||||||||||
|
Servicing revenue
|
92,600 | 98,740 | 190,852 | 221,012 | ||||||||||||
|
Contingency revenue
|
85,617 | 88,172 | 163,998 | 168,484 | ||||||||||||
|
Gains on debt repurchases
|
323 | 91,050 | 38,226 | 181,131 | ||||||||||||
|
Other
|
3,188 | (2,449 | ) | 24,933 | 11,351 | |||||||||||
|
Total other income (loss)
|
(328,060 | ) | 367,314 | (333,661 | ) | 600,022 | ||||||||||
|
Expenses:
|
||||||||||||||||
|
Salaries and benefits
|
125,139 | 139,061 | 260,580 | 288,163 | ||||||||||||
|
Other operating expenses
|
143,580 | 170,668 | 311,339 | 309,201 | ||||||||||||
|
Total operating expenses
|
268,719 | 309,729 | 571,919 | 597,364 | ||||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization expense
|
6,063 | 9,710 | 12,127 | 19,422 | ||||||||||||
|
Restructuring expenses
|
1,594 | 17,808 | 5,155 | 42,612 | ||||||||||||
|
Total expenses
|
276,376 | 337,247 | 589,201 | 659,398 | ||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
(26,715 | ) | 543,750 | 249,420 | 949,664 | |||||||||||
|
Income tax expense (benefit)
|
(9,585 | ) | 198,978 | 90,126 | 358,138 | |||||||||||
|
Net income (loss) from continuing operations
|
(17,130 | ) | 344,772 | 159,294 | 591,526 | |||||||||||
|
Income (loss) from discontinued operations, net of tax expense
(benefit)
|
11,482 | (6,954 | ) | 9,752 | (13,568 | ) | ||||||||||
|
Net income (loss)
|
(5,648 | ) | 337,818 | 169,046 | 577,958 | |||||||||||
|
Preferred stock dividends
|
4,052 | 18,711 | 7,930 | 37,389 | ||||||||||||
|
Net income (loss) attributable to common stock
|
$ | (9,700 | ) | $ | 319,107 | $ | 161,116 | $ | 540,569 | |||||||
|
Basic earnings (loss) per common share:
|
||||||||||||||||
|
Continuing operations
|
$ | (.04 | ) | $ | .67 | $ | .29 | $ | 1.15 | |||||||
|
Discontinued operations
|
.02 | (.01 | ) | .02 | (.03 | ) | ||||||||||
|
Total
|
$ | (.02 | ) | $ | .66 | $ | .31 | $ | 1.12 | |||||||
|
Average common shares outstanding
|
523,808 | 484,832 | 525,269 | 484,547 | ||||||||||||
|
Diluted earnings (loss) per common share:
|
||||||||||||||||
|
Continuing operations
|
$ | (.04 | ) | $ | .64 | $ | .28 | $ | 1.11 | |||||||
|
Discontinued operations
|
.02 | (.01 | ) | .02 | (.03 | ) | ||||||||||
|
Total
|
$ | (.02 | ) | $ | .63 | $ | .30 | $ | 1.08 | |||||||
|
Average common and common equivalent shares outstanding
|
523,808 | 527,391 | 530,865 | 527,013 | ||||||||||||
|
Dividends per common share
|
$ | .10 | $ | — | $ | .10 | $ | — | ||||||||
See accompanying notes to consolidated financial statements.
3
Table of Contents
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 March 31, 2010
|
8,110,370 | 553,407,785 | (67,563,788 | ) | 485,843,997 | $ | 1,375,370 | $ | 110,682 | $ | 5,106,094 | $ | (42,511 | ) | $ | 72,062 | $ | (1,866,020 | ) | $ | 4,755,677 | $ | 19 | $ | 4,755,696 | |||||||||||||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net income (loss)
|
337,818 | 337,818 | 337,818 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Other comprehensive income, net of tax:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Change in unrealized gains (losses) on investments, net of tax
|
1,615 | 1,615 | 1,615 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Change in unrealized gains (losses) on derivatives, net of tax
|
(2,439 | ) | (2,439 | ) | (2,439 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Defined benefit pension plans adjustment
|
2 | 2 | 2 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Comprehensive income
|
336,996 | 336,996 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
Cash dividends:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, series A ($.87 per share)
|
(2,875 | ) | (2,875 | ) | (2,875 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, series B ($.24 per share)
|
(1,014 | ) | (1,014 | ) | (1,014 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, series C ($18.13 per share)
|
(14,688 | ) | (14,688 | ) | (14,688 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Issuance of common shares
|
163,599 | 163,599 | 33 | 3,765 | 3,798 | 3,798 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock issuance costs and related amortization
|
134 | (134 | ) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
|
Tax benefit related to employee stock option and purchase plans
|
(1,212 | ) | (1,212 | ) | (1,212 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Stock-based compensation expense
|
13,802 | 13,802 | 13,802 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Repurchase of common shares:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Benefit plans
|
(211,014 | ) | (211,014 | ) | (3,740 | ) | (3,740 | ) | (3,740 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Noncontrolling interest — other
|
— | (15 | ) | (15 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
|
Balance at June 30, 2010
|
8,110,370 | 553,571,384 | (67,774,802 | ) | 485,796,582 | $ | 1,375,370 | $ | 110,715 | $ | 5,122,583 | $ | (43,333 | ) | $ | 391,169 | $ | (1,869,760 | ) | $ | 5,086,744 | $ | 4 | $ | 5,086,748 | |||||||||||||||||||||||||||
|
Balance at March 31, 2011
|
7,300,000 | 527,493,764 | — | 527,493,764 | $ | 565,000 | $ | 105,499 | $ | 4,092,334 | $ | (35,401 | ) | $ | 479,655 | $ | — | $ | 5,207,087 | $ | — | $ | 5,207,087 | |||||||||||||||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net income (loss)
|
(5,648 | ) | (5,648 | ) | (5,648 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Other comprehensive income, net of tax:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Change in unrealized gains (losses) on investments, net of tax
|
1,034 | 1,034 | 1,034 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Change in unrealized gains (losses) on derivatives, net of tax
|
4,731 | 4,731 | 4,731 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Defined benefit pension plans adjustment
|
— | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
Comprehensive income
|
117 | 117 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
Cash dividends:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Common stock ($.10 per share)
|
(52,253 | ) | (52,253 | ) | (52,253 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, series A ($.87 per share)
|
(2,875 | ) | (2,875 | ) | (2,875 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, series B ($.26 per share)
|
(1,177 | ) | (1,177 | ) | (1,177 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Issuance of common shares
|
1,129,399 | 1,129,399 | 226 | 12,079 | 12,305 | 12,305 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Tax benefit related to employee stock option and purchase plans
|
(2,216 | ) | (2,216 | ) | (2,216 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Stock-based compensation expense
|
12,069 | 12,069 | 12,069 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Repurchase of common shares:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Open market
|
(9,593,603 | ) | (9,593,603 | ) | (156,105 | ) | (156,105 | ) | (156,105 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Benefit plans
|
(880,731 | ) | (880,731 | ) | (14,391 | ) | (14,391 | ) | (14,391 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Acquisition of noncontrolling interest
|
— | 8,678 | 8,678 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Balance at June 30, 2011
|
7,300,000 | 528,623,163 | (10,474,334 | ) | 518,148,829 | $ | 565,000 | $ | 105,725 | $ | 4,114,266 | $ | (29,636 | ) | $ | 417,702 | $ | (170,496 | ) | $ | 5,002,561 | $ | 8,678 | $ | 5,011,239 | |||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
4
Table of Contents
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 (loss)
|
577,958 | 577,958 | 577,958 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Other comprehensive income, net of tax:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Change in unrealized gains (losses) on investments, net of tax
|
1,678 | 1,678 | 1,678 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Change in unrealized gains (losses) on derivatives, net of tax
|
(4,151 | ) | (4,151 | ) | (4,151 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Defined benefit pension plans adjustment
|
(35 | ) | (35 | ) | (35 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Comprehensive income
|
575,450 | 575,450 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
Cash dividends:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, series A ($1.74 per share)
|
(5,750 | ) | (5,750 | ) | (5,750 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, series B ($.48 per share)
|
(1,969 | ) | (1,969 | ) | (1,969 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, series C ($36.25 per share)
|
(29,376 | ) | (29,376 | ) | (29,376 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Restricted stock dividend
|
(11 | ) | (11 | ) | (11 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Issuance of common shares
|
1,351,808 | 1,351,808 | 271 | 10,166 | 10,437 | 10,437 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock issuance costs and related amortization
|
294 | (294 | ) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
|
Tax benefit related to employee stock option and purchase plans
|
(4,805 | ) | (4,805 | ) | (4,805 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Stock-based compensation expense
|
26,037 | 26,037 | 26,037 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Cumulative effect of accounting change
|
(753,856 | ) | (753,856 | ) | (753,856 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Repurchase of common shares:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Benefit plans
|
(552,860 | ) | (552,860 | ) | (8,022 | ) | (8,022 | ) | (8,022 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Noncontrolling interest — other
|
— | (9 | ) | (9 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
|
Balance at June 30, 2010
|
8,110,370 | 553,571,384 | (67,774,802 | ) | 485,796,582 | $ | 1,375,370 | $ | 110,715 | $ | 5,122,583 | $ | (43,333 | ) | $ | 391,169 | $ | (1,869,760 | ) | $ | 5,086,744 | $ | 4 | $ | 5,086,748 | |||||||||||||||||||||||||||
|
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 | |||||||||||||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Net income (loss)
|
169,046 | 169,046 | 169,046 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Other comprehensive income, net of tax:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Change in unrealized gains (losses) on investments, net of tax
|
715 | 715 | 715 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Change in unrealized gains (losses) on derivatives, net of tax
|
14,105 | 14,105 | 14,105 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Defined benefit pension plans adjustment
|
208 | 208 | 208 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Comprehensive income
|
184,074 | 184,074 | ||||||||||||||||||||||||||||||||||||||||||||||||||
|
Cash dividends:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Common stock ($.10 per share)
|
(52,253 | ) | (52,253 | ) | (52,253 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, series A ($1.74 per share)
|
(5,750 | ) | (5,750 | ) | (5,750 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Preferred stock, series B ($.57 per share)
|
(2,180 | ) | (2,180 | ) | (2,180 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Issuance of common shares
|
3,434,058 | 3,434,058 | 687 | 34,553 | 35,240 | 35,240 | ||||||||||||||||||||||||||||||||||||||||||||||
|
Retirement of common stock in treasury
|
(70,074,369 | ) | 70,074,369 | — | (14,015 | ) | (1,889,891 | ) | 1,903,906 | — | — | |||||||||||||||||||||||||||||||||||||||||
|
Tax benefit related to employee stock option and purchase plans
|
(7,295 | ) | (7,295 | ) | (7,295 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
|
Stock-based compensation expense
|
37,061 | 37,061 | 37,061 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Repurchase of common shares:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Open market
|
(9,593,603 | ) | (9,593,603 | ) | (156,105 | ) | (156,105 | ) | (156,105 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Benefit plans
|
(2,635,511 | ) | (2,635,511 | ) | (41,809 | ) | (41,809 | ) | (41,809 | ) | ||||||||||||||||||||||||||||||||||||||||||
|
Acquisition of noncontrolling interest
|
— | 8,678 | 8,678 | |||||||||||||||||||||||||||||||||||||||||||||||||
|
Balance at June 30, 2011
|
7,300,000 | 528,623,163 | (10,474,334 | ) | 518,148,829 | $ | 565,000 | $ | 105,725 | $ | 4,114,266 | $ | (29,636 | ) | $ | 417,702 | $ | (170,496 | ) | $ | 5,002,561 | $ | 8,678 | $ | 5,011,239 | |||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
5
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
|
Six Months Ended
|
||||||||
| June 30, | ||||||||
| 2011 | 2010 | |||||||
|
Operating activities
|
||||||||
|
Net income
|
$ | 169,046 | $ | 577,958 | ||||
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
||||||||
|
(Income) loss from discontinued operations, net of tax
|
(9,752 | ) | 13,568 | |||||
|
Gains on sale of loans and securities, net
|
— | (5,138 | ) | |||||
|
Gains on debt repurchases
|
(38,226 | ) | (181,131 | ) | ||||
|
Goodwill and acquired intangible assets impairment and
amortization expense
|
12,127 | 19,422 | ||||||
|
Stock-based compensation expense
|
37,061 | 26,097 | ||||||
|
Unrealized (gains)/losses on derivative and hedging activities
|
396,238 | (444,732 | ) | |||||
|
Provisions for loan losses
|
594,091 | 741,359 | ||||||
|
Student loans originated for sale, net
|
— | (10,482,146 | ) | |||||
|
Decrease in restricted cash — other
|
53,171 | 41,403 | ||||||
|
Decrease (increase) in accrued interest receivable
|
92,629 | (147,462 | ) | |||||
|
Increase in accrued interest payable
|
69,825 | 34,677 | ||||||
|
Decrease in other assets
|
215,598 | 1,369,568 | ||||||
|
(Decrease) in other liabilities
|
(224,671 | ) | (130,832 | ) | ||||
|
Total adjustments
|
1,198,091 | (9,145,347 | ) | |||||
|
Total net cash provided by (used in) operating activities
|
1,367,137 | (8,567,389 | ) | |||||
|
Investing activities
|
||||||||
|
Student loans acquired and originated
|
(1,817,664 | ) | (2,661,471 | ) | ||||
|
Reduction of student loans:
|
||||||||
|
Installment payments, claims and other
|
6,707,474 | 4,992,892 | ||||||
|
Proceeds from sales of student loans
|
380,965 | 164,046 | ||||||
|
Other loans — repaid
|
29,919 | 100,860 | ||||||
|
Other investing activities, net
|
(202,329 | ) | (351,700 | ) | ||||
|
Purchases of
available-for-sale
securities
|
(109,616 | ) | (27,885,519 | ) | ||||
|
Proceeds from maturities of
available-for-sale
securities
|
133,344 | 28,725,393 | ||||||
|
Purchases of other securities
|
(131,195 | ) | (64,188 | ) | ||||
|
Proceeds from maturities of other securities
|
127,944 | 71,812 | ||||||
|
Decrease (increase) in restricted cash
|
137,178 | (218,129 | ) | |||||
|
Cash provided by investing activities — continuing
operations
|
5,256,020 | 2,873,996 | ||||||
|
Cash provided by investing activities — discontinued
operations
|
50,935 | 68,788 | ||||||
|
Total net cash provided by investing activities
|
5,306,955 | 2,942,784 | ||||||
|
Financing activities
|
||||||||
|
Borrowings collateralized by loans in trust — issued
|
3,037,617 | 2,723,345 | ||||||
|
Borrowings collateralized by loans in trust — repaid
|
(5,725,474 | ) | (4,274,591 | ) | ||||
|
Asset-backed commercial paper conduits, net
|
(444,957 | ) | (1,999,582 | ) | ||||
|
ED Participation Program, net
|
— | 10,849,768 | ||||||
|
ED Conduit Program Facility, net
|
(1,728,591 | ) | 1,559,198 | |||||
|
Other short-term borrowings repaid
|
— | (198,183 | ) | |||||
|
Other long-term borrowings issued
|
1,966,806 | 1,463,538 | ||||||
|
Other long-term borrowings repaid
|
(4,132,838 | ) | (4,512,180 | ) | ||||
|
Other financing activities, net
|
371,145 | 247,613 | ||||||
|
Excess tax benefit from the exercise of stock-based awards
|
895 | 355 | ||||||
|
Common stock issued
|
— | 194 | ||||||
|
Common stock repurchased
|
(156,105 | ) | — | |||||
|
Common dividends paid
|
(52,253 | ) | — | |||||
|
Preferred dividends paid
|
(7,930 | ) | (37,095 | ) | ||||
|
Noncontrolling interest, net
|
— | (749 | ) | |||||
|
Net cash (used in) provided by financing activities
|
(6,871,685 | ) | 5,821,631 | |||||
|
Net (decrease) increase in cash and cash equivalents
|
(197,593 | ) | 197,026 | |||||
|
Cash and cash equivalents at beginning of period
|
4,342,327 | 6,070,013 | ||||||
|
Cash and cash equivalents at end of period
|
$ | 4,144,734 | $ | 6,267,039 | ||||
|
Cash disbursements made (refunds received) for:
|
||||||||
|
Interest
|
$ | 1,225,041 | $ | 1,144,499 | ||||
|
Income taxes paid
|
$ | 364,171 | $ | 48,190 | ||||
|
Income taxes (received)
|
$ | (21,966 | ) | $ | (499,041 | ) | ||
See accompanying notes to consolidated financial statements.
6
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 1. | Significant Accounting Policies |
Basis
of Presentation
The accompanying unaudited, consolidated financial statements of
SLM Corporation (“we,” “us,”
“our,” or the “Company”) have been prepared
in accordance with generally accepted accounting principles in
the United States of America (“GAAP”) for interim
financial information. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete
consolidated financial statements. 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. In the opinion of
management, all adjustments considered necessary for a fair
statement of the results for the interim periods have been
included. The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates. Operating results for the three and six
months ended June 30, 2011 are not necessarily indicative
of the results for the year ending December 31, 2011 or for
any other period. These unaudited financial statements should be
read in conjunction with the audited financial statements and
related notes included in our Annual Report on
Form 10-K
for the year ended December 31, 2010 (the “2010
Form 10-K”).
Reclassifications
Certain reclassifications have been made to the balances as of
and for the three and six months ended June 30, 2010 to be
consistent with classifications adopted for 2011, and had no
effect on net income, total assets, or total liabilities.
Recently
Issued Accounting Standards
Troubled
Debt Restructurings
In April 2011, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”)
No. 2011-02,
Receivables (Topic 310), “A Creditor’s Determination
of Whether a Restructuring Is a Troubled Debt
Restructuring.” This new guidance clarifies when a loan
restructuring constitutes a troubled debt restructuring. Under
the new guidance, student loans for which we have granted
certain concessions may now be considered troubled debt
restructurings that were previously not and this may require us
to increase the amount of our allowance for loan losses as
certain types of forbearance usage may be considered a
concession. This guidance is effective July 1, 2011,
applied retrospectively to January 1, 2011. The most likely
effect of implementing this new guidance would be to increase
the size of our allowance for losses. At this time we have not
completed the estimate of the change in our allowance for loan
losses that could result from implementing this new guidance.
Fair
Value Measurement and Disclosure Requirements
In May 2011, the FASB issued ASU
No. 2011-04,
Fair Value Measurement (Topic 820), “Amendments to Achieve
Common Fair Value Measurement and Disclosure Requirements in
U.S. GAAP and IFRSs.” These amendments
(1) clarify the FASB’s intent about the application of
existing fair value measurement and disclosure requirements; and
(2) change particular principles or requirements for measuring
fair value or for disclosing information about fair value
measurements. This new guidance is effective prospectively for
interim and annual periods beginning after December 15,
2011 and is not expected to have a material impact on our fair
value measurements.
7
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 2. | Allowance for Loan Losses |
Our provisions for loan losses represent the periodic expense of
maintaining an allowance sufficient to absorb incurred losses,
net of expected 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
(i) borrowers attending for-profit schools with an original
Fair Isaac and Company (“FICO”) score of less than 670
and (ii) 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.
In determining the allowance for loan losses, we estimate the
principal amount of loans that will default over the next two
years (two years being the expected period between a loss event
and default). In the first quarter of 2011, we implemented a new
model to estimate these Private Education Loan defaults. Both
the prior model and new model are considered “migration
models”. Our prior allowance model (in place through
December 31, 2010) segmented the portfolio into
categories of similar risk characteristics based on loan program
type, school type, loan status, seasoning, underwriting criteria
(credit scores) and the existence or absence of a cosigner using
school type, credit scores, cosigner status, loan status and
seasoning as the primary risk characteristics. Our new model
uses these same primary risk characteristics but also further
segments the portfolio by the number of months the loan is in
its repayment period (seasoning). While our previous allowance
process incorporated the impact of seasoning, the new model more
directly incorporates this feature. Another change in the new
allowance model relates to the historical period of experience
that we use as a starting point for projecting future defaults.
Our new model is based upon a seasonal average, adjusted to the
most recent three to six months of actual collection experience
as the starting point and applies expected macroeconomic changes
and collection procedure changes to estimate expected losses
caused by loss events incurred as of the balance sheet date. Our
previous model primarily used a one year historical default
experience period and did not include the ability to directly
model an economic expectation or collection procedure change. In
addition, the previous allowance process included qualitative
adjustments for these factors. Our current model places a
greater emphasis on the more recent default experience rather
than the default experience for older historical periods, as we
believe the recent default experience is more indicative of the
probable losses incurred in the loan portfolio today. While the
model we use as a part of the allowance for loan losses process
changed in the first quarter, the overall process for
calculating the appropriate amount of allowance for Private
Education Loan loss as disclosed in the 2010
Form 10-K
has not changed. We believe that the current model more
accurately reflects recent borrower behavior, loan performance,
and collection performance, as well as expectations about
economic factors. There was no adjustment to our allowance for
loan loss upon implementing this new default projection model in
the first quarter of 2011. In addition, there was no change in
how we estimate the amount we will recover over time related to
these defaulted amounts.
8
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 2. | Allowance for Loan Losses (Continued) |
|
Allowance for Loan Losses
|
||||||||||||||||
| Three Months Ended June 30, 2011 | ||||||||||||||||
|
Private Education
|
Other
|
|||||||||||||||
| FFELP Loans | Loans | Loans | Total | |||||||||||||
|
Allowance for Loan Losses
|
||||||||||||||||
|
Beginning balance
|
$ | 190,235 | $ | 2,034,318 | $ | 73,797 | $ | 2,298,350 | ||||||||
|
Total provision
|
22,313 | 264,938 | 3,435 | 290,686 | ||||||||||||
|
Charge-offs
|
(20,827 | ) | (263,580 | ) | (13,665 | ) | (298,072 | ) | ||||||||
|
Loan sales
|
(2,697 | ) | — | — | (2,697 | ) | ||||||||||
|
Reclassification of interest
reserve
(1)
|
— | 6,927 | — | 6,927 | ||||||||||||
|
Ending Balance
|
$ | 189,024 | $ | 2,042,603 | $ | 63,567 | $ | 2,295,194 | ||||||||
|
Allowance:
|
||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | — | $ | 133,796 | $ | 52,125 | $ | 185,921 | ||||||||
|
Ending balance: collectively evaluated for impairment
|
$ | 189,024 | $ | 1,908,807 | $ | 11,442 | $ | 2,109,273 | ||||||||
|
Ending balance: loans acquired with deteriorated credit quality
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Loans:
|
||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | — | $ | 563,650 | $ | 102,310 | $ | 665,960 | ||||||||
|
Ending balance: collectively evaluated for impairment
|
$ | 141,048,220 | $ | 38,093,353 | $ | 192,891 | $ | 179,334,464 | ||||||||
|
Ending balance: loans acquired with deteriorated credit quality
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Charge-offs as a percentage of average loans in repayment and
forbearance (annualized)
|
.07 | % | 3.5 | % | — | % | ||||||||||
|
Charge-offs as a percentage of average loans in repayment
(annualized)
|
.09 | % | 3.7 | % | — | % | ||||||||||
|
Allowance as a percentage of the ending total loan balance
|
.13 | % | 5.3 | % | 21.5 | % | ||||||||||
|
Allowance as a percentage of the ending loans in repayment
|
.20 | % | 7.1 | % | — | % | ||||||||||
|
Allowance coverage of charge-offs (annualized)
|
2.3 | 1.9 | 1.2 | |||||||||||||
|
Ending total
loans
(2)
|
$ | 141,048,220 | $ | 38,657,003 | $ | 295,201 | ||||||||||
|
Average loans in repayment
|
$ | 94,317,705 | $ | 28,488,734 | $ | — | ||||||||||
|
Ending loans in repayment
|
$ | 94,282,103 | $ | 28,871,968 | $ | — | ||||||||||
| (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. |
9
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 2. | Allowance for Loan Losses (Continued) |
|
Allowance for Loan Losses
|
||||||||||||||||
| Three Months Ended June 30, 2010 | ||||||||||||||||
|
Private Education
|
Other
|
|||||||||||||||
| FFELP Loans | Loans | Loans | Total | |||||||||||||
|
Allowance for Loan Losses
|
||||||||||||||||
|
Beginning balance
|
$ | 186,215 | $ | 2,018,676 | $ | 78,664 | $ | 2,283,555 | ||||||||
|
Total provision
|
28,613 | 349,211 | 4,415 | 382,239 | ||||||||||||
|
Charge-offs
|
(24,235 | ) | (335,766 | ) | (6,553 | ) | (366,554 | ) | ||||||||
|
Loan sales
|
(1,908 | ) | — | — | (1,908 | ) | ||||||||||
|
Reclassification of interest
reserve
(1)
|
— | 10,292 | — | 10,292 | ||||||||||||
|
Ending Balance
|
$ | 188,685 | $ | 2,042,413 | $ | 76,526 | $ | 2,307,624 | ||||||||
|
Allowance:
|
||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | — | $ | 81,867 | $ | 60,360 | $ | 142,227 | ||||||||
|
Ending balance: collectively evaluated for impairment
|
$ | 188,685 | $ | 1,960,546 | $ | 16,166 | $ | 2,165,397 | ||||||||
|
Ending balance: loans acquired with deteriorated credit quality
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Loans:
|
||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | — | $ | 363,370 | $ | 123,223 | $ | 486,593 | ||||||||
|
Ending balance: collectively evaluated for impairment
|
$ | 145,932,811 | $ | 37,735,165 | $ | 261,495 | $ | 183,929,471 | ||||||||
|
Ending balance: loans acquired with deteriorated credit quality
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Charge-offs as a percentage of average loans in repayment and
forbearance (annualized)
|
.10 | % | 5.1 | % | — | % | ||||||||||
|
Charge-offs as a percentage of average loans in repayment
(annualized)
|
.12 | % | 5.3 | % | — | % | ||||||||||
|
Allowance as a percentage of the ending total loan balance
|
.13 | % | 5.4 | % | 19.9 | % | ||||||||||
|
Allowance as a percentage of the ending loans in repayment
|
.23 | % | 7.9 | % | — | % | ||||||||||
|
Allowance coverage of charge-offs (annualized)
|
1.9 | 1.5 | 2.9 | |||||||||||||
|
Ending total
loans
(2)
|
$ | 145,932,811 | $ | 38,098,535 | $ | 384,718 | ||||||||||
|
Average loans in repayment
|
$ | 82,449,191 | $ | 25,178,957 | $ | — | ||||||||||
|
Ending loans in repayment
|
$ | 82,978,473 | $ | 25,721,573 | $ | — | ||||||||||
| (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. |
10
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 2. | Allowance for Loan Losses (Continued) |
|
Allowance for Loan Losses
|
||||||||||||||||
| Six Months Ended June 30, 2011 | ||||||||||||||||
|
Private Education
|
Other
|
|||||||||||||||
| FFELP Loans | Loans | Loans | Total | |||||||||||||
|
Allowance for Loan Losses
|
||||||||||||||||
|
Beginning balance
|
$ | 188,858 | $ | 2,021,580 | $ | 72,516 | $ | 2,282,954 | ||||||||
|
Total provision
|
45,435 | 539,986 | 8,670 | 594,091 | ||||||||||||
|
Charge-offs
|
(41,140 | ) | (536,582 | ) | (17,619 | ) | (595,341 | ) | ||||||||
|
Loan sales
|
(4,129 | ) | — | — | (4,129 | ) | ||||||||||
|
Reclassification of interest
reserve
(1)
|
— | 17,619 | — | 17,619 | ||||||||||||
|
Ending Balance
|
$ | 189,024 | $ | 2,042,603 | $ | 63,567 | $ | 2,295,194 | ||||||||
|
Allowance:
|
||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | — | $ | 133,796 | $ | 52,125 | $ | 185,921 | ||||||||
|
Ending balance: collectively evaluated for impairment
|
$ | 189,024 | $ | 1,908,807 | $ | 11,442 | $ | 2,109,273 | ||||||||
|
Ending balance: loans acquired with deteriorated credit quality
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Loans:
|
||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | — | $ | 563,650 | $ | 102,310 | $ | 665,960 | ||||||||
|
Ending balance: collectively evaluated for impairment
|
$ | 141,048,220 | $ | 38,093,353 | $ | 192,891 | $ | 179,334,464 | ||||||||
|
Ending balance: loans acquired with deteriorated credit quality
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Charge-offs as a percentage of average loans in repayment and
forbearance (annualized)
|
.07 | % | 3.6 | % | — | % | ||||||||||
|
Charge-offs as a percentage of average loans in repayment
(annualized)
|
.09 | % | 3.8 | % | — | % | ||||||||||
|
Allowance as a percentage of the ending total loan balance
|
.13 | % | 5.3 | % | 21.5 | % | ||||||||||
|
Allowance as a percentage of the ending loans in repayment
|
.20 | % | 7.1 | % | — | % | ||||||||||
|
Allowance coverage of charge-offs (annualized)
|
2.3 | 1.9 | 1.8 | |||||||||||||
|
Ending total
loans
(2)
|
$ | 141,048,220 | $ | 38,657,003 | $ | 295,201 | ||||||||||
|
Average loans in repayment
|
$ | 94,907,800 | $ | 28,308,899 | $ | — | ||||||||||
|
Ending loans in repayment
|
$ | 94,282,103 | $ | 28,871,968 | $ | — | ||||||||||
| (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. |
11
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 2. | Allowance for Loan Losses (Continued) |
|
Allowance for Loan Losses
|
||||||||||||||||
| Six Months Ended June 30, 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
|
51,609 | 674,233 | 15,517 | 741,359 | ||||||||||||
|
Charge-offs
|
(45,639 | ) | (620,244 | ) | (15,252 | ) | (681,135 | ) | ||||||||
|
Loan sales
|
(3,602 | ) | — | — | (3,602 | ) | ||||||||||
|
Reclassification of interest
reserve
(1)
|
— | 20,934 | — | 20,934 | ||||||||||||
|
Consolidation of securitization
trusts
(2)
|
25,149 | 524,050 | — | 549,199 | ||||||||||||
|
Ending Balance
|
$ | 188,685 | $ | 2,042,413 | $ | 76,526 | $ | 2,307,624 | ||||||||
|
Allowance:
|
||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | — | $ | 81,867 | $ | 60,360 | $ | 142,227 | ||||||||
|
Ending balance: collectively evaluated for impairment
|
$ | 188,685 | $ | 1,960,546 | $ | 16,166 | $ | 2,165,397 | ||||||||
|
Ending balance: loans acquired with deteriorated credit quality
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Loans:
|
||||||||||||||||
|
Ending balance: individually evaluated for impairment
|
$ | — | $ | 363,370 | $ | 123,223 | $ | 486,593 | ||||||||
|
Ending balance: collectively evaluated for impairment
|
$ | 145,932,811 | $ | 37,735,165 | $ | 261,495 | $ | 183,929,471 | ||||||||
|
Ending balance: loans acquired with deteriorated credit quality
|
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Charge-offs as a percentage of average loans in repayment and
forbearance (annualized)
|
.09 | % | 4.8 | % | — | % | ||||||||||
|
Charge-offs as a percentage of average loans in repayment
(annualized)
|
.11 | % | 5.0 | % | — | % | ||||||||||
|
Allowance as a percentage of the ending total loan balance
|
.13 | % | 5.4 | % | 19.9 | % | ||||||||||
|
Allowance as a percentage of the ending loans in repayment
|
.23 | % | 7.9 | % | — | % | ||||||||||
|
Allowance coverage of charge-offs (annualized)
|
2.1 | 1.6 | 2.5 | % | ||||||||||||
|
Ending total
loans
(3)
|
$ | 145,932,811 | $ | 38,098,535 | $ | 384,718 | ||||||||||
|
Average loans in repayment
|
$ | 82,443,391 | $ | 24,913,768 | $ | — | ||||||||||
|
Ending loans in repayment
|
$ | 82,978,473 | $ | 25,721,573 | $ | — | ||||||||||
| (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. | |
| (3) | Ending total loans for Private Education Loans includes the receivable for partially charged-off loans. |
12
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 2. | Allowance for Loan Losses (Continued) |
The following tables provide information regarding the loan
status and aging of past due loans as of June 30, 2011 and
December 31, 2010.
| FFELP Loan Delinquencies | ||||||||||||||||
|
June 30,
|
December 31,
|
|||||||||||||||
| 2011 | 2010 | |||||||||||||||
| (Dollars in millions) | Balance | % | Balance | % | ||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 25,718 | $ | 28,214 | ||||||||||||
|
Loans in
forbearance
(2)
|
21,048 | 22,028 | ||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||
|
Loans current
|
78,201 | 82.9 | % | 80,026 | 82.8 | % | ||||||||||
|
Loans delinquent
31-60 days
(3)
|
5,149 | 5.5 | 5,500 | 5.7 | ||||||||||||
|
Loans delinquent
61-90 days
(3)
|
2,909 | 3.1 | 3,178 | 3.3 | ||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
8,023 | 8.5 | 7,992 | 8.2 | ||||||||||||
|
Total FFELP Loans in repayment
|
94,282 | 100 | % | 96,696 | 100 | % | ||||||||||
|
Total FFELP Loans, gross
|
141,048 | 146,938 | ||||||||||||||
|
FFELP Loan unamortized premium
|
1,776 | 1,900 | ||||||||||||||
|
Total FFELP Loans
|
142,824 | 148,838 | ||||||||||||||
|
FFELP Loan allowance for losses
|
(189 | ) | (189 | ) | ||||||||||||
|
FFELP Loans, net
|
$ | 142,635 | $ | 148,649 | ||||||||||||
|
Percentage of FFELP Loans in repayment
|
66.8 | % | 65.8 | % | ||||||||||||
|
Delinquencies as a percentage of FFELP Loans in repayment
|
17.1 | % | 17.2 | % | ||||||||||||
|
FFELP Loans in forbearance as a percentage of loans in repayment
and forbearance
|
18.2 | % | 18.6 | % | ||||||||||||
| (1) | Loans for borrowers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for borrowers who have requested extension of grace period during employment transition. | |
| (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 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. |
13
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 2. | Allowance for Loan Losses (Continued) |
| Private Education Traditional Loan Delinquencies | ||||||||||||||||
|
June 30,
|
December 31,
|
|||||||||||||||
| 2011 | 2010 | |||||||||||||||
| (Dollars in millions) | Balance | % | Balance | % | ||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 6,431 | $ | 7,419 | ||||||||||||
|
Loans in
forbearance
(2)
|
1,225 | 1,156 | ||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||
|
Loans current
|
23,964 | 91.7 | % | 22,850 | 91.2 | % | ||||||||||
|
Loans delinquent
31-60 days
(3)
|
759 | 2.9 | 794 | 3.2 | ||||||||||||
|
Loans delinquent
61-90 days
(3)
|
433 | 1.7 | 340 | 1.4 | ||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
978 | 3.7 | 1,060 | 4.2 | ||||||||||||
|
Total traditional loans in repayment
|
26,134 | 100 | % | 25,044 | 100 | % | ||||||||||
|
Total traditional loans, gross
|
33,790 | 33,619 | ||||||||||||||
|
Traditional loans unamortized discount
|
(775 | ) | (801 | ) | ||||||||||||
|
Total traditional loans
|
33,015 | 32,818 | ||||||||||||||
|
Traditional loans receivable for partially charged-off loans
|
629 | 558 | ||||||||||||||
|
Traditional loans allowance for losses
|
(1,363 | ) | (1,231 | ) | ||||||||||||
|
Traditional loans, net
|
$ | 32,281 | $ | 32,145 | ||||||||||||
|
Percentage of traditional loans in repayment
|
77.3 | % | 74.5 | % | ||||||||||||
|
Delinquencies as a percentage of traditional loans in repayment
|
8.3 | % | 8.8 | % | ||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
4.5 | % | 4.4 | % | ||||||||||||
|
Loans in repayment greater than 12 months as a percentage
of loans in
repayment
(4)
|
66.7 | % | 65.2 | % | ||||||||||||
| (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 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) | Based on number of months in an active repayment status for which a scheduled monthly payment was due. |
14
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 2. | Allowance for Loan Losses (Continued) |
|
Private Education Non-Traditional Loan
|
||||||||||||||||
| Delinquencies | ||||||||||||||||
|
June 30,
|
December 31,
|
|||||||||||||||
| 2011 | 2010 | |||||||||||||||
| (Dollars in millions) | Balance | % | Balance | % | ||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 785 | $ | 921 | ||||||||||||
|
Loans in
forbearance
(2)
|
205 | 184 | ||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||
|
Loans current
|
2,030 | 74.1 | % | 2,038 | 72.6 | % | ||||||||||
|
Loans delinquent
31-60 days
(3)
|
204 | 7.5 | 217 | 7.7 | ||||||||||||
|
Loans delinquent
61-90 days
(3)
|
142 | 5.2 | 131 | 4.7 | ||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
361 | 13.2 | 422 | 15.0 | ||||||||||||
|
Total non-traditional loans in repayment
|
2,737 | 100 | % | 2,808 | 100 | % | ||||||||||
|
Total non-traditional loans, gross
|
3,727 | 3,913 | ||||||||||||||
|
Non-traditional loans unamortized discount
|
(86 | ) | (93 | ) | ||||||||||||
|
Total non-traditional loans
|
3,641 | 3,820 | ||||||||||||||
|
Non-traditional loans receivable for partially charged-off loans
|
511 | 482 | ||||||||||||||
|
Non-traditional loans allowance for losses
|
(680 | ) | (791 | ) | ||||||||||||
|
Non-traditional loans, net
|
$ | 3,472 | $ | 3,511 | ||||||||||||
|
Percentage of non-traditional loans in repayment
|
73.5 | % | 71.8 | % | ||||||||||||
|
Delinquencies as a percentage of non-traditional loans in
repayment
|
25.9 | % | 27.4 | % | ||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
7.0 | % | 6.1 | % | ||||||||||||
|
Loans in repayment greater than 12 months as a percentage
of loans in
repayment
(4)
|
60.0 | % | 55.9 | % | ||||||||||||
| (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 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) | Based on number of months in an active repayment status for which a scheduled monthly payment was due. |
15
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 2. | Allowance for Loan Losses (Continued) |
The following table provides information regarding accrued
interest receivable on our Private Education Loans at
June 30, 2011 and December 31, 2010. 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.
| Accrued Interest Receivable | ||||||||||||
|
Greater than
|
Allowance for
|
|||||||||||
|
90 days
|
Uncollectible
|
|||||||||||
| Total | Past Due | Interest | ||||||||||
|
June 30, 2011
|
||||||||||||
|
Private Education Loans — Traditional
|
$ | 970,674 | $ | 33,319 | $ | 50,718 | ||||||
|
Private Education Loans — Non-Traditional
|
178,013 | 17,990 | 36,412 | |||||||||
|
Total
|
$ | 1,148,687 | $ | 51,309 | $ | 87,130 | ||||||
|
December 31, 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 | ||||||
FFELP Loans are substantially guaranteed as to their principal
and accrued interest in the event of default; therefore, the key
credit quality indicator for this portfolio is loan status. The
impact of changes in loan status is incorporated quarterly into
the allowance for loan losses calculation. For Private Education
Loans, the key credit quality indicators are 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
16
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 2. | 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 | ||||||||||||||||
| June 30, 2011 | December 31, 2010 | |||||||||||||||
| (Dollars in millions) | Balance (3) | % of Balance | Balance (3) | % of Balance | ||||||||||||
|
Credit Quality Indicators
|
||||||||||||||||
|
School Type/FICO Scores:
|
||||||||||||||||
|
Traditional
|
$ | 33,790 | 90 | % | $ | 33,619 | 90 | % | ||||||||
|
Non-Traditional
(1)
|
3,727 | 10 | 3,913 | 10 | ||||||||||||
|
Total
|
$ | 37,517 | 100 | % | $ | 37,532 | 100 | % | ||||||||
|
Cosigners:
|
||||||||||||||||
|
With cosigner
|
$ | 22,650 | 60 | % | $ | 22,259 | 59 | % | ||||||||
|
Without cosigner
|
14,867 | 40 | 15,273 | 41 | ||||||||||||
|
Total
|
$ | 37,517 | 100 | % | $ | 37,532 | 100 | % | ||||||||
|
Seasoning
(2)
:
|
||||||||||||||||
|
1-12 payments
|
$ | 10,793 | 29 | % | $ | 10,932 | 29 | % | ||||||||
|
13-24
payments
|
6,625 | 18 | 6,659 | 18 | ||||||||||||
|
25-36
payments
|
4,592 | 12 | 4,457 | 12 | ||||||||||||
|
37-48
payments
|
3,267 | 9 | 2,891 | 8 | ||||||||||||
|
More than 48 payments
|
5,024 | 13 | 4,253 | 11 | ||||||||||||
|
Not yet in repayment
|
7,216 | 19 | 8,340 | 22 | ||||||||||||
|
Total
|
$ | 37,517 | 100 | % | $ | 37,532 | 100 | % | ||||||||
| (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. | |
| (3) | Balance represents gross Private Education Loans. |
We offer temporary interest rate reductions to Private Education
Loan borrowers who are both experiencing financial difficulties
and meet other criteria. At June 30, 2011 and
December 31, 2010, approximately $564 million and
$444 million, respectively, had qualified at some point for
an interest rate reduction modification since the inception of
the program in May 2009. These modifications met the criteria of
a troubled debt restructuring in accordance with
ASC 310-40
Receivables — Troubled Debt Restructurings by
Creditors and were individually evaluated for impairment. The
allowance for loan losses associated with these loans was
$134 million and $114 million at June 30, 2011
and December 31, 2010, respectively. Subsequent to
modification, $89 million and $53 million defaulted
through June 30, 2011 and December 31, 2010,
respectively. At June 30, 2011 and December 31, 2010,
approximately $284 million and $257 million,
respectively, had qualified for the program and were currently
receiving a reduction in their interest rate.
17
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 3. | Borrowings |
The following table summarizes our borrowings as of
June 30, 2011 and December 31, 2010.
| June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
|
Short
|
Long
|
Short
|
Long
|
|||||||||||||||||||||
| (Dollars in millions) | Term | Term | Total | Term | Term | Total | ||||||||||||||||||
|
Unsecured borrowings:
|
||||||||||||||||||||||||
|
Senior unsecured debt
|
$ | 2,464 | $ | 16,787 | $ | 19,251 | $ | 4,361 | $ | 15,742 | $ | 20,103 | ||||||||||||
|
Brokered deposits
|
1,550 | 1,654 | 3,204 | 1,387 | 3,160 | 4,547 | ||||||||||||||||||
|
Retail and other deposits
|
1,487 | — | 1,487 | 1,370 | — | 1,370 | ||||||||||||||||||
|
Other
(1)
|
1,004 | — | 1,004 | 887 | — | 887 | ||||||||||||||||||
|
Total unsecured borrowings
|
6,505 | 18,441 | 24,946 | 8,005 | 18,902 | 26,907 | ||||||||||||||||||
|
Secured borrowings:
|
||||||||||||||||||||||||
|
FFELP Loans securitizations
|
— | 109,524 | 109,524 | — | 112,425 | 112,425 | ||||||||||||||||||
|
Private Education Loans securitizations
|
— | 21,815 | 21,815 | — | 21,409 | 21,409 | ||||||||||||||||||
|
ED Conduit Program Facility
|
22,756 | — | 22,756 | 24,484 | — | 24,484 | ||||||||||||||||||
|
ABCP borrowings
|
314 | 5,000 | 5,314 | — | 5,853 | 5,853 | ||||||||||||||||||
|
Acquisition
financing
(2)
|
— | 1,010 | 1,010 | — | 1,064 | 1,064 | ||||||||||||||||||
|
FHLB-DM Facility
|
1,000 | — | 1,000 | 900 | — | 900 | ||||||||||||||||||
|
Indentured trusts
|
— | 1,125 | 1,125 | — | 1,246 | 1,246 | ||||||||||||||||||
|
Total secured borrowings
|
24,070 | 138,474 | 162,544 | 25,384 | 141,997 | 167,381 | ||||||||||||||||||
|
Total before hedge accounting adjustments
|
30,575 | 156,915 | 187,490 | 33,389 | 160,899 | 194,288 | ||||||||||||||||||
|
Hedge accounting adjustments
|
191 | 3,850 | 4,041 | 227 | 2,644 | 2,871 | ||||||||||||||||||
|
Total
|
$ | 30,766 | $ | 160,765 | $ | 191,531 | $ | 33,616 | $ | 163,543 | $ | 197,159 | ||||||||||||
| (1) | “Other” primarily consists of cash collateral held related to derivative exposures that are recorded as a short-term debt obligation. | |
| (2) | Relates to the acquisition of $25 billion of student loans at the end of 2010. |
18
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 3. | Borrowings (Continued) |
Secured
Borrowings
We currently consolidate all of our financing entities that are
variable interest entities (“VIEs”) of which we are
the primary beneficiary. As a result, these financing VIEs are
accounted for as secured borrowings. We consolidate the
following financing VIEs as of June 30, 2011 and
December 31, 2010:
| June 30, 2011 | ||||||||||||||||||||||||||||
| Debt Outstanding |
Carrying Amount of Assets Securing Debt
|
|||||||||||||||||||||||||||
|
Short
|
Long
|
Outstanding | ||||||||||||||||||||||||||
| (Dollars in millions) | Term | Term | Total | Loans | Cash | Other Assets | Total | |||||||||||||||||||||
|
Secured Borrowings — VIEs:
|
||||||||||||||||||||||||||||
|
ED Conduit Program Facility
|
$ | 22,756 | $ | — | $ | 22,756 | $ | 22,802 | $ | 647 | $ | 572 | $ | 24,021 | ||||||||||||||
|
ABCP borrowings
|
314 | 5,000 | 5,314 | 5,661 | 77 | 75 | 5,813 | |||||||||||||||||||||
|
Securitizations — FFELP Loans
|
— | 109,524 | 109,524 | 110,434 | 3,825 | 575 | 114,834 | |||||||||||||||||||||
|
Securitizations — Private Education Loans
|
— | 21,815 | 21,815 | 25,084 | 1,171 | 753 | 27,008 | |||||||||||||||||||||
|
Indentured trusts
|
— | 1,125 | 1,125 | 1,441 | 126 | 13 | 1,580 | |||||||||||||||||||||
|
Total before hedge accounting adjustments
|
23,070 | 137,464 | 160,534 | 165,422 | 5,846 | 1,988 | 173,256 | |||||||||||||||||||||
|
Hedge accounting adjustments
|
— | 2,414 | 2,414 | — | — | 2,135 | 2,135 | |||||||||||||||||||||
|
Total
|
$ | 23,070 | $ | 139,878 | $ | 162,948 | $ | 165,422 | $ | 5,846 | $ | 4,123 | $ | 175,391 | ||||||||||||||
19
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 3. | Borrowings (Continued) |
| December 31, 2010 | ||||||||||||||||||||||||||||
| Debt Outstanding |
Carrying Amount of Assets Securing Debt
|
|||||||||||||||||||||||||||
|
Short
|
Long
|
Outstanding | ||||||||||||||||||||||||||
| (Dollars in millions) | Term | Term | Total | Loans | Cash | Other Assets | Total | |||||||||||||||||||||
|
Secured Borrowings — VIEs:
|
||||||||||||||||||||||||||||
|
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 | ||||||||||||||
Transactions
During the Six Months Ended June 30, 2011
On June 30, 2011, we completed an $825 million Private
Education Loan ABS transaction at an all-in LIBOR equivalent
cost of one-month LIBOR plus 1.89 percent. This issue has a
weighted average life of 4.0 years and an initial
overcollateralization of approximately 18 percent.
On May 26, 2011, we completed an $821 million FFELP
ABS transaction at an all-in LIBOR equivalent cost of one-month
LIBOR plus 1.15 percent. This issue has a weighted average
life of 5.8 years and an initial overcollateralization of
approximately 3 percent.
On April 26, 2011, we completed a $562 million Private
Education Loan ABS transaction at an all-in LIBOR equivalent
cost of one-month LIBOR plus 1.99 percent. This issue has a
weighted average life of 3.8 years and an initial
overcollateralization of approximately 21 percent.
On March 3, 2011, we issued an $812 million FFELP ABS
transaction at an all-in LIBOR equivalent cost of one-month
LIBOR plus 1.14 percent. This issue has a weighted average
life of 5.8 years and initial over-collateralization of
approximately 3 percent.
On January 14, 2011, we issued 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 were designated for general corporate
purposes.
We also repurchase our outstanding unsecured debt in both
open-market repurchases and public tender offers. Repurchasing
debt helps us to better manage our short-term and long-term
funding needs by utilizing current excess liquidity to reduce
future obligations related to our unsecured borrowings at
favorable pricing.
20
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 3. | Borrowings (Continued) |
During the first half of 2011, we repurchased $885 million
of debt and realized gains of $38 million for the six
months ended June 30, 2011, compared with $2.7 billion
and $181 million the six months ended June 30, 2010.
We have $5.2 billion in Private Education Loan
securitization bonds outstanding at June 30, 2011, where we
have the ability to call the bonds at a discount to par between
the fourth quarter of 2011 and 2014. We have concluded that it
is probable we will call these bonds at the call date at their
respective discount to par. We consider it probable because we
believe that 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 $228 million,
cumulatively, and $28 million and $56 million in the
three and six months ended June 30, 2011 as a reduction of
interest expense.
The following table summarizes our securitization activity for
the three and six months ended June 30, 2011 and 2010. The
securitizations in the periods presented below were accounted
for as financings.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
|
Loan
|
Loan
|
Loan
|
Loan
|
|||||||||||||||||||||||||||||
|
No. of
|
Amount
|
No. of
|
Amount
|
No. of
|
Amount
|
No. of
|
Amount
|
|||||||||||||||||||||||||
| (Dollars in millions) | Transactions | Securitized | Transactions | Securitized | Transactions | Securitized | Transactions | Securitized | ||||||||||||||||||||||||
|
Securitizations:
|
||||||||||||||||||||||||||||||||
|
FFELP Stafford/PLUS Loans
|
— | $ | — | 1 | $ | 1,211 | — | $ | — | 1 | $ | 1,211 | ||||||||||||||||||||
|
FFELP Consolidation Loans
|
1 | 774 | — | — | 2 | 1,546 | — | — | ||||||||||||||||||||||||
|
Private Education Loans
|
2 | 1,699 | — | — | 2 | 1,699 | 1 | 1,929 | ||||||||||||||||||||||||
|
Total securitizations
|
3 | $ | 2,473 | 1 | $ | 1,211 | 4 | $ | 3,245 | 2 | $ | 3,140 | ||||||||||||||||||||
| 4. | Derivative Financial Instruments |
Our risk management strategy, use and accounting of derivatives
has not materially changed from that discussed in our 2010
Form 10-K.
Please refer to Note 9, “Derivative Financial
Instruments” in our 2010
Form 10-K
for a full discussion.
21
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 4. | Derivative Financial Instruments (Continued) |
Summary
of Derivative Financial Statement Impact
The following tables summarize the fair values and notional
amounts of our derivative instruments at June 30, 2011 and
December 31, 2010, and their impact on other comprehensive
income and earnings for the three and six months ended
June 30, 2011 and 2010.
Impact of
Derivatives on Consolidated Balance Sheet
| Cash Flow | Fair Value | Trading | Total | |||||||||||||||||||||||||||||||
|
Hedged Risk
|
June 30,
|
Dec. 31,
|
June 30,
|
Dec. 31,
|
June 30,
|
Dec. 31,
|
June 30,
|
Dec. 31,
|
||||||||||||||||||||||||||
| (Dollars in millions) | Exposure | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||
|
Fair
Values
(1)
|
||||||||||||||||||||||||||||||||||
|
Derivative Assets
|
||||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
Interest rate | $ | — | $ | — | $ | 972 | $ | 967 | $ | 158 | $ | 200 | $ | 1,130 | $ | 1,167 | |||||||||||||||||
|
Cross currency interest rate swaps
|
Foreign currency and
interest rate |
— | — | 2,768 | 1,925 | 100 | 101 | 2,868 | 2,026 | |||||||||||||||||||||||||
|
Other
(2)
|
Interest rate | — | — | — | — | 3 | 26 | 3 | 26 | |||||||||||||||||||||||||
|
Total derivative
assets
(3)
|
— | — | 3,740 | 2,892 | 261 | 327 | 4,001 | 3,219 | ||||||||||||||||||||||||||
|
Derivative Liabilities
|
||||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
Interest rate | (43 | ) | (75 | ) | — | — | (291 | ) | (348 | ) | (334 | ) | (423 | ) | |||||||||||||||||||
|
Floor Income Contracts
|
Interest rate | — | — | — | — | (2,390 | ) | (1,315 | ) | (2,390 | ) | (1,315 | ) | |||||||||||||||||||||
|
Cross currency interest rate swaps
|
Foreign currency and
interest rate |
— | — | (184 | ) | (215 | ) | (1 | ) | — | (185 | ) | (215 | ) | ||||||||||||||||||||
|
Other
(2)
|
Interest rate | — | — | — | — | — | (1 | ) | — | (1 | ) | |||||||||||||||||||||||
|
Total derivative
liabilities
(3)
|
(43 | ) | (75 | ) | (184 | ) | (215 | ) | (2,682 | ) | (1,664 | ) | (2,909 | ) | (1,954 | ) | ||||||||||||||||||
|
Net total derivatives
|
$ | (43 | ) | $ | (75 | ) | $ | 3,556 | $ | 2,677 | $ | (2,421 | ) | $ | (1,337 | ) | $ | 1,092 | $ | 1,265 | ||||||||||||||
| (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 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 | |||||||||||||||
|
June 30,
|
December 31,
|
June 30,
|
December 31,
|
|||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Gross position
|
$ | 4,001 | $ | 3,219 | $ | (2,909 | ) | $ | (1,954 | ) | ||||||
|
Impact of master netting agreements
|
(858 | ) | (782 | ) | 858 | 782 | ||||||||||
|
Derivative values with impact of master netting agreements (as
carried on balance sheet)
|
3,143 | 2,437 | (2,051 | ) | (1,172 | ) | ||||||||||
|
Cash collateral (held) pledged
|
(1,003 | ) | (886 | ) | 993 | 809 | ||||||||||
|
Net position
|
$ | 2,140 | $ | 1,551 | $ | (1,058 | ) | $ | (363 | ) | ||||||
The above fair values include adjustments for counterparty
credit risk for both when we are exposed to the counterparty,
net of collateral postings, and when the counterparty is exposed
to us, net of collateral postings. The net adjustments decreased
the overall net asset position at June 30, 2011 and
December 31, 2010 by $77 million and $72 million,
respectively. In addition, the above fair values reflect
adjustments for illiquid derivatives as indicated by a wide
bid/ask spread in the interest rate indices to which the
derivatives
22
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 4. | Derivative Financial Instruments (Continued) |
are indexed. These adjustments decreased the overall net asset
position at June 30, 2011 and December 31, 2010 by
$112 million and $129 million, respectively.
| Cash Flow | Fair Value | Trading | Total | |||||||||||||||||||||||||||||
|
June 30,
|
Dec. 31,
|
June 30,
|
Dec. 31,
|
June 30,
|
Dec. 31,
|
June 30,
|
Dec. 31,
|
|||||||||||||||||||||||||
| (Dollars in billions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||
|
Notional Values
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
$ | 1.1 | $ | 1.6 | $ | 14.0 | $ | 13.5 | $ | 103.1 | $ | 118.9 | $ | 118.2 | $ | 134.0 | ||||||||||||||||
|
Floor Income Contracts
|
— | — | — | — | 57.8 | 39.3 | 57.8 | 39.3 | ||||||||||||||||||||||||
|
Cross currency interest rate swaps
|
— | — | 16.5 | 17.5 | .3 | .3 | 16.8 | 17.8 | ||||||||||||||||||||||||
|
Other
(1)
|
— | — | — | — | 1.4 | 1.0 | 1.4 | 1.0 | ||||||||||||||||||||||||
|
Total derivatives
|
$ | 1.1 | $ | 1.6 | $ | 30.5 | $ | 31.0 | $ | 162.6 | $ | 159.5 | $ | 194.2 | $ | 192.1 | ||||||||||||||||
| (1) | “Other” includes Euro-dollar futures contracts, embedded derivatives bifurcated from securitization debt, as well as derivatives related to our Total Return Swap Facility. |
| Three Months Ended June 30, | ||||||||||||||||||||||||||||||||
|
Unrealized
|
||||||||||||||||||||||||||||||||
|
Realized Gain
|
Gain
|
|||||||||||||||||||||||||||||||
|
Unrealized Gain
|
(Loss)
|
(Loss)
|
||||||||||||||||||||||||||||||
|
(Loss) on
|
on
|
on Hedged
|
Total Gain
|
|||||||||||||||||||||||||||||
| Derivatives (1)(2) | Derivatives (3) | Item (1) | (Loss) | |||||||||||||||||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||
|
Fair Value Hedges:
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
$ | 203 | $ | 437 | $ | 121 | $ | 129 | $ | (230 | ) | $ | (475 | ) | $ | 94 | $ | 91 | ||||||||||||||
|
Cross currency interest rate swaps
|
173 | (1,733 | ) | 83 | 81 | (299 | ) | 1,800 | (43 | ) | 148 | |||||||||||||||||||||
|
Total fair value derivatives
|
376 | (1,296 | ) | 204 | 210 | (529 | ) | 1,325 | 51 | 239 | ||||||||||||||||||||||
|
Cash Flow Hedges:
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
— | 1 | (9 | ) | (15 | ) | — | — | (9 | ) | (14 | ) | ||||||||||||||||||||
|
Total cash flow derivatives
|
— | 1 | (9 | ) | (15 | ) | — | — | (9 | ) | (14 | ) | ||||||||||||||||||||
|
Trading:
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
54 | 289 | 17 | (6 | ) | — | — | 71 | 283 | |||||||||||||||||||||||
|
Floor Income Contracts
|
(277 | ) | (42 | ) | (202 | ) | (222 | ) | — | — | (479 | ) | (264 | ) | ||||||||||||||||||
|
Cross currency interest rate swaps
|
16 | 33 | 2 | 2 | — | — | 18 | 35 | ||||||||||||||||||||||||
|
Other
|
20 | 12 | 13 | (1 | ) | — | — | 33 | 11 | |||||||||||||||||||||||
|
Total trading derivatives
|
(187 | ) | 292 | (170 | ) | (227 | ) | — | — | (357 | ) | 65 | ||||||||||||||||||||
|
Total
|
189 | (1,003 | ) | 25 | (32 | ) | (529 | ) | 1,325 | (315 | ) | 290 | ||||||||||||||||||||
|
Less: realized gains recorded in interest expense
|
— | — | 195 | 195 | — | — | 195 | 195 | ||||||||||||||||||||||||
|
Gains (losses) on derivative and hedging activities, net
|
$ | 189 | $ | (1,003 | ) | $ | (170 | ) | $ | (227 | ) | $ | (529 | ) | $ | 1,325 | $ | (510 | ) | $ | 95 | |||||||||||
| (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.” |
23
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 4. | Derivative Financial Instruments (Continued) |
| Six Months Ended June 30, | ||||||||||||||||||||||||||||||||
|
Realized Gain
|
Unrealized
|
|||||||||||||||||||||||||||||||
|
Unrealized Gain
|
(Loss)
|
Gain
|
||||||||||||||||||||||||||||||
|
(Loss) on
|
on
|
(Loss)
|
Total Gain
|
|||||||||||||||||||||||||||||
| Derivatives (1)(2) | Derivatives (3) | on Hedged Item (1) | (Loss) | |||||||||||||||||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||
|
Fair Value Hedges:
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
$ | 5 | $ | 492 | $ | 249 | $ | 249 | $ | (25 | ) | $ | (538 | ) | $ | 229 | $ | 203 | ||||||||||||||
|
Cross currency interest rate swaps
|
874 | (3,081 | ) | 159 | 182 | (1,177 | ) | 3,163 | (144 | ) | 264 | |||||||||||||||||||||
|
Total fair value derivatives
|
879 | (2,589 | ) | 408 | 431 | (1,202 | ) | 2,625 | 85 | 467 | ||||||||||||||||||||||
|
Cash Flow Hedges:
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
(2 | ) | — | (23 | ) | (30 | ) | — | — | (25 | ) | (30 | ) | |||||||||||||||||||
|
Total cash flow derivatives
|
(2 | ) | — | (23 | ) | (30 | ) | — | — | (25 | ) | (30 | ) | |||||||||||||||||||
|
Trading:
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
32 | 400 | 57 | — | — | — | 89 | 400 | ||||||||||||||||||||||||
|
Floor Income Contracts
|
(126 | ) | (23 | ) | (428 | ) | (433 | ) | — | — | (554 | ) | (456 | ) | ||||||||||||||||||
|
Cross currency interest rate swaps
|
(1 | ) | 26 | 4 | 3 | — | — | 3 | 29 | |||||||||||||||||||||||
|
Other
|
23 | 6 | 12 | (2 | ) | — | — | 35 | 4 | |||||||||||||||||||||||
|
Total trading derivatives
|
(72 | ) | 409 | (355 | ) | (432 | ) | — | — | (427 | ) | (23 | ) | |||||||||||||||||||
|
Total
|
805 | (2,180 | ) | 30 | (31 | ) | (1,202 | ) | 2,625 | (367 | ) | 414 | ||||||||||||||||||||
|
Less: realized gains recorded in interest expense
|
— | — | 385 | 401 | — | — | 385 | 401 | ||||||||||||||||||||||||
|
Gains (losses) on derivative and hedging activities, net
|
$ | 805 | $ | (2,180 | ) | $ | (355 | ) | $ | (432 | ) | $ | (1,202 | ) | $ | 2,625 | $ | (752 | ) | $ | 13 | |||||||||||
| (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.” |
Impact of
Derivatives on Consolidated Statements of Changes in
Stockholders’ Equity (net of tax)
|
Three Months
|
Six Months
|
|||||||||||||||
|
Ended
|
Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Total losses on cash flow hedges
|
$ | (3 | ) | $ | (11 | ) | $ | (5 | ) | $ | (26 | ) | ||||
|
Realized losses reclassified to interest
expense
(1)(2)(3)
|
8 | 10 | 18 | 22 | ||||||||||||
|
Hedge ineffectiveness reclassified to
earnings
(1)(4)
|
— | (1 | ) | 1 | — | |||||||||||
|
Total change in stockholders’ equity for unrealized gains
(losses) on derivatives
|
$ | 5 | $ | (2 | ) | $ | 14 | $ | (4 | ) | ||||||
| (1) | Amounts included in “Realized gains (losses) 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 $7 million of after-tax net losses from accumulated other comprehensive income to earnings during the next 12 months related to amortization of cash flow hedges that were hedging debt instruments that are outstanding as of the reporting date. |
| (4) | Recorded in “Gains (losses) derivatives and hedging activities, net” in the consolidated statements of income. |
24
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 4. | Derivative Financial Instruments (Continued) |
Collateral
Collateral held and pledged at June 30, 2011 and
December 31, 2010 related to derivative exposures between
us and our derivative counterparties are detailed in the
following table:
| (Dollars in millions) | June 30, 2011 | December 31, 2010 | ||||||
|
Collateral held:
|
||||||||
|
Cash (obligation to return cash collateral is recorded in
short-term
borrowings)
(1)
|
$ | 1,003 | $ | 886 | ||||
|
Securities at fair value (not recorded in financial
statements)
(2)
|
1,053 | 585 | ||||||
|
Total collateral held
|
$ | 2,056 | $ | 1,471 | ||||
|
Derivative asset at fair value including accrued interest
|
$ | 3,465 | $ | 2,540 | ||||
|
Collateral pledged to others:
|
||||||||
|
Cash (right to receive return of cash collateral is recorded in
investments)
|
$ | 993 | $ | 809 | ||||
|
Securities at fair value (recorded in restricted
investments)
(3)
|
13 | 36 | ||||||
|
Total collateral pledged
|
$ | 1,006 | $ | 845 | ||||
|
Derivative liability at fair value including accrued interest
and premium receivable
|
$ | 933 | $ | 747 | ||||
| (1) | At June 30, 2011 and December 31, 2010, $136 million and $108 million, respectively, were held in restricted cash accounts. | |
| (2) | We do not have the ability to sell or re-pledge these securities. As such, the securities are not recorded in the financial statements. | |
| (3) | Counterparty has the right to sell or re-pledge securities. |
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
$864 million with our counterparties as of the collateral
call date. 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
$215 million and have posted $239 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.
25
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 5. | Other Assets |
The following table provides detail on our other assets at
June 30, 2011 and December 31, 2010.
| June 30, 2011 | December 31, 2010 | |||||||||||||||
|
Ending
|
% of
|
Ending
|
% of
|
|||||||||||||
| (Dollars in millions) | Balance | Balance | Balance | Balance | ||||||||||||
|
Derivatives at fair value
|
$ | 3,143 | 31 | % | $ | 2,437 | 27 | % | ||||||||
|
Accrued interest receivable
|
2,835 | 28 | 2,927 | 33 | ||||||||||||
|
Income tax asset, net current and deferred
|
1,511 | 15 | 1,283 | 14 | ||||||||||||
|
Accounts receivable — general
|
1,371 | 14 | 730 | 8 | ||||||||||||
|
Benefit and insurance-related investments
|
464 | 5 | 462 | 5 | ||||||||||||
|
Other loans, net
|
232 | 2 | 271 | 3 | ||||||||||||
|
Fixed assets, net
|
225 | 2 | 291 | 4 | ||||||||||||
|
Purchased paper-related receivables
|
68 | 1 | 96 | 1 | ||||||||||||
|
Other
|
281 | 2 | 473 | 5 | ||||||||||||
|
Total
|
$ | 10,130 | 100 | % | $ | 8,970 | 100 | % | ||||||||
The “Derivatives at fair value” line in the above
table represents the fair value of our derivatives in a net
asset position by counterparty, exclusive of accrued interest
and collateral. At June 30, 2011 and December 31,
2010, these balances included $3.6 billion and
$2.7 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 June 30, 2011 and
December 31, 2010, the cumulative
mark-to-market
adjustment to the hedged debt was $(3.9) billion and
$(2.7) billion, respectively.
| 6. | Stockholders’ Equity and Stock-Based Compensation |
The following table summarizes our common share repurchases and
issuances for the three and six months ended June 30, 2011
and 2010.
|
Six Months
|
||||||||||||||||
|
Three Months Ended
|
Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (Dollars and shares in millions, except per share data) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Common shares repurchased:
|
||||||||||||||||
|
Open market
|
9.6 | — | 9.6 | — | ||||||||||||
|
Benefit
plans
(1)
|
.9 | .2 | 2.6 | .6 | ||||||||||||
|
Total shares repurchased
|
10.5 | .2 | 12.2 | .6 | ||||||||||||
|
Average purchase price per share
|
$ | 16.28 | $ | 17.72 | $ | 16.18 | $ | 14.51 | ||||||||
|
Common shares issued
|
1.1 | .2 | 3.4 | 1.4 | ||||||||||||
|
Authority remaining at end of period for
repurchases
(2)
|
$ | 144.1 | 38.8 | $ | 144.1 | 38.8 | ||||||||||
| (1) | Includes 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. |
| (2) | In April 2011 we authorized the repurchase of up to $300 million of outstanding common stock in open market transactions, and terminated the previous stock repurchase program which had authorized the repurchase of up to 342.5 million shares. |
The closing price of our common stock on the New York Stock
Exchange on June 30, 2011 was $16.81.
26
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 6. | Stockholders’ Equity and Stock-Based Compensation (Continued) |
In March 2011, we retired all 70 million shares of common
stock held in treasury. This retirement decreased the balance in
treasury stock by $1.9 billion, with corresponding
decreases of $14 million in common stock and
$1.9 billion in additional paid-in capital. There was no
impact to total equity from this transaction.
In the first quarter, we changed our stock-based compensation
plans so that retirement eligible employees would not forfeit
unvested stock-based compensation upon their retirement. This
change had the effect of accelerating $11 million of future
stock-based compensation expenses associated with these unvested
stock grants into the current period for those employees who are
retirement eligible or who will become retirement eligible prior
to the vesting date.
Dividend
and Share Repurchase Program
On April 20, 2011, we declared a quarterly dividend of $.10
per share on our common stock, the first since early 2007. The
dividend was paid on June 17, 2011, to shareholders of
record at the close of business on June 3, 2011. In July
2011, we declared a $.10 per common share dividend to be
paid on September 16, 2011. In April 2011, we also
authorized the repurchase of up to $300 million of
outstanding common stock in open market transactions and
terminated all previous authorizations. During the second
quarter 2011, we repurchased 9.6 million shares for an
aggregate purchase price of $156 million.
27
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 7. | 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 three and six months ended
June 30, 2011 and 2010.
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Numerator:
|
||||||||||||||||
|
Net income (loss) from continuing operations
|
$ | (17,130 | ) | $ | 344,772 | $ | 159,294 | $ | 591,526 | |||||||
|
Less: preferred stock dividends
|
4,052 | 18,711 | 7,930 | 37,389 | ||||||||||||
|
Net income (loss) from continuing operations attributable to
common stock
|
(21,182 | ) | 326,061 | 151,364 | 554,137 | |||||||||||
|
Adjusted for dividends of Series C Preferred
Stock
(1)
|
— | 14,688 | — | 29,376 | ||||||||||||
|
Net income (loss) from continuing operations attributable to
common stock, adjusted
|
(21,182 | ) | 340,749 | 151,364 | 583,513 | |||||||||||
|
Income (loss) from discontinued operations
|
11,482 | (6,954 | ) | 9,752 | (13,568 | ) | ||||||||||
|
Net income (loss) attributable to common stock, adjusted
|
$ | (9,700 | ) | $ | 333,795 | $ | 161,116 | $ | 569,945 | |||||||
|
Denominator
(shares in thousands):
|
||||||||||||||||
|
Weighted average shares used to compute basic EPS
|
523,808 | 484,832 | 525,269 | 484,547 | ||||||||||||
|
Effect of dilutive securities:
|
||||||||||||||||
|
Dilutive effect of Series C Preferred
Stock
(1)
|
— | 41,240 | — | 41,240 | ||||||||||||
|
Dilutive effect of stock options, non-vested deferred
compensation and restricted stock, restricted stock units and
Employee Stock Purchase Plan
(“ESPP”)
(2)
|
— | 1,319 | 5,596 | 1,226 | ||||||||||||
|
Dilutive potential common
shares
(3)
|
— | 42,559 | 5,596 | 42,466 | ||||||||||||
|
Weighted average shares used to compute diluted EPS
|
523,808 | 527,391 | 530,865 | 527,013 | ||||||||||||
|
Basic earnings (loss) per common share:
|
||||||||||||||||
|
Continuing operations
|
$ | (.04 | ) | $ | .67 | $ | .29 | $ | 1.15 | |||||||
|
Discontinued operations
|
.02 | (.01 | ) | .02 | (.03 | ) | ||||||||||
|
Total
|
$ | (.02 | ) | $ | .66 | $ | .31 | $ | 1.12 | |||||||
|
Diluted earnings (loss) per common share:
|
||||||||||||||||
|
Continuing operations
|
$ | (.04 | ) | $ | .64 | $ | .28 | $ | 1.11 | |||||||
|
Discontinued operations
|
.02 | (.01 | ) | .02 | (.03 | ) | ||||||||||
|
Total
|
$ | (.02 | ) | $ | .63 | $ | .30 | $ | 1.08 | |||||||
| (1) | Our 7.25 percent mandatory convertible preferred stock Series C was issued on December 31, 2007. The Series C Preferred Stock was fully converted to common shares on December 15, 2010. | |
| (2) | Includes the potential dilutive effect of additional common shares that are issuable upon exercise of outstanding stock options, non-vested deferred compensation and restricted stock, restricted stock units, and the outstanding commitment to issue shares under the ESPP, determined by the treasury stock method. | |
| (3) | For the three months ended June 30, 2011 and 2010, stock options covering approximately 33 million and 17 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive. For the six months ended June 30, 2011 and 2010, stock options covering approximately 13 million and 17 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive. |
28
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 8. | Restructuring Activities |
The following table summarizes the restructuring expenses
incurred during the three and six months ended June 30,
2011 and 2010 and cumulative restructuring expenses incurred
through June 30, 2011 associated with our restructuring
plans.
|
Cumulative
|
||||||||||||||||||||
|
Three Months Ended
|
Six Months Ended
|
Expense
(1)
as of
|
||||||||||||||||||
| June 30, | June 30, |
June 30,
|
||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | 2011 | ||||||||||||||||
|
Severance costs
|
$ | 1,258 | $ | 17,658 | $ | 2,638 | $ | 42,455 | $ | 165,440 | ||||||||||
|
Lease and other contract termination costs
|
— | 107 | — | 107 | 10,929 | |||||||||||||||
|
Exit and other costs
|
336 | 43 | 2,517 | 50 | 18,760 | |||||||||||||||
|
Total restructuring costs from continuing
operations
(1)
|
1,594 | 17,808 | 5,155 | 42,612 | 195,129 | |||||||||||||||
|
Total restructuring costs from discontinued operations
|
9 | (142 | ) | (12 | ) | 1,336 | 29,221 | |||||||||||||
|
Total
|
$ | 1,603 | $ | 17,666 | $ | 5,143 | $ | 43,948 | $ | 224,350 | ||||||||||
| (1) | Aggregate restructuring expenses from continuing operations incurred across our reportable segments are disclosed in Note 11, “Segment Reporting.” |
Since the fourth quarter of 2007 through June 30, 2011,
severance costs were incurred in conjunction with aggregate
completed and planned position eliminations across all of our
reportable segments, ranging from senior executives to servicing
center personnel.
The following table summarizes changes in 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, 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 | ||||||||||||
|
Net accruals from continuing operations
|
2,638 | — | 2,517 | 5,155 | ||||||||||||
|
Net accruals from discontinued operations
|
(18 | ) | — | 6 | (12 | ) | ||||||||||
|
Cash paid
|
(34,534 | ) | (889 | ) | (4,185 | ) | (39,608 | ) | ||||||||
|
Balance at June 30, 2011
|
$ | 15,690 | $ | 3,266 | $ | — | $ | 18,956 | ||||||||
29
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 9. | Fair Value Measurements |
We use estimates of fair value in applying various accounting
standards in 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. During the three and six
months ended June 30, 2011, there were no significant
transfers of financial instruments between levels, or changes in
our methodology or assumptions used to value our financial
instruments. Please refer to Note 15, “Fair Value
Measurements” in our 2010
Form 10-K
for a full discussion.
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 June 30, 2011 and December 31, 2010.
|
Fair Value Measurements on a Recurring
|
Fair Value Measurements on a Recurring
|
|||||||||||||||||||||||||||||||
| Basis as of June 30, 2011 | Basis as of December 31, 2010 | |||||||||||||||||||||||||||||||
| (Dollars in millions) | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||
|
Available-for-sale
investments:
|
||||||||||||||||||||||||||||||||
|
U.S. Treasury securities
|
$ | 20 | $ | — | $ | — | $ | 20 | $ | 39 | $ | — | $ | — | $ | 39 | ||||||||||||||||
|
Agency residential mortgage backed securities
|
— | 64 | — | 64 | — | 68 | — | 68 | ||||||||||||||||||||||||
|
Guaranteed investment contracts
|
— | 21 | — | 21 | — | 20 | — | 20 | ||||||||||||||||||||||||
|
Other
|
— | 12 | — | 12 | — | 12 | — | 12 | ||||||||||||||||||||||||
|
Total
available-for-sale
investments
|
20 | 97 | — | 117 | 39 | 100 | — | 139 | ||||||||||||||||||||||||
|
Derivative
instruments:
(1)
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
— | 1,011 | 119 | 1,130 | — | 1,017 | 150 | 1,167 | ||||||||||||||||||||||||
|
Cross currency interest rate swaps
|
— | 447 | 2,421 | 2,868 | — | 427 | 1,599 | 2,026 | ||||||||||||||||||||||||
|
Other
|
— | — | 3 | 3 | — | — | 26 | 26 | ||||||||||||||||||||||||
|
Total derivative assets
|
— | 1,458 | 2,543 | 4,001 | — | 1,444 | 1,775 | 3,219 | ||||||||||||||||||||||||
|
Counterparty netting
|
(858 | ) | (782 | ) | ||||||||||||||||||||||||||||
|
Subtotal
(3)
|
3,143 | 2,437 | ||||||||||||||||||||||||||||||
|
Cash collateral held
|
(1,003 | ) | (886 | ) | ||||||||||||||||||||||||||||
|
Net derivative assets
|
2,140 | 1,551 | ||||||||||||||||||||||||||||||
|
Total
|
$ | 20 | $ | 1,555 | $ | 2,543 | $ | 2,257 | $ | 39 | $ | 1,544 | $ | 1,775 | $ | 1,690 | ||||||||||||||||
|
Liabilities
(2)
|
||||||||||||||||||||||||||||||||
|
Derivative
instruments
(1)
|
||||||||||||||||||||||||||||||||
|
Interest rate swaps
|
$ | — | $ | (135 | ) | $ | (199 | ) | $ | (334 | ) | $ | — | $ | (183 | ) | $ | (240 | ) | $ | (423 | ) | ||||||||||
|
Floor Income Contracts
|
— | (2,390 | ) | — | (2,390 | ) | — | (1,315 | ) | — | (1,315 | ) | ||||||||||||||||||||
|
Cross currency interest rate swaps
|
— | (37 | ) | (148 | ) | (185 | ) | — | (43 | ) | (172 | ) | (215 | ) | ||||||||||||||||||
|
Other
|
— | — | — | — | (1 | ) | — | — | (1 | ) | ||||||||||||||||||||||
|
Total derivative instruments
|
— | (2,562 | ) | (347 | ) | (2,909 | ) | (1 | ) | (1,541 | ) | (412 | ) | (1,954 | ) | |||||||||||||||||
|
Counterparty netting
|
858 | 782 | ||||||||||||||||||||||||||||||
|
Subtotal
(3)
|
(2,051 | ) | (1,172 | ) | ||||||||||||||||||||||||||||
|
Cash collateral pledged
|
993 | 809 | ||||||||||||||||||||||||||||||
|
Net derivative liabilities
|
(1,058 | ) | (363 | ) | ||||||||||||||||||||||||||||
|
Total
|
$ | — | $ | (2,562 | ) | $ | (347 | ) | $ | (1,058 | ) | $ | (1 | ) | $ | (1,541 | ) | $ | (412 | ) | $ | (363 | ) | |||||||||
| (1) | Fair value of derivative instruments excludes accrued interest and the value of 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. |
30
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 9. | Fair Value Measurements (Continued) |
The following tables summarize the change in balance sheet
carrying value associated with Level 3 financial
instruments carried at fair value on a recurring basis during
the three and six months ended June 30, 2011 and 2010.
| Three Months Ended June 30, 2011 (3) | Three Months Ended June 30, 2010 (3) | |||||||||||||||||||||||||||||||
| Derivative Instruments | Derivative Instruments | |||||||||||||||||||||||||||||||
|
Cross
|
Cross
|
|||||||||||||||||||||||||||||||
|
Currency
|
Total
|
Currency
|
Total
|
|||||||||||||||||||||||||||||
|
Interest
|
Interest
|
Derivative
|
Interest
|
Interest
|
Derivative
|
|||||||||||||||||||||||||||
| (Dollars in millions) | Rate Swaps | Rate Swaps | Other | Instruments | Rate Swaps | Rate Swaps | Other | Instruments | ||||||||||||||||||||||||
|
Balance, beginning of period
|
$ | (85 | ) | $ | 2,011 | $ | 26 | $ | 1,952 | $ | (329 | ) | $ | 1,548 | $ | (22 | ) | $ | 1,197 | |||||||||||||
|
Total gains/(losses) (realized and unrealized):
|
||||||||||||||||||||||||||||||||
|
Included in
earnings
(1)
|
6 | 321 | 33 | 360 | 165 | (1,086 | ) | 11 | (910 | ) | ||||||||||||||||||||||
|
Included in other comprehensive income
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Settlements
|
(1 | ) | (59 | ) | (56 | ) | (116 | ) | 2 | (39 | ) | 2 | (35 | ) | ||||||||||||||||||
|
Transfers in and/or out of Level 3
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Balance, end of period
|
$ | (80 | ) | $ | 2,273 | $ | 3 | $ | 2,196 | $ | (162 | ) | $ | 423 | $ | (9 | ) | $ | 252 | |||||||||||||
|
Change in unrealized gains/(losses) relating to instruments
still held at the reporting
date
(2)
|
$ | 5 | $ | 262 | $ | 14 | $ | 281 | $ | 161 | $ | (1,125 | ) | $ | 12 | $ | (952 | ) | ||||||||||||||
| Six Months Ended June 30, 2011 (3) | ||||||||||||||||
| Derivative Instruments | ||||||||||||||||
|
Cross
|
||||||||||||||||
|
Currency
|
Total
|
|||||||||||||||
|
Interest
|
Interest
|
Derivative
|
||||||||||||||
| (Dollars in millions) | Rate Swaps | Rate Swaps | Other | Instruments | ||||||||||||
|
Balance, beginning of period
|
$ | (90 | ) | $ | 1,427 | $ | 26 | $ | 1,363 | |||||||
|
Total gains/(losses) (realized and unrealized):
|
||||||||||||||||
|
Included in
earnings
(1)
|
34 | 954 | 35 | 1,023 | ||||||||||||
|
Included in other comprehensive income
|
— | — | — | — | ||||||||||||
|
Settlements
|
(24 | ) | (108 | ) | (58 | ) | (190 | ) | ||||||||
|
Transfers in and/or out of Level 3
|
— | — | — | — | ||||||||||||
|
Balance, end of period
|
$ | (80 | ) | $ | 2,273 | $ | 3 | $ | 2,196 | |||||||
|
Change in unrealized gains/(losses) relating to instruments
still held at the reporting
date
(2)
|
$ | 10 | $ | 844 | $ | 13 | $ | 867 | ||||||||
31
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 9. | Fair Value Measurements (Continued) |
| Six Months Ended June 30, 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)
|
— | 160 | 3 | (1,959 | ) | 4 | (1,792 | ) | (1,792 | ) | ||||||||||||||||||
|
Included in other comprehensive income
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Settlements
|
— | 6 | 51 | (87 | ) | 5 | (25 | ) | (25 | ) | ||||||||||||||||||
|
Cumulative effect of accounting
change
(3)
|
(1,828 | ) | (56 | ) | — | 873 | — | 817 | (1,011 | ) | ||||||||||||||||||
|
Transfers in and/or out of Level 3
|
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Balance, end of period
|
$ | — | $ | (162 | ) | $ | — | $ | 423 | $ | (9 | ) | $ | 252 | $ | 252 | ||||||||||||
|
Change in unrealized gains/(losses) relating to instruments
still held at the reporting
date
(2)
|
$ | — | $ | 161 | $ | — | $ | (2,047 | ) | $ | 6 | $ | (1,880 | ) | $ | (1,880 | ) | |||||||||||
| (1) | “Included in earnings” comprises the following amounts recorded in the specified line item in the consolidated statements of income: |
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Gains (losses) on derivative and hedging activities, net
|
$ | 303 | $ | (948 | ) | $ | 916 | $ | (1,876 | ) | ||||||
|
Interest expense
|
57 | 38 | 107 | 84 | ||||||||||||
|
Total
|
$ | 360 | $ | (910 | ) | $ | 1,023 | $ | (1,792 | ) | ||||||
| (2) | Recorded in “gains (losses) on derivative and hedging activities, net” in the consolidated statements of income. |
| (3) | Upon adoption of new consolidation accounting guidance on January 1, 2010, we consolidated previously off-balance sheet securitization trusts. This resulted in the removal of the Residual Interests and the recording of the fair value of swaps previously not in our consolidated results. |
32
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 9. | Fair Value Measurements (Continued) |
The following table summarizes the fair values of our financial
assets and liabilities, including derivative financial
instruments, as of June 30, 2011 and December 31, 2010.
| June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
|
Fair
|
Carrying
|
Fair
|
Carrying
|
|||||||||||||||||||||
| (Dollars in millions) | Value | Value | Difference | Value | Value | Difference | ||||||||||||||||||
|
Earning assets
|
||||||||||||||||||||||||
|
FFELP loans
|
$ | 140,341 | $ | 142,635 | $ | (2,294 | ) | $ | 147,163 | $ | 148,649 | $ | (1,486 | ) | ||||||||||
|
Private Education Loans
|
33,086 | 35,753 | (2,667 | ) | 30,949 | 35,656 | (4,707 | ) | ||||||||||||||||
|
Other loans (presented in “other assets” on the
balance sheet)
|
84 | 232 | (148 | ) | 88 | 270 | (182 | ) | ||||||||||||||||
|
Cash and
investments
(1)
|
11,359 | 11,359 | — | 11,553 | 11,553 | — | ||||||||||||||||||
|
Total earning assets
|
184,870 | 189,979 | (5,109 | ) | 189,753 | 196,128 | (6,375 | ) | ||||||||||||||||
|
Interest-bearing liabilities
|
||||||||||||||||||||||||
|
Short-term borrowings
|
30,748 | 30,766 | 18 | 33,604 | 33,616 | 12 | ||||||||||||||||||
|
Long-term borrowings
|
151,843 | 160,765 | 8,922 | 154,355 | 163,544 | 9,189 | ||||||||||||||||||
|
Total interest-bearing liabilities
|
182,591 | 191,531 | 8,940 | 187,959 | 197,160 | 9,201 | ||||||||||||||||||
|
Derivative financial instruments
|
||||||||||||||||||||||||
|
Floor Income/Cap contracts
|
(2,390 | ) | (2,390 | ) | — | (1,315 | ) | (1,315 | ) | — | ||||||||||||||
|
Interest rate swaps
|
796 | 796 | — | 744 | 744 | — | ||||||||||||||||||
|
Cross currency interest rate swaps
|
2,683 | 2,683 | — | 1,811 | 1,811 | — | ||||||||||||||||||
|
Other
|
3 | 3 | — | 25 | 25 | — | ||||||||||||||||||
|
Excess of net asset fair value over carrying value
|
$ | 3,831 | $ | 2,826 | ||||||||||||||||||||
| (1) | “Cash and investments” includes available-for-sale investments that consist of investments that are primarily U.S. Treasury or U.S. agency securities whose cost basis is $113 million and $137 million at June 20, 2011 and December 31, 2010, respectively, versus a fair value of $117 million and $139 million at June 30, 2011 and December 31, 2010, respectively. |
| 10. | Commitments and Contingencies |
Mark A. Arthur et al. v. Sallie Mae, Inc.
As
previously disclosed, this class action suit involves
allegations made in U.S. District Court for the Western
District of Washington that we contacted consumers on their
cellular telephones via autodialer without their 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 are seeking
statutory damages, damages for willful violations,
attorneys’ fees, costs, and injunctive relief. We have
denied vigorously all claims asserted against us, but previously
agreed to a preliminary settlement of $19.5 million to
avoid the burden and expense of continued litigation. Subsequent
to reaching this preliminary settlement, we filed submissions
with the Court to advise that additional individuals were
omitted from the original notice list of class members.
On August 3, 2011, we reached an agreement in principle
through a memorandum of understanding with the Plaintiffs
on behalf of the settlement class, and we expect to formalize
that agreement and request Court approval during the next
several months. Under the memorandum of understanding, we
have agreed to increase the settlement fund
to $24.15 million. We have $24.15 million accrued
related to this matter as of June 30, 2011.
33
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 10. | Commitments and Contingencies (Continued) |
In the ordinary course of business, we and our subsidiaries are
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.
| 11. | Segment Reporting |
FFELP
Loans Segment
Our FFELP Loans segment consists of our $142.6 billion
FFELP Loan portfolio as of June 30, 2011 and the underlying
debt and capital funding the loans. We no longer originate FFELP
Loans; however, we are actively seeking to acquire FFELP Loan
portfolios.
The following table includes asset information for our FFELP
Loans segment.
|
June 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
|
FFELP Loans, net
|
$ | 142,635 | $ | 148,649 | ||||
|
Cash and
investments
(1)
|
6,041 | 5,963 | ||||||
|
Other
|
4,418 | 3,911 | ||||||
|
Total assets
|
$ | 153,094 | $ | 158,523 | ||||
| (1) | Includes restricted cash and investments. |
34
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 11. | Segment Reporting (Continued) |
Consumer
Lending Segment
We originate, acquire, finance and service Private Education
Loans. The portfolio totaled $35.8 billion at June 30,
2011. We also provide savings products, primarily in the form of
retail deposits, to help customers save for a college education.
The following table includes asset information for our Consumer
Lending segment.
|
June 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
|
Private Education Loans, net
|
$ | 35,753 | $ | 35,656 | ||||
|
Cash and
investments
(1)
|
2,794 | 3,372 | ||||||
|
Other
|
4,506 | 4,004 | ||||||
|
Total assets
|
$ | 43,053 | $ | 43,032 | ||||
| (1) | Includes restricted cash and investments. |
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
Solutions, account asset servicing and transaction processing
activities.
At June 30, 2011 and December 31, 2010, the Business
Services segment had total assets of $799 million and
$930 million, 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.
At June 30, 2011 and December 31, 2010, the Other
segment had total assets of $3.4 billion and
$2.8 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 two 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 two items adjusted for in our
“Core Earnings” presentations are: (1) 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
(2) the accounting for goodwill and acquired intangible
assets. The tables presented below reflect “Core
Earnings” operating
35
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 11. | Segment Reporting (Continued) |
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.
36
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 11. | Segment Reporting (Continued) |
Segment
Results and Reconciliations to GAAP
| Three Months Ended June 30, 2011 | ||||||||||||||||||||||||||||||||
|
FFELP
|
Consumer
|
Business
|
Total “Core
|
Total
|
||||||||||||||||||||||||||||
| (Dollars in millions) | Loans | Lending | Services | Other | Eliminations (1) | Earnings” | Adjustments (2) | GAAP | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||||||||||
|
Student loans
|
$ | 721 | $ | 600 | $ | — | $ | — | $ | — | $ | 1,321 | $ | 129 | $ | 1,450 | ||||||||||||||||
|
Other loans
|
— | — | — | 5 | — | 5 | — | 5 | ||||||||||||||||||||||||
|
Cash and investments
|
1 | 2 | 2 | 2 | (2 | ) | 5 | — | 5 | |||||||||||||||||||||||
|
Total interest income
|
722 | 602 | 2 | 7 | (2 | ) | 1,331 | 129 | 1,460 | |||||||||||||||||||||||
|
Total interest expense
|
357 | 201 | — | 14 | (2 | ) | 570 | 22 | 592 | |||||||||||||||||||||||
|
Net interest income (loss)
|
365 | 401 | 2 | (7 | ) | — | 761 | 107 | 868 | |||||||||||||||||||||||
|
Less: provisions for loan losses
|
23 | 265 | — | 3 | — | 291 | — | 291 | ||||||||||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
342 | 136 | 2 | (10 | ) | — | 470 | 107 | 577 | |||||||||||||||||||||||
|
Servicing revenue
|
21 | 15 | 244 | — | (187 | ) | 93 | — | 93 | |||||||||||||||||||||||
|
Contingency revenue
|
— | — | 86 | — | — | 86 | — | 86 | ||||||||||||||||||||||||
|
Gains on debt repurchases
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Other income (loss)
|
— | — | 11 | 3 | — | 14 | (521 | ) | (507 | ) | ||||||||||||||||||||||
|
Total other income (loss)
|
21 | 15 | 341 | 3 | (187 | ) | 193 | (521 | ) | (328 | ) | |||||||||||||||||||||
|
Expenses:
|
||||||||||||||||||||||||||||||||
|
Direct operating expenses
|
192 | 73 | 121 | — | (187 | ) | 199 | — | 199 | |||||||||||||||||||||||
|
Overhead expenses
|
— | — | — | 69 | — | 69 | — | 69 | ||||||||||||||||||||||||
|
Operating expenses
|
192 | 73 | 121 | 69 | (187 | ) | 268 | — | 268 | |||||||||||||||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | — | — | — | — | — | 6 | 6 | ||||||||||||||||||||||||
|
Restructuring expenses
|
— | 1 | — | 1 | — | 2 | — | 2 | ||||||||||||||||||||||||
|
Total expenses
|
192 | 74 | 121 | 70 | (187 | ) | 270 | 6 | 276 | |||||||||||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
171 | 77 | 222 | (77 | ) | — | 393 | (420 | ) | (27 | ) | |||||||||||||||||||||
|
Income tax expense
(benefit)
(3)
|
63 | 28 | 82 | (29 | ) | — | 144 | (154 | ) | (10 | ) | |||||||||||||||||||||
|
Net income (loss) from continuing operations
|
108 | 49 | 140 | (48 | ) | — | 249 | (266 | ) | (17 | ) | |||||||||||||||||||||
|
Income from discontinued operations, net of taxes
|
— | — | — | 11 | — | 11 | — | 11 | ||||||||||||||||||||||||
|
Net income (loss)
|
$ | 108 | $ | 49 | $ | 140 | $ | (37 | ) | $ | — | $ | 260 | $ | (266 | ) | $ | (6 | ) | |||||||||||||
| (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: |
| Three Months Ended June 30, 2011 | ||||||||||||
|
Net Impact of
|
||||||||||||
|
Net Impact of
|
Goodwill and
|
|||||||||||
|
Derivative
|
Acquired
|
|||||||||||
| (Dollars in millions) | Accounting | Intangibles | Total | |||||||||
|
Net interest income after provisions for loan losses
|
$ | 107 | $ | — | $ | 107 | ||||||
|
Total other income (loss)
|
(521 | ) | — | (521 | ) | |||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | 6 | 6 | |||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | (414 | ) | $ | (6 | ) | (420 | ) | ||||
|
Income tax benefit
|
(154 | ) | ||||||||||
|
Net loss
|
$ | (266 | ) | |||||||||
| (3) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
37
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 11. | Segment Reporting (Continued) |
| Three Months Ended June 30, 2010 | ||||||||||||||||||||||||||||||||
|
FFELP
|
Consumer
|
Business
|
Total “Core
|
Total
|
||||||||||||||||||||||||||||
| (Dollars in millions) | Loans | Lending | Services | Other | Eliminations (1) | Earnings” | Adjustments (2) | GAAP | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||||||||||
|
Student loans
|
$ | 744 | $ | 575 | $ | — | $ | — | $ | — | $ | 1,319 | $ | 132 | $ | 1,451 | ||||||||||||||||
|
Other loans
|
— | — | — | 7 | — | 7 | — | 7 | ||||||||||||||||||||||||
|
Cash and investments
|
2 | 4 | 4 | 1 | (4 | ) | 7 | — | 7 | |||||||||||||||||||||||
|
Total interest income (loss)
|
746 | 579 | 4 | 8 | (4 | ) | 1,333 | 132 | 1,465 | |||||||||||||||||||||||
|
Total interest expense
|
382 | 183 | — | 11 | (4 | ) | 572 | (3 | ) | 569 | ||||||||||||||||||||||
|
Net interest income (loss)
|
364 | 396 | 4 | (3 | ) | — | 761 | 135 | 896 | |||||||||||||||||||||||
|
Less: provisions for loan losses
|
29 | 349 | — | 4 | — | 382 | — | 382 | ||||||||||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
335 | 47 | 4 | (7 | ) | — | 379 | 135 | 514 | |||||||||||||||||||||||
|
Servicing revenue
|
15 | 21 | 228 | — | (165 | ) | 99 | — | 99 | |||||||||||||||||||||||
|
Contingency revenue
|
— | — | 88 | — | — | 88 | — | 88 | ||||||||||||||||||||||||
|
Gains on debt repurchases
|
— | — | — | 91 | — | 91 | — | 91 | ||||||||||||||||||||||||
|
Other income
|
— | — | 13 | — | — | 13 | 76 | 89 | ||||||||||||||||||||||||
|
Total other income (loss)
|
15 | 21 | 329 | 91 | (165 | ) | 291 | 76 | 367 | |||||||||||||||||||||||
|
Expenses:
|
||||||||||||||||||||||||||||||||
|
Direct operating expenses
|
187 | 86 | 133 | 2 | (165 | ) | 243 | — | 243 | |||||||||||||||||||||||
|
Overhead expenses
|
— | — | — | 66 | — | 66 | — | 66 | ||||||||||||||||||||||||
|
Operating expenses
|
187 | 86 | 133 | 68 | (165 | ) | 309 | — | 309 | |||||||||||||||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | — | — | — | — | — | 10 | 10 | ||||||||||||||||||||||||
|
Restructuring expenses
|
15 | 1 | 2 | — | — | 18 | — | 18 | ||||||||||||||||||||||||
|
Total expenses
|
202 | 87 | 135 | 68 | (165 | ) | 327 | 10 | 337 | |||||||||||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
148 | (19 | ) | 198 | 16 | — | 343 | 201 | 544 | |||||||||||||||||||||||
|
Income tax expense
(benefit)
(3)
|
53 | (7 | ) | 71 | 8 | — | 125 | 74 | 199 | |||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
95 | (12 | ) | 127 | 8 | — | 218 | 127 | 345 | |||||||||||||||||||||||
|
Loss from discontinued operations, net of taxes
|
— | — | — | (7 | ) | — | (7 | ) | — | (7 | ) | |||||||||||||||||||||
|
Net income (loss)
|
$ | 95 | $ | (12 | ) | $ | 127 | $ | 1 | $ | — | $ | 211 | $ | 127 | $ | 338 | |||||||||||||||
| (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: |
| Three Months Ended June 30, 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
|
$ | 135 | $ | — | $ | 135 | ||||||
|
Total other income
|
76 | — | 76 | |||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | 10 | 10 | |||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | 211 | $ | (10 | ) | 201 | ||||||
|
Income tax expense
|
74 | |||||||||||
|
Net income
|
$ | 127 | ||||||||||
| (3) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
38
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 11. | Segment Reporting (Continued) |
| Six Months Ended June 30, 2011 | ||||||||||||||||||||||||||||||||
|
FFELP
|
Consumer
|
Business
|
Total “Core
|
Total
|
||||||||||||||||||||||||||||
| (Dollars in millions) | Loans | Lending | Services | Other | Eliminations (1) | Earnings” | Adjustments (2) | GAAP | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||||||||||
|
Student loans
|
$ | 1,457 | $ | 1,204 | $ | — | $ | — | $ | — | $ | 2,661 | $ | 270 | $ | 2,931 | ||||||||||||||||
|
Other loans
|
— | — | — | 11 | — | 11 | — | 11 | ||||||||||||||||||||||||
|
Cash and investments
|
2 | 5 | 5 | 3 | (5 | ) | 10 | — | 10 | |||||||||||||||||||||||
|
Total interest income (loss)
|
1,459 | 1,209 | 5 | 14 | (5 | ) | 2,682 | 270 | 2,952 | |||||||||||||||||||||||
|
Total interest expense
|
726 | 399 | — | 29 | (5 | ) | 1,149 | 37 | 1,186 | |||||||||||||||||||||||
|
Net interest income (loss)
|
733 | 810 | 5 | (15 | ) | — | 1,533 | 233 | 1,766 | |||||||||||||||||||||||
|
Less: provisions for loan losses
|
46 | 540 | — | 8 | — | 594 | — | 594 | ||||||||||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
687 | 270 | 5 | (23 | ) | — | 939 | 233 | 1,172 | |||||||||||||||||||||||
|
Servicing revenue
|
46 | 32 | 489 | — | (376 | ) | 191 | — | 191 | |||||||||||||||||||||||
|
Contingency revenue
|
— | — | 164 | — | — | 164 | — | 164 | ||||||||||||||||||||||||
|
Gains on debt repurchases
|
— | — | — | 64 | — | 64 | (26 | ) | 38 | |||||||||||||||||||||||
|
Other income
|
— | — | 21 | 6 | — | 27 | (754 | ) | (727 | ) | ||||||||||||||||||||||
|
Total other income (loss)
|
46 | 32 | 674 | 70 | (376 | ) | 446 | (780 | ) | (334 | ) | |||||||||||||||||||||
|
Expenses:
|
||||||||||||||||||||||||||||||||
|
Direct operating expenses
|
387 | 155 | 249 | 9 | (376 | ) | 424 | — | 424 | |||||||||||||||||||||||
|
Overhead expenses
|
— | — | — | 148 | — | 148 | — | 148 | ||||||||||||||||||||||||
|
Operating expenses
|
387 | 155 | 249 | 157 | (376 | ) | 572 | — | 572 | |||||||||||||||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | — | — | — | — | — | 12 | 12 | ||||||||||||||||||||||||
|
Restructuring expenses
|
1 | 2 | 1 | 1 | — | 5 | — | 5 | ||||||||||||||||||||||||
|
Total expenses
|
388 | 157 | 250 | 158 | (376 | ) | 577 | 12 | 589 | |||||||||||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
345 | 145 | 429 | (111 | ) | — | 808 | (559 | ) | 249 | ||||||||||||||||||||||
|
Income tax expense
(benefit)
(3)
|
127 | 54 | 158 | (41 | ) | — | 298 | (208 | ) | 90 | ||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
218 | 91 | 271 | (70 | ) | — | 510 | (351 | ) | 159 | ||||||||||||||||||||||
|
Income from discontinued operations, net of taxes
|
— | — | — | 10 | — | 10 | — | 10 | ||||||||||||||||||||||||
|
Net income (loss)
|
$ | 218 | $ | 91 | $ | 271 | $ | (60 | ) | $ | — | $ | 520 | $ | (351 | ) | $ | 169 | ||||||||||||||
| (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: |
| Six Months Ended June 30, 2011 | ||||||||||||
|
Net Impact of
|
||||||||||||
|
Net Impact of
|
Goodwill and
|
|||||||||||
|
Derivative
|
Acquired
|
|||||||||||
| (Dollars in millions) | Accounting | Intangibles | Total | |||||||||
|
Net interest income after provisions for loan losses
|
$ | 233 | $ | — | $ | 233 | ||||||
|
Total other income (loss)
|
(780 | ) | — | (780 | ) | |||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | 12 | 12 | |||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | (547 | ) | $ | (12 | ) | (559 | ) | ||||
|
Income tax benefit
|
(208 | ) | ||||||||||
|
Net loss
|
$ | (351 | ) | |||||||||
| (3) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
39
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 11. | Segment Reporting (Continued) |
| Six Months Ended June 30, 2010 | ||||||||||||||||||||||||||||||||
|
FFELP
|
Consumer
|
Business
|
Total “Core
|
Total
|
||||||||||||||||||||||||||||
| (Dollars in millions) | Loans | Lending | Services | Other | Eliminations (1) | Earnings” | Adjustments (2) | GAAP | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||||||||||
|
Student loans
|
$ | 1,386 | $ | 1,141 | $ | — | $ | — | $ | — | $ | 2,527 | $ | 296 | $ | 2,823 | ||||||||||||||||
|
Other loans
|
— | — | — | 16 | — | 16 | — | 16 | ||||||||||||||||||||||||
|
Cash and investments
|
4 | 6 | 8 | 1 | (8 | ) | 11 | — | 11 | |||||||||||||||||||||||
|
Total interest income (loss)
|
1,390 | 1,147 | 8 | 17 | (8 | ) | 2,554 | 296 | 2,850 | |||||||||||||||||||||||
|
Total interest expense
|
718 | 356 | — | 21 | (8 | ) | 1,087 | 13 | 1,100 | |||||||||||||||||||||||
|
Net interest income (loss)
|
672 | 791 | 8 | (4 | ) | — | 1,467 | 283 | 1,750 | |||||||||||||||||||||||
|
Less: provisions for loan losses
|
52 | 674 | — | 15 | — | 741 | — | 741 | ||||||||||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
620 | 117 | 8 | (19 | ) | — | 726 | 283 | 1,009 | |||||||||||||||||||||||
|
Servicing revenue
|
36 | 41 | 473 | — | (329 | ) | 221 | — | 221 | |||||||||||||||||||||||
|
Contingency revenue
|
— | — | 168 | — | — | 168 | — | 168 | ||||||||||||||||||||||||
|
Gains on debt repurchases
|
— | — | — | 181 | — | 181 | — | 181 | ||||||||||||||||||||||||
|
Other income
|
— | — | 24 | 11 | — | 35 | (5 | ) | 30 | |||||||||||||||||||||||
|
Total other income (loss)
|
36 | 41 | 665 | 192 | (329 | ) | 605 | (5 | ) | 600 | ||||||||||||||||||||||
|
Expenses:
|
||||||||||||||||||||||||||||||||
|
Direct operating expenses
|
375 | 166 | 252 | 4 | (329 | ) | 468 | — | 468 | |||||||||||||||||||||||
|
Overhead expenses
|
— | — | — | 129 | — | 129 | — | 129 | ||||||||||||||||||||||||
|
Operating expenses
|
375 | 166 | 252 | 133 | (329 | ) | 597 | — | 597 | |||||||||||||||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | — | — | — | — | — | 19 | 19 | ||||||||||||||||||||||||
|
Restructuring expenses
|
33 | 3 | 5 | 2 | — | 43 | — | 43 | ||||||||||||||||||||||||
|
Total expenses
|
408 | 169 | 257 | 135 | (329 | ) | 640 | 19 | 659 | |||||||||||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
248 | (11 | ) | 416 | 38 | — | 691 | 259 | 950 | |||||||||||||||||||||||
|
Income tax expense
(benefit)
(3)
|
89 | (4 | ) | 149 | 18 | — | 252 | 106 | 358 | |||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
159 | (7 | ) | 267 | 20 | — | 439 | 153 | 592 | |||||||||||||||||||||||
|
Loss from discontinued operations, net of taxes
|
— | — | — | (14 | ) | — | (14 | ) | — | (14 | ) | |||||||||||||||||||||
|
Net income (loss)
|
$ | 159 | $ | (7 | ) | $ | 267 | $ | 6 | $ | — | $ | 425 | $ | 153 | $ | 578 | |||||||||||||||
| (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: |
| Six Months Ended June 30, 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
|
$ | 283 | $ | — | $ | 283 | ||||||
|
Total other income (loss)
|
(5 | ) | — | (5 | ) | |||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | 19 | 19 | |||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | 278 | $ | (19 | ) | 259 | ||||||
|
Income tax benefit
|
106 | |||||||||||
|
Net loss
|
$ | 153 | ||||||||||
| (3) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
40
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 11. | Segment Reporting (Continued) |
Summary
of “Core Earnings” Adjustments to GAAP
The two adjustments required to reconcile from our “Core
Earnings” results to our GAAP results of operations relate
to differing treatments for: (1) 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 (2) the
accounting for goodwill and acquired intangible assets. The
following table reflects aggregate adjustments associated with
these areas for the three and six months ended June 30,
2011 and 2010.
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
“Core Earnings” adjustments to GAAP:
|
||||||||||||||||
|
Net impact of derivative
accounting
(1)
|
$ | (414 | ) | $ | 211 | $ | (547 | ) | $ | 278 | ||||||
|
Net impact of acquired
intangibles
(2)
|
(6 | ) | (10 | ) | (12 | ) | (19 | ) | ||||||||
|
Net tax
effect
(3)
|
154 | (74 | ) | 208 | (106 | ) | ||||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | (266 | ) | $ | 127 | $ | (351 | ) | $ | 153 | ||||||
| (1) | Derivative accounting: “Core Earnings” exclude periodic unrealized gains and losses that are caused by the mark-to-market derivative valuations on derivatives that do not qualify for hedge accounting treatment under GAAP and periodic unrealized gains and losses that are 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 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 recognized the economic effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest 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) | Net Tax Effect: Such tax effect is based upon our “Core Earnings” effective tax rate for the year. |
| 12. | Discontinued Operations |
Our Purchased Paper businesses are presented in discontinued
operations for the current and prior periods. In the fourth
quarter of 2010, we began actively marketing our Purchased
Paper — Non-Mortgage business for sale and concluded
it was probable this business would be sold within one year at
which time we would exit the business. 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.
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. We are currently seeking bids for this portfolio and
anticipate closing on the sale in the second half of 2011.
41
Table of Contents
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at June 30, 2011 and for the three and six
months ended
June 30, 2011 and 2010 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
| 12. | Discontinued Operations (Continued) |
The following table summarizes the discontinued assets and
liabilities at June 30, 2011 and December 31, 2010,
respectively.
|
June 30,
|
December 31,
|
|||||||
| 2011 | 2010 | |||||||
|
Assets:
|
||||||||
|
Cash and equivalents
|
$ | 11,912 | $ | 3,848 | ||||
|
Other assets
|
139,087 | 176,916 | ||||||
|
Assets of discontinued operations
|
$ | 150,999 | $ | 180,764 | ||||
|
Liabilities:
|
||||||||
|
Liabilities of discontinued operations
|
$ | 5,336 | $ | 6,300 | ||||
At June 30, 2011 and 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 June 30, 2011 and December 31, 2010,
liabilities of our discontinued operations consist primarily of
restructuring liabilities related to severance and contract
termination costs.
The following table summarizes the discontinued operations for
the three and six months ended June 30, 2011 and 2010.
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
Discontinued operations:
|
||||||||||||||||
|
Income (loss) from discontinued operations before income taxes
|
$ | 18,217 | $ | (9,829 | ) | $ | 15,273 | $ | (19,808 | ) | ||||||
|
Income tax expense (benefit)
|
6,735 | (2,875 | ) | 5,521 | (6,240 | ) | ||||||||||
|
Income (loss) from discontinued operations, net of taxes
|
$ | 11,482 | $ | (6,954 | ) | $ | 9,752 | $ | (13,568 | ) | ||||||
42
Table of Contents
| Item 2. | 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 Quarterly Report on
Form 10-Q.
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
our Annual Report on
Form 10-K
for the year ended December 31, 2010, in this Quarterly
Report on
Form 10-Q,
and subsequent filings with the SEC; increases in financing
costs; limits on liquidity; increases in costs associated with
compliance with laws and regulations; changes in accounting
standards and the impact of related changes in significant
accounting estimates; 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 or the credit ratings of the United States of America;
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.
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.
43
Table of Contents
Selected
Financial Information and Ratios
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (Dollars and shares in millions, except per share data) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
GAAP Basis
|
||||||||||||||||
|
Net income (loss)
|
$ | (6 | ) | $ | 338 | $ | 169 | $ | 578 | |||||||
|
Diluted earnings (loss) per common
share
(1)
|
$ | (.02 | ) | $ | .63 | $ | .30 | $ | 1.08 | |||||||
|
Weighted average shares used to compute diluted earnings (loss)
per share
|
524 | 527 | 531 | 527 | ||||||||||||
|
Return on assets
|
(.01 | )% | .68 | % | .18 | % | .59 | % | ||||||||
|
“Core Earnings”
Basis
(2)
|
||||||||||||||||
|
“Core Earnings” net income
|
$ | 260 | $ | 211 | $ | 520 | $ | 425 | ||||||||
|
“Core Earnings” diluted earnings per common
share
(1)
|
$ | .48 | $ | .39 | $ | .96 | $ | .79 | ||||||||
|
Weighted average shares used to compute diluted earnings per
share
|
530 | 527 | 531 | 527 | ||||||||||||
|
“Core Earnings” return on assets
|
.54 | % | .43 | % | .54 | % | .44 | % | ||||||||
|
Other Operating Statistics
|
||||||||||||||||
|
Ending FFELP Loans, net
|
$ | 142,635 | $ | 148,492 | $ | 142,635 | $ | 148,492 | ||||||||
|
Ending Private Education Loans, net
|
35,753 | 35,151 | 35,753 | 35,151 | ||||||||||||
|
Ending total student loans, net
|
$ | 178,388 | $ | 183,643 | $ | 178,388 | $ | 183,643 | ||||||||
|
Average student loans
|
$ | 180,783 | $ | 184,571 | $ | 182,575 | $ | 183,060 | ||||||||
| (1) | Preferred dividends of $15 million and $29 million, applicable to our convertible Series C Preferred Stock, were added back to the numerator in the three and six months ended June 30, 2010, respectively, in computing diluted earnings per share, as the Series C Preferred Stock was dilutive. The Series C Preferred Stock was fully converted to common shares on December 15, 2010. | |
| (2) | “Core Earnings” are non-GAAP measures and do not represent a comprehensive basis of accounting. For a greater explanation of “Core Earnings,” see the section titled “’Core Earnings’ — Definition and Limitations” and subsequent sections. |
Overview
Our primary business is to help students and families save, plan
and pay for college. As part of this, we 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 U.S. 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 earn fee income by providing student loan-related services
including student loan servicing, loan default aversion and
defaulted loan collections, transaction processing capabilities
and information technology to educational institutions, and 529
college-savings plan program management services and a consumer
savings network.
44
Table of Contents
We monitor and assess our ongoing operations and results based
on the following four reportable segments:
| • | FFELP Loans segment — Consists of our $142.6 billion and $148.7 billion FFELP Loan portfolio and the underlying debt and capital funding the loans as of June 30, 2011 and December 31, 2010, respectively. We no longer originate FFELP Loans; however, we are actively seeking to acquire, and have acquired, FFELP Loan portfolios. The portfolio has a weighted average remaining life of 7.65 years. | |
| • | Consumer Lending segment — We originate, acquire, finance and service Private Education Loans. The portfolio totaled $35.8 billion and $35.7 billion at June 30, 2011 and December 31, 2010, respectively. We also provide savings products, primarily in the form of retail deposits, to help customers save for a college education. | |
| • | Business Services segment — In this 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, ED and other third parties. Through our Campus Solutions business we provide comprehensive financing and transaction processing solutions to college financial aid offices and students to streamline the financial aid process. We also perform account asset servicing and other transaction processing activities. | |
| • | 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. |
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 derives its revenue from different activities
and services. A brief summary of our key financial measures (net
interest income; provision for loan losses; charge-offs and
delinquencies; servicing and contingency revenues; other
income/(loss); operating expenses; and “Core
Earnings”) can be found in Item 7
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in our 2010
Form 10-K.
First
Half of 2011 Summary of Results
We continue to operate in a challenging macroeconomic
environment marked by high unemployment and uncertainty. On
July 1, 2010, the Health Care and Education Reconciliation
Act of 2010 (“HCERA”), which included the SAFRA Act,
eliminated FFELP Loan originations, a major source of our net
income. All federal loans to students are now made through the
Direct Student Loan Program (“DSLP”) and as discussed
above, we no longer originate FFELP Loans. In addition, on
July 21, 2010, President Obama signed into law the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”) that represents a comprehensive
change to banking laws, imposing significant new regulation on
almost every aspect of the U.S. financial services
industry. A discussion of HCERA and the Dodd-Frank Act can be
found in Item 1 “Business” and in Item 1A
“Risk Factors” in our 2010
Form 10-K.
In this environment, we were able to achieve significant
accomplishments in the first half of 2011 as discussed below.
We report financial results on a GAAP basis and also present
certain “Core Earnings” performance measures. Our
management, equity investors, credit rating agencies and debt
capital providers use these “Core Earnings” measures
to monitor our business performance. See “’Core
Earnings’ — Definition and Limitations” for
a further discussion and a complete reconciliation between GAAP
net income and “Core Earnings.”
45
Table of Contents
GAAP second quarter 2011 net loss was $6 million ($.02
diluted loss per share), versus net income of $338 million
($.63 diluted earnings per share) in the same quarter last year.
We manage our business segments on a “Core Earnings”
basis. The primary difference between our “Core
Earnings” and GAAP results for the second quarter of 2011
is a $414 million unrealized,
mark-to-market
loss on certain derivative contracts recognized in GAAP but not
in “Core Earnings” results.
“Core Earnings” were $260 million ($.48 diluted
earnings per share) for the second quarter 2011, compared with
$211 million ($.39 diluted earnings per share) for the
year-ago period. Improved loan loss provision and operating
expenses more than offset lower debt repurchase gains.
During the first half of 2011, we raised $2 billion of
unsecured debt and issued $1.6 billion of FFELP
asset-backed securities and $1.4 billion of Private
Education Loan securities. We also repurchased $885 million
of debt and realized “Core Earnings” gains of
$64 million for the six months ended June 30, 2011,
compared with $2.7 billion and $181 million in the six
months ended June 30, 2010.
In the second-quarter 2011, we utilized $156 million to
repurchase 9.6 million common shares on the open market as
part of our $300 million share repurchase program announced
in April. We declared and paid a $.10 per share common dividend
during the second quarter of 2011.
Effective March 31, 2011, we completed the relocation of
our headquarters to Newark, Delaware from Reston, Virginia.
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 and
the progress we have made to date.
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. We have set a goal of getting to a quarterly
operating expense of $250 million in the fourth quarter 2011 and
are on track to achieve this goal. Operating expenses were
$268 million in the second quarter of 2011. Operating
expenses in the second quarter of 2011 included $13 million
of servicing costs related to the $25 billion student loan
portfolio acquisition at the end of last year and
$2 million for litigation contingencies. We expect these
servicing costs to decline as the acquired portfolio converts to
our loan servicing system in the second half of 2011. These
charges notwithstanding, we expect to achieve our quarterly
operating expense target of $250 million in the fourth
quarter of 2011.
Maximize
Cash Flows from FFELP Loans
We have a $142.6 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
additional FFELP Loan portfolios such as the portfolio we
purchased at the end of 2010. During the first six months of
2011 we acquired $615 million of FFELP loans and expect to
purchase additional FFELP loans in the second half of the year.
Prudently
Grow Consumer Lending Segment Assets and Revenue
Successfully growing Private Education Loan lending, which is
designed to supplement federal financial aid, 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
46
Table of Contents
and provision for loan losses. Originations were 21 percent
higher in the second quarter of 2011 compared with the year-ago
quarter. Charge-offs decreased to 3.7 percent of loans in
repayment from 5.3 percent in the year-ago quarter.
Increase
Business Services Segment Revenue
Our Business Services segment comprises 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 Solutions, transaction processing and 529
college-savings plan account asset servicing.
| • | Under our ED Servicing Contract, we currently receive a 22 percent allocation of new borrower loans originated by the Direct Loan Program. We expect that this volume will grow organically as more loans are originated under DSLP. Our goal is to further expand our market share and broaden the services we provide to ED and other third-party servicing clients. We can expand our market share under the ED Servicing Contract by having a better performance ranking than the three other servicing companies. | |
| • | Campus Solutions is a business line that we expect to grow by expanding our product offerings and leveraging our deep relationships with colleges and universities. In the first quarter, we announced a Sallie Mae Bank No-Fee Student Checking Account with Debit as an enhanced refund disbursement choice for schools and students to help higher education institutions rapidly process financial aid and tuition refunds. This new option complements existing refund disbursement choices that include electronic deposit to the bank account of the student’s choice, debit card or a check. We added 18 new refund disbursement clients in the second quarter 2011. | |
| • | Assets under management in 529 college-savings plans total $38 billion and have been growing at a rate of 25 percent over the last three years. We recently were selected to continue as the program manager for New York’s 529 College Savings Program under a seven-year contract, which is currently being negotiated. New York has the largest direct 529 plan in the country. Our goal is to service additional 529 plans. | |
| • | We also launched Sallie Mae Insurance Services during the quarter, which will offer directly to college students and higher education institutions tuition insurance, renters insurance and student health insurance. |
Reinstate
Dividends and/or Share Repurchases
Our objective was to begin either paying dividends or
repurchasing shares, or a combination of both, by the second
half of 2011. On June 17, 2011, we paid a quarterly
dividend of $.10 per share on our common stock, the first since
early 2007. In July 2011, we declared a $.10 per common
share dividend to be paid on September 16, 2011. In April
2011, we authorized the repurchase of up to $300 million of
outstanding common stock in open-market transactions and
terminated all previous authorizations. In the second quarter
2011, we utilized $156 million to repurchase
9.6 million common shares on the open market.
47
Table of Contents
RESULTS
OF OPERATIONS
We present the results of operations below first on a
consolidated basis in accordance with GAAP. Following our
discussion of consolidated earnings results on a GAAP basis, we
present our results on a segment basis. We have four business
segments: FFELP Loans, Consumer Lending, Business Services and
Other. Since these segments operate in distinct business
environments and we manage and evaluate the financial
performance of these segments using non-GAAP financial measures,
these segments are presented on a “Core Earnings”
basis (see “‘Core Earnings’ Definition and
Limitations”).
GAAP Statements
of Income (Unaudited)
|
Three Months
|
Six Months
|
|||||||||||||||||||||||||||||||
|
Ended
|
Increase
|
Ended
|
Increase
|
|||||||||||||||||||||||||||||
| June 30, | (Decrease) | June 30, | (Decrease) | |||||||||||||||||||||||||||||
| (Dollars in millions, except per share data) | 2011 | 2010 | $ | % | 2011 | 2010 | $ | % | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||||||||||
|
FFELP Loans
|
$ | 850 | $ | 876 | $ | (26 | ) | (3 | )% | $ | 1,727 | $ | 1,682 | $ | 45 | 3 | % | |||||||||||||||
|
Private Education Loans
|
600 | 575 | 25 | 4 | 1,204 | 1,141 | 63 | 6 | ||||||||||||||||||||||||
|
Other loans
|
5 | 7 | (2 | ) | (29 | ) | 11 | 16 | (5 | ) | (31 | ) | ||||||||||||||||||||
|
Cash and investments
|
5 | 7 | (2 | ) | (29 | ) | 10 | 11 | (1 | ) | (9 | ) | ||||||||||||||||||||
|
Total interest income
|
1,460 | 1,465 | (5 | ) | — | 2,952 | 2,850 | 102 | 4 | |||||||||||||||||||||||
|
Total interest expense
|
592 | 569 | 23 | 4 | 1,186 | 1,100 | 86 | 8 | ||||||||||||||||||||||||
|
Net interest income
|
868 | 896 | (28 | ) | (3 | ) | 1,766 | 1,750 | 16 | 1 | ||||||||||||||||||||||
|
Less: provisions for loan losses
|
291 | 382 | (91 | ) | (24 | ) | 594 | 741 | (147 | ) | (20 | ) | ||||||||||||||||||||
|
Net interest income after provisions for loan losses
|
577 | 514 | 63 | 12 | 1,172 | 1,009 | 163 | 16 | ||||||||||||||||||||||||
|
Other income (loss):
|
||||||||||||||||||||||||||||||||
|
Gains (losses) on sales of loans and securities, net
|
— | (3 | ) | 3 | (100 | ) | — | 5 | (5 | ) | (100 | ) | ||||||||||||||||||||
|
Gains (losses) on derivative and hedging activities, net
|
(510 | ) | 95 | (605 | ) | (637 | ) | (752 | ) | 13 | (765 | ) | (5,885 | ) | ||||||||||||||||||
|
Servicing revenue
|
93 | 99 | (6 | ) | (6 | ) | 191 | 221 | (30 | ) | (14 | ) | ||||||||||||||||||||
|
Contingency revenue
|
86 | 88 | (2 | ) | (2 | ) | 164 | 168 | (4 | ) | (2 | ) | ||||||||||||||||||||
|
Gains on debt repurchases
|
— | 91 | (91 | ) | (100 | ) | 38 | 181 | (143 | ) | (79 | ) | ||||||||||||||||||||
|
Other income (loss)
|
3 | (3 | ) | 6 | 200 | 25 | 12 | 13 | 108 | |||||||||||||||||||||||
|
Total other income (loss)
|
(328 | ) | 367 | (695 | ) | (189 | ) | (334 | ) | 600 | (934 | ) | (156 | ) | ||||||||||||||||||
|
Expenses:
|
||||||||||||||||||||||||||||||||
|
Operating expenses
|
268 | 309 | (41 | ) | (13 | ) | 572 | 597 | (25 | ) | (4 | ) | ||||||||||||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization expense
|
6 | 10 | (4 | ) | (40 | ) | 12 | 19 | (7 | ) | (37 | ) | ||||||||||||||||||||
|
Restructuring expenses
|
2 | 18 | (16 | ) | (89 | ) | 5 | 43 | (38 | ) | (88 | ) | ||||||||||||||||||||
|
Total expenses
|
276 | 337 | (61 | ) | (18 | ) | 589 | 659 | (70 | ) | (11 | ) | ||||||||||||||||||||
|
Income (loss) from continuing operations before income tax
expense (benefit)
|
(27 | ) | 544 | (571 | ) | (105 | ) | 249 | 950 | (701 | ) | (74 | ) | |||||||||||||||||||
|
Income tax expense (benefit)
|
(10 | ) | 199 | (209 | ) | (105 | ) | 90 | 358 | (268 | ) | (75 | ) | |||||||||||||||||||
|
Net income (loss) from continuing operations
|
(17 | ) | 345 | (362 | ) | (105 | ) | 159 | 592 | (433 | ) | (73 | ) | |||||||||||||||||||
|
Income (loss) from discontinued operations, net of tax expense
(benefit)
|
11 | (7 | ) | 18 | 257 | 10 | (14 | ) | 24 | 171 | ||||||||||||||||||||||
|
Net income (loss)
|
(6 | ) | 338 | (344 | ) | (102 | ) | 169 | 578 | (409 | ) | (71 | ) | |||||||||||||||||||
|
Preferred stock dividends
|
4 | 19 | (15 | ) | (79 | ) | 8 | 37 | (29 | ) | (78 | ) | ||||||||||||||||||||
|
Net income (loss) attributable to common stock
|
$ | (10 | ) | $ | 319 | $ | (329 | ) | (103 | )% | $ | 161 | $ | 541 | $ | (380 | ) | (70 | )% | |||||||||||||
|
Basic earnings (loss) per common share:
|
||||||||||||||||||||||||||||||||
|
Continuing operations
|
$ | (.04 | ) | $ | .67 | $ | (.71 | ) | (106 | )% | $ | .29 | $ | 1.15 | $ | (.86 | ) | (75 | )% | |||||||||||||
|
Discontinued operations
|
.02 | (.01 | ) | .03 | 300 | .02 | (.03 | ) | .05 | 167 | ||||||||||||||||||||||
|
Total
|
$ | (.02 | ) | $ | .66 | $ | (.68 | ) | (103 | )% | $ | .31 | $ | 1.12 | $ | (.81 | ) | (72 | )% | |||||||||||||
|
Diluted earnings (loss) per common share:
|
||||||||||||||||||||||||||||||||
|
Continuing operations
|
$ | (.04 | ) | $ | .64 | $ | (.68 | ) | (106 | )% | $ | .28 | $ | 1.11 | $ | (.83 | ) | (75 | )% | |||||||||||||
|
Discontinued operations
|
.02 | (.01 | ) | .03 | 300 | .02 | (.03 | ) | .05 | 167 | ||||||||||||||||||||||
|
Total
|
$ | (.02 | ) | $ | .63 | $ | (.65 | ) | (103 | )% | $ | .30 | $ | 1.08 | $ | (.78 | ) | (72 | )% | |||||||||||||
|
Dividends per common share
|
$ | .10 | $ | — | $ | .10 | 100 | % | $ | .10 | $ | — | $ | .10 | 100 | % | ||||||||||||||||
48
Table of Contents
Consolidated
Earnings Summary — GAAP-basis
Three
Months Ended June 30, 2011 Compared with Three Months Ended
June 30, 2010
For the three months ended June 30, 2011 and 2010, net
income (loss) was $(6) million, or $(.02) diluted loss per
common share, and $338 million, or $.63 diluted earnings
per common share, respectively. The decrease in net income was
primarily due to a $605 million increase in net losses on
derivative and hedging activities and a $91 million
decrease in gains on debt repurchases. These reductions were
partially offset by a $63 million increase in net interest
income after provisions for loan losses and a $61 million
decrease in total expenses.
The primary contributors to each of the identified drivers of
changes in net income for the current quarter compared with the
year-ago quarter are as follows:
| • | Net interest income decreased by $28 million primarily as a result of a $3.8 billion decline in the average balance of our student loan portfolio and higher funding costs. | |
| • | Provisions for loan losses decreased by $91 million as a result of the improving performance of the Private Education Loan portfolio. | |
| • | Net losses on derivatives and hedging activities increased by $605 million. The primary factors affecting the change in losses were interest rate and foreign currency fluctuations, which primarily affected the valuations of our Floor Income Contracts, basis swaps and foreign currency hedges during the period. 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, net gains and losses on derivatives and hedging activities may vary significantly in future periods. | |
| • | Servicing revenue decreased by $6 million primarily due to 2010 legislation that eliminated the origination of new FFELP Loans, thereby eliminating Guarantor issuance fees on new FFELP Loans. Outstanding FFELP Loans for which we earn additional fees also declined. | |
| • | Gains on debt repurchases decreased $91 million year-over-year as we repurchased less debt in the current period. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy. | |
| • | Operating expenses decreased $41 million primarily due to our ongoing cost savings initiative and an $18 million reduction in litigation contingency expenses. The second quarter of 2011 included $13 million of third-party servicing expenses related to the $25 billion loan portfolio acquisition on December 31, 2010 and $2 million of litigation contingency expenses. The second quarter of 2010 included $6 million of restructuring-related asset impairments and $20 million in litigation contingency expenses. | |
| • | Restructuring expenses decreased $16 million primarily as a result of the substantial completion of our plan for restructuring the Company initiated during 2010 in response to legislation ending FFELP. Restructuring our operations in response to the elimination of FFELP required us to significantly reduce our operations and related operating costs associated with the origination of FFELP Loans. Restructuring expenses associated with continuing operations under this plan were $2 million in the second quarter of 2011 and $18 million in the second quarter of 2010. We currently expect to incur an estimated $9 million of additional restructuring costs in 2011. The majority of these expenses will be severance costs. | |
| • | The effective tax rates for the second quarters of 2011 and 2010 were 36 percent and 37 percent, respectively. | |
| • | Net income from discontinued operations in the three months ended June 30, 2011 increased $18 million primarily due to a higher yield on our Purchased Paper — Non-Mortgage portfolio as a result of higher than expected collections. At the end of 2010, we began actively marketing our Purchased Paper — Non-Mortgage business for sale and concluded it was probable this business would be sold within one year at which time we would exit the business. As a result, the results of operations of this business |
49
Table of Contents
| were required to be presented as discontinued operations beginning in the fourth quarter of 2010. Our Purchased Paper businesses are presented as discontinued operations for the current and prior periods. We are currently seeking bids for this portfolio and anticipate closing on the sale of the portfolio in the second half of 2011. |
Six
Months Ended June 30, 2011 Compared with Six Months Ended
June 30, 2010
For the six months ended June 30, 2011 and 2010, net income
was $169 million, or $.30 diluted earnings per common
share, and $578 million, or $1.08 diluted earnings per
common share, respectively. The decrease in net income for the
six months ended June 30, 2011 as compared with the prior
year period was primarily due to a $765 million increase in
net losses on derivative and hedging activities and a
$143 million decrease in gains on debt repurchases. These
were partially offset by a $163 million increase in net
interest income after provisions for loans losses and a
$70 million decrease in total expenses.
The primary contributors to each of the identified drivers of
changes in net income for the current six-month period compared
with the year-ago six-month period are as follows:
| • | Net interest income increased by $16 million primarily the result of incremental net interest income from the acquisition of $25 billion of securitized student loans on December 31, 2010, which was partially offset by higher funding costs. | |
| • | Provisions for loan losses decreased by $147 million as a result of the improving performance of the Private Education Loan portfolio which was primarily driven by the improving credit quality of the portfolio as well as an overall improvement in the economy. | |
| • | Net losses on derivatives and hedging activities increased by $765 million primarily due to interest rate and foreign currency fluctuations, which primarily affected the valuations of our Floor Income Contracts, basis swaps and foreign currency hedges during the period. 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, net gains and losses on derivatives and hedging activities may vary significantly in future periods. | |
| • | Servicing revenue decreased by $30 million primarily due to 2010 legislation that eliminated the origination of new FFELP Loans, thereby eliminating Guarantor issuance fees on new FFELP Loans. Outstanding FFELP Loans for which we earn additional fees also declined. | |
| • | Gains on debt repurchases decreased $143 million as we repurchased less debt in the current period. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy. | |
| • | Other income increased by $13 million primarily due to an increase 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 decreased $25 million primarily as a result of our cost saving initiative. The first half of 2011 included $25 million of third-party servicing expenses related to the $25 billion loan portfolio acquisition on December 31, 2010, $12 million of litigation contingency expenses and $11 million from the acceleration of stock compensation expense. The first half of 2010 included $10 million of restructuring related impairments and $20 million of litigation contingency expenses. | |
| • | Restructuring expenses decreased $38 million primarily the result of the substantial completion of our plan for restructuring the Company initiated during 2010 in response to legislation ending the FFELP. | |
| • | The effective tax rates for six months ended June 30, 2011 and 2010 were 36 percent and 38 percent, respectively. The change in the effective tax rate for the six months ended June 30, 2011 was primarily driven by the impact of state tax rate changes recorded in the first half of 2010. |
50
Table of Contents
| • | Net income from discontinued operations for the six months ended June 30, 2011 was $10 million compared with a net loss from discontinued operations of $14 million for the six months ended June 30, 2010. The change was primarily driven by a higher yield on our Purchased Paper — Non-Mortgage portfolio as a result of higher than expected collections. |
“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.
“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 two 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 two items adjusted for
in our “Core Earnings” presentations are: (1) 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
(2) 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
” below.
51
Table of Contents
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 11 — Segment
Reporting.”
| Three Months Ended June 30, 2011 | ||||||||||||||||||||||||||||||||
|
FFELP
|
Consumer
|
Business
|
Total “Core
|
Total
|
||||||||||||||||||||||||||||
| (Dollars in millions) | Loans | Lending | Services | Other | Eliminations (1) | Earnings” | Adjustments (2) | GAAP | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||||||||||
|
Student loans
|
$ | 721 | $ | 600 | $ | — | $ | — | $ | — | $ | 1,321 | $ | 129 | $ | 1,450 | ||||||||||||||||
|
Other loans
|
— | — | — | 5 | — | 5 | — | 5 | ||||||||||||||||||||||||
|
Cash and investments
|
1 | 2 | 2 | 2 | (2 | ) | 5 | — | 5 | |||||||||||||||||||||||
|
Total interest income
|
722 | 602 | 2 | 7 | (2 | ) | 1,331 | 129 | 1,460 | |||||||||||||||||||||||
|
Total interest expense
|
357 | 201 | — | 14 | (2 | ) | 570 | 22 | 592 | |||||||||||||||||||||||
|
Net interest income (loss)
|
365 | 401 | 2 | (7 | ) | — | 761 | 107 | 868 | |||||||||||||||||||||||
|
Less: provisions for loan losses
|
23 | 265 | — | 3 | — | 291 | — | 291 | ||||||||||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
342 | 136 | 2 | (10 | ) | — | 470 | 107 | 577 | |||||||||||||||||||||||
|
Servicing revenue
|
21 | 15 | 244 | — | (187 | ) | 93 | — | 93 | |||||||||||||||||||||||
|
Contingency revenue
|
— | — | 86 | — | — | 86 | — | 86 | ||||||||||||||||||||||||
|
Gains on debt repurchases
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Other income (loss)
|
— | — | 11 | 3 | — | 14 | (521 | ) | (507 | ) | ||||||||||||||||||||||
|
Total other income (loss)
|
21 | 15 | 341 | 3 | (187 | ) | 193 | (521 | ) | (328 | ) | |||||||||||||||||||||
|
Expenses:
|
||||||||||||||||||||||||||||||||
|
Direct operating expenses
|
192 | 73 | 121 | — | (187 | ) | 199 | — | 199 | |||||||||||||||||||||||
|
Overhead expenses
|
— | — | — | 69 | — | 69 | — | 69 | ||||||||||||||||||||||||
|
Operating expenses
|
192 | 73 | 121 | 69 | (187 | ) | 268 | — | 268 | |||||||||||||||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | — | — | — | — | — | 6 | 6 | ||||||||||||||||||||||||
|
Restructuring expenses
|
— | 1 | — | 1 | — | 2 | — | 2 | ||||||||||||||||||||||||
|
Total expenses
|
192 | 74 | 121 | 70 | (187 | ) | 270 | 6 | 276 | |||||||||||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
171 | 77 | 222 | (77 | ) | — | 393 | (420 | ) | (27 | ) | |||||||||||||||||||||
|
Income tax expense
(benefit)
(3)
|
63 | 28 | 82 | (29 | ) | — | 144 | (154 | ) | (10 | ) | |||||||||||||||||||||
|
Net income (loss) from continuing operations
|
108 | 49 | 140 | (48 | ) | — | 249 | (266 | ) | (17 | ) | |||||||||||||||||||||
|
Income from discontinued operations, net of taxes
|
— | — | — | 11 | — | 11 | — | 11 | ||||||||||||||||||||||||
|
Net income (loss)
|
$ | 108 | $ | 49 | $ | 140 | $ | (37 | ) | $ | — | $ | 260 | $ | (266 | ) | $ | (6 | ) | |||||||||||||
| (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: |
| Three Months Ended June 30, 2011 | ||||||||||||
|
Net Impact of
|
||||||||||||
|
Net Impact of
|
Goodwill and
|
|||||||||||
|
Derivative
|
Acquired
|
|||||||||||
| (Dollars in millions) | Accounting | Intangibles | Total | |||||||||
|
Net interest income after provisions for loan losses
|
$ | 107 | $ | — | $ | 107 | ||||||
|
Total other income (loss)
|
(521 | ) | — | (521 | ) | |||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | 6 | 6 | |||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | (414 | ) | $ | (6 | ) | (420 | ) | ||||
|
Income tax benefit
|
(154 | ) | ||||||||||
|
Net loss
|
$ | (266 | ) | |||||||||
| (3) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
52
Table of Contents
| Three Months Ended June 30, 2010 | ||||||||||||||||||||||||||||||||
|
FFELP
|
Consumer
|
Business
|
Total “Core
|
Total
|
||||||||||||||||||||||||||||
| (Dollars in millions) | Loans | Lending | Services | Other | Eliminations (1) | Earnings” | Adjustments (2) | GAAP | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||||||||||
|
Student loans
|
$ | 744 | $ | 575 | $ | — | $ | — | $ | — | $ | 1,319 | $ | 132 | $ | 1,451 | ||||||||||||||||
|
Other loans
|
— | — | — | 7 | — | 7 | — | 7 | ||||||||||||||||||||||||
|
Cash and investments
|
2 | 4 | 4 | 1 | (4 | ) | 7 | — | 7 | |||||||||||||||||||||||
|
Total interest income (loss)
|
746 | 579 | 4 | 8 | (4 | ) | 1,333 | 132 | 1,465 | |||||||||||||||||||||||
|
Total interest expense
|
382 | 183 | — | 11 | (4 | ) | 572 | (3 | ) | 569 | ||||||||||||||||||||||
|
Net interest income (loss)
|
364 | 396 | 4 | (3 | ) | — | 761 | 135 | 896 | |||||||||||||||||||||||
|
Less: provisions for loan losses
|
29 | 349 | — | 4 | — | 382 | — | 382 | ||||||||||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
335 | 47 | 4 | (7 | ) | — | 379 | 135 | 514 | |||||||||||||||||||||||
|
Servicing revenue
|
15 | 21 | 228 | — | (165 | ) | 99 | — | 99 | |||||||||||||||||||||||
|
Contingency revenue
|
— | — | 88 | — | — | 88 | — | 88 | ||||||||||||||||||||||||
|
Gains on debt repurchases
|
— | — | — | 91 | — | 91 | — | 91 | ||||||||||||||||||||||||
|
Other income
|
— | — | 13 | — | — | 13 | 76 | 89 | ||||||||||||||||||||||||
|
Total other income (loss)
|
15 | 21 | 329 | 91 | (165 | ) | 291 | 76 | 367 | |||||||||||||||||||||||
|
Expenses:
|
||||||||||||||||||||||||||||||||
|
Direct operating expenses
|
187 | 86 | 133 | 2 | (165 | ) | 243 | — | 243 | |||||||||||||||||||||||
|
Overhead expenses
|
— | — | — | 66 | — | 66 | — | 66 | ||||||||||||||||||||||||
|
Operating expenses
|
187 | 86 | 133 | 68 | (165 | ) | 309 | — | 309 | |||||||||||||||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | — | — | — | — | — | 10 | 10 | ||||||||||||||||||||||||
|
Restructuring expenses
|
15 | 1 | 2 | — | — | 18 | — | 18 | ||||||||||||||||||||||||
|
Total expenses
|
202 | 87 | 135 | 68 | (165 | ) | 327 | 10 | 337 | |||||||||||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
148 | (19 | ) | 198 | 16 | — | 343 | 201 | 544 | |||||||||||||||||||||||
|
Income tax expense
(benefit)
(3)
|
53 | (7 | ) | 71 | 8 | — | 125 | 74 | 199 | |||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
95 | (12 | ) | 127 | 8 | — | 218 | 127 | 345 | |||||||||||||||||||||||
|
Loss from discontinued operations, net of taxes
|
— | — | — | (7 | ) | — | (7 | ) | — | (7 | ) | |||||||||||||||||||||
|
Net income (loss)
|
$ | 95 | $ | (12 | ) | $ | 127 | $ | 1 | $ | — | $ | 211 | $ | 127 | $ | 338 | |||||||||||||||
| (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: |
| Three Months Ended June 30, 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
|
$ | 135 | $ | — | $ | 135 | ||||||
|
Total other income
|
76 | — | 76 | |||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | 10 | 10 | |||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | 211 | $ | (10 | ) | 201 | ||||||
|
Income tax expense
|
74 | |||||||||||
|
Net income
|
$ | 127 | ||||||||||
| (3) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
53
Table of Contents
| Six Months Ended June 30, 2011 | ||||||||||||||||||||||||||||||||
|
FFELP
|
Consumer
|
Business
|
Total “Core
|
Total
|
||||||||||||||||||||||||||||
| (Dollars in millions) | Loans | Lending | Services | Other | Eliminations (1) | Earnings” | Adjustments (2) | GAAP | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||||||||||
|
Student loans
|
$ | 1,457 | $ | 1,204 | $ | — | $ | — | $ | — | $ | 2,661 | $ | 270 | $ | 2,931 | ||||||||||||||||
|
Other loans
|
— | — | — | 11 | — | 11 | — | 11 | ||||||||||||||||||||||||
|
Cash and investments
|
2 | 5 | 5 | 3 | (5 | ) | 10 | — | 10 | |||||||||||||||||||||||
|
Total interest income (loss)
|
1,459 | 1,209 | 5 | 14 | (5 | ) | 2,682 | 270 | 2,952 | |||||||||||||||||||||||
|
Total interest expense
|
726 | 399 | — | 29 | (5 | ) | 1,149 | 37 | 1,186 | |||||||||||||||||||||||
|
Net interest income (loss)
|
733 | 810 | 5 | (15 | ) | — | 1,533 | 233 | 1,766 | |||||||||||||||||||||||
|
Less: provisions for loan losses
|
46 | 540 | — | 8 | — | 594 | — | 594 | ||||||||||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
687 | 270 | 5 | (23 | ) | — | 939 | 233 | 1,172 | |||||||||||||||||||||||
|
Servicing revenue
|
46 | 32 | 489 | — | (376 | ) | 191 | — | 191 | |||||||||||||||||||||||
|
Contingency revenue
|
— | — | 164 | — | — | 164 | — | 164 | ||||||||||||||||||||||||
|
Gains on debt repurchases
|
— | — | — | 64 | — | 64 | (26 | ) | 38 | |||||||||||||||||||||||
|
Other income
|
— | — | 21 | 6 | — | 27 | (754 | ) | (727 | ) | ||||||||||||||||||||||
|
Total other income (loss)
|
46 | 32 | 674 | 70 | (376 | ) | 446 | (780 | ) | (334 | ) | |||||||||||||||||||||
|
Expenses:
|
||||||||||||||||||||||||||||||||
|
Direct operating expenses
|
387 | 155 | 249 | 9 | (376 | ) | 424 | — | 424 | |||||||||||||||||||||||
|
Overhead expenses
|
— | — | — | 148 | — | 148 | — | 148 | ||||||||||||||||||||||||
|
Operating expenses
|
387 | 155 | 249 | 157 | (376 | ) | 572 | — | 572 | |||||||||||||||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | — | — | — | — | — | 12 | 12 | ||||||||||||||||||||||||
|
Restructuring expenses
|
1 | 2 | 1 | 1 | — | 5 | — | 5 | ||||||||||||||||||||||||
|
Total expenses
|
388 | 157 | 250 | 158 | (376 | ) | 577 | 12 | 589 | |||||||||||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
345 | 145 | 429 | (111 | ) | — | 808 | (559 | ) | 249 | ||||||||||||||||||||||
|
Income tax expense
(benefit)
(3)
|
127 | 54 | 158 | (41 | ) | — | 298 | (208 | ) | 90 | ||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
218 | 91 | 271 | (70 | ) | — | 510 | (351 | ) | 159 | ||||||||||||||||||||||
|
Income from discontinued operations, net of taxes
|
— | — | — | 10 | — | 10 | — | 10 | ||||||||||||||||||||||||
|
Net income (loss)
|
$ | 218 | $ | 91 | $ | 271 | $ | (60 | ) | $ | — | $ | 520 | $ | (351 | ) | $ | 169 | ||||||||||||||
| (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: |
| Six Months Ended June 30, 2011 | ||||||||||||
|
Net Impact of
|
||||||||||||
|
Net Impact of
|
Goodwill and
|
|||||||||||
|
Derivative
|
Acquired
|
|||||||||||
| (Dollars in millions) | Accounting | Intangibles | Total | |||||||||
|
Net interest income after provisions for loan losses
|
$ | 233 | $ | — | $ | 233 | ||||||
|
Total other income (loss)
|
(780 | ) | — | (780 | ) | |||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | 12 | 12 | |||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | (547 | ) | $ | (12 | ) | (559 | ) | ||||
|
Income tax benefit
|
(208 | ) | ||||||||||
|
Net loss
|
$ | (351 | ) | |||||||||
| (3) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
54
Table of Contents
| Six Months Ended June 30, 2010 | ||||||||||||||||||||||||||||||||
|
FFELP
|
Consumer
|
Business
|
Total “Core
|
Total
|
||||||||||||||||||||||||||||
| (Dollars in millions) | Loans | Lending | Services | Other | Eliminations (1) | Earnings” | Adjustments (2) | GAAP | ||||||||||||||||||||||||
|
Interest income:
|
||||||||||||||||||||||||||||||||
|
Student loans
|
$ | 1,386 | $ | 1,141 | $ | — | $ | — | $ | — | $ | 2,527 | $ | 296 | $ | 2,823 | ||||||||||||||||
|
Other loans
|
— | — | — | 16 | — | 16 | — | 16 | ||||||||||||||||||||||||
|
Cash and investments
|
4 | 6 | 8 | 1 | (8 | ) | 11 | — | 11 | |||||||||||||||||||||||
|
Total interest income (loss)
|
1,390 | 1,147 | 8 | 17 | (8 | ) | 2,554 | 296 | 2,850 | |||||||||||||||||||||||
|
Total interest expense
|
718 | 356 | — | 21 | (8 | ) | 1,087 | 13 | 1,100 | |||||||||||||||||||||||
|
Net interest income (loss)
|
672 | 791 | 8 | (4 | ) | — | 1,467 | 283 | 1,750 | |||||||||||||||||||||||
|
Less: provisions for loan losses
|
52 | 674 | — | 15 | — | 741 | — | 741 | ||||||||||||||||||||||||
|
Net interest income (loss) after provisions for loan losses
|
620 | 117 | 8 | (19 | ) | — | 726 | 283 | 1,009 | |||||||||||||||||||||||
|
Servicing revenue
|
36 | 41 | 473 | — | (329 | ) | 221 | — | 221 | |||||||||||||||||||||||
|
Contingency revenue
|
— | — | 168 | — | — | 168 | — | 168 | ||||||||||||||||||||||||
|
Gains on debt repurchases
|
— | — | — | 181 | — | 181 | 181 | |||||||||||||||||||||||||
|
Other income
|
— | — | 24 | 11 | — | 35 | (5 | ) | 30 | |||||||||||||||||||||||
|
Total other income (loss)
|
36 | 41 | 665 | 192 | (329 | ) | 605 | (5 | ) | 600 | ||||||||||||||||||||||
|
Expenses:
|
||||||||||||||||||||||||||||||||
|
Direct operating expenses
|
375 | 166 | 252 | 4 | (329 | ) | 468 | — | 468 | |||||||||||||||||||||||
|
Overhead expenses
|
— | — | — | 129 | — | 129 | — | 129 | ||||||||||||||||||||||||
|
Operating expenses
|
375 | 166 | 252 | 133 | (329 | ) | 597 | — | 597 | |||||||||||||||||||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | — | — | — | — | — | 19 | 19 | ||||||||||||||||||||||||
|
Restructuring expenses
|
33 | 3 | 5 | 2 | — | 43 | — | 43 | ||||||||||||||||||||||||
|
Total expenses
|
408 | 169 | 257 | 135 | (329 | ) | 640 | 19 | 659 | |||||||||||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
248 | (11 | ) | 416 | 38 | — | 691 | 259 | 950 | |||||||||||||||||||||||
|
Income tax expense
(benefit)
(3)
|
89 | (4 | ) | 149 | 18 | — | 252 | 106 | 358 | |||||||||||||||||||||||
|
Net income (loss) from continuing operations
|
159 | (7 | ) | 267 | 20 | — | 439 | 153 | 592 | |||||||||||||||||||||||
|
Loss from discontinued operations, net of taxes
|
— | — | — | (14 | ) | — | (14 | ) | — | (14 | ) | |||||||||||||||||||||
|
Net income (loss)
|
$ | 159 | $ | (7 | ) | $ | 267 | $ | 6 | $ | — | $ | 425 | $ | 153 | $ | 578 | |||||||||||||||
| (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: |
| Six Months Ended June 30, 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
|
$ | 283 | $ | — | $ | 283 | ||||||
|
Total other income (loss)
|
(5 | ) | — | (5 | ) | |||||||
|
Goodwill and acquired intangible assets impairment and
amortization
|
— | 19 | 19 | |||||||||
|
Total “Core Earnings” adjustments to GAAP
|
$ | 278 | $ | (19 | ) | 259 | ||||||
|
Income tax benefit
|
106 | |||||||||||
|
Net loss
|
$ | 153 | ||||||||||
| (3) | Income taxes are based on a percentage of net income before tax for the individual reportable segment. |
55
Table of Contents
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.
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
“Core Earnings”
|
$ | 260 | $ | 211 | $ | 520 | $ | 425 | ||||||||
|
“Core Earnings” adjustments:
|
||||||||||||||||
|
Net impact of derivative accounting
|
(414 | ) | 211 | (547 | ) | 278 | ||||||||||
|
Net impact of goodwill and acquired intangibles
|
(6 | ) | (10 | ) | (12 | ) | (19 | ) | ||||||||
|
Total “Core Earnings” adjustments before income tax
effect
|
(420 | ) | 201 | (559 | ) | 259 | ||||||||||
|
Net income tax effect
|
154 | (74 | ) | 208 | (106 | ) | ||||||||||
|
Total “Core Earnings” adjustments
|
(266 | ) | 127 | (351 | ) | 153 | ||||||||||
|
GAAP net income (loss)
|
$ | (6 | ) | $ | 338 | $ | 169 | $ | 578 | |||||||
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 our
derivatives that are held to maturity, the cumulative net
unrealized gain or loss over the life of the contract 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 net settlement cash paid or received being
recognized ratably as an interest 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
56
Table of Contents
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 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 three and six months ended
June 30, 2011 and 2010.
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
“Core Earnings” derivative adjustments:
|
||||||||||||||||
|
Gains (losses) on derivative and hedging activities, net,
included in other
income
(1)
|
$ | (510 | ) | $ | 95 | $ | (752 | ) | $ | 13 | ||||||
|
Plus: Realized losses on derivative and hedging activities,
net
(1)
|
185 | 226 | 371 | 431 | ||||||||||||
|
Unrealized gains (losses) on derivative and hedging activities,
net
|
(325 | ) | 321 | (381 | ) | 444 | ||||||||||
|
Amortization of net premiums on Floor Income Contracts in net
interest income for “Core Earnings”
|
(74 | ) | (90 | ) | (159 | ) | (144 | ) | ||||||||
|
Other pre-change in derivatives accounting adjustments
|
(15 | ) | (20 | ) | (7 | ) | (22 | ) | ||||||||
|
Total net impact derivative
accounting
(2)
|
$ | (414 | ) | $ | 211 | $ | (547 | ) | $ | 278 | ||||||
| (1) | See “ Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities ” below for a detailed breakdown of the components of realized losses on derivative and hedging activities. |
| (2) | Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income and positive amounts are added to “Core Earnings” net income to arrive at GAAP net income. |
Reclassification
of Realized Gains (Losses) on Derivative and Hedging
Activities
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
57
Table of Contents
derivative and hedging activities and the associated
reclassification on a “Core Earnings” basis for the
three and six months ended June 30, 2011 and 2010.
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Reclassification of realized gains (losses) on derivative and
hedging activities:
|
||||||||||||||||
|
Net settlement expense on Floor Income Contracts reclassified to
net interest income
|
$ | (202 | ) | $ | (222 | ) | $ | (428 | ) | $ | (433 | ) | ||||
|
Net settlement income on interest rate swaps reclassified to net
interest income
|
17 | (5 | ) | 33 | 2 | |||||||||||
|
Foreign exchange derivatives losses reclassified to other income
|
— | 1 | (1 | ) | 1 | |||||||||||
|
Net realized gains (losses) on terminated derivative contracts
reclassified to other income
|
— | — | 25 | (1 | ) | |||||||||||
|
Total reclassifications of realized losses on derivative and
hedging activities
|
(185 | ) | (226 | ) | (371 | ) | (431 | ) | ||||||||
|
Add: Unrealized gains (losses) on derivative and hedging
activities,
net
(1)
|
(325 | ) | 321 | (381 | ) | 444 | ||||||||||
|
Gains (losses) on derivative and hedging activities, net
|
$ | (510 | ) | $ | 95 | $ | (752 | ) | $ | 13 | ||||||
| (1) | “Unrealized gains (losses) on derivative and hedging activities, net” comprises the following unrealized mark-to-market gains (losses): |
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Floor Income Contracts
|
$ | (277 | ) | $ | (42 | ) | $ | (126 | ) | $ | (23 | ) | ||||
|
Basis swaps
|
25 | 263 | 19 | 326 | ||||||||||||
|
Foreign currency hedges
|
(110 | ) | 99 | (304 | ) | 107 | ||||||||||
|
Other
|
37 | 1 | 30 | 34 | ||||||||||||
|
Total unrealized gains (losses) on derivative and hedging
activities, net
|
$ | (325 | ) | $ | 321 | $ | (381 | ) | $ | 444 | ||||||
2)
Goodwill and Acquired
Intangibles:
“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 three and six months
ended June 30, 2011 and 2010.
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
“Core Earnings” goodwill and acquired intangibles
adjustments
(1)
:
|
||||||||||||||||
|
Amortization of acquired intangibles from continuing operations
|
$ | (6 | ) | $ | (10 | ) | $ | (12 | ) | $ | (19 | ) | ||||
|
Total “Core Earnings” goodwill and acquired
intangibles adjustments
|
$ | (6 | ) | $ | (10 | ) | $ | (12 | ) | $ | (19 | ) | ||||
| (1) | Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income. |
58
Table of Contents
Business
Segment Earnings Summary — “Core Earnings”
Basis
FFELP
Loans Segment
The following table includes “Core Earnings” results
for our FFELP Loans segment.
|
Three Months Ended
|
% Increase
|
Six Months Ended
|
% Increase
|
|||||||||||||||||||||
| June 30, | (Decrease) | June 30, | (Decrease) | |||||||||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | ||||||||||||||||||
|
“Core Earnings” interest income:
|
||||||||||||||||||||||||
|
FFELP Loans
|
$ | 721 | $ | 744 | (3 | )% | $ | 1,457 | $ | 1,386 | 5 | % | ||||||||||||
|
Cash and investments
|
1 | 2 | (50 | ) | 2 | 4 | (50 | ) | ||||||||||||||||
|
Total “Core Earnings” interest income
|
722 | 746 | (3 | ) | 1,459 | 1,390 | 5 | |||||||||||||||||
|
Total “Core Earnings” interest expense
|
357 | 382 | (7 | ) | 726 | 718 | 1 | |||||||||||||||||
|
Net “Core Earnings” interest income
|
365 | 364 | — | 733 | 672 | 9 | ||||||||||||||||||
|
Less: provisions for loan losses
|
23 | 29 | (21 | ) | 46 | 52 | (12 | ) | ||||||||||||||||
|
Net “Core Earnings” interest income after provisions
for loan losses
|
342 | 335 | 2 | 687 | 620 | 11 | ||||||||||||||||||
|
Servicing revenue
|
21 | 15 | 40 | 46 | 36 | 28 | ||||||||||||||||||
|
Direct operating expenses
|
192 | 187 | 3 | 387 | 375 | 3 | ||||||||||||||||||
|
Restructuring expenses
|
— | 15 | (100 | ) | 1 | 33 | (97 | ) | ||||||||||||||||
|
Total expenses
|
192 | 202 | (5 | ) | 388 | 408 | (5 | ) | ||||||||||||||||
|
Income from continuing operations, before income tax expense
|
171 | 148 | 16 | 345 | 248 | 39 | ||||||||||||||||||
|
Income tax expense
|
63 | 53 | 19 | 127 | 89 | 43 | ||||||||||||||||||
|
“Core Earnings”
|
$ | 108 | $ | 95 | 14 | % | $ | 218 | $ | 159 | 37 | % | ||||||||||||
“Core Earnings” from the FFELP Loans segment were
$108 million in the second quarter of 2011, compared with
$95 million in the year-ago quarter. Key financial measures
include:
| • | Net interest margin of .98 percent in the second quarter of 2011 compared with .95 percent in the year-ago quarter. | |
| • | The provision of loan losses of $23 million in the second quarter of 2011 decreased from $29 million in the year-ago quarter. |
59
Table of Contents
FFELP
Loans Net Interest Margin
The following table shows the FFELP Loans “Core
Earnings” net interest margin along with reconciliation to
the GAAP-basis FFELP Loans net interest margin.
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
“Core Earnings” basis FFELP student loan yield
|
2.57 | % | 2.64 | % | 2.60 | % | 2.57 | % | ||||||||
|
Hedged Floor Income
|
.20 | .24 | .22 | .21 | ||||||||||||
|
Unhedged Floor Income
|
.19 | .01 | .13 | .01 | ||||||||||||
|
Consolidation Loan Rebate Fees
|
(.66 | ) | (.57 | ) | (.66 | ) | (.58 | ) | ||||||||
|
Repayment Borrower Benefits
|
(.12 | ) | (.10 | ) | (.11 | ) | (.10 | ) | ||||||||
|
Premium amortization
|
(.17 | ) | (.20 | ) | (.16 | ) | (.20 | ) | ||||||||
|
“Core Earnings” basis FFELP student loan net yield
|
2.01 | 2.02 | 2.02 | 1.91 | ||||||||||||
|
“Core Earnings” basis FFELP student loan cost of funds
|
(.96 | ) | (.97 | ) | (.96 | ) | (.93 | ) | ||||||||
|
“Core Earnings” basis FFELP student loan spread
|
1.05 | 1.05 | 1.06 | .98 | ||||||||||||
|
“Core Earnings” basis FFELP other asset spread impact
|
(.07 | ) | (.10 | ) | (.08 | ) | (.09 | ) | ||||||||
|
“Core Earnings” basis FFELP Loans net interest
margin
(1)
|
.98 | % | .95 | % | .98 | % | .89 | % | ||||||||
|
|
||||||||||||||||
|
“Core Earnings” basis FFELP Loans net interest
margin
(1)
|
.98 | % | .95 | % | .98 | % | .89 | % | ||||||||
|
Adjustment for GAAP accounting treatment
|
.32 | .34 | .34 | .38 | ||||||||||||
|
GAAP-basis FFELP Loans net interest margin(1)
|
1.30 | % | 1.29 | % | 1.32 | % | 1.27 | % | ||||||||
| (1) | The average balances of our FFELP interest-earning assets for the respective periods are: |
| (Dollars in millions) | ||||||||||||||||
|
FFELP Loans
|
$ | 143,999 | $ | 148,101 | $ | 145,681 | $ | 146,486 | ||||||||
|
Other interest-earning assets
|
4,982 | 5,649 | 4,999 | 5,655 | ||||||||||||
|
Total FFELP “Core Earnings” basis interest-earning
assets
|
$ | 148,981 | $ | 153,750 | $ | 150,680 | $ | 152,141 | ||||||||
The “Core Earnings” basis FFELP Loans net interest
margin for the six months ended June 30, 2011 compared with
the prior year period increased nine basis points which was
primarily the result of an increase in Floor Income.
As of June 30, 2011, our FFELP Loan portfolio totaled
approximately $142.6 billion, including $52.8 billion
of FFELP Stafford and $89.8 billion of FFELP Consolidation
Loans. The weighted-average life of these portfolios is
4.9 years and 9.3 years, respectively, assuming a
Constant Prepayment Rate (“CPR”) of 6 percent and
3 percent, respectively.
60
Table of Contents
Floor
Income
The following table analyzes the ability of the FFELP Loans in
our portfolio to earn Floor Income after June 30, 2011 and
2010, based on interest rates as of those dates.
| June 30, 2011 | June 30, 2010 | |||||||||||||||||||||||
|
Fixed
|
Variable
|
Fixed
|
Variable
|
|||||||||||||||||||||
|
Borrower
|
Borrower
|
Borrower
|
Borrower
|
|||||||||||||||||||||
| (Dollars in billions) | Rate | Rate | Total | Rate | Rate | Total | ||||||||||||||||||
|
Student loans eligible to earn Floor Income
|
$ | 121.5 | $ | 18.8 | $ | 140.3 | $ | 126.1 | $ | 19.0 | $ | 145.1 | ||||||||||||
|
Less: post-March 31, 2006 disbursed loans required to
rebate Floor Income
|
(64.5 | ) | (1.3 | ) | (65.8 | ) | (74.9 | ) | (1.2 | ) | (76.1 | ) | ||||||||||||
|
Less: economically hedged Floor Income Contracts
|
(41.5 | ) | — | (41.5 | ) | (39.2 | ) | — | (39.2 | ) | ||||||||||||||
|
Student loans eligible to earn Floor Income
|
$ | 15.5 | $ | 17.5 | $ | 33.0 | $ | 12.0 | $ | 17.8 | $ | 29.8 | ||||||||||||
|
Student loans earning Floor Income
|
$ | 15.5 | $ | 2.6 | $ | 18.1 | $ | 3.2 | $ | 2.7 | $ | 5.9 | ||||||||||||
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 balance
of FFELP Consolidation Loans for which Fixed Rate Floor Income
has been economically hedged through Floor Income Contracts for
the period July 1, 2011 to June 30, 2016. The hedges
related to these loans do not qualify as effective hedges.
|
July 1, 2011 to
|
||||||||||||||||||||||||
| (Dollars in billions) | December 31, 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||||
|
Average balance of FFELP Consolidation Loans whose Floor Income
is economically hedged
|
$ | 41.5 | $ | 38.3 | $ | 32.6 | $ | 28.3 | $ | 27.2 | $ | 10.4 | ||||||||||||
FFELP
Provisions for Loan Losses and Loan Charge-Offs
The following table summarizes the total FFELP provisions for
loan losses and FFELP Loan charge-offs for the three and six
months June 30, 2011 and 2010.
|
Three Months
|
Six Months
|
|||||||||||||||
|
Ended
|
Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
FFELP Loan provisions for loan losses
|
$ | 23 | $ | 29 | $ | 46 | $ | 52 | ||||||||
|
FFELP Loan charge-offs
|
21 | 24 | 41 | 46 | ||||||||||||
Operating
Expenses — FFELP Loans Segment
Operating expenses for our FFELP Loans segment primarily include
the contractual rates we pay to service loans in term
asset-backed securitization trusts or a similar rate if a loan
is not in a term financing facility (which is presented as an
intercompany charge from the Business Services segment which
services the loans), the fees we pay for third-party loan
servicing and costs incurred to acquire loans. The increases in
operating expenses in the three and six months ended
June 30, 2011 compared with the three and six months ended
June 30, 2010 were primarily the result of the increase in
servicing costs related to the $25 billion loan portfolio
acquisition on December 31, 2010. Operating expenses,
excluding restructuring-related asset impairments, were
53 basis points and 49 basis points of average FFELP
Loans in the quarters ended June 30, 2011 and June 30,
2010, respectively, and 54 basis points and 51 basis
points for the six months ended June 30, 2011 and 2010,
respectively.
61
Table of Contents
Consumer
Lending Segment
The following table includes “Core Earnings” results
for our Consumer Lending segment.
|
% Increase
|
% Increase
|
|||||||||||||||||||||||
|
Three Months Ended
|
(Decrease) |
Six Months Ended
|
(Decrease) | |||||||||||||||||||||
| June 30, |
2011 vs.
|
June 30, |
2011 vs.
|
|||||||||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2010 | 2011 | 2010 | 2010 | ||||||||||||||||||
|
“Core Earnings” interest income:
|
||||||||||||||||||||||||
|
Private Education Loans
|
$ | 600 | $ | 575 | 4 | % | $ | 1,204 | $ | 1,141 | 6 | % | ||||||||||||
|
Cash and investments
|
2 | 4 | (50 | ) | 5 | 6 | (17 | ) | ||||||||||||||||
|
Total “Core Earnings” interest income
|
602 | 579 | 4 | 1,209 | 1,147 | 5 | ||||||||||||||||||
|
Total “Core Earnings” interest expense
|
201 | 183 | 10 | 399 | 356 | 12 | ||||||||||||||||||
|
Net “Core Earnings” interest income
|
401 | 396 | 1 | 810 | 791 | 2 | ||||||||||||||||||
|
Less: provisions for loan losses
|
265 | 349 | (24 | ) | 540 | 674 | (20 | ) | ||||||||||||||||
|
Net “Core Earnings” interest income after provisions
for loan losses
|
136 | 47 | 189 | 270 | 117 | 131 | ||||||||||||||||||
|
Servicing revenue
|
15 | 21 | (29 | ) | 32 | 41 | (22 | ) | ||||||||||||||||
|
Direct operating expenses
|
73 | 86 | (15 | ) | 155 | 166 | (7 | ) | ||||||||||||||||
|
Restructuring expenses
|
1 | 1 | — | 2 | 3 | (33 | ) | |||||||||||||||||
|
Total expenses
|
74 | 87 | (15 | ) | 157 | 169 | (7 | ) | ||||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
77 | (19 | ) | 505 | 145 | (11 | ) | 1,418 | ||||||||||||||||
|
Income tax expense (benefit)
|
28 | (7 | ) | 500 | 54 | (4 | ) | 1,450 | ||||||||||||||||
|
“Core Earnings” (loss)
|
$ | 49 | $ | (12 | ) | 508 | % | $ | 91 | $ | (7 | ) | 1,400 | % | ||||||||||
“Core Earnings” were $49 million for the three
months ended June 30, 2011, compared with a net loss of
$12 million in the year-ago period. The improvement in the
three and six month periods ended June 30, 2011 compared
with prior periods was primarily due to a decreased loan loss
provision. Loan delinquencies and charge-offs both improved.
Highlights vs. second-quarter 2010 included:
| • | Loan originations were $264 million, up 21 percent from $219 million. The portfolio totaled $35.8 billion at June 30, 2011, compared with $35.2 billion one year earlier. | |
| • | Net interest margin was 4.05 percent, compared with 3.79 percent. | |
| • | The provision for loan losses declined to $265 million, compared with $349 million. | |
| • | Delinquencies of 90 days or more (as a percentage of loans in repayment) were 4.6 percent, compared with 5.8 percent. | |
| • | The annual charge-off rate (as a percentage of loans in repayment) improved to 3.7 percent, compared with 5.3 percent. |
62
Table of Contents
Consumer
Lending Net Interest Margin
The following table shows the Consumer Lending “Core
Earnings” net interest margin along with reconciliation to
the GAAP-basis Consumer Lending net interest margin before
provisions for loan losses.
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
|
“Core Earnings” basis Private Education Student Loan
yield
|
6.29 | % | 6.05 | % | 6.32 | % | 6.02 | % | ||||||||
|
Discount amortization
|
.26 | .28 | .26 | .27 | ||||||||||||
|
“Core Earnings” basis Private Education Loan net yield
|
6.55 | 6.33 | 6.58 | 6.29 | ||||||||||||
|
“Core Earnings” basis Private Education Loan cost of
funds
|
(2.02 | ) | (1.72 | ) | (1.99 | ) | (1.70 | ) | ||||||||
|
“Core Earnings” basis Private Education Loan spread
|
4.53 | 4.61 | 4.59 | 4.59 | ||||||||||||
|
“Core Earnings” basis other asset spread impact
|
(.48 | ) | (.82 | ) | (.51 | ) | (.78 | ) | ||||||||
|
“Core Earnings” basis Consumer Lending net interest
margin
(1)
|
4.05 | % | 3.79 | % | 4.08 | % | 3.81 | % | ||||||||
|
|
||||||||||||||||
|
“Core Earnings” basis Consumer Lending net interest
margin
(1)
|
4.05 | % | 3.79 | % | 4.08 | % | 3.81 | % | ||||||||
|
Adjustment for GAAP accounting treatment
|
(.05 | ) | .04 | (.05 | ) | .02 | ||||||||||
|
GAAP-basis Consumer Lending net interest
margin
(1)
|
4.00 | % | 3.83 | % | 4.03 | % | 3.83 | % | ||||||||
| (1) | The average balances of our Consumer Lending interest-earning assets for the respective periods are: |
| (Dollars in millions) | ||||||||||||||||
|
Private Education Loans
|
$ | 36,784 | $ | 36,470 | $ | 36,894 | $ | 36,574 | ||||||||
|
Other interest-earning assets
|
2,910 | 5,506 | 3,134 | 5,290 | ||||||||||||
|
Total Consumer Lending “Core Earnings” basis
interest-earning assets
|
$ | 39,694 | $ | 41,976 | $ | 40,028 | $ | 41,864 | ||||||||
The Private Education Loan spread remained relatively consistent
across all periods presented. The increase in the net interest
margin for both the comparable prior year quarter and six month
period was primarily the result of a decline in the average
balance of our Other asset portfolio. The size of the Other
asset portfolio, which is primarily securitization trust
restricted cash and cash held at Sallie Mae Bank (the
“Bank”), has decreased significantly since the first
quarter 2010. This Other asset portfolio earns a negative yield
and as a result, when its relative weighting decreases compared
to the Private Education Loan portfolio, the overall net
interest margin increases.
Private
Education Loans Provisions for Loan Losses and Loan
Charge-Offs
The following table summarizes the total Private Education Loans
provision for loan losses and charge-offs for the three and six
months ended June 30, 2011 and 2010.
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Private Education Loans provision for loan losses
|
$ | 265 | $ | 349 | $ | 540 | $ | 674 | ||||||||
|
Private Education Loans charge-offs
|
263 | 336 | 537 | 620 | ||||||||||||
The continuing improvements for all periods presented above are
primarily a result of the improving credit quality of the
portfolio as well as an overall improvement to the
U.S. economy. The Private Education Loan portfolio
experienced a significant increase in delinquencies through the
first quarter of 2010 (delinquencies as a percentage of loans in
repayment were 12.2 percent at March 31, 2010); since
then delinquencies as
63
Table of Contents
a percentage of loans in repayment have declined to
10.0 percent at June 30, 2011. Private Education Loans
in forbearance as a percentage of loans in repayment and
forbearance decreased to 4.7 percent from the year-ago
quarter’s 5.3 percent. Charge-offs as a percentage of
loans in repayment have declined significantly from
5.3 percent in the second quarter 2010 to 3.7 percent
in the second quarter of 2011. The Private Education Loan
allowance coverage of annual charge-offs ratio was 1.9 at
June 30, 2011 compared with 1.5 at June 30, 2010. The
allowance for loan losses as a percentage of ending Private
Education Loans in repayment decreased from 7.9 percent at
June 30, 2010 to 7.1 percent at June 30, 2011. We
analyzed changes in the key ratios when determining the
appropriate Private Education Loan allowance for loan losses.
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 Private Education Loan portfolio. The
decreases in operating expenses in the three and six months
ended June 30, 2011 compared with the three and six months
ended June 30, 2010 were primarily the result of our cost
cutting initiatives. Operating expenses, excluding
restructuring-related asset impairments, were 80 basis
points and 95 basis points of average Private Education
Loans in the quarters ended June 30, 2011 and June 30,
2010, respectively, and 85 basis points and 92 basis
points of average Private Education Loans in the six months
ended June 30, 2011 and 2010, respectively.
Business
Services Segment
The following tables include “Core Earnings” results
for our Business Services segment.
|
Three Months Ended
|
% Increase
|
Six Months Ended
|
% Increase
|
|||||||||||||||||||||
| June 30, | (Decrease) | June 30, | (Decrease) | |||||||||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | ||||||||||||||||||
|
Net interest income after provision
|
$ | 2 | $ | 4 | (50 | )% | $ | 5 | $ | 8 | (38 | )% | ||||||||||||
|
Servicing revenue:
|
||||||||||||||||||||||||
|
Intercompany loan servicing
|
187 | 165 | 13 | 376 | 329 | 14 | ||||||||||||||||||
|
Third-party loan servicing
|
20 | 17 | 18 | 40 | 36 | 11 | ||||||||||||||||||
|
Account asset servicing
|
19 | 19 | — | 38 | 35 | 9 | ||||||||||||||||||
|
Campus Solutions
|
3 | 4 | (25 | ) | 10 | 12 | (17 | ) | ||||||||||||||||
|
Guarantor servicing
|
15 | 23 | (35 | ) | 25 | 61 | (59 | ) | ||||||||||||||||
|
Total servicing revenue
|
244 | 228 | 7 | 489 | 473 | 3 | ||||||||||||||||||
|
Contingency revenue
|
86 | 88 | (2 | ) | 164 | 168 | (2 | ) | ||||||||||||||||
|
Transaction fees
|
11 | 12 | (8 | ) | 20 | 23 | (13 | ) | ||||||||||||||||
|
Other
|
— | 1 | (100 | ) | 1 | 1 | — | |||||||||||||||||
|
Total other income
|
341 | 329 | 4 | 674 | 665 | 1 | ||||||||||||||||||
|
Direct operating expenses
|
121 | 133 | (9 | ) | 249 | 252 | (1 | ) | ||||||||||||||||
|
Restructuring expenses
|
— | 2 | (100 | ) | 1 | 5 | (80 | ) | ||||||||||||||||
|
Total expenses
|
121 | 135 | (10 | ) | 250 | 257 | (3 | ) | ||||||||||||||||
|
Income from continuing operations, before income tax expense
|
222 | 198 | 12 | 429 | 416 | 3 | ||||||||||||||||||
|
Income tax expense
|
82 | 71 | 15 | 158 | 149 | 6 | ||||||||||||||||||
|
“Core Earnings”
|
$ | 140 | $ | 127 | 10 | % | $ | 271 | $ | 267 | 1 | % | ||||||||||||
“Core Earnings” were $140 million in the second
quarter of 2011, compared with $127 million in the year-ago
quarter. The improvement was driven by substantial FFELP loan
acquisitions last year that increased FFELP loan servicing
revenue.
64
Table of Contents
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 $142 billion and
$134 billion for the quarters ended June 30, 2011 and
June 30, 2010 and $143 billion and $133 billion
for the six months ended June 30, 2011 and 2010,
respectively. The increase in intercompany loan servicing
revenue from the year-ago periods is primarily the result of the
acquisition of the $25 billion FFELP Loan portfolio on
December 31, 2010 which was partially offset by the
amortization of the underlying portfolio as well as the FFELP
Loans sold to ED as part of the Participation Program in 2010.
We are servicing approximately 3 million accounts under the
ED Servicing Contract as of June 30, 2011. Loan servicing
fees in the second quarter of 2011 and the second quarter of
2010 included $15 million and $10 million,
respectively, of servicing revenue related to 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. Assets under administration in our 529 college savings
plans totaled $38 billion as of June 30, 2011, a
59 percent increase from the year-ago quarter.
Campus Solutions revenue is earned from our Campus 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.
The decrease in Guarantor servicing revenue compared with the
year-ago quarter and six-month period was primarily due to the
elimination of the FFELP in 2010 and our no longer earning
Guarantor issuance fees as well as the lower balance of
outstanding FFELP Loans on which we earn additional fees.
The following table presents the outstanding inventory of
contingent collections receivables that our Business Services
segment will collect on behalf of others.
|
June 30,
|
June 30,
|
|||||||
| (Dollars in millions) | 2011 | 2010 | ||||||
|
Student loans
|
$ | 10,475 | $ | 9,926 | ||||
|
Other
|
2,042 | 2,358 | ||||||
|
Total
|
$ | 12,517 | $ | 12,284 | ||||
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 79 percent and 80 percent of total segment
revenues for the quarters ended June 30, 2011 and
June 30, 2010, respectively, and 79 percent and
80 percent for the six months ended June 30, 2011 and
2010, respectively.
We recently launched Sallie Mae Insurances Services, which will
offer directly to college students and higher education
institutions tuition insurance, renters insurance and student
health insurance. In conjunction with this initiative, on
June 30, 2011, we acquired a 45 percent stake in Next
Generation Insurance Company, a nationally licensed insurance
agency. We also include a Tuition Insurance Benefit with our
Smart Option Student Loan.
Operating
Expenses — Business Services Segment
Operating expenses for the three and six months ended
June 30, 2011 decreased from the three and six months ended
June 30, 2010 primarily as a result of our cost cutting
initiatives. Included in operating expenses for 2011 are
approximately $12 million per quarter in third-party
servicing costs associated with our acquisition of
$25 billion in loans at the end of 2010. As we transition
these loans onto our own servicing platform in the second half
of 2011, we expect the servicing costs associated with these
loans to decline significantly as the loans are converted onto
our servicing platform.
65
Table of Contents
Other
Segment
The following table includes “Core Earnings” results
of our Other segment
|
Three Months Ended
|
% Increase
|
Six Months Ended
|
% Increase
|
|||||||||||||||||||||
| June 30, | (Decrease) | June 30, | (Decrease) | |||||||||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | ||||||||||||||||||
|
Net interest loss after provision
|
$ | (10 | ) | $ | (7 | ) | 43 | % | $ | (23 | ) | $ | (19 | ) | 21 | % | ||||||||
|
Gains on debt repurchases
|
— | 91 | (100 | ) | 64 | 181 | (65 | ) | ||||||||||||||||
|
Other
|
3 | — | 100 | 6 | 11 | (45 | ) | |||||||||||||||||
|
Total income
|
3 | 91 | (97 | ) | 70 | 192 | (64 | ) | ||||||||||||||||
|
Direct operating expenses
|
— | 3 | (100 | ) | 9 | 4 | 125 | |||||||||||||||||
|
Overhead expenses:
|
||||||||||||||||||||||||
|
Corporate overhead
|
38 | 34 | 12 | 87 | 66 | 32 | ||||||||||||||||||
|
Unallocated information technology costs
|
31 | 32 | (3 | ) | 61 | 63 | (3 | ) | ||||||||||||||||
|
Total overhead expenses
|
69 | 66 | 5 | 148 | 129 | 15 | ||||||||||||||||||
|
Operating expenses
|
69 | 69 | — | 157 | 133 | 18 | ||||||||||||||||||
|
Restructuring expenses
|
1 | — | 100 | 1 | 2 | (50 | ) | |||||||||||||||||
|
Total expenses
|
70 | 69 | 1 | 158 | 135 | 17 | ||||||||||||||||||
|
Income (loss) from continuing operations, before income tax
expense (benefit)
|
(77 | ) | 15 | (613 | ) | (111 | ) | 38 | (392 | ) | ||||||||||||||
|
Income tax expense (benefit)
|
(29 | ) | 7 | (514 | ) | (41 | ) | 18 | (328 | ) | ||||||||||||||
|
Net income (loss) from continuing operations
|
(48 | ) | 8 | (700 | ) | (70 | ) | 20 | (450 | ) | ||||||||||||||
|
Income (loss) from discontinued operations, net of tax
|
11 | (7 | ) | 257 | 10 | (14 | ) | 171 | ||||||||||||||||
|
“Core Earnings” (loss)
|
$ | (37 | ) | $ | 1 | (3,800 | )% | $ | (60 | ) | $ | 6 | (1,100 | )% | ||||||||||
Purchased
Paper Business
Our Purchased Paper businesses are presented in discontinued
operations for the current and prior periods. (See
“Consolidated Earnings Summary — GAAP-basis”
for further discussion.)
The following table summarizes the carrying value of the
Purchased Paper — Non-Mortgage portfolio:
|
June 30,
|
June 30,
|
|||||||
| (Dollars in millions) | 2011 | 2010 | ||||||
|
Carrying value of purchased paper
|
$ | 63 | $ | 207 | ||||
We began repurchasing our outstanding debt in the second quarter
of 2008. We repurchased $60 million and $1.4 billion
face amount of our senior unsecured notes for the quarters ended
June 30, 2011 and June 30, 2010, respectively, and
$885 million and $2.7 billion for the six months ended
June 30, 2011 and 2010, respectively.
Overhead
Corporate overhead comprises costs related to executive
management, the board of directors, accounting, finance, legal,
human resources and stock option expense. Unallocated
information technology costs are related to infrastructure and
operations.
66
Table of Contents
The increase in corporate overhead for the six-month period
ended June 30, 2011 compared with the six-month period
ended June 30, 2010, was primarily the result of a change
in the terms of our stock compensation plans and
restructuring-related consulting expenses incurred in the first
half of 2011. In the first quarter of 2011, we changed our stock
compensation plans so that retirement eligible employees would
not forfeit unvested stock compensation upon their retirement.
This change had the effect of accelerating the future stock
compensation expenses associated with these unvested stock
grants into the current period for those employees that are
retirement-eligible.
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.
Subsequent to the adoption of the new consolidation accounting
guidance on January 1, 2010, our GAAP and “Core
Earnings” loan portfolios are identical, as all of our
securitization trusts are treated as on-balance sheet for GAAP
now. Hence, in referencing the total loan portfolio, ending and
average loan balances, provision for loan losses and
charge-offs, we no longer distinguish between the two as they
are the same, unless otherwise noted.
67
Table of Contents
The following table reflects the rates earned on
interest-earning assets and paid on interest-bearing liabilities
for the three and six months ended June 30, 2011 and 2010.
This table reflects our net interest margin on a consolidated
basis.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
| (Dollars in millions) | Balance | Rate | Balance | Rate | Balance | Rate | Balance | Rate | ||||||||||||||||||||||||
|
Average Assets
|
||||||||||||||||||||||||||||||||
|
FFELP Stafford and Other Student Loans
|
$ | 53,667 | 1.83 | % | $ | 66,488 | 1.96 | % | $ | 54,597 | 1.88 | % | $ | 64,339 | 1.91 | % | ||||||||||||||||
|
FFELP Consolidation Loans
|
90,332 | 2.68 | 81,613 | 2.71 | 91,084 | 2.70 | 82,147 | 2.64 | ||||||||||||||||||||||||
|
Private Education Loans
|
36,784 | 6.55 | 36,470 | 6.33 | 36,894 | 6.58 | 36,574 | 6.29 | ||||||||||||||||||||||||
|
Other loans
|
242 | 8.94 | 322 | 9.05 | 252 | 9.06 | 356 | 9.20 | ||||||||||||||||||||||||
|
Cash and investments
|
10,565 | .18 | 13,152 | .19 | 10,870 | .19 | 12,964 | .17 | ||||||||||||||||||||||||
|
Total interest-earning assets
|
191,590 | 3.06 | % | 198,045 | 2.97 | % | 193,697 | 3.07 | % | 196,380 | 2.93 | % | ||||||||||||||||||||
|
Non-interest-earning assets
|
5,477 | 6,503 | 5,332 | 6,619 | ||||||||||||||||||||||||||||
|
Total assets
|
$ | 197,067 | $ | 204,548 | $ | 199,029 | $ | 202,999 | ||||||||||||||||||||||||
|
Average Liabilities and Stockholders’ Equity
|
||||||||||||||||||||||||||||||||
|
Short-term borrowings
|
$ | 31,352 | .88 | % | $ | 42,813 | .78 | % | $ | 32,209 | .89 | % | $ | 40,906 | .82 | % | ||||||||||||||||
|
Long-term borrowings
|
157,027 | 1.33 | 153,303 | 1.27 | 158,291 | 1.33 | 153,783 | 1.23 | ||||||||||||||||||||||||
|
Total interest-bearing liabilities
|
188,379 | 1.26 | % | 196,116 | 1.16 | % | 190,500 | 1.26 | % | 194,689 | 1.14 | % | ||||||||||||||||||||
|
Non-interest-bearing liabilities
|
3,639 | 3,485 | 3,455 | 3,449 | ||||||||||||||||||||||||||||
|
Stockholders’ equity
|
5,049 | 4,947 | 5,074 | 4,861 | ||||||||||||||||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 197,067 | $ | 204,548 | $ | 199,029 | $ | 202,999 | ||||||||||||||||||||||||
|
Net interest margin
|
1.82 | % | 1.81 | % | 1.84 | % | 1.80 | % | ||||||||||||||||||||||||
68
Table of Contents
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 | |||||||||
|
Three Months Ended June 30, 2011 vs. 2010
|
||||||||||||
|
Interest income
|
$ | (5 | ) | $ | 43 | $ | (48 | ) | ||||
|
Interest expense
|
23 | 46 | (23 | ) | ||||||||
|
Net interest income
|
$ | (28 | ) | $ | 2 | $ | (30 | ) | ||||
|
Six Months Ended June 30, 2011 vs. 2010
|
||||||||||||
|
Interest income
|
$ | 102 | $ | 141 | $ | (39 | ) | |||||
|
Interest expense
|
86 | 110 | (24 | ) | ||||||||
|
Net interest income
|
$ | 16 | $ | 40 | $ | (24 | ) | |||||
| (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 Student Loan Portfolio
Ending
Student Loan Balances, net
| June 30, 2011 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total
|
Private
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
FFELP
|
Education
|
|||||||||||||||||
| (Dollars in millions) | Other | Loans | Loans | Loans | Total | |||||||||||||||
|
Total student loan portfolio:
|
||||||||||||||||||||
|
In-school
|
$ | 4,109 | $ | — | $ | 4,109 | $ | 2,341 | $ | 6,450 | ||||||||||
|
Grace and repayment
|
47,933 | 89,006 | 136,939 | 35,176 | 172,115 | |||||||||||||||
|
Total, gross
|
52,042 | 89,006 | 141,048 | 37,517 | 178,565 | |||||||||||||||
|
Unamortized premium/(discount)
|
901 | 875 | 1,776 | (861 | ) | 915 | ||||||||||||||
|
Receivable for partially charged-off loans
|
— | — | — | 1,140 | 1,140 | |||||||||||||||
|
Allowance for losses
|
(119 | ) | (70 | ) | (189 | ) | (2,043 | ) | (2,232 | ) | ||||||||||
|
Total student loan portfolio
|
$ | 52,824 | $ | 89,811 | $ | 142,635 | $ | 35,753 | $ | 178,388 | ||||||||||
|
% of total FFELP
|
37 | % | 63 | % | 100 | % | ||||||||||||||
|
% of total
|
30 | % | 50 | % | 80 | % | 20 | % | 100 | % | ||||||||||
| December 31, 2010 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total
|
Private
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
FFELP
|
Education
|
|||||||||||||||||
| (Dollars in millions) | Other | Loans | Loans | Loans | Total | |||||||||||||||
|
Total student loan portfolio:
|
||||||||||||||||||||
|
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 student loan portfolio
|
$ | 56,252 | $ | 92,397 | $ | 148,649 | $ | 35,656 | $ | 184,305 | ||||||||||
|
% of total FFELP
|
38 | % | 62 | % | 100 | % | ||||||||||||||
|
% of total
|
31 | % | 50 | % | 81 | % | 19 | % | 100 | % | ||||||||||
69
Table of Contents
Average
Student Loan Balances (net of unamortized
premium/discount)
| Three Months Ended June 30, 2011 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total
|
Private
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
FFELP
|
Education
|
|||||||||||||||||
| (Dollars in millions) | Other | Loans | Loans | Loans | Total | |||||||||||||||
|
Total
|
$ | 53,667 | $ | 90,332 | $ | 143,999 | $ | 36,784 | $ | 180,783 | ||||||||||
|
% of FFELP
|
37 | % | 63 | % | 100 | % | ||||||||||||||
|
% of total
|
30 | % | 50 | % | 80 | % | 20 | % | 100 | % | ||||||||||
| Three Months Ended June 30, 2010 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total
|
Private
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
FFELP
|
Education
|
|||||||||||||||||
| (Dollars in millions) | Other | Loans | Loans | Loans | Total | |||||||||||||||
|
Total
|
$ | 66,488 | $ | 81,613 | $ | 148,101 | $ | 36,470 | $ | 184,571 | ||||||||||
|
% of FFELP
|
45 | % | 55 | % | 100 | % | ||||||||||||||
|
% of total
|
36 | % | 44 | % | 80 | % | 20 | % | 100 | % | ||||||||||
| Six Months Ended June 30, 2011 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total
|
Private
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
FFELP
|
Education
|
|||||||||||||||||
| (Dollars in millions) | Other | Loans | Loans | Loans | Total | |||||||||||||||
|
Total
|
$ | 54,597 | $ | 91,084 | $ | 145,681 | $ | 36,894 | $ | 182,575 | ||||||||||
|
% of FFELP
|
37 | % | 63 | % | 100 | % | ||||||||||||||
|
% of total
|
30 | % | 50 | % | 80 | % | 20 | % | 100 | % | ||||||||||
| Six Months Ended June 30, 2010 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total
|
Private
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
FFELP
|
Education
|
|||||||||||||||||
| (Dollars in millions) | Other | Loans | Loans | Loans | Total | |||||||||||||||
|
Total
|
$ | 64,339 | $ | 82,147 | $ | 146,486 | $ | 36,574 | $ | 183,060 | ||||||||||
|
% of FFELP
|
44 | % | 56 | % | 100 | % | ||||||||||||||
|
% of total
|
35 | % | 45 | % | 80 | % | 20 | % | 100 | % | ||||||||||
Student
Loan Activity
| Three Months Ended June 30, 2011 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total
|
Total Private
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
FFELP
|
Education
|
Total
|
||||||||||||||||
| (Dollars in millions) | Other | Loans | Loans | Loans | Portfolio | |||||||||||||||
|
Beginning balance
|
$ | 54,366 | $ | 91,192 | $ | 145,558 | $ | 35,966 | $ | 181,524 | ||||||||||
|
Acquisitions and originations
|
190 | 58 | 248 | 292 | 540 | |||||||||||||||
|
Capitalized interest and premium/discount amortization
|
360 | 370 | 730 | 330 | 1,060 | |||||||||||||||
|
Consolidations to third parties
|
(730 | ) | (280 | ) | (1,010 | ) | (15 | ) | (1,025 | ) | ||||||||||
|
Sales
|
(192 | ) | — | (192 | ) | — | (192 | ) | ||||||||||||
|
Repayments/defaults/other
|
(1,170 | ) | (1,529 | ) | (2,699 | ) | (820 | ) | (3,519 | ) | ||||||||||
|
Ending balance
|
$ | 52,824 | $ | 89,811 | $ | 142,635 | $ | 35,753 | $ | 178,388 | ||||||||||
70
Table of Contents
| Three Months Ended June 30, 2010 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total
|
Total Private
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
FFELP
|
Education
|
Total
|
||||||||||||||||
| (Dollars in millions) | Other | Loans | Loans | Loans | Portfolio | |||||||||||||||
|
Beginning balance
|
$ | 64,346 | $ | 82,178 | $ | 146,524 | $ | 35,362 | $ | 181,886 | ||||||||||
|
Acquisitions and originations
|
4,935 | — | 4,935 | 252 | 5,187 | |||||||||||||||
|
Capitalized interest and premium/discount amortization
|
336 | 349 | 685 | 365 | 1,050 | |||||||||||||||
|
Consolidations to third parties
|
(480 | ) | (207 | ) | (687 | ) | (10 | ) | (697 | ) | ||||||||||
|
Sales
|
(90 | ) | — | (90 | ) | — | (90 | ) | ||||||||||||
|
Repayments/defaults/other
|
(1,590 | ) | (1,285 | ) | (2,875 | ) | (818 | ) | (3,693 | ) | ||||||||||
|
Ending balance
|
$ | 67,457 | $ | 81,035 | $ | 148,492 | $ | 35,151 | $ | 183,643 | ||||||||||
| Six Months Ended June 30, 2011 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total
|
Total Private
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
FFELP
|
Education
|
Total
|
||||||||||||||||
| (Dollars in millions) | Other | Loans | Loans | Loans | Portfolio | |||||||||||||||
|
Beginning balance
|
$ | 56,252 | $ | 92,397 | $ | 148,649 | $ | 35,656 | $ | 184,305 | ||||||||||
|
Acquisitions and originations
|
293 | 305 | 598 | 1,221 | 1,819 | |||||||||||||||
|
Capitalized interest and premium/discount amortization
|
682 | 741 | 1,423 | 624 | 2,047 | |||||||||||||||
|
Consolidations to third parties
|
(1,581 | ) | (558 | ) | (2,139 | ) | (32 | ) | (2,171 | ) | ||||||||||
|
Sales
|
(381 | ) | — | (381 | ) | — | (381 | ) | ||||||||||||
|
Repayments/defaults/other
|
(2,441 | ) | (3,074 | ) | (5,515 | ) | (1,716 | ) | (7,231 | ) | ||||||||||
|
Ending balance
|
$ | 52,824 | $ | 89,811 | $ | 142,635 | $ | 35,753 | $ | 178,388 | ||||||||||
| Six Months Ended June 30, 2010 | ||||||||||||||||||||
|
FFELP
|
FFELP
|
Total
|
Total Private
|
|||||||||||||||||
|
Stafford and
|
Consolidation
|
FFELP
|
Education
|
Total
|
||||||||||||||||
| (Dollars in millions) | Other | Loans | Loans | Loans | Portfolio | |||||||||||||||
|
Beginning balance — GAAP-basis
|
$ | 52,675 | $ | 68,379 | $ | 121,054 | $ | 22,753 | $ | 143,807 | ||||||||||
|
Consolidation of off-balance sheet
loans
(1)
|
5,500 | 14,797 | 20,297 | 12,341 | 32,638 | |||||||||||||||
|
Beginning balance — total portfolio
|
58,175 | 83,176 | 141,351 | 35,094 | 176,445 | |||||||||||||||
|
Acquisitions and originations
|
13,132 | — | 13,132 | 1,062 | 14,194 | |||||||||||||||
|
Capitalized interest and premium/discount amortization
|
598 | 684 | 1,282 | 677 | 1,959 | |||||||||||||||
|
Consolidations to third parties
|
(947 | ) | (374 | ) | (1,321 | ) | (22 | ) | (1,343 | ) | ||||||||||
|
Sales
|
(166 | ) | — | (166 | ) | — | (166 | ) | ||||||||||||
|
Repayments/defaults/other
|
(3,335 | ) | (2,451 | ) | (5,786 | ) | (1,660 | ) | (7,446 | ) | ||||||||||
|
Ending balance
|
$ | 67,457 | $ | 81,035 | $ | 148,492 | $ | 35,151 | $ | 183,643 | ||||||||||
| (1) | On January 1, 2010, upon the adoption of the new consolidation accounting guidance, all off-balance sheet loans are included in the GAAP-basis. |
Private
Education Loan Originations
Total Private Education Loan originations increased
21 percent from the year-ago quarter to $264 million
in the quarter ended June 30, 2011 and 14 percent in
the first six months of 2011 compared with the year-ago period.
71
Table of Contents
The following table summarizes our Private Education Loan
originations.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Private Education Loan originations
|
$ | 264 | $ | 219 | $ | 1,204 | $ | 1,058 | ||||||||
FFELP
Loan Portfolio Performance
FFELP
Loan Delinquencies and Forbearance
The table below presents our FFELP Loan delinquency trends as of
June 30, 2011 and 2010. 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.
| FFELP Loan Delinquencies | ||||||||||||||||
| June 30, | ||||||||||||||||
| 2011 | 2010 | |||||||||||||||
| (Dollars in millions) | Balance | % | Balance | % | ||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 25,718 | $ | 43,397 | ||||||||||||
|
Loans in
forbearance
(2)
|
21,048 | 19,557 | ||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||
|
Loans current
|
78,201 | 82.9 | % | 68,657 | 82.7 | % | ||||||||||
|
Loans delinquent
31-60 days
(3)
|
5,149 | 5.5 | 4,837 | 5.8 | ||||||||||||
|
Loans delinquent
61-90 days
(3)
|
2,909 | 3.1 | 2,540 | 3.1 | ||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
8,023 | 8.5 | 6,945 | 8.4 | ||||||||||||
|
Total FFELP Loans in repayment
|
94,282 | 100 | % | 82,979 | 100 | % | ||||||||||
|
Total FFELP Loans, gross
|
141,048 | 145,933 | ||||||||||||||
|
FFELP Loan unamortized premium
|
1,776 | 2,748 | ||||||||||||||
|
Total FFELP Loans
|
142,824 | 148,681 | ||||||||||||||
|
FFELP Loan allowance for losses
|
(189 | ) | (189 | ) | ||||||||||||
|
FFELP Loans, net
|
$ | 142,635 | $ | 148,492 | ||||||||||||
|
Percentage of FFELP Loans in repayment
|
66.8 | % | 56.9 | % | ||||||||||||
|
Delinquencies as a percentage of FFELP Loans in repayment
|
17.1 | % | 17.3 | % | ||||||||||||
|
FFELP Loans in forbearance as a percentage of loans in repayment
and forbearance
|
18.2 | % | 19.1 | % | ||||||||||||
| (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 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 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. |
72
Table of Contents
Allowance
for FFELP Loan Losses
The following table summarizes changes in the allowance for
FFELP Loan losses for the three and six months ended
June 30, 2011 and 2010.
| Activity in Allowance for FFELP Loans | ||||||||||||||||
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Allowance at beginning of period — GAAP-basis
|
$ | 190 | $ | 186 | $ | 189 | $ | 161 | ||||||||
|
Consolidation of securitization
trusts
(1)
|
— | — | — | 25 | ||||||||||||
|
Allowance at beginning of period
|
190 | 186 | 189 | 186 | ||||||||||||
|
Provision for FFELP Loan losses
|
23 | 29 | 46 | 52 | ||||||||||||
|
Charge-offs
|
(21 | ) | (24 | ) | (41 | ) | (46 | ) | ||||||||
|
Student loan sales and securitization activity
|
(3 | ) | (2 | ) | (5 | ) | (3 | ) | ||||||||
|
Allowance at end of period
|
$ | 189 | $ | 189 | $ | 189 | $ | 189 | ||||||||
|
Charge-offs as a percentage of average loans in repayment
(annualized)
|
.09 | % | .12 | % | .09 | % | .11 | % | ||||||||
|
Charge-offs as a percentage of average loans in repayment and
forbearance (annualized)
|
.07 | % | .10 | % | .07 | % | .09 | % | ||||||||
|
Allowance as a percentage of the ending total loans, gross
|
.13 | % | .13 | % | .13 | % | .13 | % | ||||||||
|
Allowance as a percentage of ending loans in repayment
|
.20 | % | .23 | % | .20 | % | .23 | % | ||||||||
|
Allowance coverage of charge-offs (annualized)
|
2.3 | 1.9 | 2.3 | 2.1 | ||||||||||||
|
Ending total loans, gross
|
$ | 141,048 | $ | 145,933 | $ | 141,048 | $ | 145,933 | ||||||||
|
Average loans in repayment
|
$ | 94,318 | $ | 82,449 | $ | 94,908 | $ | 82,443 | ||||||||
|
Ending loans in repayment
|
$ | 94,282 | $ | 82,979 | $ | 94,282 | $ | 82,979 | ||||||||
| (1) | Upon the adoption of the new consolidation accounting guidance on January 1, 2010, we consolidated all of our off-balance sheet securitization trusts. |
73
Table of Contents
Consumer
Lending Portfolio Performance
Private
Education Loan Delinquencies and Forbearance
The table below presents our Private Education Loan delinquency
trends as of June 30, 2011 and 2010. 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.
| Private Education Loan Delinquencies | ||||||||||||||||
| June 30, | ||||||||||||||||
| 2011 | 2010 | |||||||||||||||
| (Dollars in millions) | Balance | % | Balance | % | ||||||||||||
|
Loans
in-school/grace/deferment
(1)
|
$ | 7,216 | $ | 10,051 | ||||||||||||
|
Loans in
forbearance
(2)
|
1,430 | 1,437 | ||||||||||||||
|
Loans in repayment and percentage of each status:
|
||||||||||||||||
|
Loans current
|
25,994 | 90.0 | % | 22,669 | 88.2 | % | ||||||||||
|
Loans delinquent
31-60 days
(3)
|
963 | 3.4 | 948 | 3.7 | ||||||||||||
|
Loans delinquent
61-90 days
(3)
|
575 | 2.0 | 604 | 2.3 | ||||||||||||
|
Loans delinquent greater than
90 days
(3)
|
1,339 | 4.6 | 1,501 | 5.8 | ||||||||||||
|
Total Private Education Loans in repayment
|
28,871 | 100.0 | % | 25,722 | 100.0 | % | ||||||||||
|
Total Private Education Loans, gross
|
37,517 | 37,210 | ||||||||||||||
|
Private Education Loan unamortized discount
|
(861 | ) | (905 | ) | ||||||||||||
|
Total Private Education Loans
|
36,656 | 36,305 | ||||||||||||||
|
Private Education Loan receivable for partially charged-off loans
|
1,140 | 888 | ||||||||||||||
|
Private Education Loan allowance for losses
|
(2,043 | ) | (2,042 | ) | ||||||||||||
|
Private Education Loans, net
|
$ | 35,753 | $ | 35,151 | ||||||||||||
|
Percentage of Private Education Loans in repayment
|
77.0 | % | 69.1 | % | ||||||||||||
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
10.0 | % | 11.9 | % | ||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
4.7 | % | 5.3 | % | ||||||||||||
|
Loans in repayment greater than 12 months as a percentage
of loans in
repayment
(4)
|
66.0 | % | 58.4 | % | ||||||||||||
| (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 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) | Based on number of months in an active repayment status for which a scheduled monthly payment was due. |
74
Table of Contents
Allowance
for Private Education Loan Losses
The following table summarizes changes in the allowance for
Private Education Loan losses for the three and six months ended
June 30, 2011 and 2010.
|
Activity in Allowance
|
||||||||||||||||
|
for Private Education
|
||||||||||||||||
| Loans | ||||||||||||||||
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Allowance at beginning of period — GAAP-basis
|
$ | 2,034 | $ | 2,019 | $ | 2,022 | $ | 1,443 | ||||||||
|
Consolidation of securitization
trusts
(1)
|
— | — | — | 524 | ||||||||||||
|
Allowance at beginning of period
|
2,034 | 2,019 | 2,022 | 1,967 | ||||||||||||
|
Provision for Private Education Loan losses
|
265 | 349 | 540 | 674 | ||||||||||||
|
Charge-offs
|
(263 | ) | (336 | ) | (537 | ) | (620 | ) | ||||||||
|
Reclassification of interest reserve
|
7 | 10 | 18 | 21 | ||||||||||||
|
Allowance at end of period
|
$ | 2,043 | $ | 2,042 | $ | 2,043 | $ | 2,042 | ||||||||
|
Charge-offs as a percentage of average loans in repayment
(annualized)
|
3.7 | % | 5.3 | % | 3.8 | % | 5.0 | % | ||||||||
|
Charge-offs as a percentage of average loans in repayment and
forbearance (annualized)
|
3.5 | % | 5.1 | % | 3.6 | % | 4.8 | % | ||||||||
|
Allowance as a percentage of the ending total loan balance
|
5.3 | % | 5.4 | % | 5.3 | % | 5.4 | % | ||||||||
|
Allowance as a percentage of ending loans in repayment
|
7.1 | % | 7.9 | % | 7.1 | % | 7.9 | % | ||||||||
|
Average coverage of charge-offs (annualized)
|
1.9 | 1.5 | 1.9 | 1.6 | ||||||||||||
|
Ending total
loans
(2)
|
$ | 38,657 | $ | 38,098 | $ | 38,657 | $ | 38,098 | ||||||||
|
Average loans in repayment
|
$ | 28,489 | $ | 25,179 | $ | 28,309 | $ | 24,914 | ||||||||
|
Ending loans in repayment
|
$ | 28,871 | $ | 25,722 | $ | 28,871 | $ | 25,722 | ||||||||
| (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) | Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans. |
75
Table of Contents
The following table provides detail for the traditional and
non-traditional Private Education Loans at June 30, 2011
and 2010.
| June 30, 2011 | June 30, 2010 | |||||||||||||||||||||||
|
Non-
|
Non-
|
|||||||||||||||||||||||
| Traditional | Traditional | Total | Traditional | Traditional | Total | |||||||||||||||||||
|
Ending total
loans
(1)
|
$ | 34,419 | $ | 4,238 | $ | 38,657 | $ | 33,541 | $ | 4,557 | $ | 38,098 | ||||||||||||
|
Ending loans in repayment
|
26,134 | 2,737 | 28,871 | 22,898 | 2,824 | 25,722 | ||||||||||||||||||
|
Private Education Loan allowance for losses
|
1,363 | 680 | 2,043 | 1,168 | 874 | 2,042 | ||||||||||||||||||
|
Charge-offs as a percentage of average loans in repayment
(annualized)
|
2.8 | % | 12.5 | % | 3.7 | % | 3.7 | % | 18.7 | % | 5.3 | % | ||||||||||||
|
Allowance as a percentage of total ending loan balance
|
4.0 | % | 16.0 | % | 5.3 | % | 3.5 | % | 19.2 | % | 5.4 | % | ||||||||||||
|
Allowance as a percentage of ending loans in repayment
|
5.2 | % | 24.8 | % | 7.1 | % | 5.1 | % | 31.0 | % | 7.9 | % | ||||||||||||
|
Average coverage of charge-offs (annualized)
|
1.9 | 2.0 | 1.9 | 1.4 | 1.7 | 1.5 | ||||||||||||||||||
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
8.3 | % | 25.9 | % | 10.0 | % | 9.7 | % | 29.6 | % | 11.9 | % | ||||||||||||
|
Delinquencies greater than 90 days as a percentage of
Private Education Loans in repayment
|
3.7 | % | 13.2 | % | 4.6 | % | 4.6 | % | 16.1 | % | 5.8 | % | ||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
4.5 | % | 7.0 | % | 4.7 | % | 5.1 | % | 7.2 | % | 5.3 | % | ||||||||||||
|
Loans that entered repayment during the
period
(2)
|
$ | 1,010 | $ | 103 | $ | 1,113 | $ | 1,339 | $ | 153 | $ | 1,492 | ||||||||||||
|
Percentage of Private Education Loans with a cosigner
|
64 | % | 29 | % | 60 | % | 62 | % | 28 | % | 58 | % | ||||||||||||
|
Average FICO at origination
|
725 | 624 | 716 | 725 | 623 | 714 | ||||||||||||||||||
| (1) | Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans. | |
| (2) | Includes loans that are required to make a payment for the first time. |
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. See “Recently Issued Accounting
Standards — Troubled Debt Restructurings” for
additional information on how our allowance for loan losses may
be affected in the third quarter of 2011 if certain types of
forbearance are now considered troubled debt restructurings.
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
76
Table of Contents
hardship and request forbearance time to provide temporary
payment relief. In these circumstances, a borrower’s loan
is placed into a forbearance status in limited monthly
increments and is reflected in the forbearance status at
month-end during this time. At the end of their granted
forbearance period, the borrower will enter repayment status as
current and is expected to begin making their scheduled monthly
payments on a go-forward basis.
Forbearance may also be granted to borrowers who are delinquent
in their payments. In these circumstances, the forbearance cures
the delinquency and the borrower is returned to a current
repayment status. In more limited instances, delinquent
borrowers will also be granted additional forbearance time.
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, 67 percent of
the loans are current, paid in full, or receiving an in-school
grace or deferment, and 19 percent have defaulted. The
default experience associated with loans which utilize
forbearance is considered in our allowance for loan losses. 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. The monthly average number
of loans granted forbearance as a percentage of loans in
repayment and forbearance increased to 5.0 percent in the
second quarter of 2011 compared with the year-ago quarter of
4.5 percent. As of June 30, 2011, 2.5 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 June 30, 2011 (borrowers made payments on
approximately 20 percent of these loans immediately prior
to being granted forbearance).
| 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
|
9.4 | % | 8.6 | % | 4.5 | % | ||||||
|
Current
|
49.8 | 57.7 | 65.2 | |||||||||
|
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
|
4.4 | 3.4 | — | |||||||||
|
Defaulted
|
18.8 | 10.0 | 5.2 | |||||||||
|
Paid
|
7.8 | 14.5 | 24.2 | |||||||||
|
Total
|
100 | % | 100 | % | 100 | % | ||||||
The tables below show the composition and status of the 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 June 30, 2011, loans in
forbearance status as a percentage of loans in repayment and
forbearance were 6.8 percent for loans that have been in
active repayment status for less than 25 months. The
percentage drops to 1.3 percent for loans that have been in
active repayment status for more than
77
Table of Contents
48 months. Approximately 83 percent of our Private
Education Loans in forbearance status has been in active
repayment status less than 25 months.
| Monthly Scheduled Payments Due | ||||||||||||||||||||||||||||
|
(Dollars in millions)
|
More
|
Not Yet in
|
||||||||||||||||||||||||||
| June 30, 2011 | 1 to 12 | 13 to 24 | 25 to 36 | 37 to 48 | than 48 | Repayment | Total | |||||||||||||||||||||
|
Loans in-school/grace/deferment
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | 7,216 | $ | 7,216 | ||||||||||||||
|
Loans in forbearance
|
990 | 200 | 118 | 57 | 65 | — | 1,430 | |||||||||||||||||||||
|
Loans in repayment — current
|
8,254 | 5,844 | 4,131 | 3,040 | 4,725 | — | 25,994 | |||||||||||||||||||||
|
Loans in repayment — delinquent
31-60 days
|
487 | 192 | 127 | 65 | 92 | — | 963 | |||||||||||||||||||||
|
Loans in repayment — delinquent
61-90 days
|
327 | 108 | 66 | 32 | 42 | — | 575 | |||||||||||||||||||||
|
Loans in repayment — delinquent greater than
90 days
|
735 | 281 | 150 | 73 | 100 | — | 1,339 | |||||||||||||||||||||
|
Total
|
$ | 10,793 | $ | 6,625 | $ | 4,592 | $ | 3,267 | $ | 5,024 | $ | 7,216 | 37,517 | |||||||||||||||
|
Unamortized discount
|
(861 | ) | ||||||||||||||||||||||||||
|
Receivable for partially charged-off loans
|
1,140 | |||||||||||||||||||||||||||
|
Allowance for loan losses
|
(2,043 | ) | ||||||||||||||||||||||||||
|
Total Private Education Loans, net
|
$ | 35,753 | ||||||||||||||||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
9.2 | % | 3.0 | % | 2.6 | % | 1.8 | % | 1.3 | % | — | % | 4.7 | % | ||||||||||||||
| Monthly Scheduled Payments Due | ||||||||||||||||||||||||||||
|
(Dollars in millions)
|
More
|
Not Yet in
|
||||||||||||||||||||||||||
| June 30, 2010 | 1 to 12 | 13 to 24 | 25 to 36 | 37 to 48 | than 48 | Repayment | Total | |||||||||||||||||||||
|
Loans in-school/grace/deferment
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | 10,051 | $ | 10,051 | ||||||||||||||
|
Loans in forbearance
|
1,087 | 175 | 86 | 41 | 48 | — | 1,437 | |||||||||||||||||||||
|
Loans in repayment — current
|
8,761 | 4,791 | 3,521 | 2,311 | 3,285 | — | 22,669 | |||||||||||||||||||||
|
Loans in repayment — delinquent
31-60 days
|
563 | 174 | 94 | 50 | 67 | — | 948 | |||||||||||||||||||||
|
Loans in repayment — delinquent
61-90 days
|
395 | 101 | 49 | 26 | 33 | — | 604 | |||||||||||||||||||||
|
Loans in repayment — delinquent greater than
90 days
|
975 | 282 | 112 | 55 | 77 | — | 1,501 | |||||||||||||||||||||
|
Total
|
$ | 11,781 | $ | 5,523 | $ | 3,862 | $ | 2,483 | $ | 3,510 | $ | 10,051 | 37,210 | |||||||||||||||
|
Unamortized discount
|
(905 | ) | ||||||||||||||||||||||||||
|
Receivable for partially charged-off loans
|
888 | |||||||||||||||||||||||||||
|
Allowance for loan losses
|
(2,042 | ) | ||||||||||||||||||||||||||
|
Total Private Education Loans, net
|
$ | 35,151 | ||||||||||||||||||||||||||
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
9.2 | % | 3.2 | % | 2.2 | % | 1.7 | % | 1.4 | % | — | % | 5.3 | % | ||||||||||||||
78
Table of Contents
The table below stratifies the portfolio of 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, 4 percent of loans currently
in forbearance have cumulative forbearance of more than
24 months.
| June 30, 2011 | June 30, 2010 | |||||||||||||||
|
Forbearance
|
% of
|
Forbearance
|
% of
|
|||||||||||||
| (Dollars in millions) | Balance | Total | Balance | Total | ||||||||||||
|
Cumulative number of months borrower has used forbearance
|
||||||||||||||||
|
Up to 12 months
|
$ | 947 | 66 | % | $ | 1,014 | 71 | % | ||||||||
|
13 to 24 months
|
433 | 30 | 372 | 26 | ||||||||||||
|
More than 24 months
|
50 | 4 | 51 | 3 | ||||||||||||
|
Total
|
$ | 1,430 | 100 | % | $ | 1,437 | 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 immediately charged off through
provision expense with an offsetting reduction in the receivable
for partially charged-off Private Education Loans. If actual
periodic recoveries are greater than expected, they will be
reflected as a recovery through the allowance for Private
Education Loan losses once the cumulative recovery amount
exceeds the cumulative amount originally expected to be
recovered.
The following table summarizes the activity in the receivable
for partially charged-off Private Education Loans for the three
and six months ended June 30, 2011, and 2010.
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
| June 30, | June 30, | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Receivable at beginning of period — GAAP-basis
|
$ | 1,090 | $ | 797 | $ | 1,039 | $ | 499 | ||||||||
|
Consolidation of off-balance sheet
trusts
(1)
|
— | — | — | 229 | ||||||||||||
|
Receivable at beginning of period
|
1,090 | 797 | 1,039 | 728 | ||||||||||||
|
Expected future recoveries of current period
defaults
(2)
|
94 | 121 | 192 | 222 | ||||||||||||
|
Recoveries
(3)
|
(37 | ) | (24 | ) | (77 | ) | (49 | ) | ||||||||
|
Charge-offs
(4)
|
(7 | ) | (6 | ) | (14 | ) | (13 | ) | ||||||||
|
Receivable at end of period
|
$ | 1,140 | $ | 888 | $ | 1,140 | $ | 888 | ||||||||
| (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) | Remaining loan balance expected to be collected from contractual loan balances partially charged off during the period. This is the difference between the defaulted loan balance and the amount of the defaulted loan balance that was charged off. | |
| (3) | Current period cash collections of amounts originally expected to be recovered. | |
| (4) | Represents the current period recovery shortfall. This is the difference between what was expected to be collected and what was actually collected. |
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
79
Table of Contents
their monthly payment. The chart below provides the optional
repayment offerings in addition to the standard level principal
and interest payments as of June 30, 2011.
| Loan Program | ||||||||||||||||
|
Signature and
|
Career
|
|||||||||||||||
| (Dollars in millions) | Other | Smart Option | Training | Total | ||||||||||||
|
$ in Repayment
|
$23,513 | $3,416 | $1,942 | $ | 28,871 | |||||||||||
|
$ in Total
|
32,036 | 3,468 | 2,013 | 37,517 | ||||||||||||
|
Payment method by enrollment status:
|
||||||||||||||||
|
In-school/Grace
|
Deferred (1 | ) | 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 feature that may
be selected at the option of the borrower. Borrowers elect to
participate in this program at the time they enter repayment
following their grace period. 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 June 30, 2011 and 2010, borrowers in
repayment owing approximately $7.4 billion (26 percent
of loans in repayment) and $7.5 billion (29 percent of
loans in repayment), respectively, were enrolled in the
interest-only program. Of these amounts, 12 percent and
13 percent were non-traditional loans as of June 30,
2011 and 2010, respectively.
Liquidity
and Capital Resources
We expect to fund our ongoing liquidity needs, including the
origination of new Private Education Loans and the repayment of
$2.5 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 FFELP ABCP
Facilities and the facility with the Federal Home Loan Bank in
Des Moines (the “FHLB-DM Facility”), the issuance of
term ABS, the collection of additional term bank deposits and
the issuance of unsecured debt.
Currently, new Private Education Loan originations are initially
funded through bank deposits and subsequently securitized to
term on a programmatic basis. We have $1.4 billion of cash
at the Bank as of June 30, 2011 available to fund future
originations.
Sources
of Liquidity and Available Capacity
The following tables detail our main sources of primary
liquidity and our main sources of secondary liquidity (unused
secured credit facilities contingent upon obtaining eligible
collateral) outstanding at June 30,
80
Table of Contents
2011 and December 31, 2010 and the average balances for the
three and six months ended June 30, 2011 and 2010.
| As of | ||||||||
| (Dollars in millions) | June 30, 2011 | December 31, 2010 | ||||||
|
Sources of primary liquidity:
|
||||||||
|
Unrestricted cash and liquid investments:
|
||||||||
|
Cash and cash equivalents
|
$ | 4,145 | $ | 4,342 | ||||
|
Investments
|
83 | 85 | ||||||
|
Total unrestricted cash and liquid
investments
(1)
|
$ | 4,228 | $ | 4,427 | ||||
|
Unencumbered FFELP Loans
|
$ | 855 | $ | 1,441 | ||||
|
Sources of secondary liquidity contingent on obtaining eligible
collateral:
|
||||||||
|
Unused secured credit facilities: FFELP ABCP Facilities and
FHLB-DM
Facility
(2)
|
$ | 10,728 | $ | 12,601 | ||||
| (1) | At June 30, 2011 and December 31, 2010, ending balances include $1.4 billion and $2.0 billion, respectively, of cash and liquid investments at the Bank. This cash will be used primarily to originate or acquire student loans. | |
| (2) | Current borrowing capacity under the FFELP ABCP Facilities and FHLB-DM Facility is determined based on qualifying collateral from the unencumbered FFELP Loans reported in primary liquidity above. Additional borrowing capacity would primarily be used to fund FFELP Loan portfolio acquisitions and to refinance FFELP Loans used as collateral in the ED Conduit Program Facility. The total amount we can borrow is contingent upon obtaining eligible collateral. If we use our unencumbered FFELP Loans as collateral to borrow against these facilities, the remaining amount we could borrow is reduced accordingly. |
|
Average Balances
|
Average Balances
|
|||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| (Dollars in millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
|
Sources of primary liquidity:
|
||||||||||||||||
|
Unrestricted cash and liquid investments:
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 3,404 | $ | 6,311 | $ | 3,815 | $ | 6,162 | ||||||||
|
Investments
|
101 | 99 | 90 | 101 | ||||||||||||
|
Total unrestricted cash and liquid
investments
(1)
|
$ | 3,505 | $ | 6,410 | $ | 3,905 | $ | 6,263 | ||||||||
|
Unused bank lines of credit
|
$ | — | $ | 2,298 | $ | — | $ | 2,889 | ||||||||
|
Unencumbered FFELP Loans
|
$ | 1,673 | $ | 1,995 | $ | 1,925 | $ | 2,092 | ||||||||
|
Sources of secondary liquidity contingent on obtaining eligible
collateral:
|
||||||||||||||||
|
Unused secured credit facilities: FFELP ABCP Facilities and
FHLB-DM
Facility
(2)
|
$ | 11,408 | $ | 13,728 | $ | 11,725 | $ | 11,983 | ||||||||
| (1) | For the three months ended June 30, 2011 and 2010, average balances include $1.0 billion and $2.7 billion, respectively, of cash and liquid investments at the Bank. For the six months ended June 30, 2011 and 2010, average balances include $1.2 billion and $2.4 billion, respectively, of cash and liquid investments at the Bank. | |
| (2) | Current borrowing capacity under the FFELP ABCP Facilities and FHLB-DM Facility is determined based on qualifying collateral from the unencumbered FFELP Loans reported in primary liquidity above. Additional borrowing capacity would primarily be used to fund FFELP Loan portfolio acquisitions and to refinance FFELP Loans used as collateral in the ED Conduit Program Facility. The total amount we can borrow is contingent upon obtaining eligible collateral. If we use our unencumbered FFELP Loans as collateral to borrow against these facilities, the remaining amount we could borrow is reduced accordingly. |
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 June 30, 2011,
we had a total of $21.4 billion of unencumbered assets
(which includes the assets that comprise our primary liquidity
and are available to serve as collateral for our secondary
liquidity), excluding goodwill and acquired intangibles. Total
student loans, net, comprised $11.4 billion of our
unencumbered assets of which $10.5 billion and
$.9 billion related to Private Education Loans, net and
FFELP Loans, net, respectively.
81
Table of Contents
For a discussion of our various sources of liquidity, such as
the ED Conduit Program, the Sallie Mae Bank, our continued
access to the ABS market, our asset-based financing facilities,
the lending agreement we entered into with the FHLB-DM and our
issuance of unsecured debt, see Item 7
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and
Capital Resources” to our 2010
Form 10-K.
The following table reconciles encumbered and unencumbered
assets and their net impact on total tangible equity.
|
June 30,
|
December 31,
|
|||||||
| (Dollars in billions) | 2011 | 2010 | ||||||
|
Net assets of consolidated variable interest entities
(encumbered assets)
|
$ | 12.4 | $ | 13.1 | ||||
|
Tangible unencumbered
assets
(1)
|
21.4 | 22.3 | ||||||
|
Unsecured debt
|
(24.9 | ) | (26.9 | ) | ||||
|
Mark-to-market
on unsecured hedged
debt
(2)
|
(1.6 | ) | (1.4 | ) | ||||
|
Other liabilities, net
|
(2.8 | ) | (2.6 | ) | ||||
|
Total tangible equity
|
$ | 4.5 | $ | 4.5 | ||||
| (1) | Excludes goodwill and acquired intangible assets. | |
| (2) | At June 30, 2011 and December 31, 2010, there were $1.4 billion and $1.4 billion, respectively, of net gains on derivatives hedging this debt in unencumbered assets, which partially offset these losses. |
Transactions
During the Second Quarter 2011
On June 30, 2011, we completed an $825 million Private
Education Loan ABS transaction at an all-in LIBOR equivalent
cost of one-month LIBOR plus 1.89 percent. This issue has a
weighted average life of 4.0 years and an initial
overcollateralization of approximately 18 percent.
On May 26, 2011, we completed an $821 million FFELP
ABS transaction at an all-in LIBOR equivalent cost of one-month
LIBOR plus 1.15 percent. This issue has a weighted average
life of 5.8 years and an initial overcollateralization of
approximately 3 percent.
On April 26, 2011, we completed a $562 million Private
Education Loan ABS transaction at an all-in LIBOR equivalent
cost of one-month LIBOR plus 1.99 percent. This issue has a
weighted average life of 3.8 years and an initial
overcollateralization of approximately 21 percent.
We also repurchase our outstanding unsecured debt in both
open-market repurchases and public tender offers. Repurchasing
debt helps us to better manage our short-term and long-term
funding needs by utilizing current excess liquidity to reduce
future obligations related to our unsecured borrowings at
favorable pricing. In the second quarter of 2011 we repurchased
$60 million face amount of our senior unsecured notes in
the aggregate, with maturity dates ranging from 2011 to 2014,
which resulted in a total gain of $0.3 million.
In the second-quarter 2011, we utilized $156 million to
repurchase 9.6 million common shares on the open market as
part of our $300 million share repurchase program announced
in April. We declared and paid a $.10 per common share dividend
during the second quarter of 2011.
While we are very comfortable with our maturity profile and
pleased with the outcome of these most recent transactions, we
will not be fully satisfied until we see our credit ratings and
our funding cost improve significantly.
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 2 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Financial Condition — FFELP Loan Portfolio
Performance” and “— Consumer Lending
Portfolio Performance.”
82
Table of Contents
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 assessing 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.
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 June 30, 2011.
|
SLM Corporation
|
||||||||
|
and Sallie Mae Bank
|
Securitization Trust
|
|||||||
| (Dollars in millions) | Contracts | Contracts | ||||||
|
Exposure, net of collateral
|
$ | 203 | $ | 1,612 | ||||
|
Percent of exposure to counterparties with credit ratings below
S&P AA- or Moody’s Aa3
|
57 | % | 34 | % | ||||
|
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 June 30, 2011
and December 31, 2010, and average balances and average
interest rates of our “Core Earnings” basis borrowings
for the three and six months ended June 30, 2011 and 2010.
The average interest rates include derivatives that are
economically hedging the underlying debt but do not qualify for
hedge accounting
83
Table of Contents
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 2.)
Ending
Balances
| June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||
|
Short
|
Long
|
Short
|
Long
|
|||||||||||||||||||||
| (Dollars in millions) | Term | Term | Total | Term | Term | Total | ||||||||||||||||||
|
Unsecured borrowings:
|
||||||||||||||||||||||||
|
Senior unsecured debt
|
$ | 2,464 | $ | 16,787 | $ | 19,251 | $ | 4,361 | $ | 15,742 | $ | 20,103 | ||||||||||||
|
Brokered deposits
|
1,550 | 1,654 | 3,204 | 1,387 | 3,160 | 4,547 | ||||||||||||||||||
|
Retail and other deposits
|
1,487 | — | 1,487 | 1,370 | — | 1,370 | ||||||||||||||||||
|
Other
(1)
|
1,004 | — | 1,004 | 887 | — | 887 | ||||||||||||||||||
|
Total unsecured borrowings
|
6,505 | 18,441 | 24,946 | 8,005 | 18,902 | 26,907 | ||||||||||||||||||
|
Secured borrowings:
|
||||||||||||||||||||||||
|
FFELP Loans securitizations
|
— | 109,524 | 109,524 | — | 112,425 | 112,425 | ||||||||||||||||||
|
Private Education Loans securitizations
|
— | 21,815 | 21,815 | — | 21,409 | 21,409 | ||||||||||||||||||
|
ED Conduit Program Facility
|
22,756 | — | 22,756 | 24,484 | — | 24,484 | ||||||||||||||||||
|
ED Participation Program Facility
|
— | — | — | — | — | — | ||||||||||||||||||
|
ABCP borrowings
|
314 | 5,000 | 5,314 | — | 5,853 | 5,853 | ||||||||||||||||||
|
Acquisition
financing
(2)
|
— | 1,010 | 1,010 | — | 1,064 | 1,064 | ||||||||||||||||||
|
FHLB-DM Facility
|
1,000 | — | 1,000 | 900 | — | 900 | ||||||||||||||||||
|
Indentured trusts
|
— | 1,125 | 1,125 | — | 1,246 | 1,246 | ||||||||||||||||||
|
Total secured borrowings
|
24,070 | 138,474 | 162,544 | 25,384 | 141,997 | 167,381 | ||||||||||||||||||
|
Total
|
$ | 30,575 | $ | 156,915 | $ | 187,490 | $ | 33,389 | $ | 160,899 | $ | 194,288 | ||||||||||||
| (1) | “Other” primarily consists of cash collateral held related to derivative exposures that are recorded as a short-term debt obligation. | |
| (2) | Relates to the acquisition of $25 billion of student loans at the end of 2010. |
Secured borrowings comprised 87 percent of our “Core
Earnings” basis debt outstanding at June 30, 2011
versus 86 percent at December 31, 2010.
84
Table of Contents
Average
Balances
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||||||
| (Dollars in millions) | Balance | Rate | Balance | Rate | Balance | Rate | Balance | Rate | ||||||||||||||||||||||||
|
Unsecured borrowings:
|
||||||||||||||||||||||||||||||||
|
Senior unsecured debt
|
$ | 19,845 | 2.31 | % | $ | 25,995 | 1.68 | % | $ | 20,629 | 2.23 | % | $ | 26,272 | 1.55 | % | ||||||||||||||||
|
Brokered deposits
|
3,729 | 2.41 | 5,212 | 2.61 | 4,040 | 2.41 | 5,406 | 2.78 | ||||||||||||||||||||||||
|
Retail and other deposits
|
1,491 | 1.16 | 278 | .84 | 1,484 | 1.20 | 246 | .68 | ||||||||||||||||||||||||
|
Other
(1)
|
1,132 | .23 | 769 | .21 | 1,076 | .28 | 934 | .18 | ||||||||||||||||||||||||
|
Total unsecured borrowings
|
26,197 | 2.17 | 32,254 | 1.79 | 27,229 | 2.12 | 32,858 | 1.71 | ||||||||||||||||||||||||
|
Secured borrowings:
|
||||||||||||||||||||||||||||||||
|
FFELP Loans securitizations
|
109,988 | .89 | 100,387 | .92 | 110,683 | .90 | 100,722 | .87 | ||||||||||||||||||||||||
|
Private Education Loans securitizations
|
21,051 | 2.19 | 21,438 | 2.15 | 21,034 | 2.18 | 21,047 | 2.09 | ||||||||||||||||||||||||
|
ED Conduit Program Facility
|
23,220 | .74 | 15,144 | .72 | 23,665 | .75 | 14,711 | .67 | ||||||||||||||||||||||||
|
ED Participation Program Facility
|
— | — | 18,374 | .72 | — | — | 15,835 | .73 | ||||||||||||||||||||||||
|
ABCP borrowings
|
4,850 | 1.03 | 6,551 | 1.16 | 4,893 | 1.08 | 7,718 | 1.20 | ||||||||||||||||||||||||
|
Acquisition
financing
(2)
|
1,024 | 4.79 | — | — | 1,044 | 4.83 | — | — | ||||||||||||||||||||||||
|
FHLB-DM Facility
|
883 | .25 | 437 | .35 | 756 | .28 | 241 | .34 | ||||||||||||||||||||||||
|
Indentured trusts
|
1,166 | .71 | 1,531 | .72 | 1,196 | .69 | 1,557 | .66 | ||||||||||||||||||||||||
|
Total secured borrowings
|
162,182 | 1.06 | 163,862 | 1.05 | 163,271 | 1.07 | 161,831 | 1.01 | ||||||||||||||||||||||||
|
Total
|
$ | 188,379 | 1.21 | % | $ | 196,116 | 1.17 | % | $ | 190,500 | 1.22 | % | $ | 194,689 | 1.13 | % | ||||||||||||||||
| (1) | “Other” primarily consists of cash collateral held related to derivative exposures that are recorded as a short-term obligation. | |
| (2) | Relates to the acquisition of $25 billion of student loans at the end of 2010. |
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. A discussion of our critical accounting policies, which
include allowance for loan losses, premium and discount
amortization related to our loan portfolio, fair value
measurement, transfers of financial assets and the VIE
consolidation model, derivative accounting and goodwill and
intangible assets can be found in our Annual Report on
Form 10-K
for the year ended December 31, 2010. There were no
significant changes to these critical accounting policies during
the first six months of 2011. However, related to Private
Education Loan allowance for loan losses, we did implement a new
model used to estimate defaults as discussed below.
In determining the allowance for loan losses, we estimate the
principal amount of loans that will default over the next two
years (two years being the expected period between a loss event
and default). In the first quarter of 2011, we implemented a new
model to estimate these Private Education Loan defaults. Both
the prior model and new model are considered “migration
models”. Our prior allowance model (in place through
December 31, 2010) segmented the portfolio into
categories of similar risk characteristics based on loan program
type, school type, loan status, seasoning, underwriting criteria
(credit scores) and the existence or absence of a cosigner using
school type, credit scores, cosigner status, loan status and
seasoning as the primary risk characteristics. Our new model
uses these same primary risk characteristics but also further
segments the portfolio by the number of months the loan is in
its repayment period (seasoning). While our previous allowance
process incorporated the impact of seasoning, the new model more
directly incorporates this feature. Another change in the new
allowance model relates to the historical period of experience
that we use as a starting point for projecting future defaults.
Our new model is based upon a seasonal average,
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Table of Contents
adjusted to the most recent three to six months of actual
collection experience as the starting point and applies expected
macroeconomic changes and collection procedure changes to
estimate expected losses caused by loss events incurred as of
the balance sheet date. Our previous model primarily used a one
year historical default experience period and did not include
the ability to directly model an economic expectation or
collection procedure change. In addition, the previous allowance
process included qualitative adjustments for these factors. Our
current model places a greater emphasis on the more recent
default experience rather than the default experience for older
historical periods, as we believe the recent default experience
is more indicative of the probable losses incurred in the loan
portfolio today. While the model we use as a part of the
allowance for loan losses process changed in the first quarter,
the overall process for calculating the appropriate amount of
allowance for Private Education Loan loss as disclosed in the
2010
Form 10-K
has not changed. We believe that the current model more
accurately reflects recent borrower behavior, loan performance,
and collection performance, as well as expectations about
economic factors. There was no adjustment to our allowance for
loan loss upon implementing this new default projection model in
the first quarter of 2011. In addition, there was no change in
how we estimate the amount we will recover over time related to
these defaulted amounts.
Recently
Issued Accounting Standards
Troubled
Debt Restructurings
In April 2011, the Financial Accounting Standards Board issued
Accounting Standards Update
No. 2011-02,
Receivables (Topic 310), “A Creditor’s Determination
of Whether a Restructuring Is a Troubled Debt
Restructuring.” This new guidance clarifies when a loan
restructuring constitutes a troubled debt restructuring. Under
the new guidance, student loans for which we have granted
certain concessions may now be considered troubled debt
restructurings that were previously not and this may require us
to increase the amount of our allowance for loan losses. This
guidance is effective July 1, 2011, applied retrospectively
to January 1, 2011. The most likely effect of implementing
this new guidance would be to increase the size of our allowance
for losses as certain types of forbearance usage may be
considered a concession. At this time we have not completed the
estimate of the change in our allowance for loan losses that
could result from implementing this new guidance.
Fair
Value Measurement and Disclosure Requirements
In May 2011, the FASB issued ASU
No. 2011-04,
Fair Value Measurement (Topic 820), “Amendments to Achieve
Common Fair Value Measurement and Disclosure Requirements in
U.S. GAAP and IFRSs.” These amendments
(1) clarify the FASB’s intent about the application of
existing fair value measurement and disclosure requirements; and
(2) change particular principles or requirements for measuring
fair value or for disclosing information about fair value
measurements. This new guidance is effective prospectively for
interim and annual periods beginning after December 15,
2011 and is not expected to have a material impact on our fair
value measurements.
| Item 3. | 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 three and six months
ended June 30, 2011 and 2010 and the effect on fair values
at June 30, 2011 and December 31, 2010, 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
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Table of Contents
funding index increases 25 basis points while holding the
asset index constant, if the funding index is different than the
asset index.
| Three Months Ended June 30, 2011 | ||||||||||||||||||||||||
|
Asset and
|
||||||||||||||||||||||||
|
Funding
|
||||||||||||||||||||||||
| Interest Rates: |
Index
|
|||||||||||||||||||||||
|
Change from
|
Change from
|
Mismatches (1) | ||||||||||||||||||||||
|
Increase of
|
Increase of
|
Increase of
|
||||||||||||||||||||||
|
100 Basis
|
300 Basis
|
25 Basis
|
||||||||||||||||||||||
| Points | Points | Points | ||||||||||||||||||||||
| (Dollars in millions, except per share amounts) | $ | % | $ | % | $ | % | ||||||||||||||||||
|
Effect on Earnings
|
||||||||||||||||||||||||
|
Decrease in pre-tax net income before unrealized gains (losses)
on derivative and hedging activities
|
$ | (21 | ) | (7 | )% | $ | (33 | ) | (10 | )% | $ | (105 | ) | (34 | )% | |||||||||
|
Unrealized gains (losses) on derivative and hedging activities
|
493 | 145 | 851 | 251 | (22 | ) | (6 | ) | ||||||||||||||||
|
Increase/(decrease) in net income before taxes
|
$ | 472 | 1,749 | % | $ | 818 | 3,029 | % | $ | (127 | ) | (470 | )% | |||||||||||
|
Increase/(decrease) in diluted earnings per common share
|
$ | .90 | 4,505 | % | $ | 1.56 | 7,804 | % | $ | (.24 | ) | (1,212 | )% | |||||||||||
| Three Months Ended June 30, 2010 | ||||||||||||||||||||||||
|
Asset and
|
||||||||||||||||||||||||
|
Funding
|
||||||||||||||||||||||||
| Interest Rates: |
Index
|
|||||||||||||||||||||||
|
Change from
|
Change from
|
Mismatches (1) | ||||||||||||||||||||||
|
Increase of
|
Increase of
|
Increase of
|
||||||||||||||||||||||
|
100 Basis
|
300 Basis
|
25 Basis
|
||||||||||||||||||||||
| Points | Points | 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
|
$ | 4 | 2 | % | $ | 11 | 5 | % | $ | (103 | ) | (49 | )% | |||||||||||
|
Unrealized gains (losses) on derivative and hedging activities
|
207 | 64 | 197 | 61 | (51 | ) | (16 | ) | ||||||||||||||||
|
Increase/(decrease) in net income before taxes
|
$ | 211 | 39 | % | $ | 208 | 39 | % | $ | (154 | ) | (29 | )% | |||||||||||
|
Increase/(decrease) in diluted earnings per common share
|
$ | .40 | 63 | % | $ | .39 | 63 | % | $ | (.29 | ) | (46 | )% | |||||||||||
| (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. |
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Table of Contents
| Six Months Ended June 30, 2011 | ||||||||||||||||||||||||
|
Asset and
|
||||||||||||||||||||||||
|
Funding
|
||||||||||||||||||||||||
| Interest Rates: |
Index
|
|||||||||||||||||||||||
|
Change from
|
Change from
|
Mismatches (1) | ||||||||||||||||||||||
|
Increase of
|
Increase of
|
Increase of
|
||||||||||||||||||||||
|
100 Basis
|
300 Basis
|
25 Basis
|
||||||||||||||||||||||
| Points | Points | Points | ||||||||||||||||||||||
| (Dollars in millions, except per share amounts) | $ | % | $ | % | $ | % | ||||||||||||||||||
|
Effect on Earnings
|
||||||||||||||||||||||||
|
Decrease in pre-tax net income before unrealized gains (losses)
on derivative and hedging activities
|
$ | (24 | ) | (4 | )% | $ | (32 | ) | (5 | )% | $ | (211 | ) | (33 | )% | |||||||||
|
Unrealized gains (losses) on derivative and hedging activities
|
472 | 119 | 818 | 206 | (22 | ) | (6 | ) | ||||||||||||||||
|
Increase/(decrease) in net income before taxes
|
$ | 448 | 180 | % | $ | 786 | 316 | % | $ | (233 | ) | (94 | )% | |||||||||||
|
Increase/(decrease) in diluted earnings per common share
|
$ | .85 | 278 | % | $ | 1.50 | 488 | % | $ | (.45 | ) | (145 | )% | |||||||||||
| Six Months Ended June 30, 2010 | ||||||||||||||||||||||||
|
Asset and
|
||||||||||||||||||||||||
|
Funding
|
||||||||||||||||||||||||
| Interest Rates: |
Index
|
|||||||||||||||||||||||
|
Change from
|
Change from
|
Mismatches (1) | ||||||||||||||||||||||
|
Increase of
|
Increase of
|
Increase of
|
||||||||||||||||||||||
|
100 Basis
|
300 Basis
|
25 Basis
|
||||||||||||||||||||||
| Points | Points | 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
|
$ | 4 | 1 | % | $ | 23 | 5 | % | $ | (204 | ) | (42 | )% | |||||||||||
|
Unrealized gains (losses) on derivative and hedging activities
|
207 | 47 | 197 | 44 | (51 | ) | (12 | ) | ||||||||||||||||
|
Increase/(decrease) in net income before taxes
|
$ | 211 | 23 | % | $ | 220 | 24 | % | $ | (255 | ) | (27 | )% | |||||||||||
|
Increase/(decrease) in diluted earnings per common share
|
$ | .40 | 37 | % | $ | .42 | 39 | % | $ | (.49 | ) | (45 | )% | |||||||||||
| (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. |
88
Table of Contents
| At June 30, 2011 | ||||||||||||||||||||
| 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
|
$ | 140,341 | $ | (671 | ) | — | % | $ | (1,348 | ) | (1 | )% | ||||||||
|
Private Education Loans
|
33,086 | — | — | — | — | |||||||||||||||
|
Other earning assets
|
11,443 | — | — | (1 | ) | — | ||||||||||||||
|
Other assets
|
10,378 | (561 | ) | (5 | ) | 977 | 9 | % | ||||||||||||
|
Total assets
|
$ | 195,248 | $ | (1,232 | ) | (1 | )% | $ | (372 | ) | — | % | ||||||||
|
Liabilities
|
||||||||||||||||||||
|
Interest — bearing liabilities
|
$ | 182,591 | $ | (749 | ) | — | % | $ | (2,068 | ) | (1 | )% | ||||||||
|
Other liabilities
|
3,814 | (513 | ) | (13 | ) | (313 | ) | (8 | ) | |||||||||||
|
Total liabilities
|
$ | 186,405 | $ | (1,262 | ) | (1 | )% | $ | (2,381 | ) | (1 | )% | ||||||||
| 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 | )% | ||||||||
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, due to the ability of some FFELP loans to earn Floor
Income, 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 three and six months ended June 30, 2011 and
2010, 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.
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
89
Table of Contents
primarily due to the impact of (i) our unhedged loans being
in a fixed-rate mode due to 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 rate liabilities and equity. 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 three months ended June 30,
2011, item (i) had a greater impact compared to the three
and six months ended June 30, 2010 due to a larger amount
of unhedged Floor Income in the current year period. The
increase in unrealized gains (losses) on derivatives and hedging
activities in both scenarios is primarily related to Floor
Income Contracts that do not qualify for GAAP hedge accounting
treatment and therefore are not offset by any
mark-to-market
of the economically hedged Floor Income.
Under the scenario in the tables above labeled “Asset and
Funding Index Mismatches,” the main driver of the decrease
in pre-tax income before unrealized gains (losses) on derivative
and hedging activities is the result of LIBOR-based debt funding
commercial paper-indexed assets. See “Asset and Liability
Funding Gap” of this Item 3 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 swap that hedge the mismatch between the
asset and funding indices.
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.
Asset and
Liability Funding Gap
The tables below present our assets and liabilities (funding)
arranged by underlying indices as of June 30, 2011. 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.
90
Table of Contents
GAAP-Basis
|
Frequency of
|
||||||||||||||
|
Index
|
Variable
|
Funding
|
||||||||||||
| (Dollars in billions) | Resets | Assets | Funding (1) | Gap | ||||||||||
|
3-month
Commercial paper
|
daily | $ | 133.7 | $ | — | $ | 133.7 | |||||||
|
3-month
Treasury bill
|
weekly | 7.7 | — | 7.7 | ||||||||||
|
Prime
|
annual | .8 | — | .8 | ||||||||||
|
Prime
|
quarterly | 5.2 | — | 5.2 | ||||||||||
|
Prime
|
monthly | 22.4 | — | 22.4 | ||||||||||
|
Prime
|
daily | — | 2.9 | (2.9 | ) | |||||||||
|
PLUS Index
|
annual | .5 | — | .5 | ||||||||||
|
3-month
LIBOR
|
daily | — | — | — | ||||||||||
|
3-month
LIBOR
|
quarterly | — | 125.5 | (125.5 | ) | |||||||||
|
1-month
LIBOR
|
monthly | 8.3 | 18.6 | (10.3 | ) | |||||||||
|
CMT/CPI Index
|
monthly/quarterly | — | 1.6 | (1.6 | ) | |||||||||
|
Non-Discrete
reset
(2)
|
monthly | — | 33.1 | (33.1 | ) | |||||||||
|
Non-Discrete
reset
(3)
|
daily/weekly | 11.3 | 2.5 | 8.8 | ||||||||||
|
Fixed
Rate
(4)
|
10.5 | 16.2 | (5.7 | ) | ||||||||||
|
Total
|
$ | 200.4 | $ | 200.4 | $ | — | ||||||||
| (1) | Funding includes all derivatives that qualify as hedges. | |
| (2) | Funding consists of auction rate securities, the ABCP Facilities, the ED Conduit Program Facility and FHLB — DM 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). |
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
3-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.
91
Table of Contents
“Core
Earnings” Basis
|
Index
|
Frequency of
|
Funding
|
||||||||||||
| (Dollars in billions) | Variable Resets | Assets | Funding (1) | Gap | ||||||||||
|
3-month
Commercial paper
|
daily | $ | 133.7 | $ | — | $ | 133.7 | |||||||
|
3-month
Treasury bill
|
weekly | 7.7 | 2.0 | 5.7 | ||||||||||
|
Prime
|
annual | .8 | — | .8 | ||||||||||
|
Prime
|
quarterly | 5.2 | 1.5 | 3.7 | ||||||||||
|
Prime
|
monthly | 22.4 | 6.5 | 15.9 | ||||||||||
|
Prime
|
daily | — | 2.9 | (2.9 | ) | |||||||||
|
PLUS Index
|
annual | .5 | — | .5 | ||||||||||
|
3-month
LIBOR
|
daily | — | 41.5 | (41.5 | ) | |||||||||
|
3-month
LIBOR
|
quarterly | — | 61.0 | (61.0 | ) | |||||||||
|
1-month
LIBOR
|
monthly | 8.3 | 25.4 | (17.1 | ) | |||||||||
|
1-month
LIBOR
|
daily | — | 9.0 | (9.0 | ) | |||||||||
|
Non-Discrete
reset
(2)
|
monthly | — | 33.1 | (33.1 | ) | |||||||||
|
Non-Discrete
reset
(3)
|
daily/weekly | 11.3 | 2.5 | 8.8 | ||||||||||
|
Fixed
Rate
(4)
|
6.7 | 11.2 | (4.5 | ) | ||||||||||
|
Total
|
$ | 196.6 | $ | 196.6 | $ | — | ||||||||
| (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, the ED Conduit Program Facility and FHLB — DM 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 and
quarterly reset
3-month
LIBOR to fund a large portion of our daily reset
3-month
commercial paper indexed assets. In addition, we use quarterly
reset
3-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 June 30, 2011, we
have approximately $87.4 billion of FFELP Loans indexed to
3-month
commercial paper that are funded with debt indexed to
3-month
LIBOR.
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Weighted
Average Life
The following table reflects the weighted average life for our
earning assets and liabilities at June 30, 2011.
|
Weighted Average
|
||||
| (Averages in Years) | Life | |||
|
Earning assets
|
||||
|
Student loans
|
7.6 | |||
|
Other loans
|
6.4 | |||
|
Cash and investments
|
.1 | |||
|
Total earning assets
|
7.2 | |||
|
Borrowings
|
||||
|
Short-term borrowings
|
.3 | |||
|
Long-term borrowings
|
7.1 | |||
|
Total borrowings
|
6.0 | |||
| Item 4. | 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 June 30, 2011. Based on
this evaluation, our Chief Executive Officer and Chief Financial
Officer, concluded that, as of June 30, 2011, 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 Exchange Act) occurred during the fiscal quarter ended
June 30, 2011 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
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| Item 1. | Legal Proceedings |
Mark A. Arthur et al. v. Sallie Mae, Inc.
As
previously disclosed, this class action suit involves
allegations made in U.S. District Court for the Western
District of Washington that we contacted consumers on their
cellular telephones via autodialer without their 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 are seeking
statutory damages, damages for willful violations,
attorneys’ fees, costs, and injunctive relief. We have
denied vigorously all claims asserted against us, but previously
agreed to a preliminary settlement of $19.5 million to
avoid the burden and expense of continued litigation. Subsequent
to reaching this preliminary settlement, we filed submissions
with the Court to advise that additional individuals were
omitted from the original notice list of class members.
On August 3, 2011, we reached an agreement in principle
through a memorandum of understanding with the Plaintiffs on
behalf of the settlement class, and we expect to formalize that
agreement and request Court approval during the next several
months. Under the memorandum of understanding, we have agreed to
increase the settlement fund to $24.15 million.
Rodriguez v. SLM Corporation et al.
As
previously disclosed, on December 17, 2007, plaintiffs
filed a complaint against us 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 did not identify the relief plaintiffs sought. We
recently agreed to settle this case, with the Court providing
preliminary approval on June 20, 2011, with final Court
approval expected on October 17, 2011. We do not expect the
settlement as currently proposed to have a material impact on
our financial position or our business.
We and our 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, we and our subsidiaries and affiliates receive
information and document requests from state attorneys general,
legislative committees and administrative agencies concerning
certain business practices. Our practice has been and continues
to be to cooperate with these bodies and to be responsive to any
such requests.
For a description of these items and other litigation to which
we are a party, see our 2010
Form 10-K.
| Item 1A. | Risk Factors |
There have been no material changes from the risk factors
previously disclosed in our Annual Report on
Form 10-K
for the year ended December 31, 2010, except as set forth
below.
Downgrades
of the credit rating of the United States of America may
materially adversely affect our business, financial condition
and results of operations.
The current U.S. debt ceiling debate in Congress has
increased the possibility of the credit-rating agencies
downgrading the U.S.’s credit rating. Various aspects of
our business may be affected by changes to the U.S.’s
credit rating. Given the unprecedented nature of events such as
these, we cannot estimate the extent to which such an action or
actions could materially adversely affect our liquidity, cash
flows and results of operations,
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Table of Contents
increase our borrowing costs, limit our access to the capital
markets or trigger other implications under certain
collateralized arrangements.
If the U.S.’s credit rating were to be downgraded our cost
of funds on new and certain existing asset-backed securities and
conduit facilities collateralized with FFELP Loans (“FFELP
ABS”) could increase; we could be required to increase the
amount of over-collateralization associated with newly issued
FFELP ABS and existing conduit facilities to maintain the AAA
credit ratings traditionally associated with these offerings and
facilities; and our ability to access
and/or
maintain existing FFELP conduit facilities and to efficiently
sell or refinance loans previously funded through these vehicles
could be adversely affected. For more information on our funding
and liquidity risk management practices and resources, see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and
Capital Resources — Funding and Liquidity Risk
Management” and “— Primary Sources of
Liquidity and Available Capacity” in our 2010
Form 10-K.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The following table provides information relating to our
purchase of shares of our common stock from April 1, 2011
through June 30, 2011:
|
Approximate Dollar
|
||||||||||||||||
|
Value of
|
||||||||||||||||
|
Shares That
|
||||||||||||||||
|
Total Number of
|
May Yet Be
|
|||||||||||||||
|
Shares Purchased
|
Purchased Under
|
|||||||||||||||
|
Total Number
|
Average Price
|
as Part of Publicly
|
Publicly Announced
|
|||||||||||||
|
of Shares
|
Paid per
|
Announced Plans
|
Plans or
|
|||||||||||||
| (Dollars and common shares in millions) | Purchased (1) | Share | or Programs (2) | Programs (2) | ||||||||||||
|
Period:
|
||||||||||||||||
|
April 1 — April 30, 2011
|
1.0 | $ | 16.33 | .7 | $ | 289.2 | ||||||||||
|
May 1 — May 31, 2011
|
4.3 | 16.33 | 4.0 | 223.1 | ||||||||||||
|
June 1 — June 30, 2011
|
5.2 | 16.22 | 4.9 | 144.1 | ||||||||||||
|
Total second-quarter 2011
|
10.5 | $ | 16.28 | 9.6 | ||||||||||||
| (1) | The total number of shares purchased includes: (i) shares purchased under the stock repurchase program discussed below, and (ii) shares of our common stock tendered to us to satisfy the exercise price in connection with cashless exercise of stock options, and tax withholding obligations in connection with exercise of stock options and vesting of restricted stock and restricted stock units. | |
| (2) | In April 2011, our board of directors authorized us to purchase up to $300 million of shares of our common stock in open market transactions, and terminated all previous authorizations. There is no expiration date related to this new program. |
The closing price of our common stock on the New York Stock
Exchange on June 30, 2011 was $16.81.
| Item 3. | Defaults upon Senior Securities |
Nothing to report.
| Item 4. | (Removed and Reserved). |
| Item 5. | Other Information |
Nothing to report.
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Table of Contents
| Item 6. | Exhibits |
The following exhibits are furnished or filed, as applicable:
| 10 | .1 | SLM Corporation Employee Stock Purchase Plan† | ||
| 12 | .1 | Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends | ||
| 31 | .1 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 31 | .2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
| 32 | .1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| 32 | .2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
| 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 |
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Table of Contents
SIGNATURES
Pursuant to the requirements 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.
SLM CORPORATION
(Registrant)
(Registrant)
| By: |
/s/
JONATHAN
C. CLARK
|
Jonathan C. Clark
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: August 5, 2011
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Table of Contents
GLOSSARY
Listed below are definitions of key terms that are used
throughout this document. See also APPENDIX A,
“FEDERAL FAMILY EDUCATION LOAN PROGRAM,” included in
SLM Corporation’s (the Company’s) 2010 Annual Report
on
Form 10-K,
filed with the Securities and Exchange Commission
(“SEC”) on February 28, 2011, 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 our
presentations with equity investors, credit rating agencies and
debt capital providers. 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 believe 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 11 — Segment Reporting” and
Item 2 “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.
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.
ED
— The U.S. Department of Education.
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
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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.
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.
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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.
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.
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
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Table of Contents
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 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.
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Part I. Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. (removed and Reserved)Item 5. Other InformationItem 6. Exhibits