e10vq
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2007 or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number:
001-13251
SLM Corporation
(Exact name of
registrant as specified in its charter)
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Delaware
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52-2013874
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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12061 Bluemont Way, Reston,
Virginia
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20190
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(Address of principal executive
offices)
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(Zip
Code)
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(703) 810-3000
(Registrants telephone
number, including area code)
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, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer 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
issuers classes of common stock, as of the latest
practicable date:
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Class
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Outstanding at April 30, 2007
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Voting common stock, $.20 par
value
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411,416,060 shares
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GLOSSARY
Listed below are definitions of key terms that are used
throughout this document.
Borrower Benefits Borrower Benefits are
financial incentives offered to borrowers who qualify based on
pre-determined qualifying factors, which are generally tied
directly to making on-time monthly payments. The impact of
Borrower Benefits is dependent on the estimate of the number of
borrowers who will eventually qualify for these benefits and the
amount of the financial benefit offered to the borrower. We
occasionally change Borrower Benefits programs in both amount
and qualification factors. These programmatic changes must be
reflected in the estimate of the Borrower Benefits discount.
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 pay 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 In accordance with
the Rules and Regulations of the Securities and Exchange
Commission (SEC), we prepare financial statements in
accordance with generally accepted accounting principles in the
United States of America (GAAP). In addition to
evaluating the Companys GAAP-based financial information,
management evaluates the Companys business segments on a
basis that, as allowed under the Financial Accounting Standards
Boards (FASB) Statement of Financial
Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related
Information, differs from GAAP. We refer to
managements basis of evaluating our segment results as
Core Earnings presentations for each business
segment and we refer to these performance measures in our
presentations with credit rating agencies and lenders. 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.
Our 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 maker.
Our Core Earnings performance measures are used in
developing our financial plans and tracking results, and also in
establishing corporate performance targets and determining
incentive compensation. Management believes this information
provides additional insight into the financial performance of
the Companys core business activities. Our Core
Earnings performance measures are not defined terms within
GAAP and may not be comparable to similarly titled measures
reported by other companies. Core Earnings net
income reflects only current period adjustments to GAAP net
income. Accordingly, the Companys Core
Earnings presentation does not represent another
comprehensive basis of accounting.
See NOTE 11 TO THE CONSOLIDATED FINANCIAL
STATEMENTS Segment Reporting and
MANAGEMENTS DISCUSSION AND ANALYSIS
BUSINESS SEGMENTS Limitations of Core
Earnings for further discussion of the differences
between Core Earnings and GAAP, as well as
reconciliations between Core Earnings and GAAP.
In prior filings with the SEC of SLM Corporations Annual
Report on
Form 10-K
and quarterly report on
Form 10-Q,
Core Earnings has been labeled as
Core net income or Managed net
income in certain instances.
Direct Loans Student loans originated
directly by ED under the FDLP.
1
ED The U.S. Department of Education.
Embedded Fixed Rate/Variable Rate Floor
Income Embedded Floor Income is Floor Income
(see definition below) that is earned on off-balance sheet
student loans that are in securitization trusts sponsored by us.
At the time of the securitization, the value of Embedded Fixed
Rate Floor Income is included in the initial valuation of the
Residual Interest (see definition below) and the gain or loss on
sale of the student loans. Embedded Floor Income is also
included in the quarterly fair value adjustments of the Residual
Interest.
Exceptional Performer (EP)
Designation The EP designation is determined by
ED in recognition of a servicer meeting certain performance
standards set by ED in servicing FFELP loans. Upon receiving the
EP designation, the EP servicer receives 99 percent
reimbursement on default claims on federally guaranteed student
loans for all loans serviced for a period of at least
270 days before the date of default and will no longer be
subject to the three percent Risk Sharing (see definition below)
on these loans. The EP servicer is entitled to receive this
benefit as long as it remains in compliance with the required
servicing standards, which are assessed on an annual and
quarterly basis through compliance audits and other criteria.
The annual assessment is in part based upon subjective factors
which alone may form the basis for an ED determination to
withdraw the designation. If the designation is withdrawn, the
three percent Risk Sharing may be applied retroactively to the
date of the occurrence that resulted in noncompliance.
FDLP The William D. Ford Federal Direct
Student Loan Program.
FFELP The Federal Family Education Loan
Program, formerly the Guaranteed Student Loan Program.
FFELP Consolidation Loans Under the Federal
Family Education Loan Program (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 note is considered a FFELP Consolidation
Loan. Typically a borrower may consolidate his student loans
only once unless the borrower has another eligible loan to
consolidate with the existing FFELP Consolidation Loan. The
borrower rate on a FFELP Consolidation Loan is fixed for the
term of the loan and is set by the weighted average interest
rate of the loans being consolidated, rounded up to the nearest
1/8th of a percent, not to exceed 8.25 percent. In low
interest rate environments, FFELP Consolidation Loans provide an
attractive refinancing opportunity to certain borrowers because
they allow borrowers to consolidate variable rate loans into a
long-term fixed rate loan. Holders of FFELP Consolidation Loans
are eligible to earn interest under the Special Allowance
Payment (SAP) formula (see definition below).
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 We refer to Floor
Income (see definition below) associated with student loans
whose borrower rate is fixed to term (primarily FFELP
Consolidation Loans and Stafford Loans originated on or after
July 1, 2006) as Fixed Rate Floor Income.
Floor Income FFELP student loans generally
earn interest at the higher of a floating rate based on the
Special Allowance Payment or SAP formula (see definition below)
set by ED and the borrower rate, which is fixed over a period of
time. We generally finance our student loan portfolio with
floating rate debt over all interest rate levels. In low
and/or
declining interest rate environments, when the fixed borrower
rate is higher than the rate produced by the SAP formula, our
student loans earn at a fixed rate while the interest on our
floating rate debt continues to decline. In these interest rate
environments, we earn additional spread income that we refer to
as Floor Income. Depending on the type of the 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 new legislation enacted in 2006, lenders are
required to rebate Floor Income to ED for all new FFELP loans
disbursed on or after April 1, 2006.
2
The following example shows the mechanics of Floor Income for a
typical fixed rate FFELP Consolidation Loan (with a commercial
paper-based SAP spread of 2.64 percent):
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Fixed Borrower Rate
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7.25
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%
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SAP Spread over Commercial Paper
Rate
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(2.64
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)%
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Floor Strike
Rate(1)
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4.61
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%
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(1) |
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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.
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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. The difference between the fixed borrower
rate and the lenders expected yield based on the SAP
formula is referred to as Floor Income. Our student loan assets
are generally funded with floating rate debt, so when student
loans are earning at the fixed borrower rate, decreases in
interest rates may increase Floor Income.
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Graphic
Depiction of Floor Income:
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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 SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and each
quarter we must record the change in fair value of these
contracts through income.
GSE The Student Loan Marketing Association
was a federally chartered government-sponsored enterprise and
wholly owned subsidiary of SLM Corporation that was dissolved
under the terms of the Privatization Act (see definition below)
on December 29, 2004.
3
HEA The Higher Education Act of 1965, as
amended.
Managed Basis We generally analyze the
performance of our student loan portfolio on a Managed Basis,
under which we view both on-balance sheet student loans and
off-balance sheet student loans owned by the securitization
trusts as a single portfolio, and the related on-balance sheet
financings are combined with off-balance sheet debt. When the
term Managed is capitalized in this document, it is referring to
Managed Basis.
Preferred Lender List Most higher education
institutions select a small number of lenders to recommend to
their students and parents. This recommended list is referred to
as the Preferred Lender List.
Preferred Channel Originations Preferred
Channel Originations are comprised of: 1) student loans
that are originated by lenders with forward purchase commitment
agreements with Sallie Mae and are committed for sale to Sallie
Mae, such that we either own them from inception or, in most
cases, acquire them soon after origination, and 2) loans
that are originated by internally marketed Sallie Mae brands.
Private Education Loans Education loans to
students or parents of students that are not guaranteed or
reinsured under the FFELP or any other federal or private
student loan program. Private Education Loans include loans for
traditional higher education, undergraduate and graduate
degrees, and for alternative education, such as career training,
private kindergarten through secondary education schools and
tutorial schools. Traditional higher education loans have
repayment terms similar to FFELP loans, whereby repayments begin
after the borrower leaves school. Repayment for alternative
education or career training loans generally begins immediately.
Privatization Act The Student Loan Marketing
Association Reorganization Act of 1996.
Reconciliation Legislation The Higher
Education Reconciliation Act of 2005, which reauthorized the
student loan programs of the HEA and generally became effective
as of July 1, 2006.
Residual Interest When we securitize student
loans, we retain the right to receive cash flows from the
student loans sold to trusts 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
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 at the end of each subsequent quarter.
Retained Interest The Retained Interest
includes the Residual Interest (defined above) and servicing
rights (as the Company retains the servicing responsibilities).
Risk Sharing When a FFELP loan 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 generally must absorb the remaining three percent not
guaranteed as a Risk Sharing loss on the loan. FFELP student
loans originated after October 1, 1993 are subject to Risk
Sharing on loan default claim payments unless the default
results from the borrowers death, disability or
bankruptcy. FFELP loans serviced by a servicer that has EP
designation (see definition above) from ED are subject to
one-percent Risk Sharing for claims filed on or after
July 1, 2006.
Special Allowance Payment (SAP)
FFELP student loans originated prior to April 1, 2006
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 loans 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.
4
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.
Title IV Programs and Title IV
Loans Student loan programs created under
Title IV of the HEA, including the FFELP and the FDLP, and
student loans originated under those programs, respectively.
Variable Rate Floor Income For FFELP Stafford
student loans whose borrower interest rate resets annually on
July 1, we may earn Floor Income or Embedded Floor Income
(see definitions above) based on a calculation of the difference
between the borrower rate and the then current interest rate. We
refer to this as Variable Rate Floor Income because Floor Income
is earned only through the next reset date.
Wholesale Consolidation Channel During 2006,
we implemented a new loan acquisition strategy under which we
began purchasing a significant amount of FFELP Consolidation
Loans, primarily via the spot market, which augments our
traditional FFELP Consolidation Loan origination process. We
refer to this new loan acquisition strategy as our Wholesale
Consolidation Channel. FFELP Consolidation Loans acquired
through this channel are considered incremental volume to our
core acquisition channels, which are focused on the retail
marketplace with an emphasis on our brand strategy.
Wind-Down The dissolution of the GSE under
the terms of the Privatization Act (see definitions above).
5
SLM
CORPORATION
FORM 10-Q
INDEX
March 31, 2007
6
PART I. FINANCIAL
INFORMATION
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Item 1.
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Financial
Statements
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SLM
CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands, except per share
amounts)
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March 31,
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December 31,
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2007
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2006
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(Unaudited)
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Assets
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FFELP Stafford and Other Student
Loans (net of allowance for losses of $10,192 and $8,701,
respectively)
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$
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28,561,670
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$
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24,840,464
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FFELP Consolidation Loans (net of
allowance for losses of $12,087 and $11,614, respectively)
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66,170,098
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61,324,008
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|
Private Education Loans (net of
allowance for losses of $369,072 and $308,346, respectively)
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9,849,481
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|
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9,755,289
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|
Other loans (net of allowance for
losses of $19,803 and $20,394, respectively)
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1,350,416
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1,308,832
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Investments
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Available-for-sale
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2,342,845
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2,464,121
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Other
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94,215
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99,330
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|
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Total investments
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|
2,437,060
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2,563,451
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Cash and cash equivalents
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|
3,679,108
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2,621,222
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Restricted cash and investments
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3,719,020
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3,423,326
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|
Retained Interest in off-balance
sheet securitized loans
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3,643,322
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3,341,591
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Goodwill and acquired intangible
assets, net
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1,364,016
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1,371,606
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Other assets
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6,102,275
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5,585,943
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|
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Total assets
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$
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126,876,466
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$
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116,135,732
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Liabilities
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Short-term borrowings
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$
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4,428,980
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$
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3,528,263
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Long-term borrowings
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114,070,797
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104,558,531
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Other liabilities
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3,990,878
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3,679,781
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Total liabilities
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122,490,655
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111,766,575
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Commitments and
contingencies
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Minority interest in
subsidiaries
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9,029
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9,115
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Stockholders
equity
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Preferred stock, par value
$.20 per share, 20,000 shares authorized;
Series A: 3,300 and 3,300 shares issued, respectively,
at stated value of $50 per share; Series B: 4,000 and
4,000 shares issued, respectively, at stated value of
$100 per share
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565,000
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565,000
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|
Common stock, par value
$.20 per share, 1,125,000 shares authorized; 434,587
and 433,113 shares issued, respectively
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86,918
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|
|
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86,623
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|
Additional paid-in capital
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2,638,334
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2,565,211
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|
Accumulated other comprehensive
income (net of tax of $158,417 and $183,684, respectively)
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300,884
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349,111
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Retained earnings
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|
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1,833,359
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|
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1,834,718
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Stockholders equity before
treasury stock
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5,424,495
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|
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5,400,663
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Common stock held in treasury:
22,650 and 22,496 shares, respectively
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1,047,713
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|
1,040,621
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|
|
|
|
|
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|
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|
Total stockholders equity
|
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4,376,782
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|
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4,360,042
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|
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Total liabilities and
stockholders equity
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|
$
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126,876,466
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$
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116,135,732
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See accompanying notes to consolidated financial statements.
7
SLM
CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands, except per share
amounts)
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Three Months Ended
|
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March 31,
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2007
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2006
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(Unaudited)
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(Unaudited)
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|
|
Interest income:
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FFELP Stafford and Other Student
Loans
|
|
$
|
450,762
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$
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298,500
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|
FFELP Consolidation Loans
|
|
|
1,014,846
|
|
|
|
821,335
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|
Private Education Loans
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|
|
338,421
|
|
|
|
241,353
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|
Other loans
|
|
|
27,973
|
|
|
|
23,307
|
|
Cash and investments
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|
|
113,904
|
|
|
|
95,810
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|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
1,945,906
|
|
|
|
1,480,305
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|
Total interest expense
|
|
|
1,532,090
|
|
|
|
1,092,784
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
413,816
|
|
|
|
387,521
|
|
Less: provisions for losses
|
|
|
150,330
|
|
|
|
60,319
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provisions for losses
|
|
|
263,486
|
|
|
|
327,202
|
|
|
|
|
|
|
|
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|
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Other income:
|
|
|
|
|
|
|
|
|
Gains on student loan
securitizations
|
|
|
367,300
|
|
|
|
30,023
|
|
Servicing and securitization
revenue
|
|
|
251,938
|
|
|
|
98,931
|
|
Losses on securities, net
|
|
|
(30,967
|
)
|
|
|
(2,948
|
)
|
Gains (losses) on derivative and
hedging activities, net
|
|
|
(356,969
|
)
|
|
|
(86,739
|
)
|
Guarantor servicing fees
|
|
|
39,241
|
|
|
|
26,907
|
|
Debt management fees
|
|
|
87,322
|
|
|
|
91,612
|
|
Collections revenue
|
|
|
65,562
|
|
|
|
56,681
|
|
Other
|
|
|
96,433
|
|
|
|
71,376
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
519,860
|
|
|
|
285,843
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
186,350
|
|
|
|
175,340
|
|
Other
|
|
|
169,824
|
|
|
|
147,969
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
356,174
|
|
|
|
323,309
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
minority interest in net earnings of subsidiaries
|
|
|
427,172
|
|
|
|
289,736
|
|
Income taxes
|
|
|
310,014
|
|
|
|
137,045
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest in
net earnings of subsidiaries
|
|
|
117,158
|
|
|
|
152,691
|
|
Minority interest in net earnings
of subsidiaries
|
|
|
1,005
|
|
|
|
1,090
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
116,153
|
|
|
|
151,601
|
|
Preferred stock dividends
|
|
|
9,093
|
|
|
|
8,301
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common
stock
|
|
$
|
107,060
|
|
|
$
|
143,300
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
.26
|
|
|
$
|
.35
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding
|
|
|
411,040
|
|
|
|
412,675
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
.26
|
|
|
$
|
.34
|
|
|
|
|
|
|
|
|
|
|
Average common and common
equivalent shares outstanding
|
|
|
418,449
|
|
|
|
422,974
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share
|
|
$
|
.25
|
|
|
$
|
.22
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
8
SLM
CORPORATION
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
|
|
|
|
Shares
|
|
|
Issued
|
|
|
Treasury
|
|
|
Outstanding
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Stock
|
|
|
Equity
|
|
|
Balance at December 31,
2005
|
|
|
7,300,000
|
|
|
|
426,483,527
|
|
|
|
(13,346,717
|
)
|
|
|
413,136,810
|
|
|
$
|
565,000
|
|
|
$
|
85,297
|
|
|
$
|
2,233,647
|
|
|
$
|
367,910
|
|
|
$
|
1,111,743
|
|
|
$
|
(572,172
|
)
|
|
$
|
3,791,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151,601
|
|
|
|
|
|
|
|
151,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of
tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses)
on investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,950
|
)
|
|
|
|
|
|
|
|
|
|
|
(44,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses)
on derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,531
|
|
|
|
|
|
|
|
|
|
|
|
5,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock ($.22 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(91,473
|
)
|
|
|
|
|
|
|
(91,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, series A
($.87 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,875
|
)
|
|
|
|
|
|
|
(2,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, series B
($1.30 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,267
|
)
|
|
|
|
|
|
|
(5,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares
|
|
|
|
|
|
|
2,845,835
|
|
|
|
46,002
|
|
|
|
2,891,837
|
|
|
|
|
|
|
|
569
|
|
|
|
83,036
|
|
|
|
|
|
|
|
|
|
|
|
2,568
|
|
|
|
86,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock issuance costs and
related amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159
|
|
|
|
|
|
|
|
(159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit related to employee
stock option and purchase plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity forwards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise cost, cash
|
|
|
|
|
|
|
|
|
|
|
(2,447,832
|
)
|
|
|
(2,447,832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(133,994
|
)
|
|
|
(133,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(806
|
)
|
|
|
(806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit plans
|
|
|
|
|
|
|
|
|
|
|
(850,608
|
)
|
|
|
(850,608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,852
|
)
|
|
|
(47,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31,
2006
|
|
|
7,300,000
|
|
|
|
429,329,362
|
|
|
|
(16,599,155
|
)
|
|
|
412,730,207
|
|
|
$
|
565,000
|
|
|
$
|
85,866
|
|
|
$
|
2,364,252
|
|
|
$
|
328,496
|
|
|
$
|
1,163,570
|
|
|
$
|
(752,256
|
)
|
|
$
|
3,754,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
9
SLM
CORPORATION
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
|
|
|
|
Shares
|
|
|
Issued
|
|
|
Treasury
|
|
|
Outstanding
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Income (Losses)
|
|
|
Earnings
|
|
|
Stock
|
|
|
Equity
|
|
|
Balance at December 31,
2006
|
|
|
7,300,000
|
|
|
|
433,112,982
|
|
|
|
(22,496,170
|
)
|
|
|
410,616,812
|
|
|
$
|
565,000
|
|
|
$
|
86,623
|
|
|
$
|
2,565,211
|
|
|
$
|
349,111
|
|
|
$
|
1,834,718
|
|
|
$
|
(1,040,621
|
)
|
|
$
|
4,360,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,153
|
|
|
|
|
|
|
|
116,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of
tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses)
on investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,188
|
)
|
|
|
|
|
|
|
|
|
|
|
(48,188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses)
on derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
483
|
|
|
|
|
|
|
|
|
|
|
|
483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans
adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(522
|
)
|
|
|
|
|
|
|
|
|
|
|
(522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock ($.25 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(102,658
|
)
|
|
|
|
|
|
|
(102,658
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, series A
($.87 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,875
|
)
|
|
|
|
|
|
|
(2,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, series B
($1.52 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,058
|
)
|
|
|
|
|
|
|
(6,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares
|
|
|
|
|
|
|
1,473,681
|
|
|
|
35,123
|
|
|
|
1,508,804
|
|
|
|
|
|
|
|
295
|
|
|
|
47,420
|
|
|
|
|
|
|
|
|
|
|
|
1,574
|
|
|
|
49,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock issuance costs and
related amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit related to employee
stock option and purchase plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,761
|
)
|
|
|
|
|
|
|
(5,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit plans
|
|
|
|
|
|
|
|
|
|
|
(188,919
|
)
|
|
|
(188,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,666
|
)
|
|
|
(8,666
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31,
2007
|
|
|
7,300,000
|
|
|
|
434,586,663
|
|
|
|
(22,649,966
|
)
|
|
|
411,936,697
|
|
|
$
|
565,000
|
|
|
$
|
86,918
|
|
|
$
|
2,638,334
|
|
|
$
|
300,884
|
|
|
$
|
1,833,359
|
|
|
$
|
(1,047,713
|
)
|
|
$
|
4,376,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
10
SLM
CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
|
|
|
Restated
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
116,153
|
|
|
$
|
151,601
|
|
Adjustments to reconcile net income
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Gains on student loan
securitizations
|
|
|
(367,300
|
)
|
|
|
(30,023
|
)
|
Losses on securities, net
|
|
|
30,967
|
|
|
|
2,948
|
|
Stock-based compensation cost
|
|
|
26,101
|
|
|
|
22,768
|
|
Unrealized (gains)/losses on
derivative and hedging activities, excluding equity forwards
|
|
|
(80,240
|
)
|
|
|
(83,332
|
)
|
Unrealized (gains)/losses on
derivative and hedging activities equity forwards
|
|
|
412,206
|
|
|
|
122,411
|
|
Provisions for losses
|
|
|
150,330
|
|
|
|
60,319
|
|
Minority interest, net
|
|
|
(1,609
|
)
|
|
|
(1,674
|
)
|
Mortgage loans originated
|
|
|
(226,208
|
)
|
|
|
(349,332
|
)
|
Proceeds from sales of mortgage
loans
|
|
|
250,156
|
|
|
|
368,008
|
|
Decrease (increase) in restricted
cash-other
|
|
|
22,202
|
|
|
|
(63,629
|
)
|
(Increase) in accrued interest
receivable
|
|
|
(350,454
|
)
|
|
|
(233,427
|
)
|
Increase in accrued interest payable
|
|
|
107,183
|
|
|
|
30,253
|
|
Adjustment for non-cash
(income)/loss related to Retained Interest
|
|
|
(67,836
|
)
|
|
|
52,524
|
|
(Increase) in other assets,
goodwill and acquired intangible assets, net
|
|
|
(29,291
|
)
|
|
|
(66,988
|
)
|
Increase (decrease) in other
liabilities
|
|
|
197,456
|
|
|
|
(193,826
|
)
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
73,663
|
|
|
|
(363,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
|
189,816
|
|
|
|
(211,399
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Student loans acquired
|
|
|
(12,278,480
|
)
|
|
|
(8,322,746
|
)
|
Loans purchased from securitized
trusts (primarily loan consolidations)
|
|
|
(1,347,297
|
)
|
|
|
(1,338,498
|
)
|
Reduction of student loans:
|
|
|
|
|
|
|
|
|
Installment payments
|
|
|
2,900,029
|
|
|
|
2,494,862
|
|
Proceeds from securitization of
student loans treated as sales
|
|
|
1,976,599
|
|
|
|
7,985,275
|
|
Proceeds from sales of student loans
|
|
|
4,184
|
|
|
|
9,214
|
|
Other loans originated
|
|
|
(965,223
|
)
|
|
|
(289,585
|
)
|
Other loans repaid
|
|
|
897,602
|
|
|
|
295,396
|
|
Other investing activities, net
|
|
|
(58,236
|
)
|
|
|
(33,065
|
)
|
Purchases of
available-for-sale
securities
|
|
|
(15,448,651
|
)
|
|
|
(10,263,898
|
)
|
Proceeds from sales of
available-for-sale
securities
|
|
|
73,143
|
|
|
|
|
|
Proceeds from maturities of
available-for-sale
securities
|
|
|
15,567,592
|
|
|
|
10,811,460
|
|
Purchases of
held-to-maturity
and other securities
|
|
|
(540
|
)
|
|
|
(235,804
|
)
|
Proceeds from maturities of
held-to-maturity
securities and other securities
|
|
|
7,065
|
|
|
|
176,344
|
|
(Increase) decrease in restricted
cash on-balance sheet trusts
|
|
|
(379,218
|
)
|
|
|
100,961
|
|
Return of investment from Retained
Interest
|
|
|
62,455
|
|
|
|
36,580
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
investing activities
|
|
|
(8,988,976
|
)
|
|
|
1,426,496
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Short-term borrowings issued
|
|
|
1,204,049
|
|
|
|
15,290,752
|
|
Short-term borrowings repaid
|
|
|
(957,381
|
)
|
|
|
(15,297,685
|
)
|
Long-term borrowings issued
|
|
|
1,567,602
|
|
|
|
1,653,839
|
|
Long-term borrowings repaid
|
|
|
(1,312,003
|
)
|
|
|
(1,763,784
|
)
|
Borrowings collateralized by loans
in trust issued
|
|
|
11,203,950
|
|
|
|
|
|
Borrowings collateralized by loans
in trust activity
|
|
|
(1,638,925
|
)
|
|
|
(1,082,549
|
)
|
Other financing activities, net
|
|
|
(8,395
|
)
|
|
|
(22,681
|
)
|
Excess tax benefit from the
exercise of stock-based awards
|
|
|
4,331
|
|
|
|
17,108
|
|
Common stock issued
|
|
|
35,423
|
|
|
|
71,942
|
|
Net settlements on equity forward
contracts
|
|
|
(121,348
|
)
|
|
|
(13,855
|
)
|
Common stock repurchased
|
|
|
(8,666
|
)
|
|
|
(181,846
|
)
|
Common dividends paid
|
|
|
(102,658
|
)
|
|
|
(91,473
|
)
|
Preferred dividends paid
|
|
|
(8,933
|
)
|
|
|
(8,142
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
9,857,046
|
|
|
|
(1,428,374
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
1,057,886
|
|
|
|
(213,277
|
)
|
Cash and cash equivalents at
beginning of period
|
|
|
2,621,222
|
|
|
|
2,498,655
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
3,679,108
|
|
|
$
|
2,285,378
|
|
|
|
|
|
|
|
|
|
|
Cash disbursements made for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,477,775
|
|
|
$
|
1,022,758
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
159,962
|
|
|
$
|
148,597
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
11
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 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 (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. 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 months
ended March 31, 2007 are not necessarily indicative of the
results for the year ending December 31, 2007. The
consolidated balance sheet at December 31, 2006, as
presented, was derived from the audited financial statements
included in the Companys Annual Report on
Form 10-K
for the period ended December 31, 2006. These unaudited
financial statements should be read in conjunction with the
audited financial statements and related notes included in the
Companys 2006 Annual Report on
Form 10-K.
Reclassifications
Certain reclassifications have been made to the balances as of
and for the three months ended March 31, 2006 to be
consistent with classifications adopted for 2007.
Restatement
of Quarterly Consolidated Statements of Cash Flows
(unaudited)
The Company restated its 2006 quarterly consolidated statements
of cash flows as more fully described within the Companys
2006 Annual Report on
Form 10-K
at Note 2, Significant Accounting
Policies Statement of Cash Flows
Restatement of the Consolidated Statements of Cash Flows
and Note 21, Restatement of Quarterly Consolidated
Statements of Cash Flows (unaudited). The restatements
solely affected the classification of items in operating,
investing and financing activities, and had no impact on the net
increase (decrease) in cash and cash equivalents set forth in
the consolidated statements of cash flows for any of the
previously reported periods. The restatements did not affect the
Companys consolidated balance sheets, consolidated
statements of income or consolidated statements of changes in
stockholders equity. Accordingly, the Companys
historical revenues, net income, earnings per share, total
assets and total stockholders equity remain unchanged.
Recently
Issued Accounting Pronouncements
The Fair
Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115
In February 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 159, The Fair Value
Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115. This statement permits entities to choose to
measure many financial instruments and certain other items at
fair value (on an instrument by instrument basis) improving
financial reporting by providing entities with the opportunity
to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to
apply complex hedge accounting provisions. Most recognized
financial assets and liabilities are eligible items for the
measurement option established by the statement. There are a few
exceptions, including an investment in a subsidiary or an
12
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
1. |
Significant Accounting Policies (Continued)
|
interest in a variable interest entity that is required to be
consolidated, certain obligations related to post-employment
benefits, assets or liabilities recognized under leases, various
deposits and financial instruments classified as
shareholders equity. A business entity shall report
unrealized gains and losses on items for which the fair value
option has been elected in earnings at each reporting date. The
Company is currently evaluating the impact of this standard on
its financial statements. The statement will be effective
beginning January 1, 2008.
Fair
Value Measurements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This statement is effective
for financial statements issued for fiscal years beginning after
November 15, 2007. This statement defines fair value,
establishes a framework for measuring fair value within GAAP,
and expands disclosures about fair value measurements. This
statement applies to other accounting pronouncements that
require or permit fair value measurements. Accordingly, this
statement does not change which types of instruments are carried
at fair value, but rather establishes the framework for
measuring fair value. The Company is currently evaluating the
potential impact of SFAS No. 157 on its financial
statements.
Accounting
for Servicing of Financial Assets
In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets, which
amends SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities. This statement was effective for the Company
beginning January 1, 2007.
This statement:
|
|
|
|
|
Requires an entity to recognize a servicing asset or liability
each time it undertakes an obligation to service a financial
asset as the result of (i) a transfer of the
servicers financial assets that meet the requirement for
sale accounting; (ii) a transfer of the servicers
financial assets to a qualifying special-purpose entity in a
guaranteed mortgage securitization in which the transferor
retains all of the resulting securities and classifies them as
either
available-for-sale
or trading securities in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities; or (iii) an acquisition or assumption of
an obligation to service a financial asset that does not relate
to financial assets of the servicer or its consolidated
affiliates.
|
|
|
|
Requires all separately recognized servicing assets or
liabilities to be initially measured at fair value, if
practicable.
|
|
|
|
Permits an entity to either (i) amortize servicing assets
or liabilities in proportion to and over the period of estimated
net servicing income or loss and assess servicing assets or
liabilities for impairment or increased obligation based on fair
value at each reporting date (amortization method); or
(ii) measure servicing assets or liabilities at fair value
at each reporting date and report changes in fair value in
earnings in the period in which the changes occur (fair value
measurement method). The method must be chosen for each
separately recognized class of servicing asset or liability.
|
|
|
|
At its initial adoption, permits a one-time reclassification of
available-for-sale
securities to trading securities by entities with recognized
servicing rights, without calling into question the treatment of
other
available-for-sale
securities under SFAS No. 115, provided that the
available-for-sale
securities are identified in some manner as offsetting the
entitys exposure to changes in fair value of servicing
assets or liabilities that a servicer elects to subsequently
measure at fair value.
|
13
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
1. |
Significant Accounting Policies (Continued)
|
|
|
|
|
|
Requires separate presentation of servicing assets and
liabilities subsequently measured at fair value in the statement
of financial position and additional disclosures for all
separately recognized servicing assets and liabilities.
|
The adoption of SFAS No. 156 did not have a material
impact on the Companys financial statements as the Company
did not elect to carry its servicing rights at fair value
through earnings.
Accounting
for Certain Hybrid Financial Instruments
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments
which amends SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and
SFAS No. 140. This statement was effective for the
Company beginning January 1, 2007.
This statement:
|
|
|
|
|
Requires that all interests in securitized financial assets be
evaluated to determine if the interests are free standing
derivatives or if the interests contain an embedded derivative;
|
|
|
|
Clarifies which interest-only strips and principal-only strips
are exempt from the requirements of SFAS No. 133;
|
|
|
|
Clarifies that the concentrations of credit risk in the form of
subordination are not an embedded derivative; and
|
|
|
|
Allows a hybrid financial instrument containing an embedded
derivative that would have required bifurcation under
SFAS No. 133 to be measured at fair value as one
instrument on a case by case basis;
|
|
|
|
Amends SFAS Statement No. 140 to eliminate the
prohibition of a qualifying special purpose entity from holding
a derivative financial instrument that pertains to beneficial
interests other than another derivative financial instrument.
|
In January 2007, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, Implementation Issues No. B39,
Embedded Derivatives: Application of Paragraph 13(b)
to Call Options That Are Exercisable Only by the Debtor
(Amended), and No. B40, Embedded Derivatives:
Application of Paragraph 13(b) to Securitized Interests in
Prepayable Financial Assets. The guidance clarifies
various aspects of SFAS No. 155 and will require the
Company to either (1) separately record embedded
derivatives that may reside in the Companys Residual
Interest and on-balance sheet securitization debt, or
(2) if embedded derivatives exist that require bifurcation,
mark-to-market
through income changes in the fair value of the Companys
Residual Interest and on-balance sheet securitization debt in
their entirety. This standard is prospectively applied in 2007
for new securitizations and does not apply to the Companys
existing Residual Interest or on-balance sheet securitization
debt that settled prior to 2007.
If material embedded derivatives exist within the Residual
Interest that require bifurcation, the Company will most likely
elect to carry the entire Residual Interest at fair value with
subsequent changes in fair value recorded in earnings. This
could have a material impact on earnings, as prior to the
adoption of SFAS No. 155, changes in the fair value of
these Residual Interests would have been recorded through other
comprehensive income (except for impairment which is recorded
through income). The Company elected this option related to the
Private Education Loan securitization which settled in the first
quarter of 2007 and as a result, recorded a $79 million
unrealized gain through earnings that, prior to the adoption of
SFAS No. 155, would have been recorded through other
comprehensive income. The Company has concluded, based on its
current
14
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
1. |
Significant Accounting Policies (Continued)
|
securitization deal structures, that its on-balance sheet
securitization debt will not be materially impacted upon the
adoption of SFAS No. 155 as embedded derivatives will
not have a material value. Accordingly, there was no impact in
the first quarter of 2007.
|
|
2.
|
Allowance
for Student Loan Losses
|
The Companys provisions for loan losses represent the
periodic expense of maintaining an allowance sufficient to
absorb losses, net of recoveries, inherent in the student loan
portfolios. The evaluation of the provisions for student loan
losses is inherently subjective as it requires material
estimates that may be susceptible to significant changes. The
Company believes that the allowance for student loan losses is
appropriate to cover probable losses in the student loan
portfolios.
The following table summarizes changes in the allowance for
student loan losses for both the Private Education Loan and
federally insured student loan portfolios for the three months
ended March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Balance at beginning of
period
|
|
$
|
328,661
|
|
|
$
|
219,062
|
|
Provisions for student loan losses
|
|
|
147,195
|
|
|
|
57,799
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(85,812
|
)
|
|
|
(33,388
|
)
|
Recoveries
|
|
|
6,790
|
|
|
|
6,389
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(79,022
|
)
|
|
|
(26,999
|
)
|
|
|
|
|
|
|
|
|
|
Balance before reductions for
student loan sales and securitizations
|
|
|
396,834
|
|
|
|
249,862
|
|
Reductions for student loan sales
and securitizations
|
|
|
(5,483
|
)
|
|
|
(2,185
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of
period
|
|
$
|
391,351
|
|
|
$
|
247,677
|
|
|
|
|
|
|
|
|
|
|
In addition to the provisions for student loan losses,
provisions for other losses totaled $3 million and
$2 million for the three months ended March 31, 2007
and 2006, respectively.
15
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
2. |
Allowance for Student Loan Losses (Continued)
|
The following table summarizes changes in the allowance for
student loan losses for Private Education Loans for the three
months ended March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Balance at beginning of period
|
|
$
|
308,346
|
|
|
$
|
204,112
|
|
Provision for Private Education
Loan losses
|
|
|
141,627
|
|
|
|
54,372
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(81,911
|
)
|
|
|
(32,726
|
)
|
Recoveries
|
|
|
6,790
|
|
|
|
6,389
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(75,121
|
)
|
|
|
(26,337
|
)
|
|
|
|
|
|
|
|
|
|
Balance before securitization of
Private Education Loans
|
|
|
374,852
|
|
|
|
232,147
|
|
Reduction for securitization of
Private Education Loans
|
|
|
(5,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
369,072
|
|
|
$
|
232,147
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs as a percentage of
average loans in repayment (annualized)
|
|
|
6.27
|
%
|
|
|
2.83
|
%
|
Allowance as a percentage of the
ending total loan balance
|
|
|
3.61
|
%
|
|
|
2.43
|
%
|
Allowance as a percentage of
ending loans in repayment
|
|
|
7.58
|
%
|
|
|
5.96
|
%
|
Allowance coverage of net
charge-offs (annualized)
|
|
|
1.21
|
|
|
|
2.17
|
|
Average total loans
|
|
$
|
11,354,166
|
|
|
$
|
9,015,727
|
|
Ending total loans
|
|
$
|
10,218,554
|
|
|
$
|
9,543,311
|
|
Average loans in repayment
|
|
$
|
4,859,260
|
|
|
$
|
3,780,100
|
|
Ending loans in repayment
|
|
$
|
4,867,215
|
|
|
$
|
3,897,945
|
|
16
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
2. |
Allowance for Student Loan Losses (Continued)
|
Delinquencies
The table below presents the Companys Private Education
Loan delinquency trends as of March 31, 2007,
December 31, 2006, and March 31, 2006. Delinquencies
have the potential to adversely impact earnings if the account
charges off and results in increased servicing and collection
costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
(Dollars in millions)
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
5,220
|
|
|
|
|
|
|
$
|
5,218
|
|
|
|
|
|
|
$
|
5,573
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
494
|
|
|
|
|
|
|
|
359
|
|
|
|
|
|
|
|
412
|
|
|
|
|
|
Loans in repayment and percentage
of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
4,260
|
|
|
|
87.5
|
%
|
|
|
4,214
|
|
|
|
86.9
|
%
|
|
|
3,487
|
|
|
|
89.4
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
184
|
|
|
|
3.8
|
|
|
|
250
|
|
|
|
5.1
|
|
|
|
170
|
|
|
|
4.4
|
|
Loans delinquent
61-90 days(3)
|
|
|
131
|
|
|
|
2.7
|
|
|
|
132
|
|
|
|
2.7
|
|
|
|
106
|
|
|
|
2.7
|
|
Loans delinquent greater than
90 days(3)
|
|
|
292
|
|
|
|
6.0
|
|
|
|
255
|
|
|
|
5.3
|
|
|
|
135
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans in
repayment
|
|
|
4,867
|
|
|
|
100
|
%
|
|
|
4,851
|
|
|
|
100
|
%
|
|
|
3,898
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans,
gross
|
|
|
10,581
|
|
|
|
|
|
|
|
10,428
|
|
|
|
|
|
|
|
9,883
|
|
|
|
|
|
Private Education Loan unamortized
discount
|
|
|
(363
|
)
|
|
|
|
|
|
|
(365
|
)
|
|
|
|
|
|
|
(340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans
|
|
|
10,218
|
|
|
|
|
|
|
|
10,063
|
|
|
|
|
|
|
|
9,543
|
|
|
|
|
|
Private Education Loan allowance
for losses
|
|
|
(369
|
)
|
|
|
|
|
|
|
(308
|
)
|
|
|
|
|
|
|
(232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Education Loans, net
|
|
$
|
9,849
|
|
|
|
|
|
|
$
|
9,755
|
|
|
|
|
|
|
$
|
9,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Private Education
Loans in repayment
|
|
|
46.0
|
%
|
|
|
|
|
|
|
46.5
|
%
|
|
|
|
|
|
|
39.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of
Private
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Education Loans in repayment
|
|
|
12.5
|
%
|
|
|
|
|
|
|
13.1
|
%
|
|
|
|
|
|
|
10.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Loans for borrowers who still may be attending school or
engaging in other permitted educational activities and are not
yet required to make payments on their loans, e.g., residency
periods for medical students or a grace period for bar exam
preparation.
|
|
(2)
|
Loans for borrowers who have requested extension of grace period
generally during employment transition or who have temporarily
ceased making full payments due to hardship or other factors
consistent with the established loan program servicing
procedures and policies.
|
|
(3)
|
The period of delinquency is based on the number of days
scheduled payments are contractually past due.
|
17
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
3.
|
Goodwill
and Acquired Intangible Assets
|
Intangible assets include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
As of March 31, 2007
|
|
|
|
Amortization
|
|
|
|
|
|
Accumulated
|
|
|
|
|
(Dollars in millions)
|
|
Period
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Intangible assets subject to
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer, services, and lending
relationships
|
|
|
12 years
|
|
|
$
|
374
|
|
|
$
|
(126
|
)
|
|
$
|
248
|
|
Tax exempt bond funding
|
|
|
10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software and technology
|
|
|
7 years
|
|
|
|
95
|
|
|
|
(66
|
)
|
|
|
29
|
|
Non-compete agreements
|
|
|
2 years
|
|
|
|
12
|
|
|
|
(9
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
481
|
|
|
|
(201
|
)
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject
to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name and trademark
|
|
|
Indefinite
|
|
|
|
115
|
|
|
|
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquired intangible assets
|
|
|
|
|
|
$
|
596
|
|
|
$
|
(201
|
)
|
|
$
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
As of December 31, 2006
|
|
|
|
Amortization
|
|
|
|
|
|
Accumulated
|
|
|
|
|
(Dollars in millions)
|
|
Period
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Intangible assets subject to
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer, services, and lending
relationships
|
|
|
12 years
|
|
|
$
|
367
|
|
|
$
|
(115
|
)
|
|
$
|
252
|
|
Tax exempt bond funding
|
|
|
10 years
|
|
|
|
46
|
|
|
|
(37
|
)
|
|
|
9
|
|
Software and technology
|
|
|
7 years
|
|
|
|
94
|
|
|
|
(62
|
)
|
|
|
32
|
|
Non-compete agreements
|
|
|
2 years
|
|
|
|
12
|
|
|
|
(9
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
519
|
|
|
|
(223
|
)
|
|
|
296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject
to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name and trademark
|
|
|
Indefinite
|
|
|
|
106
|
|
|
|
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquired intangible assets
|
|
|
|
|
|
$
|
625
|
|
|
$
|
(223
|
)
|
|
$
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded amortization of acquired intangibles
totaling $15 million and $14 million for the three
months ended March 31, 2007 and 2006, respectively. The
Company will continue to amortize its intangible assets with
definite useful lives over their remaining estimated useful
lives.
In connection with the Companys acquisition of Southwest
Student Services Corporation and Washington Transferee
Corporation, the Company acquired certain tax exempt bonds that
enable the Company to earn a 9.5 percent Special Allowance
Payment (SAP) rate on student loans funded by those
bonds in indentured trusts. In the first quarter of 2007, the
Company recognized an impairment of $9 million due to
changes that restrict the loans on which the Company is entitled
to earn a 9.5 percent yield. The impaired intangible asset is
reported in the Lending segment and the impairment charge is
included in operating expense in the Lending segment.
18
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
3.
|
Goodwill
and Acquired Intangible Assets (Continued)
|
A summary of changes in the Companys goodwill by
reportable segment (see Note 11, Segment
Reporting) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
March 31,
|
|
(Dollars in millions)
|
|
2006
|
|
|
Adjustments
|
|
|
2007
|
|
|
Lending
|
|
$
|
406
|
|
|
$
|
|
|
|
$
|
406
|
|
Debt Management Operations
|
|
|
349
|
|
|
|
10
|
|
|
|
359
|
|
Corporate and Other
|
|
|
215
|
|
|
|
(9
|
)
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
970
|
|
|
$
|
1
|
|
|
$
|
971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions are accounted for under the purchase method of
accounting as defined in SFAS No. 141, Business
Combinations. The Company allocates the purchase price to
the fair value of the acquired tangible assets, liabilities and
identifiable intangible assets as of the acquisition date as
determined by an independent appraiser. Goodwill associated with
the Companys acquisitions is reviewed for impairment in
accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, addressed further in Note 2,
Significant Accounting Policies, within the
Companys 2006 Annual Report on
Form 10-K.
|
|
4.
|
Student
Loan Securitization
|
Securitization
Activity
The Company securitizes its student loan assets and for
transactions qualifying as sales, retains a Residual Interest
and servicing rights (as the Company retains the servicing
responsibilities), all of which are referred to as the
Companys Retained Interest in off-balance sheet
securitized loans. The Residual Interest is the right to receive
cash flows from the student loans and reserve accounts in excess
of the amounts needed to pay servicing, derivative costs (if
any), other fees, and the principal and interest on the bonds
backed by the student loans. The investors of the securitization
trusts have no recourse to the Companys other assets
should there be a failure of the trusts to pay when due.
19
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
4.
|
Student
Loan Securitization (Continued)
|
The following table summarizes the Companys securitization
activity for the three months ended March 31, 2007 and
2006. Those securitizations listed as sales are off-balance
sheet transactions and those listed as financings remain
on-balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Loan
|
|
|
Pre-
|
|
|
|
|
|
|
|
|
Loan
|
|
|
Pre-
|
|
|
|
|
|
|
No. of
|
|
|
Amount
|
|
|
Tax
|
|
|
Gain
|
|
|
No. of
|
|
|
Amount
|
|
|
Tax
|
|
|
Gain
|
|
(Dollars in millions)
|
|
Transactions
|
|
|
Securitized
|
|
|
Gain
|
|
|
%
|
|
|
Transactions
|
|
|
Securitized
|
|
|
Gain
|
|
|
%
|
|
|
Securitization sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford/PLUS loans
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
|
|
2
|
|
|
$
|
5,004
|
|
|
$
|
17
|
|
|
|
.3
|
%
|
FFELP Consolidation Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
3,002
|
|
|
|
13
|
|
|
|
.4
|
|
Private Education Loans
|
|
|
1
|
|
|
|
2,000
|
|
|
|
367
|
|
|
|
18.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations
sales
|
|
|
1
|
|
|
|
2,000
|
|
|
$
|
367
|
|
|
|
18.4
|
%
|
|
|
3
|
|
|
|
8,006
|
|
|
$
|
30
|
|
|
|
.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization financings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford/PLUS
Loans(1)
|
|
|
2
|
|
|
|
7,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Consolidation
Loans(1)
|
|
|
1
|
|
|
|
4,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations
financings
|
|
|
3
|
|
|
|
11,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations
|
|
|
4
|
|
|
$
|
13,006
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
$
|
8,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain securitizations are
structured to not qualify for sale treatment and accordingly,
they are accounted for on-balance sheet as variable interest
entities (VIEs). Terms that prevent sale treatment
include: (1) allowing the Company to hold certain rights
that can affect the remarketing of certain bonds,
(2) allowing the trust to enter into interest rate cap
agreements after the initial settlement of the securitization,
which do not relate to the reissuance of third party beneficial
interests or (3) allowing the Company to hold an
unconditional call option related to a certain percentage of the
securitized assets.
|
20
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
4.
|
Student
Loan Securitization (Continued)
|
Key economic assumptions used in estimating the fair value of
Residual Interests at the date of securitization resulting from
the student loan securitization sale transactions completed
during the three months ended March 31, 2007 and 2006 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
FFELP
|
|
|
Private
|
|
|
|
|
|
FFELP
|
|
|
Private
|
|
|
|
FFELP
|
|
|
Consolidation
|
|
|
Education
|
|
|
FFELP
|
|
|
Consolidation
|
|
|
Education
|
|
|
|
Stafford(1)
|
|
|
Loans(1)
|
|
|
Loans
|
|
|
Stafford
|
|
|
Loans
|
|
|
Loans(1)
|
|
|
Prepayment speed (annual
rate)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
6%
|
|
|
|
|
|
Interim status
|
|
|
|
|
|
|
|
|
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment status
|
|
|
|
|
|
|
|
|
|
|
4-7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life of loan repayment status
|
|
|
|
|
|
|
|
|
|
|
6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average life
|
|
|
|
|
|
|
|
|
|
|
9.4 yrs.
|
|
|
|
3.7 yrs.
|
|
|
|
8.3 yrs.
|
|
|
|
|
|
Expected credit losses (% of
principal securitized)
|
|
|
|
|
|
|
|
|
|
|
4.69%
|
|
|
|
.15%
|
|
|
|
.27%
|
|
|
|
|
|
Residual cash flows discounted at
(weighted average)
|
|
|
|
|
|
|
|
|
|
|
12.5%
|
|
|
|
12.4%
|
|
|
|
10.5%
|
|
|
|
|
|
|
|
|
(1) |
|
No securitizations qualified for
sale treatment in the period.
|
|
(2) |
|
Effective December 31, 2006,
the Company implemented Constant Prepayment Rates
(CPR) curves for Residual Interest valuations that
are based on the number of months since entering repayment that
better reflect the CPR as the loan seasons. Under this
methodology, a different CPR is applied to each year of a
loans seasoning. Previously, the Company applied a CPR
that was based on a static life of loan assumption, irrespective
of seasoning, or, in the case of FFELP Stafford and PLUS loans,
the Company used a vector approach in applying the CPR. The
repayment status CPR depends on the number of months since first
entering repayment or as the loans seasons through the
portfolio. Life of loan CPR is related to repayment status
only and does not include the impact of the loan while in
interim status. The CPR assumption used for all periods includes
the impact of projected defaults.
|
|
*
|
|
CPR of 20 percent for 2006,
15 percent for 2007 and 10 percent thereafter.
|
Retained
Interest in Securitized Receivables
The following tables summarize the fair value of the
Companys Residual Interests, included in the
Companys Retained Interest (and the assumptions used to
value such Residual Interests), along with the
21
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
4.
|
Student
Loan Securitization (Continued)
|
underlying off-balance sheet student loans that relate to those
securitizations in transactions that were treated as sales as of
March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007
|
|
|
|
FFELP
|
|
|
Consolidation
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Loan
|
|
|
Education
|
|
|
|
|
Dollars in millions
|
|
PLUS
|
|
|
Trusts(1)
|
|
|
Loan Trusts
|
|
|
Total
|
|
|
Fair value of Residual
Interests(2)
|
|
$
|
637
|
|
|
$
|
671
|
|
|
$
|
2,336
|
|
|
$
|
3,644
|
|
Underlying securitized loan
balance(3)
|
|
|
13,058
|
|
|
|
17,268
|
|
|
|
14,807
|
|
|
|
45,133
|
|
Weighted average life
|
|
|
2.8 yrs.
|
|
|
|
7.2 yrs.
|
|
|
|
7.4 yrs.
|
|
|
|
|
|
Prepayment speed (annual
rate)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim status
|
|
|
0%
|
|
|
|
N/A
|
|
|
|
0%
|
|
|
|
|
|
Repayment status
|
|
|
0-43%
|
|
|
|
3-9%
|
|
|
|
4-7%
|
|
|
|
|
|
Life of loan repayment
status
|
|
|
24%
|
|
|
|
6%
|
|
|
|
6%
|
|
|
|
|
|
Expected credit losses (% of
student loan principal)
|
|
|
.07%
|
|
|
|
.06%
|
|
|
|
4.39%
|
|
|
|
|
|
Residual cash flows discount rate
|
|
|
12.4%
|
|
|
|
10.5%
|
|
|
|
12.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
FFELP
|
|
|
Consolidation
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Loan
|
|
|
Education
|
|
|
|
|
Dollars in millions
|
|
PLUS
|
|
|
Trusts(1)
|
|
|
Loan Trusts
|
|
|
Total
|
|
|
Fair value of Residual
Interests(2)
|
|
$
|
701
|
|
|
$
|
676
|
|
|
$
|
1,965
|
|
|
$
|
3,342
|
|
Underlying securitized loan
balance(3)
|
|
|
14,794
|
|
|
|
17,817
|
|
|
|
13,222
|
|
|
|
45,833
|
|
Weighted average life
|
|
|
2.9 yrs.
|
|
|
|
7.3 yrs.
|
|
|
|
7.2 yrs.
|
|
|
|
|
|
Prepayment speed (annual
rate)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim status
|
|
|
0%
|
|
|
|
N/A
|
|
|
|
0%
|
|
|
|
|
|
Repayment status
|
|
|
0-43%
|
|
|
|
3-9%
|
|
|
|
4-7%
|
|
|
|
|
|
Life of loan repayment
status
|
|
|
24%
|
|
|
|
6%
|
|
|
|
6%
|
|
|
|
|
|
Expected credit losses (% of
student loan principal)
|
|
|
.06%
|
|
|
|
.07%
|
|
|
|
4.36%
|
|
|
|
|
|
Residual cash flows discount rate
|
|
|
12.6%
|
|
|
|
10.5%
|
|
|
|
12.6%
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $147 million and
$151 million related to the fair value of the Embedded
Floor Income as of March 31, 2007 and December 31,
2006, respectively. Changes in the fair value of the Embedded
Floor Income are primarily due to changes in the interest rates
and the paydown of the underlying loans.
|
|
(2) |
|
At March 31, 2007 and
December 31, 2006, the Company had unrealized gains
(pre-tax) in accumulated other comprehensive income of
$332 million and $389 million, respectively, which
related to the Retained Interests.
|
|
(3) |
|
In addition to student loans in
off-balance sheet trusts, the Company had $58.2 billion and
$48.6 billion of securitized student loans outstanding
(face amount) as of March 31, 2007 and December 31,
2006, respectively, in on-balance sheet securitization trusts.
|
|
(4) |
|
Effective December 31, 2006,
the Company implemented CPR curves for Residual Interest
valuations that are based on seasoning (the number of months
since entering repayment). Under this methodology, a different
CPR is applied to each year of a loans seasoning.
Previously, the Company applied a CPR that was based on a static
life of loan assumption, and, in the case of FFELP Stafford and
PLUS loans, the Company applied a vector approach, irrespective
of seasoning. Repayment status CPR used is based on the number
of months since first entering repayment (seasoning). Life of
loan CPR is related to repayment status only and does not
include the impact of the loan while in interim status. The CPR
assumption used for all periods includes the impact of projected
defaults.
|
22
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
4.
|
Student
Loan Securitization (Continued)
|
The Company recorded $11 million and $52 million of
impairment related to the Retained Interests for the three
months ended March 31, 2007 and 2006, respectively. The
impairment charges were primarily the result of FFELP Stafford
loans prepaying faster than projected through loan consolidation
($11 million and $24 million for the three months
ended March 31, 2007 and 2006, respectively). The
impairment for the quarter ended March 31, 2006 also
related to the Floor Income component of the Companys
Retained Interest due to increases in interest rates during the
period ($28 million).
The table below shows the Companys off-balance sheet
Private Education Loan delinquency trends as of March 31,
2007, December 31, 2006 and March 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
(Dollars in millions)
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
6,821
|
|
|
|
|
|
|
$
|
5,608
|
|
|
|
|
|
|
$
|
3,456
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
1,147
|
|
|
|
|
|
|
|
822
|
|
|
|
|
|
|
|
784
|
|
|
|
|
|
Loans in repayment and percentage
of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
6,475
|
|
|
|
94.7
|
%
|
|
|
6,419
|
|
|
|
94.5
|
%
|
|
|
4,389
|
|
|
|
95.5
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
145
|
|
|
|
2.1
|
|
|
|
222
|
|
|
|
3.3
|
|
|
|
106
|
|
|
|
2.3
|
|
Loans delinquent
61-90 days(3)
|
|
|
88
|
|
|
|
1.3
|
|
|
|
60
|
|
|
|
.9
|
|
|
|
46
|
|
|
|
1.0
|
|
Loans delinquent greater than
90 days(3)
|
|
|
131
|
|
|
|
1.9
|
|
|
|
91
|
|
|
|
1.3
|
|
|
|
55
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet Private
Education Loans in repayment
|
|
|
6,839
|
|
|
|
100
|
%
|
|
|
6,792
|
|
|
|
100
|
%
|
|
|
4,596
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet Private
Education Loans, gross
|
|
$
|
14,807
|
|
|
|
|
|
|
$
|
13,222
|
|
|
|
|
|
|
$
|
8,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loans for borrowers who still may
be attending school or engaging in other permitted educational
activities and are not yet required to make payments on their
loans, e.g., residency periods for medical students or a grace
period for bar exam preparation.
|
|
(2) |
|
Loans for borrowers who have
requested extension of grace period generally during employment
transition or who have temporarily ceased making full payments
due to hardship or other factors consistent with the established
loan program servicing procedures and programs.
|
|
(3) |
|
The period of delinquency is based
on the number of days scheduled payments are contractually past
due.
|
5. Derivative
Financial Instruments
Summary
of Derivative Financial Statement Impact
The following tables summarize the fair values and notional
amounts or number of contracts of all derivative instruments at
March 31, 2007 and December 31, 2006 and their impact
on other comprehensive income and earnings for the three months
ended March 31, 2007 and 2006. At March 31, 2007 and
December 31, 2006, $618 million (of which
$76 million is in restricted cash and investments on the
balance sheet) and $418 million (of which $53 million
is in restricted cash and investments on the balance sheet) fair
23
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
5. Derivative
Financial Instruments (Continued)
value, respectively, of
available-for-sale
investment securities and $13 million and $28 million,
respectively, of cash were pledged as collateral against these
derivative instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow
|
|
|
Fair Value
|
|
|
Trading
|
|
|
Total
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
(Dollars in millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Fair
Values(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(10
|
)
|
|
$
|
(9
|
)
|
|
$
|
(306
|
)
|
|
$
|
(355
|
)
|
|
$
|
(50
|
)
|
|
$
|
(111
|
)
|
|
$
|
(366
|
)
|
|
$
|
(475
|
)
|
Floor/Cap contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(196
|
)
|
|
|
(200
|
)
|
|
|
(196
|
)
|
|
|
(200
|
)
|
Futures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity forwards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(504
|
)
|
|
|
(213
|
)
|
|
|
(504
|
)
|
|
|
(213
|
)
|
Cross currency interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
1,640
|
|
|
|
1,440
|
|
|
|
|
|
|
|
|
|
|
|
1,640
|
|
|
|
1,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(10
|
)
|
|
$
|
(9
|
)
|
|
$
|
1,334
|
|
|
$
|
1,085
|
|
|
$
|
(750
|
)
|
|
$
|
(524
|
)
|
|
$
|
574
|
|
|
$
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
2.4
|
|
|
$
|
2.1
|
|
|
$
|
15.6
|
|
|
$
|
15.6
|
|
|
$
|
187.5
|
|
|
$
|
162.0
|
|
|
$
|
205.5
|
|
|
$
|
179.7
|
|
Floor/Cap contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22.8
|
|
|
|
21.5
|
|
|
|
22.8
|
|
|
|
21.5
|
|
Futures
|
|
|
.1
|
|
|
|
.1
|
|
|
|
|
|
|
|
|
|
|
|
.6
|
|
|
|
.6
|
|
|
|
.7
|
|
|
|
.7
|
|
Cross currency interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
23.1
|
|
|
|
23.0
|
|
|
|
|
|
|
|
|
|
|
|
23.1
|
|
|
|
23.0
|
|
Other(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.3
|
|
|
|
2.0
|
|
|
|
2.3
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2.5
|
|
|
$
|
2.2
|
|
|
$
|
38.7
|
|
|
$
|
38.6
|
|
|
$
|
213.2
|
|
|
$
|
186.1
|
|
|
$
|
254.4
|
|
|
$
|
226.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity forwards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48.2
|
|
|
|
48.2
|
|
|
|
48.2
|
|
|
|
48.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fair values reported are exclusive
of collateral held and/or pledged.
|
|
(2) |
|
Other consists of an
embedded derivative ($2 billion notional) bifurcated from
the convertible debenture issuance that relates primarily to
certain contingent interest and conversion features of the debt.
In addition, beginning in the first quarter of 2007,
Other also includes embedded derivatives bifurcated
from newly issued on-balance sheet securitization debt, as a
result of adopting SFAS No. 155 (see Note 1,
Significant Accounting Policies Accounting for
Certain Hybrid Financial Instruments). All of the embedded
derivatives have had a de minimis fair value since
bifurcation.
|
24
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
5. Derivative
Financial Instruments (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
Cash Flow
|
|
|
Fair Value
|
|
|
Trading
|
|
|
Total
|
|
(Dollars in millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Changes to accumulated other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value to cash flow
hedges
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2
|
|
Amortization of effective
hedges(1)
|
|
|
1
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in accumulated other
comprehensive income, net
|
|
$
|
1
|
|
|
$
|
6
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of closed futures
contracts gains/losses in interest
expense(2)
|
|
$
|
(2
|
)
|
|
$
|
(6
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
(6
|
)
|
Gains (losses) on derivative and
hedging activities
Realized(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
|
|
(48
|
)
|
|
|
(25
|
)
|
|
|
(48
|
)
|
Gains (losses) on derivative and
hedging activities
Unrealized(4)
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
22
|
|
|
|
(347
|
)
|
|
|
(61
|
)
|
|
|
(332
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings impact
|
|
$
|
(2
|
)
|
|
$
|
(6
|
)
|
|
$
|
15
|
|
|
$
|
22
|
|
|
$
|
(372
|
)
|
|
$
|
(109
|
)
|
|
$
|
(359
|
)
|
|
$
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Company expects to amortize $.3 million of after-tax
net losses from accumulated other comprehensive income to
earnings during the next 12 months related to closed
futures contracts that were hedging the forecasted issuance of
debt instruments that are outstanding as of March 31, 2007.
|
|
|
(2)
|
For futures contracts that qualify as SFAS No. 133
hedges where the hedged transaction occurs.
|
|
|
(3)
|
Includes net settlement income/expense related to trading
derivatives and realized gains and losses related to derivative
dispositions.
|
|
|
(4)
|
The change in the fair value of cash flow and fair value hedges
represents amounts related to ineffectiveness.
|
25
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
The following table summarizes the Companys common share
repurchases, issuances and equity forward activity for the three
months ended March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
(Shares in millions)
|
|
2007
|
|
|
2006
|
|
|
Common shares repurchased:
|
|
|
|
|
|
|
|
|
Equity forwards
|
|
|
|
|
|
|
2.5
|
|
Benefit
plans(1)
|
|
|
.2
|
|
|
|
.8
|
|
|
|
|
|
|
|
|
|
|
Total shares repurchased
|
|
|
.2
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
Average purchase price per share
|
|
$
|
45.87
|
|
|
$
|
55.13
|
|
|
|
|
|
|
|
|
|
|
Common shares issued
|
|
|
1.5
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
Equity forward contracts:
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period
|
|
|
48.2
|
|
|
|
42.7
|
|
New contracts
|
|
|
|
|
|
|
2.5
|
|
Exercises
|
|
|
|
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
48.2
|
|
|
|
42.7
|
|
|
|
|
|
|
|
|
|
|
Authority remaining at end of
period to repurchase or enter into equity forwards
|
|
|
15.7
|
|
|
|
16.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes shares withheld from stock option exercises and vesting
of performance stock for employees tax withholding
obligations and shares tendered by employees to satisfy option
exercise costs.
|
As of March 31, 2007, the expiration dates and range and
weighted average purchase prices for outstanding equity forward
contracts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Year of Maturity
|
|
Outstanding
|
|
|
Range of
|
|
Average
|
|
(Contracts in millions of shares)
|
|
Contracts
|
|
|
Purchase Prices
|
|
Purchase Price
|
|
|
2008
|
|
|
7.3
|
|
|
$43.50 - $44.00
|
|
$
|
43.80
|
|
2009
|
|
|
14.7
|
|
|
46.00 - 54.74
|
|
|
53.66
|
|
2010
|
|
|
15.0
|
|
|
54.74
|
|
|
54.74
|
|
2011
|
|
|
9.1
|
|
|
49.75 - 53.76
|
|
|
51.91
|
|
2012
|
|
|
2.1
|
|
|
46.30 - 46.70
|
|
|
46.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48.2
|
|
|
|
|
$
|
51.86
|
|
|
|
|
|
|
|
|
|
|
|
|
The closing price of the Companys common stock on
March 30, 2007 was $40.90. Should the market value of the
Companys stock fall below certain initial trigger prices,
the counterparty to the contract has a right to terminate the
contract and settle all or a portion at the original contract
price. For equity forward contracts outstanding at
March 31, 2007, these initial trigger prices range from
$23.93 per share to $30.11 per share.
26
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
6.
|
Stockholders
Equity (Continued)
|
In February 2007, the Company made payments to certain
counterparties to lower the notional amounts on some of its
outstanding equity forward contracts. Also in February 2007, the
Company agreed with a counterparty to amend the trigger prices
on its outstanding equity forward contracts. In total, the
Company amended the terms of the contracts covering
18.5 million shares. As a result of these transactions, the
Companys aggregate position on equity forward contracts is
48.2 million shares at an average strike price of $51.86.
The highest trigger price on all outstanding equity forward
contracts is now $30.11, down from $35.58 before the amendments.
Accumulated
Other Comprehensive Income
Accumulated other comprehensive income includes the after-tax
change in unrealized gains and losses on
available-for-sale
investments, unrealized gains and losses on derivatives
qualifying as cash flow hedges, and the defined benefit pension
plans adjustment. The following table presents the cumulative
balances of the components of other comprehensive income as of
March 31, 2007, December 31, 2006 and March 31,
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
Net unrealized gains (losses) on
investments(1)
|
|
$
|
292,175
|
|
|
$
|
340,363
|
|
|
$
|
337,365
|
|
Net unrealized gains (losses) on
derivatives(2)
|
|
|
(7,087
|
)
|
|
|
(7,570
|
)
|
|
|
(7,029
|
)
|
Defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net prior service cost
|
|
|
(23
|
)
|
|
|
(24
|
)
|
|
|
|
|
Net gain
|
|
|
15,819
|
|
|
|
16,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total defined benefit pension
plans(3)
|
|
|
15,796
|
|
|
|
16,318
|
|
|
|
|
|
Minimum pension liability
adjustment(4)
|
|
|
|
|
|
|
|
|
|
|
(1,840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other
comprehensive income
|
|
$
|
300,884
|
|
|
$
|
349,111
|
|
|
$
|
328,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net of tax expense of $153,159, $179,244 and $179,281 as of
March 31, 2007, December 31, 2006 and March 31,
2006, respectively.
|
|
|
(2)
|
Net of tax benefit of $4,051, $4,347 and $4,007 as of
March 31, 2007, December 31, 2006 and March 31,
2006, respectively.
|
|
|
(3)
|
Net of tax expense of $9,309 and $8,787 as of March 31,
2007 and December 31, 2006, respectively.
|
|
|
(4)
|
Net of tax benefit of $991 as of March 31, 2006.
|
27
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
7.
|
Earnings
per Common Share
|
Basic earnings 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 is as follows for the three months ended
March 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income attributable to common
stock
|
|
$
|
107,060
|
|
|
$
|
143,300
|
|
Adjusted for debt expense of
convertible debentures (Co-Cos), net of
taxes(1)
|
|
|
|
|
|
|
|
|
Adjusted for non-taxable
unrealized gains on equity
forwards(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common
stock, adjusted
|
|
$
|
107,060
|
|
|
$
|
143,300
|
|
|
|
|
|
|
|
|
|
|
Denominator (shares in
thousands):
|
|
|
|
|
|
|
|
|
Weighted average shares used to
compute basic EPS
|
|
|
411,040
|
|
|
|
412,675
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Dilutive effect of Co-Cos
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options,
nonvested deferred compensation, nonvested restricted stock,
restricted stock units, Employee Stock Purchase Plan
(ESPP) and equity
forwards(3)(4)
|
|
|
7,409
|
|
|
|
10,299
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common
shares(5)
|
|
|
7,409
|
|
|
|
10,299
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to
compute diluted EPS
|
|
|
418,449
|
|
|
|
422,974
|
|
|
|
|
|
|
|
|
|
|
Net earnings per
share:
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
.26
|
|
|
$
|
.35
|
|
Dilutive effect of
Co-Cos(1)
|
|
|
|
|
|
|
|
|
Dilutive effect of equity
forwards(2)(4)
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options,
nonvested deferred compensation, nonvested restricted stock,
restricted stock units, and
ESPP(3)
|
|
|
|
|
|
|
(.01
|
)
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
.26
|
|
|
$
|
.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Emerging Issues Task Force (EITF) Issue
No. 04-8,
The Effect of Contingently Convertible Debt on Diluted
Earnings per Share, requires the shares underlying
Co-Cos to be
included in diluted EPS computations regardless of whether the
market price trigger or the conversion price has been met, using
the
if-converted
method.
|
|
|
(2)
|
SFAS No. 128, Earnings per Share, and the
additional guidance provided by EITF Topic
No. D-72,
Effect of Contracts That May Be Settled in Stock or Cash
on the Computation of Diluted Earnings per Share, require
both the denominator and the numerator to be adjusted in
calculating the potential impact of the Companys equity
forward contracts on diluted EPS. Under this guidance, when
certain conditions are satisfied, the impact can be dilutive
when: (1) the average share price during the period is
lower than the respective strike prices on the Companys
equity forward contracts, and (2) the Company recorded an
unrealized gain or loss on derivative and hedging activities
related to its equity forward contracts.
|
|
|
(3)
|
Reflects the potential dilutive effect of additional common
shares that are issuable upon exercise of outstanding stock
options, nonvested deferred compensation, nonvested restricted
stock, restricted stock units, and the outstanding commitment to
issue shares under the ESPP, determined by the treasury stock
method.
|
|
|
(4)
|
Reflects the potential dilutive effect of equity forward
contracts, determined by the reverse treasury stock method.
|
|
|
(5)
|
For the three months ended March 31, 2007 and 2006, stock
options and equity forwards of approximately 65 million
shares and 47 million shares, respectively, were
outstanding but not included in the computation of diluted
earnings per share because they were antidilutive.
|
28
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
Components
of Net Periodic Pension Cost
Net periodic pension cost included the following components:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Service cost benefits
earned during the period
|
|
$
|
1,775
|
|
|
$
|
2,073
|
|
Interest cost on projected benefit
obligations
|
|
|
3,084
|
|
|
|
2,862
|
|
Expected return on plan assets
|
|
|
(4,494
|
)
|
|
|
(4,069
|
)
|
Net amortization and deferral
|
|
|
(180
|
)
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
Total net periodic pension cost
|
|
$
|
185
|
|
|
$
|
988
|
|
|
|
|
|
|
|
|
|
|
Employer
Contributions
The Company previously disclosed in its financial statements for
the year ended December 31, 2006 that it did not expect to
contribute to its qualified pension plan (the Qualified
Plan) in 2007. As of March 31, 2007, the Company had
made no contributions to its Qualified Plan.
The following table summarizes the Companys unrecognized
tax benefits:
|
|
|
|
|
|
|
As of January 1, 2007
|
|
|
Gross amount of unrecognized tax
benefits
|
|
$
|
113,334
|
|
Total amount of unrecognized tax
benefits that, if recognized, would affect the effective tax rate
|
|
|
38,325
|
|
Total amount of interest and
penalties recognized in the statement of operations and the
statement of financial position
|
|
|
16,418
|
|
The Company adopted the provisions of the FASBs Financial
Interpretation (FIN) No. 48, Accounting
for Uncertainty in Income Taxes, on January 1, 2007.
As a result of the implementation of FIN 48, the Company
recognized a $6 million increase in its liability for
unrecognized tax benefits, which was accounted for as a
reduction to the January 1, 2007 balance of retained
earnings. In addition, unrecognized tax benefits of
$3 million are currently treated as a pending refund claim,
reducing the above balance of total unrecognized tax benefits
that if recognized would affect the effective tax rate.
In the first quarter of 2007, the Company adjusted its federal
unrecognized tax benefits to reflect the expected outcome of
several issues being negotiated with the IRS as a part of the
current exam cycle, primarily regarding the timing of
recognition of certain income and deduction items. Several other
less significant amounts of uncertain tax benefits were also
added during the first quarter. In total, as of March 31,
the Company has gross unrecognized tax benefits of
$166 million, as well as total interest and penalties
recognized in the statement of operations of $22 million.
29
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
9.
|
Income
Taxes (Continued)
|
Reasonably
Possible Significant Increases/ Decreases within Twelve
Months
1. U.S. Federal Tax Uncertainties
The current exam of the Companys 2003 and 2004
U.S. Federal tax return is scheduled to conclude in the
second or third quarter of 2007, pending any appeals that may be
filed by the Company on unagreed items. It is possible that
additional government reviews of the exam results could extend
the scheduled time period for conclusion of the exam. Multiple
uncertainties are under review during the current exam. An
estimate of the range of the possible change to the balance of
the Companys unrecognized tax benefits that may result
from conclusion of the exam cannot at this time be made, pending
completion of the current exam.
In addition, it is expected that during the second half of 2007,
the IRS will commence the examination of the Companys 2005
and 2006 federal income tax returns. It is reasonably possible
that issues which arise during the exam may create the need for
an increase in unrecognized tax benefits. Until the exam
commences, an estimate of any such amounts cannot currently be
made.
2. Other Tax Uncertainties
In the event that the Company is not contacted for exam by
additional tax authorities by the end of 2007, it is reasonably
possible that there will be a decrease in the Companys
unrecognized tax position liability, due to the tolling of
various statute of limitations periods. Such change could be
approximately $3 million to $5 million.
Tax
Years Remaining Subject to Exam
The Company or one of its subsidiaries files income tax returns
at the U.S. federal level, in most U.S. states, and
various foreign jurisdictions. U.S. federal income tax
returns filed for years prior to 2003 have been audited and are
now resolved. As shown in the table below, the Companys
primary operating subsidiary has been audited by the listed
states through the year shown, again with all issues resolved.
Other combinations of subsidiaries, tax years, and jurisdictions
remain open for review, subject to statute of limitations
periods (typically 3 to 4 prior years).
|
|
|
|
|
State
|
|
Year audited through
|
|
|
New York
|
|
|
2003
|
|
Texas
|
|
|
2004
|
|
Pennsylvania
|
|
|
2000
|
|
Florida
|
|
|
2000
|
|
Indiana
|
|
|
2000
|
|
California
|
|
|
2002
|
|
Missouri
|
|
|
2003
|
|
The Company recognizes interest accrued related to unrecognized
tax benefits in income tax expense, and penalties in operating
expenses.
30
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
Chae, et. al. v. SLM Corporation et. al.
On April 14, 2007, the Company was served with a putative
class action suit by several borrowers in federal court in
California. The complaint alleges violations of California
Business & Professions Code 17200, breach of contract,
breach of covenant of good faith and fair dealing, violation of
consumer legal remedies act and unjust enrichment. The complaint
challenges the Companys FFELP billing practices as they
relate to use of the simple daily interest method for
calculating interest. The Company believes the complaint is
without merit and it intends to vigorously defend this action.
The Company is also subject to various claims, lawsuits and
other actions that arise in the normal course of business. Most
of these matters are claims by borrowers disputing the manner in
which their loans have been processed or the accuracy of the
Companys reports to credit bureaus. In addition, the
collections subsidiaries in the Companys debt management
operations group are routinely named in individual plaintiff or
class action lawsuits in which the plaintiffs allege that the
Company has violated a federal or state law in the process of
collecting their account. Management believes that these claims,
lawsuits and other actions will not have a material adverse
effect on its business, financial condition or results of
operations. Finally, from time to time, the Company receives
information and document requests from state attorneys general
concerning certain of its business practices. The Companys
practice has been and continues to be to cooperate with the
state attorneys general and to be responsive to any such
requests.
The Company has two primary operating segments as defined in
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information the Lending
and Debt Management Operations (DMO) segments. The
Lending and DMO operating segments meet the quantitative
thresholds for reportable segments identified in
SFAS No. 131. Accordingly, the results of operations
of the Companys Lending and DMO segments are presented
below. The Company has smaller operating segments including the
Guarantor Servicing and Student Loan Servicing operating
segments as well as certain other products and services provided
to colleges and universities which do not meet the quantitative
thresholds identified in SFAS No. 131. Therefore, the
results of operations for these operating segments and the
revenues and expenses associated with these other products and
services are combined with corporate overhead and other
corporate activities within the Corporate and Other reporting
segment.
The management reporting process measures the performance of the
Companys operating segments based on the management
structure of the Company as well as the methodology used by
management to evaluate performance and allocate resources.
Management, including the Companys chief operating
decision maker, evaluates the performance of the Companys
operating segments based on their profitability. As discussed
further below, management measures the profitability of the
Companys operating segments based on Core
Earnings net income. Accordingly, information regarding
the Companys reportable segments is provided based on a
Core Earnings basis. The Companys Core
Earnings performance measures are not defined terms within
GAAP and may not be comparable to similarly titled measures
reported by other companies. Core Earnings net
income reflects only current period adjustments to GAAP net
income as described below. Unlike financial accounting, there is
no comprehensive, authoritative guidance for management
reporting. The management reporting process measures the
performance of the operating segments based on the management
structure of the Company and is not necessarily comparable with
similar information for any other financial institution. The
Companys 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
31
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
11.
|
Segment
Reporting (Continued)
|
management. Intersegment revenues and expenses are netted within
the appropriate financial statement line items consistent with
the income statement presentation provided to management.
Changes in management structure or allocation methodologies and
procedures may result in changes in reported segment financial
information.
The Companys principal operations are located in the
United States, and its results of operations and long-lived
assets in geographic regions outside of the United States are
not significant. In the Lending segment, no individual customer
accounted for more than 10 percent of its total revenue
during the three months ended March 31, 2007 and 2006.
United Student Aid Funds, Inc. (USA Funds) is the
Companys largest customer in both the DMO and Corporate
and Other segments. During the three months ending
March 31, 2007 and 2006, it accounted for 25 percent
and 38 percent, respectively, of the aggregate revenues
generated by the Companys DMO and Corporate and Other
segments. No other customers accounted for more than
10 percent of total revenues in those segments for the
years mentioned.
Lending
In the Companys Lending business segment, the Company
originates and acquires both federally guaranteed student loans,
which are administered by the U.S. Department of Education
(ED), and Private Education Loans, which are not
federally guaranteed. Private Education Loans are primarily used
by borrowers to supplement FFELP loans to meet the rising cost
of education. The Company manages student loans for nearly
10 million student and parent customers; its Managed
student loan portfolio totaled $150.0 billion at
March 31, 2007, of which $125.8 billion or
84 percent are federally insured. In addition to education
lending, the Company also originates mortgage and consumer loans
with the intent of selling the majority of such loans. During
the three months ended March 31, 2007, the Company
originated $310 million in mortgage and consumer loans of
which $226 million pertained to mortgages in the held for
sale portfolio. The Companys mortgage and consumer loan
portfolio totaled $597 million at March 31, 2007.
In addition to its federally insured FFELP products, the Company
originates and acquires Private Education Loans which consist of
two general types: (1) those that are designed to bridge
the gap between the cost of higher education and the amount
financed through either capped federally insured loans or the
borrowers resources, and (2) those that are used to
meet the needs of students who attend non-Title IV eligible
institutions where FFELP loans are not available (such as career
training, distance learning and lifelong learning programs).
Most higher education Private Education Loans are made in
conjunction with a FFELP Stafford loan and as such are marketed
through the same channel as FFELP loans by the same sales force.
Unlike FFELP loans, Private Education Loans are subject to the
full credit risk of the borrower. The Company manages this
additional risk through industry-tested loan underwriting
standards and a combination of higher interest rates and loan
origination fees that compensate the Company for the higher risk.
DMO
The Companys DMO operating segment provides a wide range
of accounts receivable and collections services including
student loan default aversion services, defaulted student loan
portfolio management services, contingency collections services
for student loans and other asset classes, and accounts
receivable management and collection for purchased portfolios of
receivables that are delinquent or have been charged off by
their original creditors as well as
sub-performing
and non-performing mortgage loans. The Companys DMO
operating segment serves the student loan marketplace through a
broad array of default management services
32
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
11.
|
Segment
Reporting (Continued)
|
on a contingency fee or other
pay-for-performance
basis to 14 FFELP guarantors and for campus based programs.
In addition to collecting on its own purchased receivables and
mortgage loans, the DMO operating segment provides receivable
management and collection services for large federal agencies,
credit card clients and other holders of consumer debt.
Corporate
and Other
The Companys Corporate and Other business segment includes
the aggregate activity of its smaller operating segments
primarily its Guarantor Servicing, student loan servicing
operating segments, and its recently acquired Upromise operating
segments. Corporate and Other also includes several smaller
products and services, as well as corporate overhead.
In the Guarantor Servicing operating segment, the Company
provides a full complement of administrative services to FFELP
guarantors including guarantee issuance, account maintenance,
and guarantee fulfillment. In the Loan Servicing operating
segment, the Company provides a full complement of activities
required to service student loans on behalf of lenders who are
unrelated to the Company. Such servicing activities generally
commence once a loan has been fully disbursed and include
sending out payment coupons to borrowers, processing borrower
payments, originating and disbursing FFELP Consolidation Loans
on behalf of the lender, and other administrative activities
required by ED.
Upromise markets and administers
saving-for-college
plans and also provides administration services for college
savings plans. The Companys other products and services
include comprehensive financing and loan delivery solutions that
it provides to college financial aid offices and students to
streamline the financial aid process. Corporate overhead
includes all of the typical headquarter functions such as
executive management, accounting and finance, human resources
and marketing.
Measure
of Profitability
The tables below include the condensed operating results for
each of the Companys reportable segments. Management,
including the chief operating decision maker, evaluates the
Company on certain performance measures that the Company refers
to as Core Earnings performance measures for each
operating segment. While Core Earnings results are
not a substitute for reported results under GAAP, the Company
relies on Core Earnings performance measures to
manage each operating segment because it believes these measures
provide additional information regarding the operational and
performance indicators that are most closely assessed by
management.
Core Earnings performance measures are the primary
financial performance measures used by management to develop the
Companys financial plans, track results, and establish
corporate performance targets and incentive compensation.
Management believes this information provides additional insight
into the financial performance of the core business activities
of its operating segments. Accordingly, the tables presented
below reflect Core Earnings operating measures
reviewed and utilized by management to manage the business.
Reconciliation of the Core Earnings segment totals
to the Companys consolidated operating results in
accordance with GAAP is also included in the tables below.
33
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 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 March 31, 2007
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Total Core
|
|
|
|
|
|
Total
|
|
(Dollars in millions)
|
|
Lending
|
|
|
DMO
|
|
|
and Other
|
|
|
Earnings
|
|
|
Adjustments(3)
|
|
|
GAAP
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student
Loans
|
|
$
|
695
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
695
|
|
|
$
|
(244
|
)
|
|
$
|
451
|
|
FFELP Consolidation Loans
|
|
|
1,331
|
|
|
|
|
|
|
|
|
|
|
|
1,331
|
|
|
|
(316
|
)
|
|
|
1,015
|
|
Private Education Loans
|
|
|
658
|
|
|
|
|
|
|
|
|
|
|
|
658
|
|
|
|
(320
|
)
|
|
|
338
|
|
Other loans
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
28
|
|
Cash and investments
|
|
|
162
|
|
|
|
|
|
|
|
2
|
|
|
|
164
|
|
|
|
(50
|
)
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
2,874
|
|
|
|
|
|
|
|
2
|
|
|
|
2,876
|
|
|
|
(930
|
)
|
|
|
1,946
|
|
Total interest expense
|
|
|
2,220
|
|
|
|
7
|
|
|
|
5
|
|
|
|
2,232
|
|
|
|
(700
|
)
|
|
|
1,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
654
|
|
|
|
(7
|
)
|
|
|
(3
|
)
|
|
|
644
|
|
|
|
(230
|
)
|
|
|
414
|
|
Less: provisions for losses
|
|
|
198
|
|
|
|
|
|
|
|
1
|
|
|
|
199
|
|
|
|
(49
|
)
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provisions for losses
|
|
|
456
|
|
|
|
(7
|
)
|
|
|
(4
|
)
|
|
|
445
|
|
|
|
(181
|
)
|
|
|
264
|
|
Fee income
|
|
|
|
|
|
|
87
|
|
|
|
39
|
|
|
|
126
|
|
|
|
|
|
|
|
126
|
|
Collections revenue
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
65
|
|
|
|
1
|
|
|
|
66
|
|
Other income
|
|
|
44
|
|
|
|
|
|
|
|
52
|
|
|
|
96
|
|
|
|
231
|
|
|
|
327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
44
|
|
|
|
152
|
|
|
|
91
|
|
|
|
287
|
|
|
|
232
|
|
|
|
519
|
|
Operating
expenses(1)
|
|
|
171
|
|
|
|
93
|
|
|
|
68
|
|
|
|
332
|
|
|
|
24
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
minority interest in net earnings of subsidiaries
|
|
|
329
|
|
|
|
52
|
|
|
|
19
|
|
|
|
400
|
|
|
|
27
|
|
|
|
427
|
|
Income tax
expense(2)
|
|
|
122
|
|
|
|
19
|
|
|
|
7
|
|
|
|
148
|
|
|
|
162
|
|
|
|
310
|
|
Minority interest in net earnings
of subsidiaries
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
207
|
|
|
$
|
32
|
|
|
$
|
12
|
|
|
$
|
251
|
|
|
$
|
(135
|
)
|
|
$
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating expenses for the Lending,
DMO, and Corporate and Other business segments include
$9 million, $3 million, and $4 million,
respectively, of stock option compensation expense due to the
implementation of SFAS No. 123(R) in the first quarter
of 2006.
|
|
(2) |
|
Income taxes are based on a
percentage of net income before tax for the individual
reportable segment.
|
|
(3) |
|
Core Earnings
adjustments to GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
|
|
Net Impact of
|
|
|
Net Impact of
|
|
|
|
|
|
Net impact
|
|
|
|
|
|
|
Securitization
|
|
|
Derivative
|
|
|
Net Impact of
|
|
|
of Acquired
|
|
|
|
|
(Dollars in millions)
|
|
Accounting
|
|
|
Accounting
|
|
|
Floor Income
|
|
|
Intangibles
|
|
|
Total
|
|
|
Net interest income
|
|
$
|
(216
|
)
|
|
$
|
25
|
|
|
$
|
(39
|
)
|
|
$
|
|
|
|
$
|
(230
|
)
|
Less: provisions for losses
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provisions for losses
|
|
|
(167
|
)
|
|
|
25
|
|
|
|
(39
|
)
|
|
|
|
|
|
|
(181
|
)
|
Fee income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collections revenue
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Other income
|
|
|
588
|
|
|
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
589
|
|
|
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
|
232
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax Core
Earnings adjustments to GAAP
|
|
$
|
422
|
|
|
$
|
(332
|
)
|
|
$
|
(39
|
)
|
|
$
|
(24
|
)
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162
|
|
Minority interest in net earnings
of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings
adjustments to GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
11.
|
Segment
Reporting (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Total Core
|
|
|
|
|
|
Total
|
|
(Dollars in millions)
|
|
Lending
|
|
|
DMO
|
|
|
and Other
|
|
|
Earnings
|
|
|
Adjustments(3)
|
|
|
GAAP
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student
Loans
|
|
$
|
650
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
650
|
|
|
$
|
(351
|
)
|
|
$
|
299
|
|
FFELP Consolidation Loans
|
|
|
1,028
|
|
|
|
|
|
|
|
|
|
|
|
1,028
|
|
|
|
(207
|
)
|
|
|
821
|
|
Private Education Loans
|
|
|
429
|
|
|
|
|
|
|
|
|
|
|
|
429
|
|
|
|
(188
|
)
|
|
|
241
|
|
Other loans
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
23
|
|
Cash and investments
|
|
|
131
|
|
|
|
|
|
|
|
1
|
|
|
|
132
|
|
|
|
(36
|
)
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
2,261
|
|
|
|
|
|
|
|
1
|
|
|
|
2,262
|
|
|
|
(782
|
)
|
|
|
1,480
|
|
Total interest expense
|
|
|
1,660
|
|
|
|
5
|
|
|
|
1
|
|
|
|
1,666
|
|
|
|
(573
|
)
|
|
|
1,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
601
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
596
|
|
|
|
(209
|
)
|
|
|
387
|
|
Less: provisions for losses
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
(15
|
)
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provisions for losses
|
|
|
526
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
521
|
|
|
|
(194
|
)
|
|
|
327
|
|
Fee income
|
|
|
|
|
|
|
92
|
|
|
|
27
|
|
|
|
119
|
|
|
|
|
|
|
|
119
|
|
Collections revenue
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
56
|
|
Other income
|
|
|
40
|
|
|
|
|
|
|
|
30
|
|
|
|
70
|
|
|
|
41
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
40
|
|
|
|
148
|
|
|
|
57
|
|
|
|
245
|
|
|
|
41
|
|
|
|
286
|
|
Operating
expenses(1)
|
|
|
161
|
|
|
|
89
|
|
|
|
59
|
|
|
|
309
|
|
|
|
14
|
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
minority interest in net earnings of subsidiaries
|
|
|
405
|
|
|
|
54
|
|
|
|
(2
|
)
|
|
|
457
|
|
|
|
(167
|
)
|
|
|
290
|
|
Income tax
expense(2)
|
|
|
150
|
|
|
|
20
|
|
|
|
(1
|
)
|
|
|
169
|
|
|
|
(32
|
)
|
|
|
137
|
|
Minority interest in net earnings
of subsidiaries
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
255
|
|
|
$
|
33
|
|
|
$
|
(1
|
)
|
|
$
|
287
|
|
|
$
|
(135
|
)
|
|
$
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating expenses for the Lending,
DMO, and Corporate and Other business segments include
$10 million, $3 million, and $5 million,
respectively, of stock option compensation expense due to the
implementation of SFAS No. 123(R) in the first quarter
of 2006.
|
|
(2) |
|
Income taxes are based on a
percentage of net income before tax for the individual
reportable segment.
|
|
(3) |
|
Core Earnings
adjustments to GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2006
|
|
|
|
Net Impact of
|
|
|
Net Impact of
|
|
|
|
|
|
Net Impact
|
|
|
|
|
|
|
Securitization
|
|
|
Derivative
|
|
|
Net Impact of
|
|
|
of Acquired
|
|
|
|
|
(Dollars in millions)
|
|
Accounting
|
|
|
Accounting
|
|
|
Floor Income
|
|
|
Intangibles
|
|
|
Total
|
|
|
Net interest income
|
|
$
|
(205
|
)
|
|
$
|
48
|
|
|
$
|
(52
|
)
|
|
$
|
|
|
|
$
|
(209
|
)
|
Less: provisions for losses
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provisions for losses
|
|
|
(190
|
)
|
|
|
48
|
|
|
|
(52
|
)
|
|
|
|
|
|
|
(194
|
)
|
Fee income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collections revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
128
|
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
128
|
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
41
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax Core
Earnings adjustments to GAAP
|
|
$
|
(62
|
)
|
|
$
|
(39
|
)
|
|
$
|
(52
|
)
|
|
$
|
(14
|
)
|
|
|
(167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings
adjustments to GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
11.
|
Segment
Reporting (Continued)
|
Summary
of Core Earnings Adjustments to GAAP
The adjustments required to reconcile from the Companys
Core Earnings results to its GAAP results of
operations relate to differing treatments for securitization
transactions, derivatives, Floor Income related to the
Companys student loans, and certain other items that
management does not consider in evaluating the Companys
operating results. The following table reflects aggregate
adjustments associated with these areas for the three months
ended March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(Dollars in millions)
|
|
2007
|
|
|
2006
|
|
|
Core Earnings
adjustments to GAAP:
|
|
|
|
|
|
|
|
|
Net impact of securitization
accounting(1)
|
|
$
|
422
|
|
|
$
|
(62
|
)
|
Net impact of derivative
accounting(2)
|
|
|
(332
|
)
|
|
|
(39
|
)
|
Net impact of Floor
Income(3)
|
|
|
(39
|
)
|
|
|
(52
|
)
|
Net impact of acquired
intangibles(4)
|
|
|
(24
|
)
|
|
|
(14
|
)
|
Net tax
effect(5)
|
|
|
(162
|
)
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings
adjustments to GAAP
|
|
$
|
(135
|
)
|
|
$
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Securitization: Under
GAAP, certain securitization transactions in the Companys
Lending operating segment are accounted for as sales of assets.
Under the Companys Core Earnings presentation
for the Lending operating segment, the Company presents all
securitization transactions on a Core Earnings basis
as long-term non-recourse financings. The upfront
gains on sale from securitization transactions as
well as ongoing servicing and securitization revenue
presented in accordance with GAAP are excluded from Core
Earnings net income and replaced by the interest income,
provisions for loan losses, and interest expense as they are
earned or incurred on the securitization loans. The Company also
excludes transactions with its off-balance sheet trusts from
Core Earnings net income as they are considered
intercompany transactions on a Core Earnings basis.
|
|
(2) |
|
Derivative
accounting: Core
Earnings net income excludes periodic unrealized gains and
losses arising primarily in the Companys Lending operating
segment, and to a lesser degree in the Companys Corporate
and Other reportable segment, that are caused primarily by the
one-sided
mark-to-market
derivative valuations prescribed by SFAS No. 133 on
derivatives that do not qualify for hedge treatment
under GAAP. Under the Companys Core Earnings
presentation, the Company recognizes the economic effect of
these hedges, which generally results in any cash paid or
received being recognized ratably as an expense or revenue over
the hedged items life. Core Earnings net
income also excludes the gain or loss on equity forward
contracts that under SFAS No. 133, are required to be
accounted for as derivatives and are
marked-to-market
through GAAP net income.
|
|
(3) |
|
Floor
Income: The
timing and amount (if any) of Floor Income earned in the
Companys Lending operating segment is uncertain and in
excess of expected spreads. Therefore, the Company excludes such
income from Core Earnings net income when it is not
economically hedged. The Company employs derivatives, primarily
Floor Income Contracts and futures, to economically hedge Floor
Income. As discussed above in Derivative Accounting,
these derivatives do not qualify as effective accounting hedges
and therefore, under GAAP, are
marked-to-market
through the gains (losses) on derivative and hedging
activities, net line on the income statement with no
offsetting gain or loss recorded for the economically hedged
items. For Core Earnings net income, the Company
reverses the fair value adjustments on the Floor Income
Contracts and futures economically hedging Floor Income and
includes the amortization of net premiums received (net of
Eurodollar futures contracts realized gains or losses) in
income.
|
|
(4) |
|
Acquired
Intangibles: The
Company excludes goodwill and intangible impairment and
amortization of acquired intangibles.
|
|
(5) |
|
Net Tax
Effect: Such
tax effect is based upon the Companys Core
Earnings effective tax rate for the year. The net tax
effect results primarily from the exclusion of the permanent
income tax impact of the equity forward contracts.
|
36
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
On April 16, 2007, the Company announced that an investor
group (the Investor Group) led by J.C.
Flowers & Co. (J.C. Flowers) signed a
definitive agreement to acquire the Company for approximately
$25.2 billion or $60.00 per share of common stock.
When the transaction is complete, J.C. Flowers and certain other
private equity investors including Friedman
Fleischer & Lowe; will invest approximately
$4.4 billion and own 50.2 percent, and Bank of America
(NYSE: BAC) and JPMorgan Chase (NYSE: JPM) each will invest
approximately $2.2 billion and each will own
24.9 percent. The Companys independent board members
unanimously approved the agreement and recommended that its
shareholders approve the agreement. (See also the Merger
Agreement filed with the Securities and Exchange
Commission (SEC) on the Companys Current
Report on
Form 8-K,
dated April 18, 2007.)
The Investor Group has stated that it is committed to supporting
the Companys focus on transparency among lenders, schools
and students and on corporate responsibility. The Company will
be subject to oversight by Congress and the Department of
Education, and will continue to be subject to all applicable
federal and state laws, including the Higher Education Act.
The transaction will require the approval of the Companys
stockholders, is subject to required regulatory approvals and
other closing conditions, and, under very limited circumstances,
may be terminated by the Investor Group. The transaction is
expected to close in late 2007. The consummation of the
transaction is subject to regulatory review and the expiration
of the waiting periods under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976. The Company will not
pay further dividends on its common stock prior to consummation
of the proposed transaction.
In connection with negotiations to purchase the Company, the
Companys preliminary financial results for the first
quarter of 2007 were shared with representatives of the Investor
Group.
Financing
Considerations Related to the Transaction
Following the closing, the Company will continue to have
publicly traded debt securities and as a result will continue
comprehensive financial reporting about its business, financial
condition and results of operations. Bank of America and
JPMorgan Chase are committed to provide debt financing for the
transaction and to provide additional liquidity to the Company
prior to and after the closing date, subject to customary terms
and conditions.
A portion of the Companys existing unsecured debt will
remain outstanding, and such outstanding debt will not be
equally and ratably secured with the new acquisition-related
debt. The acquisition financing will be structured with the
intent to accommodate the repayment of any outstanding debt as
it matures. The Company expects this transaction to have no
material impact on its outstanding asset-backed debt and to
remain an active participant in the asset-backed securities
market.
On April 16, 2007, after the Company announced the
transaction, Moodys Investor Services,
Standard & Poors and Fitch Ratings placed the
long and short-term ratings on the Companys senior
unsecured debt under review for possible downgrade. In addition,
following the announcement, secondary market credit spreads on
the Companys outstanding senior unsecured bonds widened
significantly, limiting access to new sources of senior
unsecured funds at borrowing costs comparable to those available
before the announcement.
On April 30, 2007, Bank of America and JPMorgan Chase
provided the Company with a new, $30 billion asset-backed
commercial paper conduit facility. This additional liquidity,
combined with the Companys existing liquidity, is
anticipated to be sufficient to meet the Companys cash
needs beyond the expected closing
37
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Information at March 31, 2007 and for the three months
ended
March 31, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
12.
|
Subsequent
Event (Continued)
|
date of the announced transaction, even if no additional
securities are issued by the Company during that time. However,
the Company does expect to resume issuance of the Companys
traditional asset-backed securities within the next few months.
Accounting
Considerations Related to the Transaction
Upon closing, the transaction will be accounted for using the
purchase accounting method, and purchase accounting adjustments
will be pushed down to the Company. Under purchase accounting,
the total cost of the acquisition will be allocated to the
Companys identifiable assets and liabilities based on
their respective fair values. Thus, all the assets and
liabilities will have a new basis of accounting and therefore
previous unamortized premiums, discounts and reserves related to
those assets and liabilities will be written-off once the
transaction closes. The excess of the purchase price over the
estimated fair value of the identifiable assets and liabilities
will be recognized as goodwill. Since the Company is the
acquired enterprise, expenses incurred in connection with the
transaction will be expensed. Transaction fees that are
contingent upon the closing will be recognized when the
transaction closes. Transaction fees that are not contingent on
the closing will be expensed as incurred. Vesting accelerates on
all stock-based compensation awards, and as a result, all
deferred compensation related to those awards will be expensed
upon closing of the transaction.
At March 31, 2007, the Company had approximately
$2 billion Contingently Convertible Debentures
(Co-Cos) outstanding. The Co-Cos are eligible to be
called at par on or after July 25, 2007, under certain
circumstances. At March 31, 2007, the Company classified
its $2 billion outstanding Co-Cos as a long-term obligation
because as of that date, the Company believed that a successful
remarketing of the Co-Cos in July 2007 was probable. Upon
announcement of the transaction on April 16, 2007, the
Company deemed that a successful remarketing of the bonds in
July 2007 was no longer probable. The Company expects to
classify the Co-Cos as a short-term obligation at June 30,
2007 if at that time the Company believes that a successful
remarketing of the bonds will not occur in July 2007, as the
investors will have the option to put the bonds back to the
Company at such time. Additionally, in the definitive agreement
to acquire the Company signed on April 16, 2007, the
Company agreed to redeem the Co-Cos on July 25, 2007 after
receiving written notice from the Investor Group upon certain
conditions.
38
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three months ended March 31, 2007 and 2006
(Dollars in millions, except per share amounts, unless otherwise
noted)
FORWARD-LOOKING
AND CAUTIONARY STATEMENTS
This quarterly report contains forward-looking statements and
information that are based on managements current
expectations as of the date of this document. When used in this
report, the words anticipate, believe,
estimate, intend and expect
and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are subject to
risks, uncertainties, assumptions and other factors that may
cause the actual results to be materially different from those
reflected in such forward-looking statements. These factors
include, among others, the occurrence of any event, change or
other circumstances that could give rise to the termination of
the merger agreement (see SUBSEQUENT EVENT that
describes the definitive agreement for an investor group to
acquire the Company (the Merger)); the outcome of
any legal proceedings that may be instituted against us and
others relating to the merger agreement; the inability to
complete the Merger due to the failure to obtain shareholder
approval or the failure to satisfy other conditions to
completion of the Merger; the failure to obtain the necessary
debt financing arrangements set forth in commitment letters
received in connection with the Merger; the effect of the
announcement of the Merger on our customer relationships,
operating results and business generally; the amount of the
costs, fees, expenses and charges related to the Merger and the
actual terms of certain financings that will be obtained for the
Merger; the impact of the substantial indebtedness incurred to
finance the consummation of the Merger; changes in the terms of
student loans and the educational credit marketplace arising
from the implementation of applicable laws and regulations and
from changes in these laws and regulations, which may reduce the
volume, average term and yields on student loans under the
Federal Family Education Loan Program (FFELP) or
result in loans being originated or refinanced under non-FFELP
programs or may affect the terms upon which banks and others
agree to sell FFELP loans to SLM Corporation, more commonly
known as Sallie Mae, and its subsidiaries (collectively,
the Company). In addition, a larger than expected
increase in third party consolidations of our FFELP loans could
materially adversely affect our results of operations. The
Company could also be affected by changes in the demand for
educational financing or in financing preferences of lenders,
educational institutions, students and their families; incorrect
estimates or assumptions by management in connection with the
preparation of our consolidated financial statements; changes in
the composition of our Managed FFELP and Private Education Loan
portfolios; a significant decrease in our common stock price,
which may result in counterparties terminating equity forward
positions with us, which, in turn, could have a materially
dilutive effect on our common stock; changes in the general
interest rate environment and in the securitization markets for
education loans, which may increase the costs or limit the
availability of financings necessary to initiate, purchase or
carry education loans; losses from loan defaults; changes in
prepayment rates and credit spreads; and changes in the demand
for debt management services and new laws or changes in existing
laws that govern debt management services.
OVERVIEW
We are the largest source of funding, delivery and servicing
support for education loans in the United States. Our primary
business is to originate, acquire and hold both federally
guaranteed student loans and Private Education Loans, which are
not federally guaranteed or privately insured. The primary
source of our earnings is from net interest income earned on
those student loans as well as gains on the sales of such loans
in securitization transactions. We also earn fees for
pre-default and post-default receivables management services on
student loans, such that we are engaged in every phase of the
student loan life cycle from originating and
servicing student loans to default prevention and ultimately the
collection on defaulted student loans. Through recent
acquisitions, we have expanded our receivables management
services to a number of different asset classes outside of
student loans. We also provide a wide range of other financial
services, processing capabilities and information technology to
meet the needs of educational institutions, lenders,
39
students and their families, and guarantee agencies. SLM
Corporation, more commonly known as Sallie Mae, is a holding
company that operates through a number of subsidiaries.
References in this report to the Company refer to
SLM Corporation and its subsidiaries.
We have used both internal growth and strategic acquisitions to
attain our leadership position in the education finance
marketplace. Our sales force, which delivers our products on
campuses across the country, is the largest in the student loan
industry. The core of our marketing strategy is to promote our
on-campus brands, which generate student loan originations
through our Preferred Channel. Loans generated through our
Preferred Channel are more profitable than loans acquired
through other acquisition channels because we own them earlier
in the student loans life and generally incur lower costs
to acquire such loans. We have built brand leadership through
the Sallie Mae name, the brands of our subsidiaries and those of
our lender partners. These sales and marketing efforts are
supported by the largest and most diversified servicing
capabilities in the industry, providing an unmatched array of
services to financial aid offices. In recent years, borrowers
have been consolidating their FFELP Stafford loans into FFELP
Consolidation Loans in much greater numbers such that FFELP
Consolidation Loans now constitute 56 percent of our
Managed loan portfolio. FFELP Consolidation Loans are marketed
directly to consumers and we believe they will continue to be an
important loan acquisition channel.
We have expanded into a number of fee-based businesses, most
notably, our Debt Management Operations (DMO)
business. Our DMO business provides a wide range of accounts
receivable and collections services including student loan
default aversion services, defaulted student loan portfolio
management services, contingency collections services for
student loans and other asset classes, and accounts receivable
management and collection for purchased portfolios of
receivables that are delinquent or have been charged off by
their original creditors. We also purchase and manage portfolios
of
sub-performing
and non-performing mortgage loans.
We manage our business through two primary operating segments:
the Lending operating segment and the DMO operating segment.
Accordingly, the results of operations of the Companys
Lending and DMO segments are presented separately below under
BUSINESS SEGMENTS. These operating segments are
considered reportable segments under the Financial Accounting
Standards Boards (FASB) Statement of Financial
Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related
Information, based on quantitative thresholds applied to
the Companys financial statements.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
A discussion of the Companys critical accounting policies,
which include premiums, discounts and Borrower Benefits,
securitization accounting and Retained Interests, provisions for
loan losses, derivative accounting and the effects of
Consolidation Loan activity on estimates, can be found in the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2006. There have been no
material changes to these policies during the first quarter of
2007.
40
SELECTED
FINANCIAL DATA
Condensed
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
Increase
|
|
|
|
March 31,
|
|
|
(Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
Net interest income
|
|
$
|
414
|
|
|
$
|
387
|
|
|
$
|
27
|
|
|
|
7
|
%
|
Less: provisions for losses
|
|
|
150
|
|
|
|
60
|
|
|
|
90
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provisions for losses
|
|
|
264
|
|
|
|
327
|
|
|
|
(63
|
)
|
|
|
(19
|
)
|
Gains on student loan
securitizations
|
|
|
367
|
|
|
|
30
|
|
|
|
337
|
|
|
|
1123
|
|
Servicing and securitization
revenue
|
|
|
252
|
|
|
|
99
|
|
|
|
153
|
|
|
|
155
|
|
Losses on securities, net
|
|
|
(31
|
)
|
|
|
|
|
|
|
(31
|
)
|
|
|
(100
|
)
|
Gains (losses) on derivative and
hedging activities, net
|
|
|
(357
|
)
|
|
|
(87
|
)
|
|
|
(270
|
)
|
|
|
(310
|
)
|
Guarantor servicing fees
|
|
|
39
|
|
|
|
27
|
|
|
|
12
|
|
|
|
44
|
|
Debt management fees
|
|
|
87
|
|
|
|
92
|
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Collections revenue
|
|
|
66
|
|
|
|
56
|
|
|
|
10
|
|
|
|
18
|
|
Other income
|
|
|
96
|
|
|
|
69
|
|
|
|
27
|
|
|
|
39
|
|
Operating expenses
|
|
|
356
|
|
|
|
323
|
|
|
|
33
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
|
427
|
|
|
|
290
|
|
|
|
137
|
|
|
|
47
|
%
|
Income taxes
|
|
|
310
|
|
|
|
137
|
|
|
|
173
|
|
|
|
126
|
|
Minority interest in net earnings
of subsidiaries
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
116
|
|
|
|
152
|
|
|
|
(36
|
)
|
|
|
(24
|
)
|
Preferred stock dividends
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common
stock
|
|
$
|
107
|
|
|
$
|
143
|
|
|
$
|
(36
|
)
|
|
|
(25
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common
share
|
|
$
|
.26
|
|
|
$
|
.35
|
|
|
$
|
(.09
|
)
|
|
|
(26
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common
share
|
|
$
|
.26
|
|
|
$
|
.34
|
|
|
$
|
(.08
|
)
|
|
|
(24
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share
|
|
$
|
.25
|
|
|
$
|
.22
|
|
|
$
|
.03
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
Condensed
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
(Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
Assets
|
FFELP Stafford and Other Student
Loans, net
|
|
$
|
28,562
|
|
|
$
|
24,841
|
|
|
$
|
3,721
|
|
|
|
15
|
%
|
FFELP Consolidation Loans, net
|
|
|
66,170
|
|
|
|
61,324
|
|
|
|
4,846
|
|
|
|
8
|
|
Private Education Loans, net
|
|
|
9,849
|
|
|
|
9,755
|
|
|
|
94
|
|
|
|
1
|
|
Other loans, net
|
|
|
1,351
|
|
|
|
1,309
|
|
|
|
42
|
|
|
|
3
|
|
Cash and investments
|
|
|
6,116
|
|
|
|
5,185
|
|
|
|
931
|
|
|
|
18
|
|
Restricted cash and investments
|
|
|
3,719
|
|
|
|
3,423
|
|
|
|
296
|
|
|
|
9
|
|
Retained Interest in off-balance
sheet securitized loans
|
|
|
3,643
|
|
|
|
3,341
|
|
|
|
302
|
|
|
|
9
|
|
Goodwill and acquired intangible
assets, net
|
|
|
1,364
|
|
|
|
1,372
|
|
|
|
(8
|
)
|
|
|
(1
|
)
|
Other assets
|
|
|
6,102
|
|
|
|
5,586
|
|
|
|
516
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
126,876
|
|
|
$
|
116,136
|
|
|
$
|
10,740
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Stockholders Equity
|
Short-term borrowings
|
|
$
|
4,429
|
|
|
$
|
3,528
|
|
|
$
|
901
|
|
|
|
26
|
%
|
Long-term borrowings
|
|
|
114,071
|
|
|
|
104,559
|
|
|
|
9,512
|
|
|
|
9
|
|
Other liabilities
|
|
|
3,991
|
|
|
|
3,680
|
|
|
|
311
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
122,491
|
|
|
|
111,767
|
|
|
|
10,724
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in subsidiaries
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
Stockholders equity before
treasury stock
|
|
|
5,424
|
|
|
|
5,401
|
|
|
|
23
|
|
|
|
|
|
Common stock held in treasury
|
|
|
1,048
|
|
|
|
1,041
|
|
|
|
7
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
4,376
|
|
|
|
4,360
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
126,876
|
|
|
$
|
116,136
|
|
|
$
|
10,740
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESULTS
OF OPERATIONS
Consolidated
Earnings Summary
Three
Months Ended March 31, 2007 Compared to Three Months Ended
March 31, 2006
For the three months ended March 31, 2007, net income of
$116 million ($.26 diluted earnings per share) was a
decrease of 24 percent from net income of $152 million
($.34 diluted earnings per share) for the three months ended
March 31, 2006. First quarter 2007 pre-tax income of
$427 million was a 47 percent increase from
$290 million earned in the first quarter of 2006. The
decrease in current quarter over year-ago quarter, after-tax net
income versus the increase in pre-tax net income is driven by
fluctuations in the unrealized gains and losses on equity
forward contracts as described above. Excluding the unrealized
loss on equity forward contracts of $412 million in the
first quarter of 2007 and $122 million in the first quarter
of 2006, taxable income increased the effective tax rate from
47 percent in the first quarter of 2006 to 73 percent
in the first quarter of 2007.
The increase in the pre-tax results of the first quarter of 2007
versus the year-ago quarter was primarily due to an increase in
securitization gains of $337 million, partially offset by
an increase in the net losses on derivative and hedging
activities of $270 million. In the first quarter of 2007,
we recognized a pre-tax securitization gain of $367 million
from one Private Education Loan securitization compared to
pre-tax securitization gains of $30 million in the first
quarter of 2006, as the result of two FFELP Stafford
securitizations and one FFELP Consolidation Loan securitization.
The
year-over-year
increase in net losses on derivative and hedging activities is
primarily due to the $290 million increase in the
unrealized loss on equity
42
forward contracts as discussed above and to a decrease of
$139 million in the unrealized gains on our Floor Income
Contracts. The negative impact on pre-tax income from these
items is partially offset by a positive impact from basis swaps
which swung from an unrealized loss of $82 million in the
first quarter of 2006 to an unrealized gain of $60 million
in the first quarter of 2007.
Net interest income after provisions for loan losses decreased
by $63 million versus the first quarter of 2006. The
decrease is due to the
year-over-year
increase in the provision for Private Education Loan losses of
$90 million, which offset the
year-over-year
$27 million increase in net interest income. The increase
in the provisions for loan losses reflects a further seasoning
of the portfolio and an increase in delinquencies and
charge-offs related to lower collections caused by operational
challenges encountered from the relocation of one of the
Companys call centers. The $27 million, or
7 percent,
year-over-year
increase in net interest income is primarily due to a
$19.8 billion increase in average interest earning assets,
offset by a 22 basis point decrease in the net interest
margin. The
year-over-year
decrease in the net interest margin is due to higher average
interest rates which reduced Floor Income by $10 million, a
higher provision for interest reserves as a result of the
increase in delinquencies noted above, and an increase in the
average balance of cash and investments.
In the first quarter of 2007, servicing and securitization
income was $252 million, a $153 million increase over
the year-ago quarter. This increase can primarily be attributed
to a
year-over-year
decrease of $41 million in impairments to our Retained
Interests. The prior year impairments were primarily caused by
the effect of higher than expected FFELP Consolidation Loan
activity on our off-balance sheet FFELP Stafford
securitizations. The remaining increase in securitization
revenue is due to the increase of higher yielding Private
Education Loan Residual Interests, and the adoption of
SFAS No. 155 Accounting for Certain Hybrid
Financial Instruments in the first quarter of 2007. Under
SFAS No. 155, the Company has elected to recognize the
unrealized fair value adjustment to our Residual Interests in
earnings. For securitizations closed prior to December 31,
2006, this adjustment was recorded in other comprehensive income.
In the first quarter of 2007, fee and other income and
collections revenue totaled $289 million, an increase of
17 percent over the year-ago quarter. This increase was
primarily driven by revenue from Upromise, acquired in August
2006 and to higher guarantor servicing fees.
Our Managed student loan portfolio grew by $23.1 billion
(or 18 percent), from $126.9 billion at March 31,
2006 to $150.0 billion at March 31, 2007. In the first
quarter of 2007, we acquired $12.5 billion of student
loans, a 46 percent increase over the $8.6 billion
acquired in the year-ago period. The first quarter 2007
acquisitions included $2.4 billion in Private Education
Loans, a 24 percent increase over the $2.0 billion
acquired in the year-ago period. In the quarter ended
March 31, 2007, we originated $8.0 billion of student
loans through our Preferred Channel, an increase of
5 percent over the $7.6 billion originated in the
year-ago quarter.
43
NET
INTEREST INCOME
Average
Balance Sheets
The following table reflects the rates earned on interest
earning assets and paid on interest bearing liabilities for the
three months ended March 31, 2007 and 2006. This table
reflects the net interest margin for the entire Company on a
consolidated basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Average Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student
Loans
|
|
$
|
26,885
|
|
|
|
6.80
|
%
|
|
$
|
19,522
|
|
|
|
6.20
|
%
|
FFELP Consolidation Loans
|
|
|
63,260
|
|
|
|
6.51
|
|
|
|
54,312
|
|
|
|
6.13
|
|
Private Education Loans
|
|
|
11,354
|
|
|
|
12.09
|
|
|
|
9,016
|
|
|
|
10.86
|
|
Other loans
|
|
|
1,365
|
|
|
|
8.31
|
|
|
|
1,172
|
|
|
|
8.14
|
|
Cash and investments
|
|
|
7,958
|
|
|
|
5.81
|
|
|
|
7,042
|
|
|
|
5.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
110,822
|
|
|
|
7.12
|
%
|
|
|
91,064
|
|
|
|
6.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest earning assets
|
|
|
9,095
|
|
|
|
|
|
|
|
7,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
119,917
|
|
|
|
|
|
|
$
|
99,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Liabilities and
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
3,220
|
|
|
|
5.89
|
%
|
|
$
|
4,174
|
|
|
|
4.78
|
%
|
Long-term borrowings
|
|
|
107,950
|
|
|
|
5.58
|
|
|
|
87,327
|
|
|
|
4.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
111,170
|
|
|
|
5.59
|
%
|
|
|
91,501
|
|
|
|
4.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities
|
|
|
4,483
|
|
|
|
|
|
|
|
3,703
|
|
|
|
|
|
Stockholders equity
|
|
|
4,264
|
|
|
|
|
|
|
|
3,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
119,917
|
|
|
|
|
|
|
$
|
99,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
1.51
|
%
|
|
|
|
|
|
|
1.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate/Volume
Analysis
The following rate/volume analysis illustrates the relative
contribution of changes in interest rates and asset volumes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
(Decrease)
|
|
|
|
|
|
|
Attributable to
|
|
|
|
Increase
|
|
|
Change in
|
|
|
|
(Decrease)
|
|
|
Rate
|
|
|
Volume
|
|
|
Three months ended
March 31, 2007 vs. three months ended March 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
465
|
|
|
$
|
138
|
|
|
$
|
327
|
|
Interest expense
|
|
|
439
|
|
|
|
204
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
26
|
|
|
$
|
(66
|
)
|
|
$
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in the net interest margin for the three months
ended March 31, 2007 versus the year-ago quarter, was
primarily due to fluctuations in the student loan spread as
discussed under Student Loans Student Loan
Spread Student Loan Spread Analysis
On-Balance Sheet.
44
Student
Loans
For both federally insured and Private Education Loans, we
account for premiums paid, discounts received and certain
origination costs incurred on the origination and acquisition of
student loans in accordance with SFAS No. 91,
Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of
Leases. The unamortized portion of the premiums and
discounts is included in the carrying value of the student loan
on the consolidated balance sheet. We recognize income on our
student loan portfolio based on the expected yield of the
student loan after giving effect to the amortization of purchase
premiums and the accretion of student loan discounts, as well as
interest rate reductions and rebates expected to be earned
through Borrower Benefits programs. Discounts on Private
Education Loans are deferred and accreted to income over the
lives of the student loans. In the table below, this accretion
of discounts is netted with the amortization of the premiums.
Student
Loan Spread
An important performance measure closely monitored by management
is the student loan spread. The student loan spread is the
difference between the income earned on the student loan assets
and the interest paid on the debt funding those assets. A number
of factors can affect the overall student loan spread such as:
|
|
|
|
|
the mix of student loans in the portfolio, with FFELP
Consolidation Loans having the lowest spread and Private
Education Loans having the highest spread;
|
|
|
|
the premiums paid, borrower fees charged and capitalized costs
incurred to acquire student loans which impact the spread
through subsequent amortization;
|
|
|
|
the type and level of Borrower Benefits programs for which the
student loans are eligible;
|
|
|
|
the estimate of uncollectible accrued interest in the period
provided through interest income;
|
|
|
|
the level of Floor Income and, when considering the Core
Earnings basis student loan spread, the amount of Floor
Income-eligible loans that have been hedged through Floor Income
Contracts; and
|
|
|
|
funding and hedging costs.
|
Wholesale
Consolidation Loans
During 2006, we implemented a new loan acquisition strategy
under which we began purchasing FFELP Consolidation Loans
outside of our normal origination channels, primarily via the
spot market. We refer to this new loan acquisition strategy as
our Wholesale Consolidation Channel. FFELP Consolidation Loans
acquired through this channel are considered incremental volume
to our core acquisition channels, which are focused on the
retail marketplace with an emphasis on our internal brand
strategy. Wholesale Consolidation Loans generally command
significantly higher premiums than our originated FFELP
Consolidation Loans, and as a result, Wholesale Consolidation
Loans have lower spreads. Since Wholesale Consolidation Loans
are acquired outside of our core loan acquisition channels and
have different yields and return expectations than the rest of
our FFELP Consolidation Loan portfolio, we have excluded the
impact of the Wholesale Consolidation Loan volume from the
student loan spread analysis to provide more meaningful
period-over-period
comparisons on the performance of our student loan portfolio.
The average balance of our Wholesale Consolidation Loan
portfolio was $4.6 billion for the first quarter of 2007.
Had the impact of the Wholesale Consolidation Loan volume been
included in the on-balance sheet student loan spread it would
have reduced the spread by approximately 7 basis points for
the first quarter of 2007. As of March 31, 2007, Wholesale
Consolidation Loans totaled $6.7 billion, or
10 percent, of our total on-balance sheet FFELP
Consolidation Loan portfolio.
The student loan spread is highly susceptible to liquidity,
funding and interest rate risk. These risks are discussed
separately in our 2006 Annual Report on
Form 10-K
at LIQUIDITY AND CAPITAL RESOURCES and in the
RISK FACTORS discussion.
45
Student
Loan Spread Analysis On-Balance Sheet
The following table analyzes the reported earnings from student
loans on-balance sheet. For an analysis of our student loan
spread for the entire portfolio of Managed student loans on a
similar basis to the on-balance sheet analysis, see
LENDING BUSINESS SEGMENT Student Loan Spread
Analysis Core Earnings Basis.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
On-Balance Sheet
|
|
|
|
|
|
|
|
|
Student loan yield, before Floor
Income
|
|
|
8.17
|
%
|
|
|
7.51
|
%
|
Gross Floor Income
|
|
|
.02
|
|
|
|
.07
|
|
Consolidation Loan Rebate Fees
|
|
|
(.63
|
)
|
|
|
(.68
|
)
|
Borrower Benefits
|
|
|
(.13
|
)
|
|
|
(.11
|
)
|
Premium and discount amortization
|
|
|
(.15
|
)
|
|
|
(.12
|
)
|
|
|
|
|
|
|
|
|
|
Student loan net yield
|
|
|
7.28
|
|
|
|
6.67
|
|
Student loan cost of funds
|
|
|
(5.57
|
)
|
|
|
(4.84
|
)
|
|
|
|
|
|
|
|
|
|
Student loan
spread(1)
|
|
|
1.71
|
%
|
|
|
1.83
|
%
|
|
|
|
|
|
|
|
|
|
Average Balances
|
|
|
|
|
|
|
|
|
On-balance sheet student
loans(1)
|
|
$
|
96,866
|
|
|
$
|
82,850
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Excludes the impact of the Wholesale Consolidation Loan
portfolio on the student loan spread and average balances for
the three months ended March 31, 2007.
|
Discussion
of Student Loan Spread Effects of Floor Income and
Derivative Accounting
In low interest rate environments, one of the primary drivers of
fluctuations in our on-balance sheet student loan spread is the
level of gross Floor Income (Floor Income earned before payments
on Floor Income Contracts) earned in the period. Short-term
interest rates have increased to a level that significantly
reduced the level of gross Floor Income earned in the periods
presented. We believe that we have economically hedged most of
the Floor Income through the sale of Floor Income Contracts,
under which we receive an upfront fee and agree to pay the
counterparty the Floor Income earned on a notional amount of
student loans. These contracts do not qualify for hedge
accounting treatment and as a result the payments on the Floor
Income Contracts are included on the income statement with
gains (losses) on derivative and hedging activities,
net rather than in student loan interest income.
In addition to Floor Income Contracts, we also extensively use
basis swaps to manage our basis risk associated with interest
rate sensitive assets and liabilities. These swaps generally do
not qualify as accounting hedges and are likewise required to be
accounted for in the gains (losses) on derivative and
hedging activities, net line on the income statement. As a
result, they are not considered in the calculation of the cost
of funds in the above table.
Discussion
of Student Loan Spread Other
Quarter-over-Quarter
Fluctuations
We estimate the amount of Private Education Loan accrued
interest in a period that is not reasonably expected to be
collected in the future using a methodology consistent with the
status-based migration analysis used for the allowance for
Private Education Loans. We use this estimate to offset accrued
interest in the current period through a charge to student loan
interest income. As our provisions for loan losses increased
significantly in the first quarter of 2007, we had a similar
rise in the estimate of uncollectible accrued interest
receivable which reduced the student loan spread by
approximately 5 basis points as compared to the first
quarter of 2006.
46
In the first quarter of 2006, we changed our policy related to
Borrower Benefits qualification requirements and updated our
assumptions to reflect this policy. These changes resulted in a
reduction of our liability for Borrower Benefits of
$10 million or 5 basis points.
FEDERAL
AND STATE TAXES
The Company is subject to federal and state income taxes. Our
effective tax rate for the three months ended March 31,
2007 was 73 percent versus 47 percent for the three
months ended March 31, 2006. The effective tax rate
reflects the permanent impact of the exclusion of the gains or
losses on equity forward contracts recognized under
SFAS No. 150.
BUSINESS
SEGMENTS
The results of operations of the Companys Lending and Debt
Management Operations (DMO) operating segments are
presented below. These defined business segments operate in
distinct business environments and are considered reportable
segments under SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, based
on quantitative thresholds applied to the Companys
financial statements. In addition, we provide other
complementary products and services, including guarantor and
student loan servicing, through smaller operating segments that
do not meet such thresholds and are aggregated in the Corporate
and Other reportable segment for financial reporting purposes.
The management reporting process measures the performance of the
Companys operating segments based on the management
structure of the Company as well as the methodology used by
management to evaluate performance and allocate resources. In
accordance with the Rules and Regulations of the Securities and
Exchange Commission (SEC), we prepare financial
statements in accordance with generally accepted accounting
principles in the United States of America (GAAP).
In addition to evaluating the Companys GAAP-based
financial information, management, including the Companys
chief operation decision maker, evaluates the performance of the
Companys operating segments based on their profitability
on a basis that, as allowed under SFAS No. 131,
differs from GAAP. We refer to managements basis of
evaluating our segment results as Core Earnings
presentations for each business segment and we refer to these
performance measures in our presentations with credit rating
agencies and lenders. Accordingly, information regarding the
Companys reportable segments is provided herein based on
Core Earnings, which are discussed in detail below.
Our Core Earnings are not defined terms within GAAP
and may not be comparable to similarly titled measures reported
by other companies. Core Earnings net income
reflects only current period adjustments to GAAP net income as
described below. Unlike financial accounting, there is no
comprehensive, authoritative guidance for management reporting
and as a result, our management reporting is not necessarily
comparable with similar information for any other financial
institution. The Companys 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.
Core Earnings are the primary financial performance
measures used by management to develop the Companys
financial plans, track results, and establish corporate
performance targets and incentive compensation. While Core
Earnings are not a substitute for reported results under
GAAP, the Company relies on Core Earnings in
operating its business because Core Earnings permit
management to make meaningful
period-to-period
comparisons of the operational and performance indicators that
are most closely assessed by management. Management believes
this information provides additional insight into the financial
performance of the core business activities of our operating
segments. Accordingly, the tables presented below reflect
Core Earnings which is reviewed and utilized by
management to manage the business for each of the Companys
reportable segments. A further discussion regarding Core
Earnings is included under Limitations of Core
Earnings and Pre-tax Differences
between Core Earnings and GAAP by Business
Segment.
47
The Lending operating segment includes all discussion of income
and related expenses associated with the net interest margin,
the student loan spread and its components, the provisions for
loan losses, and other fees earned on our Managed portfolio of
student loans. The DMO operating segment reflects the fees
earned and expenses incurred in providing accounts receivable
management and collection services. Our Corporate and Other
reportable segment includes our remaining fee businesses and
other corporate expenses that do not pertain directly to the
primary segments identified above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2007
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
Lending
|
|
|
DMO
|
|
|
and Other
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student
Loans
|
|
$
|
695
|
|
|
$
|
|
|
|
$
|
|
|
FFELP Consolidation Loans
|
|
|
1,331
|
|
|
|
|
|
|
|
|
|
Private Education Loans
|
|
|
658
|
|
|
|
|
|
|
|
|
|
Other loans
|
|
|
28
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
|
162
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
2,874
|
|
|
|
|
|
|
|
2
|
|
Total interest expense
|
|
|
2,220
|
|
|
|
7
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
654
|
|
|
|
(7
|
)
|
|
|
(3
|
)
|
Less: provisions for losses
|
|
|
198
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provisions for losses
|
|
|
456
|
|
|
|
(7
|
)
|
|
|
(4
|
)
|
Fee income
|
|
|
|
|
|
|
87
|
|
|
|
39
|
|
Collections revenue
|
|
|
|
|
|
|
65
|
|
|
|
|
|
Other income
|
|
|
44
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
44
|
|
|
|
152
|
|
|
|
91
|
|
Operating
expenses(1)
|
|
|
171
|
|
|
|
93
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
minority interest in net earnings of subsidiaries
|
|
|
329
|
|
|
|
52
|
|
|
|
19
|
|
Income tax
expense(2)
|
|
|
122
|
|
|
|
19
|
|
|
|
7
|
|
Minority interest in net earnings
of subsidiaries
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net
income
|
|
$
|
207
|
|
|
$
|
32
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating expenses for the Lending,
DMO, and Corporate and Other business segments include
$9 million, $3 million, and $4 million,
respectively, of stock option compensation expense due to the
implementation of SFAS No. 123(R) in the first quarter
of 2006.
|
|
(2) |
|
Income taxes are based on a
percentage of net income before tax for the individual
reportable segment.
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2006
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
Lending
|
|
|
DMO
|
|
|
and Other
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student
Loans
|
|
$
|
650
|
|
|
$
|
|
|
|
$
|
|
|
FFELP Consolidation Loans
|
|
|
1,028
|
|
|
|
|
|
|
|
|
|
Private Education Loans
|
|
|
429
|
|
|
|
|
|
|
|
|
|
Other loans
|
|
|
23
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
|
131
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
2,261
|
|
|
|
|
|
|
|
1
|
|
Total interest expense
|
|
|
1,660
|
|
|
|
5
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
601
|
|
|
|
(5
|
)
|
|
|
|
|
Less: provisions for losses
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provisions for losses
|
|
|
526
|
|
|
|
(5
|
)
|
|
|
|
|
Fee income
|
|
|
|
|
|
|
92
|
|
|
|
27
|
|
Collections revenue
|
|
|
|
|
|
|
56
|
|
|
|
|
|
Other income
|
|
|
40
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
40
|
|
|
|
148
|
|
|
|
57
|
|
Operating
expenses(1)
|
|
|
161
|
|
|
|
89
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
and minority interest in net earnings of subsidiaries
|
|
|
405
|
|
|
|
54
|
|
|
|
(2
|
)
|
Income tax expense
(benefit)(2)
|
|
|
150
|
|
|
|
20
|
|
|
|
(1
|
)
|
Minority interest in net earnings
of subsidiaries
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net
income (loss)
|
|
$
|
255
|
|
|
$
|
33
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating expenses for the Lending,
DMO, and Corporate and Other business segments include
$10 million, $3 million, and $5 million,
respectively, of stock option compensation expense due to the
implementation of SFAS No. 123(R) in the first quarter
of 2006.
|
|
(2) |
|
Income taxes are based on a
percentage of net income before tax for the individual
reportable segment.
|
Limitations
of Core Earnings
While GAAP provides a uniform, comprehensive basis of
accounting, for the reasons described above, management believes
that Core Earnings are an important additional tool
for providing a more complete understanding of the
Companys results of operations. Nevertheless, Core
Earnings are subject to certain general and specific
limitations that investors should carefully consider. For
example, as stated above, unlike financial accounting, there is
no comprehensive, authoritative guidance for management
reporting. Our Core Earnings are not defined terms
within GAAP and may not be comparable to similarly titled
measures reported by other companies. Unlike GAAP, Core
Earnings reflect only current period adjustments to GAAP.
Accordingly, the Companys Core Earnings
presentation does not represent a comprehensive basis of
accounting. Investors, therefore, may not compare our
Companys performance with that of other financial services
companies based upon Core Earnings. Core
Earnings results are only meant to supplement GAAP results
by providing additional information regarding the operational
and performance indicators that are most closely used by
management, the Companys board of directors, rating
agencies and lenders to assess performance.
Other limitations arise from the specific adjustments that
management makes to GAAP results to derive Core
Earnings results. For example, in reversing the unrealized
gains and losses that result from SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, on derivatives that do not
49
qualify for hedge treatment, as well as on
derivatives that do qualify but are in part ineffective because
they are not perfect hedges, we focus on the long-term economic
effectiveness of those instruments relative to the underlying
hedged item and isolate the effects of interest rate volatility,
changing credit spreads and changes in our stock price on the
fair value of such instruments during the period. Under GAAP,
the effects of these factors on the fair value of the derivative
instruments (but not on the underlying hedged item) tend to show
more volatility in the short term. While our presentation of our
results on a Core Earnings basis provides important
information regarding the performance of our Managed portfolio,
a limitation of this presentation is that we are presenting the
ongoing spread income on loans that have been sold to a trust
managed by us. While we believe that our Core
Earnings presentation presents the economic substance of
our Managed loan portfolio, it understates earnings volatility
from securitization gains. Our Core Earnings results
exclude certain Floor Income, which is real cash income, from
our reported results and therefore may understate earnings in
certain periods. Managements financial planning and
valuation of operating results, however, does not take into
account Floor Income because of its inherent uncertainty,
except when it is economically hedged through Floor Income
Contracts.
Pre-tax
differences between Core Earnings and GAAP by
Business Segment
Our Core Earnings are the primary financial
performance measures used by management to evaluate performance
and to allocate resources. Accordingly, financial information is
reported to management on a Core Earnings basis by
reportable segment, as these are the measures used regularly by
our chief operating decision maker. Our Core
Earnings are used in developing our financial plans and
tracking results, and also in establishing corporate performance
targets and determining incentive compensation. Management
believes this information provides additional insight into the
financial performance of the Companys core business
activities. Core Earnings net income reflects only
current period adjustments to GAAP net income, as described in
the more detailed discussion of the differences between
Core Earnings and GAAP that follows, which includes
further detail on each specific adjustment required to reconcile
our Core Earnings segment presentation to our GAAP
earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
Lending
|
|
|
DMO
|
|
|
and Other
|
|
|
Lending
|
|
|
DMO
|
|
|
and Other
|
|
|
Core Earnings
adjustments to GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact of securitization
accounting
|
|
$
|
422
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(62
|
)
|
|
$
|
|
|
|
$
|
|
|
Net impact of derivative accounting
|
|
|
80
|
|
|
|
|
|
|
|
(412
|
)
|
|
|
83
|
|
|
|
|
|
|
|
(122
|
)
|
Net impact of Floor Income
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
Amortization of acquired
intangibles
|
|
|
(14
|
)
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(9
|
)
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings
adjustments to GAAP
|
|
$
|
449
|
|
|
$
|
(5
|
)
|
|
$
|
(417
|
)
|
|
$
|
(40
|
)
|
|
$
|
(4
|
)
|
|
$
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1) Securitization: Under GAAP, certain
securitization transactions in our Lending operating segment are
accounted for as sales of assets. Under the Companys
Core Earnings presentation for the Lending operating
segment, we present all securitization transactions on a
Core Earnings basis as long-term non-recourse
financings. The upfront gains on sale from
securitization transactions as well as ongoing servicing
and securitization revenue presented in accordance with
GAAP are excluded from Core Earnings net income and
replaced by the interest income, provisions for loan losses, and
interest expense as they are earned or incurred on the
securitization loans. We also exclude transactions with our
off-balance sheet trusts from Core Earnings net
income as they are considered intercompany transactions on a
Core Earnings basis.
50
The following table summarizes the securitization adjustments in
our Lending operating segment for the three months ended
March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Core Earnings
securitization adjustments:
|
|
|
|
|
|
|
|
|
Net interest income on securitized
loans, after provisions for losses
|
|
$
|
(167
|
)
|
|
$
|
(189
|
)
|
Gains on student loan
securitizations
|
|
|
367
|
|
|
|
30
|
|
Servicing and securitization
revenue
|
|
|
252
|
|
|
|
99
|
|
Intercompany transactions with
off-balance sheet trusts
|
|
|
(30
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
Total Core Earnings
securitization adjustments
|
|
$
|
422
|
|
|
$
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
2) Derivative Accounting: Core
Earnings net income excludes periodic unrealized gains and
losses arising primarily in our Lending operating segment, and
to a lesser degree in our Corporate and Other reportable
segment, that are caused primarily by the one-sided
mark-to-market
derivative valuations prescribed by SFAS No. 133 on
derivatives that do not qualify for hedge treatment
under GAAP. Under the Companys Core Earnings
presentation, we recognize the economic effect of these hedges,
which generally results in any cash paid or received being
recognized ratably as an expense or revenue over the hedged
items life. Core Earnings also excludes the
gain or loss on equity forward contracts that under
SFAS No. 133, are required to be accounted for as
derivatives and are
marked-to-market
through earnings.
SFAS No. 133 requires that changes in the fair value
of derivative instruments be recognized currently in earnings
unless specific hedge accounting criteria, as specified by
SFAS No. 133, are met. We believe that our derivatives
are effective economic hedges, and as such, are a critical
element of our interest rate risk management strategy. However,
some of our derivatives, primarily Floor Income Contracts,
certain basis swaps and equity forward contracts (discussed in
detail below), do not qualify for hedge treatment as
defined by SFAS No. 133, and the stand-alone
derivative must be
marked-to-market
in the income statement with no consideration for the
corresponding change in fair value of the hedged item. The gains
and losses described in gains (losses) on derivative and
hedging activities, net are primarily caused by interest
rate and foreign currency exchange rate volatility, changing
credit spreads and changes in our stock price during the period
as well as the volume and term of derivatives not receiving
hedge treatment.
Our Floor Income Contracts are written options that must meet
more stringent requirements than other hedging relationships to
achieve hedge effectiveness under SFAS No. 133.
Specifically, our Floor Income Contracts do not qualify for
hedge accounting treatment because the paydown 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
SFAS No. 133, the upfront payment is deemed a
liability and changes in fair value are recorded through income
throughout the life of the contract. The change in the value of
Floor Income Contracts is primarily caused by changing interest
rates that cause the amount of Floor Income earned on the
underlying student loans and paid to the counterparties to vary.
This is economically offset by the change in value of the
student loan portfolio, including our Retained Interests,
earning Floor Income but that offsetting change in value is not
recognized under SFAS No. 133. We believe the Floor
Income Contracts are economic hedges because they effectively
fix the amount of Floor Income earned over the contract period,
thus eliminating the timing and uncertainty that changes in
interest rates can have on Floor Income for that period. Prior
to SFAS No. 133, we accounted for Floor Income
Contracts as hedges and amortized the upfront cash compensation
ratably over the lives of the contracts.
Basis swaps are used to convert floating rate debt from one
interest rate index to another to better match the interest rate
characteristics of the assets financed by that debt. We
primarily use basis swaps to change the index of our floating
rate debt to better match the cash flows of our student loan
assets that are primarily indexed to a commercial paper, Prime
or Treasury bill index. In addition, we use basis swaps to
convert debt indexed to the Consumer Price Index
(CPI) to
3-month
LIBOR debt. SFAS No. 133 requires that when using
basis swaps, the change in the cash flows of the hedge
effectively offset both the change in the cash
51
flows of the asset and the change in the cash flows of the
liability. Our basis swaps hedge variable interest rate risk,
however they do not meet this effectiveness test because our
FFELP student loans can earn at either a variable or a fixed
interest rate depending on market interest rates. We also have
basis swaps that do not meet the SFAS No. 133
effectiveness test that economically hedge off-balance sheet
instruments. As a result, under GAAP these swaps are recorded at
fair value with changes in fair value reflected in the income
statement.
Under SFAS No. 150, equity forward contracts that
allow a net settlement option either in cash or the
Companys stock are required to be accounted for as
derivatives in accordance with SFAS No. 133. As a
result, we account for our equity forward contracts as
derivatives in accordance with SFAS No. 133 and mark
them to market through earnings. They do not qualify as
effective SFAS No. 133 hedges, as a requirement to
achieve hedge accounting is the hedged item must impact net
income and the settlement of these contracts through the
purchase of our own stock does not impact net income.
The table below quantifies the adjustments for derivative
accounting under SFAS No. 133 on our net income for
the three months ended March 31, 2007 and 2006 when
compared with the accounting principles employed in all years
prior to the SFAS No. 133 implementation.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
Core Earnings
derivative adjustments:
|
|
|
|
|
|
|
|
|
Gains (losses) on derivative and
hedging activities, net included in other
income(1)
|
|
$
|
(357
|
)
|
|
$
|
(87
|
)
|
Less: Realized losses on
derivative and hedging activities,
net(1)
|
|
|
25
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on
derivative and hedging activities,
net(1)
|
|
|
(332
|
)
|
|
|
(39
|
)
|
Other pre-SFAS No. 133
accounting adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net impact of
SFAS No. 133 derivative accounting
|
|
$
|
(332
|
)
|
|
$
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Reclassification of
Realized Gains (Losses) on Derivative and Hedging
Activities below for a detailed breakdown of the
components of both the realized and unrealized losses on
derivative and hedging activities.
|
Reclassification
of Realized Gains (Losses) on Derivative and Hedging
Activities
SFAS No. 133 requires net settlement income/expense on
derivatives and realized gains/losses related to derivative
dispositions (collectively referred to as realized gains
(losses) on derivative and hedging activities) that do not
qualify as hedges under SFAS No. 133 to be recorded in
a separate income statement line item below net interest income.
The table below summarizes the realized losses on derivative and
hedging activities, and where they are reclassified to on a
Core Earnings basis for the three months ended
March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
Reclassification of realized
losses on derivative and hedging activities:
|
|
|
|
|
|
|
|
|
Net settlement expense on Floor
Income Contracts reclassified to net interest income
|
|
$
|
(7
|
)
|
|
$
|
(21
|
)
|
Net settlement expense on interest
rate swaps reclassified to net interest income
|
|
|
(18
|
)
|
|
|
(27
|
)
|
Net realized losses on closed
Eurodollar futures contracts and terminated derivative contracts
reclassified to other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications of
realized losses on derivative and hedging activities
|
|
|
(25
|
)
|
|
|
(48
|
)
|
Add: Unrealized gains (losses) on
derivative and hedging activities,
net(1)
|
|
|
(332
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
Gains (losses) on derivative and
hedging activities, net
|
|
$
|
(357
|
)
|
|
$
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unrealized gains (losses) on
derivative and hedging activities, net is comprised of the
following unrealized
mark-to-market
gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Floor Income Contracts
|
|
$
|
5
|
|
|
$
|
144
|
|
Equity forward contracts
|
|
|
(412
|
)
|
|
|
(122
|
)
|
Basis swaps
|
|
|
60
|
|
|
|
(82
|
)
|
Other
|
|
|
15
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Total unrealized gains (losses) on
derivative and hedging activities, net
|
|
$
|
(332
|
)
|
|
$
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
52
Unrealized gains and losses on Floor Income Contracts are
primarily caused by changes in interest rates. In general, an
increase in interest rates results in an unrealized gain and
vice versa. Unrealized gains and losses on Equity Forward
Contracts fluctuate with changes in the Companys stock
price. Unrealized gains and losses on basis swaps result from
changes in the spread between indices, primarily as it relates
to CPI swaps economically hedging debt issuances indexed to CPI.
3) Floor Income: The timing and amount
(if any) of Floor Income earned in our Lending operating segment
is uncertain and in excess of expected spreads. Therefore, we
exclude such income from Core Earnings net income
when it is not economically hedged. We employ derivatives,
primarily Floor Income Contracts and futures, to economically
hedge Floor Income. As discussed above in Derivative
Accounting, these derivatives do not qualify as effective
accounting hedges and therefore, under GAAP, they are
marked-to-market
through the gains (losses) on derivative and hedging
activities, net line on the income statement with no
offsetting gain or loss recorded for the economically hedged
items. For Core Earnings net income, we reverse the
fair value adjustments on the Floor Income Contracts and futures
economically hedging Floor Income and include the amortization
of net premiums received (net of Eurodollar futures
contracts realized gains or losses) in income.
The following table summarizes the Floor Income adjustments in
our Lending operating segment for the three months ended
March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Month Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Core Earnings Floor
Income adjustments:
|
|
|
|
|
|
|
|
|
Floor Income earned on Managed
loans, net of payments on Floor Income Contracts
|
|
$
|
|
|
|
$
|
|
|
Amortization of net premiums on
Floor Income Contracts and futures in net interest income
|
|
|
(39
|
)
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
Total Core Earnings
Floor Income adjustments
|
|
$
|
(39
|
)
|
|
$
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
4) Acquired Intangibles: We exclude
goodwill and intangible impairment and amortization of acquired
intangibles. These amounts totaled $24 million and
$14 million, respectively, for the three months ended
March 31, 2007 and 2006, respectively. In the first quarter
of 2007, we recognized an intangible impairment of
$9 million due to changes in projected interest rates and
to changes that restrict the loans on which the Company is
entitled to earn a 9.5 percent yield (Special Allowance Payment
(SAP) loans).
53
LENDING
BUSINESS SEGMENT
In our Lending business segment, we originate and acquire
federally guaranteed student loans, which are administered by
ED, and Private Education Loans, which are not federally
guaranteed. The majority of our Private Education Loans is made
in conjunction with a FFELP Stafford loan and as a result is
marketed through the same marketing channels as FFELP Stafford
loans. While FFELP student loans and Private Education Loans
have different overall risk profiles due to the federal
guarantee of the FFELP student loans, they share many of the
same characteristics such as similar repayment terms, the same
marketing channel and sales force, and are originated and
serviced on the same servicing platform. Finally, where
possible, the borrower receives a single bill for both the
federally guaranteed and privately underwritten loans.
The following table summarizes the Core Earnings
results of operations for our Lending business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
% Increase
|
|
|
|
March 31,
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
2007 vs.
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
Core Earnings interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student
Loans
|
|
$
|
695
|
|
|
$
|
650
|
|
|
|
7
|
%
|
FFELP Consolidation Loans
|
|
|
1,331
|
|
|
|
1,028
|
|
|
|
29
|
|
Private Education Loans
|
|
|
658
|
|
|
|
429
|
|
|
|
53
|
|
Other loans
|
|
|
28
|
|
|
|
23
|
|
|
|
22
|
|
Cash and investments
|
|
|
162
|
|
|
|
131
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings
interest income
|
|
|
2,874
|
|
|
|
2,261
|
|
|
|
27
|
|
Total Core Earnings
interest expense
|
|
|
2,220
|
|
|
|
1,660
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Core Earnings
interest income
|
|
|
654
|
|
|
|
601
|
|
|
|
9
|
|
Less: provisions for losses
|
|
|
198
|
|
|
|
75
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Core Earnings
interest income after provisions for losses
|
|
|
456
|
|
|
|
526
|
|
|
|
(13
|
)
|
Other income
|
|
|
44
|
|
|
|
40
|
|
|
|
10
|
|
Operating
expenses(1)
|
|
|
171
|
|
|
|
161
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
minority interest in net earnings of subsidiaries
|
|
|
329
|
|
|
|
405
|
|
|
|
(19
|
)
|
Income taxes
|
|
|
122
|
|
|
|
150
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net
income
|
|
$
|
207
|
|
|
$
|
255
|
|
|
|
(19
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The three months ended
March 31, 2007 and 2006 operating expenses for the Lending
segment include $9 million and $10 million,
respectively, of stock option compensation expense due to the
implementation of SFAS No. 123(R) in the first quarter
of 2006.
|
54
Summary
of our Managed Student Loan Portfolio
The following tables summarize the components of our Managed
student loan portfolio and show the changing composition of our
portfolio.
Ending
Balances (net of allowance for loan losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
|
|
|
Education
|
|
|
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
Total FFELP
|
|
|
Loans
|
|
|
Total
|
|
|
On-balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-school
|
|
$
|
11,682
|
|
|
$
|
|
|
|
$
|
11,682
|
|
|
$
|
4,379
|
|
|
$
|
16,061
|
|
Grace and repayment
|
|
|
16,201
|
|
|
|
64,994
|
|
|
|
81,195
|
|
|
|
6,202
|
|
|
|
87,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet, gross
|
|
|
27,883
|
|
|
|
64,994
|
|
|
|
92,877
|
|
|
|
10,581
|
|
|
|
103,458
|
|
On-balance sheet unamortized
premium/(discount)
|
|
|
689
|
|
|
|
1,188
|
|
|
|
1,877
|
|
|
|
(363
|
)
|
|
|
1,514
|
|
On-balance sheet allowance for
losses
|
|
|
(10
|
)
|
|
|
(12
|
)
|
|
|
(22
|
)
|
|
|
(369
|
)
|
|
|
(391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet, net
|
|
|
28,562
|
|
|
|
66,170
|
|
|
|
94,732
|
|
|
|
9,849
|
|
|
|
104,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-school
|
|
|
1,824
|
|
|
|
|
|
|
|
1,824
|
|
|
|
4,978
|
|
|
|
6,802
|
|
Grace and repayment
|
|
|
11,233
|
|
|
|
17,269
|
|
|
|
28,502
|
|
|
|
9,829
|
|
|
|
38,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet, gross
|
|
|
13,057
|
|
|
|
17,269
|
|
|
|
30,326
|
|
|
|
14,807
|
|
|
|
45,133
|
|
Off-balance sheet unamortized
premium/(discount)
|
|
|
221
|
|
|
|
492
|
|
|
|
713
|
|
|
|
(339
|
)
|
|
|
374
|
|
Off-balance sheet allowance for
losses
|
|
|
(8
|
)
|
|
|
(3
|
)
|
|
|
(11
|
)
|
|
|
(116
|
)
|
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet, net
|
|
|
13,270
|
|
|
|
17,758
|
|
|
|
31,028
|
|
|
|
14,352
|
|
|
|
45,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
|
|
$
|
41,832
|
|
|
$
|
83,928
|
|
|
$
|
125,760
|
|
|
$
|
24,201
|
|
|
$
|
149,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of on-balance sheet FFELP
|
|
|
30
|
%
|
|
|
70
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Managed FFELP
|
|
|
33
|
%
|
|
|
67
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of total
|
|
|
28
|
%
|
|
|
56
|
%
|
|
|
84
|
%
|
|
|
16
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
|
|
|
Education
|
|
|
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
Total FFELP
|
|
|
Loans
|
|
|
Total
|
|
|
On-balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-school
|
|
$
|
9,745
|
|
|
$
|
|
|
|
$
|
9,745
|
|
|
$
|
4,353
|
|
|
$
|
14,098
|
|
Grace and repayment
|
|
|
14,530
|
|
|
|
60,348
|
|
|
|
74,878
|
|
|
|
6,075
|
|
|
|
80,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet, gross
|
|
|
24,275
|
|
|
|
60,348
|
|
|
|
84,623
|
|
|
|
10,428
|
|
|
|
95,051
|
|
On-balance sheet unamortized
premium/(discount)
|
|
|
575
|
|
|
|
988
|
|
|
|
1,563
|
|
|
|
(365
|
)
|
|
|
1,198
|
|
On-balance sheet allowance for
losses
|
|
|
(9
|
)
|
|
|
(12
|
)
|
|
|
(21
|
)
|
|
|
(308
|
)
|
|
|
(329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet, net
|
|
|
24,841
|
|
|
|
61,324
|
|
|
|
86,165
|
|
|
|
9,755
|
|
|
|
95,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-school
|
|
|
2,047
|
|
|
|
|
|
|
|
2,047
|
|
|
|
3,892
|
|
|
|
5,939
|
|
Grace and repayment
|
|
|
12,747
|
|
|
|
17,817
|
|
|
|
30,564
|
|
|
|
9,330
|
|
|
|
39,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet, gross
|
|
|
14,794
|
|
|
|
17,817
|
|
|
|
32,611
|
|
|
|
13,222
|
|
|
|
45,833
|
|
Off-balance sheet unamortized
premium/(discount)
|
|
|
244
|
|
|
|
497
|
|
|
|
741
|
|
|
|
(303
|
)
|
|
|
438
|
|
Off-balance sheet allowance for
losses
|
|
|
(10
|
)
|
|
|
(3
|
)
|
|
|
(13
|
)
|
|
|
(86
|
)
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet, net
|
|
|
15,028
|
|
|
|
18,311
|
|
|
|
33,339
|
|
|
|
12,833
|
|
|
|
46,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
|
|
$
|
39,869
|
|
|
$
|
79,635
|
|
|
$
|
119,504
|
|
|
$
|
22,588
|
|
|
$
|
142,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of on-balance sheet FFELP
|
|
|
29
|
%
|
|
|
71
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Managed FFELP
|
|
|
33
|
%
|
|
|
67
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of total
|
|
|
28
|
%
|
|
|
56
|
%
|
|
|
84
|
%
|
|
|
16
|
%
|
|
|
100
|
%
|
|
|
|
(1) |
|
FFELP category is primarily
Stafford loans, but also includes federally insured PLUS and
HEAL loans.
|
55
Average
Balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2007
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
|
|
|
Education
|
|
|
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
Total FFELP
|
|
|
Loans
|
|
|
Total
|
|
|
On-balance sheet
|
|
$
|
26,885
|
|
|
$
|
63,260
|
|
|
$
|
90,145
|
|
|
$
|
11,354
|
|
|
$
|
101,499
|
|
Off-balance sheet
|
|
|
13,920
|
|
|
|
18,022
|
|
|
|
31,942
|
|
|
|
12,721
|
|
|
|
44,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
|
|
$
|
40,805
|
|
|
$
|
81,282
|
|
|
$
|
122,087
|
|
|
$
|
24,075
|
|
|
$
|
146,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of on-balance sheet FFELP
|
|
|
30
|
%
|
|
|
70
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Managed FFELP
|
|
|
33
|
%
|
|
|
67
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
28
|
%
|
|
|
56
|
%
|
|
|
84
|
%
|
|
|
16
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2006
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
|
|
|
Education
|
|
|
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
Total FFELP
|
|
|
Loans
|
|
|
Total
|
|
|
On-balance sheet
|
|
$
|
19,522
|
|
|
$
|
54,312
|
|
|
$
|
73,834
|
|
|
$
|
9,016
|
|
|
$
|
82,850
|
|
Off-balance sheet
|
|
|
21,784
|
|
|
|
11,636
|
|
|
|
33,420
|
|
|
|
8,649
|
|
|
|
42,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
|
|
$
|
41,306
|
|
|
$
|
65,948
|
|
|
$
|
107,254
|
|
|
$
|
17,665
|
|
|
$
|
124,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of on-balance sheet FFELP
|
|
|
26
|
%
|
|
|
74
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Managed FFELP
|
|
|
39
|
%
|
|
|
61
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
33
|
%
|
|
|
53
|
%
|
|
|
86
|
%
|
|
|
14
|
%
|
|
|
100
|
%
|
|
|
|
(1) |
|
FFELP category is primarily
Stafford loans, but also includes federally insured PLUS and
HEAL loans.
|
Student
Loan Spread Analysis Core Earnings
Basis
The following table analyzes the earnings from our portfolio of
Managed student loans on a Core Earnings basis (see
BUSINESS SEGMENTS Pre-tax differences between
Core Earnings and GAAP by Business Segment).
The Core Earnings Basis Student Loan Spread Analysis
presentation and certain components used in the calculation
differ from the On-Balance Sheet Student Loan Spread Analysis
presentation. The Core Earnings basis presentation,
when compared to our on-balance sheet presentation, is different
in that it:
|
|
|
|
|
includes the net interest margin related to our off-balance
sheet student loan securitization trusts. This includes any
related fees or costs such as the Consolidation Loan Rebate
Fees, premium/discount amortization and Borrower Benefits yield
adjustments;
|
|
|
|
includes the reclassification of certain derivative net
settlement amounts. The net settlements on certain derivatives
that do not qualify as SFAS No. 133 hedges are
recorded as part of the gain (loss) on derivative and hedging
activities, net for GAAP purposes are reclassified to the line
item on the income statement that such derivative is
economically hedging for the Core Earnings basis
presentation. For our Core Earnings basis student
loan spread, this would primarily include:
(a) reclassifying the net settlement amounts related to our
written Floor Income Contracts to student loan interest income
and (b) reclassifying the net settlement amounts related to
certain of our basis swaps to debt interest expense;
|
|
|
|
excludes unhedged Floor Income earned on the Managed student
loan portfolio; and
|
|
|
|
includes the amortization of upfront payments on Floor Income
Contracts in student loan income that we believe are
economically hedging the Floor Income.
|
As discussed above, these differences result in the Core
Earnings basis student loan spread not being a GAAP-basis
presentation. Management relies on this measure to manage our
Lending business segment.
56
Specifically, management uses the Core Earnings
basis student loan spread to evaluate the overall economic
effect that certain factors have on all student loans either on-
or off-balance sheet. These factors include the overall mix of
student loans in our portfolio, acquisition costs, Borrower
Benefits program costs, Floor Income and funding and hedging
costs. Management believes that it is important to evaluate all
of these factors on a Managed Basis to gain additional
information about the economic effect of these factors on all
student loans under management. Management believes that this
additional information assists us in making strategic decisions
about the Companys business model for the Lending business
segment, including among other factors, how we acquire or
originate student loans, how we fund acquisitions and
originations, what Borrower Benefits we offer and what type of
loans we purchase or originate. While management believes that
the Core Earnings basis student loan spread is an
important tool for evaluating the Companys performance for
the reasons described above, it is subject to certain general
and specific limitations that investors should carefully
consider. See BUSINESS SEGMENTS Limitations of
Core Earnings. One specific limitation is that
the Core Earnings basis student loan spread includes
the spread on loans that we have sold to securitization trusts.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Core Earnings basis
student loan yield
|
|
|
8.33
|
%
|
|
|
7.60
|
%
|
Consolidation Loan Rebate Fees
|
|
|
(.56
|
)
|
|
|
(.55
|
)
|
Borrower Benefits
|
|
|
(.11
|
)
|
|
|
(.07
|
)
|
Premium and discount amortization
|
|
|
(.16
|
)
|
|
|
(.14
|
)
|
|
|
|
|
|
|
|
|
|
Core Earnings basis
student loan net yield
|
|
|
7.50
|
|
|
|
6.84
|
|
Core Earnings basis
student loan cost of funds
|
|
|
(5.68
|
)
|
|
|
(4.97
|
)
|
|
|
|
|
|
|
|
|
|
Core Earnings basis
student loan
spread(1)
|
|
|
1.82
|
%
|
|
|
1.87
|
%
|
|
|
|
|
|
|
|
|
|
Average Balances
|
|
|
|
|
|
|
|
|
On-balance sheet student
loans(1)
|
|
$
|
96,866
|
|
|
$
|
82,850
|
|
Off-balance sheet student loans
|
|
|
44,663
|
|
|
|
42,069
|
|
|
|
|
|
|
|
|
|
|
Managed student loans
|
|
$
|
141,529
|
|
|
|
124,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes the impact of the
Wholesale Consolidation Loan portfolio on the student loan
spread and average balance for the three months ended
March 31, 2007.
|
Discussion
of Core Earnings Basis Student Loan
Spread
Quarter-over-Quarter
Fluctuations
As discussed under Student Loans Student Loan
Spread Wholesale Consolidation Loans,
the student loan spread analysis above also excludes the impact
of our Wholesale Consolidation Loan portfolio whose average
balance was $4.6 billion for the first quarter of 2007. Had
the impact of the Wholesale Consolidation Loan volume been
included in the Core Earnings Basis Student Loan
Spread Analysis, it would have reduced the spread by
approximately 5 basis points for the first quarter of 2007.
As of March 31, 2007, Wholesale Consolidation Loans totaled
$6.7 billion, or 8.0 percent, of our total Managed
Consolidation Loan portfolio.
Core
Earnings Basis Student Loan Spreads by Loan Type
The student loan spread continues to reflect the changing mix of
loans in our portfolio, specifically the shift from FFELP
Stafford loans to FFELP Consolidation Loans and the higher
overall growth rate in Private Education Loans as a percentage
of the total portfolio. (See LENDING BUSINESS
SEGMENT Summary of our Managed Student Loan
Portfolio Average Balances.)
57
The following table reflects the Core Earnings basis
student loan spreads by product, excluding the effect of
non-recurring items, for the three months ended March 31,
2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
FFELP Loan Spreads (Core
Earnings Basis):
|
|
|
|
|
|
|
|
|
Stafford
|
|
|
1.24
|
%
|
|
|
1.41
|
%
|
Consolidation
|
|
|
1.04
|
|
|
|
1.25
|
|
|
|
|
|
|
|
|
|
|
FFELP Loan Spread (Core
Earnings Basis)
|
|
|
1.11
|
|
|
|
1.32
|
|
|
|
|
|
|
|
|
|
|
Private Education Loan Spreads
(Core Earnings Basis):
|
|
|
|
|
|
|
|
|
Before provision
|
|
|
5.28
|
%
|
|
|
4.87
|
%
|
After provision
|
|
|
2.10
|
|
|
|
3.32
|
|
The FFELP loan spreads will continue to decline on a
year-over-year
basis as the mix of the portfolios of both Stafford and
Consolidation Loans shift away from older loans with higher SAP
spreads to newer loans with reduced SAP spreads. Stafford loan
spreads have also declined as a result of increased amortization
expense associated with the cost of absorbing the origination
fees and guarantor fees on behalf of borrowers. Additionally,
FFELP Consolidation Loan spreads were negatively impacted
year-over-year
from the lower amortization associated with the maturing of
existing Floor Income Contracts.
The increase in Private Education Loan spreads before provision
from the first quarter of 2006 to the first quarter of 2007 was
driven by widening margins associated with our various product
offerings. The decrease in the spread after provision was due to
the increase in the provision associated with our allowance for
Private Education Loan losses as discussed in Private
Education Loans Activity in the Allowance for
Private Education Loan Losses.
Floor
Income Managed Basis
The following table analyzes the ability of the FFELP student
loans in our Managed student loan portfolio to earn Floor Income
after March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
March 31, 2006
|
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
|
|
|
Borrower
|
|
|
Borrower
|
|
|
|
|
|
Borrower
|
|
|
Borrower
|
|
|
|
|
(Dollars in billions)
|
|
Rate
|
|
|
Rate
|
|
|
Total
|
|
|
Rate
|
|
|
Rate
|
|
|
Total
|
|
|
Student loans eligible to earn
Floor Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet student loans
|
|
$
|
72.4
|
|
|
$
|
19.6
|
|
|
$
|
92.0
|
|
|
$
|
51.7
|
|
|
$
|
14.9
|
|
|
$
|
66.6
|
|
Off-balance sheet student loans
|
|
|
17.2
|
|
|
|
12.9
|
|
|
|
30.1
|
|
|
|
12.9
|
|
|
|
20.7
|
|
|
|
33.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed student loans eligible to
earn Floor Income
|
|
|
89.6
|
|
|
|
32.5
|
|
|
|
122.1
|
|
|
|
64.6
|
|
|
|
35.6
|
|
|
|
100.2
|
|
Less: notional amount of Floor
Income Contracts
|
|
|
(16.3
|
)
|
|
|
|
|
|
|
(16.3
|
)
|
|
|
(25.1
|
)
|
|
|
|
|
|
|
(25.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Managed student loans eligible
to earn Floor Income
|
|
$
|
73.3
|
|
|
$
|
32.5
|
|
|
$
|
105.8
|
|
|
$
|
39.5
|
|
|
$
|
35.6
|
|
|
$
|
75.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Managed student loans earning
Floor Income
|
|
$
|
2.0
|
|
|
$
|
.2
|
|
|
$
|
2.2
|
|
|
$
|
.4
|
|
|
$
|
|
|
|
$
|
.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
58
The following table presents a projection of the average Managed
balance of FFELP Consolidation Loans for which its Fixed Rate
Floor Income has already been economically hedged through Floor
Income Contracts for the period April 1, 2007 to
June 30, 2010. These loans are both on-balance sheet and
off-balance sheet and the related hedges do not qualify under
SFAS No. 133 accounting as effective hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1, 2007 to
|
|
|
|
|
|
|
|
|
|
|
(Dollars in billions)
|
|
December 31, 2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Average balance of FFELP
Consolidation Loans whose Floor Income is economically hedged
(Managed Basis)
|
|
$
|
16
|
|
|
$
|
15
|
|
|
$
|
10
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Education Loans
All Private Education Loans are initially acquired on-balance
sheet. In securitizations of Private Education Loans that are
treated as sales, the loans are no longer owned by us, and they
are accounted for off-balance sheet. For our Managed Basis
presentation in the table below, when Private Education Loans
are sold to securitization trusts, we reduce the on-balance
sheet allowance for loan losses for amounts previously provided
and then re-establish the allowance for these loans in the
off-balance sheet section. The total allowance of both
on-balance sheet and off-balance sheet loan losses results in
the Managed Basis allowance for loan losses. The off-balance
sheet allowance is lower than the on-balance sheet allowance
when measured as a percentage of ending loans in repayment
because of the different mix of loans on-balance sheet and
off-balance sheet.
When Private Education Loans in our securitized trusts settling
before September 30, 2005, become 180 days delinquent,
we typically exercise our contingent call option to repurchase
these loans at par value out of the trust and record a loss for
the difference in the par value paid and the fair market value
of the loan at the time of purchase. If these loans reach the
212-day
delinquency, a charge-off for the remaining balance of the loan
is triggered. On a Managed Basis, the losses recorded under GAAP
for loans repurchased at day 180 are reversed and the full
amount is charged off in the month in which the loan is
212 days delinquent. We do not hold the contingent call
option for all trusts settled after September 30, 2005 and
as such, the loans are charged off in these trusts.
59
Activity
in the Allowance for Private Education Loan Losses
The provision for student loan losses represents the periodic
expense of maintaining an allowance sufficient to absorb losses,
net of recoveries, inherent in the portfolio of Private
Education Loans.
The following table summarizes changes in the allowance for
Private Education Loan losses for the three months ended
March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity in Allowance for Private Education Loan Losses
|
|
|
|
On-Balance Sheet
|
|
|
Off-Balance Sheet
|
|
|
Managed Basis
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Allowance at beginning of period
|
|
$
|
308
|
|
|
$
|
204
|
|
|
$
|
86
|
|
|
$
|
78
|
|
|
$
|
394
|
|
|
$
|
282
|
|
Provision for Private Education
Loan losses
|
|
|
142
|
|
|
|
54
|
|
|
|
47
|
|
|
|
14
|
|
|
|
189
|
|
|
|
68
|
|
Charge-offs
|
|
|
(82
|
)
|
|
|
(32
|
)
|
|
|
(23
|
)
|
|
|
(1
|
)
|
|
|
(105
|
)
|
|
|
(33
|
)
|
Recoveries
|
|
|
7
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(75
|
)
|
|
|
(26
|
)
|
|
|
(23
|
)
|
|
|
(1
|
)
|
|
|
(98
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance before securitization of
Private Education Loans
|
|
|
375
|
|
|
|
232
|
|
|
|
110
|
|
|
|
91
|
|
|
|
485
|
|
|
|
323
|
|
Reduction for securitization of
Private Education Loans
|
|
|
(6
|
)
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period
|
|
$
|
369
|
|
|
$
|
232
|
|
|
$
|
116
|
|
|
$
|
91
|
|
|
$
|
485
|
|
|
$
|
323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs as a percentage of
average loans in repayment (annualized)
|
|
|
6.27
|
%
|
|
|
2.83
|
%
|
|
|
1.35
|
%
|
|
|
.01
|
%
|
|
|
3.40
|
%
|
|
|
1.27
|
%
|
Allowance as a percentage of the
ending total loan balance
|
|
|
3.61
|
%
|
|
|
2.43
|
%
|
|
|
.80
|
%
|
|
|
1.06
|
%
|
|
|
1.96
|
%
|
|
|
1.78
|
%
|
Allowance as a percentage of
ending loans in repayment
|
|
|
7.58
|
%
|
|
|
5.96
|
%
|
|
|
1.70
|
%
|
|
|
1.99
|
%
|
|
|
4.14
|
%
|
|
|
3.81
|
%
|
Average coverage of net
charge-offs (annualized)
|
|
|
1.21
|
|
|
|
2.17
|
|
|
|
1.25
|
|
|
|
326.22
|
|
|
|
1.22
|
|
|
|
3.02
|
|
Average total loans
|
|
$
|
11,354
|
|
|
$
|
9,016
|
|
|
$
|
12,721
|
|
|
$
|
8,649
|
|
|
$
|
24,075
|
|
|
$
|
17,665
|
|
Ending total loans
|
|
$
|
10,218
|
|
|
$
|
9,543
|
|
|
$
|
14,468
|
|
|
$
|
8,648
|
|
|
$
|
24,686
|
|
|
$
|
18,191
|
|
Average loans in repayment
|
|
$
|
4,859
|
|
|
$
|
3,780
|
|
|
$
|
6,815
|
|
|
$
|
4,624
|
|
|
$
|
11,674
|
|
|
$
|
8,404
|
|
Ending loans in repayment
|
|
$
|
4,867
|
|
|
$
|
3,898
|
|
|
$
|
6,839
|
|
|
$
|
4,596
|
|
|
$
|
11,706
|
|
|
$
|
8,494
|
|
Toward the end of 2006 and in early 2007, we experienced lower
collections resulting in increased levels of charge-off activity
in our Private Education Loan portfolio. As the portfolio
seasons, we expect charge-off rates to increase from the
historically low levels experienced in the prior periods.
However, the large increase in the first quarter of 2007 is
caused by factors beyond the portfolio seasoning. In the third
and fourth quarters of 2006, we encountered a number of
operational challenges at our DMO in performing pre-default
collections on the Companys Private Education Loan
portfolio that contributed to the increase in charge-offs in the
first quarter of 2007. In August 2006, we announced that we
intended to relocate responsibility for certain Private
Education Loan collections from our Nevada call center to a new
call center in Indiana. This transfer presented us with
unexpected operational challenges that resulted in lower
collections that have negatively impacted the Private Education
Loan portfolio. Management has taken several remedial actions,
including transferring experienced collection personnel to the
new call center. In addition, the DMO also revised certain
procedures, including its use of forbearance, to better optimize
our long-term collection strategies. These developments resulted
in increased later stage delinquency levels and associated
higher charges-offs in the first quarter of 2007, and are
expected to affect second quarter and to a lesser extent third
quarter delinquency and charge-off levels as well.
60
Delinquencies
The tables below present our Private Education Loan delinquency
trends as of March 31, 2007 and 2006. Delinquencies have
the potential to adversely impact earnings through increased
servicing and collection costs in the event the delinquent
accounts charge off.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Balance Sheet Private Education
|
|
|
|
Loan Delinquencies
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
5,220
|
|
|
|
|
|
|
$
|
5,573
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
494
|
|
|
|
|
|
|
|
412
|
|
|
|
|
|
Loans in repayment and percentage
of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
4,260
|
|
|
|
87.5
|
%
|
|
|
3,487
|
|
|
|
89.4
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
184
|
|
|
|
3.8
|
|
|
|
170
|
|
|
|
4.4
|
|
Loans delinquent
61-90 days(3)
|
|
|
131
|
|
|
|
2.7
|
|
|
|
106
|
|
|
|
2.7
|
|
Loans delinquent greater than
90 days(3)
|
|
|
292
|
|
|
|
6.0
|
|
|
|
135
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans in
repayment
|
|
|
4,867
|
|
|
|
100
|
%
|
|
|
3,898
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans,
gross
|
|
|
10,581
|
|
|
|
|
|
|
|
9,883
|
|
|
|
|
|
Private Education Loan unamortized
discount
|
|
|
(363
|
)
|
|
|
|
|
|
|
(340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans
|
|
|
10,218
|
|
|
|
|
|
|
|
9,543
|
|
|
|
|
|
Private Education Loan allowance
for losses
|
|
|
(369
|
)
|
|
|
|
|
|
|
(232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Education Loans, net
|
|
$
|
9,849
|
|
|
|
|
|
|
$
|
9,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Private Education
Loans in repayment
|
|
|
46.0
|
%
|
|
|
|
|
|
|
39.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of
Private Education Loans in repayment
|
|
|
12.5
|
%
|
|
|
|
|
|
|
10.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Private Education
|
|
|
|
Loan Delinquencies
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
6,821
|
|
|
|
|
|
|
$
|
3,456
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
1,147
|
|
|
|
|
|
|
|
784
|
|
|
|
|
|
Loans in repayment and percentage
of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
6,475
|
|
|
|
94.7
|
%
|
|
|
4,389
|
|
|
|
95.5
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
145
|
|
|
|
2.1
|
|
|
|
106
|
|
|
|
2.3
|
|
Loans delinquent
61-90 days(3)
|
|
|
88
|
|
|
|
1.3
|
|
|
|
46
|
|
|
|
1.0
|
|
Loans delinquent greater than
90 days(3)
|
|
|
131
|
|
|
|
1.9
|
|
|
|
55
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans in
repayment
|
|
|
6,839
|
|
|
|
100
|
%
|
|
|
4,596
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans,
gross
|
|
|
14,807
|
|
|
|
|
|
|
|
8,836
|
|
|
|
|
|
Private Education Loan unamortized
discount
|
|
|
(339
|
)
|
|
|
|
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans
|
|
|
14,468
|
|
|
|
|
|
|
|
8,648
|
|
|
|
|
|
Private Education Loan allowance
for losses
|
|
|
(116
|
)
|
|
|
|
|
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Education Loans, net
|
|
$
|
14,352
|
|
|
|
|
|
|
$
|
8,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Private Education
Loans in repayment
|
|
|
46.2
|
%
|
|
|
|
|
|
|
52.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of
Private Education Loans in repayment
|
|
|
5.3
|
%
|
|
|
|
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loans for borrowers who still may
be attending school or engaging in other permitted educational
activities and are not yet required to make payments on the
loans, e.g., residency periods for medical students or a grace
period for bar exam preparation.
|
(2) |
|
Loans for borrowers who have
requested extension of grace period generally during employment
transition or who have temporarily ceased making full payments
due to hardship or other factors, consistent with the
established loan program servicing policies and procedures.
|
(3) |
|
The period of delinquency is based
on the number of days scheduled payments are contractually past
due.
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Basis Private Education
|
|
|
|
Loan Delinquencies
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
12,041
|
|
|
|
|
|
|
$
|
9,029
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
1,641
|
|
|
|
|
|
|
|
1,196
|
|
|
|
|
|
Loans in repayment and percentage
of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
10,735
|
|
|
|
91.7
|
%
|
|
|
7,876
|
|
|
|
92.7
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
329
|
|
|
|
2.8
|
|
|
|
276
|
|
|
|
3.3
|
|
Loans delinquent
61-90 days(3)
|
|
|
219
|
|
|
|
1.9
|
|
|
|
152
|
|
|
|
1.8
|
|
Loans delinquent greater than
90 days(3)
|
|
|
423
|
|
|
|
3.6
|
|
|
|
190
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans in
repayment
|
|
|
11,706
|
|
|
|
100
|
%
|
|
|
8,494
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans,
gross
|
|
|
25,388
|
|
|
|
|
|
|
|
18,719
|
|
|
|
|
|
Private Education Loan unamortized
discount
|
|
|
(702
|
)
|
|
|
|
|
|
|
(528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans
|
|
|
24,686
|
|
|
|
|
|
|
|
18,191
|
|
|
|
|
|
Private Education Loan allowance
for losses
|
|
|
(485
|
)
|
|
|
|
|
|
|
(323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Education Loans, net
|
|
$
|
24,201
|
|
|
|
|
|
|
$
|
17,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Private Education
Loans in repayment
|
|
|
46.1
|
%
|
|
|
|
|
|
|
45.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of
Private Education Loans in repayment
|
|
|
8.3
|
%
|
|
|
|
|
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Loans for borrowers who still may be attending school or
engaging in other permitted educational activities and are not
yet required to make payments on the loans, e.g., residency
periods for medical students or a grace period for bar exam
preparation.
|
|
(2)
|
Loans for borrowers who have requested extension of grace period
generally during employment transition or who have temporarily
ceased making full payments due to hardship or other factors,
consistent with the established loan program servicing policies
and procedures.
|
|
(3)
|
The period of delinquency is based on the number of days
scheduled payments are contractually past due.
|
Forbearance
Managed Basis Private Education Loans
Private Education Loans are made to parent and student borrowers
in accordance with our underwriting policies. These loans
generally supplement federally guaranteed student loans, which
are subject to federal lending caps. Private Education Loans are
not federally guaranteed nor insured against any loss of
principal or interest. Traditional student borrowers use the
proceeds of these loans to obtain higher education, which
increases the likelihood of obtaining employment at higher
income levels than would be available without the additional
education. As a result, the borrowers repayment capability
improves between the time the loan is made and the time they
enter the post-education work force. We generally allow the loan
repayment period on traditional higher education Private
Education Loans to begin six months after the borrower leaves
school (consistent with our federally regulated FFELP loans).
This provides the borrower time after graduation to obtain a job
to service the debt. For borrowers that need more time or
experience other hardships, we permit additional delays in
payment or partial payments (both referred to as forbearances)
when we believe additional time will improve the borrowers
ability to repay the loan. Forbearance is also granted to
borrowers who may experience temporary hardship after entering
repayment, when we believe that it will increase the likelihood
of ultimate collection of the loan. Such forbearance is granted
within established policies that include limits on the number of
forbearance months granted consecutively and limits on the total
number of forbearance months granted over the life of the loan.
In some instances of forbearance, we require good-faith payments
or continuing partial payments. Exceptions to forbearance
policies are permitted in limited circumstances and only when
such exceptions are judged to increase the likelihood of
ultimate collection of the loan.
Forbearance does not grant any reduction in the total repayment
obligation (principal or interest) but does allow for the
temporary cessation of borrower payments (on a prospective
and/or
retroactive basis) or a reduction in monthly payments for an
agreed period of time. The forbearance period extends the
original term of the loan. While the loan is in forbearance,
interest continues to accrue and is capitalized as principal
upon
62
the loan re-entering repayment status. Loans exiting forbearance
into repayment status are considered current regardless of their
previous delinquency status.
Forbearance is used most heavily immediately after the loan
enters repayment. As a result, forbearance levels are impacted
by the timing of loans entering repayment and are generally at
higher levels in the first quarter. As indicated in the tables
below that show the composition and status of the Managed
Private Education Loan portfolio by number of months aged from
the first date of repayment, the percentage of loans in
forbearance decreases the longer the loans have been in
repayment. At March 31, 2007, loans in forbearance as a
percentage of loans in repayment and forbearance are
16.4 percent for loans that have been in repayment one to
twenty-four months. The percentage drops to 3.8 percent for
loans that have been in repayment more than 48 months.
Approximately 80 percent of our Managed Private Education
Loans in forbearance have been in repayment less than
24 months. These borrowers are essentially extending their
grace period as they transition to the workforce. Forbearance
continues to be a positive collection tool for the Private
Education Loans as we believe it can provide the borrower with
sufficient time to obtain employment and income to support his
or her obligation. We consider the potential impact of
forbearance in the determination of the loan loss reserves.
The tables below show the composition and status of the Private
Education Loan portfolio by number of months aged from the first
date of repayment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months since entering repayment
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
|
|
1 to 24
|
|
|
25 to 48
|
|
|
More than
|
|
|
Mar. 31,
|
|
|
|
|
March 31, 2007
|
|
months
|
|
|
months
|
|
|
48 months
|
|
|
2007(1)
|
|
|
Total
|
|
|
Loans in-school/grace/deferment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,041
|
|
|
$
|
12,041
|
|
Loans in forbearance
|
|
|
1,314
|
|
|
|
242
|
|
|
|
85
|
|
|
|
|
|
|
|
1,641
|
|
Loans in repayment
current
|
|
|
6,154
|
|
|
|
2,614
|
|
|
|
1,967
|
|
|
|
|
|
|
|
10,735
|
|
Loans in repayment
delinquent
31-60 days
|
|
|
193
|
|
|
|
81
|
|
|
|
55
|
|
|
|
|
|
|
|
329
|
|
Loans in repayment
delinquent
61-90 days
|
|
|
144
|
|
|
|
47
|
|
|
|
28
|
|
|
|
|
|
|
|
219
|
|
Loans in repayment
delinquent greater than 90 days
|
|
|
212
|
|
|
|
130
|
|
|
|
81
|
|
|
|
|
|
|
|
423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,017
|
|
|
$
|
3,114
|
|
|
$
|
2,216
|
|
|
$
|
12,041
|
|
|
$
|
25,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(702
|
)
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed Private Education
Loans, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a
percentage of loans in repayment and forbearance
|
|
|
16.4
|
%
|
|
|
7.8
|
%
|
|
|
3.8
|
%
|
|
|
|
%
|
|
|
12.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes all loans in-school/grace/deferment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months since entering repayment
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
|
|
1 to 24
|
|
|
25 to 48
|
|
|
More than
|
|
|
Mar. 31,
|
|
|
|
|
March 31, 2006
|
|
months
|
|
|
months
|
|
|
48 months
|
|
|
2006(1)
|
|
|
Total
|
|
|
Loans in-school/grace/deferment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,029
|
|
|
$
|
9,029
|
|
Loans in forbearance
|
|
|
940
|
|
|
|
180
|
|
|
|
76
|
|
|
|
|
|
|
|
1,196
|
|
Loans in repayment
current
|
|
|
4,535
|
|
|
|
1,845
|
|
|
|
1,496
|
|
|
|
|
|
|
|
7,876
|
|
Loans in repayment
delinquent
31-60 days
|
|
|
153
|
|
|
|
70
|
|
|
|
53
|
|
|
|
|
|
|
|
276
|
|
Loans in repayment
delinquent
61-90 days
|
|
|
94
|
|
|
|
35
|
|
|
|
23
|
|
|
|
|
|
|
|
152
|
|
Loans in repayment
delinquent greater than 90 days
|
|
|
109
|
|
|
|
51
|
|
|
|
30
|
|
|
|
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,831
|
|
|
$
|
2,181
|
|
|
$
|
1,678
|
|
|
$
|
9,029
|
|
|
$
|
18,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(528
|
)
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed Private Education
Loans, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a
percentage of loans in repayment and forbearance
|
|
|
16.1
|
%
|
|
|
8.3
|
%
|
|
|
4.5
|
%
|
|
|
|
%
|
|
|
12.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes all loans in-school/grace/deferment.
|
63
There were $1.6 billion of loans in forbearance status at
March 31, 2007, or 12.3 percent of loans in repayment
and forbearance. This is consistent with our expectation of
higher forbearances in the first quarter based on the large
increase in the number of loans entering repayment in the fourth
quarter. Student loan borrowers have typically used forbearance
shortly after entering repayment to extend their grace periods
as they establish themselves in the workforce.
The table below stratifies the portfolio of loans in forbearance
by the cumulative number of months the borrower has used
forbearance as of the dates indicated. As detailed in the table
below, 3 percent of loans currently in forbearance have
deferred their loan repayment more than 24 months, which is
3 percent lower versus the year-ago quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
March 31, 2006
|
|
|
|
Forbearance
|
|
|
% of
|
|
|
Forbearance
|
|
|
% of
|
|
|
|
Balance
|
|
|
Total
|
|
|
Balance
|
|
|
Total
|
|
|
Cumulative number of months
borrower has used forbearance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Up to 12 months
|
|
$
|
1,219
|
|
|
|
74
|
%
|
|
$
|
901
|
|
|
|
76
|
%
|
13 to 24 months
|
|
|
374
|
|
|
|
23
|
|
|
|
220
|
|
|
|
18
|
|
25 to 36 months
|
|
|
37
|
|
|
|
2
|
|
|
|
51
|
|
|
|
4
|
|
More than 36 months
|
|
|
11
|
|
|
|
1
|
|
|
|
24
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,641
|
|
|
|
100
|
%
|
|
$
|
1,196
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Loan Net Charge-offs
The following tables summarize the net charge-offs for all loan
types on both an on-balance sheet basis and a Managed Basis for
the three months ended March 31, 2007 and 2006. Almost all
Private Education Loan charge-offs occur on-balance sheet due to
the contingent call feature in a majority of the off-balance
sheet securitization trusts, which is discussed in more detail
at LENDING BUSINESS SEGMENT Private Education
Loans.
Total
on-balance sheet loan net charge-offs
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Private Education Loans
|
|
$
|
75
|
|
|
$
|
26
|
|
FFELP Stafford and Other Student
Loans
|
|
|
4
|
|
|
|
1
|
|
Mortgage and consumer loans
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet loan net
charge-offs
|
|
$
|
81
|
|
|
$
|
28
|
|
|
|
|
|
|
|
|
|
|
Total
Managed loan net charge-offs
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Private Education Loans
|
|
$
|
98
|
|
|
$
|
27
|
|
FFELP Stafford and Other Student
Loans
|
|
|
8
|
|
|
|
1
|
|
Mortgage and consumer loans
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet loan net
charge-offs
|
|
$
|
108
|
|
|
$
|
29
|
|
|
|
|
|
|
|
|
|
|
The increase in net charge-offs on FFELP Stafford and Other
student loans from the year-ago quarter is the result of the
legislative changes which lower the federal guaranty on claims
filed after July 1, 2006 to
64
97 percent from 98 percent (or 99 percent from
100 percent for lenders and servicers with the Exceptional
Performer designation). Additionally, first quarter net
charge-offs on FFELP loans are historically higher than other
periods as a result of the timing of the claim filing process,
following the seasonal wave of borrowers entering repayment
status. See Private Education Loans
Activity in the Allowance for Private Education Loan
Losses for a discussion of net charge-offs related to
our Private Education Loans.
Student
Loan Premiums as a Percentage of Principal
The following table presents student loan premiums paid as a
percentage of the principal balance of student loans acquired
for the three months ended March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Volume
|
|
|
Rate
|
|
|
Student loan premiums paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sallie Mae brands
|
|
$
|
4,598
|
|
|
|
1.41
|
%
|
|
$
|
3,304
|
|
|
|
.50
|
%
|
Lender partners
|
|
|
2,377
|
|
|
|
2.89
|
|
|
|
3,592
|
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Preferred Channel
|
|
|
6,975
|
|
|
|
1.92
|
|
|
|
6,896
|
|
|
|
1.28
|
|
Other
purchases(1)
|
|
|
3,874
|
|
|
|
5.46
|
|
|
|
175
|
|
|
|
1.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal base purchases
|
|
|
10,849
|
|
|
|
3.18
|
|
|
|
7,071
|
|
|
|
1.30
|
|
Consolidations originations
|
|
|
702
|
|
|
|
2.28
|
|
|
|
897
|
|
|
|
1.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,551
|
|
|
|
3.13
|
%
|
|
$
|
7,968
|
|
|
|
1.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Primarily includes spot purchases
(including Wholesale Consolidation Loans), other commitment
clients, and subsidiary acquisitions.
|
The increase in premiums paid as a percentage of principal
balance for Sallie Mae brands over the prior year is
primarily due to the increase in loans where we pay the
origination fee
and/or
federal guaranty fee on behalf of borrowers, a practice we call
zero-fee lending. Premiums paid on Lender partners
volume were similarly impacted by zero-fee lending. The borrower
origination fee will be gradually phased out by the
Reconciliation Legislation from 2007 to 2010.
The Other purchases category includes the
acquisition of Wholesale Consolidation Loans which totaled
$3.1 billion at a rate of 6.28 percent for the quarter
ended March 31, 2007. At March 31, 2007, the ending
balance of Wholesale Consolidation Loans totaled
$6.7 billion.
We include in consolidation originations premiums the
50 basis point consolidation origination fee paid on each
FFELP Stafford loan that we consolidate, including loans that
are already in our portfolio. The consolidation originations
premium paid percentage is calculated on only consolidation
volume that is incremental to our portfolio. This percentage is
largely driven by the mix of FFELP Stafford loans consolidated
in this quarter.
65
Student
Loan Acquisitions
The following tables summarize the components of our student
loan acquisition activity for the three months ended
March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2007
|
|
|
|
FFELP
|
|
|
Private
|
|
|
Total
|
|
|
Preferred Channel
|
|
$
|
4,775
|
|
|
$
|
2,200
|
|
|
$
|
6,975
|
|
Wholesale Consolidations
|
|
|
3,076
|
|
|
|
|
|
|
|
3,076
|
|
Other commitment clients
|
|
|
49
|
|
|
|
3
|
|
|
|
52
|
|
Spot purchases
|
|
|
746
|
|
|
|
|
|
|
|
746
|
|
Consolidations from third parties
|
|
|
649
|
|
|
|
53
|
|
|
|
702
|
|
Acquisitions from off-balance
sheet securitized trusts, primarily consolidations
|
|
|
1,183
|
|
|
|
163
|
|
|
|
1,346
|
|
Capitalized interest, premiums and
discounts
|
|
|
631
|
|
|
|
59
|
|
|
|
690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet student
loan acquisitions
|
|
|
11,109
|
|
|
|
2,478
|
|
|
|
13,587
|
|
Consolidations to SLM Corporation
from off-balance sheet securitized trusts
|
|
|
(1,183
|
)
|
|
|
(163
|
)
|
|
|
(1,346
|
)
|
Capitalized interest, premiums and
discounts off-balance sheet securitized trusts
|
|
|
153
|
|
|
|
125
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed student loan
acquisitions
|
|
$
|
10,079
|
|
|
$
|
2,440
|
|
|
$
|
12,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2006
|
|
|
|
FFELP
|
|
|
Private
|
|
|
Total
|
|
|
Preferred Channel
|
|
$
|
5,031
|
|
|
$
|
1,865
|
|
|
$
|
6,896
|
|
Other commitment clients
|
|
|
114
|
|
|
|
2
|
|
|
|
116
|
|
Spot purchases
|
|
|
59
|
|
|
|
|
|
|
|
59
|
|
Consolidations from third parties
|
|
|
896
|
|
|
|
1
|
|
|
|
897
|
|
Acquisitions from off-balance
sheet securitized trusts, primarily consolidations
|
|
|
1,329
|
|
|
|
|
|
|
|
1,329
|
|
Capitalized interest, premiums and
discounts
|
|
|
346
|
|
|
|
23
|
|
|
|
369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet student
loan acquisitions
|
|
|
7,775
|
|
|
|
1,891
|
|
|
|
9,666
|
|
Consolidations to SLM Corporation
from off-balance sheet securitized trusts
|
|
|
(1,329
|
)
|
|
|
|
|
|
|
(1,329
|
)
|
Capitalized interest, premiums and
discounts off-balance sheet securitized trusts
|
|
|
145
|
|
|
|
69
|
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed student loan
acquisitions
|
|
$
|
6,591
|
|
|
$
|
1,960
|
|
|
$
|
8,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As shown on the above table, off-balance sheet FFELP Stafford
loans that consolidate with us become an on-balance sheet
interest earning asset. This activity results in impairments of
our Retained Interests in securitizations, but this is offset by
an increase in on-balance sheet interest earning assets, for
which we do not record an offsetting gain.
66
The following table includes on-balance sheet asset information
for our Lending business segment.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
FFELP Stafford and Other Student
Loans, net
|
|
$
|
28,562
|
|
|
$
|
24,841
|
|
FFELP Consolidation Loans, net
|
|
|
66,170
|
|
|
|
61,324
|
|
Private Education Loans, net
|
|
|
9,849
|
|
|
|
9,755
|
|
Other loans, net
|
|
|
1,351
|
|
|
|
1,309
|
|
Investments(1)
|
|
|
9,618
|
|
|
|
8,175
|
|
Retained Interest in off-balance
sheet securitized loans
|
|
|
3,643
|
|
|
|
3,341
|
|
Other(2)
|
|
|
5,166
|
|
|
|
4,859
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
124,359
|
|
|
$
|
113,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Investments include cash and cash
equivalents, investments, restricted cash and investments,
leveraged leases, and municipal bonds.
|
|
(2) |
|
Other assets include accrued
interest receivable, goodwill and acquired intangible assets and
other non-interest earning assets.
|
Preferred
Channel Originations
We originated $8.0 billion in student loan volume through
our Preferred Channel in the quarter ended March 31, 2007
versus $7.6 billion in the quarter ended March 31,
2006.
For the quarter ended March 31, 2007, our internal lending
brands grew 35 percent over the year-ago quarter, and
comprised 60 percent of our Preferred Channel Originations,
up from 47 percent in the year-ago quarter. Our internal
lending brands combined with our other lender partners comprised
88 percent of our Preferred Channel Originations for the
current quarter, versus 78 percent for the year-ago
quarter; together these two segments of our Preferred Channel
grew 19 percent over the year-ago quarter.
Our Managed loan acquisitions for the current quarter totaled
$12.5 billion, an increase of 46 percent over the
year-ago quarter. The following tables further break down our
Preferred Channel Originations by type of loan and source.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Preferred Channel
Originations Type of
Loan
|
|
|
|
|
|
|
|
|
Stafford
|
|
$
|
4,601
|
|
|
$
|
4,426
|
|
PLUS
|
|
|
920
|
|
|
|
1,002
|
|
GradPLUS
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP
|
|
|
5,649
|
|
|
|
5,428
|
|
Private Education Loans
|
|
|
2,362
|
|
|
|
2,185
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,011
|
|
|
$
|
7,613
|
|
|
|
|
|
|
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase (Decrease)
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
$
|
|
|
%
|
|
|
FFELP Preferred Channel
Originations Source
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal lending brands
|
|
$
|
2,719
|
|
|
$
|
1,955
|
|
|
$
|
764
|
|
|
|
39
|
%
|
Other lender partners
|
|
|
2,050
|
|
|
|
2,024
|
|
|
|
26
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before JPMorgan Chase
|
|
|
4,769
|
|
|
|
3,979
|
|
|
|
790
|
|
|
|
20
|
|
JPMorgan Chase
|
|
|
880
|
|
|
|
1,449
|
|
|
|
(569
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,649
|
|
|
$
|
5,428
|
|
|
$
|
221
|
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase (Decrease)
|
|
|
|
Private
|
|
|
Private
|
|
|
$
|
|
|
%
|
|
|
Private Preferred Channel
Originations Source
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal lending brands
|
|
$
|
2,082
|
|
|
$
|
1,600
|
|
|
$
|
482
|
|
|
|
30
|
%
|
Other lender partners
|
|
|
208
|
|
|
|
338
|
|
|
|
(130
|
)
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before JPMorgan Chase
|
|
|
2,290
|
|
|
|
1,938
|
|
|
|
352
|
|
|
|
18
|
|
JPMorgan Chase
|
|
|
72
|
|
|
|
247
|
|
|
|
(175
|
)
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,362
|
|
|
$
|
2,185
|
|
|
$
|
177
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase (Decrease)
|
|
|
|
Total
|
|
|
Total
|
|
|
$
|
|
|
%
|
|
|
Total Preferred Channel
Originations Source
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal lending brands
|
|
$
|
4,801
|
|
|
$
|
3,555
|
|
|
$
|
1,246
|
|
|
|
35
|
%
|
Other lender partners
|
|
|
2,258
|
|
|
|
2,362
|
|
|
|
(104
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before JPMorgan Chase
|
|
|
7,059
|
|
|
|
5,917
|
|
|
|
1,142
|
|
|
|
19
|
|
JPMorgan Chase
|
|
|
952
|
|
|
|
1,696
|
|
|
|
(744
|
)
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,011
|
|
|
$
|
7,613
|
|
|
$
|
398
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
Student
Loan Activity
The following tables summarize the activity in our on-balance
sheet, off-balance sheet and Managed portfolios of FFELP student
loans and Private Education Loans and highlight the effects of
Consolidation Loan activity on our FFELP portfolios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Balance Sheet
|
|
|
|
Three months ended March 31, 2007
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Total Private
|
|
|
Total On-
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Balance Sheet
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
24,841
|
|
|
$
|
61,324
|
|
|
$
|
86,165
|
|
|
$
|
9,755
|
|
|
$
|
95,920
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from
third parties
|
|
|
|
|
|
|
649
|
|
|
|
649
|
|
|
|
53
|
|
|
|
702
|
|
Consolidations to third parties
|
|
|
(607
|
)
|
|
|
(233
|
)
|
|
|
(840
|
)
|
|
|
(9
|
)
|
|
|
(849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(607
|
)
|
|
|
416
|
|
|
|
(191
|
)
|
|
|
44
|
|
|
|
(147
|
)
|
Acquisitions
|
|
|
5,783
|
|
|
|
3,494
|
|
|
|
9,277
|
|
|
|
2,262
|
|
|
|
11,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
5,176
|
|
|
|
3,910
|
|
|
|
9,086
|
|
|
|
2,306
|
|
|
|
11,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal consolidations
|
|
|
(975
|
)
|
|
|
1,755
|
|
|
|
780
|
|
|
|
149
|
|
|
|
929
|
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,871
|
)
|
|
|
(1,871
|
)
|
Repayments/claims/resales/other
|
|
|
(480
|
)
|
|
|
(819
|
)
|
|
|
(1,299
|
)
|
|
|
(490
|
)
|
|
|
(1,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
28,562
|
|
|
$
|
66,170
|
|
|
$
|
94,732
|
|
|
$
|
9,849
|
|
|
$
|
104,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet
|
|
|
|
Three months ended March 31, 2007
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Total Private
|
|
|
Total Off-
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Balance Sheet
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
15,028
|
|
|
$
|
18,311
|
|
|
$
|
33,339
|
|
|
$
|
12,833
|
|
|
$
|
46,172
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from
third parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidations to third parties
|
|
|
(373
|
)
|
|
|
(71
|
)
|
|
|
(444
|
)
|
|
|
(19
|
)
|
|
|
(463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(373
|
)
|
|
|
(71
|
)
|
|
|
(444
|
)
|
|
|
(19
|
)
|
|
|
(463
|
)
|
Acquisitions
|
|
|
95
|
|
|
|
58
|
|
|
|
153
|
|
|
|
125
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
(278
|
)
|
|
|
(13
|
)
|
|
|
(291
|
)
|
|
|
106
|
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(466
|
)
|
|
|
(314
|
)
|
|
|
(780
|
)
|
|
|
(149
|
)
|
|
|
(929
|
)
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,871
|
|
|
|
1,871
|
|
Repayments/claims/resales/other
|
|
|
(1,014
|
)
|
|
|
(226
|
)
|
|
|
(1,240
|
)
|
|
|
(309
|
)
|
|
|
(1,549
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
13,270
|
|
|
$
|
17,758
|
|
|
$
|
31,028
|
|
|
$
|
14,352
|
|
|
$
|
45,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Portfolio
|
|
|
|
Three months ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Total Private
|
|
|
Managed
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Basis
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
39,869
|
|
|
$
|
79,635
|
|
|
$
|
119,504
|
|
|
$
|
22,588
|
|
|
$
|
142,092
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from
third parties
|
|
|
|
|
|
|
649
|
|
|
|
649
|
|
|
|
53
|
|
|
|
702
|
|
Consolidations to third parties
|
|
|
(980
|
)
|
|
|
(304
|
)
|
|
|
(1,284
|
)
|
|
|
(28
|
)
|
|
|
(1,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(980
|
)
|
|
|
345
|
|
|
|
(635
|
)
|
|
|
25
|
|
|
|
(610
|
)
|
Acquisitions
|
|
|
5,878
|
|
|
|
3,552
|
|
|
|
9,430
|
|
|
|
2,387
|
|
|
|
11,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
4,898
|
|
|
|
3,897
|
|
|
|
8,795
|
|
|
|
2,412
|
|
|
|
11,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(1,441
|
)
|
|
|
1,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments/claims/resales/other
|
|
|
(1,494
|
)
|
|
|
(1,045
|
)
|
|
|
(2,539
|
)
|
|
|
(799
|
)
|
|
|
(3,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
41,832
|
|
|
$
|
83,928
|
|
|
$
|
125,760
|
|
|
$
|
24,201
|
|
|
$
|
149,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
Acquisitions(3)
|
|
$
|
5,878
|
|
|
$
|
4,201
|
|
|
$
|
10,079
|
|
|
$
|
2,440
|
|
|
$
|
12,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
FFELP category is primarily
Stafford loans and also includes PLUS and HEAL loans.
|
|
(2) |
|
Represents FFELP/Stafford loans
that we either own on-balance sheet or in our off-balance sheet
securitization trusts that we consolidate.
|
|
(3) |
|
The purchases line includes
incremental consolidations from third parties and acquisitions.
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Balance Sheet
|
|
|
|
Three months ended March 31, 2006
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Total Private
|
|
|
Total On-
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Balance Sheet
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
19,988
|
|
|
$
|
54,859
|
|
|
$
|
74,847
|
|
|
$
|
7,757
|
|
|
$
|
82,604
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from
third parties
|
|
|
|
|
|
|
896
|
|
|
|
896
|
|
|
|
1
|
|
|
|
897
|
|
Consolidations to third parties
|
|
|
(307
|
)
|
|
|
(572
|
)
|
|
|
(879
|
)
|
|
|
(4
|
)
|
|
|
(883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(307
|
)
|
|
|
324
|
|
|
|
17
|
|
|
|
(3
|
)
|
|
|
14
|
|
Acquisitions
|
|
|
5,274
|
|
|
|
275
|
|
|
|
5,549
|
|
|
|
1,892
|
|
|
|
7,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
4,967
|
|
|
|
599
|
|
|
|
5,566
|
|
|
|
1,889
|
|
|
|
7,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal consolidations
|
|
|
(784
|
)
|
|
|
1,623
|
|
|
|
839
|
|
|
|
|
|
|
|
839
|
|
Off-balance sheet securitizations
|
|
|
(5,034
|
)
|
|
|
(3,039
|
)
|
|
|
(8,073
|
)
|
|
|
|
|
|
|
(8,073
|
)
|
Repayments/claims/resales/other
|
|
|
(254
|
)
|
|
|
(591
|
)
|
|
|
(845
|
)
|
|
|
(335
|
)
|
|
|
(1,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
18,883
|
|
|
$
|
53,451
|
|
|
$
|
72,334
|
|
|
$
|
9,311
|
|
|
$
|
81,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet
|
|
|
|
Three months ended March 31, 2006
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Total Private
|
|
|
Total Off-
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Balance Sheet
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
20,670
|
|
|
$
|
10,575
|
|
|
$
|
31,245
|
|
|
$
|
8,680
|
|
|
$
|
39,925
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from
third parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidations to third parties
|
|
|
(428
|
)
|
|
|
(178
|
)
|
|
|
(606
|
)
|
|
|
(5
|
)
|
|
|
(611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(428
|
)
|
|
|
(178
|
)
|
|
|
(606
|
)
|
|
|
(5
|
)
|
|
|
(611
|
)
|
Acquisitions
|
|
|
88
|
|
|
|
58
|
|
|
|
146
|
|
|
|
67
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
(340
|
)
|
|
|
(120
|
)
|
|
|
(460
|
)
|
|
|
62
|
|
|
|
(398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(741
|
)
|
|
|
(98
|
)
|
|
|
(839
|
)
|
|
|
|
|
|
|
(839
|
)
|
Off-balance sheet securitizations
|
|
|
5,034
|
|
|
|
3,039
|
|
|
|
8,073
|
|
|
|
|
|
|
|
8,073
|
|
Repayments/claims/resales/other
|
|
|
(1,166
|
)
|
|
|
(185
|
)
|
|
|
(1,351
|
)
|
|
|
(185
|
)
|
|
|
(1,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
23,457
|
|
|
$
|
13,211
|
|
|
$
|
36,668
|
|
|
$
|
8,557
|
|
|
$
|
45,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Portfolio
|
|
|
|
Three months ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Total Private
|
|
|
Managed
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Basis
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
40,658
|
|
|
$
|
65,434
|
|
|
$
|
106,092
|
|
|
$
|
16,437
|
|
|
$
|
122,529
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from
third parties
|
|
|
|
|
|
|
896
|
|
|
|
896
|
|
|
|
1
|
|
|
|
897
|
|
Consolidations to third parties
|
|
|
(735
|
)
|
|
|
(750
|
)
|
|
|
(1,485
|
)
|
|
|
(9
|
)
|
|
|
(1,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(735
|
)
|
|
|
146
|
|
|
|
(589
|
)
|
|
|
(8
|
)
|
|
|
(597
|
)
|
Acquisitions
|
|
|
5,362
|
|
|
|
333
|
|
|
|
5,695
|
|
|
|
1,959
|
|
|
|
7,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
4,627
|
|
|
|
479
|
|
|
|
5,106
|
|
|
|
1,951
|
|
|
|
7,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(1,525
|
)
|
|
|
1,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments/claims/resales/other
|
|
|
(1,420
|
)
|
|
|
(776
|
)
|
|
|
(2,196
|
)
|
|
|
(520
|
)
|
|
|
(2,716
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
42,340
|
|
|
$
|
66,662
|
|
|
$
|
109,002
|
|
|
$
|
17,868
|
|
|
$
|
126,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
Acquisitions(3)
|
|
$
|
5,362
|
|
|
$
|
1,229
|
|
|
$
|
6,591
|
|
|
$
|
1,960
|
|
|
$
|
8,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
FFELP category is primarily
Stafford loans and also includes PLUS and HEAL loans.
|
|
(2) |
|
Represents FFELP/Stafford loans
that we either own on-balance sheet or in our off-balance sheet
securitization trusts that we consolidate.
|
|
(3) |
|
The purchases line includes
incremental consolidations from third parties and acquisitions.
|
70
During the first quarter of 2006, certain FFELP lenders engaged
in a practice of reconsolidating FFELP Consolidation Loans using
the Direct Loan program as a pass-through entity. This resulted
in increased levels of FFELP Consolidation Loans consolidating
away to third parties. This practice was restricted through
legislation as of July 1, 2006 and has led to a reduction
in the amount of FFELP Consolidation Loans that are lost to
third parties. On the other hand, we experienced a higher level
of consolidations to third parties from our FFELP Stafford
portfolio for the quarter ended March 31, 2007 as compared
to the year-ago quarter primarily as a result of the repeal of
the single-holder rule which is effective for FFELP
Consolidation Loan applications received on or after
June 15, 2006. The single-holder rule had previously
required that when a lender held all of the FFELP Stafford loans
of a particular borrower whose loans were held by a single
lender, in most cases that borrower could only obtain a FFELP
Consolidation Loan from that lender.
During 2006, Private Education Loan consolidations were
introduced as a separate product line. In the first quarter of
2007, we added $25 million of net incremental volume on a
Managed Basis through this new product line. We expect this
product line to grow in the future and will aggressively protect
our portfolio against third-party consolidation of Private
Education Loans.
Other
Income Lending Business Segment
The following table summarizes the components of other income,
net, for our Lending business segment for the three months ended
March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Late fees
|
|
$
|
35
|
|
|
$
|
25
|
|
Gains on sales of mortgages and
other loan fees
|
|
|
3
|
|
|
|
3
|
|
Other
|
|
|
6
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
$
|
44
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
The decrease in the Other category versus the prior
year is due to the shift of origination volume to Sallie Mae
Bank from third party lenders. Previously, we earned servicing
fees for originating loans on behalf of these third party
lenders in transactions where the loan was eventually sold to
us. The reduction in this revenue stream has been more than
offset by capturing the earning spread on the loans earlier.
Operating
Expense Lending Business Segment
The following table summarizes the components of operating
expenses for our Lending business segment for the three months
ended March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Sales and originations
|
|
$
|
87
|
|
|
$
|
84
|
|
Servicing and information
technology
|
|
|
54
|
|
|
|
50
|
|
Corporate overhead
|
|
|
30
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
171
|
|
|
$
|
161
|
|
|
|
|
|
|
|
|
|
|
Operating expenses for our Lending business segment include
costs incurred to service our Managed student loan portfolio and
acquire student loans, as well as other general and
administrative expenses. For the quarters ended March 31,
2007 and 2006, operating expenses for the Lending business
segment also include $9 million and $10 million,
respectively, of stock option compensation expense.
71
DEBT
MANAGEMENT OPERATIONS (DMO) BUSINESS
SEGMENT
The following table includes the Core Earnings
results of operations for our DMO business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
Three Months
|
|
|
(Decrease)
|
|
|
|
Ended March 31,
|
|
|
2007 vs.
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
Fee income
|
|
$
|
87
|
|
|
$
|
92
|
|
|
|
(5
|
)%
|
Collections revenue
|
|
|
65
|
|
|
|
56
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
152
|
|
|
|
148
|
|
|
|
3
|
|
Operating expenses
|
|
|
93
|
|
|
|
89
|
|
|
|
4
|
|
Net interest expense
|
|
|
7
|
|
|
|
5
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
minority interest in net earnings of subsidiaries
|
|
|
52
|
|
|
|
54
|
|
|
|
(4
|
)
|
Income taxes
|
|
|
19
|
|
|
|
20
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest in
net earnings of subsidiaries
|
|
|
33
|
|
|
|
34
|
|
|
|
(3
|
)
|
Minority interest in net earnings
of subsidiaries
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net
income
|
|
$
|
32
|
|
|
$
|
33
|
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
For both the three months ended March 31, 2007 and 2006,
operating expenses for the DMO segment include $3 million
of stock option compensation expense due to the implementation
of SFAS No. 123(R) in the first quarter of 2006.
|
DMO
Revenue by Product
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Purchased paper collections revenue
|
|
$
|
65
|
|
|
$
|
56
|
|
Contingency:
|
|
|
|
|
|
|
|
|
Student loans
|
|
|
68
|
|
|
|
70
|
|
Other
|
|
|
6
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
Total contingency
|
|
|
74
|
|
|
|
80
|
|
Other
|
|
|
13
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
152
|
|
|
$
|
148
|
|
|
|
|
|
|
|
|
|
|
USA
Funds(1)
|
|
$
|
44
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
% of total DMO revenue
|
|
|
29
|
%
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
(1) United
Student Aid Funds, Inc. (USA Funds)
The decrease in contingency fees versus the year-ago quarter is
primarily due to the shift in collection strategy from loan
consolidation to rehabilitating student loans. This shift was in
response to a legislative change which reduced the rate earned
from consolidating loans. To qualify for a rehabilitation,
borrowers must make nine consecutive payments. The first quarter
of 2007 was also negatively impacted by lower performance in
default prevention which lowered the portfolio management fee.
The increase in purchased paper collections revenue primarily
reflects the increase in the carrying value of purchases.
72
Purchased
Paper Non-Mortgage
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Face value of purchases for the
period
|
|
$
|
1,076
|
|
|
$
|
530
|
|
Purchase price for the period
|
|
|
102
|
|
|
|
34
|
|
% of face value purchased
|
|
|
9.5
|
%
|
|
|
6.4
|
%
|
Gross Cash Collections
(GCC)
|
|
$
|
115
|
|
|
$
|
89
|
|
Collections revenue
|
|
|
56
|
|
|
|
49
|
|
% of GCC
|
|
|
48
|
%
|
|
|
55
|
%
|
Carrying value of purchases
|
|
$
|
316
|
|
|
$
|
146
|
|
The amount of face value of purchases in any quarter is a
function of a combination of factors including the amount of
receivables available for purchase in the marketplace, average
age of each portfolio, the asset class of the receivables, and
competition in the marketplace. As a result, the percentage of
face value purchased will vary from quarter to quarter.
Purchased
Paper Mortgage/Properties
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Face value of purchases for the
period
|
|
$
|
239
|
|
|
$
|
132
|
|
Collections revenue
|
|
|
10
|
|
|
|
8
|
|
Collateral value of purchases
|
|
|
248
|
|
|
|
151
|
|
Purchase price for the period
|
|
|
196
|
|
|
|
113
|
|
% of collateral value
|
|
|
79
|
%
|
|
|
75
|
%
|
Carrying value of purchases
|
|
$
|
649
|
|
|
$
|
355
|
|
The purchase price for
sub-performing
and non-performing mortgage loans is generally determined as a
percentage of the underlying collateral, but we also consider a
number of factors in pricing mortgage loan portfolios to attain
a targeted yield. Therefore, the purchase price as a percentage
of collateral value can fluctuate depending on the mix of
sub-performing
versus non-performing mortgages in the portfolio, the projected
timeline to resolution of loans in the portfolio and the level
of private mortgage insurance associated with particular assets.
The increase in the collateral value of purchases and the
carrying value of purchases reflects the increase in the amount
of loans purchased in the quarter.
Contingency
Inventory
The following table presents the outstanding inventory of
receivables that are currently being serviced through our DMO
business.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Contingency:
|
|
|
|
|
|
|
|
|
Student loans
|
|
$
|
8,083
|
|
|
$
|
6,971
|
|
Other
|
|
|
1,529
|
|
|
|
1,667
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,612
|
|
|
$
|
8,638
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses DMO Business Segment
For the three months ended March 31, 2007 and 2006,
operating expenses for our DMO business segment totaled
$93 million and $89 million, respectively. The
increase in operating expenses of $4 million or
4 percent
73
versus the year-ago quarter was primarily due to increased
expenses for outsourced collections and overall growth in the
purchased paper business.
For both the three months ended March 31, 2007 and 2006,
operating expenses for the DMO business segment also include
$3 million of stock option compensation expense.
At March 31, 2007 and December 31, 2006, the DMO
business segment had total assets of $1.8 billion and
$1.5 billion, respectively.
CORPORATE
AND OTHER BUSINESS SEGMENT
The following table includes Core Earnings results
of operations for our Corporate and Other business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
% Increase
|
|
|
|
Ended
|
|
|
(Decrease)
|
|
|
|
March 31,
|
|
|
2007 vs.
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
Total interest income
|
|
$
|
2
|
|
|
$
|
1
|
|
|
|
100
|
%
|
Total interest expense
|
|
|
5
|
|
|
|
1
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
(3
|
)
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: provisions for losses
|
|
|
1
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after
provisions for losses
|
|
|
(4
|
)
|
|
|
|
|
|
|
(100
|
)
|
Fee income
|
|
|
39
|
|
|
|
27
|
|
|
|
44
|
|
Other income
|
|
|
52
|
|
|
|
30
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
91
|
|
|
|
57
|
|
|
|
60
|
|
Operating
expenses(1)
|
|
|
68
|
|
|
|
59
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
19
|
|
|
|
(2
|
)
|
|
|
(1,050
|
)
|
Income tax expense (benefit)
|
|
|
7
|
|
|
|
(1
|
)
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net
income (loss)
|
|
$
|
12
|
|
|
$
|
(1
|
)
|
|
|
(1,300
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
For the three months ended March 31, 2007 and 2006,
operating expenses for the Corporate and Other Business segment
include $4 million and $5 million, respectively, of
stock option compensation expense due to the implementation of
SFAS No. 123(R) in the first quarter of 2006.
|
Fee and
Other Income Corporate and Other Business
Segment
The following table summarizes the components of fee and other
income for our Corporate and Other business segment for the
three months ended March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Guarantor servicing fees
|
|
$
|
39
|
|
|
$
|
27
|
|
Loan servicing fees
|
|
|
7
|
|
|
|
8
|
|
Upromise
|
|
|
25
|
|
|
|
|
|
Other
|
|
|
20
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Total fee and other income
|
|
$
|
91
|
|
|
$
|
57
|
|
|
|
|
|
|
|
|
|
|
The increase in guarantor servicing fees versus the prior year
is due to a cap on the payment of account maintenance fees
imposed by ED in the fourth quarter of 2005. In the second
quarter of 2006 we negotiated a settlement with USA Funds such
that USA Funds was able to cover the previous shortfall caused
by the cap
74
on payments from ED to guarantors. This cap was removed by
legislation reauthorizing the student loan programs of the
Higher Education Act on October 1, 2006. Also, the first
quarter of 2007 Other line item includes fees from
Upromise, acquired in August 2006.
USA Funds, the nations largest guarantee agency, accounted
for 87 percent and 87 percent, respectively, of
guarantor servicing fees and 16 percent and
18 percent, respectively, of revenues associated with other
products and services for the three months ended March 31,
2007 and 2006.
Operating
Expenses Corporate and Other Business
Segment
The following table summarizes the components of operating
expenses for our Corporate and Other Business segment for the
three months ended March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Operating expenses
|
|
$
|
29
|
|
|
$
|
38
|
|
Upromise
|
|
|
21
|
|
|
|
|
|
Corporate overhead
|
|
|
18
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
68
|
|
|
$
|
59
|
|
|
|
|
|
|
|
|
|
|
Operating expenses for our Corporate and Other business segment
include direct costs incurred to service loans for unrelated
third parties and to perform guarantor servicing on behalf of
guarantor agencies, as well as information technology expenses
related to these functions. For the three months ended
March 31, 2007 and 2006, operating expenses for our
Corporate and Other business segment also include
$4 million and $5 million, respectively, of stock
option compensation expense. Also, the first quarter of 2007
reflects expenses of Upromise, acquired in August 2006.
At March 31, 2007 and December 31, 2006, the Corporate
and Other business segment had total assets of $766 million
and $999 million, respectively.
LIQUIDITY
AND CAPITAL RESOURCES
Except in the case of acquisitions, which are discussed
separately, our DMO and Corporate and Other business segments
are not capital intensive businesses, and as such, a minimal
amount of debt and equity capital is allocated to these
segments. Therefore, the following LIQUIDITY AND CAPITAL
RESOURCES discussion is concentrated on our Lending
business segment.
Our primary funding objective is to maintain cost-effective
liquidity to fund the growth in the Managed portfolio of student
loans, as well as to refinance previously securitized loans when
borrowers choose to refinance their loans through a FFELP
Consolidation Loan or a Private Education Consolidation Loan.
Since the announcement of the proposed Merger (see
SUBSEQUENT EVENT), credit spreads on our unsecured
debt widened considerably, which significantly increased our
cost of accessing the unsecured debt markets. As a result, in
the near term, student loan securitizations will be the only
source of cost effective financing. We have built a highly
liquid and deep market for our securitizations, and in the first
quarter of 2007, we securitized $13.0 billion in student
loans in four transactions versus $8.0 billion in three
transactions in the year-ago quarter. We believe the market for
these securities will be available to meet our long-term funding
needs for the foreseeable future. Securitizations comprised
68 percent of our Managed debt outstanding at
March 31, 2007, unchanged from March 31, 2006.
We hedge the full fair value of certain fixed rate U.S. dollar
denominated unsecured debt for SFAS No. 133 hedge
accounting purposes. The widening of our credit spreads due to
the Merger announcement resulted in certain hedge relationships
no longer qualifying for hedge accounting as full fair value
hedges. Those relationships which no longer qualify for hedge
accounting as full fair value hedges will be terminated and
re-designated as hedges of changes in fair value due to interest
rates only.
75
Prior to the announcement of the Merger (see discussion above of
the effect of the Merger on the unsecured debt markets), we
issued $1.6 billion in SLM Corporation long-term, unsecured
debt in the three months ended March 31, 2007. In total, at
March 31, 2007, on-balance sheet debt, exclusive of
on-balance sheet securitizations and secured indentured trusts,
totaled $49.6 billion versus $41.6 billion at
March 31, 2006.
Liquidity at SLM Corporation is important to enable us to
effectively fund our student loan acquisitions, to meet maturing
debt obligations, and to fund operations. The following table
details our sources of liquidity and the available capacity at
March 31, 2007 and December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Available Capacity
|
|
|
Available Capacity
|
|
|
Sources of primary liquidity:
|
|
|
|
|
|
|
|
|
Unrestricted cash and liquid
investments(1)
|
|
$
|
5,480
|
|
|
$
|
4,720
|
|
Unused commercial paper and bank
lines of credit
|
|
|
6,500
|
|
|
|
6,500
|
|
ABCP borrowing capacity
|
|
|
1,752
|
|
|
|
1,047
|
|
|
|
|
|
|
|
|
|
|
Total sources of primary liquidity
|
|
|
13,732
|
|
|
|
12,267
|
|
|
|
|
|
|
|
|
|
|
Sources of stand-by liquidity:
|
|
|
|
|
|
|
|
|
Unencumbered FFELP student loans
|
|
|
27,376
|
|
|
|
28,070
|
|
|
|
|
|
|
|
|
|
|
Total sources of primary and
stand-by liquidity
|
|
$
|
41,108
|
|
|
$
|
40,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes $542 million of
investments pledged as collateral related to certain derivative
positions and $95 million of other non-liquid investments
classified at March 31, 2007 as cash and investments on our
balance sheet in accordance with GAAP
|
We believe our unencumbered FFELP student loan portfolio
provides an excellent source of potential or stand-by liquidity
because of the well-developed market for government guaranteed
student loan securitizations. There is also an active wholesale
market for FFELP loan sales that provides an additional
potential source of stand-by liquidity. In addition to
unencumbered FFELP student loans, we hold on-balance sheet a
number of unencumbered assets, consisting of Private Education
Loans, cash and investments, Retained Interests and other
assets. At March 31, 2007, we had a total of
$53.8 billion of unencumbered assets, including goodwill
and acquired intangibles.
In addition to liquidity, a major objective when financing our
business is to minimize interest rate risk by matching the
interest rate and reset characteristics of our Managed assets
and liabilities, generally on a pooled basis, to the extent
practicable. In this process we use derivative financial
instruments extensively to reduce our interest rate and foreign
currency exposure. This interest rate risk management helps us
to stabilize our student loan spread in various and changing
interest rate environments.
76
Managed
Borrowings
The following tables present the ending balances of our Managed
borrowings at March 31, 2007 and 2006 and average balances
and average interest rates of our Managed borrowings for the
three months ended March 31, 2007 and 2006. The average
interest rates include derivatives that are economically hedging
the underlying debt, but do not qualify for hedge accounting
treatment under SFAS No. 133. (See BUSINESS
SEGMENTS Pre-tax differences Between Core
Earnings and GAAP by Business Segment
Reclassification of Realized Gains (Losses) on Derivative and
Hedging Activities.)
Ending
Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Ending Balance
|
|
|
Ending Balance
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Short
|
|
|
Long
|
|
|
Managed
|
|
|
Short
|
|
|
Long
|
|
|
Managed
|
|
|
|
Term
|
|
|
Term
|
|
|
Basis
|
|
|
Term
|
|
|
Term
|
|
|
Basis
|
|
|
Unsecured borrowings
|
|
$
|
4,374
|
|
|
$
|
45,253
|
|
|
$
|
49,627
|
|
|
$
|
3,285
|
|
|
$
|
38,339
|
|
|
$
|
41,624
|
|
Indentured trusts (on-balance
sheet)
|
|
|
71
|
|
|
|
2,793
|
|
|
|
2,864
|
|
|
|
78
|
|
|
|
3,280
|
|
|
|
3,358
|
|
Securitizations (on-balance sheet)
|
|
|
|
|
|
|
64,670
|
|
|
|
64,670
|
|
|
|
|
|
|
|
46,193
|
|
|
|
46,193
|
|
Securitizations (off-balance sheet)
|
|
|
|
|
|
|
49,245
|
|
|
|
49,245
|
|
|
|
|
|
|
|
47,998
|
|
|
|
47,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,445
|
|
|
$
|
161,961
|
|
|
$
|
166,406
|
|
|
$
|
3,363
|
|
|
$
|
135,810
|
|
|
$
|
139,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Unsecured borrowings
|
|
$
|
48,658
|
|
|
|
5.64
|
%
|
|
$
|
41,571
|
|
|
|
5.05
|
%
|
Indentured trusts (on-balance
sheet)
|
|
|
2,908
|
|
|
|
4.69
|
|
|
|
3,380
|
|
|
|
4.20
|
|
Securitizations (on-balance sheet)
|
|
|
59,604
|
|
|
|
5.67
|
|
|
|
46,551
|
|
|
|
4.87
|
|
Securitizations (off-balance sheet)
|
|
|
48,206
|
|
|
|
5.79
|
|
|
|
44,887
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
159,376
|
|
|
|
5.68
|
%
|
|
$
|
136,389
|
|
|
|
4.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
On-Balance Sheet Financing Activities
The following table presents the senior unsecured credit ratings
on our debt from major rating agencies as of March 31,
2007. (See SUBSEQUENT EVENT
Financing Considerations Related to the
Transaction.)
|
|
|
|
|
|
|
|
|
S&P
|
|
Moodys
|
|
Fitch
|
|
Short-term unsecured debt
|
|
A-1
|
|
P-1
|
|
F1
|
Long-term unsecured debt
|
|
A
|
|
A2
|
|
A+
|
77
The table below presents our unsecured on-balance sheet term
funding by funding source for the three months ended
March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Issued for
|
|
|
|
|
|
|
the Three Months
|
|
|
Outstanding at
|
|
|
|
Ended March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Convertible debentures
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,998
|
|
|
$
|
1,994
|
|
Retail notes
|
|
|
59
|
|
|
|
157
|
|
|
|
4,195
|
|
|
|
3,762
|
|
Foreign currency denominated
notes(1)
|
|
|
161
|
|
|
|
423
|
|
|
|
12,798
|
|
|
|
9,206
|
|
Extendible notes
|
|
|
|
|
|
|
|
|
|
|
5,747
|
|
|
|
5,247
|
|
Global notes (Institutional)
|
|
|
1,348
|
|
|
|
1,074
|
|
|
|
22,476
|
|
|
|
19,613
|
|
Medium-term notes (Institutional)
|
|
|
|
|
|
|
|
|
|
|
1,796
|
|
|
|
1,801
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
617
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,568
|
|
|
$
|
1,654
|
|
|
$
|
49,627
|
|
|
$
|
41,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All foreign currency denominated
notes are hedged using derivatives that exchange the foreign
denomination for U.S. dollars.
|
In addition to the term issuances reflected in the table above,
we also use our commercial paper program for short-term
liquidity purposes. The average balance of commercial paper
outstanding during the three months ended March 31, 2007
and 2006 was $0 and $331 million, respectively. The maximum
daily amount outstanding for the three months ended
March 31, 2007 and 2006 was $0 and $2.2 billion,
respectively.
78
Securitization
Activities
Securitization
Program
The following table summarizes our securitization activity for
the three months ended March 31, 2007 and 2006. Those
securitizations listed as sales are off-balance sheet
transactions and those listed as financings remain on-balance
sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Loan
|
|
|
|
|
|
|
|
|
|
|
|
Loan
|
|
|
|
|
|
|
|
|
|
No. of
|
|
|
Amount
|
|
|
Pre-Tax
|
|
|
|
|
|
No. of
|
|
|
Amount
|
|
|
Pre-Tax
|
|
|
|
|
(Dollars in millions)
|
|
Transactions
|
|
|
Securitized
|
|
|
Gain
|
|
|
Gain %
|
|
|
Transactions
|
|
|
Securitized
|
|
|
Gain
|
|
|
Gain %
|
|
|
Securitization sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford/PLUS loans
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
|
|
2
|
|
|
$
|
5,004
|
|
|
$
|
17
|
|
|
|
.3
|
%
|
FFELP Consolidation Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
3,002
|
|
|
|
13
|
|
|
|
.4
|
|
Private Education Loans
|
|
|
1
|
|
|
|
2,000
|
|
|
|
367
|
|
|
|
18.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations
sales
|
|
|
1
|
|
|
|
2,000
|
|
|
$
|
367
|
|
|
|
18.4
|
%
|
|
|
3
|
|
|
|
8,006
|
|
|
$
|
30
|
|
|
|
.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization financings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford/PLUS
Loans(1)
|
|
|
2
|
|
|
|
7,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Consolidation
Loans(1)
|
|
|
1
|
|
|
|
4,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations
financings
|
|
|
3
|
|
|
|
11,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations
|
|
|
4
|
|
|
$
|
13,006
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
$
|
8,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain securitizations are
structured to not qualify for sale treatment and accordingly,
they are accounted for on-balance sheet as variable interest
entities (VIEs). Terms that prevent sale treatment
include: (1) allowing us to hold certain rights that can
affect the remarketing of certain bonds, (2) allowing the
trust to enter into interest rate cap agreements after the
initial settlement of the securitization, which do not relate to
the reissuance of third party beneficial interests or
(3) allowing us to hold an unconditional call option
related to a certain percentage of the securitized assets.
|
Our Private Education Loan gain on sale percentages are
significantly higher than our FFELP gain on sale percentages
primarily for two reasons: (1) significantly higher excess
spread earned by the Residual Interest holder which is primarily
due to the higher spreads to index the Company earns on the
underlying Private Education Loans compared to FFELP loans (see
LENDING BUSINESS SEGMENT Core
Earnings Basis Student Loan Spreads by Loan Type for
further discussion regarding average student loan spreads by
loan type) and (2) the weighted average life of the Private
Education Loan securitizations are longer. The weighted average
life for the first quarter of 2007 Private Education Loan
securitization was 9.4 years. The Constant Prepayment Rate
(CPR) assumption we use to determine the fair value
of the Residual Interest impacts the weighted average life of
the securitization. See the Companys 2006
Form 10-K,
Note 9 to the consolidated financial statements,
Student Loan Securitization, for a sensitivity
analysis of the significant assumptions used to determine the
fair value of the Residual Interest.
79
Retained
Interest in Securitized Receivables
The following tables summarize the fair value of the
Companys Residual Interests, included in the
Companys Retained Interest (and the assumptions used to
value such Residual Interests), along with the underlying
off-balance sheet student loans that relate to those
securitizations in transactions that were treated as sales as of
March 31, 2007 and December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007
|
|
|
|
FFELP
|
|
|
Consolidation
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Loan
|
|
|
Education
|
|
|
|
|
|
|
PLUS
|
|
|
Trusts(1)
|
|
|
Loan Trusts
|
|
|
Total
|
|
|
Fair value of Residual
Interests(2)
|
|
$
|
637
|
|
|
$
|
671
|
|
|
$
|
2,336
|
|
|
$
|
3,644
|
|
Underlying securitized loan
balance(3)
|
|
|
13,058
|
|
|
|
17,268
|
|
|
|
14,807
|
|
|
|
45,133
|
|
Weighted average life
|
|
|
2.8 yrs.
|
|
|
|
7.2 yrs.
|
|
|
|
7.4 yrs.
|
|
|
|
|
|
Prepayment speed (annual
rate)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim status
|
|
|
0
|
%
|
|
|
N/A
|
|
|
|
0
|
%
|
|
|
|
|
Repayment status
|
|
|
0-43
|
%
|
|
|
3-9
|
%
|
|
|
4-7
|
%
|
|
|
|
|
Life of loan repayment
status
|
|
|
24
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
|
|
Expected credit losses (% of
student loan principal)
|
|
|
.07
|
%
|
|
|
.06
|
%
|
|
|
4.39
|
%
|
|
|
|
|
Residual cash flows discount rate
|
|
|
12.4
|
%
|
|
|
10.5
|
%
|
|
|
12.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
FFELP
|
|
|
Consolidation
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Loan
|
|
|
Education
|
|
|
|
|
|
|
PLUS
|
|
|
Trusts(1)
|
|
|
Loan Trusts
|
|
|
Total
|
|
|
Fair value of Residual
Interests(2)
|
|
$
|
701
|
|
|
$
|
676
|
|
|
$
|
1,965
|
|
|
$
|
3,342
|
|
Underlying securitized loan
balance(3)
|
|
|
14,794
|
|
|
|
17,817
|
|
|
|
13,222
|
|
|
|
45,833
|
|
Weighted average life
|
|
|
2.9 yrs.
|
|
|
|
7.3 yrs.
|
|
|
|
7.2 yrs.
|
|
|
|
|
|
Prepayment speed (annual
rate)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim status
|
|
|
0
|
%
|
|
|
N/A
|
|
|
|
0
|
%
|
|
|
|
|
Repayment status
|
|
|
0-43
|
%
|
|
|
3-9
|
%
|
|
|
4-7
|
%
|
|
|
|
|
Life of loan repayment
status
|
|
|
24
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
|
|
Expected credit losses (% of
student loan principal)
|
|
|
.06
|
%
|
|
|
.07
|
%
|
|
|
4.36
|
%
|
|
|
|
|
Residual cash flows discount rate
|
|
|
12.6
|
%
|
|
|
10.5
|
%
|
|
|
12.6
|
%
|
|
|
|
|
|
|
|
(1) |
|
Includes $147 million and
$151 million related to the fair value of the Embedded
Floor Income as of March 31, 2007 and December 31,
2006, respectively. Changes in the fair value of the Embedded
Floor Income are primarily due to changes in the interest rates
and the paydown of the underlying loans.
|
|
(2) |
|
At March 31, 2007 and
December 31, 2006, we had unrealized gains (pre-tax) in
accumulated other comprehensive income of $332 million and
$389 million, respectively, that related to the Retained
Interests.
|
|
(3) |
|
In addition to student loans in
off-balance sheet trusts, we had $58.2 billion and
$48.6 billion of securitized student loans outstanding
(face amount) as of March 31, 2007 and December 31,
2006, respectively, in on-balance sheet securitization trusts.
|
|
(4) |
|
Effective December 31, 2006,
the Company implemented CPR curves for Residual Interest
valuations that are based on seasoning (the number of months
since entering repayment). Under this methodology, a different
CPR is applied to each year of a loans seasoning.
Previously, we applied a CPR that was based on a static life of
loan assumption, and, in the case of FFELP Stafford and PLUS
loans, we applied a vector approach, irrespective of seasoning.
Repayment status CPR used is based on the number of months since
first entering repayment (seasoning). Life of loan CPR is
related to repayment status only and does not include the impact
of the loan while in interim status. The CPR assumption used for
all periods includes the impact of projected defaults.
|
During 2006, we, along with others in the industry, began
consolidating Private Education Loans. This will increase the
prepayment speeds in Private Education Loan trusts, and as a
result, the Company increased its CPR assumption related to
Private Education Loan trusts from 4 percent to
6 percent as of December 31, 2006.
80
Off-Balance
Sheet Net Assets
The following table summarizes our off-balance sheet net assets
at March 31, 2007 and December 31, 2006 on a basis
equivalent to our GAAP on-balance sheet trusts, which presents
the assets and liabilities in the off-balance sheet trusts as if
they were being accounted for on-balance sheet rather than
off-balance sheet. This presentation, therefore, includes a
theoretical calculation of the premiums on student loans, the
allowance for loan losses, and the discounts and deferred
financing costs on the debt. This presentation is not, nor is it
intended to be, a liquidation basis of accounting. (See also
LENDING BUSINESS SEGMENT Summary of our
Managed Loan Portfolio Ending Balances (net of
allowance for loan losses) and LIQUIDITY AND
CAPITAL RESOURCES Managed Borrowings
Ending Balances, earlier in this section.)
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Off-Balance Sheet
Assets:
|
|
|
|
|
|
|
|
|
Total student loans, net
|
|
$
|
45,380
|
|
|
$
|
46,172
|
|
Restricted cash and investments
|
|
|
4,197
|
|
|
|
4,269
|
|
Accrued interest receivable
|
|
|
1,553
|
|
|
|
1,467
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet assets
|
|
|
51,130
|
|
|
|
51,908
|
|
Off-Balance Sheet
Liabilities:
|
|
|
|
|
|
|
|
|
Debt, par value
|
|
|
49,372
|
|
|
|
50,058
|
|
Debt, unamortized discount and
deferred issuance costs
|
|
|
(127
|
)
|
|
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
49,245
|
|
|
|
49,865
|
|
Accrued interest payable
|
|
|
372
|
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet liabilities
|
|
|
49,617
|
|
|
|
50,270
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Net
Assets
|
|
$
|
1,513
|
|
|
$
|
1,638
|
|
|
|
|
|
|
|
|
|
|
Liquidity
Risk and Funding Long-Term
Since the announcement of the Merger (see SUBSEQUENT
EVENT), the asset-backed capital markets have been the
only source of cost effective financing and as a result we have
significant long-term funding, credit spread and liquidity
exposure to those markets. A major disruption in the fixed
income asset-backed capital markets that limits our ability to
raise funds or significantly increases the cost of those funds
could have a material impact on our ability to acquire student
loans, or on our results of operations. Additionally, if the
Merger is not consummated, we can not predict the result on our
ability to access the fixed income capital markets.
Securitizations are, and will continue to be, the primary source
of long-term financing and liquidity. Our securitizations are
structured such that we are not obligated to provide any
material level of financial, credit or liquidity support to any
of the trusts, thus limiting our exposure to the recovery of the
Retained Interest asset on the balance sheet for off-balance
sheet securitizations or to the loss of the earnings spread for
loans securitized on-balance sheet. While all of our Retained
Interests are subject to some prepayment risk, Retained
Interests from our FFELP Stafford securitizations have
significant prepayment risk primarily arising from borrowers
opting to consolidate their Stafford/PLUS loans. When
consolidation activity is higher than projected, the increase in
prepayment could materially impair the value of our Retained
Interest. However, this negative effect on our Retained Interest
is somewhat offset by the loans that consolidate back on our
balance sheet, which we view as trading one interest bearing
asset for another, whereas loans that consolidate with third
parties represent a complete loss of future economics to the
Company. We discuss our short-term liquidity risk, including a
table of our sources of liquidity at the beginning of this
LIQUIDITY AND CAPITAL RESOURCES section.
81
Servicing
and Securitization Revenue
Servicing and securitization revenue, the ongoing revenue from
securitized loan pools accounted for off-balance sheet as QSPEs,
includes the interest earned on the Residual Interest asset and
the revenue we receive for servicing the loans in the
securitization trusts. Interest income recognized on the
Residual Interest is based on our anticipated yield determined
by estimating future cash flows each quarter.
The following table summarizes the components of servicing and
securitization revenue for the three months ended March 31,
2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Servicing revenue
|
|
$
|
77
|
|
|
$
|
79
|
|
Securitization revenue, before
Embedded Floor Income and impairment
|
|
|
106
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
Servicing and securitization
revenue, before Embedded Floor Income and impairment
|
|
|
183
|
|
|
|
148
|
|
Embedded Floor Income
|
|
|
2
|
|
|
|
7
|
|
Less: Floor Income previously
recognized in gain calculation
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Net Embedded Floor Income
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Servicing and securitization
revenue, before impairment and unrealized fair value adjustment
|
|
|
184
|
|
|
|
151
|
|
Unrealized fair value
adjustment(1)
|
|
|
79
|
|
|
|
|
|
Retained Interest impairment
|
|
|
(11
|
)
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
Total servicing and securitization
revenue
|
|
$
|
252
|
|
|
$
|
99
|
|
|
|
|
|
|
|
|
|
|
Average off-balance sheet student
loans
|
|
$
|
44,663
|
|
|
$
|
42,069
|
|
|
|
|
|
|
|
|
|
|
Average balance of Retained
Interest
|
|
$
|
3,442
|
|
|
$
|
2,501
|
|
|
|
|
|
|
|
|
|
|
Servicing and securitization
revenue as a percentage of the average balance of off-balance
sheet student loans (annualized)
|
|
|
2.29
|
%
|
|
|
.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Company adopted SFAS No. 155 on January 1,
2007. SFAS No. 155 requires the Company to identify
and bifurcate embedded derivatives from the Residual Interest.
However, SFAS No. 155 does allow the Company to elect
to carry the entire Residual Interest at fair value through
earnings rather than bifurcate such embedded derivatives. For
the Private Education Loan securitization which settled in the
first quarter of 2007, the Company elected to carry the entire
Residual Interest recorded in the quarter ended March 31,
2007 at fair value through earnings. As a result of this
election, all changes in the fair value of that Residual
Interest will be recorded through earnings. Management
anticipates electing to carry future Residual Interests at fair
value through earnings. For securitizations settling prior to
January 1, 2007, changes in the fair value of Residual
Interests were recorded in other comprehensive income.
|
Servicing and securitization revenue is primarily driven by the
average balance of off-balance sheet student loans, the amount
of and the difference in the timing of Embedded Floor Income
recognition on off-balance sheet student loans, Retained
Interest impairments, and the fair value adjustment related to
those Residual Interests where the Company has elected to carry
such Residual Interests at fair value through earnings under
SFAS No. 155 as discussed in the above table.
Servicing and securitization revenue can be negatively impacted
by impairments of the value of our Retained Interest, caused
primarily by the effect of higher than expected consolidation
activity on FFELP Stafford/PLUS student loan securitizations and
the effect of market interest rates on the Embedded Floor Income
included in the Retained Interest. The majority of the
consolidations bring the loans back on-balance sheet, so for
those loans, we retain the value of the asset on-balance sheet
versus in the trust. For the three months ended March 31,
2007 and 2006, we recorded impairments to the Retained Interests
of $11 million and $52 million, respectively. The
impairment charges were primarily the result of FFELP loans
prepaying faster than projected through loan consolidations
($11 million and $24 million for the three months
ended March 31, 2007 and 2006, respectively). The
impairment for the three months ended March 31, 2006 also
82
related to the Floor Income component of the Companys
Retained Interest due to increases in interest rates during the
period ($28 million). The unrealized fair value adjustment
recorded relates to the difference between recording the
Residual Interest at its allocated cost basis as part of the
gain on sale calculation and the Residual Interests fair
value.
Interest
Rate Risk Management
Asset
and Liability Funding Gap
The tables below present our assets and liabilities (funding)
arranged by underlying indices as of March 31, 2007. In the
following GAAP presentation, the funding gap only includes
derivatives that qualify as effective SFAS No. 133
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 income statement). 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 on a Managed basis, which
consists of both on-balance sheet and off-balance sheet assets
and liabilities and includes all derivatives that are
economically hedging our debt whether they qualify as effective
hedges under SFAS No. 133 or not. Accordingly, we are
also presenting the asset and liability funding gap on a Managed
basis in the table that follows the GAAP presentation.
GAAP Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index
|
|
Frequency of
|
|
|
|
|
|
|
|
Funding
|
|
(Dollars in billions)
|
|
Variable Resets
|
|
Assets
|
|
|
Funding(1)
|
|
|
Gap
|
|
|
3 month Commercial paper
|
|
daily
|
|
$
|
84.0
|
|
|
$
|
|
|
|
$
|
84.0
|
|
3 month Treasury bill
|
|
weekly
|
|
|
7.9
|
|
|
|
.3
|
|
|
|
7.6
|
|
Prime
|
|
annual
|
|
|
.6
|
|
|
|
|
|
|
|
.6
|
|
Prime
|
|
quarterly
|
|
|
1.3
|
|
|
|
|
|
|
|
1.3
|
|
Prime
|
|
monthly
|
|
|
8.2
|
|
|
|
|
|
|
|
8.2
|
|
PLUS Index
|
|
annual
|
|
|
1.9
|
|
|
|
.3
|
|
|
|
1.6
|
|
3-month
LIBOR
|
|
daily
|
|
|
|
|
|
|
|
|
|
|
|
|
3-month
LIBOR
|
|
quarterly
|
|
|
1.5
|
|
|
|
98.8
|
|
|
|
(97.3
|
)
|
1-month
LIBOR
|
|
monthly
|
|
|
.1
|
|
|
|
3.0
|
|
|
|
(2.9
|
)
|
CMT/CPI index
|
|
monthly/quarterly
|
|
|
|
|
|
|
4.3
|
|
|
|
(4.3
|
)
|
Non Discrete
reset(2)
|
|
monthly
|
|
|
|
|
|
|
7.0
|
|
|
|
(7.0
|
)
|
Non Discrete
reset(3)
|
|
daily/weekly
|
|
|
8.2
|
|
|
|
.3
|
|
|
|
7.9
|
|
Fixed
Rate(4)
|
|
|
|
|
13.2
|
|
|
|
12.9
|
|
|
|
.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
126.9
|
|
|
$
|
126.9
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes all derivatives that
qualify as hedges under SFAS No. 133.
|
|
(2) |
|
Consists of asset-backed commercial
paper and auction rate securities, which are discount note type
instruments that generally roll over monthly.
|
|
(3) |
|
Includes restricted and
non-restricted cash equivalents and other overnight type
instruments.
|
|
(4) |
|
Includes receivables/payables,
other assets (including Retained Interest), 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 primarily convert quarterly
3-month
LIBOR to other indices that are more correlated to our asset
indices. These basis swaps do not qualify as effective hedges
under SFAS No. 133 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.
83
Managed
Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index
|
|
Frequency of
|
|
|
|
|
|
|
|
Funding
|
|
(Dollars in billions)
|
|
Variable Resets
|
|
Assets
|
|
|
Funding(1)
|
|
|
Gap
|
|
|
3 month Commercial paper
|
|
daily
|
|
$
|
108.4
|
|
|
$
|
12.2
|
|
|
$
|
96.2
|
|
3 month Treasury bill
|
|
weekly
|
|
|
13.3
|
|
|
|
12.2
|
|
|
|
1.1
|
|
Prime
|
|
annual
|
|
|
1.1
|
|
|
|
|
|
|
|
1.1
|
|
Prime
|
|
quarterly
|
|
|
7.2
|
|
|
|
5.5
|
|
|
|
1.7
|
|
Prime
|
|
monthly
|
|
|
15.9
|
|
|
|
14.8
|
|
|
|
1.1
|
|
PLUS Index
|
|
annual
|
|
|
3.2
|
|
|
|
5.2
|
|
|
|
(2.0
|
)
|
3-month
LIBOR
|
|
daily
|
|
|
|
|
|
|
92.0
|
|
|
|
(92.0
|
)
|
3-month
LIBOR
|
|
quarterly
|
|
|
1.4
|
|
|
|
9.5
|
|
|
|
(8.1
|
)
|
1-month
LIBOR
|
|
monthly
|
|
|
.1
|
|
|
|
2.0
|
|
|
|
(1.9
|
)
|
Non Discrete
reset(2)
|
|
monthly
|
|
|
|
|
|
|
9.3
|
|
|
|
(9.3
|
)
|
Non Discrete
reset(3)
|
|
daily/weekly
|
|
|
12.4
|
|
|
|
.3
|
|
|
|
12.1
|
|
Fixed
Rate(4)
|
|
|
|
|
10.3
|
|
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
173.3
|
|
|
$
|
173.3
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes all derivatives that
management considers economic hedges of interest rate risk and
reflects how we internally manage our interest rate exposure.
|
|
(2) |
|
Consists of asset-backed commercial
paper and auction rate securities, which are discount note type
instruments that generally roll over monthly.
|
|
(3) |
|
Includes restricted and
non-restricted cash equivalents and other overnight type
instruments.
|
|
(4) |
|
Includes receivables/payables,
other assets, other liabilities and stockholders equity
(excluding Series B Preferred Stock).
|
To the extent possible, we generally 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
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 funding (asset-backed commercial paper program
and auction rate securities) 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. 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. We use interest rate
swaps and other derivatives to achieve our risk management
objectives.
When compared with the GAAP presentation, the Managed basis
presentation includes all of our off-balance sheet assets and
funding, and also includes basis swaps that primarily convert
quarterly
3-month
LIBOR to other indices that are more correlated to our asset
indices.
84
Weighted
Average Life
The following table reflects the weighted average life for our
Managed earning assets and liabilities at March 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Balance
|
|
|
Off-Balance
|
|
|
|
|
(Averages in Years)
|
|
Sheet
|
|
|
Sheet
|
|
|
Managed
|
|
|
Earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loans
|
|
|
9.6
|
|
|
|
5.9
|
|
|
|
9.5
|
|
Other loans
|
|
|
5.5
|
|
|
|
|
|
|
|
5.5
|
|
Cash and investments
|
|
|
.5
|
|
|
|
.1
|
|
|
|
.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
8.8
|
|
|
|
5.4
|
|
|
|
8.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
.5
|
|
|
|
|
|
|
|
.5
|
|
Long-term borrowings
|
|
|
6.6
|
|
|
|
5.9
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
6.4
|
|
|
|
5.9
|
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt issuances likely to be called by us or putable by
the investor have been categorized according to their call or
put dates rather than their maturity dates.
COMMON
STOCK
The following table summarizes our common share repurchases,
issuances and equity forward activity for the three months ended
March 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
(Shares in millions)
|
|
2007
|
|
|
2006
|
|
|
Common shares repurchased:
|
|
|
|
|
|
|
|
|
Equity forwards
|
|
|
|
|
|
|
2.5
|
|
Benefit
plans(1)
|
|
|
.2
|
|
|
|
.8
|
|
|
|
|
|
|
|
|
|
|
Total shares repurchased
|
|
|
.2
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
Average purchase price per share
|
|
$
|
45.87
|
|
|
$
|
55.13
|
|
|
|
|
|
|
|
|
|
|
Common shares issued
|
|
|
1.5
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
Equity forward contracts:
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period
|
|
|
48.2
|
|
|
|
42.7
|
|
New contracts
|
|
|
|
|
|
|
2.5
|
|
Exercises
|
|
|
|
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
48.2
|
|
|
|
42.7
|
|
|
|
|
|
|
|
|
|
|
Authority remaining at end of
period to repurchase or enter into equity forwards
|
|
|
15.7
|
|
|
|
16.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes shares withheld from stock option exercises and vesting
of performance stock for employees tax withholding
obligations and shares tendered by employees to satisfy option
exercise costs.
|
85
As of March 31, 2007, the expiration dates and range and
weighted average purchase prices for outstanding equity forward
contracts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Year of Maturity
|
|
Outstanding
|
|
|
Range of
|
|
Average
|
|
(Contracts in millions of shares)
|
|
Contracts
|
|
|
Purchase Prices
|
|
Purchase Price
|
|
|
2008
|
|
|
7.3
|
|
|
$43.50 - $44.00
|
|
$
|
43.80
|
|
2009
|
|
|
14.7
|
|
|
46.00 - 54.74
|
|
|
53.66
|
|
2010
|
|
|
15.0
|
|
|
54.74
|
|
|
54.74
|
|
2011
|
|
|
9.1
|
|
|
49.75 - 53.76
|
|
|
51.91
|
|
2012
|
|
|
2.1
|
|
|
46.30 - 46.70
|
|
|
46.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48.2
|
|
|
|
|
$
|
51.86
|
|
|
|
|
|
|
|
|
|
|
|
|
The closing price of the Companys common stock on
March 30, 2007 was $40.90. Should the market value of our
stock fall below certain initial trigger prices, the
counterparty to the contract has a right to terminate the
contract and settle all or a portion at the original contract
price. For equity forward contracts outstanding at
March 31, 2007, these initial trigger prices range from
$23.93 per share to $30.11 per share.
In February 2007, the Company made payments to certain
counterparties to lower the notional amounts on some of its
outstanding equity forward contracts. Also in February 2007, the
Company agreed with a counterparty to amend the trigger prices
on its outstanding equity forward contracts. In total, the
Company amended the terms of the contracts covering
18.5 million shares. As a result of these transactions, the
Companys aggregate position on equity forward contracts is
48.2 million shares at an average strike price of $51.86.
The highest trigger price on all outstanding equity forward
contracts is now $30.11, down from $35.58 before the amendments.
SUBSEQUENT
EVENT
On April 16, 2007, the Company announced that an investor
group (the Investor Group) led by J.C.
Flowers & Co. (J.C. Flowers) signed a
definitive agreement to acquire the Company for approximately
$25.2 billion or $60.00 per share of common stock. When the
transaction is complete, J.C. Flowers and certain other private
equity investors, including Friedman Fleischer & Lowe;
will invest approximately $4.4 billion and own
50.2 percent, and Bank of America (NYSE: BAC) and JPMorgan
Chase (NYSE: JPM) each will invest approximately
$2.2 billion and each will own 24.9 percent. The
Companys independent board members unanimously approved
the agreement and recommended that its shareholders approve the
agreement. (See also the Merger Agreement filed with
the SEC on the Companys Current Report on
Form 8-K,
dated April 18, 2007.)
The Investor Group has stated that it is committed to supporting
the Companys focus on transparency among lenders, schools
and students and on corporate responsibility. The Company will
be subject to oversight by Congress and ED, and will continue to
be subject to all applicable federal and state laws, including
the Higher Education Act.
The transaction will require the approval of the Companys
stockholders, is subject to required regulatory approval and
other closing conditions, and, under very limited circumstances,
may be terminated by the Investor Group. The transaction is
expected to close in late 2007. The consummation of the
transaction is subject to regulatory review and the expiration
of the waiting periods under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976. The Company will not pay
further dividends on its common stock prior to consummation of
the proposed transaction.
In connection with negotiations to purchase the Company, the
Companys preliminary financial results for the first
quarter of 2007 were shared with representatives of the Investor
Group.
86
Financing
Considerations Related to the Transaction
Following the closing, the Company will continue to have
publicly traded debt securities and as a result will continue
comprehensive financial reporting about its business, financial
condition and results of operations. Bank of America and
JPMorgan Chase are committed to provide debt financing for the
transaction and to provide additional liquidity to the Company
prior to and after the closing date, subject to customary terms
and conditions.
A portion of the Companys existing unsecured debt will
remain outstanding, and such outstanding debt will not be
equally and ratably secured with the new acquisition-related
debt. The acquisition financing will be structured with the
intent to accommodate the repayment of any outstanding debt as
it matures. The Company expects this transaction to have no
material impact on its outstanding asset-backed debt and to
remain an active participant in the asset-backed securities
market.
On April 16, 2007, after the Company announced the
transaction, Moodys Investor Services,
Standard & Poors and Fitch Ratings placed the
long and short-term ratings on the Companys senior
unsecured debt under review for possible downgrade. In addition,
following the announcement, secondary market credit spreads on
the Companys outstanding senior unsecured bonds widened
significantly, limiting access to new sources of senior
unsecured funds at borrowing costs comparable to those available
before the announcement.
On April 30, 2007, Bank of America and JPMorgan Chase
provided the Company with a new, $30 billion asset-backed
commercial paper conduit facility. This additional liquidity,
combined with the Companys existing liquidity, is
anticipated to be sufficient to meet the Companys cash
needs beyond the expected closing date of the announced
transaction, even if no additional securities are issued by the
Company during that time. However, the Company does expect to
resume issuance of the Companys traditional asset-backed
securities within the next few months.
Accounting
Considerations Related to the Transaction
Upon closing, the transaction will be accounted for under
purchase accounting, which will be pushed down to the Company.
Under purchase accounting, the total cost of the acquisition
will be allocated to the Companys identifiable assets and
liabilities based on their respective fair values. Thus, all the
assets and liabilities will have a new basis of accounting and
therefore previous unamortized premiums, discounts and reserves
related to those assets and liabilities will be written-off once
the transaction closes. The excess of the purchase price over
the estimated fair value of the identifiable assets and
liabilities will be recognized as goodwill. Since the Company is
the acquired enterprise, expenses incurred in connection with
the transaction will be expensed. Transaction fees that are
contingent upon the closing will be recognized when the
transaction closes. Transaction fees that are not contingent on
the closing will be expensed as incurred. Vesting accelerates on
all stock-based compensation awards, and as a result, all
deferred compensation related to those awards will be expensed
upon closing of the transaction.
At March 31, 2007, the Company had approximately
$2 billion Contingently Convertible Debentures
(Co-Cos) outstanding. The Co-Cos are eligible to be
called at par on or after July 25, 2007, under certain
circumstances. At March 31, 2007, the Company classified
its $2 billion outstanding Co-Cos as a long-term obligation
because as of that date, the Company believed that a successful
remarketing of the Co-Cos in July 2007 was probable. Upon
announcement of the transaction on April 16, 2007, the
Company deemed that a successful remarketing of the bonds in
July 2007 was no longer probable. The Company expects to
classify the Co-Cos as a short-term obligation at June 30,
2007 if at that time the Company believes that a successful
remarketing of the bonds will not occur in July 2007, as the
investors will have the option to put the bonds back to the
Company at such time. Additionally, in the definitive agreement
to acquire the Company signed on April 16, 2007, the
Company agreed to redeem the Co-Cos on July 25, 2007 after
receiving written notice from the Investor Group upon certain
conditions.
87
RECENT
DEVELOPMENTS
We are withdrawing our 2007 guidance as a result of our
execution of the definitive agreement providing for the sale of
the Company and described under SUBSEQUENT EVENT
above, including the uncertain impact on future 2007 quarters,
of the transactions contemplated by this agreement.
State
Attorney General Investigations
On April 11, 2007, the Company entered into a settlement
agreement with the Office of the Attorney General of the State
of New York under which we agreed to adopt the New York Attorney
Generals Code of Conduct governing student lending and
donate $2 million to a national fund devoted to educating
college bound students about their loan options. Under the
agreement, the Company did not admit, and expressly denied, that
our conduct constituted any violation of law. The Code of
Conduct, among other things, precludes the Company from
providing anything more than nominal value to any employees of
an institution of higher education and requires additional
disclosures to borrowers and schools under certain
circumstances. We cannot predict the effect that adopting the
Code of Conduct will have on our future business prospects.
Under the settlement agreement, we are required to certify
implementation of its terms by August 15, 2007.
New York
State SLATE Act
On May 7, 2007, the New York State legislature passed the
Student Lending Accountability, Transparency and Enforcement
Act, which seeks to codify the Code of Conduct that we agreed to
adopt as part of the settlement agreement with the New York
Attorney General described above. The new legislation would
prohibit lenders from making gifts to universities or their
employees in exchange for any advantage or consideration related
to the lenders education loan activities. The legislation
also prohibits revenue sharing arrangements between lenders and
schools and establishes standards for schools using preferred
lender lists.
Separate from the settlement agreement with the Office of the
Attorney General of the State of New York, the attorneys general
of the States of Arizona, California, Missouri, New Jersey and
Ohio and the Commonwealth of Massachusetts have served civil
investigative demands or requests for documents on the Company
seeking information concerning our relationships with schools.
NYSE,
SEC, House and Senate
NYSE Regulation, Inc. and the Philadelphia office of the SEC
both have notified the Company that they are conducting an
inquiry into the trading of SLM stock and securities relating to
the Companys announcement on April 16, 2007 that an
investor group led by J.C. Flowers & Co. had signed a
definitive agreement to purchase the Company. We are cooperating
with NYSE Regulation, Inc. and the SEC in order to provide the
requested information and documents.
The SEC is conducting an investigation into trading of SLM stock
prior to the public release of the Presidents budget on
February 5, 2007. We are cooperating with the SEC and have
provided the requested information and documents. Before the SEC
investigation commenced, U.S. Senator Edward Kennedy, chairman
of the Senate Committee on Health, Education, Labor and
Pensions, and U.S. Representatives George Miller and Barney
Frank, chairmen of the House of Representatives Committee on
Education and Labor and Committee on Financial Services,
respectively, separately submitted requests for information
regarding certain SLM stock sales by SLMs Chairman of the
Board of Directors Albert L. Lord. We have cooperated with the
Senate and House Committee counsel to provide the requested
information.
The U.S. House of Representatives Committee on Education
and Labor submitted a request to the Company dated
March 28, 2007 seeking information regarding our marketing
practices in the student loan business. We are cooperating with
committee counsel in order to provide the requested information.
The U.S. Senate Committee on Health, Education, Labor and
Pensions submitted requests to the Company seeking information
regarding our marketing practices in the student loan business
and our collections practices on delinquent and defaulted FFELP
student loans. We are cooperating with committee counsel in
order to provide the requested information.
88
Concurrent
Resolution on the Budget for 2008
On March 29, 2007, the House of Representatives passed
H.Con.Res. 99, its plan for the Fiscal 2008 budget. The
House-passed budget resolution included a single reconciliation
instruction to the House Education and Labor Committee which
would require it to report legislation that would cut
entitlement spending in its jurisdiction by $75 million.
Although the savings amount is minimal, it was widely reported
that the language was included to facilitate passage of student
loan reform legislation
Senator
Kennedy Proposal for Title IV Programs
It has been widely reported that Senator Kennedy, Chairman of
the Health, Education, Labor, and Pensions (HELP)
Committee has circulated his draft proposals for Title IV
programs, including student loan programs and Pell Grants. The
proposal, which has reportedly been provided to members of the
HELP Committee, proposes to make several reductions in the
student loan program: (1) reduce Special Allowance Payments
on new loans by 0.60 percentage points; (2) reduce
federal insurance on new loans to 85 percent and eliminate
Exceptional Performer; (3) increase lender origination fee
to 1 percent; (4) reduce guaranty agency collection
fee to 16 percent; and (5) base the calculation of the
guaranty agency account maintenance fee on number of borrowers
rather than loan level.
The proposal would also change the delivery of PLUS loans to two
different auction models: (1) a loan sale model, where the
FDLP would originate the PLUS loans and then auction the loans
when they entered repayment; and (2) a loan originations
rights auction where the Department of Education would auction
off the right to originate loans for each school that
participated in the auction. The auction would be based on
Special Allowance Payment rates.
The proposal would use the savings to pay for (1) a phased
in increase in Pell Grants to $5,400 by fiscal 2010;
(2) increase eligibility of families for maximum
assistance; (3) phase in a reduction in the Stafford
interest rate to 5.8 percent over five years;
(4) introduce new type of income-contingent repayment plan,
which would include FFELP borrowers; and (5) expand loan
forgiveness in the FDLP.
Student
Loan Accountability and Disclosure Reform Act
On May 2, 2007, Senator Michael Enzi, ranking Republican on
the Senate Health, Education, Labor, and Pensions Committee,
introduced S. 1262, the Student Loan Accountability and
Disclosure Reform Act. The proposed legislation would
regulate gifts, travel, entertainment, and services provided to
institutions of higher education by guarantors and lenders. The
legislation would add additional disclosure requirements on
lenders and would prohibit schools from designating preferred
lender lists. Schools could keep standard lists of lenders but
would be required to include any lender on the list that
requested inclusion. Disclosure and prohibitions would apply to
direct loan schools as well as FFELP schools. The legislation
would eliminate school-as-lenders after June 30, 2008.
Student
Loan Sunshine Act
On Wednesday, May 9, 2007, the House of Representatives
passed H.R. 890, a bipartisan version of the Student Loan
Sunshine Act. The vote in the House was 414 to 3. The bill
would establish greater disclosure requirements on schools and
lenders for both FFELP loans and Private Education Loans. The
legislation would require higher education institutions to
establish codes of conduct that would include
prohibition on many areas that have been cited as creating
conflicts of interest. Areas specified by the legislation
include gifts, consulting or other fees paid by lenders to
financial aid officers and other school officials, fees or other
material benefits, including profit or revenue sharing to
institutions or their staff, staffing assistance, opportunity
loans, and advisory councils. The legislation would require that
schools include at least three unaffiliated lenders on any
Preferred Lender List and disclose the rationale for
recommending such lenders.
89
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 1 to the consolidated financial statements,
Significant Accounting Policies Recently
Issued Accounting Pronouncements.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Interest
Rate Sensitivity Analysis
The effect of short-term movements in interest rates on our
results of operations and financial position has been limited
through our interest rate risk management. The following tables
summarize the effect on earnings for the three months ended
March 31, 2007 and 2006 and the effect on fair values at
March 31, 2007 and December 31, 2006, 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. This analysis does not consider any potential
impairment to our Residual Interests that may result from a
higher discount rate that would be used to compute the present
value of the cash flows if long-term interest rates increased.
See the Companys 2006
Form 10-K,
Footnote 9 to the consolidated financial statements,
Student Loan Securitization, which details the
potential decrease to fair value that could occur.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Interest Rates:
|
|
|
Interest Rates:
|
|
|
|
Change from
|
|
|
Change from
|
|
|
Change from
|
|
|
Change from
|
|
|
|
Increase of
|
|
|
Increase of
|
|
|
Increase of
|
|
|
Increase of
|
|
|
|
100 Basis
|
|
|
300 Basis
|
|
|
100 Basis
|
|
|
300 Basis
|
|
|
|
Points
|
|
|
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
|
|
$
|
3
|
|
|
|
|
%
|
|
$
|
4
|
|
|
|
1
|
%
|
|
$
|
(4
|
)
|
|
|
(1
|
)%
|
|
$
|
(14
|
)
|
|
|
(4
|
)%
|
Unrealized gains (losses) on
derivative and hedging activities
|
|
|
133
|
|
|
|
40
|
|
|
|
200
|
|
|
|
60
|
|
|
|
144
|
|
|
|
368
|
|
|
|
228
|
|
|
|
582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in net income before taxes
|
|
$
|
136
|
|
|
|
32
|
%
|
|
$
|
204
|
|
|
|
48
|
%
|
|
$
|
140
|
|
|
|
48
|
%
|
|
$
|
214
|
|
|
|
74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in diluted earnings per
common share
|
|
$
|
.214
|
|
|
|
82
|
%
|
|
$
|
.333
|
|
|
|
128
|
%
|
|
$
|
.220
|
|
|
|
65
|
%
|
|
$
|
.345
|
|
|
|
101
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2007
|
|
|
|
|
|
|
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 student loans
|
|
$
|
96,437
|
|
|
$
|
(186
|
)
|
|
|
|
%
|
|
$
|
(315
|
)
|
|
|
|
%
|
Private Education Loans
|
|
|
12,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other earning assets
|
|
|
11,220
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
(96
|
)
|
|
|
(1
|
)
|
Other assets
|
|
|
11,110
|
|
|
|
(456
|
)
|
|
|
(4
|
)
|
|
|
(756
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
131,442
|
|
|
$
|
(675
|
)
|
|
|
(1
|
)%
|
|
$
|
(1,167
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
$
|
118,584
|
|
|
$
|
(1,362
|
)
|
|
|
(1
|
)%
|
|
$
|
(3,433
|
)
|
|
|
(3
|
)%
|
Other liabilities
|
|
|
3,991
|
|
|
|
803
|
|
|
|
20
|
|
|
|
2,464
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
122,575
|
|
|
$
|
(559
|
)
|
|
|
|
%
|
|
$
|
(969
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006
|
|
|
|
|
|
|
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 student loans
|
|
$
|
87,797
|
|
|
$
|
(182
|
)
|
|
|
|
%
|
|
$
|
(313
|
)
|
|
|
|
%
|
Private Education Loans
|
|
|
12,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other earning assets
|
|
|
9,950
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
(109
|
)
|
|
|
(1
|
)
|
Other assets
|
|
|
10,299
|
|
|
|
(436
|
)
|
|
|
(4
|
)
|
|
|
(750
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
120,109
|
|
|
$
|
(656
|
)
|
|
|
(1
|
)%
|
|
$
|
(1,172
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
$
|
108,142
|
|
|
$
|
(1,427
|
)
|
|
|
(1
|
)%
|
|
$
|
(3,610
|
)
|
|
|
(3
|
)%
|
Other liabilities
|
|
|
3,680
|
|
|
|
877
|
|
|
|
24
|
|
|
|
2,613
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
111,822
|
|
|
$
|
(550
|
)
|
|
|
|
%
|
|
$
|
(997
|
)
|
|
|
(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, we can have a fixed versus floating mismatch in funding
if the student loan earns Floor Income at the fixed borrower
rate and the funding remains floating.
During the three months ended March 31, 2007 and 2006,
certain FFELP student loans were earning Floor Income and we
locked in a portion of that Floor Income through the use of
futures and Floor Income Contracts. The result of these hedging
transactions was to convert a portion of the fixed rate nature
of student loans to variable rate, and to fix the relative
spread between the student loan asset rate and the variable rate
liability.
91
In the above table, under the scenario where interest rates
increase 100 and 300 basis points, the changes in pre-tax net
income before the unrealized gains (losses) on derivative and
hedging activities is primarily due to the impact of
(i) our off-balance sheet hedged FFELP Consolidation Loan
securitizations and the related Embedded Floor Income recognized
as part of the gain on sale, which results in a decrease in
payments on the written Floor contracts that more than offset
impairment losses on the Embedded Floor Income in the Residual
Interest; (ii) variable rate assets being funded with fixed
rate debt and (iii) fixed rate assets being funded with
variable debt. The first two items will generally cause income
to increase when interest rates increase, whereas, the third
item will generally offset this increase. In the 100 and 300
basis point scenarios for the three months ended March 31,
2007, items (i) and (ii) resulted in a gain. In the
prior year period, item (iii) had a bigger impact than item
(i) resulting in a net loss for both the 100 and 300 basis
point scenarios.
In addition to interest rate risk addressed in the preceding
tables, the Company is also exposed to risks related to foreign
currency exchange rates and the equity price of its own stock.
Foreign currency exchange risk is primarily the result of
foreign denominated debt issued by the Company. As it relates to
the Companys corporate unsecured and securitization debt
programs used to fund the Companys business, the
Companys policy is to use cross currency interest rate
swaps to swap all foreign 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 addition, the Company has
foreign exchange risk as a result of international operations;
however, the exposure is minimal at this time.
Equity price risk of the Companys own stock is due to
equity forward contracts used in the Companys share
repurchase program. A hypothetical decrease in the
Companys stock price per share of $5.00 and $10.00 would
result in a $241 million and $482 million unrealized
loss on derivative and hedging, respectively. In addition to the
net income impact, other liabilities would increase by the
aforementioned amounts. Stock price decreases can also result in
the counterparty exercising its right to demand early settlement
on a portion of or the total contract depending on trigger
prices set in each contract. The initial trigger prices as of
March 31, 2007 range from approximately $23.93 to $30.11.
At March 30, 2007, the closing price of the Companys
stock was $40.90. With the $5.00 and $10.00 decrease in unit
stock price above, none of these triggers would be met and no
counterparty would have the right to early settlement.
|
|
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 March 31, 2007. Based on
this evaluation, our Chief Executive Officer and Chief Financial
Officer, concluded that, as of March 31, 2007, 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 SECs rules and forms and
(b) accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding
required disclosure.
Changes
in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as
defined in
Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934, as
amended) occurred during the fiscal quarter ended March 31,
2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
92
PART II. OTHER
INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
On April 14, 2007, the Company was served with a putative
class action suit by several borrowers in federal court in
California. The complaint alleges violations of California
Business & Professions Code 17200, breach of contract,
breach of covenant of good faith and fair dealing, violation of
consumer legal remedies act and unjust enrichment. The complaint
challenges the Companys FFELP billing practices as they
relate to use of the simple daily interest method for
calculating interest. The Company believes the complaint is
without merit and it intends to vigorously defend this action.
On January 25, 2007, the Attorney General of Illinois filed
a lawsuit against one of the Companys subsidiaries, Arrow
Financial Services, LLC (AFS), in the Circuit Court
of Cook County, Illinois alleging that AFS violated the Illinois
Consumer Fraud and Deceptive Practices Act and the federal Fair
Debt Collections Practices Act. The lawsuit seeks to enjoin AFS
from violating the Illinois Consumer Fraud and Deceptive
Practices Act and from engaging in debt management and
collection services in or from the State of Illinois. The
lawsuit also seeks to rescind certain agreements to pay back
debt between AFS and Illinois consumers, to pay restitution to
all consumers who have been harmed by AFSs alleged
unlawful practices, to impose a statutory civil penalty of
$50,000 and to impose a civil penalty of $50,000 per violation
($60,000 per violation if the consumer is 65 years of age
or older). The lawsuit alleges that as of January 25, 2007,
660 complaints against Arrow Financial have been filed with the
Office of the Illinois Attorney General since 1999 and over 800
complaints have been filed with the Better Business Bureau. As
of December 29, 2006, the Company owns 88 percent of
the membership interests in AFS Holdings, LLC, the parent
company of AFS. Management cannot predict the outcome of this
lawsuit or its effect on the Companys financial position
or results of operations.
We are also subject to various claims, lawsuits and other
actions that arise in the normal course of business. Most of
these matters are claims by borrowers disputing the manner in
which their loans have been processed or the accuracy of our
reports to credit bureaus. In addition, the collections
subsidiaries in our debt management operations group are
routinely named in individual plaintiff or class action lawsuits
in which the plaintiffs allege that we have violated a federal
or state law in the process of collecting their account.
Management believes 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 receive information and document requests from state
attorneys general concerning certain of our business practices.
Our practice has been and continues to be to cooperate with the
state attorneys general and to be responsive to any such
requests.
If the
acquisition of the Company is not closed, our access to the
credit markets and our liquidity could be materially adversely
affected.
On April 16, 2007, the Company announced that an Investor
Group led by J.C. Flowers & Co. signed a definitive
agreement to acquire the Company for approximately
$25.2 billion or $60.00 per share of common stock. See
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS SUBSEQUENT
EVENT in this
Form 10-Q.
Following the Companys announcement, Moodys Investor
Services, Standard & Poors and Fitch Ratings
placed the long and short-term ratings on our senior unsecured
debt under review for possible downgrade. In addition, following
the announcement, secondary market credit spreads on our
outstanding senior unsecured bonds widened significantly. The
transaction is subject to regulatory approvals and other closing
conditions, and, under very limited circumstances, may be
terminated by the Investor Group. While we expect to close the
transaction in late 2007, if the transaction is terminated or
otherwise does not close, our access to the credit markets and
our liquidity could be materially adversely affected and new
issuance of unsecured debt could be subject to much wider
spreads and more restrictive terms than we have historically
experienced. In addition, depending upon the circumstances under
which the transaction is terminated, we will only have access to
the interim
93
asset-backed financing facilities for a limited period.
Moreover, the price of our stock could be materially adversely
affected. In such circumstances, if the stock price were to fall
below $30.11, we may be required to settle our equity forward
contracts in a manner that could have a materially dilutive
effect on our common stock, as more fully described within the
Companys 2006 Annual Report on
Form 10-K
at Item 1A. Risk Factors LIQUIDITY AND CAPITAL
RESOURCES.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
The following table summarizes the Companys common share
repurchases during the first quarter of 2007 pursuant to the
stock repurchase program (see Note 6,
Stockholders Equity, to the consolidated
financial statements) first authorized in September 1997 by the
Board of Directors. Since the inception of the program, which
has no expiration date, the Board of Directors has authorized
the purchase of up to 317.5 million shares as of
March 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
of Shares That
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
May Yet Be
|
|
|
|
Total Number
|
|
|
Average Price
|
|
|
as Part of Publicly
|
|
|
Purchased Under
|
|
|
|
of Shares
|
|
|
Paid per
|
|
|
Announced Plans
|
|
|
the Plans or
|
|
(Common shares in millions)
|
|
Purchased(1)
|
|
|
Share
|
|
|
or Programs
|
|
|
Programs(2)
|
|
|
Period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1
January 31, 2007
|
|
|
.1
|
|
|
$
|
47.41
|
|
|
|
|
|
|
|
15.7
|
|
February 1
February 28, 2007
|
|
|
.1
|
|
|
|
42.85
|
|
|
|
|
|
|
|
15.7
|
|
March 1 March 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total first quarter
|
|
|
.2
|
|
|
$
|
45.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The total number of shares
purchased includes: i) shares purchased under the stock
repurchase program discussed above, and ii) shares
purchased in connection with the exercise of stock options and
vesting of performance stock to satisfy minimum statutory tax
withholding obligations and shares tendered by employees to
satisfy option exercise costs (which combined totaled
.2 million shares for the first quarter of 2007).
|
|
(2)
|
|
Reduced by outstanding equity
forward contracts.
|
Item 3. Defaults
upon Senior Securities
Nothing to report.
Item 4. Submission
of Matters to a Vote of Security Holders
Nothing to report.
Item 5. Other
Information
Nothing to report.
Item 6. Exhibits
The following exhibits are furnished or filed, as applicable:
|
|
|
|
|
|
3
|
.2
|
|
By-Laws of SLM Corporation
|
|
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
|
94
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)
C.E. Andrews
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer and
Duly Authorized Officer)
Date: May 10, 2007
95