10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008 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 numbers
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 of 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)
Securities registered pursuant to Section 12(b) of the
Act
Common Stock, par value $.20 per share.
Name of Exchange on which Listed:
New York Stock Exchange
6.97% Cumulative Redeemable Preferred Stock, Series A, par
value $.20 per share
Floating Rate Non-Cumulative Preferred Stock, Series B, par
value $.20 per share
Name of Exchange on which Listed:
New York Stock Exchange
Medium Term Notes, Series A, CPI-Linked Notes due 2017
Medium Term Notes, Series A, CPI-Linked Notes due 2018
6% Senior Notes due December 15, 2043
Name of Exchange on which Listed:
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the
Act:
None.
Indicate by check mark whether the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller
reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of voting stock held by
non-affiliates of the registrant as of June 30, 2008 was
$8.9 billion (based on closing sale price of $19.35 per
share as reported for the New York Stock Exchange
Composite Transactions).
As of February 27, 2009, there were 467,403,909 shares
of voting common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the
registrants Annual Meeting of Shareholders scheduled to be
held May 22, 2009 are incorporated by reference into
Part III of this Report.
TABLE OF CONTENTS
FORWARD-LOOKING
AND CAUTIONARY STATEMENTS
This report contains forward-looking statements and information
based on managements current expectations as of the date
of this document. Statements that are not historical facts,
including statements about our beliefs or expectations and
statements that assume or are dependent upon future events, are
forward-looking statements, and are contained throughout this
Annual Report on
Form 10-K,
including under the sections entitled Business and
Managements Discussion and Analysis of Financial
Condition and Results of Operations. Forward-looking
statements are subject to risks, uncertainties, assumptions and
other factors that may cause actual results to be materially
different from those reflected in such forward-looking
statements. These factors include, among others, the occurrence
of any event, change or other circumstances that could give rise
to our ability to cost-effectively refinance asset-backed
financing facilities due April 2009, (collectively, the
2008 Asset-Backed Financing Facilities), including
any potential foreclosure on the student loans under those
facilities following their termination; increased financing
costs; limited liquidity; any adverse outcomes in any
significant litigation to which we are a party; our derivative
counterparties terminating their positions with the Company if
permitted by their contracts and the Company substantially
incurring additional costs to replace any terminated positions;
changes in the terms of student loans and the educational credit
marketplace (including changes resulting from new laws, such as
any laws enacted to implement the Administrations 2010
budget proposals as they relate to the Federal Family Education
Loan Program (FFELP) and regulations and from the
implementation of applicable laws and regulations) which, among
other things, may change the volume, average term and yields on
student loans under the FFELP, may result in loans being
originated or refinanced under non-FFELP programs, or may affect
the terms upon which banks and others agree to sell FFELP loans
to the Company. The Company could be affected by: various
liquidity programs being implemented by the federal government;
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; changes in the general
interest rate environment, including the rate relationships
among relevant money-market instruments, 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; changes in
projections of losses from loan defaults; changes in general
economic conditions; 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. All forward-looking statements contained in
this report are qualified by these cautionary statements and are
made only as of the date this Annual Report on
Form 10-K
is filed. The Company does not undertake any obligation to
update or revise these forward-looking statements to conform the
statement to actual results or changes in the Companys
expectations.
Definitions for capitalized terms used in this document can be
found in the Glossary at the end of this document.
1
PART I.
INTRODUCTION
TO SLM CORPORATION
SLM Corporation, more commonly known as Sallie Mae, is the
market leader in education finance. SLM Corporation is a holding
company that operates through a number of subsidiaries.
References in this Annual Report to the Company
refer to SLM Corporation and its subsidiaries. The Company was
formed in 1972 as the Student Loan Marketing Association, a
federally chartered government sponsored enterprise
(GSE), with the goal of furthering access to higher
education by providing liquidity to the student loan
marketplace. On December 29, 2004, we completed the
privatization process that began in 1997 and resulted in the
wind down of the GSE.
Our primary business is to originate, service and collect
student loans. We provide funding, delivery and servicing
support for education loans in the United States through our
participation in the Federal Family Education Loan Program
(FFELP) and through our non-federally guaranteed
Private Education Loan programs.
We have used internal growth and strategic acquisitions to
attain our leadership position in the education finance market.
Our sales force is the largest in the student loan industry. The
core of our marketing strategy is to generate student loan
originations by promoting our brands on campus through the
financial aid office. These sales and marketing efforts are
supported by the largest and most diversified servicing
capabilities in the industry.
In addition to the net interest income generated by our lending
activities, we earn fees for a number of services including
student loan and guarantee servicing, loan default aversion and
defaulted loan collections, and for providing processing
capabilities and information technology to educational
institutions, as well as, 529 college savings plan program
management, transfer and servicing agent services, and
administrative services through Upromise Investments, Inc.
(UII) and Upromise Investment Advisors, LLC
(UIA). We also operate a consumer savings network
through Upromise, Inc. (Upromise). References in
this Annual Report to Upromise refer to Upromise and
its subsidiaries, UII and UIA.
At December 31, 2008, we had approximately
8,000 employees.
Recent
Developments
Legislative developments, conditions in the capital markets and
regulatory actions taken by the federal government over the last
eighteen months have had a significant and, in some cases, an
unintended impact on the student loan industry. This has caused
the Company to make significant changes in the way it conducts
its business.
The College Cost Reduction and Access Act of 2007
(CCRAA) resulted in, among other things, a reduction
in the yield received by the Company on FFELP loans originated
on or after October 1, 2007. A description of the CCRAA can
be found in APPENDIX A, FEDERAL FAMILY EDUCATION LOAN
PROGRAM.
In the summer of 2007, the global capital markets began to
experience a severe dislocation that has persisted to the
present. This dislocation, along with a reduction in the
Companys unsecured debt ratings caused by the Proposed
Merger, resulted in more limited access to the capital markets
than the Company has experienced in the past and a substantial
increase in its cost of funding.
Historically, the Company relied on the term asset-backed
securities (ABS) market for the majority of its
funding. In 2006, the Company issued FFELP ABS at an average
cost of 14 basis points over LIBOR. In 2007, the average
cost rose slightly to 19 basis points over LIBOR. By
December 2007, however, we paid in excess of 50 basis
points over LIBOR for similar FFELP ABS. In 2008, the cost to
issue FFELP ABS rose steadily before access was eliminated for
all issuers. In 2008, we issued $18.5 billion of FFELP ABS
at an
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average spread of 125 basis points over LIBOR. The Company
has not accessed the market for Private Education Loan ABS since
2007.
In the past, the Company primarily relied on the unsecured debt
market for the balance of its funding. In June 2008, the Company
issued a $2.5 billion, ten-year unsecured note at an
equivalent cost of 400 basis points over LIBOR. This rate
is more than 300 basis points higher than the cost of any
previously issued unsecured debt. Subsequent to this debt
issuance, the market for unsecured,
non-U.S. government
guaranteed debt issued by financial services companies
materially deteriorated and became unavailable at profitable
terms.
The net interest margin earned on a newly-originated FFELP loan
came under pressure as the asset yield was cut and funding costs
increased, making new lending unprofitable. As a result, over
160 student lenders have exited the business since the
implementation of CCRAA, and most remaining issuers
significantly reduced their lending activities. By January 2008,
it became clear that unless the capital markets recovered there
would be a sharp contraction in the number of student loans
available. The Company, along with other participants in the
student loan industry, began to bring this to the attention of
legislators, schools and students. As early as February 2008,
members of Congress were writing to the U.S. Department of
Education (ED) and the Federal Reserve alerting them
to the imminent crisis and urging them to find a solution.
Congress acted quickly and passed legislation that authorized ED
to take action.
The Ensuring Continued Access to Student Loans Act of 2008
(ECASLA) was passed in both houses of Congress with
overwhelming bipartisan support and was signed into law on
May 7, 2008. Under ECASLA, ED implemented two programs in
2008, the Loan Participation Program and Loan Purchase
Commitment Program (Participation Program and
Purchase Program). Through the Participation
Program, ED provides interim short-term liquidity to FFELP
lenders by purchasing participation interests in pools of FFELP
loans. FFELP lenders are charged at the commercial paper
(CP) rate plus 0.50 percent on the principal
amount of participation interests outstanding. Loans funded
under the Participation Program must be either refinanced by the
lender or sold to ED pursuant to the Purchase Program prior to
its expiration on September 30, 2010. Under the Purchase
Program, ED purchases eligible FFELP loans at a price equal to
the sum of (i) par value, (ii) accrued interest,
(iii) the one-percent origination fee paid to ED, and
(iv) a fixed amount of $75 per loan. Generally, loans
originated between May 1, 2008 and June 30, 2010 are
eligible for these programs. ECASLA also significantly increased
student loan limits. A description of ECASLA can be found in
APPENDIX A, FEDERAL FAMILY EDUCATION LOAN
PROGRAM.
The Participation Program enabled the Company to make a pledge
to make every loan to every eligible student on every
campus under FFELP and to help the country avoid a major
crisis on campuses across the United States. In the first six
months of academic year (AY)
2008-2009,
the Company originated $9.5 billion of FFELP loans, an
increase of 3 percent from the prior year. In addition, it
originated $1.4 billion of FFELP loans for third parties.
In addition to the Participation and Purchase Programs, ECASLA
authorized funding vehicles for FFELP loans originated after
October 1, 2003 through June 30, 2009. On
January 15, 2009, ED published summary terms under which it
will purchase eligible FFELP Stafford and PLUS loans from a
conduit vehicle established to provide funding for eligible
student lenders (the ED Conduit Program). Funding
for the ED Conduit Program will be provided by the capital
markets at a cost based on market rates. The ED Conduit Program
will have a term of five years. An estimated $16.0 billion
of our Stafford and PLUS loans (excluding loans currently in the
Participation Program) were eligible for funding under the ED
Conduit Program as of December 31, 2008. We expect to
utilize the ED Conduit Program to fund a significant percentage
of these assets over time. The initial funding under the ED
Conduit Program is expected to occur in the first quarter of
2009.
Interest paid on FFELP loans is set by law and is based on the
Federal Reserves Statistical Release H.15
90-day
financial CP rate. As of December 31, 2008, on a Managed
Basis, the Company had approximately $127.2 billion of
FFELP loans indexed to three-month financial CP that are funded
with debt indexed or swapped to LIBOR. Due to the unintended
consequences of government actions in other areas of the capital
markets and limited issuances of qualifying financial CP, the
relationship between the three-month financial
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CP and LIBOR became distorted and volatile resulting in CP rates
being substantially below LIBOR starting in the fall of 2008.
To address this issue for the fourth quarter of 2008, ED
announced that for purposes of calculating the FFELP loan index
from October 27, 2008 to the end of the fourth quarter, the
Federal Reserves CP Funding Facility rates would be used
for those days in which no three-month financial CP rate was
available. This resulted in a CP/LIBOR spread of 21 basis
points in the fourth quarter of 2008 compared to 8 basis
points in the third quarter of 2008. The CP/LIBOR spread would
have been 62 basis points in the fourth quarter of 2008 if
the ED had not addressed the issue by using the Federal
Reserves CP Funding Facility rates discussed above. The
Company continues to work with Congress and ED to implement an
acceptable long-term solution to this issue.
On February 26, 2009, the Administration issued their 2010
budget request to Congress, which included provisions that could
impact significantly the FFELP. The Presidents budget
overview states: FFEL processors would continue to receive
federal subsidies for new loans originated in the
2009-2010
academic year and prior academic years under the regular FFEL
program and the emergency programs established by the Ensuring
Continued Access to Student Loans Act of 2008. The budget
proposal must be passed in the Congress, prior to enactment into
law. The Company will work with Congress and ED to assist them
in achieving the objectives outlined in the
Administrations 2010 budget request.
In 2008, the Company conducted a thorough review of our entire
business model and operations with a goal of achieving
appropriate risk adjusted returns across all of our business
segments and providing cost-effective services. As a result, we
have reduced our operating expenses by over 20 percent in
the fourth quarter of 2008 compared to the fourth quarter of
2007, after adjusting for restructuring costs, growth and other
investments. This reduction was accomplished by lowering our
headcount by a total of 2,900 or 26 percent, and
consolidating operations through closing several work locations.
The Company also curtailed less profitable FFELP student loan
acquisitions such as from Lender Partners, spot purchases and
consolidation lending. In our private education lending
business, we curtailed high default lending programs, tightened
credit underwriting standards and increased pricing. We also
made the decision to wind down our purchased receivables
business in our Asset Performance Group (APG)
business segment to focus on our core student loan collection
business. These measures are discussed in more detail in the
Business Segments discussion below.
Student
Lending Market
Students and their families use multiple sources of funding to
pay for their college education including savings, current
income, grants, scholarships, and federally guaranteed and
private education loans. Historically, one-third of the cost of
an education has come from federally guaranteed student loans
and private education loans. Over the last five years, these
sources of funding for higher education have been relatively
stable with a general trend towards an increased use of student
loans. Due to the legislative changes described above, a
dramatic reduction in other sources of credit such as home
equity and private education loans, and a significant decline in
personal wealth as a result of declining home prices and equity
values, the Company expects to see a substantial increase in
borrowing from federal loan programs in the current and future
years.
Federally
Guaranteed Student Lending Programs
There are two loan delivery programs that provide federal
government guaranteed student loans: the FFELP and the Federal
Direct Loan Program (FDLP). FFELP loans are provided
by private sector institutions and are ultimately guaranteed by
ED, except for the Risk Sharing loss. FDLP loans are provided to
borrowers directly by ED on terms similar to student loans
provided under the FFELP. We participate in and are the largest
lender under the FFELP program.
For the federal fiscal year (FFY) ended
September 30, 2008 (FFY 2008), ED estimated that the market
share of FFELP loans was 76 percent, down from
80 percent in FFY 2007. (See LENDING BUSINESS
SEGMENT Competition.) Total FFELP and FDLP
volume for FFY 2008 grew by 17 percent, with the FFELP
portion growing 12 percent and the FDLP portion growing
40 percent.
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As discussed above, in 2008, many lenders exited the FFELP
marketplace, creating concerns about the availability of federal
loans for students served by this program. As a result, some
schools began to decrease their participation in the FFELP
program in July 2008 for the stability of the FDLP. ED estimated
that the FDLP could double its market share.
The Higher Education Act (the HEA) regulates every
aspect of the federally guaranteed student loan program,
including communications with borrowers, loan originations and
default aversion. Failure to service a student loan properly
could jeopardize the guarantee on federal student loans. This
guarantee generally covers 98 and 97 percent of the student
loans principal and accrued interest for loans disbursed
before and after July 1, 2006, respectively. In the case of
death, disability or bankruptcy of the borrower, the guarantee
covers 100 percent of the loans principal and accrued
interest.
FFELP loans are guaranteed by state agencies or non-profit
companies designated as guarantors, with ED providing
reinsurance to the guarantor. Guarantors are responsible for
performing certain functions necessary to ensure the
programs soundness and accountability. These functions
include reviewing loan application data to detect and prevent
fraud and abuse and to assist lenders in preventing default by
providing counseling to borrowers. Generally, the guarantor is
responsible for ensuring that loans are serviced in compliance
with the requirements of the HEA. When a borrower defaults on a
FFELP loan, we submit a claim to the guarantor who provides
reimbursements of principal and accrued interest subject to the
Risk Sharing (See APPENDIX A, FEDERAL FAMILY
EDUCATION LOAN PROGRAM, to this document for a description
of the role of guarantors.)
Private
Education Loan Products
In addition to federal loan programs, which have statutory
limits on annual and total borrowing, we sponsor a variety of
Private Education Loan programs to bridge the gap between the
cost of education and a students resources. The majority
of our Private Education Loans are made in conjunction with a
FFELP Stafford loan and are marketed to schools through the same
marketing channels and by the same sales force as FFELP loans.
As a result of the credit market dislocation discussed above, a
large number of lenders have exited the Private Education Loan
business and only a few of the countrys largest banks
continue to offer the product. Private Education Loans are
discussed in more detail below.
Drivers
of Growth in the Student Loan Industry
Growth in our Managed student loan portfolio is driven by the
growth in the overall market for student loans, as well as by
our own market share gains. Rising enrollment and college costs
have resulted in the size of the federally insured student loan
market more than doubling over the last 10 years. Federally
insured student loan originations grew from $30.0 billion
in FFY 1998 to $75.5 billion in FFY 2008.
According to the College Board, tuition and fees at four-year
public institutions and four-year private institutions have
increased 50 percent and 27 percent, respectively, in
constant, inflation-adjusted dollars, since AY
1998-1999.
Under the FFELP, there are limits to the amount students can
borrow each academic year. The first loan limit increases since
1992 were implemented July 1, 2007. In response to the
credit crisis, Congress significantly increased loan limits
again in 2008. As a result, we anticipate that students will
rely more on federal loans to fund their tuition needs. Both
federal and private loans as a percentage of total student aid
were 52 percent of total student aid in AY
1997-1998
and 53 percent in AY
2007-2008.
Private Education Loans accounted for 22 percent of total
student loans both federally guaranteed and Private
Education Loans in AY
2007-2008,
compared to 7 percent in AY
1997-1998.
The National Center for Education Statistics predicts that the
college-age population will increase approximately
10 percent from 2008 to 2017. Demand for education credit
is expected to increase due to this population demographic,
first-time college enrollments of older students and continuing
interest in adult education.
5
The following charts show the historical and projected
enrollment and average tuition and fee growth for four-year
public and private colleges and universities.
Historical
and Projected Enrollment
(in millions)
Source: National Center for
Education Statistics
Note: Total enrollment
in all degree-granting institutions; middle alternative
projections for 2006 onward.
Cost of
Attendance(1)
Cumulative % Increase from AY
1997-1998
Source: The College Board
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Cost of attendance is in current
dollars and includes
tuition, fees and on-campus room and board.
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BUSINESS
SEGMENTS
We provide credit products and related services to the higher
education and consumer credit communities and others through two
primary business segments: our Lending business segment and our
APG business segment. In addition, within our Corporate and
Other business segment, we provide a number of complementary
products and services to guarantors and Lender Partners that are
managed within smaller operating segments, the most prominent
being our Guarantor Servicing and Loan Servicing businesses. Our
Corporate and Other business segment also includes the
activities of our Upromise subsidiaries. Each of these segments
is summarized below. The accounting treatment for the segments
is explained in MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
6
LENDING
BUSINESS SEGMENT
In the Lending business segment, we originate and acquire both
federally guaranteed student loans, which are administered by
ED, and Private Education Loans, which are not federally
guaranteed. Most of our borrowers use Private Education Loans
primarily to supplement federally guaranteed loans in meeting
the cost of education. We manage the largest portfolio of FFELP
and Private Education Loans in the student loan industry, and
have 10 million student and parent customers through our
ownership and management of $180.4 billion in Managed
student loans as of December 31, 2008, of which
$147.0 billion or 81 percent are federally insured. We
serve over 6,000 clients including educational and financial
institutions and state agencies. We are the largest servicer of
student loans, servicing a portfolio of $139 billion of
FFELP loans and $39 billion of Private Education Loans as
of December 31, 2008.
Sallie
Maes Lending Business
Our primary marketing
point-of-contact
is the schools financial aid office. We deliver flexible
and cost-effective products to the school and its students. The
focus of our sales force is to market Sallie Maes suite of
education finance products and business office solutions to
colleges. These include FFELP and Private Education Loans and
our Web-based loan origination and servicing platform
OpenNet®.
Simply put, our strategy is to provide the financial aid and
bursars office with the tools they need to provide their
students with the financing students require to pay for their
education.
In 2008, we originated $24.2 billion in student loans.
FFELP originations for the year ended December 31, 2008
totaled $17.9 billion, an increase of 4 percent from
the year ended December 31, 2007. The slowdown in FFELP
loan origination growth is due principally to a large decline in
loan originations through Lender Partners as a result of the
diminished profitability of FFELP loans discussed earlier.
Private Education Loan originations totaled $6.3 billion, a
decrease of 20 percent from the prior year. The decline in
Private Education Loan originations is due to our elimination of
non-traditional lending announced earlier in the year and
funding pressures which required us to limit our Private
Education lending activities.
In the past we relied on Lender Partners, typically national or
regional banks, for a large percentage of our loan originations.
Our sales force promoted their brands on campuses and we
purchased the loans after disbursement. In recent years, we
migrated away from this strategy due to the stronger
profitability of our internal brands. The increased pressures on
the profitability of student loans described above accelerated
this shift. In 2007, 34 percent of our loan originations
were from Lender Partners. For 2008, lender partner originations
declined to 19 percent of total loan originations. They
were just 10 percent in the fourth quarter. The Company
believes that the contribution to total loan originations from
Lender Partners will be immaterial in future years.
Growth in FFELP lending is expected to come from loan limit
increases and capturing market share as other participants exit
the sector (see APPENDIX A, FEDERAL FAMILY EDUCATION
LOAN PROGRAM, for a discussion of the history of student
loan limits). In addition, the sharp contraction in household
wealth is expected to increase the use of both federal and
Private Education Loan programs. Offsetting these factors is an
expected increase in participation in the FDLP. The FDLP
program, with a market share of 20 percent in FFY 2007, had
consistently lost market share since it peaked in FFY 1997 at
34 percent. In 2008, this trend reversed for the first time
in over a decade due to the events described above and
FDLPs market share rose to 24 percent.
In recent years, consolidation loans were an integral part of
the FFELP business. Students were able to fix their interest
rate for twenty years or more. Very low interest rates persisted
in the early part of this decade, resulting in high levels of
loan consolidation. At the end of 2008, 63 percent of our
average Managed FFELP loans were consolidation loans, down from
67 percent at the end of 2007. The CCRAA made consolidation
loans virtually unprofitable; it also removed the interest rate
incentive for borrowers to consolidate their loans. As a result,
we no longer offer this product.
7
Private
Education Loans
We bear the full credit risk for Private Education Loans, which
are underwritten and priced according to credit risk based upon
customized credit scoring criteria. Due to their higher risk
profile, Private Education Loans have higher interest rates than
FFELP loans. Over the last several years, there has been
significant growth in Private Education Loans as tuition has
increased faster than the rate of inflation and FFELP lending
limits have not increased. This growth combined with relatively
higher spreads led to Private Education Loans contributing a
higher percentage of our net interest margin in recent years. We
expect this trend to continue in the foreseeable future, despite
recent increases in FFELP loan limits, in part due to margin
erosion of FFELP student loans.
Our Private Education Loan portfolio grew at a compound annual
growth rate of just under 30 percent over the last three
years. The current credit environment has created significant
challenges funding Private Education Loans and we have become
more restrictive in our underwriting criteria. In addition, as
discussed above, FFELP lending limits have increased
significantly over the last three years. As a result of these
factors, we expect originations of Private Education Loans to be
lower in 2009 than in 2008.
At the beginning of 2008, we announced the discontinuation of
non-traditional lending. Over the course of 2008, we made
improvements in the structure, pricing, underwriting, servicing,
collecting and funding of Private Education Loans. These changes
were made to increase the profitability and decrease the risk of
the product. For example, the average FICO score for loans
disbursed in the fourth quarter of 2008 was up 26 points to 738
and the percentage of co-signed loans increased to
74 percent from 57 percent in the prior year.
These improvements in portfolio quality are being driven by our
more selective underwriting criteria. We have instituted higher
FICO cut-offs and require cosigners for borrowers with higher
credit scores than in the past. Our experience shows that adding
a cosigner to a loan reduces the default rate by more than
50 percent. We are also originating more loans at lower
risk schools. We are capturing more data on our borrowers and
cosigners and using this data in the credit decision and pricing
process. We have also introduced judgmental lending. We plan to
deploy up to one hundred credit analysts in our new Delaware
credit center who will review applications for private credit.
During 2008, we enhanced our default aversion and collection
processes. This included significantly reducing the granting of
prospective forbearance as a result of a risk-based eligibility
model and better development of a borrowers ability to
repay. Our focus is to remain in close contact with delinquent
borrowers through our call centers, email and letters in order
to improve our cure rates in each stage of delinquency to assist
our borrowers in returning to current status.
Our largest Private Education Loan program is the Signature
Student
Loan®,
which is offered to undergraduates and graduates through the
financial aid offices of colleges and universities to supplement
traditional FFELP loans. We also offer specialized loan products
to graduate and professional students primarily through our MBA
Loans®,
LAWLOANS®,
Sallie Mae Medical School
Loans®
and Sallie Mae
DENTALoans®
programs. During 2008, as a result of funding pressures, we
curtailed the issuance of new Tuition
Answer®
loans.
Competition
The FDLPs market share peaked at 34 percent in FFY
1997. The FDLPs market share had steadily declined since
then to 20 percent in FFY 2007. However, as discussed
above, schools began to return to the FDLP in FFY 2008, driven
by the concern that FFELP lenders were exiting the business, and
FDLPs market share rose to 24 percent.
Historically, we have faced competition for both federally
guaranteed and non-guaranteed student loans from a variety of
financial institutions including banks, thrifts and
state-supported secondary markets. However, as a result of the
CCRAA and the dislocation in the capital markets, the student
loan industry is undergoing a significant transition. A number
of student lenders have ceased operations altogether or
curtailed activity. The environment of aggressive price
competition between FFELP lenders has also lessened
dramatically. Many of the FFELP lenders that remain in the
business have been adjusting their pricing by reducing
8
borrower benefits and other costs. As a result of these factors,
we believe that as the largest student lender, we are well
positioned to increase market share in the coming years. Our FFY
2008 FFELP originations totaled $17.1 billion, representing
a 23 percent market share.
ASSET
PERFORMANCE GROUP BUSINESS SEGMENT
In our APG business segment, we provide accounts receivable and
collections services including student loan default aversion
services, defaulted student loan portfolio management services,
and contingency collections services for student loans and other
asset classes. In 2008, we decided to wind down our accounts
receivable management and collections services on consumer and
mortgage receivable portfolios that we purchased because we did
not realize the expected synergies between this business and our
traditional contingent student loan collection business.
In 2008, our APG business segment had revenues totaling
$277 million and net loss of $106 million. Our largest
customer, United Student Aid Funds, Inc. (USA
Funds), accounted for 37 percent, excluding
impairments, of our revenue in this segment in 2008.
Products
and Services
Student
Loan Default Aversion Services
We provide default aversion services for five guarantors,
including the nations largest, USA Funds. These services
are designed to prevent a default once a borrowers loan
has been placed in delinquency status.
Defaulted
Student Loan Portfolio Management Services
Our APG business segment manages the defaulted student loan
portfolios for six guarantors under long-term contracts.
APGs largest customer, USA Funds, represents approximately
17 percent of defaulted student loan portfolios in the
market. Our portfolio management services include selecting
collection agencies and determining account placements to those
agencies, processing loan consolidations and loan
rehabilitations, and managing federal and state offset programs.
Contingency
Collection Services
Our APG business segment is also engaged in the collection of
defaulted student loans on behalf of various clients including
guarantors, federal and state agencies, and schools. We earn
fees that are contingent on the amounts collected. We provide
collection services for ED and now have approximately
10 percent of the total market for such services. We have
relationships with approximately 900 colleges and universities
to provide collection services for delinquent student loans and
other receivables from various campus-based programs. We also
collected other debt for credit card issuers, federal and state
agencies, and retail clients.
Competition
The private sector collections industry is highly fragmented
with few large companies and a large number of small scale
companies. The APG businesses that provide third-party
collections services for ED, FFELP guarantors and other federal
holders of defaulted debt are highly competitive. In addition to
competing with other collection enterprises, we also compete
with credit grantors who each have unique mixes of internal
collections, outsourced collections and debt sales. The scale,
diversification and performance of our APG business segment has
been a competitive advantage for the Company.
CORPORATE
AND OTHER BUSINESS SEGMENT
The Companys Corporate and Other business segment includes
the aggregate activity of its smaller operating segments,
primarily its Guarantor Servicing, Loan Servicing, and Upromise
operating segments. Corporate and Other also includes several
smaller products and services, including comprehensive financing
and loan delivery solutions to college financial aid offices and
students to streamline the financial aid process.
9
Guarantor
Services
We earn fees for providing a full complement of administrative
services to FFELP guarantors. FFELP student loans are guaranteed
by these agencies, with ED providing reinsurance to the
guarantor. The guarantors are non-profit institutions or state
agencies that, in addition to providing the primary guarantee on
FFELP loans, are responsible for other activities, including:
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guarantee issuance the initial approval of loan
terms and guarantee eligibility;
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account maintenance the maintaining, updating and
reporting of records of guaranteed loans;
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default aversion services these services are
designed to prevent a default once a borrowers loan has
been placed in delinquency status (we perform these activities
within our APG business segment);
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guarantee fulfillment the review and processing of
guarantee claims;
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post-claim assistance assisting borrowers in
determining the best way to pay off a defaulted loan; and
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systems development and maintenance the development
of automated systems to maintain compliance and accountability
with ED regulations.
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Currently, we provide a variety of these services to nine
guarantors and, in AY
2007-2008,
we processed $21.3 billion in new FFELP loan guarantees, of
which $17.2 billion was for USA Funds, the nations
largest guarantor. We processed guarantees for approximately
33 percent of the FFELP loan market in AY
2007-2008.
Guarantor servicing fee revenue, which includes guarantee
issuance and account maintenance fees, was $121 million for
the year ended December 31, 2008, 85 percent of which
we earned from services performed on behalf of USA Funds. Under
some of our guarantee services agreements, including our
agreement with USA Funds, we receive certain scheduled fees for
the services that we provide under such agreements. The payment
for these services includes a contractually
agreed-upon
percentage of the account maintenance fees that the guarantors
receive from ED.
The Companys guarantee services agreement with USA Funds
has a five-year term that will be automatically increased by an
additional year on October 1 of each year unless prior notice is
given by either party.
Our primary non-profit competitors in guarantor servicing are
state and non-profit guarantee agencies that provide third-party
outsourcing to other guarantors.
(See APPENDIX A, FEDERAL FAMILY EDUCATION LOAN
PROGRAM Guarantor Funding for details of the
fees paid to guarantors.)
Upromise
Upromise provides a number of programs that encourage consumers
to save for college. Upromise has established a consumer savings
network which is designed to promote college savings by
consumers who are members of this program by encouraging them to
purchase goods and services from the companies that participate
in the program (Participating Companies).
Participating Companies generally pay Upromise transaction fees
based on member purchase volume, either online or in stores
depending on the contractual arrangement with the Participating
Company. Typically, a percentage of the purchase price of the
consumer members eligible purchases with Participating
Companies is set aside in an account maintained by Upromise on
behalf of its members.
Upromise, through its wholly owned subsidiaries, UII, a
registered broker-dealer, and UIA, a registered investment
advisor, provides program management, transfer and servicing
agent services, and administration services for various 529
college-savings plans. UII and UIA manage more than
$17.0 billion in 529 college-savings plans.
10
REGULATION
Like other participants in the FFELP, the Company is subject to
the HEA and, from time to time, to review of its student loan
operations by ED and guarantee agencies. As a servicer of
federal student loans, the Company is subject to certain ED
regulations regarding financial responsibility and
administrative capability that govern all third-party servicers
of insured student loans. In connection with our guarantor
servicing operations, the Company must comply with, on behalf of
its guarantor servicing customers, certain ED regulations that
govern guarantor activities as well as agreements for
reimbursement between the Secretary of Education and the
Companys guarantor servicing customers.
The Companys originating or servicing of federal and
private student loans also subjects it to federal and state
consumer protection, privacy and related laws and regulations.
Some of the more significant federal laws and regulations that
are applicable to our student loan business include:
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the
Truth-In-Lending
Act;
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the Fair Credit Reporting Act;
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the Equal Credit Opportunity Act;
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the Gramm-Leach Bliley Act; and
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the U.S. Bankruptcy Code.
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APGs debt collection and receivables management activities
are subject to federal and state consumer protection, privacy
and related laws and regulations. Some of the more significant
federal laws and regulations that are applicable to our APG
business segment include:
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the Fair Debt Collection Practices Act;
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the Fair Credit Reporting Act;
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the Gramm-Leach-Bliley Act; and
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the U.S. Bankruptcy Code.
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Our APG business segment is subject to state laws and
regulations similar to the federal laws and regulations listed
above. Finally, certain APG subsidiaries are subject to
regulation under the HEA and under the various laws and
regulations that govern government contractors.
Sallie Mae Bank is subject to Utah banking regulations as well
as regulations issued by the Federal Deposit Insurance
Corporation, and undergoes periodic regulatory examinations.
UII and UIA, which administer 529 college-savings plans, are
subject to regulation by the Municipal Securities Rulemaking
Board, the Financial Industry Regulatory Authority (formerly the
National Association of Securities Dealers, Inc.) and the
Securities and Exchange Commission (SEC) through the
Investment Advisers Act of 1940.
AVAILABLE
INFORMATION
The SEC maintains an Internet site
(http://www.
sec.gov) that contains periodic and other reports such as
annual, quarterly and current reports on
Forms 10-K,
10-Q and
8-K,
respectively, as well as proxy and information statements
regarding SLM Corporation and other companies that file
electronically with the SEC. Copies of our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and other periodic reports are available on our website as soon
as reasonably practicable after we electronically file such
reports with the SEC. Investors and other interested parties can
also access these reports at www.salliemae.com/about/investors.
Our Code of Business Conduct, which applies to Board members and
all employees, including our Chief Executive Officer and Chief
Financial Officer, is also available, free of charge, on our
website at www.salliemae.com/about/business_code. htm. We intend
to disclose any amendments to or waivers from our
11
Code of Business Conduct (to the extent applicable to our Chief
Executive Officer or Chief Financial Officer) by posting such
information on our website.
In 2008, the Company submitted the annual certification of its
Chief Executive Officer regarding the Companys compliance
with the NYSEs corporate governance listing standards,
pursuant to Section 303A.12(a) of the NYSE Listed Company
Manual.
In addition, we filed as exhibits to the Companys Annual
Report on
Form 10-K
for the years ended December 31, 2006 and 2007 and to this
Annual Report on
Form 10-K,
the certifications required under Section 302 of the
Sarbanes-Oxley Act of 2002.
12
The Company faces a variety of significant risks that are
inherent in our business. Risks that affect the Company may be
grouped into the following categories: financial and funding,
credit, operations, legislation and regulation, and market
competition. Some of the more important risk factors that affect
our business are described below.
Our
business continues to be affected by the significant funding
constraints in the credit market, dependence on various
government funding sources, and higher and more volatile funding
costs, both in absolute terms and relative to competing market
instruments.
2008 was an extraordinarily disruptive year for the
financial services sector. Tremendous volatility in the credit
markets and significant declines in values affected all asset
classes, including FFELP assets, which are no less than
97 percent guaranteed by the federal government. The
disruption in the credit markets and legislative changes in the
economics of the FFELP resulted in challenges for the Company to
fund new loans at positive spreads and re-finance our existing
portfolio.
The Company was able to meet the demand for new loan
originations under the FFELP through funding and liquidity
programs established by the federal government. Several of these
programs are described in the LIQUIDITY AND CAPITAL
RESOURCES section of this
Form 10-K.
These programs are not permanent and may not be extended upon
their expiration dates. While the Company expects a
normalization of market conditions, there is no assurance that
the credit markets over time will return to a level that makes
FFELP loan originations available or profitable beyond the time
these programs are presently scheduled to end.
FFELP loans originated under the government programs mentioned
above must be re-financed by the Company or sold to the
government by a date determined under the terms of the programs.
There is no assurance that the credit markets will return to a
level that makes re-financing of these loans available or
profitable before that date. If this is the case, the Company
may sell these loans to the government, which at the current
time could result in the loss of income associated with the
ownership and servicing of the loans in the future.
Since the market disruptions began, the Company has funded
private, non-federally guaranteed loan originations through term
brokered deposits raised by Sallie Mae Bank. While this
brokered-deposit funding market has been functioning well, there
may be an ultimate limit to the size of this market for Sallie
Mae Bank. Also, this source of funding creates certain
re-financing risks because the average term of the deposits is
shorter than the expected term of the Banks loan assets
the deposits are funding. There is no assurance that this source
of funding will continue to be available at a level and a cost
that makes new private credit loan originations possible or
profitable, nor is there any assurance that the loans can be
re-financed at profitable margins. If deposit funding is not
available at profitable levels, the origination of our Private
Education Loans will be limited.
Recent market conditions have reduced our access to and
increased the cost of borrowing for student loan asset-backed
securities. If the government programs mentioned were to prove
ineffective or were terminated and if alternative funding
sources were not available, the Company may be compelled to
reduce or suspend the origination of new loans. If we were
unable to find cost-effective and stable funding alternatives,
our funding and liquidity would be negatively impacted and our
cost of funds could increase, adversely affecting our results of
operations.
The Company expects that current market conditions will not
always persist and that access to market funding will eventually
improve and become less volatile. Even upon the expected
normalization of the capital markets, however, the Company will
be exposed to typical financing risks. Factors that could make
financing difficult, more expensive or unavailable on any terms
include, but are not limited to, financial results and losses of
the Company, changes within our organization, events that have
an adverse impact on our reputation, changes in the activities
of our business partners, disruptions in the capital markets,
events that have an adverse impact on the financial services
industry, counterparty availability, changes affecting our
assets, corporate and regulatory actions, absolute and
comparative interest rate changes, ratings agencies
actions, general economic conditions and the legal, regulatory,
accounting and tax environments governing our funding
transactions.
13
At some time, the Company may decide that it is prudent or
necessary to raise additional equity capital through the sale of
common stock, preferred stock, or securities that convert into
common stock. There are no restrictions on entering into the
sale of any equity securities in either public or private
transactions, except that any private transaction involving more
than 20 percent of shares outstanding requires shareholder
approval. Under current market conditions, the terms of an
equity transaction may subject existing security holders to
potential subordination or dilution and may involve a change in
governance.
The
interest rate characteristics of our earning assets do not
always match the interest rate characteristics of our funding
arrangements. This mismatch exposes us to risk in the form of
basis risk and repricing risk.
The Companys funding sources do not exactly match the
interest rate indices, re-set frequencies, and maturities of the
Companys loan assets. While most of such basis risks are
hedged using interest rate swap contracts, such hedges are not
always perfect matches and, therefore, may result in losses.
While the asset and hedge indices are short-term with rate
movements that are typically highly correlated, there can be no
assurance that the historically high correlation will not be
disrupted by capital market dislocations or other factors not
within our control. For instance, the spread between
3-month CP
and 3-month
LIBOR was unusually volatile and wide in the fourth quarter of
2008 due to the unintended consequences of the Federal
Reserves operations in the CP market. In such
circumstances, our earnings could be adversely affected,
possibly to a material extent.
The
rating agencies could downgrade our ratings, which could limit
our access to financing, increase the cost of financing or
trigger obligations under collateralized financing
arrangements.
Our credit ratings are important to our liquidity, particularly
in times when the asset-backed securitization market is
uncertain. A reduction in our credit ratings could adversely
affect our liquidity, increase our borrowing costs, limit our
access to the markets or trigger obligations under certain
provisions in collateralized arrangements. Under these
provisions, counterparties may require us to post additional
collateral, segregate collateral or terminate certain contracts.
Termination of our collateralized financing contracts could
cause us to sustain losses and impair our liquidity by
necessitating the use of other sources of financing.
There
is no assurance that the ABCP Facility of $26 billion, as
described in the LIQUIDITY AND CAPITAL RESOURCES
section, which has a scheduled maturity date of April 28,
2009, will be extended on cost effective terms.
As reported on February 2, 2009, the Company and the
parties to the $26 billion ABCP Facility that provides
funding for the Companys federally-guaranteed student
loans and private education loans agreed to extend the Facility
by 60 days. The new scheduled maturity date of the Facility
is April 28, 2009 and the new scheduled termination date is
July 27, 2009. There can be no assurance that the Company
will be able to cost-effectively refinance the Facility.
Furthermore, foreclosure on the student loans securing the
Facility might occur if we were not able to refinance the
Facility at all. Either event could adversely affect the
operations, capital and compliance with other debt/lender
covenants of the Company.
Unexpected
and sharp changes in the overall economic environment may result
in the credit performance of our loan portfolio being materially
different from what we expect. In addition, the Company is also
subject to the creditworthiness of counterparties to our
derivative contracts.
The Companys earnings are critically dependent on the
evolving creditworthiness of our student loan customers. We
maintain a reserve for credit losses based on current and past
charge-offs, levels of past due loans and forbearances and
expected economic conditions. However, managements
determination of the appropriate reserve level may under- or
over-estimate future losses. If the credit quality of our
customer base materially decreases, if a market risk changes
significantly, or if our reserves for credit losses are not
adequate, our business, financial condition and results of
operations could suffer.
In addition to customer credit risk, we are exposed to other
forms of credit risk, including counterparties to our derivative
transactions. For example, the Company has exposure to the
financial condition of its various
14
lending, investment and derivative counterparties. If any of the
Companys counterparties is unable to perform its
obligations, the Company would, depending on the type of
counterparty arrangement, experience a loss of liquidity or an
economic loss. In addition, related to derivative exposure, the
Company may not be able to cost effectively replace the
derivative position depending on the type of derivative and the
current economic environment. If the Company was not able to
replace the derivative position, the Company may be exposed to a
greater level of interest rate
and/or
foreign currency exchange rate risk which could lead to
additional losses. The Companys counterparty exposure is
more fully discussed herein in LIQUIDITY AND CAPITAL
RESOURCES Counterparty Exposure.
Our
businesses are regulated by state and federal laws and
regulations and our failure to comply with these laws and
regulations may result in significant costs or business
sanctions.
The Company is subject to numerous state and federal laws and
regulations. Loans originated and serviced under the FFELP are
subject to legislative and regulatory changes. A summary of the
program, which indicates its complexity and frequent changes,
may be found in APPENDIX A, FEDERAL FAMILY EDUCATION
LOAN PROGRAM of this
Form 10-K.
We continually update our FFELP loan originations and servicing
policies and procedures and our systems technologies, provide
training to our staff and maintain quality control over
processes through compliance reviews and internal and external
audits. We are at risk, however, for misinterpretation of ED
guidance and incorrect application of ED regulations and
policies, which could result in fines, the loss of the federal
guarantee on FFELP loans, or limits on our participation in the
FFELP.
Our private credit lending and debt collection business are
subject to regulation and oversight by various state and federal
agencies, particularly in the area of consumer protection
regulation. Various state attorneys general have been active in
this area of consumer protection. We are subject, and may be
subject in the future, to inquiries and audits from state and
federal regulators. Sallie Mae Bank is subject to state and FDIC
regulation and at the time of this filing, was the subject of a
cease and desist order for weaknesses in its compliance
function. While the issues addressed in the order have largely
been remediated, the action has not yet been lifted. We have
committed resources to enhance our compliance function. Our
failure to comply with various laws and regulations or with the
terms of the cease and desist order could result in litigation
expenses, fines, business sanctions, limitations on our ability
to fund our Private Education Loans, which are currently funded
by term deposits issued by Sallie Mae Bank, or restrictions on
the operations of Sallie Mae Bank.
A
failure of our operational systems or infrastructure, or those
of our third-party vendors, could disrupt our business, result
in disclosure of confidential customer information, damage our
reputation and cause losses.
Our business is dependent on our ability to process and monitor,
on a daily basis, a large number of transactions. These
transactions must be processed in compliance with legal and
regulatory standards and our product specifications, which we
change to reflect our business needs. As processing demands
change and grow, developing and maintaining our operational
systems and infrastructure becomes increasingly challenging. Our
reduction in operating expenses and off-shoring of certain
processes has also increased challenges in maintaining accurate
and efficient operations.
Our loan originations and servicing, financial, accounting, data
processing or other operating systems and facilities may fail to
operate properly or become disabled as a result of events that
are beyond our control, adversely affecting our ability to
process these transactions. Any such failure could adversely
affect our ability to service our clients, result in financial
loss or liability to our clients, disrupt our business, result
in regulatory action or cause reputational damage.
Despite the plans and facilities we have in place, our ability
to conduct business may be adversely impacted by a disruption in
the infrastructure that supports our businesses. This may
include a disruption involving electrical, communications,
internet, transportation or other services used by us or third
parties with which we conduct business. Notwithstanding our
efforts to maintain business continuity, a disruptive event
impacting our processing locations could negatively affect our
business.
15
Our operations rely on the secure processing, storage and
transmission of confidential and other information in our
computer systems and networks. Although we take protective
measures, our computer systems, software and networks may be
vulnerable to unauthorized access, computer viruses or other
malicious code and other events that could have a security
impact. If one or more of such events occur, this could
jeopardize confidential and other information processed and
stored in, and transmitted through, our computer systems and
networks, or otherwise cause interruptions or malfunctions in
our operations which could result in significant losses or
reputational damage. We may be required to expend significant
additional resources to modify our protective measures or to
investigate and remediate vulnerabilities or other exposures,
and we may be subject to litigation and financial losses that
are either not insured against or not fully covered through any
insurance maintained by us.
We routinely transmit and receive personal, confidential and
proprietary information. We have put in place secure
transmission capability, and may not be able to ensure secure
transmissions and we may not be able to ensure that third
parties with whom we work have appropriate controls in place to
protect the confidentiality of the information. An interception,
misuse or mishandling of personal, confidential or proprietary
information being sent to or received from a customer or third
party could result in legal liability, regulatory action and
reputational harm.
Incorrect
estimates and assumptions by management in connection with the
preparation of our consolidated financial statements could
adversely affect the reported amounts of assets and liabilities
and the reported amounts of income and expenses.
The preparation of our consolidated financial statements
requires management to make certain critical accounting
estimates and assumptions that could affect the reported amounts
of assets and liabilities and the reported amounts of income and
expense during the reporting periods. A description of our
critical accounting estimates and assumptions may be found in
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CRITICAL
ACCOUNTING POLICIES AND ESTIMATES in this
Form 10-K.
If we make incorrect assumptions or estimates, we may under- or
overstate reported financial results, which could result in
actual results being significantly different than current
estimates which could adversely affect our business.
Changes
in laws and regulations that affect the FFELP in particular and
consumer lending in general could affect the profitability of
our business.
The FFELP portion of our business is authorized under the HEA,
which is amended by Congress from time to time. ED administers
the FFELP and modifies its guidance from time to time. We are
also subject to various state and federal laws and regulations
that govern our private credit lending and debt collection
businesses.
Changes in laws and regulations that govern our businesses
affect the profitability and viability of our businesses. For
example, amendments made to the HEA in 2007 significantly
reduced the profitability of our FFELP business. Also, the
Administrations budget for the 2010 fiscal year, submitted
to Congress on February 26, 2009, includes proposals that
could impact significantly the FFELP. It is possible that future
changes in laws and regulations could negatively impact our
ability to grow and be profitable. The Administrations
budget request and the current economic environment may make
legislative changes more likely, making this risk to our
business greater.
We
operate in a competitive environment.
The financial services industry is highly competitive. We
compete with banks and other consumer lending institutions, many
with strong consumer brand name recognition. The market for
federally-guaranteed student loans is shared among the Company
and other private sector lenders who participate in the FFELP
and the federal government through the FDLP. We compete based on
our products and customer service. To the extent our competitors
compete aggressively or more effectively, we could lose market
share to them.
16
Our
product offerings are primarily concentrated in loan and savings
products for higher education expenses. This concentration is
both a competitive advantage and a risk.
We are a leading provider of saving- and
paying-for-college
products and programs. This concentration gives us a competitive
advantage in the market place. This concentration also creates
risks in our business, particularly in light of our
concentration as a FFELP lender. If population demographics
result in a decrease in college-age individuals, if demand for
higher education decreases, the cost of attendance of higher
education decreases, if public support for higher education
costs increases, or if the demand for higher education loans
decreases or increases from one product to another, our business
could be negatively affected. In addition, if we introduce new
education loan products, there is a risk that those new products
will not be accepted in the marketplace. Because we are not a
diversified financial services company, we would not have other
product offerings to offset any loss of business in the
education credit market.
We may
be adversely affected by deterioration in economic
conditions.
A recession or downturn in the economy could make it difficult
for us to originate new business, given the resultant reduced
demand for consumer credit. Credit quality may also be impacted
as borrowers may fail to meet their obligations. Adverse
economic conditions may result in declines in collateral values.
Accordingly, higher credit-related losses could impact our
financial position. In addition, weaker credit quality could
limit funding options, including capital markets activity, which
could adversely impact the Companys liquidity position.
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Item 1B.
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Unresolved
Staff Comments
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None.
17
The following table lists the principal facilities owned by the
Company:
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Approximate
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Location
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Function
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Square Feet
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Reston, VA
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Headquarters
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240,000
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Fishers, IN
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Loan Servicing and Data Center
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450,000
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Newark, DE
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Credit and Collections Center
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160,000
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|
Wilkes Barre, PA
|
|
Loan Servicing Center
|
|
|
133,000
|
|
Killeen,
TX(1)
|
|
Loan Servicing Center
|
|
|
133,000
|
|
Lynn Haven, FL
|
|
Loan Servicing Center
|
|
|
133,000
|
|
Indianapolis, IN
|
|
Loan Servicing Center
|
|
|
100,000
|
|
Big Flats, NY
|
|
Asset Performance Group and Collections Center
|
|
|
60,000
|
|
Arcade,
NY(2)
|
|
Asset Performance Group and Collections Center
|
|
|
46,000
|
|
Perry,
NY(2)
|
|
Asset Performance Group and Collections Center
|
|
|
45,000
|
|
Swansea, MA
|
|
AMS Headquarters
|
|
|
36,000
|
|
|
|
|
(1) |
|
Excludes approximately
30,000 square feet Class B single story building on
four acres, located across the street from the Loan Servicing
Center.
|
|
(2) |
|
In the first quarter of 2003, the
Company entered into a ten year lease with the Wyoming County
Industrial Development Authority with a right of reversion to
the Company for the Arcade and Perry, New York facilities.
|
The following table lists the principal facilities leased by the
Company as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
Location
|
|
Function
|
|
Square Feet
|
|
Niles, IL
|
|
AFS Headquarters
|
|
|
84,000
|
|
Newton, MA
|
|
Upromise
|
|
|
78,000
|
|
Cincinnati, OH
|
|
GRC Headquarters and Asset Performance Group
and Collections Center
|
|
|
59,000
|
|
Muncie, IN
|
|
SLM APG
|
|
|
54,000
|
|
Mt. Laurel, NJ
|
|
SLM Financial Headquarters and Operations
|
|
|
42,000
|
|
Moorestown, NJ
|
|
Pioneer Credit Recovery
|
|
|
30,000
|
|
Novi,
MI(1)
|
|
Sallie Mae, Inc.
|
|
|
27,000
|
|
White Plains, NY
|
|
GRPFS
|
|
|
26,000
|
|
Gaithersburg,
MD(2)
|
|
AFS Operations
|
|
|
24,000
|
|
Whitewater, WI
|
|
AFS Operations
|
|
|
16,000
|
|
Las Vegas, NV
|
|
Asset Performance Group and Collections Center
|
|
|
16,000
|
|
West Valley,
NY(3)
|
|
Pioneer Credit Recovery
|
|
|
14,000
|
|
Batavia, NY
|
|
Pioneer Credit Recovery
|
|
|
13,000
|
|
Seattle, WA
|
|
NELA
|
|
|
13,000
|
|
Perry, NY
|
|
Pioneer Credit Recovery
|
|
|
12,000
|
|
Gainesville,
FL(4)
|
|
SLM-LSC
|
|
|
11,000
|
|
|
|
|
(1) |
|
Space vacated in September 2007;
approximately 30 percent of space is currently being
subleased.
|
|
(2) |
|
Space vacated in September 2006;
the Company is actively searching for subtenants or tenants.
|
|
(3) |
|
Space vacated in June 2008; the
Company is actively searching for subtenants or tenants.
|
|
(4) |
|
Space vacated in September 2008.
|
None of the Companys facilities is encumbered by a
mortgage. The Company believes that its headquarters, loan
servicing centers data center,
back-up
facility and data management and collections centers are
generally adequate to meet its long-term student loan and
business goals. The Companys principal office is currently
in owned space at 12061 Bluemont Way, Reston, Virginia, 20190.
18
|
|
Item 3.
|
Legal
Proceedings
|
The Company is involved in a number of judicial and regulatory
proceedings, including those described below, concerning matters
arising in connection with the conduct of our business. We
believe, based on currently available information, that the
results of such proceedings, in the aggregate, will not have a
material adverse effect on the financial condition of the
Company.
Investor
Litigation
On January 31, 2008, a putative class action lawsuit was
filed against the Company and certain officers in
U. S. District Court for the Southern District of New
York. This case and other actions arising out of the same
circumstances and alleged acts have been consolidated and are
now identified as In Re SLM Corporation Securities Litigation.
The case purports to be brought on behalf of those who acquired
common stock of the Company between January 18, 2007 and
January 23, 2008 (the Securities
Class Period). The complaint alleges that the Company
and certain officers violated federal securities laws by issuing
a series of materially false and misleading statements and that
the statements had the effect of artificially inflating the
market price for the Companys securities. The complaint
alleges that defendants caused the Companys results for
year-end 2006 and for the first quarter of 2007 to be materially
misstated because the Company failed to adequately provide for
loan losses, which overstated the Companys net income, and
that the Company failed to adequately disclose allegedly known
trends and uncertainties with respect to its non-traditional
loan portfolio. On July 23, 2008, the court appointed
Westchester Capital Management (Westchester) Lead
Plaintiff. On December 8, 2008, Lead Plaintiff filed a
consolidated amended complaint. In addition to the prior
allegations, the consolidated amended complaint alleges that the
Company understated loan delinquencies and loan loss reserves by
promoting loan forbearances. On December 19, 2008, and
December 31, 2008, two rejected lead plaintiffs filed a
challenge to Westchester as Lead Plaintiff. That motion is
pending. Lead Plaintiff seeks unspecified compensatory damages,
attorneys fees, costs, and equitable and injunctive relief.
A similar case is pending against the Company, certain officers,
retirement plan fiduciaries, and the Board of Directors, In Re
SLM Corporation ERISA Litigation, also in the U.S. District
Court for the Southern District of New York. The proposed class
consists of participants in or beneficiaries of the Sallie Mae
401(K) Retirement Savings Plan (401K Plan) between
January 18, 2007 and the present whose accounts
included investments in Sallie Mae stock (401K
Class Period). The complaint alleges breaches of
fiduciary duties and prohibited transactions in violation of the
Employee Retirement Income Security Act arising out of alleged
false and misleading public statements regarding the
Companys business made during the 401(K) Class Period
and investments in the Companys common stock by
participants in the 401(K) Plan. On December 15, 2008,
Plaintiffs filed a Consolidated Class Action Complaint. The
plaintiffs seek unspecified damages, attorneys fees,
costs, and equitable and injunctive relief.
Lending
and Collection Litigation and Investigations
On September 17, 2007, the Company became a party to a qui
tam whistleblower case, United States ex. Rel. Rhonda
Salmeron v. Sallie Mae, in the U.S. District Court for
the Northern District of Illinois. The plaintiff alleges that
various defendants submitted false claims
and/or
created records to support false claims in connection with
collection activity on federally guaranteed student loans, and
specifically that the Company was negligent in auditing the
collection practices of one of the defendants. The plaintiffs
seek money damages in excess of $12 million plus treble
damages on behalf of the federal government. This case was
dismissed with prejudice in August 2008 and was appealed to the
Seventh Circuit Court of Appeals in September 2008. The appeal
is pending.
On December 17, 2007, plaintiffs filed a complaint against
the Company, Rodriguez v. SLM Corporation et al., in the
U.S. District Court for the District of Connecticut
alleging that the Company engaged in underwriting practices
which, among other things, resulted in certain applicants for
student loans being directed into substandard and expensive
loans on the basis of race. The plaintiffs have not stated the
relief they seek. Motions to dismiss Sallie Mae, Inc. and for
summary judgment as to the Company are pending.
19
On April 6, 2007, the Company was served with a putative
class action suit by several borrowers in U.S. District
Court for the Central District of California (Anne Chae et
al. v. SLM Corporation et al.) Plaintiffs challenge under
California common and statutory law the Companys FFELP
billing practices as they relate to the use of the simple daily
interest method for calculating interest, the charging of late
fees while charging simple daily interest, and setting the first
payment date at 60 days after loan disbursement for
consolidation and PLUS loans thereby alleging that the Company
effectively capitalizes interest. The plaintiffs seek
unspecified actual and punitive damages, restitution,
disgorgement of late fees, pre-judgment and post-judgment
interest, attorneys fees, costs, and equitable and
injunctive relief. On June 16, 2008, the Court granted
summary judgment to the Company on all counts on the basis of
federal preemption. The decision was appealed to the Ninth
Circuit Court of Appeals. The appeal is pending.
The Office of the Inspector General (OIG) of ED has
been conducting an audit of the Companys billing practices
for special allowance payments under what is known as the
9.5 percent floor calculation since September
2007. The audit covers the period from 2003 through 2006 and is
focused on the Companys Nellie Mae subsidiaries. While the
audit is not yet complete and there has been no definitive
determination by the OIG auditors, initial indications are that
the OIG disagrees with the Companys billing practices on
an immaterial portion of the Companys bills. We continue
to believe that our practices are consistent with longstanding
ED guidance and all applicable rules and regulations. A final
audit report has not been filed. Once a final report is filed,
it will be presented to the Secretary of ED for consideration.
The OIG has audited other industry participants on this issue
and in certain cases the Secretary of ED has disagreed with the
OIGs recommendation.
The Company continues to respond to numerous requests from state
attorneys general and other government agencies regarding
marketing and debt collection practices.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
Nothing to report.
20
PART II.
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
The Companys common stock is listed and traded on the New
York Stock Exchange under the symbol SLM. The number of holders
of record of the Companys common stock as of
January 31, 2009 was 833. The following table sets forth
the high and low sales prices for the Companys common
stock for each full quarterly period within the two most recent
fiscal years.
Common
Stock Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
|
2nd Quarter
|
|
|
3rd Quarter
|
|
|
4th Quarter
|
|
|
2008
|
|
|
High
|
|
|
$
|
23.00
|
|
|
$
|
25.05
|
|
|
$
|
19.81
|
|
|
$
|
12.03
|
|
|
|
|
Low
|
|
|
|
14.70
|
|
|
|
15.45
|
|
|
|
9.37
|
|
|
|
4.19
|
|
2007
|
|
|
High
|
|
|
$
|
49.96
|
|
|
$
|
57.96
|
|
|
$
|
58.00
|
|
|
$
|
53.65
|
|
|
|
|
Low
|
|
|
|
40.30
|
|
|
|
40.60
|
|
|
|
41.73
|
|
|
|
18.68
|
|
The Company paid quarterly cash dividends of $.22 for the first
quarter of 2006, $.25 for the last three quarters of 2006 and
$.25 for the first quarter of 2007. There were no cash dividends
paid in 2008.
Issuer
Purchases of Equity Securities
The following table summarizes the Companys common share
repurchases during 2008 in connection with the exercise of stock
options and vesting of restricted stock to satisfy minimum
statutory tax withholding obligations and shares tendered by
employees to satisfy option exercise costs (which combined
totaled approximately 600 thousand shares for 2008). See
Note 11, Stockholders Equity, to the
consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
of Shares that
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
May Yet Be
|
|
|
|
Total Number
|
|
|
Average Price
|
|
|
as Part of Publicly
|
|
|
Purchased Under
|
|
|
|
of Shares
|
|
|
Paid per
|
|
|
Announced Plans
|
|
|
the Plans or
|
|
|
|
Purchased
|
|
|
Share
|
|
|
or Programs
|
|
|
Programs
|
|
(Common shares in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1 March 31, 2008
|
|
|
.3
|
|
|
$
|
19.82
|
|
|
|
|
|
|
|
38.8
|
|
April 1 June 30, 2008
|
|
|
.2
|
|
|
|
23.74
|
|
|
|
|
|
|
|
38.8
|
|
July 1 September 30, 2008
|
|
|
.1
|
|
|
|
19.32
|
|
|
|
|
|
|
|
38.8
|
|
October 1 October 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38.8
|
|
November 1 November 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38.8
|
|
December 1 December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fourth quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
|
.6
|
|
|
$
|
20.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Stock
Performance
The following graph compares the yearly percentage change in the
Companys cumulative total shareholder return on its common
stock to that of Standard & Poors 500 Stock
Index and Standard & Poors Financials Index. The
graph assumes a base investment of $100 at December 31,
2003 and reinvestment of dividends through December 31,
2008.
Five Year
Cumulative Total Shareholder Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company/Index
|
|
12/31/03
|
|
12/31/04
|
|
12/31/05
|
|
12/31/06
|
|
12/31/07
|
|
12/31/08
|
|
SLM Corporation
|
|
$
|
100.0
|
|
|
$
|
143.7
|
|
|
$
|
150.5
|
|
|
$
|
135.9
|
|
|
$
|
56.8
|
|
|
$
|
25.1
|
|
S&P Financials Index
|
|
|
100.0
|
|
|
|
110.7
|
|
|
|
117.7
|
|
|
|
139.9
|
|
|
|
114.5
|
|
|
|
52.4
|
|
S&P 500 Index
|
|
|
100.0
|
|
|
|
110.7
|
|
|
|
116.1
|
|
|
|
134.2
|
|
|
|
141.6
|
|
|
|
89.8
|
|
Source: Bloomberg Total Return
Analysis
22
|
|
Item 6.
|
Selected
Financial Data
|
Selected
Financial Data
2004-2008
(Dollars in millions, except per share amounts)
The following table sets forth selected financial and other
operating information of the Company. The selected financial
data in the table is derived from the consolidated financial
statements of the Company. The data should be read in
conjunction with the consolidated financial statements, related
notes, and MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS included in
this
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
1,365
|
|
|
$
|
1,588
|
|
|
$
|
1,454
|
|
|
$
|
1,451
|
|
|
$
|
1,299
|
|
Net income (loss)
|
|
|
(213
|
)
|
|
|
(896
|
)
|
|
|
1,157
|
|
|
|
1,382
|
|
|
|
1,914
|
|
Basic earnings (loss) per common share
|
|
|
(.69
|
)
|
|
|
(2.26
|
)
|
|
|
2.73
|
|
|
|
3.25
|
|
|
|
4.36
|
|
Diluted earnings (loss) per common share
|
|
|
(.69
|
)
|
|
|
(2.26
|
)
|
|
|
2.63
|
|
|
|
3.05
|
|
|
|
4.04
|
|
Dividends per common share
|
|
|
|
|
|
|
.25
|
|
|
|
.97
|
|
|
|
.85
|
|
|
|
.74
|
|
Return on common stockholders equity
|
|
|
(9
|
)%
|
|
|
(22
|
)%
|
|
|
32
|
%
|
|
|
45
|
%
|
|
|
73
|
%
|
Net interest margin
|
|
|
.93
|
|
|
|
1.26
|
|
|
|
1.54
|
|
|
|
1.77
|
|
|
|
1.92
|
|
Return on assets
|
|
|
(.14
|
)
|
|
|
(.71
|
)
|
|
|
1.22
|
|
|
|
1.68
|
|
|
|
2.80
|
|
Dividend payout ratio
|
|
|
|
|
|
|
(11
|
)
|
|
|
37
|
|
|
|
28
|
|
|
|
18
|
|
Average equity/average assets
|
|
|
3.45
|
|
|
|
3.51
|
|
|
|
3.98
|
|
|
|
3.82
|
|
|
|
3.73
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loans, net
|
|
$
|
144,802
|
|
|
$
|
124,153
|
|
|
$
|
95,920
|
|
|
$
|
82,604
|
|
|
$
|
65,981
|
|
Total assets
|
|
|
168,768
|
|
|
|
155,565
|
|
|
|
116,136
|
|
|
|
99,339
|
|
|
|
84,094
|
|
Total borrowings
|
|
|
160,158
|
|
|
|
147,046
|
|
|
|
108,087
|
|
|
|
91,929
|
|
|
|
78,122
|
|
Stockholders equity
|
|
|
4,999
|
|
|
|
5,224
|
|
|
|
4,360
|
|
|
|
3,792
|
|
|
|
3,102
|
|
Book value per common share
|
|
|
7.03
|
|
|
|
7.84
|
|
|
|
9.24
|
|
|
|
7.81
|
|
|
|
6.93
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet securitized student loans, net
|
|
$
|
35,591
|
|
|
$
|
39,423
|
|
|
$
|
46,172
|
|
|
$
|
39,925
|
|
|
$
|
41,457
|
|
23
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years ended December 31,
2006-2008
(Dollars in millions, except per share amounts, unless otherwise
stated)
FORWARD-LOOKING
AND CAUTIONARY STATEMENTS
Some of the statements contained in this Annual Report discuss
future expectations and business strategies or include other
forward-looking information. Those statements are
subject to known and unknown risks, uncertainties and other
factors that could cause the actual results to differ materially
from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using
numerous assumptions.
OVERVIEW
This section provides an overview of the Companys 2008
business results from a financial perspective. Certain financial
impacts of funding and liquidity, loan losses, asset growth, fee
income, the distressed debt purchased paper business, operating
expenses, and capital adequacy are summarized below. The income
statement amounts discussed in this Overview section are on a
Core Earnings basis.
As discussed in the Business section, legislative changes to the
FFELP, the credit markets and the economic downturn impacted the
Companys financial results for 2008. The Company reported
$526 million in Core Earnings net income, a
decrease from $560 million in 2007. (Core
Earnings are defined in BUSINESS
SEGMENTS Limitations of Core
Earnings Pre-tax Differences between
Core Earnings and GAAP by Business
Segment.)
Funding
and Liquidity
The Companys results were affected by higher funding costs
than in prior periods. The higher costs were, in part, related
to the 2008 Asset-Backed Financing Facility; the after-tax fees
for this Facility were $225 million for the year. This
Facility was reduced from $34 billion at the beginning of
the year to $28 billion by year end and was extended by
60 days to mature on April 28, 2009.
Our funding costs were also affected by higher than average
interest rate index divergence. Most of our FFELP loans earn
interest based on market CP rates; our funding costs are
primarily based on LIBOR. Due to government intervention in the
CP marketplace and other market dislocations, the spread widened
as much as 200 basis points on certain days during the
fourth quarter of 2008, compared to an average spread of
8 basis points in the third quarter of 2008. ED established
an alternative interest rate calculation for a portion of the
fourth quarter to address the issue, which resulted in a
21 basis point spread for the Company for the fourth
quarter.
In the fourth quarter, we secured access to stable and
profitable funding sources for new FFELP and Private Education
Loan originations. ECASLA provides FFELP lenders with access to
unlimited funding to meet student demand through AY
2009-2010.
Our Private Education Loan originations are being funded by term
deposits issued by Sallie Mae Bank.
The Companys primary funding challenge is to replace our
short-term funding sources, principally the 2008 Asset-Backed
Financing Facility, with longer-term, lower-cost funding. Two
federally-sponsored programs, the ED Conduit Program and the
Federal Reserve Bank of New Yorks Term Asset-Backed
Liquidity Facility, which are discussed in the LIQUIDITY
AND CAPITAL RESOURCES section, are under development and
offer significant potential. At year end, approximately
$30 billion in student loans assets were eligible for these
programs, which are expected to be operational in the first
quarter of 2009.
In 2008, we issued approximately $26 billion in term
funding, including $18.5 billion in term FFELP ABS funding,
which carried an average spread of 125 basis points over
LIBOR. In early January 2009, we
24
announced a $1.5 billion, 12.5 year asset-backed
securities facility. The cost of this facility is expected to
average LIBOR plus 5.75 percent and is expected to fund our
Private Education Loans. Though significantly more expensive
than historical transactions, this facility demonstrates term
funding capability and availability for our Private Education
Loan portfolio.
At year end, 70 percent of our Managed student loans were
funded for the life of the loans and another 12 percent
were funded for an average life of 4.3 years.
At year end, we held approximately $11 billion in primary
liquidity, consisting of cash and short-term investments and
committed lines of credit. We have $5.2 billion in standby
liquidity in the form of unencumbered FFELP loans.
Loan
Losses
On a Core Earnings basis, the loan loss provision
for the year was $1 billion, of which $127 million was
for FFELP loans. The provision for Private Education Loans in
the fourth quarter was $348 million, approximately double
the average of the first three quarters of the year. We began
significantly increasing the Private Education Loan allowance
for loan loss in the fourth quarter of 2007 and throughout 2008
primarily related to the continued weakening of the
U.S. economy, which in particular impacts our
non-traditional loans which are now moving into repayment
status. At year end, our Private Education Loan allowance for
loan loss covered approximately two years of expected losses for
Private Education Loans.
Asset
Growth
In 2008, the Company originated $17.9 billion in FFELP
loans, a four percent increase over 2007. We refocused our FFELP
originations on our internal lending brands, which grew
48 percent over 2007. We expect FFELP volume to exceed
$20 billion in AY
2008-2009.
Private Education Loan originations for 2008 were
$6.3 billion, a 20 percent decline from 2007. In 2008,
the Company increased its underwriting standards and as a
result, average FICO scores and loans with cosigner have
increased. The Company expects to continue to increase its
underwriting standards, shorten the term of Private Education
Loans, and require interest payments while students are
attending school. The impact of these product changes and the
overall economy may impact future Private Education Loan asset
growth.
Fee
Income
Fee income from our contingency business was relatively stable,
increasing $4 million from $336 million in 2007 to
$340 million in 2008.
Fee income from our guarantor servicing business was
$121 million for the year, a $35 million decrease from
last year. The decrease was primarily due to legislative changes
that reduce by 40 percent the account maintenance fee paid
to guarantee agencies, and a one-time non-recurring increase to
2007 revenue of $15 million related to a contingency
resolution.
A possible source of additional fee income for 2009 is an
increase in third-party servicing. We originated
$0.5 billion of FFELP loans for third parties in the fourth
quarter, a 14 percent increase from the year-ago quarter.
The Company will seek to be a loan servicer for ED under the
Loan Purchase Program.
Purchased
Paper Business
We have decided to exit the debt purchased paper business (see
ASSET PERFORMANCE GROUP BUSINESS SEGMENT). This line
of business reported a $203 million after-tax loss for the
year, primarily due to a $368 million pre-tax impairment
charge. The economy and changes in real estate values will
continue to impact this line of business.
25
Operating
Expenses
Excluding restructuring expenses, fourth quarter 2008 operating
expenses on a Core Earnings basis were
$270 million, a 26 percent decrease from the year-ago
period, exceeding the Companys 20 percent cost
reduction target. For 2008, operating expenses on a Core
Earnings basis were $1.3 billion, compared to
$1.4 billion in 2007.
Capital
Adequacy
At year end, the Companys tangible capital ratio was
1.8 percent of Managed assets, compared to 2 percent
at 2007 year end. With 81 percent of our Managed loans
carrying an explicit federal government guarantee and with
70 percent of our Managed loans funded for the life of the
loan, we currently believe that our capital levels are
appropriate. In the current economic environment, we cannot
predict the availability nor cost of additional capital, should
the Company determine that additional capital is necessary.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Managements Discussion and Analysis of Financial Condition
and Results of Operations addresses our consolidated financial
statements, which have been prepared in accordance with
generally accepted accounting principles in the United States of
America (GAAP). Note 2 to the consolidated
financial statements, Significant Accounting
Policies, includes a summary of the significant accounting
policies and methods used in the preparation of our consolidated
financial statements. The preparation of these financial
statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
the reported amounts of income and expenses during the reporting
periods. Actual results may differ from these estimates under
varying assumptions or conditions. On a quarterly basis,
management evaluates its estimates, particularly those that
include the most difficult, subjective or complex judgments and
are often about matters that are inherently uncertain. The most
significant estimates and assumptions relate to the following
critical accounting policies that are discussed in more detail
below.
Allowance
for Loan Losses
We maintain an allowance for loan losses at an amount sufficient
to absorb losses incurred in our FFELP loan and Private
Education Loan portfolios at the reporting date based on a
projection of estimated probable net credit losses incurred in
the portfolio. We analyze those portfolios to determine the
effects that the various stages of delinquency have on borrower
default behavior and ultimate net charge-off. We estimate the
allowance for loan losses for our loan portfolio using a
migration analysis of delinquent and current accounts. A
migration analysis is a technique used to estimate the
likelihood that a loan receivable may progress through the
various delinquency stages and ultimately charge off, net of
recoveries, and is a widely used reserving methodology in the
consumer finance industry. We also use the migration analysis to
estimate the amount of uncollectible accrued interest on Private
Education Loans and write-off that amount against current period
interest income. The evaluation of the allowance for loan losses
is inherently subjective, as it requires material estimates that
may be susceptible to significant changes. Our default estimates
are based on a loss confirmation period of generally two years
(i.e., our allowance for loan loss covers the next two years of
expected losses). The two-year estimate of the allowance for
loan losses is subject to a number of assumptions. If actual
future performance in delinquency, charge-offs and recoveries
are significantly different than estimated, this could
materially affect our estimate of the allowance for loan losses
and the related provision for loan losses on our income
statement. We believe that the Private Education Loan and FFELP
allowance for loan losses are appropriate to cover probable
losses incurred in the student loan portfolio.
When calculating the allowance for loan losses on Private
Education Loans, we divide the portfolio into categories of
similar risk characteristics based on loan program type, loan
status (in-school, grace, forbearance, repayment, and
delinquency), underwriting criteria (FICO scores), and existence
or absence of a cosigner. As noted above, we use historical
experience of borrower default behavior and charge-offs to
estimate the probable credit losses incurred in the loan
portfolio at the reporting date. Also, we use historical
borrower payment behavior to estimate the timing and amount of
future recoveries on charged off loans. We then apply the
default and collection rate projections to each category of
loans. Once the quantitative calculation is
26
performed, management reviews the adequacy of the allowance for
loan losses and determines if qualitative adjustments need to be
considered. One technique for making this determination is
through projection modeling, which is used to determine if the
allowance for loan losses is sufficient to absorb net credit
losses anticipated during the loss confirmation period.
Projection modeling is an independent forward-looking projection
of net charge-offs. Assumptions that are utilized in the
projection modeling include (but are not limited to) historical
experience, recent changes in collection policies and
procedures, collection performance, and macroeconomic
indicators. Additionally, management considers changes in laws
and regulations that could potentially impact the allowance for
loan losses.
The majority of our Private Education Loan programs do not
require that borrowers begin repayment until six months after
they have graduated or otherwise left school. Consequently, our
loss estimates for these programs are generally low while the
borrower is in school. At December 31, 2008,
38 percent of the principal balance in the higher education
Managed Private Education Loan portfolio is related to borrowers
who are in in-school or grace status and not required to make
payments. As the current portfolio ages, an increasing
percentage of the borrowers will leave school and be required to
begin payments on their loans. The allowance for losses will
change accordingly.
Similar to the rules governing FFELP payment requirements, our
collection policies allow for periods of nonpayment for
borrowers requesting additional payment grace periods upon
leaving school or experiencing temporary difficulty meeting
payment obligations. This is referred to as forbearance status
and is considered separately in our allowance for loan losses.
The loss confirmation period is in alignment with our typical
collection cycle and takes into account these periods of
nonpayment.
In general, Private Education Loan principal is charged off
against the allowance when the loan exceeds 212 days
delinquency. As further discussed in LENDING BUSINESS
SEGMENT Private Education Loan
Losses Activity in the Allowance for Private
Education Loan Losses, this period we corrected our
charge-off methodology.
In the fourth quarter of 2007, we recorded provision expense of
$667 million related to the Managed Private Education Loan
portfolio. This significant increase in provision primarily
related to the non-traditional portion of our loan portfolio
(education loans made to certain borrowers that have or are
expected to have a high default rate) which we had been
expanding over the past few years. We have taken actions in 2008
to terminate these non-traditional loan programs because the
performance of these loans is materially different from our
original expectations and from the rest of our Private Education
Loan programs. However, there can be no assurance that our
non-traditional loans outstanding will not require additional
significant loan provisions or have any further adverse effect
on the overall credit quality of our Managed Private Education
Loan portfolio.
Also, we have seen higher delinquencies and continued
deterioration of the overall portfolio in 2008 due primarily to
the weakening U.S. economy, which has resulted in increased
provisioning for expected losses. If the economy continues to
weaken beyond our expectations, the expected losses resulting
from our default and collection estimates embedded in the
allowance for loan losses could continue to increase.
FFELP loans are guaranteed as to their principal and accrued
interest in the event of default subject to a Risk Sharing level
set based on the date of loan disbursement. For loans disbursed
after October 1, 1993, and before July 1, 2006, we
receive 98 percent reimbursement on all qualifying default
claims. For loans disbursed on or after July 1, 2006, we
receive 97 percent reimbursement. The CCRAA reduces the
Risk Sharing level for loans disbursed on or after
October 1, 2012 to 95 percent reimbursement, which
will impact the allowance for loan losses in the future.
Similar to the Private Education allowance for loan losses, the
FFELP allowance for loan losses uses historical experience of
borrower default behavior and a two year loss confirmation
period to estimate the credit losses incurred in the loan
portfolio at the reporting date. We divide the portfolio into
categories of similar risk characteristics based on loan program
type, school type and loan status. We then apply the default
rate projections, net of applicable Risk Sharing, to each
category for the current period to perform our
27
quantitative calculation. Once the quantitative calculation is
performed, management reviews the adequacy of the allowance for
loan losses and determines if qualitative adjustments need to be
considered.
The 2007 FFELP provision included one-time adjustments for the
repeal of the Exceptional Performer program (and the resulting
increase in our Risk Sharing percentage) due to the passage of
the CCRAA, which was effective October 1, 2007, as well as
increased provision related to the increase in our default
expectations due to an increase in recent delinquencies and
claim filings. The provision in 2008 increased due to an
increase in delinquencies and claim filings from the weakening
of the U.S. economy, as well as the portfolio transitioning
to FFELP loans, which are subject to more Risk Sharing. Since we
are impacted by changes in the laws and regulations of the
FFELP, any changes made to the Risk Sharing levels could have a
material impact on our FFELP allowance for loan losses. Also, if
the economy continues to weaken beyond our expectations, the
losses embedded in the FFELP allowance for loan losses could
continue to increase.
Premium
and Discount Amortization
For both federally insured and Private Education Loans, we
account for premiums paid, discounts received, and capitalized
direct origination costs incurred on the origination of student
loans in accordance with the Financial Accounting Standards
Boards (FASB) Statement of Financial
Accounting Standard (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 the
discounts is included in the carrying value of the student loans
on the consolidated balance sheet. We recognize income on our
student loan portfolio based on the expected yield over the
estimated life of the student loan after giving effect to the
amortization of purchase premiums and accretion of student loan
discounts. In arriving at the expected yield, we make a number
of estimates that when changed are reflected as a cumulative
adjustment to interest income in the current period. The most
critical estimates for premium and discount amortization are
incorporated in the Constant Prepayment Rate (CPR),
which measures the rate at which loans in the portfolio pay down
principal compared to their stated terms. The CPR estimate is
based on historical prepayments due to consolidation activity,
defaults, and term extensions from the utilization of
forbearance, as well as, managements qualitative
expectation of future prepayments and term extensions.
In the development of the CPR estimates, the effect of
consolidation activity can be a significant assumption. Between
2003 and 2006, we experienced a surge in FFELP Stafford loan
consolidation activity as a result of aggressive marketing and
historically low interest rates. This, in turn, has had a
significant effect on premium and discount amortization in our
financial statements. More recently, as a result of the CCRAA
and the current U.S. economic and credit environment, we,
as well as many other industry competitors, have suspended our
FFELP consolidation program. In lieu of consolidation, we may
offer a term extension option for FFELP loans based on the
borrowers total indebtedness.
Based upon these market factors, we have updated our CPR
assumptions that are affected by consolidation activity, and we
have updated the estimates used in developing the cash flows and
effective yield calculations as they relate to the amortization
of student loan premium and discount amortization.
Consolidation activity affects estimates differently depending
on whether the original loans being consolidated were on-balance
sheet or off-balance sheet and whether the resulting
consolidation is retained by us or consolidated with a third
party. When we consolidate a loan that was in our portfolio, the
term of that loan is generally extended and the term of the
amortization of associated student loan premiums and discounts
is likewise extended to match the new term of the loan. In that
process, the unamortized premium balance must be adjusted to
reflect the new expected term of the consolidated loan as if it
had been in place from inception.
At the beginning of 2008, when we evaluated our estimates by
taking into consideration the suspension of our FFELP
consolidation program, there was an expectation of increased
external consolidations to third parties, but an overall
decrease in total consolidation activity (when taking into
account both internal consolidations and consolidations to third
parties) due to a lack of financial incentive for lenders to
continue offering a consolidation product. External
consolidations did not significantly increase as expected;
therefore,
28
the consolidation assumptions implemented in the first quarter
of 2008 were reduced during the third quarter of 2008, as we
made the decision to lower the consolidation rate as additional
information became available.
Additionally, in previous years, the increased activity in FFELP
Consolidation Loans had led to demand for the consolidation of
Private Education Loans. Private Education Consolidation Loans
provide an attractive refinancing opportunity to certain
borrowers because they allow borrowers to lower their monthly
payments by extending the life of the loan
and/or
lowering their interest rate. The private loan consolidation
assumption was established in 2007 and was changed to explicitly
consider private loan consolidation in the same manner as for
FFELP. Because of limited historical data on private loan
consolidation, the assumption primarily relies on near term plan
data and timing assumptions. In the second quarter of 2008, we
suspended making private consolidation loans due to funding
limitations which impacted this assumption.
The consolidation, default, term extension and other prepayment
factors affecting our CPR estimates are impacted by changes in
our business strategy, FFELP legislative changes, and changes to
the current economic and credit environment. If our accounting
estimates, especially CPRs, are different as a result of changes
to our business environment or actual consolidation or default
activity, the previously recognized interest income on our
student loan portfolio based on the expected yield of the
student loan would potentially result in a material adjustment
in the current period.
Fair
Value Measurement
On January 1, 2008, we adopted SFAS No. 157,
Fair Value Measurements. This statement defines fair
value, establishes a framework for measuring fair value within
GAAP, and expands disclosures about 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.
On February 12, 2008, the FASB issued FASB Staff Position
(FSP)
SFAS No. 157-2,
Effective Date of SFAS No. 157, which
deferred the effective date of SFAS No. 157 for
nonfinancial assets and liabilities, except for items that are
recognized or disclosed at fair value in the financial
statements on a recurring basis. This FSP delayed the
implementation of SFAS No. 157 for our accounting of
goodwill, acquired intangibles, and other nonfinancial assets
and liabilities that are measured at the lower of cost or market
until January 1, 2009.
As such, SFAS No. 157 applies to the recurring fair
value measurements of our investment portfolio accounted for
under SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities; our derivative
portfolio and designated hedged assets or liabilities accounted
for under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities; and our
Residual Interest in off-balance sheet securitization trusts
accounted for under SFAS No. 159, The Fair Value
Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115. In general, changes in the fair value of
items measured at fair value on a recurring basis will affect
the consolidated statement of income and capital each period. In
addition, SFAS No. 157 applies to FFELP student loans
accounted for as
held-for-sale
loans under Statement of Position
01-6,
Accounting by Certain Entities (Including Entities with
Trade Receivables) That Lend to or Finance the Activities of
Others. These loans are accounted for at the lower of cost
or fair value and as such affect the consolidated statements of
income and capital on a non-recurring basis. Lastly, the
valuation principles set forth in SFAS No. 157 apply
to all financial instruments disclosed at fair value under
SFAS No. 107, Disclosures about Fair Value of
Financial Instruments in Note 16, Fair Values
of Financial Instruments, to the consolidated financial
statements.
Liquidity is impacted to the extent that a decrease in fair
value would result in less cash being received upon a sale of an
investment. Liquidity is also impacted to the extent that
changes in capital and net income affect compliance with
principal financial covenants in our unsecured revolving credit
facilities. Noncompliance with these covenants also impacts our
ability to use our 2008 ABCP Facilities (see LIQUIDITY AND
CAPITAL RESOURCES Additional Funding Sources for
General Corporate Purposes). Additionally, liquidity is
impacted to the extent that changes in the fair value of
derivative instruments result in the movement of collateral
between us and our counterparties. Collateral agreements are
bilateral and are based on the derivative fair values used to
determine the net exposure between us and individual
counterparties. For a
29
general description of valuation techniques and models used for
the above items, see Note 16, Fair Values of
Financial Instruments, to the consolidated financial
statements. For a discussion of the sensitivity of fair value
estimates, see Item 7A. Quantitative and Qualitative
Disclosures about Market Risk.
In light of the recent economic turmoil occurring in the U.S.,
the FASB released FSP
No. 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active, on October 10,
2008. This FSP clarified, among other things, that quotes and
other market inputs need not be solely used to determine fair
value if they do not relate to an active market. The FSP points
out that when relevant observable market information is not
available, an approach that incorporates managements
judgments about the assumptions that market participants would
use in pricing the asset in a current sale transaction would be
acceptable (such as a discounted cash flow analysis). Regardless
of the valuation technique applied, entities must include
appropriate risk adjustments that market participants would
make, including adjustments for non-performance risk (credit
risk) and liquidity risk. In determining the fair value of the
instruments that fall under SFAS No. 157, we have
specifically taken into account both credit risk and liquidity
risk as of December 31, 2008.
Significant assumptions used in fair value measurements
including those related to credit and liquidity risk are as
follows:
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1.
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Investments Our investments primarily consist
of overnight/weekly maturity instruments with high credit
quality counterparties. However, we have considered credit and
liquidity risk involving specific instruments. These assumptions
have further been validated by the successful maturity of these
investments in the period immediately following the end of the
reporting period. In the fourth quarter 2008, we recorded an
impairment of $8 million related to our investment in the
Reserve Primary Fund based on an internal assessment of the
collectability of our remaining investment. See LIQUIDITY
AND CAPITAL RESOURCES Counterparty Exposure
for further discussion.
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2.
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Derivatives When determining the fair value
of derivatives, we take into account counterparty credit risk
for positions where we are exposed to the counterparty on a net
basis by assessing exposure net of collateral held. (See
Note 9, Derivative Financial Instruments
Risk Management Strategy, to the consolidated
financial statements for further discussion of our derivative
agreements and their policy to require legally enforceable
netting provisions and collateral agreements.) The net exposure
for each counterparty is adjusted based on market information
available for the specific counterparty including spreads from
credit default swaps. Additionally, when the counterparty has
exposure to the Company related to SLM Corporation derivatives,
we fully collateralize the exposure minimizing the adjustment
necessary to the derivative valuations for our credit risk.
While trusts that contain derivatives are not required to post
collateral to counterparties, the credit quality and securitized
nature of the trusts minimizes any adjustments for the
counterpartys exposure to the trusts. Adjustments related
to credit risk reduced the overall value of our derivatives by
$41 million as of December 31, 2008. We also take into
account changes in liquidity related to derivative positions and
the fair value. We adjusted the fair value of certain less
liquid positions by approximately $201 million to take into
account a significant reduction in liquidity as of
December 31, 2008, related primarily to basis swaps indexed
to interest rate indices with inactive markets. A major
indicator of market inactivity is the widening of the bid/ask
spread in these markets. In general, the widening of
counterparty credit spreads and reduced liquidity for derivative
instruments as indicated by wider bid/ask spreads will reduce
the fair value of derivatives.
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3.
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Residual Interests We have never sold our
Residual Interests and we are unaware of any sales of student
loan residual interests by others. As a result, these
instruments have never been considered liquid. This lack of
liquidity has always been taken into account when valuing the
Residual Interests. The discount rate assumption related to the
Private Education Loan Residual Interests has been increased
every quarter since the fourth quarter of 2007 to take into
account changes in credit and liquidity risks. The discount rate
assumption related to the FFELP Loan Residual Interests was
examined and deemed to accurately reflect the risks associated
with these instruments each quarter through the second quarter
of 2008. It was subsequently increased for both quarters ending
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September 30, 2008 and December 31, 2008. We use
non-binding broker quotes and industry analyst reports which
show changes in the indicative prices of the asset-backed
securities tranches immediately senior to the Residual Interest
as an indication of potential changes in the discount rate used
to value the Residual Interest. We also use the most current
prepayment and default rate assumptions to project the expected
cash flows used to value Residual Interests. These assumptions
are internally developed and primarily based on analyzing the
actual results of loan performance from past periods. See
Note 8, Student Loan Securitization, to the
consolidated financial statements for a discussion of all
assumption changes made during the quarter to properly determine
the fair value of the Residual Interests as well as a shock
analysis to fair value related to all significant assumptions.
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4.
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Student Loans Our FFELP loans and Private
Education Loans are accounted for at cost or at the lower of
cost or fair value if the loan is
held-for-sale.
The fair value is disclosed in compliance with
SFAS No. 107. For both FFELP loans and Private
Education Loans accounted for at cost, fair value is determined
by modeling loan level cash flows using stated terms of the
assets and internally-developed assumptions to determine
aggregate portfolio yield, net present value and average life.
The significant assumptions used to project cash flows are
prepayment speeds, default rates, cost of funds, and required
return on equity. In addition, the Floor Income component of our
FFELP loan portfolio is valued through discounted cash flow and
option models using both observable market inputs and internally
developed inputs. Significant inputs into the models are not
generally market observable. They are either derived internally
through a combination of historical experience and
managements qualitative expectation of future performance
(in the case of prepayment speeds, default rates, and capital
assumptions), or are obtained through external broker quotes (as
in the case of cost of funds). When possible, market
transactions are used to validate the model. In most cases these
are either infrequent or not observable. For FFELP loans
classified as
held-for-sale
and accounted for at the lower of cost or market, the fair value
is based on the committed sales price of the various loan
purchase programs established by ED.
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Securitization
Accounting and Retained Interests
We regularly engage in securitization transactions as part of
our Lending segment financing strategy (see also LIQUIDITY
AND CAPITAL RESOURCES Securitization
Activities). In a securitization, we sell student loans to
a trust that issues bonds backed by the student loans as part of
the transaction. When our securitizations meet the sale criteria
of SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities a Replacement of
SFAS No. 125, we record a gain on the sale of
the student loans, which is the difference between the allocated
cost basis of the assets sold and the relative fair value of the
assets received including the Residual Interest component of the
Retained Interest in the securitization transaction. The
Residual Interest is the right to receive cash flows from the
student loans and reserve accounts in excess of the amounts
needed to pay servicing, derivative costs (if any), other fees,
and the principal and interest on the bonds backed by the
student loans. We have not structured any securitization
transaction to meet the sale criteria since March 2007 and all
securitizations settled since that date have been accounted for
on-balance sheet as secured financings as a result.
We adopted SFAS 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including
an Amendment of FASB Statement 115, effective
January 1, 2008, whereby we elected to carry all existing
Residual Interests at fair value with subsequent changes in fair
value recorded in servicing and securitization revenue. Since
there are no quoted market prices for our Residual Interests, we
estimate their fair value both initially and each subsequent
quarter using the key assumptions listed below:
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The CPR (see Premium and Discount Amortization above
for discussion of this assumption);
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The expected credit losses from the underlying securitized loan
portfolio. Although loss estimates related to the Allowance for
Loan Loss are based on a loss confirmation period of generally
two years, expected credit losses related to the Residual
Interests use a life of loan default rate. The life of loan
default rate is used to determine the percentage of the
loans original balance that will default. The life of loan
default rate is then applied using a curve to determine the
percentage of the overall default rate
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that should be recognized annually throughout the life of the
loan. (See also Allowance for Loan Losses above for
the determination of default rates and the factors that may
impact them.)
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The discount rate used (see Fair Value Measurement
discussed above).
|
We also receive income for servicing the loans in our
securitization trusts. We assess the amounts received as
compensation for these activities at inception and on an ongoing
basis to determine if the amounts received are adequate
compensation as defined in SFAS No. 140. To the extent
such compensation is determined to be no more or less than
adequate compensation, no servicing asset or obligation is
recorded.
Derivative
Accounting
We use interest rate swaps, cross-currency interest rate swaps,
interest rate futures contracts, Floor Income Contracts and
interest rate cap contracts as an integral part of our overall
risk management strategy to manage interest rate and foreign
currency risk arising from our fixed rate and floating rate
financial instruments. We account for these instruments in
accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which
requires that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded
at fair value on the balance sheet as either an asset or
liability. We determine the fair value for our derivative
instruments primarily by using pricing models that consider
current market conditions and the contractual terms of the
derivative contracts. Market inputs into the model include
interest rates, forward interest rate curves, volatility
factors, forward foreign exchange rates, and the closing price
of our stock (related to our equity forward contracts). Inputs
are generally from active financial markets; however, as
mentioned under Fair Value Measurements above,
adjustments are made for inputs from illiquid markets and to
adjust for credit risk. In some instances, counterparty
valuations are used in determining the fair value of a
derivative when deemed a more appropriate estimate of the fair
value. Pricing models and their underlying assumptions impact
the amount and timing of unrealized gains and losses recognized
and, as such, the use of different pricing models or assumptions
could produce different financial results. As a matter of
policy, we compare the fair values of our derivatives that we
calculate to those provided by our counterparties on a monthly
basis. Any significant differences are identified and resolved
appropriately.
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 all of our
derivatives are effective economic hedges and are a critical
element of our interest rate risk management strategy. However,
under SFAS No. 133, some of our derivatives, primarily
Floor Income Contracts, certain Eurodollar futures contracts,
basis swaps and equity forwards, do not qualify for hedge
treatment under SFAS No. 133. Therefore, changes
in market value along with the periodic net settlements must be
recorded through the gains (losses) on derivative and
hedging activities, net line in the consolidated statement
of income with no consideration for the corresponding change in
fair value of the hedged item. The derivative market value
adjustment is primarily caused by interest rate and foreign
currency exchange rate volatility, changing credit spreads
during the period, and changes in our stock price (related to
equity forwards), as well as, the volume and term of derivatives
not receiving hedge accounting treatment. See also
BUSINESS SEGMENTS Limitations of Core
Earnings Pre-tax Differences between
Core Earnings and GAAP by Business Segment
Derivative Accounting for a detailed
discussion of our accounting for derivatives.
32
SELECTED
FINANCIAL DATA
Condensed
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
Years Ended December 31,
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Net interest income
|
|
$
|
1,365
|
|
|
$
|
1,588
|
|
|
$
|
1,454
|
|
|
$
|
(223
|
)
|
|
|
(14
|
)%
|
|
$
|
134
|
|
|
|
9
|
%
|
Less: provisions for loan losses
|
|
|
720
|
|
|
|
1,015
|
|
|
|
287
|
|
|
|
(295
|
)
|
|
|
(29
|
)
|
|
|
728
|
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provisions for loan losses
|
|
|
645
|
|
|
|
573
|
|
|
|
1,167
|
|
|
|
72
|
|
|
|
13
|
|
|
|
(594
|
)
|
|
|
(51
|
)
|
Gains on student loan securitizations
|
|
|
|
|
|
|
367
|
|
|
|
902
|
|
|
|
(367
|
)
|
|
|
(100
|
)
|
|
|
(535
|
)
|
|
|
(59
|
)
|
Servicing and securitization revenue
|
|
|
262
|
|
|
|
437
|
|
|
|
553
|
|
|
|
(175
|
)
|
|
|
(40
|
)
|
|
|
(116
|
)
|
|
|
(21
|
)
|
Losses on loans and securities, net
|
|
|
(186
|
)
|
|
|
(95
|
)
|
|
|
(49
|
)
|
|
|
(91
|
)
|
|
|
(96
|
)
|
|
|
(46
|
)
|
|
|
(94
|
)
|
Gains (losses) on derivative and hedging activities, net
|
|
|
(445
|
)
|
|
|
(1,361
|
)
|
|
|
(339
|
)
|
|
|
916
|
|
|
|
67
|
|
|
|
(1,022
|
)
|
|
|
(301
|
)
|
Contingency fee revenue
|
|
|
340
|
|
|
|
336
|
|
|
|
397
|
|
|
|
4
|
|
|
|
1
|
|
|
|
(61
|
)
|
|
|
(15
|
)
|
Collections revenue (loss)
|
|
|
(64
|
)
|
|
|
272
|
|
|
|
240
|
|
|
|
(336
|
)
|
|
|
(124
|
)
|
|
|
32
|
|
|
|
13
|
|
Guarantor servicing fees
|
|
|
121
|
|
|
|
156
|
|
|
|
132
|
|
|
|
(35
|
)
|
|
|
(22
|
)
|
|
|
24
|
|
|
|
18
|
|
Other income
|
|
|
392
|
|
|
|
385
|
|
|
|
338
|
|
|
|
7
|
|
|
|
2
|
|
|
|
47
|
|
|
|
14
|
|
Restructuring expenses
|
|
|
84
|
|
|
|
23
|
|
|
|
|
|
|
|
61
|
|
|
|
265
|
|
|
|
23
|
|
|
|
100
|
|
Operating expenses
|
|
|
1,357
|
|
|
|
1,529
|
|
|
|
1,346
|
|
|
|
(172
|
)
|
|
|
(11
|
)
|
|
|
183
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income (loss)
|
|
|
(376
|
)
|
|
|
(482
|
)
|
|
|
1,995
|
|
|
|
106
|
|
|
|
22
|
|
|
|
(2,477
|
)
|
|
|
(124
|
)
|
Income tax expense (benefit)
|
|
|
(167
|
)
|
|
|
412
|
|
|
|
834
|
|
|
|
(579
|
)
|
|
|
(141
|
)
|
|
|
(422
|
)
|
|
|
(51
|
)
|
Minority interest in net earnings of subsidiaries
|
|
|
4
|
|
|
|
2
|
|
|
|
4
|
|
|
|
2
|
|
|
|
100
|
|
|
|
(2
|
)
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(213
|
)
|
|
|
(896
|
)
|
|
|
1,157
|
|
|
|
683
|
|
|
|
76
|
|
|
|
(2,053
|
)
|
|
|
(177
|
)
|
Preferred stock dividends
|
|
|
111
|
|
|
|
37
|
|
|
|
36
|
|
|
|
74
|
|
|
|
200
|
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stock
|
|
$
|
(324
|
)
|
|
$
|
(933
|
)
|
|
$
|
1,121
|
|
|
$
|
609
|
|
|
|
65
|
%
|
|
$
|
(2,054
|
)
|
|
|
(183
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
(.69
|
)
|
|
$
|
(2.26
|
)
|
|
$
|
2.73
|
|
|
$
|
1.57
|
|
|
|
69
|
%
|
|
$
|
(4.99
|
)
|
|
|
(183
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
(.69
|
)
|
|
$
|
(2.26
|
)
|
|
$
|
2.63
|
|
|
$
|
1.57
|
|
|
|
69
|
%
|
|
$
|
(4.89
|
)
|
|
|
(186
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share
|
|
$
|
|
|
|
$
|
.25
|
|
|
$
|
.97
|
|
|
$
|
(.25
|
)
|
|
|
(100
|
)%
|
|
$
|
(.72
|
)
|
|
|
(74
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Condensed
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
December 31,
|
|
|
2008 vs. 2007
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
%
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans, net
|
|
$
|
44,025
|
|
|
$
|
35,726
|
|
|
$
|
8,299
|
|
|
|
23
|
%
|
FFELP Stafford Loans
Held-for-Sale
|
|
|
8,451
|
|
|
|
|
|
|
|
8,451
|
|
|
|
100
|
|
FFELP Consolidation Loans, net
|
|
|
71,744
|
|
|
|
73,609
|
|
|
|
(1,865
|
)
|
|
|
(3
|
)
|
Private Education Loans, net
|
|
|
20,582
|
|
|
|
14,818
|
|
|
|
5,764
|
|
|
|
39
|
|
Other loans, net
|
|
|
729
|
|
|
|
1,174
|
|
|
|
(445
|
)
|
|
|
(38
|
)
|
Cash and investments
|
|
|
5,112
|
|
|
|
10,546
|
|
|
|
(5,434
|
)
|
|
|
(52
|
)
|
Restricted cash and investments
|
|
|
3,535
|
|
|
|
4,600
|
|
|
|
(1,065
|
)
|
|
|
(23
|
)
|
Retained Interest in off-balance sheet securitized loans
|
|
|
2,200
|
|
|
|
3,044
|
|
|
|
(844
|
)
|
|
|
(28
|
)
|
Goodwill and acquired intangible assets, net
|
|
|
1,249
|
|
|
|
1,301
|
|
|
|
(52
|
)
|
|
|
(4
|
)
|
Other assets
|
|
|
11,141
|
|
|
|
10,747
|
|
|
|
394
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
168,768
|
|
|
$
|
155,565
|
|
|
$
|
13,203
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
41,933
|
|
|
$
|
35,947
|
|
|
$
|
5,986
|
|
|
|
17
|
%
|
Long-term borrowings
|
|
|
118,225
|
|
|
|
111,098
|
|
|
|
7,127
|
|
|
|
6
|
|
Other liabilities
|
|
|
3,604
|
|
|
|
3,285
|
|
|
|
319
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
163,762
|
|
|
|
150,330
|
|
|
|
13,432
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in subsidiaries
|
|
|
7
|
|
|
|
11
|
|
|
|
(4
|
)
|
|
|
(36
|
)
|
Stockholders equity before treasury stock
|
|
|
6,855
|
|
|
|
7,055
|
|
|
|
(200
|
)
|
|
|
(3
|
)
|
Common stock held in treasury
|
|
|
1,856
|
|
|
|
1,831
|
|
|
|
25
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
4,999
|
|
|
|
5,224
|
|
|
|
(225
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
168,768
|
|
|
$
|
155,565
|
|
|
$
|
13,203
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESULTS
OF OPERATIONS
We present the results of operations first on a consolidated
basis in accordance with GAAP. As discussed in
Item 1. Business, we have two primary business
segments, Lending and APG, plus a Corporate and Other business
segment. Since these business segments operate in distinct
business environments, the discussion following the Consolidated
Earnings Summary is primarily presented on a segment basis. See
BUSINESS SEGMENTS for further discussion on the
components of each segment. Securitization gains and the ongoing
servicing and securitization income are included in
LIQUIDITY AND CAPITAL RESOURCES Securitization
Activities. The discussion of derivative market value
gains and losses is under BUSINESS SEGMENTS
Limitations of Core Earnings Pre-tax
Differences between Core Earnings and GAAP by
Business Segment Derivative Accounting.
The discussion of goodwill and acquired intangible amortization
and impairment is discussed under BUSINESS
SEGMENTS Limitations of Core
Earnings Pre-tax Differences between
Core Earnings and GAAP by Business
Segment Acquired Intangibles.
CONSOLIDATED
EARNINGS SUMMARY
The main drivers of our net income are the growth in our Managed
student loan portfolio, which drives net interest income and
securitization transactions, the spread we earn on student
loans, unrealized gains and losses on derivatives that do not
receive hedge accounting treatment, the timing and size of
securitization gains, growth in our fee-based business, and
expense control.
34
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
For the year ended December 31, 2008, our net loss was
$213 million or $.69 diluted loss per share, compared to a
net loss of $896 million, or $2.26 diluted loss per share,
for the year December 31, 2007. The effective tax rate for
those periods was 45 percent and (86) percent,
respectively. The movement in the effective tax rate was
primarily driven by the permanent tax impact of excluding
non-taxable gains and losses on equity forward contracts which
were marked to market through earnings under
SFAS No. 133 in 2007. Pre-tax loss decreased by
$106 million versus the year-ago period primarily due to a
decrease in net losses on derivative and hedging activities from
$1.4 billion for the year ended December 31, 2007 to
$445 million for the year ended December 31, 2008,
which was primarily a result of the
mark-to-market
on the equity forward contracts in the fourth quarter of 2007.
There were no gains on student loan securitizations in the year
ended December 31, 2008 compared to gains of
$367 million in the year-ago period. We did not complete
any off-balance sheet securitizations in the year ended
December 31, 2008, versus one Private Education Loan
securitization in the year-ago period. We adopted
SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including
an Amendment of FASB Statement No. 115, on
January 1, 2008, and elected the fair value option on all
of the Residual Interests effective January 1, 2008. We
made this election in order to simplify the accounting for
Residual Interests by having all Residual Interests under one
accounting model. Prior to this election, Residual Interests
were accounted for either under SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, with changes in fair value recorded through
other comprehensive income or under SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments,
with changes in fair value recorded through income. We
reclassified the related accumulated other comprehensive income
of $195 million into retained earnings and as a result
equity was not impacted at transition on January 1, 2008.
Changes in fair value of Residual Interests on and after
January 1, 2008 are recorded through servicing and
securitization income. We have not elected the fair value option
for any other financial instruments at this time. Servicing and
securitization revenue decreased by $175 million from
$437 million in the year ended December 31, 2007 to
$262 million in the year ended December 31, 2008. This
decrease was primarily due to a $425 million unrealized
mark-to-market
loss recorded under SFAS No. 159 in the current year
compared to a $278 million unrealized
mark-to-market
loss in the prior year, which included both impairment and an
unrealized
mark-to-market
gain recorded under SFAS No. 155. The increase in the
unrealized
mark-to-market
loss in 2008 versus 2007 was primarily due to increases in the
discount rates used to value the Residual Interests. See
LIQUIDITY AND CAPITAL RESOURCES Residual
Interest in Securitized Receivables for further
discussion of the factors impacting the fair values.
Net interest income after provisions for loan losses increased
by $72 million in the year ended December 31, 2008
from the prior year. This increase was due to a
$296 million decrease in provisions for loan losses, offset
by a $224 million decrease in net interest income. The
decrease in net interest income was primarily due to a decrease
in the student loan spread (see LENDING BUSINESS
SEGMENT Net Interest Income Net
Interest Margin On-Balance Sheet), an
increase in the 2008 Asset-Backed Financing Facilities Fees,
partially offset by a $25 billion increase in the average
balance of on-balance sheet student loans. The decrease in
provisions for loan losses relates to the higher provision
amounts in the fourth quarter of 2007 for Private Education
Loans, FFELP loans and mortgage loans, primarily due to a
weakening U.S. economy. The significant provision in the
fourth quarter of 2007 primarily related to the non-traditional
portfolio which was particularly impacted by the weakening
U.S. economy (see LENDING BUSINESS
SEGMENT Private Education Loan Losses
Private Education Loan Delinquencies and
Forbearance and Activity in the
Allowance for Private Education Loan Losses).
For the year ended December 31, 2008, fee and other income
and collections revenue totaled $790 million, a
$359 million decrease from $1.1 billion in the prior
year. This decrease was primarily the result of
$368 million of impairment related to both declines in the
fair value of mortgage loans and real estate held by our
mortgage purchased paper subsidiary and related to our
non-mortgage purchased paper subsidiary recorded in 2008
compared to $21 million in 2007 (see ASSET
PERFORMANCE GROUP BUSINESS SEGMENT).
35
Losses on loans and securities, net, totaled $186 million
for the year ended December 31, 2008, a $91 million
increase from $95 million incurred in the year ended
December 31, 2007. Prior to the fourth quarter of 2008,
these losses were primarily the result of our repurchase of
delinquent Private Education Loans from our off-balance sheet
securitization trusts. When Private Education Loans in our
off-balance sheet securitization trusts that settled before
September 30, 2005 became 180 days delinquent, we
previously exercised our contingent call option to repurchase
these loans at par value out of the trusts and recorded a loss
for the difference in the par value paid and the fair market
value of the loans at the time of purchase. We do not hold the
contingent call option for any trusts that settled after
September 30, 2005. Beginning in October 2008, we decided
to no longer exercise our contingent call option. The loss in
the fourth quarter of 2008 primarily relates to the sale of
approximately $1.0 billion FFELP loans to ED under the
ECASLA, which resulted in a $53 million loss. See
LIQUIDITY AND CAPITAL RESOURCES ED Funding
Programs for further discussion.
We are restructuring our business in response to the impact of
CCRAA and current challenges in the capital markets. In
conjunction with our restructuring plan, we are refocusing our
lending activities, exiting certain customer relationships and
product lines, and winding down our debt purchase paper
businesses. As a result, during 2008 we have reduced our
operating expenses by over 20 percent in the fourth quarter
of 2008 compared to the fourth quarter of 2007, after adjusting
for restructuring costs, growth and other investments. As part
of our cost reduction efforts, restructuring expenses of
$84 million and $23 million were recognized in the
years ended December 31, 2008 and 2007, respectively.
Restructuring expenses from the fourth quarter of 2007 through
the fourth quarter of 2008 totaled $106 million. The
majority of these restructuring expenses were severance costs
related to the completed and planned elimination of
approximately 2,900 positions, or approximately 26 percent
of the workforce. We estimate approximately $8 million to
$15 million of additional restructuring expenses associated
with our current cost reduction efforts will be incurred and our
current restructuring plan will be substantially complete by the
end of 2009. During 2009, we will continue to review our
business to determine whether there are other opportunities to
further streamline the business.
Operating expenses totaled $1.4 billion and
$1.5 billion for the years ended December 31, 2008 and
2007, respectively. The
year-over-year
reduction is primarily due to our cost reduction efforts
discussed above. Of these amounts, $91 million and
$112 million, respectively, relate to amortization and
impairment of goodwill and intangible assets.
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
For the year ended December 31, 2007, our net loss was
$896 million, or $2.26 diluted loss per share, compared to
net income of $1.2 billion, or $2.63 diluted earnings per
share, in the year-ago period. The effective tax rate in those
periods was (86) percent and 42 percent, respectively.
The movement in the effective tax rate was primarily driven by
the permanent tax impact of excluding non-taxable gains and
losses on equity forward contracts which are marked to market
through earnings under the FASBs SFAS No. 133.
Pre-tax income decreased by $2.5 billion versus the year
ended December 31, 2006 primarily due to a
$1.0 billion increase in net losses on derivative and
hedging activities, which was mostly comprised of losses on our
equity forward contracts. Losses on derivative and hedging
activities were $1.4 billion for the year ended
December 31, 2007 compared to $339 million for the
year ended December 31, 2006.
Pre-tax income for the year ended December 31, 2007 also
decreased versus the year ended December 31, 2006 due to a
$535 million decrease in gains on student loan
securitizations. The securitization gain in 2007 was the result
of one Private Education Loan securitization that had a pre-tax
gain of $367 million or 18.4 percent of the amount
securitized. In the year-ago period, there were three Private
Education Loan securitizations that had total pre-tax gains of
$830 million or 16.3 percent of the amount
securitized. For the year ended December 31, 2007,
servicing and securitization income was $437 million, a
$116 million decrease from the year ended December 31,
2006. This decrease was primarily due to a $97 million
increase in impairment losses which was mainly the result of
FFELP Stafford Consolidation Loan activity exceeding
expectations, increased Private Education Consolidation Loan
activity, increased Private Education Loan expected default
activity, and an increase in the discount rate used to value the
Private Education Loan
36
Residual Interests (see LIQUIDITY AND CAPITAL
RESOURCES Residual Interest in Securitized
Receivables).
Net interest income after provisions for loan losses decreased
by $594 million versus the year ended December 31,
2006. The decrease was due to the
year-over-year
increase in the provisions for loan losses of $728 million,
which offset the
year-over-year
$134 million increase in net interest income. The increase
in net interest income was primarily due to an increase of
$30.8 billion in the average balance of on-balance sheet
interest earning assets offset by a decrease in the student loan
spread (see LENDING BUSINESS SEGMENT Net
Interest Income Net Interest Margin-On-Balance
SheetStudent Loan Spread On-Balance
Sheet). The increase in provisions for loan losses
relates to higher provision amounts for Private Education Loans,
FFELP loans, and mortgage loans primarily due to a weakening
U.S. economy (see LENDING BUSINESS
SEGMENT Activity in the Allowance for Private
Education Loan Losses; and Total Provisions for
Loan Losses).
Fee and other income and collections revenue increased
$42 million from $1.11 billion for the year ended
December 31, 2006 to $1.15 billion for the year ended
December 31, 2007.
As noted above, we began restructuring our business in the
fourth quarter of 2007 in response to the impact of the CCRAA
and current challenges in the capital markets. As part of our
cost reduction efforts, $23 million of severance costs
related to the elimination of approximately 400 positions
across all areas of the Company were incurred in the fourth
quarter of 2007.
Operating expenses increased by $183 million
year-over-year.
This increase in operating expenses was primarily due to
$56 million in the Proposed Merger-related expenses
incurred in 2007. Operating expenses in 2007 also included
$93 million related to a full year of expenses for
Upromise, acquired in August 2006, compared to $33 million
incurred in 2006.
Our Managed student loan portfolio grew by $21.5 billion
(or 15 percent), from $142.1 billion at
December 31, 2006 to $163.6 billion at
December 31, 2007. In 2007 we acquired $40.3 billion
of student loans, an 8 percent increase over the
$37.4 billion acquired in the year-ago period. The 2007
acquisitions included $9.3 billion in Private Education
Loans, an 11 percent increase over the $8.4 billion
acquired in 2006. In the year ended December 31, 2007, we
originated $25.2 billion of student loans through our
Preferred Channel, an increase of 8 percent over the
$23.4 billion originated in the year-ago period.
Other
Income
The following table summarizes the components of Other
income in the consolidated statements of income for the
years ended December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Late fees and forbearance fees
|
|
$
|
143
|
|
|
$
|
136
|
|
|
$
|
121
|
|
Asset servicing and other transaction fees
|
|
|
108
|
|
|
|
110
|
|
|
|
42
|
|
Loan servicing fees
|
|
|
26
|
|
|
|
26
|
|
|
|
48
|
|
Gains on sales of mortgages and other loan fees
|
|
|
3
|
|
|
|
11
|
|
|
|
15
|
|
Other
|
|
|
112
|
|
|
|
102
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
$
|
392
|
|
|
$
|
385
|
|
|
$
|
338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BUSINESS
SEGMENTS
The results of operations of the Companys Lending and APG
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
37
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 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.
38
The LENDING BUSINESS SEGMENT section includes all
discussion of income and related expenses associated with the
net interest margin, the student loan spread and its components,
the provisions for loan losses, and other fees earned on our
Managed portfolio of student loans. The APG BUSINESS
SEGMENT section reflects the fees earned and expenses
incurred in providing accounts receivable management and
collection services. Our CORPORATE AND OTHER BUSINESS
SEGMENT section includes our remaining fee businesses and
other corporate expenses that do not pertain directly to the
primary operating segments identified above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
2,216
|
|
|
$
|
|
|
|
$
|
|
|
FFELP Consolidation Loans
|
|
|
3,748
|
|
|
|
|
|
|
|
|
|
Private Education Loans
|
|
|
2,752
|
|
|
|
|
|
|
|
|
|
Other loans
|
|
|
83
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
|
304
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
9,103
|
|
|
|
|
|
|
|
25
|
|
Total interest expense
|
|
|
6,665
|
|
|
|
25
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
2,438
|
|
|
|
(25
|
)
|
|
|
6
|
|
Less: provisions for loan losses
|
|
|
1,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
1,409
|
|
|
|
(25
|
)
|
|
|
6
|
|
Contingency fee revenue
|
|
|
|
|
|
|
340
|
|
|
|
|
|
Collections revenue (loss)
|
|
|
|
|
|
|
(63
|
)
|
|
|
|
|
Guarantor serving fees
|
|
|
|
|
|
|
|
|
|
|
121
|
|
Other income
|
|
|
180
|
|
|
|
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
180
|
|
|
|
277
|
|
|
|
320
|
|
Restructuring expenses
|
|
|
49
|
|
|
|
12
|
|
|
|
23
|
|
Operating expenses
|
|
|
589
|
|
|
|
398
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
638
|
|
|
|
410
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest in net
earnings of subsidiaries
|
|
|
951
|
|
|
|
(158
|
)
|
|
|
26
|
|
Income tax expense
(benefit)(1)
|
|
|
336
|
|
|
|
(56
|
)
|
|
|
9
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income (loss)
|
|
$
|
615
|
|
|
$
|
(106
|
)
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Income taxes are based on a
percentage of net income before tax for the individual
reportable segment.
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
2,848
|
|
|
$
|
|
|
|
$
|
|
|
FFELP Consolidation Loans
|
|
|
5,522
|
|
|
|
|
|
|
|
|
|
Private Education Loans
|
|
|
2,835
|
|
|
|
|
|
|
|
|
|
Other loans
|
|
|
106
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
|
868
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
12,179
|
|
|
|
|
|
|
|
21
|
|
Total interest expense
|
|
|
9,597
|
|
|
|
27
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
2,582
|
|
|
|
(27
|
)
|
|
|
|
|
Less: provisions for loan losses
|
|
|
1,394
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
1,188
|
|
|
|
(27
|
)
|
|
|
(1
|
)
|
Contingency fee revenue
|
|
|
|
|
|
|
336
|
|
|
|
|
|
Collections revenue
|
|
|
|
|
|
|
269
|
|
|
|
|
|
Guarantor serving fees
|
|
|
|
|
|
|
|
|
|
|
156
|
|
Other income
|
|
|
194
|
|
|
|
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
194
|
|
|
|
605
|
|
|
|
374
|
|
Restructuring expenses
|
|
|
19
|
|
|
|
2
|
|
|
|
2
|
|
Operating expenses
|
|
|
690
|
|
|
|
388
|
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
709
|
|
|
|
390
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
673
|
|
|
|
188
|
|
|
|
32
|
|
Income tax
expense(1)
|
|
|
249
|
|
|
|
70
|
|
|
|
12
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income
|
|
$
|
424
|
|
|
$
|
116
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Income taxes are based on a
percentage of net income before tax for the individual
reportable segment.
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
2,771
|
|
|
$
|
|
|
|
$
|
|
|
FFELP Consolidation Loans
|
|
|
4,690
|
|
|
|
|
|
|
|
|
|
Private Education Loans
|
|
|
2,092
|
|
|
|
|
|
|
|
|
|
Other loans
|
|
|
98
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
|
705
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
10,356
|
|
|
|
|
|
|
|
7
|
|
Total interest expense
|
|
|
7,877
|
|
|
|
23
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
2,479
|
|
|
|
(23
|
)
|
|
|
(5
|
)
|
Less: provisions for loan losses
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
2,176
|
|
|
|
(23
|
)
|
|
|
(5
|
)
|
Contingency fee revenue
|
|
|
|
|
|
|
397
|
|
|
|
|
|
Collections revenue
|
|
|
|
|
|
|
239
|
|
|
|
|
|
Guarantor servicing fees
|
|
|
|
|
|
|
|
|
|
|
132
|
|
Other income
|
|
|
177
|
|
|
|
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
177
|
|
|
|
636
|
|
|
|
287
|
|
Restructuring expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
645
|
|
|
|
358
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
645
|
|
|
|
358
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
1,708
|
|
|
|
255
|
|
|
|
32
|
|
Income tax
expense(1)
|
|
|
632
|
|
|
|
94
|
|
|
|
12
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income
|
|
$
|
1,076
|
|
|
$
|
157
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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
41
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, on derivatives that do
not qualify for hedge treatment, as well as on
derivatives that do qualify but are in part ineffective because
they are not perfect hedges, we focus on the long-term economic
effectiveness of those instruments relative to the underlying
hedged item and isolate the effects of interest rate volatility,
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 makers. Our Core
Earnings are used in developing our financial plans and
tracking results, and also in establishing corporate performance
targets and incentive compensation. Management believes this
information provides additional insight into the financial
performance of the 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Core Earnings adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact of securitization accounting
|
|
$
|
(442
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
247
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
532
|
|
|
$
|
|
|
|
$
|
|
|
Net impact of derivative accounting
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
217
|
|
|
|
|
|
|
|
(1,558
|
)
|
|
|
131
|
|
|
|
|
|
|
|
(360
|
)
|
Net impact of Floor Income
|
|
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
(209
|
)
|
|
|
|
|
|
|
|
|
Net impact of acquired intangibles
|
|
|
(53
|
)
|
|
|
(24
|
)
|
|
|
(14
|
)
|
|
|
(55
|
)
|
|
|
(28
|
)
|
|
|
(29
|
)
|
|
|
(49
|
)
|
|
|
(34
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings adjustments to GAAP
|
|
$
|
(1,157
|
)
|
|
$
|
(24
|
)
|
|
$
|
(14
|
)
|
|
$
|
240
|
|
|
$
|
(28
|
)
|
|
$
|
(1,587
|
)
|
|
$
|
405
|
|
|
$
|
(34
|
)
|
|
$
|
(371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1) Securitization Accounting: Under GAAP,
certain securitization transactions in our Lending operating
segment are accounted for as sales of assets. Under Core
Earnings for the Lending operating segment, we present all
securitization transactions on a Core Earnings basis
as long-term non-recourse financings. The upfront
gains on sale from securitization transactions, as
well as ongoing servicing and securitization revenue
presented in accordance with GAAP, are excluded from Core
Earnings and are replaced by interest income, provisions
for loan losses, and interest expense as earned or incurred on
the securitization loans. We also exclude transactions with our
off-balance sheet trusts from Core Earnings as they
are considered intercompany transactions on a Core
Earnings basis.
42
The following table summarizes Core Earnings
securitization adjustments for the Lending operating segment for
the years ended December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Core Earnings securitization adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on securitized loans, before provisions for
loan losses and before intercompany transactions
|
|
$
|
(872
|
)
|
|
$
|
(818
|
)
|
|
$
|
(896
|
)
|
Provisions for loan losses
|
|
|
309
|
|
|
|
380
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on securitized loans, after provisions for
loan losses, before intercompany transactions
|
|
|
(563
|
)
|
|
|
(438
|
)
|
|
|
(880
|
)
|
Intercompany transactions with off-balance sheet trusts
|
|
|
(141
|
)
|
|
|
(119
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on securitized loans, after provisions for
loan losses
|
|
|
(704
|
)
|
|
|
(557
|
)
|
|
|
(923
|
)
|
Gains on student loan securitizations
|
|
|
|
|
|
|
367
|
|
|
|
902
|
|
Servicing and securitization revenue
|
|
|
262
|
|
|
|
437
|
|
|
|
553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings securitization
adjustments(1)
|
|
$
|
(442
|
)
|
|
$
|
247
|
|
|
$
|
532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Negative amounts are subtracted
from Core Earnings net income to arrive at GAAP net
income and positive amounts are added to Core
Earnings net income to arrive at GAAP net income.
|
Intercompany transactions with off-balance sheet
trusts in the above table relate primarily to losses that
result from the repurchase of delinquent loans from our
off-balance sheet securitization trusts. When Private Education
Loans in our securitization trusts settling before
September 30, 2005 became 180 days delinquent, we
previously exercised our contingent call option to repurchase
these loans at par value out of the trust and recorded a loss
for the difference in the par value paid and the fair market
value of the loan at the time of purchase. We do not hold the
contingent call option for any trusts settled after
September 30, 2005. In October 2008, the Company decided to
no longer exercise its contingent call option.
2) Derivative Accounting: Core
Earnings exclude periodic unrealized gains and losses that
are caused primarily by the one-sided mark-to-market derivative
valuations prescribed by SFAS No. 133 on derivatives
that do not qualify for hedge treatment under GAAP.
These unrealized gains and losses occur in our Lending operating
segment, and occurred in our Corporate and Other reportable
segment related to equity forward contracts prior to 2008. In
our Core Earnings presentation, we recognize the
economic effect of these hedges, which generally results in any
cash paid or received being recognized ratably as an expense or
revenue over the hedged items life. Core
Earnings also exclude 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 pay down of principal of
the student loans underlying the Floor Income embedded in those
student loans does not exactly match the change in the notional
amount of our written Floor Income Contracts. Under
SFAS No. 133, the upfront payment is deemed
43
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
floating interest rate index to another to better match the
interest rate characteristics of the assets financed by that
debt. We primarily use basis swaps to change the index of our
floating rate debt to better match the cash flows of our student
loan assets that are primarily indexed to a commercial paper,
Prime or Treasury bill index. In addition, we use basis swaps to
convert debt indexed to the Consumer Price Index to three-month
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 flows of the
asset and the change in the cash flows of the liability. Our
basis swaps hedge variable interest rate risk; however, they
generally do not meet this effectiveness test because the index
of the swap does not exactly match the index of the hedged
assets as required by SFAS No. 133. Additionally, some
of our FFELP loans can earn at either a variable or a fixed
interest rate depending on market interest rates. We also have
basis swaps that do not meet the 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 currently in the
income statement.
Under SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity, 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 Company settled all of its equity forward contracts
in January 2008.
The table below quantifies the adjustments for derivative
accounting under SFAS No. 133 on our net income for
the years ended December 31, 2008, 2007 and 2006 when
compared with the accounting principles employed in all years
prior to the SFAS No. 133 implementation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Core Earnings derivative adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on derivative and hedging activities, net,
included in other
income(1)
|
|
$
|
(445
|
)
|
|
$
|
(1,361
|
)
|
|
$
|
(339
|
)
|
Less: Realized (gains) losses on derivative and hedging
activities,
net(1)
|
|
|
(107
|
)
|
|
|
18
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on derivative and hedging activities,
net
|
|
|
(552
|
)
|
|
|
(1,343
|
)
|
|
|
(230
|
)
|
Other pre-SFAS No. 133 accounting adjustments
|
|
|
(8
|
)
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net impact of SFAS No. 133 derivative
accounting(2)
|
|
$
|
(560
|
)
|
|
$
|
(1,341
|
)
|
|
$
|
(229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Reclassification of
Realized Gains (Losses) on Derivative and Hedging
Activities below for a detailed breakdown of the
components of realized losses on derivative and hedging
activities.
|
|
(2) |
|
Negative amounts are subtracted
from Core Earnings net income to arrive at GAAP net
income and positive amounts are added to Core
Earnings net income to arrive at GAAP net income.
|
44
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 the associated reclassification on a
Core Earnings basis for the years ended
December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Reclassification of realized gains (losses) on derivative and
hedging activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net settlement expense on Floor Income Contracts reclassified to
net interest income
|
|
$
|
(488
|
)
|
|
$
|
(67
|
)
|
|
$
|
(50
|
)
|
Net settlement income (expense) on interest rate swaps
reclassified to net interest income
|
|
|
563
|
|
|
|
47
|
|
|
|
(59
|
)
|
Foreign exchange derivatives gains/(losses) reclassified to
other income
|
|
|
11
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) on terminated derivative contracts
reclassified to other income
|
|
|
21
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications of realized (gains)losses on
derivative and hedging activities
|
|
|
107
|
|
|
|
(18
|
)
|
|
|
(109
|
)
|
Add: Unrealized gains (losses) on derivative and hedging
activities,
net(1)
|
|
|
(552
|
)
|
|
|
(1,343
|
)
|
|
|
(230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on derivative and hedging activities, net
|
|
$
|
(445
|
)
|
|
$
|
(1,361
|
)
|
|
$
|
(339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unrealized gains (losses) on
derivative and hedging activities, net comprises the
following unrealized mark-to-market gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Floor Income Contracts
|
|
$
|
(529
|
)
|
|
$
|
(209
|
)
|
|
$
|
176
|
|
Equity forward contracts
|
|
|
|
|
|
|
(1,558
|
)
|
|
|
(360
|
)
|
Basis swaps
|
|
|
(239
|
)
|
|
|
360
|
|
|
|
(58
|
)
|
Other
|
|
|
216
|
|
|
|
64
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrealized gains (losses) on derivative and hedging
activities, net
|
|
$
|
(552
|
)
|
|
$
|
(1,343
|
)
|
|
$
|
(230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and on changes in the
forward interest rate curves that impact basis swaps hedging
repricing risk between quarterly reset debt and daily reset
assets. Other unrealized gains are primarily the result of
ineffectiveness on cross-currency interest rate swaps hedging
foreign currency denominated debt related to differences between
forward and spot foreign currency exchange rates.
3) Floor Income: The timing and amount
(if any) of Floor Income earned in our Lending operating segment
is uncertain and in excess of expected spreads. Therefore, we
exclude such income from Core Earnings 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 in the consolidated statement of income with no
offsetting gain or loss recorded for the economically hedged
items. For Core Earnings, we reverse the
45
fair value adjustments on the Floor Income Contracts and futures
economically hedging Floor Income and include the amortization
of net premiums received in income.
The following table summarizes the Floor Income adjustments in
our Lending operating segment for the years ended
December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Core earnings Floor Income adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Floor Income earned on Managed loans, net of payments on Floor
Income Contracts
|
|
$
|
69
|
|
|
$
|
|
|
|
$
|
|
|
Amortization of net premiums on Floor Income Contracts and
futures in net interest income
|
|
|
(171
|
)
|
|
|
(169
|
)
|
|
$
|
(209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings Floor Income
adjustments(1)
|
|
$
|
(102
|
)
|
|
$
|
(169
|
)
|
|
$
|
(209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Negative amounts are subtracted
from Core Earnings net income to arrive at GAAP net
income and positive amounts are added to Core
Earnings net income to arrive at GAAP net income.
|
4) Acquired Intangibles: Our Core
Earnings exclude goodwill and intangible impairment and
the amortization of acquired intangibles. These amounts totaled
$91 million, $112 million and $94 million,
respectively, for the years ended December 31, 2008, 2007
and 2006. As discussed in ASSET PERFORMANCE GROUP BUSINESS
SEGMENT, the Company decided to wind down its purchased
paper businesses. This decision resulted in $36 million of
impairment of intangible assets for the year ended
December 31, 2008, of which $28 million related to the
impairment of two trade names and $8 million related to
certain banking customer relationships. In 2007, we recognized
impairments related principally to our mortgage origination and
mortgage purchased paper businesses including approximately
$20 million of goodwill and $10 million of value
attributable to certain banking relationships. In connection
with our acquisition of Southwest Student Services Corporation
and Washington Transferee Corporation, we acquired certain tax
exempt bonds that enabled us to earn a 9.5 percent SAP
rate on student loans funded by those bonds in indentured
trusts. In 2007 and 2006, we recognized intangible impairments
of $9 million and $21 million, respectively, due to
changes in projected interest rates used to initially value the
intangible asset and to a regulatory change that restricts the
loans on which we are entitled to earn a 9.5 percent yield.
LENDING
BUSINESS SEGMENT
In our Lending business segment, we originate and acquire
federally guaranteed student loans and Private Education Loans,
which are not federally guaranteed. Typically a Private
Education Loan is made in conjunction with a FFELP Stafford loan
and as a result is marketed through the same marketing channels
as FFELP loans. While FFELP loans and Private Education Loans
have different overall risk profiles due to the federal
guarantee of the FFELP loans, they currently share many of the
same characteristics such as similar repayment terms, the same
marketing channel and sales force, and are originated and
serviced on the same servicing platform. Finally, where
possible, the borrower receives a single bill for both FFELP and
Private Education Loans.
An overview of this segment and recent developments that have
significantly impacted this segment are included in the
Item 1. Business, section of this document.
46
The following table summarizes the Core Earnings
results of operations for our Lending business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
% Increase (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
Core Earnings interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
2,216
|
|
|
$
|
2,848
|
|
|
$
|
2,771
|
|
|
|
(22
|
)%
|
|
|
3
|
%
|
FFELP Consolidation Loans
|
|
|
3,748
|
|
|
|
5,522
|
|
|
|
4,690
|
|
|
|
(32
|
)
|
|
|
18
|
|
Private Education Loans
|
|
|
2,752
|
|
|
|
2,835
|
|
|
|
2,092
|
|
|
|
(3
|
)
|
|
|
36
|
|
Other loans
|
|
|
83
|
|
|
|
106
|
|
|
|
98
|
|
|
|
(22
|
)
|
|
|
8
|
|
Cash and investments
|
|
|
304
|
|
|
|
868
|
|
|
|
705
|
|
|
|
(65
|
)
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings interest income
|
|
|
9,103
|
|
|
|
12,179
|
|
|
|
10,356
|
|
|
|
(25
|
)
|
|
|
18
|
|
Total Core Earnings interest expense
|
|
|
6,665
|
|
|
|
9,597
|
|
|
|
7,877
|
|
|
|
(31
|
)
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Core Earnings interest income
|
|
|
2,438
|
|
|
|
2,582
|
|
|
|
2,479
|
|
|
|
(6
|
)
|
|
|
4
|
|
Less: provisions for loan losses
|
|
|
1,029
|
|
|
|
1,394
|
|
|
|
303
|
|
|
|
(26
|
)
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Core Earnings interest income after provisions
for loan losses
|
|
|
1,409
|
|
|
|
1,188
|
|
|
|
2,176
|
|
|
|
19
|
|
|
|
(45
|
)
|
Other income
|
|
|
180
|
|
|
|
194
|
|
|
|
177
|
|
|
|
(7
|
)
|
|
|
10
|
|
Restructuring expenses
|
|
|
49
|
|
|
|
19
|
|
|
|
|
|
|
|
158
|
|
|
|
100
|
|
Operating expenses
|
|
|
589
|
|
|
|
690
|
|
|
|
645
|
|
|
|
(15
|
)
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
638
|
|
|
|
709
|
|
|
|
645
|
|
|
|
(10
|
)
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
951
|
|
|
|
673
|
|
|
|
1,708
|
|
|
|
41
|
|
|
|
(61
|
)
|
Income tax expense
|
|
|
336
|
|
|
|
249
|
|
|
|
632
|
|
|
|
35
|
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest in net earnings of subsidiaries
|
|
|
615
|
|
|
|
424
|
|
|
|
1,076
|
|
|
|
45
|
|
|
|
(61
|
)
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income
|
|
$
|
615
|
|
|
$
|
424
|
|
|
$
|
1,076
|
|
|
|
45
|
%
|
|
|
(61
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
Changes in net interest income are primarily due to fluctuations
in the student loan and other asset spread discussed below, the
growth of our student loan portfolio, and changes in the level
of cash and investments we hold on our balance sheet for
liquidity purposes.
47
Average
Balance Sheets On-Balance Sheet
The following table reflects the rates earned on
interest-earning assets and paid on interest-bearing liabilities
for the years ended December 31, 2008, 2007 and 2006. This
table reflects the net interest margin for the entire Company
for our on-balance sheet assets. It is included in the Lending
business segment discussion because the Lending business segment
includes substantially all interest-earning assets and
interest-bearing liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Average Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
44,291
|
|
|
|
4.50
|
%
|
|
$
|
31,294
|
|
|
|
6.59
|
%
|
|
$
|
21,152
|
|
|
|
6.66
|
%
|
FFELP Consolidation Loans
|
|
|
73,091
|
|
|
|
4.35
|
|
|
|
67,918
|
|
|
|
6.39
|
|
|
|
55,119
|
|
|
|
6.43
|
|
Private Education Loans
|
|
|
19,276
|
|
|
|
9.01
|
|
|
|
12,507
|
|
|
|
11.65
|
|
|
|
8,585
|
|
|
|
11.90
|
|
Other loans
|
|
|
955
|
|
|
|
8.66
|
|
|
|
1,246
|
|
|
|
8.49
|
|
|
|
1,155
|
|
|
|
8.48
|
|
Cash and investments
|
|
|
9,279
|
|
|
|
2.98
|
|
|
|
12,710
|
|
|
|
5.57
|
|
|
|
8,824
|
|
|
|
5.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
146,892
|
|
|
|
4.95
|
%
|
|
|
125,675
|
|
|
|
6.90
|
%
|
|
|
94,835
|
|
|
|
6.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets
|
|
|
9,999
|
|
|
|
|
|
|
|
9,715
|
|
|
|
|
|
|
|
8,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
156,891
|
|
|
|
|
|
|
$
|
135,390
|
|
|
|
|
|
|
$
|
103,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ED Participation Program facility
|
|
$
|
1,727
|
|
|
|
3.43
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
Term bank deposits
|
|
|
696
|
|
|
|
3.95
|
|
|
|
166
|
|
|
|
5.26
|
|
|
|
1
|
|
|
|
4.98
|
|
Other short-term borrowings
|
|
|
33,636
|
|
|
|
4.81
|
|
|
|
16,219
|
|
|
|
5.75
|
|
|
|
3,901
|
|
|
|
5.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
36,059
|
|
|
|
4.73
|
|
|
|
16,385
|
|
|
|
5.74
|
|
|
|
3,902
|
|
|
|
5.33
|
|
Long-term borrowings
|
|
|
111,625
|
|
|
|
3.76
|
|
|
|
109,984
|
|
|
|
5.59
|
|
|
|
91,461
|
|
|
|
5.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
147,684
|
|
|
|
4.00
|
%
|
|
|
126,369
|
|
|
|
5.61
|
%
|
|
|
95,363
|
|
|
|
5.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities
|
|
|
3,797
|
|
|
|
|
|
|
|
4,272
|
|
|
|
|
|
|
|
3,912
|
|
|
|
|
|
Stockholders equity
|
|
|
5,410
|
|
|
|
|
|
|
|
4,749
|
|
|
|
|
|
|
|
4,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
156,891
|
|
|
|
|
|
|
$
|
135,390
|
|
|
|
|
|
|
$
|
103,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
.93
|
%
|
|
|
|
|
|
|
1.26
|
%
|
|
|
|
|
|
|
1.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
Rate/Volume
Analysis On-Balance Sheet
The following rate/volume analysis shows the relative
contribution of changes in interest rates and asset volumes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
Attributable to
|
|
|
|
(Decrease)
|
|
|
Change in
|
|
|
|
Increase
|
|
|
Rate
|
|
|
Volume
|
|
|
2008 vs. 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
(1,404
|
)
|
|
$
|
(3,163
|
)
|
|
$
|
1,759
|
|
Interest expense
|
|
|
(1,181
|
)
|
|
|
(2,402
|
)
|
|
|
1,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
(223
|
)
|
|
$
|
(761
|
)
|
|
$
|
538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
2,096
|
|
|
$
|
(98
|
)
|
|
$
|
2,194
|
|
Interest expense
|
|
|
1,962
|
|
|
|
301
|
|
|
|
1,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
134
|
|
|
$
|
(399
|
)
|
|
$
|
533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Margin On-Balance Sheet
The following table reflects the net interest margin of
on-balance sheet interest-earning assets, before provisions for
loan losses. (Certain percentages do not add or subtract down as
they are based on average balances.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Student loan
spread(1)(2)
|
|
|
1.28
|
%
|
|
|
1.44
|
%
|
|
|
1.68
|
%
|
Other asset
spread(1)(3)
|
|
|
(.27
|
)
|
|
|
(.16
|
)
|
|
|
.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin, before the impact of 2008 Asset-Backed
Financing Facilities
fees(1)
|
|
|
1.17
|
|
|
|
1.26
|
|
|
|
1.53
|
|
Less: 2008 Asset-Backed Financing Facilities fees
|
|
|
(.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
.93
|
%
|
|
|
1.26
|
%
|
|
|
1.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Before commitment and liquidity
fees associated with the 2008 Asset-Backed Financing Facilities,
which are referred to as the 2008 Asset-Backed Financing
Facilities fees (see LIQUIDITY AND CAPITAL
RESOURCES Additional Funding Sources for General
Corporate Purposes for a further discussion).
|
|
(2) |
|
Composition of student loan spread:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loan yield, before Floor Income
|
|
|
5.60
|
%
|
|
|
7.92
|
%
|
|
|
7.93
|
%
|
Gross Floor Income
|
|
|
.28
|
|
|
|
.05
|
|
|
|
.04
|
|
Consolidation Loan Rebate Fees
|
|
|
(.55
|
)
|
|
|
(.63
|
)
|
|
|
(.67
|
)
|
Repayment Borrower Benefits
|
|
|
(.11
|
)
|
|
|
(.12
|
)
|
|
|
(.12
|
)
|
Premium and discount amortization
|
|
|
(.16
|
)
|
|
|
(.18
|
)
|
|
|
(.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loan net yield
|
|
|
5.06
|
|
|
|
7.04
|
|
|
|
7.04
|
|
Student loan cost of funds
|
|
|
(3.78
|
)
|
|
|
(5.60
|
)
|
|
|
(5.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loan spread, before 2008 Asset-Backed Financing
Facilities fees
|
|
|
1.28
|
%
|
|
|
1.44
|
%
|
|
|
1.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Comprised of investments, cash and
other loans.
|
49
Student
Loan Spread On-Balance Sheet
The student loan spread is impacted by changes in its various
components, as reflected in footnote (2) to the
Net Interest Margin On-Balance
Sheet table above. Gross Floor Income is impacted by
interest rates and the percentage of the FFELP portfolio
eligible to earn Floor Income. The spread impact from
Consolidation Loan Rebate Fees fluctuates as a function of the
percentage of FFELP Consolidation Loans on our balance sheet.
Repayment Borrower Benefits are generally impacted by the terms
of the Repayment Borrower Benefits being offered as well as the
payment behavior of the underlying loans. Premium and discount
amortization is generally impacted by the prices previously paid
for loans and amounts capitalized related to such purchases or
originations. Premium and discount amortization is also impacted
by prepayment behavior of the underlying loans.
The student loan spread, before 2008 Asset-Backed Financing
Facilities fees, for 2008 decreased 16 basis points from
the prior year. The decrease was primarily due to an increase in
our cost of funds, which was partially offset by an increase in
Floor Income due to a decrease in interest rates in 2008
compared to 2007. The cost of funds for on-balance sheet student
loans excludes the impact of basis swaps that are intended to
economically hedge the re-pricing and basis mismatch between our
funding and student loan asset indices; these swaps do not
receive hedge accounting treatment under SFAS No. 133.
We extensively use basis swaps to manage our basis risk
associated with our interest rate sensitive assets and
liabilities. These swaps generally do not qualify as accounting
hedges, and as a result, are required to be accounted for in the
gains (losses) on derivatives and hedging activities,
net line on the income statement, as opposed to being
accounted for in interest expense. As a result, these basis
swaps are not considered in the calculation of the cost of funds
in the table above and therefore, in times of volatile movements
of interest rates like those experienced in 2008, the student
loan spread can significantly change. See
Core Earnings Net Interest
Margin in the following table, which reflects these
basis swaps in interest expense and demonstrates the economic
hedge effectiveness of these basis swaps.
The decrease in our student loan spread, before the 2008
Asset-Backed Financing Facilities fees, for 2007 versus 2006 was
primarily due to an increase in our cost of funds. The increase
in the cost of funds is due to the same reason discussed above
related to 2008. See Core Earnings
Net Interest Margin Core Earnings Basis
Student Loan Spread, which reflects these basis swaps
in interest expense, and demonstrates the economic hedge
effectiveness of these basis swaps. The decrease in the student
loan spread was also due to an increase in the estimate of
uncollectible accrued interest related to our Private Education
Loans (see Core Earnings Net Interest
Margin Core Earnings Basis Student Loan
Spread).
Other
Asset Spread On-Balance Sheet
The other asset spread is generated from cash and investments
(both restricted and unrestricted) primarily in our liquidity
portfolio and other loans. The Company invests its liquidity
portfolio primarily in short-term securities with maturities of
one week or less in order to manage counterparty credit risk and
maintain available cash balances. The other asset spread
decreased 11 basis points from 2007 to 2008, and decreased
43 basis points from 2006 to 2007. Changes in the other
asset spread primarily relate to differences in the index basis
and reset frequency between the asset indices and funding
indices. A portion of this risk is hedged with derivatives that
do not receive hedge accounting treatment under
SFAS No. 133 and will impact the other asset spread in
a similar fashion as the impact to the on-balance sheet student
loan spread as discussed above. In volatile interest rate
environments, these spreads may move significantly from period
to period and differ from the Core Earnings basis
other asset spread discussed below.
Net
Interest Margin On-Balance Sheet
The net interest margin, before 2008 Asset-Backed Financing
Facilities fees, for 2008 decreased 9 basis points from the
year-ago period and decreased 27 basis points from 2006 to
2007. The increase in the student loan portfolio as a percentage
of the overall interest-earning asset portfolio from 2007 to
2008 resulted in an increase to net interest margin of
7 basis points due to the student loan portfolio earning a
higher spread than the other asset portfolio. A decrease of
16 basis points relates primarily to the previous
discussions of changes
50
in the on-balance sheet student loan and other asset spreads.
The student loan portfolio as a percentage of the overall
interest earning asset portfolio did not change substantially
from 2006 to 2007. The decrease in spread from 2006 to 2007
primarily related to the previously discussed changes in the
on-balance sheet student loan and other asset spreads.
The 2008 Asset-Backed Financing Facilities closed on
February 29, 2008. Amortization of the upfront commitment
and liquidity fees began on that date.
Core
Earnings Net Interest Margin
The following table analyzes the earnings from our portfolio of
Managed interest-earning assets on a Core Earnings
basis (see BUSINESS SEGMENTS Limitations of
Core Earnings Pre-tax Differences
between Core Earnings and GAAP by Business
Segment). The Core Earnings
Net Interest Margin presentation and certain
components used in the calculation differ from the Net
Interest Margin On-Balance Sheet
presentation. The Core Earnings presentation, when
compared to our on-balance sheet presentation, is different in
that it:
|
|
|
|
|
includes the net interest margin related to our off-balance
sheet student loan securitization trusts. This includes any
related fees or costs such as the Consolidation Loan Rebate
Fees, premium/discount amortization and Repayment Borrower
Benefits yield adjustments;
|
|
|
|
includes the reclassification of certain derivative net
settlement amounts. The net settlements on certain derivatives
that do not qualify as SFAS No. 133 hedges are
recorded as part of the gain (loss) on derivative and
hedging activities, net line on the income statement and
are therefore not recognized in the on-balance sheet student
loan spread. Under this presentation, these gains and losses are
reclassified to the income statement line item of the
economically hedged item. For our Core Earnings net
interest margin, this would primarily include:
(a) reclassifying the net settlement amounts related to our
written Floor Income Contracts to student loan interest income
and (b) reclassifying the net settlement amounts related to
certain of our basis swaps to debt interest expense;
|
|
|
|
excludes unhedged Floor Income 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.
|
51
The following table reflects the Core Earnings net
interest margin, before provisions for loan losses. (Certain
percentages do not add or subtract down as they are based on
average balances.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings basis student loan
spread(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loan spread
|
|
|
.83
|
%
|
|
|
.96
|
%
|
|
|
1.25
|
%
|
Private Education Loan
spread(2)
|
|
|
5.09
|
|
|
|
5.12
|
|
|
|
5.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings basis student loan
spread(3)
|
|
|
1.63
|
|
|
|
1.67
|
|
|
|
1.84
|
|
Core Earnings basis other asset
spread(1)(4)
|
|
|
(.51
|
)
|
|
|
(.11
|
)
|
|
|
.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net interest margin, before 2008
Asset-Backed Financing Facilities
fees(1)
|
|
|
1.49
|
|
|
|
1.49
|
|
|
|
1.69
|
|
Less: 2008 Asset-Backed Financing Facilities fees
|
|
|
(.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net interest
margin(5)
|
|
|
1.30
|
%
|
|
|
1.49
|
%
|
|
|
1.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Before commitment and liquidity
fees associated with the 2008 Asset-Backed Financing Facilities,
which are referred to as the 2008 Asset-Backed Financing
Facilities fees (see LIQUIDITY AND CAPITAL
RESOURCES Additional Funding Sources for General
Corporate Purposes for a further discussion).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
Core Earnings basis Private Education Loan Spread,
before 2008 Asset-Backed Financing Facilities fees and after
provision for loan losses
|
|
|
2.41
|
%
|
|
|
.41
|
%
|
|
|
3.75
|
%
|
(3)
|
|
Composition of Core Earnings basis student loan
spread:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings basis student loan yield
|
|
|
5.77
|
%
|
|
|
8.12
|
%
|
|
|
8.10
|
%
|
|
|
Consolidation Loan Rebate Fees
|
|
|
(.52
|
)
|
|
|
(.57
|
)
|
|
|
(.56
|
)
|
|
|
Repayment Borrower Benefits
|
|
|
(.11
|
)
|
|
|
(.11
|
)
|
|
|
(.09
|
)
|
|
|
Premium and discount amortization
|
|
|
(.14
|
)
|
|
|
(.17
|
)
|
|
|
(.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings basis student loan net yield
|
|
|
5.00
|
|
|
|
7.27
|
|
|
|
7.29
|
|
|
|
Core Earnings basis student loan cost of funds
|
|
|
(3.37
|
)
|
|
|
(5.60
|
)
|
|
|
(5.45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings basis student loan spread, before 2008
Asset-Backed Financing Facilities fees
|
|
|
1.63
|
%
|
|
|
1.67
|
%
|
|
|
1.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
|
Comprised of investments, cash and other loans
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
|
|
The average balances of our Managed interest-earning assets for
the respective periods are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loans
|
|
$
|
141,647
|
|
|
$
|
127,940
|
|
|
$
|
111,469
|
|
|
|
Private Education Loans
|
|
|
32,597
|
|
|
|
26,190
|
|
|
|
19,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total student loans
|
|
|
174,244
|
|
|
|
154,130
|
|
|
|
131,192
|
|
|
|
Other interest-earning assets
|
|
|
12,403
|
|
|
|
17,455
|
|
|
|
14,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed interest-earning assets
|
|
$
|
186,647
|
|
|
$
|
171,585
|
|
|
$
|
145,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
Earnings Basis Student Loan Spread
The Core Earnings basis student loan spread, before
the 2008 Asset Backed Financing Facilities fees, for 2008
decreased 4 basis points from the prior year which was
primarily due to an increase in the Companys cost of
funds. The increase in the Companys cost of funds was due
to an increase in the credit spreads on the Companys debt
issued during the past year due to the current credit
environment. These decreases to the student loan spread were
partially offset by the growth in the Private Education Loan
portfolio which earns a higher margin than FFELP.
The Core Earnings basis student loan spread, before
the 2008 Asset-Backed Financing Facilities fees, for 2007
decreased 17 basis points from the prior year primarily due
to the interest income reserve on our Private Education loans.
We estimate the amount of Private Education Loan accrued
interest on our balance sheet that is not reasonably expected to
be collected in the future using a methodology consistent with
the
52
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 provision for loan losses increased
significantly in 2007 compared to 2006, we had a similar rise in
the estimate of uncollectible accrued interest receivable. The
Company also experienced a higher cost of funds in 2007
primarily due to the disruption in the credit markets, as
previously discussed.
The Core Earnings basis FFELP loan spread for 2008
declined from 2007 and 2006 primarily as a result of the
increase in the cost of funds previously discussed, as well as
the mix of the FFELP portfolio shifting towards loans originated
subsequent to October 1, 2007 which have lower yields as a
result of the CCRAA. The Core Earnings basis Private
Education Loan spread before provision for loan losses for 2008
was relatively consistent with 2007 and 2006. The changes in the
Core Earnings basis Private Education Loan spread
after provision for loan losses for all periods presented was
primarily due to the timing and amount of provision associated
with our allowance for Private Education Loan Losses as
discussed below (see Private Education Loan
Losses Activity in the Allowance for Private
Education Loan Losses).
Core
Earnings Basis Other Asset Spread
The Core Earnings basis other asset spread is
generated from cash and investments (both restricted and
unrestricted) primarily in our liquidity portfolio, and other
loans. The Company invests its liquidity portfolio primarily in
short-term securities with maturities of one week or less in
order to manage counterparty credit risk and maintain available
cash balances. The Core Earnings basis other asset
spread for 2008 decreased 40 basis points from 2007. The
2007 spread decreased by 41 basis points from 2006. Changes
in this spread primarily relate to differences between the index
basis and reset frequency of the asset indices and funding
indices. In volatile interest rate environments, the asset and
debt reset frequencies will lag each other. Changes in this
spread are also a result of the increase in our cost of funds as
previously discussed.
Core
Earnings Net Interest Margin
The Core Earnings net interest margin, before 2008
Asset-Backed Financing Facilities fees, for 2008 was unchanged
from the prior year and decreased 20 basis points from 2006
to 2007. The increase in the Managed student loan portfolio as a
percentage of the overall Managed interest-earning asset
portfolio from 2007 to 2008 resulted in an increase to
Core Earnings net interest margin of 6 basis
points due to the Managed student loan portfolio earning a
higher spread than the Managed other interest-earning asset
portfolio. This was offset by a decrease of 6 basis points
primarily due to the previously discussed changes in the student
loan and other asset spreads. The student loan portfolio as a
percentage of the overall interest earning asset portfolio did
not change substantially from 2006 to 2007. The decrease in
spread from 2006 to 2007 primarily related to the previously
discussed changes in the on-balance sheet student loan and other
asset spreads.
The 2008 Asset-Backed Financing Facilities closed on
February 29, 2008. Amortization of the upfront commitment
and liquidity fees began on that date.
53
Summary
of our Managed Student Loan Portfolio
The following tables summarize the components of our Managed
student loan portfolio and show the changing composition of our
portfolio.
Ending
Managed Student Loan Balances, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Total
|
|
|
On-balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-school
|
|
$
|
18,961
|
|
|
$
|
|
|
|
$
|
18,961
|
|
|
$
|
7,972
|
|
|
$
|
26,933
|
|
Grace and repayment
|
|
|
32,455
|
|
|
|
70,511
|
|
|
|
102,966
|
|
|
|
14,231
|
|
|
|
117,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet, gross
|
|
|
51,416
|
|
|
|
70,511
|
|
|
|
121,927
|
|
|
|
22,203
|
|
|
|
144,130
|
|
On-balance sheet unamortized premium/(discount)
|
|
|
1,151
|
|
|
|
1,280
|
|
|
|
2,431
|
|
|
|
(535
|
)
|
|
|
1,896
|
|
On-balance sheet receivable for partially charged-off loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
|
|
222
|
|
On-balance sheet allowance for losses
|
|
|
(91
|
)
|
|
|
(47
|
)
|
|
|
(138
|
)
|
|
|
(1,308
|
)
|
|
|
(1,446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet, net
|
|
|
52,476
|
|
|
|
71,744
|
|
|
|
124,220
|
|
|
|
20,582
|
|
|
|
144,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-school
|
|
|
473
|
|
|
|
|
|
|
|
473
|
|
|
|
1,629
|
|
|
|
2,102
|
|
Grace and repayment
|
|
|
6,583
|
|
|
|
15,078
|
|
|
|
21,661
|
|
|
|
12,062
|
|
|
|
33,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet, gross
|
|
|
7,056
|
|
|
|
15,078
|
|
|
|
22,134
|
|
|
|
13,691
|
|
|
|
35,825
|
|
Off-balance sheet unamortized premium/(discount)
|
|
|
105
|
|
|
|
462
|
|
|
|
567
|
|
|
|
(361
|
)
|
|
|
206
|
|
Off-balance sheet receivable for partially charged-off loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
92
|
|
Off-balance sheet allowance for losses
|
|
|
(18
|
)
|
|
|
(9
|
)
|
|
|
(27
|
)
|
|
|
(505
|
)
|
|
|
(532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet, net
|
|
|
7,143
|
|
|
|
15,531
|
|
|
|
22,674
|
|
|
|
12,917
|
|
|
|
35,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
|
|
$
|
59,619
|
|
|
$
|
87,275
|
|
|
$
|
146,894
|
|
|
$
|
33,499
|
|
|
$
|
180,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of on-balance sheet FFELP
|
|
|
42
|
%
|
|
|
58
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Managed FFELP
|
|
|
41
|
%
|
|
|
59
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of total
|
|
|
33
|
%
|
|
|
48
|
%
|
|
|
81
|
%
|
|
|
19
|
%
|
|
|
100
|
%
|
|
|
|
(1) |
|
FFELP category is primarily
Stafford loans and also includes federally insured PLUS and HEAL
loans.
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Total
|
|
|
On-balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-school
|
|
$
|
14,390
|
|
|
$
|
|
|
|
$
|
14,390
|
|
|
$
|
6,735
|
|
|
$
|
21,125
|
|
Grace and repayment
|
|
|
20,469
|
|
|
|
72,306
|
|
|
|
92,775
|
|
|
|
9,437
|
|
|
|
102,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet, gross
|
|
|
34,859
|
|
|
|
72,306
|
|
|
|
107,165
|
|
|
|
16,172
|
|
|
|
123,337
|
|
On-balance sheet unamortized premium/(discount)
|
|
|
915
|
|
|
|
1,344
|
|
|
|
2,259
|
|
|
|
(468
|
)
|
|
|
1,791
|
|
On-balance sheet receivable for partially charged-off loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118
|
|
|
|
118
|
|
On-balance sheet allowance for losses
|
|
|
(48
|
)
|
|
|
(41
|
)
|
|
|
(89
|
)
|
|
|
(1,004
|
)
|
|
|
(1,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet, net
|
|
|
35,726
|
|
|
|
73,609
|
|
|
|
109,335
|
|
|
|
14,818
|
|
|
|
124,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-school
|
|
|
1,004
|
|
|
|
|
|
|
|
1,004
|
|
|
|
3,117
|
|
|
|
4,121
|
|
Grace and repayment
|
|
|
8,334
|
|
|
|
15,968
|
|
|
|
24,302
|
|
|
|
11,082
|
|
|
|
35,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet, gross
|
|
|
9,338
|
|
|
|
15,968
|
|
|
|
25,306
|
|
|
|
14,199
|
|
|
|
39,505
|
|
Off-balance sheet unamortized premium/(discount)
|
|
|
154
|
|
|
|
482
|
|
|
|
636
|
|
|
|
(355
|
)
|
|
|
281
|
|
Off-balance sheet receivable for partially charged-off loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
28
|
|
Off-balance sheet allowance for losses
|
|
|
(20
|
)
|
|
|
(9
|
)
|
|
|
(29
|
)
|
|
|
(362
|
)
|
|
|
(391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet, net
|
|
|
9,472
|
|
|
|
16,441
|
|
|
|
25,913
|
|
|
|
13,510
|
|
|
|
39,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
|
|
$
|
45,198
|
|
|
$
|
90,050
|
|
|
$
|
135,248
|
|
|
$
|
28,328
|
|
|
$
|
163,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of on-balance sheet FFELP
|
|
|
33
|
%
|
|
|
67
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Managed FFELP
|
|
|
33
|
%
|
|
|
67
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of total
|
|
|
28
|
%
|
|
|
55
|
%
|
|
|
83
|
%
|
|
|
17
|
%
|
|
|
100
|
%
|
|
|
|
(1) |
|
FFELP category is primarily
Stafford loans and also includes federally insured PLUS and HEAL
loans.
|
55
Student
Loan Average Balances (net of unamortized
premium/discount)
The following tables summarize the components of our Managed
student loan portfolio and show the changing composition of our
portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
|
|
|
Education
|
|
|
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
Total FFELP
|
|
|
Loans
|
|
|
Total
|
|
|
On-balance sheet
|
|
$
|
44,291
|
|
|
$
|
73,091
|
|
|
$
|
117,382
|
|
|
$
|
19,276
|
|
|
$
|
136,658
|
|
Off-balance sheet
|
|
|
8,299
|
|
|
|
15,966
|
|
|
|
24,265
|
|
|
|
13,321
|
|
|
|
37,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
|
|
$
|
52,590
|
|
|
$
|
89,057
|
|
|
$
|
141,647
|
|
|
$
|
32,597
|
|
|
$
|
174,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of on-balance sheet FFELP
|
|
|
38
|
%
|
|
|
62
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Managed FFELP
|
|
|
37
|
%
|
|
|
63
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of total
|
|
|
30
|
%
|
|
|
51
|
%
|
|
|
81
|
%
|
|
|
19
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
|
|
|
Education
|
|
|
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
Total FFELP
|
|
|
Loans
|
|
|
Total
|
|
|
On-balance sheet
|
|
$
|
31,294
|
|
|
$
|
67,918
|
|
|
$
|
99,212
|
|
|
$
|
12,507
|
|
|
$
|
111,719
|
|
Off-balance sheet
|
|
|
11,533
|
|
|
|
17,195
|
|
|
|
28,728
|
|
|
|
13,683
|
|
|
|
42,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
|
|
$
|
42,827
|
|
|
$
|
85,113
|
|
|
$
|
127,940
|
|
|
$
|
26,190
|
|
|
$
|
154,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of on-balance sheet FFELP
|
|
|
32
|
%
|
|
|
68
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Managed FFELP
|
|
|
33
|
%
|
|
|
67
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of total
|
|
|
28
|
%
|
|
|
55
|
%
|
|
|
83
|
%
|
|
|
17
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
|
|
|
Education
|
|
|
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
Total FFELP
|
|
|
Loans
|
|
|
Total
|
|
|
On-balance sheet
|
|
$
|
21,152
|
|
|
$
|
55,119
|
|
|
$
|
76,271
|
|
|
$
|
8,585
|
|
|
$
|
84,856
|
|
Off-balance sheet
|
|
|
19,546
|
|
|
|
15,652
|
|
|
|
35,198
|
|
|
|
11,138
|
|
|
|
46,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
|
|
$
|
40,698
|
|
|
$
|
70,771
|
|
|
$
|
111,469
|
|
|
$
|
19,723
|
|
|
$
|
131,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of on-balance sheet FFELP
|
|
|
28
|
%
|
|
|
72
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Managed FFELP
|
|
|
37
|
%
|
|
|
63
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of total
|
|
|
31
|
%
|
|
|
54
|
%
|
|
|
85
|
%
|
|
|
15
|
%
|
|
|
100
|
%
|
|
|
|
(1) |
|
FFELP category is primarily
Stafford loans and also includes federally insured PLUS and HEAL
loans.
|
56
Floor
Income Managed Basis
The following table analyzes the ability of the FFELP loans in
our Managed portfolio to earn Floor Income after
December 31, 2008 and 2007, based on interest rates as of
those dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
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
|
|
$
|
104.9
|
|
|
$
|
16.1
|
|
|
$
|
121.0
|
|
|
$
|
89.3
|
|
|
$
|
17.1
|
|
|
$
|
106.4
|
|
Off-balance sheet student loans
|
|
|
15.0
|
|
|
|
7.0
|
|
|
|
22.0
|
|
|
|
15.9
|
|
|
|
9.2
|
|
|
|
25.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed student loans eligible to earn Floor Income
|
|
|
119.9
|
|
|
|
23.1
|
|
|
|
143.0
|
|
|
|
105.2
|
|
|
|
26.3
|
|
|
|
131.5
|
|
Less: post-March 31, 2006 disbursed loans required to
rebate Floor Income
|
|
|
(64.3
|
)
|
|
|
(1.3
|
)
|
|
|
(65.6
|
)
|
|
|
(45.9
|
)
|
|
|
(1.5
|
)
|
|
|
(47.4
|
)
|
Less: economically hedged Floor Income Contracts
|
|
|
(28.6
|
)
|
|
|
|
|
|
|
(28.6
|
)
|
|
|
(15.7
|
)
|
|
|
(17.4
|
)
|
|
|
(33.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Managed student loans eligible to earn Floor Income
|
|
$
|
27.0
|
|
|
$
|
21.8
|
|
|
$
|
48.8
|
|
|
$
|
43.6
|
|
|
$
|
7.4
|
|
|
$
|
51.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Managed student loans earning Floor Income as of
December 31,
|
|
$
|
4.3
|
|
|
$
|
4.8
|
|
|
$
|
9.1
|
|
|
$
|
1.3
|
|
|
$
|
7.4
|
|
|
$
|
8.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have sold Floor Income contracts to hedge the potential Floor
Income from specifically identified pools of FFELP Consolidation
loans that are eligible to earn Floor Income.
The following table presents a projection of the average Managed
balance of FFELP Consolidation Loans for which Fixed Rate Floor
Income has already been economically hedged through Floor Income
Contracts for the period January 1, 2009 to
September 30, 2013. These loans are both on and off-balance
sheet and the related hedges do not qualify under
SFAS No. 133 accounting as effective hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Dollars in billions)
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Average balance of FFELP Consolidation Loans whose Floor Income
is economically hedged (Managed Basis)
|
|
$
|
21
|
|
|
$
|
19
|
|
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Education Loan Losses
On-Balance
Sheet versus Managed Basis Presentation
All Private Education Loans are initially acquired on-balance
sheet. The securitization of Private Education Loans to date has
been accounted for off-balance sheet under
SFAS No. 140. For our Managed Basis presentation in
the table below, when loans are securitized, we reduce the
on-balance sheet allowance for loan losses for amounts
previously provided and then increase the allowance for loan
losses for these loans off-balance sheet, with the total of both
on-balance sheet and off-balance sheet being the Managed Basis
allowance for loan losses.
When Private Education Loans in our securitized trusts settling
before September 30, 2005, became 180 days delinquent,
we previously exercised our contingent call option to repurchase
these loans at par value out of the trust and recorded a loss
for the difference in the par value paid and the fair market
value of the loan at the time of purchase. We account for these
loans in accordance with the American Institute of Certified
Public Accountants (AICPA) Statement of
Position (SOP)
03-3,
Accounting for Certain Loans or Debt Securities Acquired
in a Transfer. Revenue is recognized over the anticipated
remaining life of the loan based upon the amount and timing of
anticipated cash flows. Beginning in October 2008, the Company
decided to no longer exercise its contingent call option. On a
Managed Basis, the losses recorded under GAAP for loans
repurchased at day 180 are reversed and the full amount is
charged-off at day 212. We do not hold the contingent call
option for any trusts settled after September 30, 2005.
When measured as a percentage of ending loans in repayment, the
off-balance sheet allowance for loan losses percentage is lower
than the on-balance sheet percentage because of the different
mix of loans on-balance sheet and off-balance sheet.
57
Private
Education Loan Delinquencies and Forbearance
The table below presents our Private Education Loan delinquency
trends as of December 31, 2008, 2007 and 2006.
Delinquencies have the potential to adversely impact earnings as
they are an initial indication of the borrowers potential
to possibly default and as a result command a higher loan loss
reserve than loans in current status. Delinquent loans also
require increased servicing and collection efforts, resulting in
higher operating costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Balance Sheet Private Education
|
|
|
|
Loan Delinquencies
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
10,159
|
|
|
|
|
|
|
$
|
8,151
|
|
|
|
|
|
|
$
|
5,218
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
862
|
|
|
|
|
|
|
|
974
|
|
|
|
|
|
|
|
359
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
9,748
|
|
|
|
87.2
|
%
|
|
|
6,236
|
|
|
|
88.5
|
%
|
|
|
4,214
|
|
|
|
86.9
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
551
|
|
|
|
4.9
|
|
|
|
306
|
|
|
|
4.3
|
|
|
|
250
|
|
|
|
5.1
|
|
Loans delinquent
61-90 days(3)
|
|
|
296
|
|
|
|
2.6
|
|
|
|
176
|
|
|
|
2.5
|
|
|
|
132
|
|
|
|
2.7
|
|
Loans delinquent greater than
90 days(3)
|
|
|
587
|
|
|
|
5.3
|
|
|
|
329
|
|
|
|
4.7
|
|
|
|
255
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans in repayment
|
|
|
11,182
|
|
|
|
100
|
%
|
|
|
7,047
|
|
|
|
100
|
%
|
|
|
4,851
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans, gross
|
|
|
22,203
|
|
|
|
|
|
|
|
16,172
|
|
|
|
|
|
|
|
10,428
|
|
|
|
|
|
Private Education Loan unamortized discount
|
|
|
(535
|
)
|
|
|
|
|
|
|
(468
|
)
|
|
|
|
|
|
|
(365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans
|
|
|
21,668
|
|
|
|
|
|
|
|
15,704
|
|
|
|
|
|
|
|
10,063
|
|
|
|
|
|
Private Education Loan receivable for partially charged-off loans
|
|
|
222
|
|
|
|
|
|
|
|
118
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
Private Education Loan allowance for losses
|
|
|
(1,308
|
)
|
|
|
|
|
|
|
(1,004
|
)
|
|
|
|
|
|
|
(372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Education Loans, net
|
|
$
|
20,582
|
|
|
|
|
|
|
$
|
14,818
|
|
|
|
|
|
|
$
|
9,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Private Education Loans in repayment
|
|
|
|
|
|
|
50.4
|
%
|
|
|
|
|
|
|
43.6
|
%
|
|
|
|
|
|
|
46.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
|
|
|
|
|
|
12.8
|
%
|
|
|
|
|
|
|
11.5
|
%
|
|
|
|
|
|
|
13.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
|
|
|
|
7.2
|
%
|
|
|
|
|
|
|
12.1
|
%
|
|
|
|
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 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.
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Private Education
|
|
|
|
Loan Delinquencies
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
3,461
|
|
|
|
|
|
|
$
|
4,963
|
|
|
|
|
|
|
$
|
5,608
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
700
|
|
|
|
|
|
|
|
1,417
|
|
|
|
|
|
|
|
822
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
8,843
|
|
|
|
92.8
|
%
|
|
|
7,403
|
|
|
|
94.7
|
%
|
|
|
6,419
|
|
|
|
94.5
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
315
|
|
|
|
3.3
|
|
|
|
202
|
|
|
|
2.6
|
|
|
|
222
|
|
|
|
3.3
|
|
Loans delinquent
61-90 days(3)
|
|
|
121
|
|
|
|
1.3
|
|
|
|
84
|
|
|
|
1.1
|
|
|
|
60
|
|
|
|
.9
|
|
Loans delinquent greater than
90 days(3)
|
|
|
251
|
|
|
|
2.6
|
|
|
|
130
|
|
|
|
1.6
|
|
|
|
91
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans in repayment
|
|
|
9,530
|
|
|
|
100
|
%
|
|
|
7,819
|
|
|
|
100
|
%
|
|
|
6,792
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans, gross
|
|
|
13,691
|
|
|
|
|
|
|
|
14,199
|
|
|
|
|
|
|
|
13,222
|
|
|
|
|
|
Private Education Loan unamortized discount
|
|
|
(361
|
)
|
|
|
|
|
|
|
(355
|
)
|
|
|
|
|
|
|
(303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans
|
|
|
13,330
|
|
|
|
|
|
|
|
13,844
|
|
|
|
|
|
|
|
12,919
|
|
|
|
|
|
Private Education Loan receivable for partially charged-off loans
|
|
|
92
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Education Loan allowance for losses
|
|
|
(505
|
)
|
|
|
|
|
|
|
(362
|
)
|
|
|
|
|
|
|
(86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Education Loans, net
|
|
$
|
12,917
|
|
|
|
|
|
|
$
|
13,510
|
|
|
|
|
|
|
$
|
12,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Private Education Loans in repayment
|
|
|
|
|
|
|
69.6
|
%
|
|
|
|
|
|
|
55.1
|
%
|
|
|
|
|
|
|
51.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
|
|
|
|
|
|
7.2
|
%
|
|
|
|
|
|
|
5.3
|
%
|
|
|
|
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
|
|
|
|
6.8
|
%
|
|
|
|
|
|
|
15.3
|
%
|
|
|
|
|
|
|
10.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 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.
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Basis Private Education
|
|
|
|
Loan Delinquencies
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
13,620
|
|
|
|
|
|
|
$
|
13,114
|
|
|
|
|
|
|
$
|
10,826
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
1,562
|
|
|
|
|
|
|
|
2,391
|
|
|
|
|
|
|
|
1,181
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
18,591
|
|
|
|
89.8
|
%
|
|
|
13,639
|
|
|
|
91.7
|
%
|
|
|
10,633
|
|
|
|
91.3
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
866
|
|
|
|
4.2
|
|
|
|
508
|
|
|
|
3.4
|
|
|
|
472
|
|
|
|
4.0
|
|
Loans delinquent
61-90 days(3)
|
|
|
417
|
|
|
|
2.0
|
|
|
|
260
|
|
|
|
1.8
|
|
|
|
192
|
|
|
|
1.7
|
|
Loans delinquent greater than
90 days(3)
|
|
|
838
|
|
|
|
4.0
|
|
|
|
459
|
|
|
|
3.1
|
|
|
|
346
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans in repayment
|
|
|
20,712
|
|
|
|
100
|
%
|
|
|
14,866
|
|
|
|
100
|
%
|
|
|
11,643
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans, gross
|
|
|
35,894
|
|
|
|
|
|
|
|
30,371
|
|
|
|
|
|
|
|
23,650
|
|
|
|
|
|
Private Education Loan unamortized discount
|
|
|
(896
|
)
|
|
|
|
|
|
|
(823
|
)
|
|
|
|
|
|
|
(668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans
|
|
|
34,998
|
|
|
|
|
|
|
|
29,548
|
|
|
|
|
|
|
|
22,982
|
|
|
|
|
|
Private Education Loan receivable for partially charged-off loans
|
|
|
314
|
|
|
|
|
|
|
|
146
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
Private Education Loan allowance for losses
|
|
|
(1,813
|
)
|
|
|
|
|
|
|
(1,366
|
)
|
|
|
|
|
|
|
(458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Education Loans, net
|
|
$
|
33,499
|
|
|
|
|
|
|
$
|
28,328
|
|
|
|
|
|
|
$
|
22,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Private Education Loans in repayment
|
|
|
|
|
|
|
57.7
|
%
|
|
|
|
|
|
|
48.9
|
%
|
|
|
|
|
|
|
49.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
|
|
|
|
|
|
10.2
|
%
|
|
|
|
|
|
|
8.3
|
%
|
|
|
|
|
|
|
8.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
|
|
|
|
7.0
|
%
|
|
|
|
|
|
|
13.9
|
%
|
|
|
|
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 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.
|
Activity
in the Allowance for Private Education Loan Losses
As discussed in detail under CRITICAL ACCOUNTING POLICIES
AND ESTIMATES, the provisions for student loan losses
represent the periodic expense of maintaining an allowance
sufficient to absorb losses, net of recoveries, incurred in the
portfolio of Private Education Loans.
The Company is changing its methodology used to present
charge-offs related to Private Education Loans to more clearly
reflect the expected loss. Net income, provision for loan loss
expense, the net loan balance, default rate and expected
recovery rate assumptions are not impacted by this change. Based
on our historic experience, we expect to recover a portion of
loans that default. This expected recovery is taken into account
in arriving at our periodic provision for loan loss expense.
Previously, once a loan has been delinquent for
60
212 days, we have charged off 100 percent of the loan
balance, even though we had provisioned for the estimated loss
of the defaulted loan balance, comprised of the full loan
balance less the expected recovery.
The Company is changing its methodology to charge off the
estimated loss of the defaulted loan balance to be consistent
with the amount included in the provision. Actual recoveries are
applied against the remaining loan balance that was not charged
off. If actual periodic recoveries are less than originally
expected, the difference results in immediate additional
provision expense and charge off of such amount.
This revised methodology results in a charge-off equal to the
amount provided for through the allowance for loan loss. As a
result, the Company believes that this methodology better
reflects the actual events occurring. Although there is
diversity in practice on how charge-offs are presented, this
method is more comparable to other financial institutions in how
charge-offs and the related charge-off and allowance ratios are
presented. The Company emphasizes that although the presentation
improves the various charge-off and allowance ratios, the change
does not reflect an improvement in the collectability of the
Companys loan portfolio.
As a result of this change, a $314 million receivable on a
Managed basis ($222 million for GAAP) as of
December 31, 2008, is being reclassified from the allowance
for loan loss to the Private Education Loan balance. This amount
represents the expected future recoveries related to previously
defaulted loans (i.e., the amount not charged off when a loan
defaults that has not yet been collected). As of
December 31, 2008, the Company assumes it will collect, on
average, 27 percent of a defaulted loans balance over
an extended period of time. This recovery assumption is based on
historic recovery rates achieved and is updated, as appropriate,
on a quarterly basis.
The Company believes this change to be an immaterial correction
of previous disclosures. Following are tables depicting the
Allowance for Private Education Loan Losses as
previously presented and as corrected for this change.
61
The following table summarizes changes in the allowance for
Private Education Loan losses for the years ended
December 31, 2008, 2007 and 2006 as previously reported.
Activity
in the Allowance for Private Education Loan Losses
Prior Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity in Allowance for Private Education Loans
|
|
|
|
On-Balance Sheet
|
|
|
Off-Balance Sheet
|
|
|
Managed Basis
|
|
|
|
Years Ended December 31,
|
|
|
Years Ended December 31,
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Allowance at beginning of period
|
|
$
|
886
|
|
|
$
|
308
|
|
|
$
|
204
|
|
|
$
|
334
|
|
|
$
|
86
|
|
|
$
|
78
|
|
|
$
|
1,220
|
|
|
$
|
394
|
|
|
$
|
282
|
|
Provision for Private Education Loan losses
|
|
|
586
|
|
|
|
884
|
|
|
|
258
|
|
|
|
288
|
|
|
|
349
|
|
|
|
15
|
|
|
|
874
|
|
|
|
1,233
|
|
|
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(460
|
)
|
|
|
(332
|
)
|
|
|
(160
|
)
|
|
|
(226
|
)
|
|
|
(107
|
)
|
|
|
(24
|
)
|
|
|
(686
|
)
|
|
|
(439
|
)
|
|
|
(184
|
)
|
Recoveries
|
|
|
36
|
|
|
|
32
|
|
|
|
23
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
32
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(424
|
)
|
|
|
(300
|
)
|
|
|
(137
|
)
|
|
|
(217
|
)
|
|
|
(107
|
)
|
|
|
(24
|
)
|
|
|
(641
|
)
|
|
|
(407
|
)
|
|
|
(161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of interest
reserve(1)
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance before securitization of Private Education Loans
|
|
|
1,086
|
|
|
|
892
|
|
|
|
325
|
|
|
|
413
|
|
|
|
328
|
|
|
|
69
|
|
|
|
1,499
|
|
|
|
1,220
|
|
|
|
394
|
|
Reduction for securitization of Private Education Loans
|
|
|
|
|
|
|
(6
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
6
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period
|
|
$
|
1,086
|
|
|
$
|
886
|
|
|
$
|
308
|
|
|
$
|
413
|
|
|
$
|
334
|
|
|
$
|
86
|
|
|
$
|
1,499
|
|
|
$
|
1,220
|
|
|
$
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs as a percentage of average loans in repayment
|
|
|
4.98
|
%
|
|
|
5.04
|
%
|
|
|
3.22
|
%
|
|
|
2.68
|
%
|
|
|
1.46
|
%
|
|
|
.43
|
%
|
|
|
3.86
|
%
|
|
|
3.07
|
%
|
|
|
1.62
|
%
|
Net charge-offs as a percentage of average loans in repayment
and forbearance
|
|
|
4.39
|
%
|
|
|
4.54
|
%
|
|
|
2.99
|
%
|
|
|
2.31
|
%
|
|
|
1.27
|
%
|
|
|
.38
|
%
|
|
|
3.37
|
%
|
|
|
2.71
|
%
|
|
|
1.47
|
%
|
Allowance as a percentage of ending total loans, gross
|
|
|
4.89
|
%
|
|
|
5.48
|
%
|
|
|
2.96
|
%
|
|
|
3.02
|
%
|
|
|
2.35
|
%
|
|
|
.65
|
%
|
|
|
4.18
|
%
|
|
|
4.02
|
%
|
|
|
1.66
|
%
|
Allowance as a percentage of ending loans in repayment
|
|
|
9.71
|
%
|
|
|
12.57
|
%
|
|
|
6.36
|
%
|
|
|
4.34
|
%
|
|
|
4.28
|
%
|
|
|
1.26
|
%
|
|
|
7.24
|
%
|
|
|
8.21
|
%
|
|
|
3.38
|
%
|
Average coverage of net charge-offs
|
|
|
2.56
|
|
|
|
2.95
|
|
|
|
2.25
|
|
|
|
1.91
|
|
|
|
3.13
|
|
|
|
3.46
|
|
|
|
2.34
|
|
|
|
3.00
|
|
|
|
2.44
|
|
Ending total loans, gross
|
|
$
|
22,203
|
|
|
$
|
16,172
|
|
|
$
|
10,428
|
|
|
$
|
13,691
|
|
|
$
|
14,199
|
|
|
$
|
13,222
|
|
|
$
|
35,894
|
|
|
$
|
30,371
|
|
|
$
|
23,650
|
|
Average loans in repayment
|
|
$
|
8,533
|
|
|
$
|
5,949
|
|
|
$
|
4,257
|
|
|
$
|
8,088
|
|
|
$
|
7,305
|
|
|
$
|
5,721
|
|
|
$
|
16,621
|
|
|
$
|
13,254
|
|
|
$
|
9,978
|
|
Ending loans in repayment
|
|
$
|
11,182
|
|
|
$
|
7,047
|
|
|
$
|
4,851
|
|
|
$
|
9,530
|
|
|
$
|
7,819
|
|
|
$
|
6,792
|
|
|
$
|
20,712
|
|
|
$
|
14,866
|
|
|
$
|
11,643
|
|
|
|
|
(1) |
|
Represents the additional allowance
related to the amount of uncollectible interest reserved within
interest income that is transferred in the period to the
allowance for loan losses when interest is capitalized to a
loans principal balance. Prior to 2008, the interest
provision was reversed in interest income and then provided for
through provision within the allowance for loan loss. For the
year ended December 31, 2007, this amount was
$21 million and $27 million on an On-Balance Sheet
Basis and a Managed Basis, respectively, and for the year ended
December 31, 2006, this amount was $12 million and
$15 million on an On-Balance Sheet Basis and a Managed
Basis, respectively.
|
62
The following table provides the detail for our traditional and
non-traditional Managed Private Education Loans at
December 31, 2008, 2007 and 2006 as previously presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Traditional
|
|
|
Traditional
|
|
|
Total
|
|
|
Traditional
|
|
|
Traditional
|
|
|
Total
|
|
|
Traditional
|
|
|
Traditional
|
|
|
Total
|
|
|
Ending total loans, gross
|
|
$
|
30,949
|
|
|
$
|
4,945
|
|
|
$
|
35,894
|
|
|
$
|
25,791
|
|
|
$
|
4,580
|
|
|
$
|
30,371
|
|
|
$
|
20,006
|
|
|
$
|
3,644
|
|
|
$
|
23,650
|
|
Ending loans in repayment
|
|
|
17,715
|
|
|
|
2,997
|
|
|
|
20,712
|
|
|
|
12,711
|
|
|
|
2,155
|
|
|
|
14,866
|
|
|
|
9,821
|
|
|
|
1,822
|
|
|
|
11,643
|
|
Private Education Loan allowance for losses
|
|
|
707
|
|
|
|
792
|
|
|
|
1,499
|
|
|
|
438
|
|
|
|
782
|
|
|
|
1,220
|
|
|
|
179
|
|
|
|
215
|
|
|
|
394
|
|
Net charge-offs as a percentage of average loans in
repayment(1)
|
|
|
2.1
|
%
|
|
|
14.3
|
%
|
|
|
3.9
|
%
|
|
|
1.5
|
%
|
|
|
11.9
|
%
|
|
|
3.1
|
%
|
|
|
.6
|
%
|
|
|
7.2
|
%
|
|
|
1.6
|
%
|
Allowance as a percentage of ending total loans, gross
|
|
|
2.3
|
%
|
|
|
16.0
|
%
|
|
|
4.2
|
%
|
|
|
1.7
|
%
|
|
|
17.1
|
%
|
|
|
4.0
|
%
|
|
|
.9
|
%
|
|
|
5.9
|
%
|
|
|
1.7
|
%
|
Allowance as a percentage of ending loans in repayment
|
|
|
4.0
|
%
|
|
|
26.4
|
%
|
|
|
7.2
|
%
|
|
|
3.5
|
%
|
|
|
36.3
|
%
|
|
|
8.2
|
%
|
|
|
1.8
|
%
|
|
|
11.8
|
%
|
|
|
3.4
|
%
|
Average coverage of net
charge-offs(1)
|
|
|
2.4
|
|
|
|
2.3
|
|
|
|
2.3
|
|
|
|
2.6
|
|
|
|
3.3
|
|
|
|
3.0
|
|
|
|
3.3
|
|
|
|
2.0
|
|
|
|
2.4
|
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
|
|
7.1
|
%
|
|
|
28.9
|
%
|
|
|
10.2
|
%
|
|
|
5.2
|
%
|
|
|
26.3
|
%
|
|
|
8.3
|
%
|
|
|
5.4
|
%
|
|
|
26.0
|
%
|
|
|
8.7
|
%
|
Delinquencies greater than 90 days as a percentage of
Private Education Loans in repayment
|
|
|
2.6
|
%
|
|
|
12.7
|
%
|
|
|
4.0
|
%
|
|
|
1.7
|
%
|
|
|
11.1
|
%
|
|
|
3.1
|
%
|
|
|
1.5
|
%
|
|
|
10.6
|
%
|
|
|
3.0
|
%
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
6.7
|
%
|
|
|
9.0
|
%
|
|
|
7.0
|
%
|
|
|
12.8
|
%
|
|
|
19.4
|
%
|
|
|
13.9
|
%
|
|
|
8.7
|
%
|
|
|
11.9
|
%
|
|
|
9.2
|
%
|
|
|
|
(1) |
|
Full year actuals for the years
ended December 31, 2008, 2007 and 2006.
|
63
Activity
in the Allowance for Private Education Loan Losses
Corrected Presentation
The following table summarizes changes in the allowance for
Private Education Loan losses for the years ended
December 31, 2008, 2007 and 2006 as corrected and discussed
above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity in Allowance for Private Education Loans
|
|
|
|
On-Balance Sheet
|
|
|
Off-Balance Sheet
|
|
|
Managed Basis
|
|
|
|
Years Ended December 31,
|
|
|
Years Ended December 31,
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Allowance at beginning of period
|
|
$
|
1,004
|
|
|
$
|
372
|
|
|
$
|
250
|
|
|
$
|
362
|
|
|
$
|
86
|
|
|
$
|
78
|
|
|
$
|
1,366
|
|
|
$
|
458
|
|
|
$
|
328
|
|
Provision for Private Education Loan losses
|
|
|
586
|
|
|
|
884
|
|
|
|
258
|
|
|
|
288
|
|
|
|
349
|
|
|
|
15
|
|
|
|
874
|
|
|
|
1,233
|
|
|
|
273
|
|
Charge-offs
|
|
|
(320
|
)
|
|
|
(246
|
)
|
|
|
(119
|
)
|
|
|
(153
|
)
|
|
|
(79
|
)
|
|
|
(24
|
)
|
|
|
(473
|
)
|
|
|
(325
|
)
|
|
|
(143
|
)
|
Reclassification of interest
reserve(1)
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance before securitization of Private Education Loans
|
|
|
1,308
|
|
|
|
1,010
|
|
|
|
389
|
|
|
|
505
|
|
|
|
356
|
|
|
|
69
|
|
|
|
1,813
|
|
|
|
1,366
|
|
|
|
458
|
|
Reduction for securitization of Private Education Loans
|
|
|
|
|
|
|
(6
|
)
|
|
|
(17
|
)
|
|
|
|
|
|
|
6
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period
|
|
$
|
1,308
|
|
|
$
|
1,004
|
|
|
$
|
372
|
|
|
$
|
505
|
|
|
$
|
362
|
|
|
$
|
86
|
|
|
$
|
1,813
|
|
|
$
|
1,366
|
|
|
$
|
458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs as a percentage of average loans in repayment
|
|
|
3.75
|
%
|
|
|
4.14
|
%
|
|
|
2.79
|
%
|
|
|
1.90
|
%
|
|
|
1.09
|
%
|
|
|
.43
|
%
|
|
|
2.85
|
%
|
|
|
2.46
|
%
|
|
|
1.44
|
%
|
Charge-offs as a percentage of average loans in repayment and
forbearance
|
|
|
3.31
|
%
|
|
|
3.72
|
%
|
|
|
2.59
|
%
|
|
|
1.64
|
%
|
|
|
.94
|
%
|
|
|
.38
|
%
|
|
|
2.49
|
%
|
|
|
2.17
|
%
|
|
|
1.30
|
%
|
Allowance as a percentage of the ending total loan
balance(2)
|
|
|
5.83
|
%
|
|
|
6.16
|
%
|
|
|
3.55
|
%
|
|
|
3.66
|
%
|
|
|
2.54
|
%
|
|
|
.66
|
%
|
|
|
5.01
|
%
|
|
|
4.48
|
%
|
|
|
1.93
|
%
|
Allowance as a percentage of ending loans in repayment
|
|
|
11.70
|
%
|
|
|
14.25
|
%
|
|
|
7.68
|
%
|
|
|
5.29
|
%
|
|
|
4.63
|
%
|
|
|
1.26
|
%
|
|
|
8.75
|
%
|
|
|
9.19
|
%
|
|
|
3.93
|
%
|
Average coverage of charge-offs
|
|
|
4.08
|
|
|
|
4.08
|
|
|
|
3.14
|
|
|
|
3.29
|
|
|
|
4.56
|
|
|
|
3.46
|
|
|
|
3.83
|
|
|
|
4.19
|
|
|
|
3.19
|
|
Ending total
loans(2)
|
|
$
|
22,426
|
|
|
$
|
16,290
|
|
|
$
|
10,492
|
|
|
$
|
13,782
|
|
|
$
|
14,227
|
|
|
$
|
13,222
|
|
|
$
|
36,208
|
|
|
$
|
30,517
|
|
|
$
|
23,714
|
|
Average loans in repayment
|
|
$
|
8,533
|
|
|
$
|
5,949
|
|
|
$
|
4,257
|
|
|
$
|
8,088
|
|
|
$
|
7,305
|
|
|
$
|
5,721
|
|
|
$
|
16,621
|
|
|
$
|
13,254
|
|
|
$
|
9,978
|
|
Ending loans in repayment
|
|
$
|
11,182
|
|
|
$
|
7,047
|
|
|
$
|
4,851
|
|
|
$
|
9,530
|
|
|
$
|
7,819
|
|
|
$
|
6,792
|
|
|
$
|
20,712
|
|
|
$
|
14,866
|
|
|
$
|
11,643
|
|
|
|
|
(1) |
|
Represents the additional allowance
related to the amount of uncollectible interest reserved within
interest income that is transferred in the period to the
allowance for loan losses when interest is capitalized to a
loans principal balance. Prior to 2008, the interest
provision was reversed in interest income and then provided for
through provision within the allowance for loan loss. For the
year ended December 31, 2007, this amount was
$21 million and $27 million on an On-Balance Sheet
Basis and a Managed Basis, respectively, and for the year ended
December 31, 2006, this amount was $12 million and
$15 million on an On-Balance Sheet Basis and a Managed
Basis, respectively.
|
|
(2) |
|
Ending total loans represents gross
Private Education Loans, plus the receivable for partially
charged-off loans.
|
64
The following table provides the detail for our traditional and
non-traditional Managed Private Education Loans at
December 31, 2008, 2007 and 2006 as corrected and discussed
above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Traditional
|
|
|
Traditional
|
|
|
Total
|
|
|
Traditional
|
|
|
Traditional
|
|
|
Total
|
|
|
Traditional
|
|
|
Traditional
|
|
|
Total
|
|
|
Ending total
loans(2)
|
|
$
|
31,101
|
|
|
$
|
5,107
|
|
|
$
|
36,208
|
|
|
$
|
25,848
|
|
|
$
|
4,669
|
|
|
$
|
30,517
|
|
|
$
|
20,037
|
|
|
$
|
3,677
|
|
|
$
|
23,714
|
|
Ending loans in repayment
|
|
|
17,715
|
|
|
|
2,997
|
|
|
|
20,712
|
|
|
|
12,711
|
|
|
|
2,155
|
|
|
|
14,866
|
|
|
|
9,821
|
|
|
|
1,822
|
|
|
|
11,643
|
|
Private Education Loan allowance for losses
|
|
|
859
|
|
|
|
954
|
|
|
|
1,813
|
|
|
|
495
|
|
|
|
871
|
|
|
|
1,366
|
|
|
|
209
|
|
|
|
249
|
|
|
|
458
|
|
Charge-offs as a percentage of average loans in
repayment(1)
|
|
|
1.4
|
%
|
|
|
11.1
|
%
|
|
|
2.9
|
%
|
|
|
1.2
|
%
|
|
|
9.5
|
%
|
|
|
2.5
|
%
|
|
|
.6
|
%
|
|
|
6.3
|
%
|
|
|
1.4
|
%
|
Allowance as a percentage of ending total loan
balance(2)
|
|
|
2.8
|
%
|
|
|
18.7
|
%
|
|
|
5.0
|
%
|
|
|
1.9
|
%
|
|
|
18.7
|
%
|
|
|
4.5
|
%
|
|
|
1.0
|
%
|
|
|
6.8
|
%
|
|
|
1.9
|
%
|
Allowance as a percentage of ending loans in repayment
|
|
|
4.8
|
%
|
|
|
31.8
|
%
|
|
|
8.8
|
%
|
|
|
3.9
|
%
|
|
|
40.4
|
%
|
|
|
9.2
|
%
|
|
|
2.1
|
%
|
|
|
13.7
|
%
|
|
|
3.9
|
%
|
Average coverage of
charge-offs(1)
|
|
|
4.2
|
|
|
|
3.5
|
|
|
|
3.8
|
|
|
|
3.6
|
|
|
|
4.6
|
|
|
|
4.2
|
|
|
|
4.2
|
|
|
|
2.7
|
|
|
|
3.2
|
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
|
|
7.1
|
%
|
|
|
28.9
|
%
|
|
|
10.2
|
%
|
|
|
5.2
|
%
|
|
|
26.3
|
%
|
|
|
8.3
|
%
|
|
|
5.4
|
%
|
|
|
26.0
|
%
|
|
|
8.7
|
%
|
Delinquencies greater than 90 days as a percentage of
Private Education Loans in repayment
|
|
|
2.6
|
%
|
|
|
12.7
|
%
|
|
|
4.0
|
%
|
|
|
1.7
|
%
|
|
|
11.1
|
%
|
|
|
3.1
|
%
|
|
|
1.5
|
%
|
|
|
10.6
|
%
|
|
|
3.0
|
%
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
6.7
|
%
|
|
|
9.0
|
%
|
|
|
7.0
|
%
|
|
|
12.8
|
%
|
|
|
19.4
|
%
|
|
|
13.9
|
%
|
|
|
8.7
|
%
|
|
|
11.9
|
%
|
|
|
9.2
|
%
|
|
|
|
(1) |
|
Full year actuals for the years
ended December 31, 2008, 2007 and 2006.
|
|
(2) |
|
Ending total loans represents gross
Private Education Loans, plus the receivable for partially
charged-off loans.
|
Due to the seasoning of the Managed Private Education Loan
portfolio, shifts in its mix, the continued weakening of the
U.S. economy, and other operational factors, the Company
expected and has seen charge-off rates increase from the
historically low levels experienced prior to 2007.
Managed provision expense decreased to $874 million in 2008
from $1.2 billion in 2007. In the fourth quarter of 2007,
the Company recorded provision expense of $667 million for
the Managed Private Education Loan portfolio. This significant
level of provision expense compared to prior and subsequent
quarters primarily related to the non-traditional portion of the
Companys Private Education Loan portfolio which the
Company had been expanding over the past few years. The Company
has terminated these non-traditional loan programs because the
performance of these loans was found to be materially different
from original expectations. The non-traditional portfolio is
particularly impacted by the weakening U.S. economy and an
underlying borrowers ability to repay.
Although provision expense decreased from 2007 to 2008,
provision expense remained elevated in 2008 due to an increase
in delinquencies and charge-offs and the continued weakening of
the U.S. economy. Managed delinquencies as a percentage of
Private Education Loans in repayment increased from
8.3 percent at December 31, 2007 to 10.2 percent
at December 31, 2008. Managed Private Education Loans in
forbearance as a percentage of loans in repayment and
forbearance decreased from 13.9 percent at
December 31, 2007 to 7.0 percent at December 31,
2008.
Borrowers use the proceeds of Private Education 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, borrowers
repayment capability is expected to improve between the time the
loan is made and the time they enter the post-education work
force. Consistent with FFELP loans, we generally allow the loan
repayment period on higher education Private Education Loans to
begin six months after the borrower
65
graduates (or grace period). This provides the
borrower time after graduation to obtain a job to service the
debt. For borrowers that need more time or experience hardships,
we offer periods of forbearance similar to that provided to
borrowers in the FFELP.
Forbearance involves granting the borrower a temporary cessation
of payments (or temporary acceptance of smaller than scheduled
payments) for a specified period of time. Using forbearance in
this manner effectively extends the original term of the loan.
Forbearance does not grant any reduction in the total repayment
obligation (principal or interest). While a loan is in
forbearance status, interest continues to accrue and is
capitalized to principal when the loan re-enters repayment
status. Our forbearance policies include limits on the number of
forbearance months granted consecutively and limits on the total
number of forbearance months granted over the life of the loan.
In some instances, we require good-faith payments before
granting the forbearance. Exceptions to forbearance policies are
permitted when such exceptions are judged to increase the
likelihood of ultimate collection of the loan. Forbearance as a
collection tool is used most effectively when applied based on a
borrowers unique situation, including assumptions based on
historical information and judgments. We combine borrower
information with a risk-based segmentation model to assist in
our decision making as to who will be granted forbearance based
on our expectation as to a borrowers ability and
willingness to repay their obligation. This strategy is aimed at
mitigating the overall risk of the portfolio as well as
encouraging cash resolution of delinquent loans.
Forbearance may be granted to borrowers who are exiting their
grace period to provide additional time to obtain employment and
income to support their obligations, or to current borrowers who
are faced with a hardship and request forbearance time to
provide temporary payment relief. In these circumstances, a
borrowers loan is placed into a forbearance status in
limited monthly increments and is reflected in the forbearance
status at month-end during this time. At the end of their
granted forbearance period, the borrower will enter repayment
status as current and is expected to begin making their
scheduled monthly payments on a go-forward basis.
Forbearance may also be granted to borrowers who are delinquent
in their payments. In these circumstances, the forbearance cures
the delinquency and the borrower is returned to a current
repayment status. In more limited instances, delinquent
borrowers will also be granted additional forbearance time. As
we have obtained further experience about the effectiveness of
forbearance, we have reduced the amount of time a loan will
spend in forbearance, thereby increasing our ongoing contact
with the borrower to encourage consistent repayment behavior
once the loan is returned to a current repayment status. As a
result, the balance of loans in a forbearance status as of month
end has decreased over the course of 2008, while the monthly
average amount of loans granted forbearance in the fourth
quarter of 2008 was consistent with the year-ago quarter at
6.5 percent of loans in repayment and forbearance. As of
December 31, 2008, 3 percent of loans in current
status were delinquent as of the end of the prior month, but
were granted a forbearance that made them current during
December. The majority of these borrowers would have previously
received a forbearance which resulted in their loan being
reflected in the forbearance status at month end, and eventually
entering repayment status as current at the end of the
forbearance period. These borrowers are now being placed in
repayment status earlier than they previously would have been.
66
The table below reflects the historical effectiveness of using
forbearance. Our experience has shown that three years after
being granted forbearance for the first time, over
70 percent of the loans are current, paid in full, or
receiving an in-school grace or deferment, and 12 percent
have defaulted. The default experience associated with loans
which utilize forbearance is considered in our allowance for
loan losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
Tracking by First Time in Forbearance Compared to All Loans
Entering Repayment
|
|
|
|
Status distribution
|
|
|
|
|
|
Status distribution
|
|
|
|
36 months after
|
|
|
Status distribution
|
|
|
36 months after
|
|
|
|
being granted
|
|
|
36 months after
|
|
|
entering repayment for
|
|
|
|
forbearance
|
|
|
entering repayment
|
|
|
loans never entering
|
|
|
|
for the first time
|
|
|
(all loans)
|
|
|
forbearance
|
|
|
In-school/grace/deferment
|
|
|
7.9
|
%
|
|
|
8.1
|
%
|
|
|
2.5
|
%
|
Current
|
|
|
55.9
|
|
|
|
60.6
|
|
|
|
66.8
|
|
Delinquent
31-60 days
|
|
|
3.1
|
|
|
|
1.9
|
|
|
|
.4
|
|
Delinquent
61-90 days
|
|
|
1.6
|
|
|
|
.9
|
|
|
|
.2
|
|
Delinquent greater than 90 days
|
|
|
2.8
|
|
|
|
1.7
|
|
|
|
.3
|
|
Forbearance
|
|
|
7.1
|
|
|
|
4.9
|
|
|
|
|
|
Defaulted
|
|
|
12.0
|
|
|
|
5.9
|
|
|
|
4.4
|
|
Paid
|
|
|
9.6
|
|
|
|
16.0
|
|
|
|
25.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tables below show the composition and status of the Managed
Private Education Loan portfolio aged by number of months in
active repayment status (months for which a scheduled monthly
payment was due). As indicated in the tables, the percentage of
loans in forbearance status decreases the longer the loans have
been in active repayment status. At December 31, 2008,
loans in forbearance status as a percentage of loans in
repayment and forbearance are 8.9 percent for loans that
have been in active repayment status for less than
25 months. The percentage drops to 2.1 percent for
loans that have been in active repayment status for more than
48 months. Approximately 90 percent of our Managed
Private Education Loans in forbearance status have been in
active repayment status less than 25 months.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly Scheduled Payments Due
|
|
|
Not Yet in
|
|
|
|
|
December 31, 2008
|
|
0 to 24
|
|
|
25 to 48
|
|
|
More than 48
|
|
|
Repayment
|
|
|
Total
|
|
|
Loans in-school/grace/deferment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,620
|
|
|
$
|
13,620
|
|
Loans in forbearance
|
|
|
1,406
|
|
|
|
106
|
|
|
|
50
|
|
|
|
|
|
|
|
1,562
|
|
Loans in repayment current
|
|
|
12,551
|
|
|
|
3,798
|
|
|
|
2,242
|
|
|
|
|
|
|
|
18,591
|
|
Loans in repayment delinquent
31-60 days
|
|
|
728
|
|
|
|
93
|
|
|
|
45
|
|
|
|
|
|
|
|
866
|
|
Loans in repayment delinquent
61-90 days
|
|
|
351
|
|
|
|
44
|
|
|
|
22
|
|
|
|
|
|
|
|
417
|
|
Loans in repayment delinquent greater than
90 days
|
|
|
691
|
|
|
|
97
|
|
|
|
50
|
|
|
|
|
|
|
|
838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,727
|
|
|
$
|
4,138
|
|
|
$
|
2,409
|
|
|
$
|
13,620
|
|
|
|
35,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(896
|
)
|
Receivable for partially charged-off loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed Private Education Loans, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
8.9
|
%
|
|
|
2.6
|
%
|
|
|
2.1
|
%
|
|
|
|
%
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly Scheduled Payments Due
|
|
|
Not Yet in
|
|
|
|
|
December 31, 2007
|
|
0 to 24
|
|
|
25 to 48
|
|
|
More than 48
|
|
|
Repayment
|
|
|
Total
|
|
|
Loans in-school/grace/deferment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,114
|
|
|
$
|
13,114
|
|
Loans in forbearance
|
|
|
2,228
|
|
|
|
118
|
|
|
|
45
|
|
|
|
|
|
|
|
2,391
|
|
Loans in repayment current
|
|
|
9,184
|
|
|
|
2,807
|
|
|
|
1,648
|
|
|
|
|
|
|
|
13,639
|
|
Loans in repayment delinquent
31-60 days
|
|
|
407
|
|
|
|
64
|
|
|
|
37
|
|
|
|
|
|
|
|
508
|
|
Loans in repayment delinquent
61-90 days
|
|
|
221
|
|
|
|
25
|
|
|
|
14
|
|
|
|
|
|
|
|
260
|
|
Loans in repayment delinquent greater than
90 days
|
|
|
376
|
|
|
|
52
|
|
|
|
31
|
|
|
|
|
|
|
|
459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,416
|
|
|
$
|
3,066
|
|
|
$
|
1,775
|
|
|
$
|
13,114
|
|
|
|
30,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(823
|
)
|
Receivable for partially charged-off loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed Private Education Loans, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
17.9
|
%
|
|
|
3.8
|
%
|
|
|
2.5
|
%
|
|
|
|
%
|
|
|
13.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly Scheduled Payments Due
|
|
|
Not Yet in
|
|
|
|
|
December 31, 2006
|
|
0 to 24
|
|
|
25 to 48
|
|
|
More than 48
|
|
|
Repayment
|
|
|
Total
|
|
|
Loans in-school/grace/deferment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,826
|
|
|
$
|
10,826
|
|
Loans in forbearance
|
|
|
1,106
|
|
|
|
50
|
|
|
|
25
|
|
|
|
|
|
|
|
1,181
|
|
Loans in repayment current
|
|
|
7,181
|
|
|
|
2,151
|
|
|
|
1,301
|
|
|
|
|
|
|
|
10,633
|
|
Loans in repayment delinquent
31-60 days
|
|
|
366
|
|
|
|
66
|
|
|
|
40
|
|
|
|
|
|
|
|
472
|
|
Loans in repayment delinquent
61-90 days
|
|
|
149
|
|
|
|
27
|
|
|
|
16
|
|
|
|
|
|
|
|
192
|
|
Loans in repayment delinquent greater than
90 days
|
|
|
254
|
|
|
|
60
|
|
|
|
32
|
|
|
|
|
|
|
|
346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,056
|
|
|
$
|
2,354
|
|
|
$
|
1,414
|
|
|
$
|
10,826
|
|
|
|
23,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(668
|
)
|
Receivable for partially charged-off loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed Private Education Loans, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
12.2
|
%
|
|
|
2.1
|
%
|
|
|
1.8
|
%
|
|
|
|
%
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below stratifies the portfolio of Managed Private
Education Loans in forbearance by the cumulative number of
months the borrower has used forbearance as of the dates
indicated. As detailed in the table below, 8 percent of
loans currently in forbearance have cumulative forbearance of
more than 24 months.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Forbearance
|
|
|
% of
|
|
|
Forbearance
|
|
|
% of
|
|
|
Forbearance
|
|
|
% of
|
|
|
|
Balance
|
|
|
Total
|
|
|
Balance
|
|
|
Total
|
|
|
Balance
|
|
|
Total
|
|
|
Cumulative number of months borrower has used forbearance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Up to 12 months
|
|
$
|
1,075
|
|
|
|
69
|
%
|
|
$
|
1,641
|
|
|
|
69
|
%
|
|
$
|
870
|
|
|
|
74
|
%
|
13 to 24 months
|
|
|
368
|
|
|
|
23
|
|
|
|
629
|
|
|
|
26
|
|
|
|
262
|
|
|
|
22
|
|
More than 24 months
|
|
|
119
|
|
|
|
8
|
|
|
|
121
|
|
|
|
5
|
|
|
|
49
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,562
|
|
|
|
100
|
%
|
|
$
|
2,391
|
|
|
|
100
|
%
|
|
$
|
1,181
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
FFELP
Loan Losses
FFELP
Delinquencies and Forbearance
The tables below present our FFELP loan delinquency trends as of
December 31, 2008, 2007 and 2006. Delinquencies have the
potential to adversely impact earnings as they are an initial
indication of the borrowers potential to possibly default
and as a result command a higher loan loss reserve than loans in
current status. Delinquent loans also require increased
servicing and collection efforts, resulting in higher operating
costs.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Balance Sheet FFELP
|
|
|
|
Loan Delinquencies
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(Dollars in millions)
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
39,270
|
|
|
|
|
|
|
$
|
31,200
|
|
|
|
|
|
|
$
|
23,171
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
12,483
|
|
|
|
|
|
|
|
10,675
|
|
|
|
|
|
|
|
8,325
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
58,811
|
|
|
|
83.8
|
%
|
|
|
55,128
|
|
|
|
84.4
|
%
|
|
|
45,664
|
|
|
|
86.0
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
4,044
|
|
|
|
5.8
|
|
|
|
3,650
|
|
|
|
5.6
|
|
|
|
2,787
|
|
|
|
5.2
|
|
Loans delinquent
61-90 days(3)
|
|
|
2,064
|
|
|
|
2.9
|
|
|
|
1,841
|
|
|
|
2.8
|
|
|
|
1,468
|
|
|
|
2.8
|
|
Loans delinquent greater than
90 days(3)
|
|
|
5,255
|
|
|
|
7.5
|
|
|
|
4,671
|
|
|
|
7.2
|
|
|
|
3,207
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans in repayment
|
|
|
70,174
|
|
|
|
100
|
%
|
|
|
65,290
|
|
|
|
100
|
%
|
|
|
53,126
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans, gross
|
|
|
121,927
|
|
|
|
|
|
|
|
107,165
|
|
|
|
|
|
|
|
84,622
|
|
|
|
|
|
FFELP loan unamortized premium
|
|
|
2,431
|
|
|
|
|
|
|
|
2,259
|
|
|
|
|
|
|
|
1,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans
|
|
|
124,358
|
|
|
|
|
|
|
|
109,424
|
|
|
|
|
|
|
|
86,185
|
|
|
|
|
|
FFELP loan allowance for losses
|
|
|
(138
|
)
|
|
|
|
|
|
|
(89
|
)
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loans, net
|
|
$
|
124,220
|
|
|
|
|
|
|
$
|
109,335
|
|
|
|
|
|
|
$
|
86,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of FFELP loans in repayment
|
|
|
|
|
|
|
57.6
|
%
|
|
|
|
|
|
|
60.9
|
%
|
|
|
|
|
|
|
62.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of FFELP loans in repayment
|
|
|
|
|
|
|
16.2
|
%
|
|
|
|
|
|
|
15.6
|
%
|
|
|
|
|
|
|
14.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loans in forbearance as a percentage of loans in repayment
and forbearance
|
|
|
|
|
|
|
15.1
|
%
|
|
|
|
|
|
|
14.1
|
%
|
|
|
|
|
|
|
13.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, as well as, loans for borrowers
who have requested extension of grace period during employment
transition or who have temporarily ceased making full payments
due to hardship or other factors.
|
|
(2) |
|
Loans for borrowers who have used
their allowable deferment time or do not qualify for deferment,
that need additional time to obtain employment or who have
temporarily ceased making full payments due to hardship or other
factors.
|
|
(3) |
|
The period of delinquency is based
on the number of days scheduled payments are contractually past
due.
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet FFELP
|
|
|
|
Loan Delinquencies
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(Dollars in millions)
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
4,115
|
|
|
|
|
|
|
$
|
5,060
|
|
|
|
|
|
|
$
|
7,392
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
2,821
|
|
|
|
|
|
|
|
2,950
|
|
|
|
|
|
|
|
3,789
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
12,441
|
|
|
|
81.9
|
%
|
|
|
13,703
|
|
|
|
79.2
|
%
|
|
|
16,655
|
|
|
|
77.7
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
881
|
|
|
|
5.8
|
|
|
|
1,017
|
|
|
|
5.9
|
|
|
|
1,278
|
|
|
|
6.0
|
|
Loans delinquent
61-90 days(3)
|
|
|
484
|
|
|
|
3.2
|
|
|
|
577
|
|
|
|
3.3
|
|
|
|
777
|
|
|
|
3.6
|
|
Loans delinquent greater than
90 days(3)
|
|
|
1,392
|
|
|
|
9.1
|
|
|
|
1,999
|
|
|
|
11.6
|
|
|
|
2,721
|
|
|
|
12.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans in repayment
|
|
|
15,198
|
|
|
|
100
|
%
|
|
|
17,296
|
|
|
|
100
|
%
|
|
|
21,431
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans, gross
|
|
|
22,134
|
|
|
|
|
|
|
|
25,306
|
|
|
|
|
|
|
|
32,612
|
|
|
|
|
|
FFELP loan unamortized premium
|
|
|
567
|
|
|
|
|
|
|
|
636
|
|
|
|
|
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans
|
|
|
22,701
|
|
|
|
|
|
|
|
25,942
|
|
|
|
|
|
|
|
33,353
|
|
|
|
|
|
FFELP loan allowance for losses
|
|
|
(27
|
)
|
|
|
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loans, net
|
|
$
|
22,674
|
|
|
|
|
|
|
$
|
25,913
|
|
|
|
|
|
|
$
|
33,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of FFELP loans in repayment
|
|
|
|
|
|
|
68.7
|
%
|
|
|
|
|
|
|
68.4
|
%
|
|
|
|
|
|
|
65.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of FFELP loans in repayment
|
|
|
|
|
|
|
18.1
|
%
|
|
|
|
|
|
|
20.8
|
%
|
|
|
|
|
|
|
22.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loans in forbearance as a percentage of loans in repayment
and forbearance
|
|
|
|
|
|
|
15.7
|
%
|
|
|
|
|
|
|
14.6
|
%
|
|
|
|
|
|
|
15.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, as well as, loans for borrowers
who have requested extension of grace period during employment
transition or who have temporarily ceased making full payments
due to hardship or other factors.
|
|
(2) |
|
Loans for borrowers who have used
their allowable deferment time or do not qualify for deferment,
that need additional time to obtain employment or who have
temporarily ceased making full payments due to hardship or other
factors.
|
|
(3) |
|
The period of delinquency is based
on the number of days scheduled payments are contractually past
due.
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Basis FFELP
|
|
|
|
Loan Delinquencies
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(Dollars in millions)
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
43,385
|
|
|
|
|
|
|
$
|
36,260
|
|
|
|
|
|
|
$
|
30,563
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
15,304
|
|
|
|
|
|
|
|
13,625
|
|
|
|
|
|
|
|
12,114
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
71,252
|
|
|
|
83.5
|
%
|
|
|
68,831
|
|
|
|
83.3
|
%
|
|
|
62,319
|
|
|
|
83.6
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
4,925
|
|
|
|
5.8
|
|
|
|
4,667
|
|
|
|
5.7
|
|
|
|
4,065
|
|
|
|
5.5
|
|
Loans delinquent
61-90 days(3)
|
|
|
2,548
|
|
|
|
2.9
|
|
|
|
2,418
|
|
|
|
2.9
|
|
|
|
2,245
|
|
|
|
3.0
|
|
Loans delinquent greater than
90 days(3)
|
|
|
6,647
|
|
|
|
7.8
|
|
|
|
6,670
|
|
|
|
8.1
|
|
|
|
5,928
|
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans in repayment
|
|
|
85,372
|
|
|
|
100
|
%
|
|
|
82,586
|
|
|
|
100
|
%
|
|
|
74,557
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans, gross
|
|
|
144,061
|
|
|
|
|
|
|
|
132,471
|
|
|
|
|
|
|
|
117,234
|
|
|
|
|
|
FFELP loan unamortized premium
|
|
|
2,998
|
|
|
|
|
|
|
|
2,895
|
|
|
|
|
|
|
|
2,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans
|
|
|
147,059
|
|
|
|
|
|
|
|
135,366
|
|
|
|
|
|
|
|
119,538
|
|
|
|
|
|
FFELP loan allowance for losses
|
|
|
(165
|
)
|
|
|
|
|
|
|
(118
|
)
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loans, net
|
|
$
|
146,894
|
|
|
|
|
|
|
$
|
135,248
|
|
|
|
|
|
|
$
|
119,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of FFELP loans in repayment
|
|
|
|
|
|
|
59.3
|
%
|
|
|
|
|
|
|
62.3
|
%
|
|
|
|
|
|
|
63.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of FFELP loans in repayment
|
|
|
|
|
|
|
16.5
|
%
|
|
|
|
|
|
|
16.7
|
%
|
|
|
|
|
|
|
16.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loans in forbearance as a percentage of loans in repayment
and forbearance
|
|
|
|
|
|
|
15.2
|
%
|
|
|
|
|
|
|
14.2
|
%
|
|
|
|
|
|
|
14.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, as well as, loans for borrowers
who have requested extension of grace period during employment
transition or who have temporarily ceased making full payments
due to hardship or other factors.
|
|
(2) |
|
Loans for borrowers who have used
their allowable deferment time or do not qualify for deferment,
that need additional time to obtain employment or who have
temporarily ceased making full payments due to hardship or other
factors.
|
|
(3) |
|
The period of delinquency is based
on the number of days scheduled payments are contractually past
due.
|
71
Activity
in the Allowance for FFELP Loan Losses
The provision for student loan losses represents the periodic
expense of maintaining an allowance sufficient to absorb
incurred Risk Sharing losses, in the portfolio of FFELP loans.
The following table summarizes changes in the allowance for
FFELP loan losses for the years ended December 31, 2008,
2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity in Allowance for FFELP Loans
|
|
|
|
On-Balance Sheet
|
|
|
Off-Balance Sheet
|
|
|
Managed Basis
|
|
|
|
Years Ended December 31,
|
|
|
Years Ended December 31,
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Allowance at beginning of period
|
|
$
|
89
|
|
|
$
|
20
|
|
|
$
|
14
|
|
|
$
|
29
|
|
|
$
|
14
|
|
|
$
|
11
|
|
|
$
|
118
|
|
|
$
|
34
|
|
|
$
|
25
|
|
Provision for FFELP Loan losses
|
|
|
106
|
|
|
|
89
|
|
|
|
14
|
|
|
|
21
|
|
|
|
32
|
|
|
|
3
|
|
|
|
127
|
|
|
|
121
|
|
|
|
17
|
|
Charge-offs
|
|
|
(58
|
)
|
|
|
(21
|
)
|
|
|
(5
|
)
|
|
|
(21
|
)
|
|
|
(15
|
)
|
|
|
(3
|
)
|
|
|
(79
|
)
|
|
|
(36
|
)
|
|
|
(8
|
)
|
Student loan sales and securitization activity
|
|
|
1
|
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period
|
|
$
|
138
|
|
|
$
|
89
|
|
|
$
|
20
|
|
|
$
|
27
|
|
|
$
|
29
|
|
|
$
|
14
|
|
|
$
|
165
|
|
|
$
|
118
|
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs as a percentage of average loans in repayment
|
|
|
.09
|
%
|
|
|
.04
|
%
|
|
|
.01
|
%
|
|
|
.13
|
%
|
|
|
.08
|
%
|
|
|
.01
|
%
|
|
|
.10
|
%
|
|
|
.05
|
%
|
|
|
.01
|
%
|
Charge-offs as a percentage of average loans in repayment and
forbearance
|
|
|
.07
|
%
|
|
|
.03
|
%
|
|
|
.01
|
%
|
|
|
.11
|
%
|
|
|
.07
|
%
|
|
|
.01
|
%
|
|
|
.08
|
%
|
|
|
.04
|
%
|
|
|
.01
|
%
|
Allowance as a percentage of the ending total loans, gross
|
|
|
.11
|
%
|
|
|
.08
|
%
|
|
|
.02
|
%
|
|
|
.12
|
%
|
|
|
.11
|
%
|
|
|
.04
|
%
|
|
|
.11
|
%
|
|
|
.09
|
%
|
|
|
.03
|
%
|
Allowance as a percentage of ending loans in repayment
|
|
|
.20
|
%
|
|
|
.14
|
%
|
|
|
.04
|
%
|
|
|
.18
|
%
|
|
|
.17
|
%
|
|
|
.06
|
%
|
|
|
.19
|
%
|
|
|
.14
|
%
|
|
|
.05
|
%
|
Average coverage of charge-offs
|
|
|
2.39
|
|
|
|
4.18
|
|
|
|
4.03
|
|
|
|
1.27
|
|
|
|
1.90
|
|
|
|
4.73
|
|
|
|
2.09
|
|
|
|
3.23
|
|
|
|
4.28
|
|
Ending total loans, gross
|
|
$
|
121,927
|
|
|
$
|
107,165
|
|
|
$
|
84,622
|
|
|
$
|
22,134
|
|
|
$
|
25,306
|
|
|
$
|
32,612
|
|
|
$
|
144,061
|
|
|
$
|
132,471
|
|
|
$
|
117,234
|
|
Average loans in repayment
|
|
$
|
66,392
|
|
|
$
|
58,999
|
|
|
$
|
47,155
|
|
|
$
|
16,086
|
|
|
$
|
18,624
|
|
|
$
|
21,630
|
|
|
$
|
82,478
|
|
|
$
|
77,623
|
|
|
$
|
68,785
|
|
Ending loans in repayment
|
|
$
|
70,174
|
|
|
$
|
65,290
|
|
|
$
|
53,126
|
|
|
$
|
15,198
|
|
|
$
|
17,296
|
|
|
$
|
21,431
|
|
|
$
|
85,372
|
|
|
$
|
82,586
|
|
|
$
|
74,557
|
|
Total
Provisions for Loan Losses
The following tables summarize the total loan provisions on both
an on-balance sheet and on a Managed Basis for the years ended
December 31, 2008, 2007 and 2006.
Total
on-balance sheet loan provisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Private Education Loans
|
|
$
|
586
|
|
|
$
|
884
|
|
|
$
|
258
|
|
FFELP Loans
|
|
|
106
|
|
|
|
89
|
|
|
|
14
|
|
Mortgage and consumer loans
|
|
|
28
|
|
|
|
42
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet provisions for loan losses
|
|
$
|
720
|
|
|
$
|
1,015
|
|
|
$
|
287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
Total
Managed Basis loan provisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Private Education Loans
|
|
$
|
874
|
|
|
$
|
1,233
|
|
|
$
|
273
|
|
FFELP Loans
|
|
|
127
|
|
|
|
121
|
|
|
|
17
|
|
Mortgage and consumer loans
|
|
|
28
|
|
|
|
40
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed Basis provisions for loan losses
|
|
$
|
1,029
|
|
|
$
|
1,394
|
|
|
$
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision expense for Private Education Loans was previously
discussed above (see Activity in the Allowance for
Private Education Loan Losses).
The 2008 provision for FFELP loans is up slightly over the prior
year, but up significantly from 2006. The increase in provision
over 2006 related primarily to legislative changes (the change
to a lower rate of insurance on loans disbursed after
June 30, 2006 and the repeal of the Exceptional Performer
program in 2007) which increased our Risk Sharing
percentage on the portfolio. Additionally, growth in the
repayment portion of the portfolio and a rise in delinquencies
and charge-offs led to an increase in future default
expectations.
The increase in provision related to mortgage and consumer loans
for the years ended December 31, 2008 and 2007 compared to
the year ended December 31, 2006, primarily related to a
weakening U.S. economy and the deterioration of certain real
estate markets related to our mortgage portfolio. As of
December 31, 2008, our mortgage portfolio totaled
$242 million.
Total
Loan Charge-offs Corrected Presentation
The following tables summarize the charge-offs for all loan
types on-balance sheet and on a Managed Basis for the years
ended December 31, 2008, 2007 and 2006, as corrected, for
Private Education Loans.
Total
on-balance sheet loan charge-offs Corrected
Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Private Education Loans
|
|
$
|
320
|
|
|
$
|
246
|
|
|
$
|
119
|
|
FFELP Loans
|
|
|
58
|
|
|
|
21
|
|
|
|
5
|
|
Mortgage and consumer loans
|
|
|
17
|
|
|
|
11
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet loan charge-offs
|
|
$
|
395
|
|
|
$
|
278
|
|
|
$
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Managed Basis loan charge-offs Corrected
Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Private Education Loans
|
|
$
|
473
|
|
|
$
|
325
|
|
|
$
|
143
|
|
FFELP Loans
|
|
|
79
|
|
|
|
36
|
|
|
|
8
|
|
Mortgage and consumer loans
|
|
|
17
|
|
|
|
11
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed loan charge-offs
|
|
$
|
569
|
|
|
$
|
372
|
|
|
$
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in charge-offs on FFELP loans from 2006 through
2008 was primarily the result of legislative changes occurring
in 2006 (the reduction in the federal guaranty on new loans to
97 percent) and 2007 (the repeal of the Exceptional
Performer designation, under which claims were paid at
99 percent). The majority of our FFELP loans now possess a
federal guaranty level on claims filed to either 97 percent
or
73
98 percent depending on date of disbursement. The increase
in charge-offs is also due to the continued weakening of the
U.S. economy. See Private Education Loan
Losses Activity in the Allowance for Private
Education Loan Losses above 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 respective periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Volume
|
|
|
Rate
|
|
|
Volume
|
|
|
Rate
|
|
|
Student loan premiums paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal lending brands FFELP
|
|
$
|
13,272
|
|
|
|
1.69
|
%
|
|
$
|
8,544
|
|
|
|
2.67
|
%
|
|
$
|
6,339
|
|
|
|
1.81
|
%
|
Internal lending brands Private
|
|
|
5,749
|
|
|
|
|
|
|
|
7,193
|
|
|
|
|
|
|
|
5,932
|
|
|
|
.01
|
|
Lender Partners FFELP
|
|
|
6,622
|
|
|
|
3.00
|
|
|
|
9,033
|
|
|
|
3.14
|
|
|
|
10,059
|
|
|
|
2.29
|
|
Lender Partners Private
|
|
|
688
|
|
|
|
|
|
|
|
695
|
|
|
|
.02
|
|
|
|
1,679
|
|
|
|
.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
26,331
|
|
|
|
1.61
|
|
|
|
25,465
|
|
|
|
2.01
|
|
|
|
24,009
|
|
|
|
1.44
|
|
Other
purchases(1)
|
|
|
907
|
|
|
|
1.26
|
|
|
|
8,473
|
|
|
|
4.16
|
|
|
|
6,228
|
|
|
|
4.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal base purchases
|
|
|
27,238
|
|
|
|
1.59
|
|
|
|
33,938
|
|
|
|
2.54
|
|
|
|
30,237
|
|
|
|
2.05
|
|
Consolidation originations
|
|
|
611
|
|
|
|
1.98
|
|
|
|
2,441
|
|
|
|
2.72
|
|
|
|
4,188
|
|
|
|
2.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,849
|
|
|
|
1.60
|
%
|
|
$
|
36,379
|
|
|
|
2.56
|
%
|
|
$
|
34,425
|
|
|
|
2.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Primarily includes spot purchases
(including Wholesale Consolidation Loans for the year ended
December 31, 2007), other commitment clients, and
subsidiary acquisitions.
|
Premiums paid as a percentage of principal balance for both
internal lending brands and lender partner volume can be
impacted by Front-End Borrower Benefits where we pay the
origination fee and/or federal guaranty fee on behalf of
borrowers. Historically, this offered benefit had the impact of
increasing the effective premium rate on the loan volume over
time as this benefit was offered to a larger segment of our loan
originations. During the first half of 2008, the Company
suspended participation in the federal consolidation loan
program and also discontinued subsidizing on behalf of borrowers
the federally mandated Stafford loan origination fee for loans
guaranteed after May 2, 2008. As a result, we expect and
have seen our premiums decline on this volume in 2008. Declines
in lender partner premiums will lag those of internal lending
brands since acquisitions of lender partner volume may relate to
loans originated in prior periods when the Front-End Borrower
Benefits were still being offered.
Included in consolidation originations is the
0.5 percent FFELP Consolidation Loan origination fee paid
on the total balance of new FFELP Consolidation Loans made prior
to October 1, 2007 (and 1.0 percent for FFELP
Consolidation Loans made after October 1, 2007), including
internally consolidated loans from our existing 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 internal consolidations. As previously discussed, the Company
suspended participation in the federal consolidation loan
program in April 2008.
74
Student
Loan Acquisitions
The following tables summarize the components of our student
loan acquisition activity for the years ended December 31,
2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2008
|
|
|
|
FFELP
|
|
|
Private
|
|
|
Total
|
|
|
Internal lending brands and Lender Partners
|
|
$
|
19,894
|
|
|
$
|
6,437
|
|
|
$
|
26,331
|
|
Other commitment clients
|
|
|
701
|
|
|
|
|
|
|
|
701
|
|
Spot purchases
|
|
|
206
|
|
|
|
|
|
|
|
206
|
|
Consolidations from third parties
|
|
|
462
|
|
|
|
149
|
|
|
|
611
|
|
Consolidations and
clean-up
calls of off-balance sheet securitized loans
|
|
|
986
|
|
|
|
280
|
|
|
|
1,266
|
|
Capitalized interest, premiums and discounts
|
|
|
2,446
|
|
|
|
921
|
|
|
|
3,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet student loan acquisitions
|
|
|
24,695
|
|
|
|
7,787
|
|
|
|
32,482
|
|
Consolidations and
clean-up
calls of off-balance sheet securitized loans
|
|
|
(986
|
)
|
|
|
(280
|
)
|
|
|
(1,266
|
)
|
Capitalized interest, premiums and discounts
off-balance sheet securitized loans
|
|
|
457
|
|
|
|
741
|
|
|
|
1,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed student loan acquisitions
|
|
$
|
24,166
|
|
|
$
|
8,248
|
|
|
$
|
32,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2007
|
|
|
|
FFELP
|
|
|
Private
|
|
|
Total
|
|
|
Internal lending brands and Lender Partners
|
|
$
|
17,577
|
|
|
$
|
7,888
|
|
|
$
|
25,465
|
|
Wholesale Consolidations
|
|
|
7,048
|
|
|
|
|
|
|
|
7,048
|
|
Other commitment clients
|
|
|
248
|
|
|
|
57
|
|
|
|
305
|
|
Spot purchases
|
|
|
1,120
|
|
|
|
|
|
|
|
1,120
|
|
Consolidations from third parties
|
|
|
2,206
|
|
|
|
235
|
|
|
|
2,441
|
|
Consolidations and
clean-up
calls of off-balance sheet securitized loans
|
|
|
3,744
|
|
|
|
582
|
|
|
|
4,326
|
|
Capitalized interest, premiums and discounts
|
|
|
2,279
|
|
|
|
444
|
|
|
|
2,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet student loan acquisitions
|
|
|
34,222
|
|
|
|
9,206
|
|
|
|
43,428
|
|
Consolidations and
clean-up
calls of off-balance sheet securitized loans
|
|
|
(3,744
|
)
|
|
|
(582
|
)
|
|
|
(4,326
|
)
|
Capitalized interest, premiums and discounts
off-balance sheet securitized loans
|
|
|
539
|
|
|
|
703
|
|
|
|
1,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed student loan acquisitions
|
|
$
|
31,017
|
|
|
$
|
9,327
|
|
|
$
|
40,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2006
|
|
|
|
FFELP
|
|
|
Private
|
|
|
Total
|
|
|
Internal lending brands and Lender Partners
|
|
$
|
16,398
|
|
|
$
|
7,611
|
|
|
$
|
24,009
|
|
Other commitment clients
|
|
|
457
|
|
|
|
61
|
|
|
|
518
|
|
Spot purchases
|
|
|
5,710
|
|
|
|
|
|
|
|
5,710
|
|
Consolidations from third parties
|
|
|
4,092
|
|
|
|
96
|
|
|
|
4,188
|
|
Consolidations and
clean-up
calls of off-balance sheet securitized loans
|
|
|
7,141
|
|
|
|
255
|
|
|
|
7,396
|
|
Capitalized interest, premiums and discounts
|
|
|
1,716
|
|
|
|
146
|
|
|
|
1,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet student loan acquisitions
|
|
|
35,514
|
|
|
|
8,169
|
|
|
|
43,683
|
|
Consolidations and
clean-up
calls of off-balance sheet securitized loans
|
|
|
(7,141
|
)
|
|
|
(255
|
)
|
|
|
(7,396
|
)
|
Capitalized interest, premiums and discounts
off-balance sheet securitized loans
|
|
|
658
|
|
|
|
472
|
|
|
|
1,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed student loan acquisitions
|
|
$
|
29,031
|
|
|
$
|
8,386
|
|
|
$
|
37,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As shown in the above tables, off-balance sheet FFELP Stafford
loans that consolidate with us become an on-balance sheet
interest earning asset. This activity results in impairments of
our Retained Interests in securitizations, but this is offset by
an increase in on-balance sheet interest earning assets, for
which we do not record an offsetting gain.
The following table includes on-balance sheet asset information
for our Lending business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
FFELP Stafford and Other Student Loans, net
|
|
$
|
44,025
|
|
|
$
|
35,726
|
|
|
$
|
24,841
|
|
FFELP Stafford Loans
Held-for-Sale
|
|
|
8,451
|
|
|
|
|
|
|
|
|
|
FFELP Consolidation Loans, net
|
|
|
71,744
|
|
|
|
73,609
|
|
|
|
61,324
|
|
Managed Private Education Loans, net
|
|
|
20,582
|
|
|
|
14,818
|
|
|
|
9,755
|
|
Other loans, net
|
|
|
729
|
|
|
|
1,174
|
|
|
|
1,309
|
|
Investments(1)
|
|
|
8,445
|
|
|
|
14,870
|
|
|
|
8,175
|
|
Retained Interest in off-balance sheet securitized loans
|
|
|
2,200
|
|
|
|
3,044
|
|
|
|
3,341
|
|
Other(2)
|
|
|
9,947
|
|
|
|
8,953
|
|
|
|
4,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
166,123
|
|
|
$
|
152,194
|
|
|
$
|
113,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Investments include cash and cash
equivalents, short and long-term investments, restricted cash
and investments, leveraged leases, and municipal bonds.
|
|
(2) |
|
Other assets include accrued
interest receivable, goodwill and acquired intangible assets and
other non-interest earning assets.
|
Loan
Originations
The Company originates loans under its own brand names, which we
refer to as internal lending brands, and also through Lender
Partners under forward contracts to purchase loans at
contractual prices. In the past, we referred to these combined
channels as Preferred Channel Originations. As discussed at the
beginning of this LENDING BUSINESS SEGMENT,
legislative changes and credit market conditions have resulted
in other FFELP lenders reducing their participation in the FFELP
program.
As a result of the impacts described above, our FFELP internal
brand originations were up sharply in 2008, increasing
48 percent from the prior year. Our FFELP lender partner
originations declined 49 percent from 2007 to 2008. A
number of these Lender Partners, including some of our largest
originators representing
76
approximately 49 percent of the decline in Lender Partner
originations from the year ended December 31, 2007 have
converted to third-party servicing arrangements in which we
service loans on behalf of these parties.
Consistent with our announcement in the first quarter that we
were tightening our private credit lending standards and ceasing
non-traditional lending, Private Education Loan originations
declined 20 percent to $6.3 billion in the year ended
December 31, 2008.
At December 31, 2008, the Company was committed to purchase
$2.3 billion of loans originated by our lender partners
($1.6 billion of FFELP loans and $.7 billion of
Private Education Loans). Approximately $.8 billion of
these FFELP loans were originated prior to CCRAA. Approximately
$.5 billion of these FFELP loans are eligible for EDs
Purchase and Participation Programs (see LIQUIDITY AND
CAPITAL RESOURCES ED Funding Programs).
The following tables summarize our loan originations by type of
loan and source.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Loan Originations Internal lending brands
|
|
|
|
|
|
|
|
|
|
|
|
|
Stafford
|
|
$
|
11,593
|
|
|
$
|
7,404
|
|
|
$
|
5,398
|
|
PLUS
|
|
|
1,437
|
|
|
|
1,439
|
|
|
|
1,349
|
|
GradPLUS
|
|
|
801
|
|
|
|
498
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP
|
|
|
13,831
|
|
|
|
9,341
|
|
|
|
6,939
|
|
Private Education Loans
|
|
|
5,791
|
|
|
|
7,267
|
|
|
|
6,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,622
|
|
|
$
|
16,608
|
|
|
$
|
13,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Loan Originations Lender Partners
|
|
|
|
|
|
|
|
|
|
|
|
|
Stafford
|
|
$
|
3,652
|
|
|
$
|
6,963
|
|
|
$
|
7,786
|
|
PLUS
|
|
|
362
|
|
|
|
855
|
|
|
|
1,191
|
|
GradPLUS
|
|
|
62
|
|
|
|
103
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP
|
|
|
4,076
|
|
|
|
7,921
|
|
|
|
9,031
|
|
Private Education Loans
|
|
|
545
|
|
|
|
648
|
|
|
|
1,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,621
|
|
|
$
|
8,569
|
|
|
$
|
10,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
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
FFELP Consolidation Loan activity on our FFELP portfolios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Balance Sheet
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Total Private
|
|
|
Total On-
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Balance Sheet
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
35,726
|
|
|
$
|
73,609
|
|
|
$
|
109,335
|
|
|
$
|
14,818
|
|
|
$
|
124,153
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
462
|
|
|
|
462
|
|
|
|
149
|
|
|
|
611
|
|
Consolidations to third parties
|
|
|
(703
|
)
|
|
|
(392
|
)
|
|
|
(1,095
|
)
|
|
|
(41
|
)
|
|
|
(1,136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(703
|
)
|
|
|
70
|
|
|
|
(633
|
)
|
|
|
108
|
|
|
|
(525
|
)
|
Acquisitions
|
|
|
21,889
|
|
|
|
1,358
|
|
|
|
23,247
|
|
|
|
7,357
|
|
|
|
30,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
21,186
|
|
|
|
1,428
|
|
|
|
22,614
|
|
|
|
7,465
|
|
|
|
30,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(409
|
)
|
|
|
529
|
|
|
|
120
|
|
|
|
228
|
|
|
|
348
|
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments/claims/resales/other
|
|
|
(4,027
|
)
|
|
|
(3,822
|
)
|
|
|
(7,849
|
)
|
|
|
(1,929
|
)
|
|
|
(9,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
52,476
|
|
|
$
|
71,744
|
|
|
$
|
124,220
|
|
|
$
|
20,582
|
|
|
$
|
144,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Total Private
|
|
|
Total Off-
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Balance Sheet
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
9,472
|
|
|
$
|
16,441
|
|
|
$
|
25,913
|
|
|
$
|
13,510
|
|
|
$
|
39,423
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidations to third parties
|
|
|
(311
|
)
|
|
|
(83
|
)
|
|
|
(394
|
)
|
|
|
(57
|
)
|
|
|
(451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(311
|
)
|
|
|
(83
|
)
|
|
|
(394
|
)
|
|
|
(57
|
)
|
|
|
(451
|
)
|
Acquisitions
|
|
|
246
|
|
|
|
211
|
|
|
|
457
|
|
|
|
742
|
|
|
|
1,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
(65
|
)
|
|
|
128
|
|
|
|
63
|
|
|
|
685
|
|
|
|
748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(84
|
)
|
|
|
(36
|
)
|
|
|
(120
|
)
|
|
|
(228
|
)
|
|
|
(348
|
)
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments/claims/resales/other
|
|
|
(2,180
|
)
|
|
|
(1,002
|
)
|
|
|
(3,182
|
)
|
|
|
(1,050
|
)
|
|
|
(4,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
7,143
|
|
|
$
|
15,531
|
|
|
$
|
22,674
|
|
|
$
|
12,917
|
|
|
$
|
35,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Portfolio
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Total Private
|
|
|
Total
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Managed Basis
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
45,198
|
|
|
$
|
90,050
|
|
|
$
|
135,248
|
|
|
$
|
28,328
|
|
|
$
|
163,576
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
462
|
|
|
|
462
|
|
|
|
149
|
|
|
|
611
|
|
Consolidations to third parties
|
|
|
(1,014
|
)
|
|
|
(475
|
)
|
|
|
(1,489
|
)
|
|
|
(98
|
)
|
|
|
(1,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(1,014
|
)
|
|
|
(13
|
)
|
|
|
(1,027
|
)
|
|
|
51
|
|
|
|
(976
|
)
|
Acquisitions
|
|
|
22,135
|
|
|
|
1,569
|
|
|
|
23,704
|
|
|
|
8,099
|
|
|
|
31,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
21,121
|
|
|
|
1,556
|
|
|
|
22,677
|
|
|
|
8,150
|
|
|
|
30,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(493
|
)
|
|
|
493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments/claims/resales/other
|
|
|
(6,207
|
)
|
|
|
(4,824
|
)
|
|
|
(11,031
|
)
|
|
|
(2,979
|
)
|
|
|
(14,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance(3)
|
|
$
|
59,619
|
|
|
$
|
87,275
|
|
|
$
|
146,894
|
|
|
$
|
33,499
|
|
|
$
|
180,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
Acquisitions(4)
|
|
$
|
22,135
|
|
|
$
|
2,031
|
|
|
$
|
24,166
|
|
|
$
|
8,248
|
|
|
$
|
32,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
FFELP category is primarily
Stafford loans and also includes PLUS and HEAL loans.
|
(2) |
|
Represents loans that we either own
on-balance sheet or loans that we consolidated from our
off-balance sheet securitization trusts.
|
(3) |
|
As of December 31, 2008, the
ending balance includes $13.7 billion of FFELP Stafford and
Other Loans and $2.6 billion of FFELP Consolidation Loans
disbursed on or after October 1, 2007, which are impacted
by CCRAA legislation.
|
(4) |
|
The Total Managed Acquisitions line
includes incremental consolidations from third parties and
acquisitions.
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Balance Sheet
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
FFELP
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Stafford
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
Total On-
|
|
|
|
and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Balance Sheet
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
24,841
|
|
|
$
|
61,324
|
|
|
$
|
86,165
|
|
|
$
|
9,755
|
|
|
$
|
95,920
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
2,206
|
|
|
|
2,206
|
|
|
|
235
|
|
|
|
2,441
|
|
Consolidations to third parties
|
|
|
(2,352
|
)
|
|
|
(801
|
)
|
|
|
(3,153
|
)
|
|
|
(45
|
)
|
|
|
(3,198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(2,352
|
)
|
|
|
1,405
|
|
|
|
(947
|
)
|
|
|
190
|
|
|
|
(757
|
)
|
Acquisitions
|
|
|
19,835
|
|
|
|
8,437
|
|
|
|
28,272
|
|
|
|
8,388
|
|
|
|
36,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
17,483
|
|
|
|
9,842
|
|
|
|
27,325
|
|
|
|
8,578
|
|
|
|
35,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal consolidations
|
|
|
(4,413
|
)
|
|
|
6,652
|
|
|
|
2,239
|
|
|
|
536
|
|
|
|
2,775
|
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,871
|
)
|
|
|
(1,871
|
)
|
Repayments/claims/resales/other
|
|
|
(2,185
|
)
|
|
|
(4,209
|
)
|
|
|
(6,394
|
)
|
|
|
(2,180
|
)
|
|
|
(8,574
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
35,726
|
|
|
$
|
73,609
|
|
|
$
|
109,335
|
|
|
$
|
14,818
|
|
|
$
|
124,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
FFELP
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Stafford
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
Total Off-
|
|
|
|
and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Balance Sheet
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
15,028
|
|
|
$
|
18,311
|
|
|
$
|
33,339
|
|
|
$
|
12,833
|
|
|
$
|
46,172
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidations to third parties
|
|
|
(933
|
)
|
|
|
(207
|
)
|
|
|
(1,140
|
)
|
|
|
(93
|
)
|
|
|
(1,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(933
|
)
|
|
|
(207
|
)
|
|
|
(1,140
|
)
|
|
|
(93
|
)
|
|
|
(1,233
|
)
|
Acquisitions
|
|
|
330
|
|
|
|
209
|
|
|
|
539
|
|
|
|
704
|
|
|
|
1,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
(603
|
)
|
|
|
2
|
|
|
|
(601
|
)
|
|
|
611
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(1,494
|
)
|
|
|
(745
|
)
|
|
|
(2,239
|
)
|
|
|
(536
|
)
|
|
|
(2,775
|
)
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,871
|
|
|
|
1,871
|
|
Repayments/claims/resales/other
|
|
|
(3,459
|
)
|
|
|
(1,127
|
)
|
|
|
(4,586
|
)
|
|
|
(1,269
|
)
|
|
|
(5,855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
9,472
|
|
|
$
|
16,441
|
|
|
$
|
25,913
|
|
|
$
|
13,510
|
|
|
$
|
39,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Portfolio
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
FFELP
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Stafford
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
Total
|
|
|
|
and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Managed
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Basis Portfolio
|
|
|
Beginning balance
|
|
$
|
39,869
|
|
|
$
|
79,635
|
|
|
$
|
119,504
|
|
|
$
|
22,588
|
|
|
$
|
142,092
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
2,206
|
|
|
|
2,206
|
|
|
|
235
|
|
|
|
2,441
|
|
Consolidations to third parties
|
|
|
(3,285
|
)
|
|
|
(1,008
|
)
|
|
|
(4,293
|
)
|
|
|
(138
|
)
|
|
|
(4,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(3,285
|
)
|
|
|
1,198
|
|
|
|
(2,087
|
)
|
|
|
97
|
|
|
|
(1,990
|
)
|
Acquisitions
|
|
|
20,165
|
|
|
|
8,646
|
|
|
|
28,811
|
|
|
|
9,092
|
|
|
|
37,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
16,880
|
|
|
|
9,844
|
|
|
|
26,724
|
|
|
|
9,189
|
|
|
|
35,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(5,907
|
)
|
|
|
5,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments/claims/resales/other
|
|
|
(5,644
|
)
|
|
|
(5,336
|
)
|
|
|
(10,980
|
)
|
|
|
(3,449
|
)
|
|
|
(14,429
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance(3)
|
|
$
|
45,198
|
|
|
$
|
90,050
|
|
|
$
|
135,248
|
|
|
$
|
28,328
|
|
|
$
|
163,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
Acquisitions(4)
|
|
$
|
20,165
|
|
|
$
|
10,852
|
|
|
$
|
31,017
|
|
|
$
|
9,327
|
|
|
$
|
40,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
FFELP category is primarily
Stafford loans and also includes PLUS and HEAL loans.
|
|
(2) |
|
Represents loans that we either own
on-balance sheet or loans that we consolidated from our
off-balance sheet securitization trusts.
|
|
(3) |
|
As of December 31, 2007, the
ending balance includes $1.3 billion of FFELP Stafford and
Other Loans and $1.4 billion of FFELP Consolidation Loans
disbursed on or after October 1, 2007, which are impacted
by CCRAA legislation.
|
|
(4) |
|
The Total Managed Acquisitions line
includes incremental consolidations from third parties and
acquisitions.
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Balance Sheet
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
FFELP
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Stafford
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
Total On-
|
|
|
|
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
|
|
|
|
|
|
|
4,092
|
|
|
|
4,092
|
|
|
|
96
|
|
|
|
4,188
|
|
Consolidations to third parties
|
|
|
(2,201
|
)
|
|
|
(2,078
|
)
|
|
|
(4,279
|
)
|
|
|
(14
|
)
|
|
|
(4,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(2,201
|
)
|
|
|
2,014
|
|
|
|
(187
|
)
|
|
|
82
|
|
|
|
(105
|
)
|
Acquisitions
|
|
|
19,585
|
|
|
|
4,697
|
|
|
|
24,282
|
|
|
|
7,818
|
|
|
|
32,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
17,384
|
|
|
|
6,711
|
|
|
|
24,095
|
|
|
|
7,900
|
|
|
|
31,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal consolidations
|
|
|
(5,973
|
)
|
|
|
11,931
|
|
|
|
5,958
|
|
|
|
254
|
|
|
|
6,212
|
|
Off-balance sheet securitizations
|
|
|
(5,034
|
)
|
|
|
(9,638
|
)
|
|
|
(14,672
|
)
|
|
|
(4,737
|
)
|
|
|
(19,409
|
)
|
Repayments/claims/resales/other
|
|
|
(1,524
|
)
|
|
|
(2,539
|
)
|
|
|
(4,063
|
)
|
|
|
(1,419
|
)
|
|
|
(5,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
24,841
|
|
|
$
|
61,324
|
|
|
$
|
86,165
|
|
|
$
|
9,755
|
|
|
$
|
95,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
FFELP
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Stafford
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
Total Off-
|
|
|
|
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
|
|
|
(2,258
|
)
|
|
|
(672
|
)
|
|
|
(2,930
|
)
|
|
|
(32
|
)
|
|
|
(2,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(2,258
|
)
|
|
|
(672
|
)
|
|
|
(2,930
|
)
|
|
|
(32
|
)
|
|
|
(2,962
|
)
|
Acquisitions
|
|
|
424
|
|
|
|
233
|
|
|
|
657
|
|
|
|
472
|
|
|
|
1,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
(1,834
|
)
|
|
|
(439
|
)
|
|
|
(2,273
|
)
|
|
|
440
|
|
|
|
(1,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(5,366
|
)
|
|
|
(592
|
)
|
|
|
(5,958
|
)
|
|
|
(254
|
)
|
|
|
(6,212
|
)
|
Off-balance sheet securitizations
|
|
|
5,034
|
|
|
|
9,638
|
|
|
|
14,672
|
|
|
|
4,737
|
|
|
|
19,409
|
|
Repayments/claims/resales/other
|
|
|
(3,476
|
)
|
|
|
(871
|
)
|
|
|
(4,347
|
)
|
|
|
(770
|
)
|
|
|
(5,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
15,028
|
|
|
$
|
18,311
|
|
|
$
|
33,339
|
|
|
$
|
12,833
|
|
|
$
|
46,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Portfolio
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
FFELP
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Stafford
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Total Managed
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Basis Portfolio
|
|
|
Beginning balance
|
|
$
|
40,658
|
|
|
$
|
65,434
|
|
|
$
|
106,092
|
|
|
$
|
16,437
|
|
|
$
|
122,529
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
4,092
|
|
|
|
4,092
|
|
|
|
96
|
|
|
|
4,188
|
|
Consolidations to third parties
|
|
|
(4,459
|
)
|
|
|
(2,750
|
)
|
|
|
(7,209
|
)
|
|
|
(46
|
)
|
|
|
(7,255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(4,459
|
)
|
|
|
1,342
|
|
|
|
(3,117
|
)
|
|
|
50
|
|
|
|
(3,067
|
)
|
Acquisitions
|
|
|
20,009
|
|
|
|
4,930
|
|
|
|
24,939
|
|
|
|
8,290
|
|
|
|
33,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
15,550
|
|
|
|
6,272
|
|
|
|
21,822
|
|
|
|
8,340
|
|
|
|
30,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(11,339
|
)
|
|
|
11,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments/claims/resales/other
|
|
|
(5,000
|
)
|
|
|
(3,410
|
)
|
|
|
(8,410
|
)
|
|
|
(2,189
|
)
|
|
|
(10,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
39,869
|
|
|
$
|
79,635
|
|
|
$
|
119,504
|
|
|
$
|
22,588
|
|
|
$
|
142,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
Acquisitions(3)
|
|
$
|
20,009
|
|
|
$
|
9,022
|
|
|
$
|
29,031
|
|
|
$
|
8,386
|
|
|
$
|
37,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 Total Managed Acquisitions line
includes incremental consolidations from third parties and
acquisitions.
|
The significant amount of consolidations to third parties in
2006 reflects FFELP lenders reconsolidating FFELP Consolidation
Loans using the FDLP as a pass-through entity, a practice which
was severely restricted by The Higher Education Reconciliation
Act of 2005 as of July 1, 2006. Additionally, the increases
in 2006
80
and 2007 also reflect the effect of the repeal of the
single-holder rule, which was effective for 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. 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 years ended
December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Late fees and forbearance fees
|
|
$
|
143
|
|
|
$
|
134
|
|
|
$
|
119
|
|
Gains on sales of mortgages and other loan fees
|
|
|
3
|
|
|
|
11
|
|
|
|
15
|
|
Gains (losses) on sales of student loans
|
|
|
(51
|
)
|
|
|
24
|
|
|
|
2
|
|
Other
|
|
|
85
|
|
|
|
25
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
$
|
180
|
|
|
$
|
194
|
|
|
$
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company periodically sells student loans. The timing and
amount of loan sales impacts the amount of recognized gains on
sales of student loans. The $51 million loss in 2008
primarily relates to the sale of approximately $1.0 billion
of FFELP loans sold to ED under ECASLA. (See LIQUIDITY AND
CAPITAL RESOURCES ED Funding Programs for
further discussion.)
The increase in other income of $60 million from 2007 to
2008 primarily related to approximately $68 million of
gains recognized on the Companys repurchase of a portion
of its unsecured debt with short-term maturities.
Operating
Expenses Lending Business Segment
The following table summarizes the components of operating
expenses for our Lending business segment for the years ended
December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Sales and originations
|
|
$
|
241
|
|
|
$
|
351
|
|
|
$
|
327
|
|
Servicing
|
|
|
237
|
|
|
|
227
|
|
|
|
201
|
|
Corporate overhead
|
|
|
111
|
|
|
|
112
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
589
|
|
|
$
|
690
|
|
|
$
|
645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
2008
versus 2007
Operating expenses for the year ended December 31, 2008,
decreased by 15 percent from the prior year. The decrease
is primarily due to the impact of our cost reduction initiatives
and to the suspension of certain student loan programs.
2007
versus 2006
Operating expenses for the year ended December 31, 2007,
increased by 7 percent over the prior year. The increase is
primarily due to increased consolidation and higher education
sales and marketing expenses, Private Education Loan collection
costs, and severance-related expenses.
81
ASSET
PERFORMANCE GROUP (APG) BUSINESS SEGMENT
In our APG business segment, we provide a wide range of accounts
receivable and collections services including student loan
default aversion services, defaulted student loan portfolio
management services, contingency collections services for
student loans and other asset classes, and accounts receivable
management and collection for purchased portfolios of
receivables that are delinquent or have been charged off by
their original creditors as well as
sub-performing
and non-performing mortgage loans. In the purchased receivables
business, we focus on a variety of consumer debt types with
emphasis on charged off credit card receivables and distressed
mortgage receivables. We purchase these portfolios at a discount
to their face value, and then use both our internal collection
operations coupled with third-party collection agencies to
maximize the recovery on these receivables.
An overview of this segment and recent developments that have
significantly impacted this segment are included in the
Item 1. Business section of this document. The
private sector collections industry is highly fragmented with
few large public companies and a large number of small scale
privately-held companies. The collections industry is highly
competitive. We are responding to these competitive challenges
through enhanced servicing efficiencies and by continuing to
build on customer relationships through value added services and
financings.
Condensed
Statements of Income
The following tables include Core Earnings results
of operations for our APG business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
Purchased
|
|
|
Purchased
|
|
|
|
|
|
|
|
|
|
Paper
|
|
|
Paper
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
Mortgage/
|
|
|
Contingency
|
|
|
|
|
|
|
Mortgage
|
|
|
Properties
|
|
|
& Other
|
|
|
Total APG
|
|
|
Contingency fee income
|
|
$
|
10
|
|
|
$
|
|
|
|
$
|
330
|
|
|
$
|
340
|
|
Collections revenue (loss)
|
|
|
129
|
|
|
|
(192
|
)
|
|
|
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss)
|
|
|
139
|
|
|
|
(192
|
)
|
|
|
330
|
|
|
|
277
|
|
Restructuring expenses
|
|
|
6
|
|
|
|
1
|
|
|
|
5
|
|
|
|
12
|
|
Operating expenses
|
|
|
193
|
|
|
|
38
|
|
|
|
167
|
|
|
|
398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
199
|
|
|
|
39
|
|
|
|
172
|
|
|
|
410
|
|
Net interest expense
|
|
|
13
|
|
|
|
4
|
|
|
|
8
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest in net
earnings of subsidiaries
|
|
|
(73
|
)
|
|
|
(235
|
)
|
|
|
150
|
|
|
|
(158
|
)
|
Income tax expense (benefit)
|
|
|
(26
|
)
|
|
|
(83
|
)
|
|
|
53
|
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest in net earnings of
subsidiaries
|
|
|
(47
|
)
|
|
|
(152
|
)
|
|
|
97
|
|
|
|
(102
|
)
|
Minority interest in net earnings of subsidiaries
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income (loss)
|
|
$
|
(51
|
)
|
|
$
|
(152
|
)
|
|
$
|
97
|
|
|
$
|
(106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Purchased
|
|
|
Purchased
|
|
|
|
|
|
|
|
|
|
Paper
|
|
|
Paper
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
Mortgage/
|
|
|
Contingency
|
|
|
|
|
|
|
Mortgage
|
|
|
Properties
|
|
|
& Other
|
|
|
Total APG
|
|
|
Contingency fee income
|
|
$
|
9
|
|
|
$
|
|
|
|
$
|
327
|
|
|
$
|
336
|
|
Collections revenue
|
|
|
217
|
|
|
|
52
|
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
226
|
|
|
|
52
|
|
|
|
327
|
|
|
|
605
|
|
Restructuring expenses
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
Operating expenses
|
|
|
164
|
|
|
|
28
|
|
|
|
196
|
|
|
|
388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
165
|
|
|
|
28
|
|
|
|
197
|
|
|
|
390
|
|
Net interest expense
|
|
|
13
|
|
|
|
5
|
|
|
|
9
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
48
|
|
|
|
19
|
|
|
|
121
|
|
|
|
188
|
|
Income tax expense
|
|
|
18
|
|
|
|
7
|
|
|
|
45
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest in net earnings of subsidiaries
|
|
|
30
|
|
|
|
12
|
|
|
|
76
|
|
|
|
118
|
|
Minority interest in net earnings of subsidiaries
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income
|
|
$
|
28
|
|
|
$
|
12
|
|
|
$
|
76
|
|
|
$
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
Purchased
|
|
|
Purchased
|
|
|
|
|
|
|
|
|
|
Paper
|
|
|
Paper
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
Mortgage/
|
|
|
Contingency
|
|
|
|
|
|
|
Mortgage
|
|
|
Properties
|
|
|
& Other
|
|
|
Total APG
|
|
|
Contingency fee income
|
|
$
|
24
|
|
|
$
|
|
|
|
$
|
373
|
|
|
$
|
397
|
|
Collections revenue
|
|
|
199
|
|
|
|
40
|
|
|
|
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
223
|
|
|
|
40
|
|
|
|
373
|
|
|
|
636
|
|
Restructuring expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
145
|
|
|
|
19
|
|
|
|
194
|
|
|
|
358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
145
|
|
|
|
19
|
|
|
|
194
|
|
|
|
358
|
|
Net interest expense
|
|
|
10
|
|
|
|
4
|
|
|
|
9
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
68
|
|
|
|
17
|
|
|
|
170
|
|
|
|
255
|
|
Income tax expense
|
|
|
25
|
|
|
|
6
|
|
|
|
63
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest in net earnings of subsidiaries
|
|
|
43
|
|
|
|
11
|
|
|
|
107
|
|
|
|
161
|
|
Minority interest in net earnings of subsidiaries
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income
|
|
$
|
39
|
|
|
$
|
11
|
|
|
$
|
107
|
|
|
$
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collections
Revenue
The Company has concluded that its APG purchased paper
businesses no longer produce a mutual strategic fit. The Company
finalized the sale of its international Purchased
Paper Non-Mortgage business in the first quarter of
2009. At December 31, 2008, the net assets of this business
were classified as held-for-sale. Accordingly, in 2008, the
Company wrote down the net assets to their estimated fair value
and recognized a $51 million loss on the sale of this
business in 2008.
83
The Company continues to wind down the domestic side of its
Purchased Paper Non-Mortgage and Purchased
Paper Mortgage/Properties businesses. The Company
will continue to consider opportunities to sell these businesses
at acceptable prices in the future.
The Companys domestic Purchased Paper
Non-Mortgage business has certain forward purchase obligations
under which the Company is committed to buy purchased paper from
January 2009 through April 2009 at a purchase price of
approximately $28 million. The Company will not buy any
additional purchased paper in excess of these obligations. Due
to the continued weakening of the U.S. economy, the Company
lowered its assumed collection rates it expects to achieve
related to this portfolio in the third quarter of 2008. This
assumption change resulted in impairments of $55 million in
2008 versus $17 million in 2007.
The Companys Purchased Paper
Mortgage/Properties business will not purchase any new
mortgage/property assets and will work-out and liquidate its
portfolio as quickly and economically as possible. In 2008, real
estate values declined significantly as a result of the
weakening U.S. economy and expected future resolution
time-frames were extended, resulting in impairments of
$262 million in 2008 versus $4 million in 2007.
Contingency
Fee Income
The contingency fee income for the year ended December 31,
2008 was relatively unchanged compared to 2007. The
$61 million decrease in contingency fee income for the year
ended December 31, 2007 versus 2006 was primarily due to a
2006 legislative change that reduced fees paid for collections
via loan consolidation and direct cash collections. In addition,
the 2006 legislation changed the policy governing rehabilitated
loans by reducing the number of consecutive payments to qualify
for a loan rehabilitation from twelve months to nine months.
This accelerated process added approximately $36 million of
incremental revenue in 2006. To a lesser extent, 2007 was
negatively impacted by lower performance in default prevention.
Purchased
Paper Non-Mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Face value of purchases for the period
|
|
$
|
5,353
|
|
|
$
|
6,111
|
|
|
$
|
3,438
|
|
Purchase price for the period
|
|
|
483
|
|
|
|
556
|
|
|
|
278
|
|
% of face value purchased
|
|
|
9.0
|
%
|
|
|
9.1
|
%
|
|
|
8.1
|
%
|
Gross cash collections (GCC)
|
|
$
|
655
|
|
|
$
|
463
|
|
|
$
|
348
|
|
Collections revenue
|
|
|
129
|
|
|
|
217
|
|
|
|
199
|
|
Collections revenue as a % of GCC
|
|
|
20
|
%
|
|
|
47
|
%
|
|
|
56
|
%
|
Carrying value of purchased paper
|
|
$
|
544
|
|
|
$
|
587
|
|
|
$
|
274
|
|
The decrease in collections revenue as a percentage of gross
cash collections (GCC) in 2008 compared to 2007 and
2006 was primarily due to the significant impairment recognized
in 2008.
Purchased
Paper Mortgage/Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Face value of purchases for the period
|
|
$
|
39
|
|
|
$
|
1,307
|
|
|
$
|
556
|
|
Collections revenue, net of impairments
|
|
|
(192
|
)
|
|
|
52
|
|
|
|
40
|
|
Collateral value of purchases
|
|
|
29
|
|
|
|
1,171
|
|
|
|
607
|
|
Purchase price for the period
|
|
|
19
|
|
|
|
855
|
|
|
|
462
|
|
Purchase price as a % of collateral value
|
|
|
66
|
%
|
|
|
73
|
%
|
|
|
76
|
%
|
Carrying value of purchases
|
|
$
|
675
|
|
|
$
|
1,162
|
|
|
$
|
518
|
|
Carrying value of purchased paper as a % of collateral value
|
|
|
69
|
%
|
|
|
77
|
%
|
|
|
75
|
%
|
84
The carrying value of purchased paper (the basis we carry on our
balance sheet) as a percentage of collateral fair value has
decreased in 2008 as a result of the significant impairment
recognized during the year.
Contingency
Inventory
The following table presents the outstanding inventory of
receivables serviced through our APG business segment. These
assets are not on our balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Contingency:
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loans
|
|
$
|
9,852
|
|
|
$
|
8,195
|
|
|
$
|
6,971
|
|
Other
|
|
|
1,726
|
|
|
|
1,509
|
|
|
|
1,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,578
|
|
|
$
|
9,704
|
|
|
$
|
8,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses APG Business Segment
For the years ended December 31, 2008, 2007 and 2006,
operating expenses for the APG contingency and other businesses
totaled $167 million, $196 million and
$194 million, respectively. The decrease in operating
expenses in 2008 versus prior years is primarily due to the
Companys cost reduction initiatives.
For the years ended December 31, 2008, 2007 and 2006,
operating expenses for the APG purchased paper businesses
totaled $231 million, $192 million and
$164 million, respectively. The increase over the prior
year is primarily due to higher collection costs.
At December 31, 2008, 2007 and 2006, the APG business
segment had total assets of $2.0 billion, $2.6 billion
and $1.5 billion, respectively.
85
CORPORATE
AND OTHER BUSINESS SEGMENT
Our Corporate and Other reportable segment reflects the
aggregate activity of our smaller operating units including our
Guarantor Servicing and Loan Servicing operating units, Upromise
(acquired in August 2006), other products and services, as well
as corporate expenses that do not pertain directly to our
operating segments.
In our Guarantor Servicing operating unit, we provide a full
complement of administrative services to FFELP guarantors,
including guarantee issuance, processing, account maintenance
and guarantee fulfillment. In our Loan Servicing operating unit,
we originate and service student loans on behalf of lenders who
are unrelated to SLM Corporation. In our Upromise operating
unit, we provide 529 college-savings plan program management,
transfer and servicing agent, and administration services and
operate a consumer savings network.
Condensed
Statements of Income
The following tables include Core Earnings results
of operations for our Corporate and Other business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
December 31,
|
|
|
% Increase (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
Net interest income (loss) after provisions for losses
|
|
$
|
6
|
|
|
$
|
(1
|
)
|
|
$
|
(5
|
)
|
|
|
700
|
%
|
|
|
80
|
%
|
Guarantor servicing fees
|
|
|
121
|
|
|
|
156
|
|
|
|
132
|
|
|
|
(22
|
)
|
|
|
18
|
|
Loan servicing fees
|
|
|
26
|
|
|
|
23
|
|
|
|
29
|
|
|
|
13
|
|
|
|
(21
|
)
|
Upromise
|
|
|
108
|
|
|
|
110
|
|
|
|
42
|
|
|
|
(2
|
)
|
|
|
162
|
|
Other
|
|
|
65
|
|
|
|
85
|
|
|
|
84
|
|
|
|
(24
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee and other income
|
|
|
320
|
|
|
|
374
|
|
|
|
287
|
|
|
|
(14
|
)
|
|
|
30
|
|
Restructuring expenses
|
|
|
23
|
|
|
|
2
|
|
|
|
|
|
|
|
1,050
|
|
|
|
100
|
|
Operating expenses
|
|
|
277
|
|
|
|
339
|
|
|
|
250
|
|
|
|
(18
|
)
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
300
|
|
|
|
341
|
|
|
|
250
|
|
|
|
(12
|
)
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
26
|
|
|
|
32
|
|
|
|
32
|
|
|
|
(19
|
)
|
|
|
|
|
Income tax expense
|
|
|
9
|
|
|
|
12
|
|
|
|
12
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income
|
|
$
|
17
|
|
|
$
|
20
|
|
|
$
|
20
|
|
|
|
(15
|
)%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA Funds, the nations largest guarantee agency, accounted
for 85 percent, 86 percent and 83 percent,
respectively, of guarantor servicing fees and 11 percent,
16 percent and 25 percent, respectively, of revenues
associated with other products and services for the years ended
December 31, 2008, 2007 and 2006.
2008
versus 2007
The decrease in guarantor servicing fees from 2007 to 2008 was
primarily due to the recognition of $15 million in the
fourth quarter of 2007 of previously deferred guarantee account
maintenance fee revenue related to a negotiated settlement with
USA Funds as discussed further below, as well as to a decrease
in the account maintenance fees earned in 2008 due to the
legislative changes effective October 1, 2007 as a result
of CCRAA.
2007
versus 2006
The increase in guarantor servicing fees from 2006 to 2007 was
primarily due to the recognition of $15 million of
previously deferred guarantee account maintenance fee revenue
related to a negotiated settlement with USA Funds in the second
quarter of 2006. The negotiated settlement with USA Funds would
have resulted in the Company having to return the
$15 million to USA Funds, if certain events occurred prior
86
to December 31, 2007. These events did not occur prior to
December 31, 2007, as stipulated in the negotiated
settlement. As a result, all such contingencies were removed,
resulting in the recognition of this deferred revenue in 2007.
This amount is non-recurring in nature.
The increase in fees from Upromise for the year ended
December 31, 2007 versus the year-ago period was primarily
due to 2007 having a full year of fees from Upromise, which was
acquired in August 2006.
Operating
Expenses Corporate and Other Business
Segment
The following table summarizes the components of operating
expenses for our Corporate and Other business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Operating expenses
|
|
$
|
90
|
|
|
$
|
109
|
|
|
$
|
148
|
|
Upromise
|
|
|
91
|
|
|
|
94
|
|
|
|
33
|
|
General and administrative expenses
|
|
|
96
|
|
|
|
136
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
277
|
|
|
$
|
339
|
|
|
$
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses for our Corporate and Other business segment
include direct costs incurred to service loans for unrelated
third parties, perform guarantor servicing on behalf of
guarantor agencies, and operate our Upromise subsidiary, as well
as information technology expenses related to these functions.
Operating expenses also include unallocated corporate overhead
expenses for centralized headquarters functions.
2008
versus 2007
The decrease in operating expenses in 2008 compared to 2007 was
primarily due to $56 million of non-recurring Proposed
Merger-related expenses in 2007, as well as the Companys
cost reduction initiatives.
2007
versus 2006
Operating expenses decreased $39 million in 2007 due
primarily to the sale of the Noel Levitz subsidiary in the
second half of 2007. General and administrative expenses
increased $67 million in 2007 compared to the year-ago
period, primarily due to Proposed Merger-related expenses of
$56 million. The increase in Upromise expenses from 2006 to
2007 was primarily due to 2007 having a full year of expenses
for Upromise, which was acquired in August 2006.
At December 31, 2008, 2007 and 2006, the Corporate and
Other business segment had total assets of $685 million,
$780 million and $999 million, respectively.
87
LIQUIDITY
AND CAPITAL RESOURCES
The following LIQUIDITY AND CAPITAL RESOURCES
discussion concentrates on our Lending business segment. Our APG
contingency collections and Corporate and Other business
segments are not capital intensive businesses and as such, a
minimal amount of debt capital is allocated to these segments.
Historically, we funded new loan originations with a combination
of unsecured debt and student loan asset-backed securities.
Following the Proposed Merger announcement in April 2007, we
temporarily suspended issuance of unsecured debt and began
funding loan originations primarily through the issuance of
student loan asset-backed securities and secured student loan
financing facilities. In June 2008, the Company re-entered the
corporate bond market with a $2.5 billion issue of
10-year
senior unsecured notes. In August 2008, we began funding new
FFELP Stafford and PLUS student loan originations for AY
2008-2009
pursuant to EDs Loan Participation Program, as described
below. During the fourth quarter of 2008, the Company began
retaining its Private Education Loan originations in our banking
subsidiary, Sallie Mae Bank, and funding these assets with term
bank deposits. In the near term, we expect to continue to use
EDs Purchase and Participation Programs to fund future
FFELP Stafford and PLUS loan originations and to use deposits to
fund Private Education Loan originations. We plan to use
term asset-backed securities, asset-backed financing facilities,
cash flow provided by earnings and repayment of principal on our
unencumbered student loan assets, as well as other sources, to
refinance maturing debt and provide cash for operations and
other needs.
ED
Funding Programs
In August 2008, ED implemented the Loan Purchase Commitment
Program (Purchase Program) and the Loan
Participation Program (Participation Program)
pursuant to ECASLA. Under the Purchase Program, ED purchases
eligible FFELP loans at a price equal to the sum of (i) par
value, (ii) accrued interest, (iii) the one-percent
origination fee paid to ED, and (iv) a fixed amount of $75
per loan. Under the Participation Program, ED provides interim
short-term liquidity to FFELP lenders by purchasing
participation interests in pools of FFELP loans. FFELP lenders
are charged at a rate of commercial paper plus 0.50 percent
on the principal amount of participation interests outstanding.
Loans funded under the Participation Program must be either
refinanced by the lender or sold to ED pursuant to the Purchase
Program prior to its expiration on September 30, 2009.
Given the state of the credit markets, we currently expect to
sell all of the loans we fund under the Participation Program to
ED on or before the programs expiration date. Loans
eligible for the Participation or Purchase Programs were
originally limited to FFELP Stafford or PLUS, first disbursed
between May 1, 2008 and July 1, 2009, with no ongoing
borrower benefits, other than permitted rate reductions of
0.25 percent for automatic payment processing. On
October 7, 2008, legislation was enacted extending
EDs authority to address FFELP Stafford and PLUS loans
made for AYs
2009-2010,
and allowing for the extension of EDs Purchase and
Participation Programs from September 30, 2009 to
September 30, 2010. On November 8, 2008, ED formally
announced new purchase and participation programs which cover
eligible loans originated for the AY
2009-2010.
On January 15, 2009, ED announced that the terms of the
programs for AY
2009-2010
will replicate in all material respects the terms of the
programs for AY
2008-2009.
On August 14, 2008, the Company received its initial
advance under the Participation Program. As of December 31,
2008, the Company had $7.4 billion of advances outstanding
under the Participation Program.
The Company is classifying all loans eligible to be sold to ED
under the Purchase Program as
held-for-sale.
Held-for-sale
loans are carried at the lower of cost or market with no premium
amortization or provision expenses. At December 31, 2008,
the Company had approximately $8.0 billion of FFELP loans
classified as
held-for-sale
related to this program. These loans are included in the
FFELP Stafford Loans
Held-for-Sale
line on the consolidated balance sheets.
Also pursuant to ECASLA, on January 15, 2009, ED published
summary terms under which it will purchase eligible FFELP
Stafford and PLUS loans from a conduit vehicle established to
provide funding for eligible student lenders (the ED
Conduit Program). Loans eligible for the ED Conduit
Program must be first disbursed on or after October 1,
2003, but not later than June 30, 2009, and fully disbursed
before June 30, 2009, and meet certain other requirements
including with respect to borrower benefits. Funding for the ED
88
Conduit Program will be provided by the capital markets at a
cost based on market rates. The ED Conduit Program will have a
term of five years. An estimated $16.0 billion of our
Stafford and PLUS loans (excluding loans currently in the
Participation Program) were eligible for funding under the ED
Conduit Program as of December 31, 2008. We expect to
utilize the ED Conduit Program to fund a significant percentage
of these assets over time. The initial funding under the ED
Conduit Program is expected to occur in the first quarter of
2009.
On November 20, 2008, ED announced it was using its
authority under ECASLA to directly purchase certain eligible
FFELP Stafford and PLUS loans originated during AY
2007-2008.
This purchase program began in December 2008 and will end the
earlier of the date the ED Conduit Program becomes operational
or February 28, 2009. Pursuant to this program, ED proposed
to purchase up to a total of $6.5 billion of loans, in
increments of up to $500 million per week, at a price of
97 percent of principal and unpaid interest. In late
December 2008, we sold to ED approximately $494 million
(principal and accrued interest) of qualifying FFELP loans and
realized $480 million in net proceeds. In early January
2009, we executed an additional asset sale under the program of
approximately $486 million (principal and accrued interest)
and received $472 million in net proceeds. The related loss
was recognized in the fourth quarter and year ended
December 31, 2008, as the loans were classified as
held-for-sale
under GAAP. Our servicing rights on the loans were released upon
sale.
Additional
Funding Sources for General Corporate Purposes
The Company has encountered many challenges to its business
model over the course of the last several years. In order to
continue to meet our mission of providing access to higher
education we have worked with Congress, ED and the Treasury
Department to find solutions to those challenges that have been
created by market conditions.
In addition to funding FFELP loans through EDs
Participation and Purchase Programs, the Company employs other
financing sources for general corporate purposes, which includes
originating Private Education Loans and repayments of unsecured
debt obligations.
During the fourth quarter of 2008, Sallie Mae Bank, our Utah
banking subsidiary, began expanding its deposit base to fund new
Private Education Loan originations. Sallie Mae Bank raises
deposits primarily through intermediaries in the retail brokered
CD market. From the period October 1, 2008 to
December 31, 2008, Sallie Mae Bank raised $1.6 billion
of term bank deposits with a weighted average life of
2.2 years and a weighted average cost of approximately
three-month LIBOR plus 0.97 percent. As of
December 31, 2008, total term bank deposits were
$2.3 billion. We expect Sallie Mae Bank to fund newly
originated Private Education Loans by continuing to raise term
bank deposits. We ultimately expect to raise long-term
financing, through Private Education Loan securitizations or
otherwise, to fund these loans.
We completed nine FFELP term ABS transactions totaling
$18.5 billion during the nine months ended
September 30, 2008. We did not complete an ABS transaction
during the fourth quarter of 2008. Although we expect ABS
financing to remain our primary source of funding over the long
term, we expect our transaction volumes to be more limited and
pricing less favorable than prior to the credit market
dislocation that began in the summer of 2007, with significantly
reduced opportunities to place subordinated tranches of ABS with
investors. All-in costs of our new issue FFELP term ABS averaged
LIBOR plus 1.25 percent for the full year ended
December 31, 2008.
Since late September 2008, there has been severe dislocation in
the financial markets. At present, we are unable to predict when
market conditions will allow for more regular and reliable
access to the term ABS market.
During the first quarter of 2008, the Company entered into three
new asset-backed financing facilities (the 2008
Asset-Backed Financing Facilities): (i) a
$26.0 billion FFELP student loan ABCP conduit facility;
(ii) a $5.9 billion Private Education Loan ABCP
conduit facility (collectively, the 2008 ABCP
Facilities); and (iii) a $2.0 billion secured
FFELP loan facility (the 2008 Asset-Backed Loan
Facility). The initial term of the 2008 Asset-Backed
Financing Facilities is 364 days. The underlying cost of
borrowing under the 2008
89
ABCP Facilities is approximately LIBOR plus 0.68 percent
for the FFELP loan facilities and LIBOR plus 1.55 percent
for the Private Education Loan facility, excluding up-front and
unused commitment fees. All-in pricing on the 2008 ABCP
Facilities varies based on usage. For the full year 2008, the
combined, all-in cost of borrowings related to the 2008
Asset-Backed Financing Facilities, including amortized up-front
fees and unused commitment fees, was three-month LIBOR plus
2.47 percent. The primary use of the 2008 Asset-Backed
Financing Facilities was to refinance comparable asset-backed
commercial paper facilities incurred in connection with the
Proposed Merger, with the expectation that outstanding balances
under the 2008 Asset- Backed Financing Facilities would be
reduced through securitization of the underlying student loan
collateral in the term ABS market. Funding under the 2008
Asset-backed Financing Facilities is subject to usual and
customary conditions.
In the third quarter of 2008, the Company reduced the
commitments under its Private Education Loan ABCP conduit
facility by approximately $2.2 billion to $3.7 billion
and the commitments under its FFELP ABCP Facilities by
$4.1 billion to $21.9 billion. There were no changes
to interest rates, maturity or other terms of the facilities
made in connection with the reductions. The Company reduced
these commitments after an analysis of its ongoing liquidity
needs and following its acceptance and funding under EDs
Participation and Purchase Programs.
The maximum amount the Company may borrow under the 2008 ABCP
Facilities is limited based on certain factors, including market
conditions and the fair value of student loans in the facility.
As of December 31, 2008, the maximum borrowing amount was
approximately $20.9 billion under the FFELP ABCP Facilities
and $3.0 billion under the Private Education Loan ABCP
Facility. The 2008 Asset-Backed Financing Facilities are subject
to termination under certain circumstances, including the
Companys failure to comply with the principal financial
covenants in its unsecured revolving credit facilities.
On February 2, 2009, the Company extended the maturity date
of the 2008 ABCP Facilities from February 28, 2009 to
April 28, 2009 for a $61 million upfront fee. The
other terms of the facilities remain materially unchanged. The
Company expects to refinance the 2008 ABCP Facilities at a lower
aggregate commitment than the $25.6 billion committed as of
December 31, 2008. If the Company does not pay off all
outstanding amounts of the 2008 ABCP Facilities at maturity, the
facilities will extend by 90 days with the interest rate
increasing each month during the
90-day
period. The total increase in interest rates during this period
is 1.5 percent to 2.0 percent depending on the facility. On
February 27, 2009, the Company extended the maturity date
of the 2008 Asset-Backed Loan Facility from February 28, 2009 to
April 28, 2009 for a $4 million upfront fee. The other
terms of this facility remain materially unchanged.
Borrowings under the 2008 Asset-Backed Financing Facilities are
nonrecourse to the Company. As of December 31, 2008, the
Company had $24.8 billion outstanding in connection with
the 2008 Asset Backed Financing Facilities. The book basis of
the assets securing these facilities as of December 31,
2008 was $33.2 billion.
On January 6, 2009 we closed a $1.5 billion,
12.5 year asset-backed securities based facility. This
facility will be used to provide up to $1.5 billion term
financing for Private Education Loans. The fully utilized cost
of financing obtained under this facility is expected to be
LIBOR plus 5.75 percent.
Secured borrowings, including securitizations, asset-backed
commercial paper (ABCP) borrowings and indentured
trusts, comprised 78 percent of our Managed debt
outstanding at December 31, 2008 versus 75 percent at
December 31, 2007.
On February 6, 2009, the Federal Reserve Bank of New York
published proposed terms for a program designed to facilitate
renewed issuance of consumer and small business asset-backed
securities (ABS) at lower interest rate
spreads. As proposed, the U.S. Governments Term
Asset-Backed Securities Loan Facility (TALF) will
provide investors with funding of up to three years for eligible
ABS rated by two or more rating agencies in the highest
investment-grade rating category. Eligible ABS include
AAA rated student loan ABS backed by FFELP and
private student loans first disbursed since May 1, 2007. As
of December 31, 2008, we had approximately $14 billion
of student loans eligible to serve as collateral for ABS funded
under TALF; this amount does not include loans eligible for
ECASLA financing programs. The Federal Reserve Bank
90
expects to announce in the first quarter of 2009 when lending
under TALF will commence. While we expect TALF to improve our
access to and reduce our cost of ABS funding, we are unable to
predict, at this time, the impact TALF will ultimately have on
our funding activities.
At December 31, 2008, we had $3.3 billion of taxable
and $1.4 billion of tax-exempt auction rate securities
outstanding in on-balance sheet securitizations and indentured
trusts, respectively, on a Managed Basis. Since February 2008,
an imbalance of supply and demand in the auction rate securities
market as a whole led to failures of the auctions pursuant to
which certain of our auction rate securities interest
rates are set. As a result, all of the Companys auction
rate securities as of December 31, 2008 bore interest at
the maximum rate allowable under their terms. The maximum
allowable interest rate on our $3.3 billion of taxable
auction rate securities is generally LIBOR plus
1.50 percent. The maximum allowable interest rate on many
of the Companys $1.4 billion of tax-exempt auction
rate securities was amended to LIBOR plus 2.00 percent
through May 31, 2008. After May 31, 2008, the maximum
allowable rate on these securities reverted to a formula driven
rate, which produced various maximum rates up to 14 percent
during 2008 but averaged 1.60 percent at December 31,
2008.
Certain tranches of our term ABS are reset rate notes. Reset
rate notes are subject to periodic remarketing, at which time
the interest rates on the reset rate notes are reset. The
Company also has the option to repurchase the reset rate note
prior to a failed remarketing and hold it as an investment until
such time it can be remarketed. In the event a reset rate note
cannot be remarketed on its remarketing date, and is not
repurchased, the interest rate generally steps up to and remains
at LIBOR plus 0.75 percent, until such time as the bonds
are successfully remarketed or repurchased. The Companys
repurchase of a reset rate note requires additional funding, the
availability and pricing of which may be less favorable to the
Company than it was at the time the reset rate note was
originally issued. Unlike the repurchase of a reset rate note,
the occurrence of a failed remarketing does not require
additional funding. As a result of the ongoing dislocation in
the capital markets, at December 31, 2008,
$407 million of our reset rate notes, representing a single
tranche of a single ABS issue, bore interest at LIBOR plus 0.75
percent due to a failed remarketing. Until capital markets
conditions improve, it is possible additional reset rate notes
will experience failed remarketings. As of December 31,
2008, on a Managed Basis, the Company had $3.7 billion and
$2.5 billion of reset rate notes due to be remarketed in
2009 and 2010, respectively, and an additional $8.5 billion
to be remarketed thereafter.
Primary
Sources of Liquidity and Available Capacity
We expect to fund our ongoing liquidity needs, including the
origination of new loans and the repayment of $6.8 billion
of senior unsecured notes maturing in 2009, through our current
cash and investment portfolio, cash flow provided by earnings
and repayment of principal on unencumbered student loan assets,
the liquidity facilities made available by ED, TALF, the 2008
Asset-Backed Financing Facilities, the issuance of term ABS,
term bank deposits, and, to a lesser extent, if possible,
unsecured debt and other sources.
To supplement our funding sources, we maintained an additional
$5.2 billion in unsecured revolving credit facilities as of
December 31, 2008. These facilities include a
$1.4 billion revolving credit facility maturing in October
2009; $1.9 billion maturing in October 2010; and
$1.9 billion maturing in October 2011. They do not include
a $0.3 billion commitment from a subsidiary of Lehman
Brothers Holding, Inc. The principal financial covenants in the
unsecured revolving credit facilities require the Company to
maintain tangible net worth of at least $1.38 billion at
all times. Consolidated tangible net worth as calculated for
purposes of this covenant was $3.2 billion as of
December 31, 2008. The covenants also require the Company
to meet either a minimum interest coverage ratio or a minimum
net adjusted revenue test based on the four preceding
quarters adjusted Core Earnings financial
performance. The Company was compliant with the minimum net
adjusted revenue test as of the quarter ended December 31,
2008. In the past, we have not relied upon our unsecured
revolving credit facilities as a primary source of liquidity.
Although we have never borrowed under these facilities, they are
available to be drawn upon for general corporate purposes.
91
The following table details our primary sources of primary and
stand-by liquidity and the available capacity at
December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Available Capacity
|
|
|
Available Capacity
|
|
|
Sources of primary liquidity available for new FFELP Stafford
and PLUS loan originations:
|
|
|
|
|
|
|
|
|
ED Purchase and Participation
Programs(1)
|
|
|
Unlimited
|
(1)
|
|
|
|
|
Sources of primary liquidity for general corporate purposes:
|
|
|
|
|
|
|
|
|
Unrestricted cash and liquid investments:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,070
|
|
|
$
|
7,582
|
|
U.S. Treasury-backed securities
|
|
|
|
|
|
|
643
|
|
Commercial paper and asset-backed commercial paper
|
|
|
801
|
|
|
|
1,349
|
|
Certificates of deposit
|
|
|
|
|
|
|
600
|
|
Other(2)
|
|
|
133
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
Total unrestricted cash and liquid
investments(3)(4)(5)
|
|
|
5,004
|
|
|
|
10,257
|
|
Unused
commercial paper and bank lines of credit
(6)
|
|
|
5,192
|
|
|
|
6,500
|
|
2008 FFELP ABCP Facilities
|
|
|
807
|
|
|
|
|
|
2008 Private Credit ABCP Facilities
|
|
|
332
|
|
|
|
|
|
ABCP borrowing capacity
|
|
|
|
|
|
|
5,933
|
|
Interim ABCP Facility borrowing capacity
|
|
|
|
|
|
|
4,040
|
|
|
|
|
|
|
|
|
|
|
Total sources of primary liquidity for general corporate purposes
|
|
|
11,335
|
|
|
|
26,730
|
|
|
|
|
|
|
|
|
|
|
Sources of stand-by liquidity:
|
|
|
|
|
|
|
|
|
Unencumbered
FFELP loans
(7)
|
|
|
5,222
|
|
|
|
18,731
|
|
|
|
|
|
|
|
|
|
|
Total sources of primary and stand-by liquidity for general
corporate
purposes(8)
|
|
$
|
16,557
|
|
|
$
|
45,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The ED Purchase and Participation
Programs provide unlimited funding for eligible FFELP Stafford
and PLUS loans made by the Company with first disbursements
between May 1, 2008 through June 30, 2010. See
ED Funding Programs discussed earlier in this
section.
|
|
(2) |
|
At December 31, 2008, includes
$97 million due from The Reserve Primary Fund (see
Counterparty Exposure below).
|
|
(3) |
|
Excludes $26 million and
$196 million of investments pledged as collateral related
to certain derivative positions and $82 million and
$93 million of other non-liquid investments classified at
December 31, 2008 and December 31, 2007, respectively,
as cash and investments on our balance sheet in accordance with
GAAP.
|
|
(4) |
|
Includes $1.6 billion and
$1.3 billion at December 31, 2008 and
December 31, 2007, respectively, of cash collateral pledged
by derivative counterparties and held by the Company in
unrestricted cash.
|
|
(5) |
|
At December 31, 2008, includes
$1.1 billion of cash and liquid investments at Sallie Mae
Bank, which Sallie Mae Bank was not authorized to dividend to
the Company without FDIC approval. This cash primarily will be
used to originate Private Education Loans in the first quarter
of 2009.
|
|
(6) |
|
At December 31, 2008, excludes
commitments of $308 million from Lehman Brothers Bank, FSB,
a subsidiary of Lehman Brothers Holdings, Inc. Lehman Brothers
Holdings, Inc. declared bankruptcy on September 15, 2008.
The Companys line of credit commitments decreased by
$1.0 billion effective October 23, 2008.
|
|
(7) |
|
At December 31, 2008, includes
$486 million (face amount and accrued interest) of student
loans committed to be sold to ED, but not settled until January
2009. Also includes approximately $241 million of
unencumbered FFELP student loans qualified to be financed by
EDs Participation Program that were subsequently financed
under that program.
|
|
(8) |
|
General corporate purposes
primarily include originating Private Education Loans and
repaying unsecured debt as it matures.
|
92
In addition to the assets listed in the table above, we hold
on-balance sheet a number of other unencumbered assets,
consisting primarily of Private Education Loans, Retained
Interests and other assets. At December 31, 2008, we had a
total of $36.1 billion (including assets in the table
above) of unencumbered assets, including goodwill and acquired
intangibles. Student loans, net, comprised $21.1 billion of
this unencumbered asset total.
As disclosed, we have extended the 2008 Asset-Backed Financing
Facilities to mature on April 28, 2009. We believe that we
will be successful in our effort to refinance the facility at a
lower balance at such time. If we are unable to refinance the
2008 Asset-Backed Financing Facilities and if our obligation was
settled through the lenders possession of posted collateral we
would incur a charge of $8.4 billion, ($5.3 billion
after tax) representing the difference between our cost basis in
the collateral and current borrowings under the facility as of
December 31, 2008. As a result, we would no longer meet the
covenants related to our lines of credit and our ability to
conduct business could be materially changed. While we would
still be able to originate loans into the ED Participation and
Purchase program, our ability to originate private credit loans
could be limited or curtailed. However, even if we are
unsuccessful in this renegotiation, we believe that our current
investment portfolio, when combined with our net expected cash
inflows (principally from loan repayments) and the ED Conduit
Program borrowing we expect to begin using in the first quarter
of 2009 will provide sufficient liquidity to meet our short term
obligations.
Counterparty
Exposure
As of December 31, 2008, the Company had certain exposures
to counterparties impacted by the ongoing credit market
dislocation. Counterparty exposure related to financial
instruments arises from the risk that a lending, investment or
derivative counterparty will not be able to meet its obligations
to the Company.
Lehman Brothers Bank, FSB, a subsidiary of Lehman Brothers
Holdings Inc., is a party to the Companys unsecured
revolving credit facilities under which they provide the Company
with a $308 million commitment. Lehman Brothers Holdings
Inc., declared bankruptcy on September 15, 2008. The
Company is operating under the assumption that the lending
commitment of Lehman Brothers Bank, FSB, will not be honored if
drawn upon. While the Company continues to explore various
options, it does not anticipate replacing its commitment from
Lehman Brothers Bank, FSB.
To provide liquidity for future cash needs, SLM invests in high
quality money market investments. At December 31, 2008, the
Company had investments of $97 million with The Reserve
Primary Fund (The Fund). In September 2008, the
Company requested redemption of all monies invested in The Fund
prior to The Funds announcement that it suspended
distributions as a result of The Funds exposure to Lehman
Brothers Holdings Inc.s bankruptcy filing and The
Funds net asset value being below one dollar per share.
The Company was originally informed by The Fund that the Company
would receive its entire investment amount. Subsequently, the
SEC granted The Fund an indefinite extension to pay
distributions as The Fund is being liquidated. The Company has
received, to date, a total of $394 million of an initial
investment of $500 million from The Fund. The Company
anticipates further delay of remaining distributions and a
potential loss on its investments, even though the Company is
legally entitled to receive 100 percent of its remaining
investment amount. In the fourth quarter of 2008, we recorded an
impairment of $8 million related to our investment in the
Fund.
Protection against counterparty risk in derivative transactions
is generally provided by the International Swaps and Derivatives
Association, Inc. (ISDA) Credit Support Annexes
(CSAs). CSAs require a counterparty to post
collateral if a potential default would expose the other party
to a loss. The Company is a party to derivative contracts for
its corporate purposes and also within its securitization
trusts. The Company has CSAs and collateral requirements with
all of its corporate derivative counterparties requiring
collateral to be exchanged based on the net fair value of
derivatives with each counterparty above a threshold.
Additionally, credit downgrades below a preset level can
eliminate this threshold. The Companys securitization
trusts require collateral in all cases if the
counterpartys credit rating is withdrawn or downgraded
below a certain level. If the counterparty does not post the
required collateral or is downgraded further, the counterparty
must find a suitable replacement counterparty or provide the
trust with a letter of credit or a guaranty from an entity
93
that has the required credit ratings. Failure to post the
collateral or find a replacement counterparty could result in a
termination event under the derivative contract. The Company
considers counterparties credit risk when determining the
fair value of derivative positions on its exposure net of
collateral. Securitizations involving foreign currency notes
issued after November 2005 also require the counterparty to post
collateral to the trust based on the fair value of the
derivative regardless of credit rating. The trusts are not
required to post collateral to the counterparties. If we were
unable to collect from a counterparty related to SLM Corporation
and on-balance sheet trust derivatives, we would have a loss
equal to the amount the derivative is recorded on our balance
sheet. If we were unable to collect from a counterparty related
to an off-balance sheet trust derivative, the value of our
Residual Interest on our balance sheet would be reduced through
earnings.
The Company has liquidity exposure related to collateral
movements between SLM Corporation and its derivative
counterparties. The collateral movements can increase or
decrease our primary liquidity depending on the nature of the
collateral (whether cash or securities), and on movements in the
value of the derivatives, which are primarily impacted by
changes in interest rate and foreign exchange rates. These
movements may require the Company to return cash collateral
posted or may require the Company to access primary liquidity to
post collateral to counterparties. Additionally, when securities
are posted as collateral to the Company, the Company generally
has the right to re-pledge or sell the security. As of
December 31, 2008, the Company held $1.6 billion of
cash collateral in unrestricted cash accounts.
The table below highlights exposure related to our derivative
counterparties at December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Balance Sheet
|
|
|
Off-Balance Sheet
|
|
|
|
SLM Corporation
|
|
|
Securitizations
|
|
|
Securitizations
|
|
|
|
Contracts
|
|
|
Contracts
|
|
|
Contracts
|
|
|
Exposure, net of collateral
|
|
$
|
234
|
|
|
$
|
926
|
|
|
$
|
716
|
|
Percent of exposure to counterparties with credit ratings below
S&P AA- or Moodys Aa3
|
|
|
60
|
%
|
|
|
42
|
%
|
|
|
42
|
%
|
Percent of exposure to counterparties with credit ratings below
S&P A- or Moodys A3
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
94
Managed
Borrowings
The following tables present the ending and average balances and
average interest rates of our Managed borrowings for the years
ended December 31, 2008, 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 Limitations of Core
Earnings Pre-tax Differences between
Core Earnings and GAAP by Business
Segment Derivative Accounting
Reclassification of Realized Gains (Losses) on Derivative and
Hedging Activities.)
Ending
Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Ending Balance
|
|
|
Ending Balance
|
|
|
Ending Balance
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Short
|
|
|
Long
|
|
|
Managed
|
|
|
Short
|
|
|
Long
|
|
|
Managed
|
|
|
Short
|
|
|
Long
|
|
|
Managed
|
|
|
|
Term
|
|
|
Term
|
|
|
Basis
|
|
|
Term
|
|
|
Term
|
|
|
Basis
|
|
|
Term
|
|
|
Term
|
|
|
Basis
|
|
|
Unsecured borrowings
|
|
$
|
6,794
|
|
|
$
|
31,182
|
|
|
$
|
37,976
|
|
|
$
|
8,297
|
|
|
$
|
36,796
|
|
|
$
|
45,093
|
|
|
$
|
3,187
|
|
|
$
|
45,501
|
|
|
$
|
48,688
|
|
Term bank deposits
|
|
|
1,148
|
|
|
|
1,108
|
|
|
|
2,256
|
|
|
|
254
|
|
|
|
|
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indentured trusts (on-balance
sheet)(1)
|
|
|
31
|
|
|
|
1,972
|
|
|
|
2,003
|
|
|
|
100
|
|
|
|
2,481
|
|
|
|
2,581
|
|
|
|
93
|
|
|
|
2,852
|
|
|
|
2,945
|
|
ABCP borrowings (on-balance
sheet)(1)(2)
|
|
|
24,768
|
|
|
|
|
|
|
|
24,768
|
|
|
|
25,960
|
|
|
|
67
|
|
|
|
26,027
|
|
|
|
|
|
|
|
4,953
|
|
|
|
4,953
|
|
ED Participation Program facility
(on-balance
sheet)(1)(3)
|
|
|
7,365
|
|
|
|
|
|
|
|
7,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations (on-balance
sheet)(1)
|
|
|
|
|
|
|
80,601
|
|
|
|
80,601
|
|
|
|
|
|
|
|
68,048
|
|
|
|
68,048
|
|
|
|
|
|
|
|
50,147
|
|
|
|
50,147
|
|
Securitizations (off-balance sheet)
|
|
|
|
|
|
|
37,159
|
|
|
|
37,159
|
|
|
|
|
|
|
|
42,088
|
|
|
|
42,088
|
|
|
|
|
|
|
|
49,865
|
|
|
|
49,865
|
|
Other
|
|
|
1,827
|
|
|
|
|
|
|
|
1,827
|
|
|
|
1,342
|
|
|
|
|
|
|
|
1,342
|
|
|
|
248
|
|
|
|
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,933
|
|
|
$
|
152,022
|
|
|
$
|
193,955
|
|
|
$
|
35,953
|
|
|
$
|
149,480
|
|
|
$
|
185,433
|
|
|
$
|
3,528
|
|
|
$
|
153,318
|
|
|
$
|
156,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The book basis of the assets that
secure the on-balance sheet secured financings is approximately
$128.8 billion in total at December 31, 2008.
|
|
(2) |
|
Includes $1.9 billion
outstanding in the 2008 Asset-Backed Loan Facility at
December 31, 2008.
|
|
(3) |
|
The Company has the option of
paying off this amount with cash or by putting the loans to ED
as previously discussed.
|
Average
Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Unsecured borrowings
|
|
$
|
39,794
|
|
|
|
3.65
|
%
|
|
$
|
46,095
|
|
|
|
5.58
|
%
|
|
$
|
43,754
|
|
|
|
5.50
|
%
|
Term bank deposits
|
|
|
854
|
|
|
|
4.07
|
|
|
|
166
|
|
|
|
5.26
|
|
|
|
1
|
|
|
|
4.98
|
|
Indentured trusts (on-balance sheet)
|
|
|
2,363
|
|
|
|
3.90
|
|
|
|
2,768
|
|
|
|
4.90
|
|
|
|
3,252
|
|
|
|
4.57
|
|
ABCP borrowings (on-balance
sheet)(1)
|
|
|
24,855
|
|
|
|
5.27
|
|
|
|
13,938
|
|
|
|
5.85
|
|
|
|
4,874
|
|
|
|
5.36
|
|
ED Participation Program facility (on-balance sheet)
|
|
|
1,727
|
|
|
|
3.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations (on-balance sheet)
|
|
|
76,028
|
|
|
|
3.26
|
|
|
|
62,765
|
|
|
|
5.55
|
|
|
|
43,310
|
|
|
|
5.40
|
|
Securitizations (off-balance sheet)
|
|
|
39,625
|
|
|
|
3.11
|
|
|
|
45,733
|
|
|
|
5.68
|
|
|
|
50,112
|
|
|
|
5.49
|
|
Other
|
|
|
2,063
|
|
|
|
2.35
|
|
|
|
637
|
|
|
|
4.85
|
|
|
|
172
|
|
|
|
5.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
187,309
|
|
|
|
3.58
|
%
|
|
$
|
172,102
|
|
|
|
5.60
|
%
|
|
$
|
145,475
|
|
|
|
5.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the 2008 Asset-Backed Loan
Facility.
|
95
Unsecured
On-Balance Sheet Financing Activities
The following table presents the senior unsecured credit ratings
assigned by major rating agencies as of February 27, 2009.
|
|
|
|
|
|
|
|
|
Moodys
|
|
S&P
|
|
Fitch
|
|
Short-term unsecured debt
|
|
P-2(1)
|
|
A-3
|
|
F3
|
Long-term senior unsecured debt
|
|
Baa2(1)
|
|
BBB-
|
|
BBB
|
|
|
|
(1) |
|
Under review for potential
downgrade.
|
The table below presents our unsecured on-balance sheet funding
by funding source for the years ended December 31, 2008 and
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Issued
|
|
|
|
|
|
|
For The Years
|
|
|
Outstanding at
|
|
|
|
Ended December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Convertible debentures
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Retail notes
|
|
|
|
|
|
|
59
|
|
|
|
3,914
|
|
|
|
4,192
|
|
Foreign currency denominated
notes(1)
|
|
|
|
|
|
|
161
|
|
|
|
12,127
|
|
|
|
12,805
|
|
Extendible notes
|
|
|
|
|
|
|
|
|
|
|
1,464
|
|
|
|
5,749
|
|
Global notes (Institutional)
|
|
|
2,437
|
|
|
|
1,348
|
|
|
|
19,874
|
|
|
|
21,750
|
|
Medium-term notes (Institutional)
|
|
|
|
|
|
|
|
|
|
|
597
|
|
|
|
597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unsecured corporate borrowings
|
|
|
2,437
|
|
|
|
1,568
|
|
|
|
37,976
|
|
|
|
45,093
|
|
Term bank deposits
|
|
|
2,845
|
|
|
|
552
|
|
|
|
2,256
|
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,282
|
|
|
$
|
2,120
|
|
|
$
|
40,232
|
|
|
$
|
45,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All foreign currency denominated
notes are hedged using derivatives that exchange the foreign
denomination for U.S. dollars.
|
96
Securitization
Activities
Securitization
Program
The following table summarizes our securitization activity for
the years ended December 31, 2008, 2007 and 2006. Those
securitizations listed as sales are off-balance sheet
transactions and those listed as financings remain on-balance
sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Loan
|
|
|
|
|
|
|
|
|
|
|
|
Loan
|
|
|
|
|
|
|
|
|
|
|
|
Loan
|
|
|
|
|
|
|
|
|
|
No. of
|
|
|
Amount
|
|
|
Pre-Tax
|
|
|
Gain
|
|
|
No. of
|
|
|
Amount
|
|
|
Pre-Tax
|
|
|
Gain
|
|
|
No. of
|
|
|
Amount
|
|
|
Pre-Tax
|
|
|
Gain
|
|
|
|
Transactions
|
|
|
Securitized
|
|
|
Gain
|
|
|
%
|
|
|
Transactions
|
|
|
Securitized
|
|
|
Gain
|
|
|
%
|
|
|
Transactions
|
|
|
Securitized
|
|
|
Gain
|
|
|
%
|
|
|
Securitizations sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford/PLUS loans
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
|
|
2
|
|
|
$
|
5,004
|
|
|
$
|
17
|
|
|
|
.3
|
%
|
FFELP Consolidation Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
9,503
|
|
|
|
55
|
|
|
|
.6
|
|
Private Education Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
2,001
|
|
|
|
367
|
|
|
|
18.4
|
|
|
|
3
|
|
|
|
5,088
|
|
|
|
830
|
|
|
|
16.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations sales
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
%
|
|
|
1
|
|
|
|
2,001
|
|
|
$
|
367
|
|
|
|
18.4
|
%
|
|
|
9
|
|
|
|
19,595
|
|
|
$
|
902
|
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations financings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford/PLUS
loans(1)
|
|
|
9
|
|
|
|
18,546
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
8,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Consolidation
Loans(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
14,476
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
12,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations financings
|
|
|
9
|
|
|
|
18,546
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
23,431
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
12,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations
|
|
|
9
|
|
|
$
|
18,546
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
$
|
25,432
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
$
|
32,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In certain securitizations there
are terms within the deal structure that result in such
securitizations not qualifying for sale treatment and
accordingly, they are accounted for on-balance sheet as 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 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.
|
97
Residual
Interest in Securitized Receivables
The following tables summarize the fair value of our Residual
Interests and the assumptions used to value such Residual
Interests, along with the underlying off-balance sheet student
loans that relate to those securitizations in securitization
transactions that were treated as sales as of December 31,
2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
FFELP
|
|
|
Consolidation
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Loan
|
|
|
Education
|
|
|
|
|
|
|
PLUS
|
|
|
Trusts(1)
|
|
|
Loan Trusts
|
|
|
Total
|
|
|
Fair value of Residual
Interests(2)
|
|
$
|
250
|
|
|
$
|
918
|
|
|
$
|
1,032
|
|
|
$
|
2,200
|
|
Underlying securitized loan balance
|
|
|
7,057
|
|
|
|
15,077
|
|
|
|
13,690
|
|
|
|
35,824
|
|
Weighted average life
|
|
|
3.0 yrs.
|
|
|
|
8.1 yrs.
|
|
|
|
6.4 yrs
|
|
|
|
|
|
Prepayment speed (annual
rate)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim status
|
|
|
0
|
%
|
|
|
N/A
|
|
|
|
0
|
%
|
|
|
|
|
Repayment status
|
|
|
2-19
|
%
|
|
|
1-6
|
%
|
|
|
2-15
|
%
|
|
|
|
|
Life of loan repayment status
|
|
|
12
|
%
|
|
|
4
|
%
|
|
|
6
|
%
|
|
|
|
|
Expected credit losses (% of student loan
principal)(4)
|
|
|
.11
|
%
|
|
|
.23
|
%
|
|
|
5.22
|
%
|
|
|
|
|
Residual cash flows discount rate
|
|
|
13.1
|
%
|
|
|
11.9
|
%
|
|
|
26.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
Consolidation
|
|
|
Private
|
|
|
|
|
|
|
FFELP
|
|
|
Loan
|
|
|
Education
|
|
|
|
|
|
|
Stafford and PLUS
|
|
|
Trusts(1)
|
|
|
Loan Trusts
|
|
|
Total
|
|
|
Fair value of Residual
Interests(2)
|
|
$
|
390
|
|
|
$
|
730
|
|
|
$
|
1,924
|
|
|
$
|
3,044
|
|
Underlying securitized loan balance
|
|
|
9,338
|
|
|
|
15,968
|
|
|
|
14,199
|
|
|
|
39,505
|
|
Weighted average life
|
|
|
2.7 yrs.
|
|
|
|
7.4 yrs.
|
|
|
|
7.0 yrs
|
|
|
|
|
|
Prepayment speed (annual
rate)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim status
|
|
|
0
|
%
|
|
|
N/A
|
|
|
|
0
|
%
|
|
|
|
|
Repayment status
|
|
|
0-37
|
%
|
|
|
3-8
|
%
|
|
|
1-30
|
%
|
|
|
|
|
Life of loan repayment status
|
|
|
21
|
%
|
|
|
6
|
%
|
|
|
9
|
%
|
|
|
|
|
Expected credit losses (% of student loan
principal)(4)
|
|
|
.11
|
%
|
|
|
.21
|
%
|
|
|
5.28
|
%
|
|
|
|
|
Residual cash flows discount rate
|
|
|
12.0
|
%
|
|
|
9.8
|
%
|
|
|
12.9
|
%
|
|
|
|
|
|
|
|
(1) |
|
Includes $762 million and
$283 million related to the fair value of the Embedded
Floor Income as of December 31, 2008 and 2007,
respectively. Changes in the fair value of the Embedded Floor
Income are primarily due to changes in the interest rates and
the pay down of the underlying loans.
|
|
(2) |
|
At December 31, 2007, we had
unrealized gains (pre-tax) in accumulated other comprehensive
income of $301 million that related to the Residual
Interests. There were no such gains at December 31, 2008.
|
|
(3) |
|
The Company uses CPR curves for
Residual Interest valuations that are based on seasoning (the
number of months since entering repayment). Under this
methodology, a different CPR is applied to each year of a
loans 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.
|
|
(4) |
|
Remaining expected credit losses as
of the respective balance sheet date.
|
98
Off-Balance
Sheet Net Assets
The following table summarizes our off-balance sheet net assets
at December 31, 2008 and 2007 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 Student Loan
Portfolio Ending Managed Student Loan Balances,
net and LIQUIDITY AND CAPITAL
RESOURCES Managed Borrowings Ending
Balances, earlier in this section.)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Off-Balance Sheet Assets:
|
|
|
|
|
|
|
|
|
Total student loans, net
|
|
$
|
35,591
|
|
|
$
|
39,423
|
|
Restricted cash and investments
|
|
|
1,557
|
|
|
|
2,706
|
|
Accrued interest receivable
|
|
|
937
|
|
|
|
1,413
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet assets
|
|
|
38,085
|
|
|
|
43,542
|
|
Off-Balance Sheet Liabilities:
|
|
|
|
|
|
|
|
|
Debt, par value
|
|
|
37,228
|
|
|
|
42,192
|
|
Debt, unamortized discount and deferred issuance costs
|
|
|
(69
|
)
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
37,159
|
|
|
|
42,088
|
|
Accrued interest payable
|
|
|
166
|
|
|
|
305
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet liabilities
|
|
|
37,325
|
|
|
|
42,393
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Net Assets
|
|
$
|
760
|
|
|
$
|
1,149
|
|
|
|
|
|
|
|
|
|
|
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 and the
revenue we receive for servicing the loans in the securitization
trusts.
99
The following table summarizes the components of servicing and
securitization revenue for the years ended December 31,
2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Servicing revenue
|
|
$
|
247
|
|
|
$
|
285
|
|
|
$
|
336
|
|
Securitization revenue, before Net Embedded Floor Income,
impairment and unrealized fair value adjustment
|
|
|
323
|
|
|
|
419
|
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing and securitization revenue, before Net Embedded Floor
Income, impairment and unrealized fair value adjustment
|
|
|
570
|
|
|
|
704
|
|
|
|
704
|
|
Embedded Floor Income
|
|
|
191
|
|
|
|
20
|
|
|
|
14
|
|
Less: Floor Income previously recognized in gain calculation
|
|
|
(76
|
)
|
|
|
(9
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Embedded Floor Income
|
|
|
115
|
|
|
|
11
|
|
|
|
6
|
|
Servicing and securitization revenue, before impairment and
unrealized fair value adjustment
|
|
|
685
|
|
|
|
715
|
|
|
|
710
|
|
Gain/(loss) on consolidation of off-balance sheet trusts
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Unrealized fair value adjustment
|
|
|
(425
|
)
|
|
|
(24
|
)
|
|
|
|
|
Retained Interest impairment
|
|
|
|
|
|
|
(254
|
)
|
|
|
(157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing and securitization revenue
|
|
$
|
262
|
|
|
$
|
437
|
|
|
$
|
553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average off-balance sheet student loans
|
|
$
|
37,586
|
|
|
$
|
42,411
|
|
|
$
|
46,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance of Retained Interest
|
|
$
|
2,596
|
|
|
$
|
3,385
|
|
|
$
|
3,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing and securitization revenue as a percentage of the
average balance of off-balance sheet student loans
|
|
|
.70
|
%
|
|
|
1.03
|
%
|
|
|
1.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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. 159.
The Company adopted SFAS No. 159 on January 1,
2008, and has elected the fair value option on all of the
Residual Interests effective January 1, 2008. The Company
chose this election in order to record all Residual Interests
under one accounting model. Prior to this election, Residual
Interests were accounted for either under SFAS No. 115
with changes in fair value recorded through other comprehensive
income, except if impaired in which case changes in fair value
were recorded through income, or under SFAS No. 155
with all changes in fair value recorded through income. Changes
in the fair value of Residual Interests from January 1,
2008 forward are recorded in the servicing and securitization
revenue line item of the consolidated income statement.
As of December 31, 2008, the Company had changed the
following significant assumptions compared to those used as of
December 31, 2007, to determine the fair value of the
Residual Interests:
|
|
|
|
|
Prepayment speed assumptions were decreased for all three asset
types primarily as a result of a significant reduction in
prepayment activity experienced which is expected to continue
into the foreseeable future. The decrease in prepayment speeds
is primarily due to a reduction in third-party consolidation
activity as a result of the CCRAA (for FFELP only) and the
current U.S. economic and credit environment. This resulted
in a $114 million unrealized
mark-to-market
gain.
|
|
|
|
Life of loan default rate assumptions for Private Education
loans were increased as a result of the continued weakening of
the U.S. economy. This resulted in a $79 million
unrealized
mark-to-market
loss.
|
100
|
|
|
|
|
Cost of funds assumptions related to the underlying auction rate
securities bonds ($2.3 billion face amount of bonds) within
FFELP loan ($1.7 billion face amount of bonds) and Private
Education Loan ($0.6 billion face amount of bonds) trusts
were increased to take into account the expectations these
auction rate securities will continue to reset at higher rates
for an extended period of time. This resulted in a
$116 million unrealized
mark-to-market
loss.
|
|
|
|
The discount rate assumption related to the Private Education
Loan and FFELP Residual Interests was increased. The Company
assessed the appropriateness of the current risk premium, which
is added to the risk free rate for the purpose of arriving at a
discount rate, in light of the current economic and credit
uncertainty that exists in the market as of December 31,
2008. This discount rate is applied to the projected cash flows
to arrive at a fair value representative of the current economic
conditions. The Company increased the risk premium by
1,550 basis points and 390 basis points for Private
Education and FFELP, respectively, to take into account the
current level of cash flow uncertainty and lack of liquidity
that exists with the Residual Interests. This resulted in a
$904 million unrealized
mark-to-market
loss.
|
The Company recorded net unrealized
mark-to-market
losses related to the Residual Interests of $425 million
during the year ended December 31, 2008. The
mark-to-market
losses were primarily related to the increase in the discount
rate assumptions discussed above which resulted in a
$904 million
mark-to-market
loss. This was partially offset by an unrealized
mark-to-market
gain of $555 million related to the Floor Income component
of the Residual Interest primarily due to the significant
decrease in interest rates from December 31, 2007 to
December 31, 2008.
The Company recorded impairments to the Retained Interests of
$254 million and $157 million, respectively, for the
years ended December 31, 2007 and 2006. The impairment
charges were the result of FFELP loans prepaying faster than
projected through loan consolidations ($110 million and
$104 million for the years ended December 31, 2007 and
2006, respectively), impairment to the Floor Income component of
the Companys Retained Interest due to increases in
interest rates during the period ($24 million and
$53 million for the years ended December 31, 2007 and
2006, respectively), and increases in prepayments, defaults, and
the discount rate related to Private Education Loans
($120 million for the year ended December 31, 2007).
In addition, the Company recorded an unrealized
mark-to-market
loss under SFAS No. 155 of $25 million for the
year ended December 31, 2007.
CONTRACTUAL
CASH OBLIGATIONS
The following table provides a summary of our obligations
associated with long-term notes at December 31, 2008. For
further discussion of these obligations, see Note 7,
Borrowings, to the consolidated financial
statements. The Company has no outstanding equity forward
positions outstanding after the contract settlement on
January 9, 2008. See Note 11, Stockholders
Equity, to the consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
2 to 3
|
|
|
4 to 5
|
|
|
Over
|
|
|
|
|
|
|
or Less
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Total
|
|
|
Long-term notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured borrowings
|
|
$
|
|
|
|
$
|
14,184
|
|
|
$
|
5,324
|
|
|
$
|
11,674
|
|
|
$
|
31,182
|
|
Term bank deposits
|
|
|
|
|
|
|
727
|
|
|
|
381
|
|
|
|
|
|
|
|
1,108
|
|
Secured
borrowings(1)
|
|
|
6,722
|
|
|
|
14,390
|
|
|
|
13,262
|
|
|
|
48,199
|
|
|
|
82,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash
obligations(2)
|
|
$
|
6,722
|
|
|
$
|
29,301
|
|
|
$
|
18,967
|
|
|
$
|
59,873
|
|
|
$
|
114,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Financial Interpretation
(FIN) No. 46(R) long-term beneficial interests
of $80.6 billion of notes issued by consolidated variable
interest entities in conjunction with our on-balance sheet
securitization transactions and included in long-term notes in
the consolidated balance sheet. Timing of obligations is
estimated based on the Companys current projection of
prepayment speeds of the securitized assets.
|
|
(2) |
|
Only includes principal obligations
and specifically excludes SFAS No. 133 derivative
market value adjustments of $3.4 billion for long-term
notes. Interest obligations on notes is predominantly variable
in nature, resetting quarterly based on 3 month LIBOR.
|
101
The Company also records unrecognized tax benefits in accordance
with FIN No. 48. Unrecognized tax benefits were
$81 million and $176 million for the years ended
December 31, 2008 and 2007, respectively. For additional
information, see Note 19, Income Taxes, to the
consolidated financial statements.
OFF-BALANCE
SHEET LENDING ARRANGEMENTS
The following table summarizes the contractual amounts related
to off-balance sheet lending-related financial instruments at
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
2 to 3
|
|
|
|
|
|
|
or Less
|
|
|
Years
|
|
|
Total
|
|
|
Lines of credit
|
|
$
|
221
|
|
|
$
|
800
|
|
|
$
|
1,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have issued lending-related financial instruments including
lines of credit to meet the financing needs of our institutional
customers. In connection with these agreements, the Company also
enters into a participation agreement with the institution to
participate in the loans as they are originated. In the event
that a line of credit is drawn upon, the loan is collateralized
by underlying student loans and is usually participated on the
same day. The contractual amount of these financial instruments
represents the maximum possible credit risk should the
counterparty draw down the commitment, the Company does not
participate in the loan, and the counterparty subsequently fails
to perform according to the terms of our contract. The remaining
total contractual amount available to be borrowed under these
commitments is $1.0 billion. We do not believe that these
instruments are representative of our actual future credit
exposure. To the extent that the lines of credit are drawn upon,
the balance outstanding is collateralized by student loans. At
December 31, 2008, outstanding draws on lines of credit
were approximately $9 million, and are reflected in other
loans in the consolidated balance sheet. For additional
information, see Note 17, Commitments, Contingencies
and Guarantees, to the consolidated financial statements.
The Company maintains forward contracts to purchase loans from
our lending partners at contractual prices. These contracts
typically have a maximum amount we are committed to buy, but
lack a fixed or determinable amount as it ultimately is based on
the lending partners origination activity. FFELP forward
purchase contracts typically contain language relieving us of
most of our responsibilities under the contract due to, among
other things, changes in student loan legislation. These
commitments are not accounted for as derivatives under
SFAS No. 133 as they do not meet the definition of a
derivative due to the lack of a fixed and determinable purchase
amount. At December 31, 2008, there were $2.3 billion
originated loans (FFELP and Private Education Loans) in the
pipeline that the Company is committed to purchase.
MANAGEMENT
OF RISKS
Significant risks that affect the Company may be grouped in the
following categories: financial and funding, credit, operations,
legislation and regulation, and market competition. These risks
are discussed in the Item 1A. Risk Factors
section of this document. Managements strategies for
managing some of these risks are discussed below.
Risk
Management Processes
Risk management is a shared responsibility throughout the
Company. The Board of Directors and its committees oversee risk
and risk management practices. Executive management is
responsible for monitoring and assessing risks. Managers of
individual lines of business have direct and primary
responsibility and accountability to manage risks specific in
their operations by identifying and assessing risks,
implementing internal controls and reporting control issues to
the Companys Risk Assessment Department. The Risk
Assessment Department monitors these efforts, identifies areas
that require increased focus and resources, and reports
significant control issues to executive management and the Audit
Committee of the Board. The Companys centralized staff
functions, such as accounting, human resources and legal,
further strengthen our risk controls.
102
At least annually, the Risk Assessment Department conducts a
survey to identify the Companys top risks, which supports
the development of the internal audit plan. The survey solicits
information from over 200 managers and seeks their input on
issues such as entity level controls, compliance with laws and
regulations, anti-fraud programs and the internal audit plan.
Identified risks are rated on significance and the likelihood of
occurrence. Risks with the greatest significance and highest
likelihood of occurrence receive the most attention and
resources from management. Top risks are mapped to the
appropriate management committee for problem resolution and to
the appropriate committee of the Board for oversight.
Management risk committees and their primary responsibility are
as follows:
Credit Committee: establishes and enforces credit lending
policies;
Compliance Committee: advises on and reviews regulatory
compliance;
Asset/Liability Committee: manages market, interest rate and
balance sheet risk;
Disclosure Committee: manages risk of compliance with SEC
disclosure obligations;
Critical Accounting Assumptions Committee: reviews key critical
accounting assumptions,
judgments and estimates; manages risk of compliance with
financial reporting requirements;
Information Technology Steering Committee: manages security and
confidentially of
information and effectiveness of IT infrastructure;
Business Continuity Steering Committee: manages risk of
emergency loss of IT and other
infrastructure resources;
Internal Controls Excellence Steering Committee: monitors
internal controls and compliance
with the Sarbanes-Oxley Act;
New Product Advisory Committee: approves new loan products and
services.
The formal risk management process represents only one portion
of our overall risk management framework. Our Code of Business
Conduct and the on-going training our employees receive in many
compliance areas provide a framework for employees to conduct
themselves with the highest integrity. We instill a
risk-conscious culture through communications, training,
policies and procedures and organizational roles and
responsibilities. We have strengthened the linkage between the
management performance process and individual compensation to
encourage employees to work toward corporate-wide compliance
goals.
Liquidity
Risk Management
Liquidity is the ongoing ability to accommodate liability
maturities and deposit withdrawals, fund asset growth and
business operations, and meet contractual obligations at
reasonable market rates. Liquidity management involves
forecasting funding requirements and maintaining sufficient
capacity to meet the needs and accommodate fluctuations in asset
and liability levels due to changes in our business operations
or unanticipated events. Sources of liquidity include wholesale
market-based funding and deposits at Sallie Mae Bank.
Through the Companys Asset and Liability Management
Policy, the Finance Committee of the Board of Directors is
responsible for establishing our liquidity policy and monitoring
liquidity on an ongoing basis. The Corporate Finance Department
is responsible for planning and executing our funding activities
and strategy.
In order to ensure adequate liquidity through the full range of
potential operating environments and market conditions, we
conduct our liquidity management and business activities in a
manner that will preserve and enhance funding stability,
flexibility and diversity. Key components of this operating
strategy include maintaining direct relationships with wholesale
market funding providers and maintaining the ability to liquefy
certain assets when, and if, requirements warrant.
For a further discussion of our liquidity and capital resources
and the sources and uses of liquidity see the LIQUIDITY
AND CAPITAL RESOURCES section of this
Form 10-K.
103
Credit
Risk Management
We bear the full risk of loss on our Private Education Loan
portfolio. These loans are underwritten and priced according to
risk, generally determined by a consumer credit scoring system,
FICO. Because our borrowers often have limited repayment history
on other loan products and the addition of our loans increases
the debt burden of our borrowers, the origination of our loans
generally results in an initial decrease in borrowers FICO
scores. After this initial decrease, borrowers FICO scores
generally improve over time as the financial positions of our
borrowers become more established and their repayment history on
all loans becomes more seasoned. Additionally, for borrowers who
do not meet our lending requirements or who desire more
favorable terms, we generally require credit-worthy cosigners.
We have defined underwriting and collection policies, and
ongoing risk monitoring and review processes for all Private
Education Loans. Potential credit losses are considered in our
risk-based pricing model. The performance of the Private
Education Loan portfolio may be affected by borrowers who fail
to complete their education and by the economy; a prolonged
economic downturn may have an adverse effect on our credit
performance. This is taken into account when establishing
allowances to cover the incurred losses.
We have credit risk exposure to the various counterparties with
whom we have entered into derivative contracts. We review the
credit standing of these companies. Our credit policies place
limits on the amount of exposure we may take with any one party
and in most cases, require collateral to secure the position.
The credit risk associated with derivatives is measured based on
the replacement cost should the counterparties with contracts in
a gain position to the Company fail to perform under the terms
of the contract.
Credit risk in our investment portfolio is minimized by only
investing in paper with highly rated issuers. Additionally,
limits per issuer are determined by our internal credit and
investment guidelines to limit our exposure to any one issuer.
We also have credit risk with several higher education
institutions related to academic facilities loans secured by
real estate.
Market
and Interest Rate Risk Management
We measure interest rate risk by calculating the variability of
net interest income in future periods under various interest
rate scenarios using projected balances for interest-earning
assets, interest-bearing liabilities and derivatives used to
hedge interest rate risk. Many assumptions are utilized by
management to calculate the impact that changes in interest
rates may have on net interest income, the more significant of
which are related to student loan volumes and pricing, the
timing of cash flows from our student loan portfolio,
particularly the impact of Floor Income and the rate of student
loan consolidations, basis risk, credit spreads and the maturity
of our debt and derivatives.
Asset and
Liability Funding Gap
The tables below present our assets and liabilities (funding)
arranged by underlying indices as of December 31, 2008. 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.
104
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frequency of
|
|
|
|
|
|
|
|
|
|
Index
|
|
Variable
|
|
|
|
|
|
|
|
Funding
|
|
(Dollars in billions)
|
|
Resets
|
|
Assets
|
|
|
Funding(1)
|
|
|
Gap
|
|
|
3-month
Commercial
paper(2)
|
|
daily
|
|
$
|
114.7
|
|
|
$
|
7.4
|
|
|
$
|
107.3
|
|
3-month
Treasury bill
|
|
weekly
|
|
|
7.2
|
|
|
|
.1
|
|
|
|
7.1
|
|
Prime
|
|
annual
|
|
|
.5
|
|
|
|
|
|
|
|
.5
|
|
Prime
|
|
quarterly
|
|
|
1.5
|
|
|
|
|
|
|
|
1.5
|
|
Prime
|
|
monthly
|
|
|
17.5
|
|
|
|
|
|
|
|
17.5
|
|
PLUS Index
|
|
annual
|
|
|
.5
|
|
|
|
|
|
|
|
.5
|
|
3-month LIBOR
|
|
daily
|
|
|
|
|
|
|
|
|
|
|
|
|
3-month LIBOR
|
|
quarterly
|
|
|
.1
|
|
|
|
109.8
|
|
|
|
(109.7
|
)
|
1-month
LIBOR(3)
|
|
monthly
|
|
|
2.3
|
|
|
|
2.0
|
|
|
|
.3
|
|
CMT/CPI index
|
|
monthly/quarterly
|
|
|
|
|
|
|
3.1
|
|
|
|
(3.1
|
)
|
Non Discrete
reset(4)
|
|
monthly
|
|
|
|
|
|
|
25.3
|
|
|
|
(25.3
|
)
|
Non Discrete
reset(5)
|
|
daily/weekly
|
|
|
8.5
|
|
|
|
2.1
|
|
|
|
6.4
|
|
Fixed
Rate(6)
|
|
|
|
|
16.0
|
|
|
|
19.0
|
|
|
|
(3.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
168.8
|
|
|
$
|
168.8
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Funding includes all derivatives
that qualify as hedges under SFAS No. 133.
|
|
(2) |
|
Funding includes $7.4 billion
of ED Purchase and Participation Program.
|
|
(3) |
|
Funding includes the 2008
Asset-Backed Loan Facility.
|
|
(4) |
|
Funding includes auction rate
securities and the 2008 ABCP Facilities.
|
|
(5) |
|
Assets include restricted and
non-restricted cash equivalents and other overnight-type
instruments.
|
|
(6) |
|
Assets include receivables and
other assets (including Retained Interests, goodwill and
acquired intangibles). Funding includes other liabilities and
stockholders equity (excluding Series B Preferred
Stock).
|
The Funding Gaps in the above table are primarily
interest rate mismatches in short-term indices between our
assets and liabilities. We address this issue typically through
the use of basis swaps that typically convert quarterly
three-month LIBOR to other indices that are more correlated to
our asset indices. These basis swaps do not qualify as effective
hedges under 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.
105
Managed
Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frequency of
|
|
|
|
|
|
|
|
|
|
Index
|
|
Variable
|
|
|
|
|
|
|
|
Funding
|
|
(Dollars in billions)
|
|
Resets
|
|
Assets
|
|
|
Funding(1)
|
|
|
Gap
|
|
|
3 month Commercial
paper(2)
|
|
daily
|
|
$
|
134.7
|
|
|
$
|
7.5
|
|
|
$
|
127.2
|
|
3 month Treasury bill
|
|
weekly
|
|
|
9.8
|
|
|
|
6.7
|
|
|
|
3.1
|
|
Prime
|
|
annual
|
|
|
1.0
|
|
|
|
.3
|
|
|
|
.7
|
|
Prime
|
|
quarterly
|
|
|
6.6
|
|
|
|
3.5
|
|
|
|
3.1
|
|
Prime
|
|
monthly
|
|
|
25.0
|
|
|
|
15.3
|
|
|
|
9.7
|
|
PLUS Index
|
|
annual
|
|
|
.6
|
|
|
|
.1
|
|
|
|
.5
|
|
3-month
LIBOR(3)
|
|
daily
|
|
|
|
|
|
|
116.1
|
|
|
|
(116.1
|
)
|
3-month LIBOR
|
|
quarterly
|
|
|
|
|
|
|
11.8
|
|
|
|
(11.8
|
)
|
1-month
LIBOR(4)
|
|
monthly
|
|
|
2.3
|
|
|
|
2.0
|
|
|
|
.3
|
|
Non Discrete
reset(5)
|
|
monthly
|
|
|
|
|
|
|
22.0
|
|
|
|
(22.0
|
)
|
Non Discrete
reset(6)
|
|
daily/weekly
|
|
|
10.1
|
|
|
|
1.6
|
|
|
|
8.5
|
|
Fixed
Rate(7)
|
|
|
|
|
12.4
|
|
|
|
15.6
|
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
202.5
|
|
|
$
|
202.5
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Funding includes all derivatives
that management considers economic hedges of interest rate risk
and reflects how we internally manage our interest rate exposure.
|
|
(2) |
|
Funding includes $7.4 billion
of ED Purchase and Participation Program.
|
|
(3) |
|
Funding includes $2.5 billion
of auction rate securities.
|
|
(4) |
|
Funding includes the 2008
Asset-Backed Loan Facility.
|
|
(5) |
|
Funding includes auction rate
securities and the 2008 ABCP Facility.
|
|
(6) |
|
Assets include restricted and
non-restricted cash equivalents and other overnight-type
instruments.
|
|
(7) |
|
Assets include receivables and
other assets (including goodwill and acquired intangibles).
Funding includes other liabilities and stockholders equity
(excluding Series B Preferred Stock).
|
We use interest rate swaps and other derivatives to achieve our
risk management objectives. To the extent possible, we fund our
assets with debt (in combination with derivatives) that has the
same underlying index (index type and index reset frequency).
When it is more economical, we also fund our assets with debt
that has a different index
and/or reset
frequency than the asset, but only in instances where we believe
there is a high degree of correlation between the interest rate
movement of the two indices. For example, we use daily reset
three-month LIBOR to fund a large portion of our daily reset
three-month commercial paper indexed assets. In addition, we use
quarterly reset three-month LIBOR to fund a portion of our
quarterly reset Prime rate indexed Private Education Loans. We
also use our monthly Non Discrete reset and
1-month
LIBOR funding to fund various asset types. In using different
index types and different index reset frequencies to fund our
assets, we are exposed to interest rate risk in the form of
basis risk and repricing risk, which is the risk that the
different indices that may reset at different frequencies will
not move in the same direction or at the same magnitude. While
we believe that this risk is low as all of these indices are
short-term with rate movements that are highly correlated over a
long period of time, market disruptions can lead to a temporary
divergence between indices as was experienced with the
commercial paper and LIBOR indices beginning in the second half
of 2007 and becoming more volatile in the second half of 2008.
As of December 31, 2008, on a Managed Basis, we have
approximately $127.2 billion of FFELP loans indexed to
three-month commercial paper (3M CP) that are funded
with debt indexed to LIBOR. We believe there is broad market
recognition that, due to the unintended consequences of
government action in other areas of the capital markets and
virtually no issuances of qualifying commercial paper, the 3M CP
index and its relationship to LIBOR is broken. The relationship
between the indices has been volatile. See Item 1.
Business, for a discussion of this CP/LIBOR issue and
government actions to date.
106
When compared with the GAAP presentation, the Managed basis
presentation includes all of our off-balance sheet assets and
funding, and also includes basis swaps that primarily convert
quarterly three-month LIBOR to other indices that are more
correlated to our asset indices.
Weighted
Average Life
The following table reflects the weighted average life for our
Managed earning assets and liabilities at December 31, 2008
and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
On-Balance
|
|
|
|
|
|
On-Balance
|
|
|
|
|
(Averages in Years)
|
|
Sheet
|
|
|
Managed
|
|
|
Sheet
|
|
|
Managed
|
|
|
Earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loans
|
|
|
7.8
|
|
|
|
7.9
|
|
|
|
9.0
|
|
|
|
8.9
|
|
Other loans
|
|
|
5.7
|
|
|
|
5.7
|
|
|
|
5.0
|
|
|
|
5.0
|
|
Cash and investments
|
|
|
.2
|
|
|
|
.1
|
|
|
|
.2
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
7.4
|
|
|
|
7.5
|
|
|
|
8.0
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
.3
|
|
|
|
.3
|
|
|
|
.2
|
|
|
|
.2
|
|
Long-term borrowings
|
|
|
6.8
|
|
|
|
6.7
|
|
|
|
6.6
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
5.0
|
|
|
|
5.3
|
|
|
|
5.0
|
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt issuances likely to be called by us or putable by
the investor have been categorized according to their call or
put dates rather than their maturity dates.
Foreign
Currency Exchange Rate Exposure
Foreign currency exchange rate exposure is primarily the result
of foreign denominated liabilities issued by the Company.
Cross-currency interest rate swaps are used to lock-in the
exchange rate for the term of the liability. In addition, the
Company has foreign exchange rate exposure as a result of
international operations; however, the exposure is minimal at
this time.
107
COMMON
STOCK
The following table summarizes the Companys common share
repurchases and issuances for the years ended December 31,
2008, 2007 and 2006. Equity forward activity for the years ended
December 31, 2007 and 2006 is also reported.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Shares in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Common shares repurchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
Open market
|
|
|
|
|
|
|
1.8
|
|
|
|
2.2
|
|
Equity forward contracts
|
|
|
|
|
|
|
4.2
|
|
|
|
5.4
|
|
Equity forward contracts agreed to be
settled(1)
|
|
|
|
|
|
|
44.0
|
|
|
|
|
|
Benefit
plans(2)
|
|
|
1.0
|
|
|
|
3.3
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares repurchased
|
|
|
1.0
|
|
|
|
53.3
|
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average purchase price per share
|
|
$
|
24.51
|
|
|
$
|
44.59
|
|
|
$
|
52.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued
|
|
|
1.9
|
|
|
|
109.2
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period
|
|
|
|
|
|
|
48.2
|
|
|
|
42.7
|
|
New contracts
|
|
|
|
|
|
|
|
|
|
|
10.9
|
|
Settlements
|
|
|
|
|
|
|
(4.2
|
)
|
|
|
(5.4
|
)
|
Agreed to be
settled(1)
|
|
|
|
|
|
|
(44.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
|
|
|
|
|
|
|
|
48.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authority remaining at end of period for repurchases
|
|
|
38.8
|
|
|
|
38.8
|
|
|
|
15.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On December 31, 2007, the
Company and Citibank agreed to physically settle the contract as
detailed below. Consequently, the common shares outstanding and
shareholders equity on the Companys year-end balance
sheet reflect the physical settlement of the equity forward
contract. As of December 31, 2007, the 44 million
shares under this equity forward contract are reflected in
treasury stock.
|
|
(2) |
|
Shares withheld from stock option
exercises and vesting of restricted stock for employees
tax withholding obligations and shares tendered by employees to
satisfy option exercise costs.
|
Beginning on November 29, 2007, the Company amended or
closed out certain equity forward contracts. On
December 19, 2007, the Company entered into a series of
transactions with its equity forward counterparties and Citibank
to assign all of its remaining equity forward contracts,
covering 44,039,890 shares, to Citibank. In connection with
the assignment of the equity forward contracts, the Company and
Citibank amended the terms of the equity forward contract to
eliminate all stock price triggers (which had previously allowed
the counterparty to terminate the contracts prior to their
scheduled maturity date) and termination events based on the
Companys credit ratings. The strike price of the equity
forward contract on December 19, 2007, was $45.25 with a
maturity date of February 22, 2008. The new Citibank equity
forward contract was 100 percent collateralized with cash.
On December 31, 2007, the Company and Citibank agreed to
physically settle the contract and the Company paid Citibank
approximately $1.1 billion, the difference between the
contract purchase price and the previous market closing price on
the 44,039,890 shares. Consequently, the common shares
outstanding and shareholders equity on the Companys
year-end balance sheet reflect the shares issued in the public
offerings and the physical settlement of the equity forward
contract. As of December 31, 2007, the 44 million
shares under this equity forward contract are reflected in
treasury stock. The Company paid Citibank the remaining balance
of approximately $0.9 billion due under the contract on
January 9, 2008. The Company now has no outstanding equity
forward positions.
On December 31, 2007, the Company issued
101,781,170 shares of its common stock at a price of $19.65
per share. Net proceeds from the sale were approximately
$1.9 billion. The Company used approximately
$2.0 billion of the net proceeds from the sale of
Series C Preferred Stock and the sale of its common stock
to
108
settle its outstanding equity forward contract (see
Note 11, Stockholders Equity, for further
discussion). The remaining proceeds are used for general
corporate purposes. The Company issued 9,781,170 shares of
the 102 million share offering from its treasury stock.
These shares were removed from treasury stock at an average cost
of $43.13, resulting in a $422 million decrease to the
balance of treasury stock with an offsetting $235 million
decrease to retained earnings.
The closing price of the Companys common stock on
December 31, 2008 was $8.90.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 2 to the consolidated financial statements,
Significant Accounting Policies Recently
Issued Accounting Pronouncements.
109
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Interest
Rate Sensitivity Analysis
The Companys interest rate risk management seeks to limit
the impact of short-term movements in interest rates on our
results of operations and financial position. The following
tables summarize the effect on earnings for the years ended
December 31, 2008 and 2007 and the effect on fair values at
December 31, 2008 and 2007, based upon a sensitivity
analysis performed by management assuming a hypothetical
increase in market interest rates of 100 basis points and
300 basis points while funding spreads remain constant.
Additionally, as it relates to the effect on earnings, a
sensitivity analysis was performed assuming the funding index
increases 25 basis points while holding the asset index
constant, if the funding index is different that the asset
index. Both of these analyses do not consider any potential
impairment to our Residual Interests that may result from asset
and funding basis divergence or a higher discount rate that
would be used to compute the present value of the cash flows if
long-term interest rates increased. See Note 8,
Student Loan Securitization, which details the
potential decrease to the fair value of the Residual Interest
that could occur under the referenced interest rate environment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
|
Interest Rates:
|
|
|
and Funding
|
|
|
|
Change from
|
|
|
Change from
|
|
|
Index
|
|
|
|
Increase of
|
|
|
Increase of
|
|
|
Mismatches(1)
|
|
|
|
100 Basis
|
|
|
300 Basis
|
|
|
Increase of
|
|
|
|
Points
|
|
|
Points
|
|
|
25 Basis Points
|
|
(Dollars in millions, except per share amounts)
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Effect on Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in pre-tax net income before unrealized
gains (losses) on derivative and hedging activities
|
|
$
|
(6
|
)
|
|
|
(3
|
)%
|
|
$
|
13
|
|
|
|
7
|
%
|
|
$
|
(297
|
)
|
|
|
(162
|
)%
|
Unrealized gains (losses) on derivative and hedging activities
|
|
|
460
|
|
|
|
82
|
|
|
|
956
|
|
|
|
171
|
|
|
|
95
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in net income before taxes
|
|
$
|
454
|
|
|
|
121
|
%
|
|
$
|
969
|
|
|
|
258
|
%
|
|
$
|
(202
|
)
|
|
|
(54
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in diluted earnings per common share
|
|
$
|
.974
|
|
|
|
141
|
%
|
|
$
|
2.076
|
|
|
|
301
|
%
|
|
$
|
(.433
|
)
|
|
|
(63
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Interest Rates:
|
|
|
Asset
|
|
|
|
Change from
|
|
|
Change from
|
|
|
and Funding
|
|
|
|
Increase of
|
|
|
Increase of
|
|
|
Index
Mismatches(1)
|
|
|
|
100 Basis
|
|
|
300 Basis
|
|
|
Increase of
|
|
|
|
Points
|
|
|
Points
|
|
|
25 Basis Points
|
|
(Dollars in millions, except per share amounts)
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Effect on Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in pre-tax net income before unrealized
gains (losses) on derivative and hedging activities
|
|
$
|
11
|
|
|
|
1
|
%
|
|
$
|
32
|
|
|
|
4
|
%
|
|
$
|
(229
|
)
|
|
|
(27
|
)%
|
Unrealized gains (losses) on derivative and hedging activities
|
|
|
213
|
|
|
|
16
|
|
|
|
375
|
|
|
|
28
|
|
|
|
80
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in net income before taxes
|
|
$
|
224
|
|
|
|
46
|
%
|
|
$
|
407
|
|
|
|
85
|
%
|
|
$
|
(149
|
)
|
|
|
(31
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in diluted earnings per common share
|
|
$
|
.361
|
|
|
|
16
|
%
|
|
$
|
.674
|
|
|
|
30
|
%
|
|
$
|
(.361
|
)
|
|
|
(16
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
If an asset is not funded with the
same index/frequency reset of the asset then it is assumed the
funding index increases 25 basis points while holding the
asset index constant.
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008
|
|
|
|
|
|
|
Interest Rates:
|
|
|
|
|
|
|
Change from
|
|
|
Change from
|
|
|
|
|
|
|
Increase of
|
|
|
Increase of
|
|
|
|
|
|
|
100 Basis
|
|
|
300 Basis
|
|
|
|
|
|
|
Points
|
|
|
Points
|
|
(Dollars in millions)
|
|
Fair Value
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Effect on Fair Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP student loans
|
|
$
|
107,319
|
|
|
$
|
(758
|
)
|
|
|
(1
|
)%
|
|
$
|
(1,602
|
)
|
|
|
(1
|
)%
|
Private Education Loans
|
|
|
14,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other earning assets
|
|
|
9,265
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
Other assets
|
|
|
14,590
|
|
|
|
(848
|
)
|
|
|
(6
|
)
|
|
|
(2,108
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
145,315
|
|
|
$
|
(1,615
|
)
|
|
|
(1
|
)%
|
|
$
|
(3,735
|
)
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
$
|
135,070
|
|
|
$
|
(837
|
)
|
|
|
(1
|
)%
|
|
$
|
(2,500
|
)
|
|
|
(2
|
)%
|
Other liabilities
|
|
|
3,604
|
|
|
|
(293
|
)
|
|
|
(8
|
)
|
|
|
(273
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
138,674
|
|
|
$
|
(1,130
|
)
|
|
|
(1
|
)%
|
|
$
|
(2,773
|
)
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 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
|
|
$
|
111,552
|
|
|
$
|
(303
|
)
|
|
|
|
%
|
|
$
|
(603
|
)
|
|
|
(1
|
)%
|
Private Education Loans
|
|
|
17,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other earning assets
|
|
|
16,321
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
(59
|
)
|
|
|
|
|
Other assets
|
|
|
15,092
|
|
|
|
(887
|
)
|
|
|
(6
|
)
|
|
|
(1,566
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
160,254
|
|
|
$
|
(1,210
|
)
|
|
|
(1
|
)%
|
|
$
|
(2,228
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
$
|
141,055
|
|
|
$
|
(1,424
|
)
|
|
|
(1
|
)%
|
|
$
|
(3,330
|
)
|
|
|
(2
|
)%
|
Other liabilities
|
|
|
3,285
|
|
|
|
392
|
|
|
|
12
|
|
|
|
1,471
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
144,340
|
|
|
$
|
(1,032
|
)
|
|
|
(1
|
)%
|
|
$
|
(1,859
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A primary objective in our funding is to minimize our
sensitivity to changing interest rates by generally funding our
floating rate student loan portfolio with floating rate debt.
However, as discussed under LENDING BUSINESS
SEGMENT Summary of our Managed Student Loan
Portfolio Floor Income Managed
Basis, we can have a fixed versus floating mismatch in
funding if the student loan earns at the fixed borrower rate and
the funding remains floating. In addition, we can have a
mismatch in the index of floating rate debt versus floating rate
assets.
During the years ended December 31, 2008 and 2007, certain
FFELP student loans were earning Floor Income and we locked in a
portion of that Floor Income through the use of interest rate
swaps and Floor Income Contracts. The result of these hedging
transactions was to convert a portion of the fixed rate nature
of student loans to variable rate, and to fix the relative
spread between the student loan asset rate and the variable rate
liability.
111
In the above table, under the scenario where interest rates
increase 100 and 300 basis points, the change in pre-tax
net income before the unrealized gains (losses) on derivative
and hedging activities is primarily due to the impact of
(i) our 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) in low interest rate environments, our
unhedged on-balance sheet loans being in a fixed-rate mode due
to Embedded Floor Income while being funded with a variable
debt; (iii) a portion of our fixed rate assets being funded
with variable debt and (iv) a portion of our variable
assets being funded with fixed debt. Items (i) and
(iv) will generally cause income to increase when interest
rates increase from a low interest rate environment, whereas,
items (ii) and (iii) will generally offset this
increase. In the 100 basis point scenario for the year
ended December 31, 2008, item (ii) had a greater
impact than items (i) and (iv) resulting in a net
loss. However, in the 300 basis point scenario, the impact
of item (ii) was less relative to item (iv). In the 100 and
300 basis point scenario for the year ended
December 31, 2007, items (i) and (iv) had a
greater impact than item (ii) resulting in a net gain.
Under the scenario in the tables above, called Asset and
Funding Index Mismatches, the main driver of the decrease
in pre-tax income before unrealized gains (losses) on derivative
and hedging activities is the result of LIBOR-based debt funding
commercial paper-indexed assets. See Market and Interest
Rate Risk Management Asset and Liability Funding
Gap for a further discussion. Increasing the spread
between indices will also impact the unrealized gains (losses)
on derivatives and hedging activities as it relates to basis
swaps. Basis swaps used to convert LIBOR-based debt to indices
that we believe are economic hedges of the indices of the assets
being funded resulted in unrealized losses of
$(134) million and $(175) million for the years ended
December 31, 2008 and 2007, respectively. Offsetting this
unrealized loss are basis swaps that economically hedge our
off-balance sheet Private Credit securitization trusts.
Unrealized gains for these basis swaps totaled $229 million
and $255 million for the years ended December 31, 2008
and 2007, respectively. The net impact of both of these items
was an unrealized gain for all periods presented.
In addition to interest rate risk addressed in the preceding
tables, the Company is also exposed to risks related to foreign
currency exchange rates. Foreign currency exchange risk is
primarily the result of foreign 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.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Reference is made to the financial statements listed under the
heading (a) 1.A. Financial Statements of
Item 15 hereof, which financial statements are incorporated
by reference in response to this Item 8.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Nothing to report.
|
|
Item 9A.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of December 31, 2008. Based
on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of
112
December 31, 2008, 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 December 31, 2008 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
Nothing to report.
113
PART III.
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Guidance
|
The information regarding directors and executive officers set
forth under the headings Proposal 1: Election of
Directors and Executive Officers in the Proxy
Statement to be filed on schedule 14A relating to the
Companys Annual Meeting of Stockholders scheduled to be
held on May 22, 2009 (the 2009 Proxy Statement)
is incorporated by reference in this section.
The information regarding reports filed under Section 16 of
the Securities and Exchange Act of 1934 set forth under the
heading Section 16(a) Beneficial Ownership Reporting
Compliance of our 2009 Proxy Statement is incorporated by
reference in this section.
The information regarding the Companys Code of Business
Conduct set forth under the heading Code of Business
Conduct of our 2009 Proxy Statement is incorporated by
reference in this section.
The information regarding the Companys process regarding
nominees to the board of directors and the identification of the
audit committee financial experts set forth under
the heading Corporate Governance of our 2009 Proxy
Statement is incorporated by reference in this section.
|
|
Item 11.
|
Executive
Compensation
|
The information set forth under the caption Executive and
Director Compensation in the Proxy Statement is
incorporated into this Annual Report by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information set forth in Note 13, Stock-Based
Compensation Plans and Arrangements, to the consolidated
financial statements, and listed under the heading
(a) 1.A. Financial Statements of Item 15
hereof and the information set forth under the captions
Stock Ownership and General
Information Principal Shareholders in the
Proxy Statement is incorporated by reference in this section.
There are no arrangements known to the Company, the operation of
which may at a subsequent date result in a change in control of
the Company.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information set forth under the caption Related-Party
Transactions and, regarding director independence,
Corporate Governance in the Proxy Statement is
incorporated by reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information set forth under the caption Ratification
of the Appointment of Independent Registered Public Accounting
Firm in the Proxy Statement is incorporated by reference
in this section.
114
PART IV.
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
|
|
(a)
|
1. Financial
Statements
|
A. The following consolidated financial statements of SLM
Corporation and the Report of the Independent Registered Public
Accounting Firm thereon are included in Item 8 above:
|
|
|
|
|
Managements Annual Report on Internal Control over
Financial Reporting
|
|
|
F-2
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-3
|
|
Consolidated Balance Sheets as of December 31, 2008 and 2007
|
|
|
F-4
|
|
Consolidated Statements of Income for the years ended
December 31, 2008, 2007 and 2006
|
|
|
F-5
|
|
Consolidated Statements of Changes in Stockholders Equity
for the years ended December 31, 2008, 2007 and 2006
|
|
|
F-6
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2008, 2007 and 2006
|
|
|
F-8
|
|
Notes to Consolidated Financial Statements
|
|
|
F-9
|
|
|
|
2.
|
Financial
Statement Schedules
|
All schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial
statements or notes thereto.
The exhibits listed in the accompanying index to exhibits are
filed or incorporated by reference as part of this Annual Report.
The Company will furnish at cost a copy of any exhibit filed
with or incorporated by reference into this Annual Report. Oral
or written requests for copies of any exhibits should be
directed to the Corporate Secretary.
Appendix A Federal Family Education Loan Program
|
|
|
|
|
|
2
|
|
|
Agreement and Plan of Reorganization by and among the Student
Loan Marketing Association, SLM Holding Corporation, and Sallie
Mae Merger Company incorporated by reference to the
correspondingly numbered exhibits to the Companys
Registration Statement on
Form S-4,
as amended.
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of the
Company, incorporated by reference to
Exhibit 4.1 of the Companys Current Report on
Form 8-K
filed on January 2, 2008
|
|
3
|
.2
|
|
Amended By-Laws of the Company incorporated by reference to
Exhibit 3.1(ii) of the Companys Current Report on
Form 8-K
filed on August 6, 2008.
|
|
10
|
.1
|
|
Board of Directors Stock Option Plan (Incorporated by reference
to the Company Definitive Proxy Statement on
Schedule 14A, as filed with the Securities and Exchange
Commission on April 10, 1998.
|
|
10
|
.2
|
|
SLM Holding Corporation Management Incentive Plan, incorporated
by reference to Exhibit B of the Companys Definitive
Proxy Statement on Schedule 14A, as filed on April 10,
1998.
|
|
10
|
.3
|
|
Stock Option Agreement, SLM Corporation Incentive Plan, ISO,
Price-Vested with Replacements 2004, incorporated by reference
to Exhibit 10.2 of the Companys Quarterly Report on
Form 10-Q
filed on November 9, 2004.
|
115
|
|
|
|
|
|
10
|
.4
|
|
Stock Option Agreement, SLM Corporation Incentive Plan,
Non-Qualified, Price-Vested Options-2004, incorporated by
reference to Exhibit 10.3 of the Companys Quarterly
Report on
Form 10-Q
filed on November 9, 2004.
|
|
10
|
.5
|
|
Terms of Performance Stock Grant, incorporated by reference to
Exhibit 10.4 of the Companys Quarterly Report on
Form 10-Q
filed on November 9, 2004.
|
|
10
|
.6
|
|
Settlement Agreement and Release (1) (Filed with the
Securities and Exchange Commission with the Company Quarterly
Report on
Form 10-Q
for the quarter ended March 31, 2005).
|
|
10
|
.7
|
|
First Amendment to Settlement Agreement and Release (1)
(Filed with the Securities and Exchange Commission with the
Company Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2005).
|
|
10
|
.8
|
|
Second Amendment to Settlement Agreement and Release (1)
(Filed with the Securities and Exchange Commission with the
Company Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2005).
|
|
10
|
.9
|
|
Amended and Restated SLM Corporation Incentive Plan,
incorporated by reference to Exhibit 10.24 of the
Companys Current Report on
Form 8-K
filed on May 25, 2005.
|
|
10
|
.10
|
|
Directors Stock Plan, incorporated by reference to
Exhibit 10.25 of the Companys Current Report on
Form 8-K
filed on May 25, 2005.
|
|
10
|
.11
|
|
Employment Agreement between the Company and Thomas J.
Fitzpatrick, President and Chief Executive Officer, effective as
of June 1, 2005, incorporated by reference to
Exhibit 10.23 of the Companys Quarterly Report on
Form 10-Q
filed on November 8, 2005.
|
|
10
|
.12
|
|
SLM Corporation Incentive Plan Performance Stock Term Sheet
Core Net Income Target, incorporated by reference to
Exhibit 10.25 of the Companys Annual Report on
Form 10-K
filed on March 9, 2006.
|
|
10
|
.13
|
|
Stock Option Agreement SLM Corporation Incentive Plan
Net-Settled, Price-Vested Options 1 year
minimum 2006, incorporated by reference to
Exhibit 10.25 of the Companys Annual Report on
Form 10-K
filed on March 9, 2006.
|
|
10
|
.14
|
|
SLM Corporation Change in Control Severance Plan for Senior
Officers, incorporated by reference to Exhibit 10.27 of the
Companys Annual Report on
Form 10-K
filed on March 9, 2006.
|
|
10
|
.15
|
|
Participation Purchase and Security Agreement between Mustang
Funding I LLC, Bank of American, JP Morgan Chase, Chase Bank
USA, Sallie Mae, incorporated by reference to Exhibit 10.31
of the Companys Quarterly Report on
Form 10-Q
filed on August 7, 2007.
|
|
10
|
.16
|
|
Participation Purchase and Security Agreement between Mustang
Funding II LLC, Bank of American, JP Morgan Chase, Chase
Bank USA, Sallie Mae, incorporated by reference to
Exhibit 10.31 of the Companys Quarterly Report on
Form 10-Q
filed on August 7, 2007.
|
|
10
|
.17
|
|
Confidential Agreement and Release between the Company and Kevin
F. Moehn, dated December 19, 2007, incorporated by
reference to Exhibit 10.28 of the Companys Annual
Report on
Form 10-K
filed on February 29, 2008.
|
|
10
|
.18
|
|
Confidential Agreement and Release between the Company and June
M. McCormack, dated December 22, 2007, incorporated by
reference to Exhibit 10.29 of the Companys Annual
Report on
Form 10-K
filed on February 29, 2008.
|
|
10
|
.19
|
|
Retainer Agreement between Anthony P. Terracciano and the
Company, incorporated by reference to Exhibit 10.30 of the
Companys Quarterly Report on
Form 10-Q
filed on May 9, 2008.
|
|
10
|
.20
|
|
Employment Agreement between Albert L. Lord and the Company,
incorporated by reference to Exhibit 10.31 of the
Companys Quarterly Report on
Form 10-Q
filed on May 9, 2008.
|
|
10
|
.21
|
|
Note of Purchase and Security Agreement between Phoenix
Funding I, Sallie Mae, Bank of NY Trust Company,
Deutsche Bank Trust Company Americas, UBS Real Estate
Securities, UBS Securities LLC, incorporated by reference to
Exhibit 10.31 of the Companys Quarterly Report on
Form 10-Q
filed on May 9, 2008.
|
116
|
|
|
|
|
|
10
|
.22
|
|
Note of Purchase and Security Agreement between Rendezvous
Funding I, Bank of America, JPMorgan Chase, Bank of America
Securities LLC, JP Morgan Securities, Barclays Bank PLC, Royal
Bank of Scotland, Deutsche Bank Securities, Credit Suisse, Bank
of NY Trust Co., Sallie Mae, incorporated by reference to
Exhibit 10.31 of the Companys Quarterly Report on
Form 10-Q
filed on May 9, 2008.
|
|
10
|
.23
|
|
Note of Purchase and Security Agreement between Bluemont
Funding I, Bank of America, JPMorgan Chase, Bank of America
Securities LLC, JP Morgan Securities, Barclays Bank PLC, Royal
Bank of Scotland, Deutsche Bank Securities, Credit Suisse, Bank
of NY Trust Co., Sallie Mae, incorporated by reference to
Exhibit 10.31 of the Companys Quarterly Report on
Form 10-Q
filed on May 9, 2008.
|
|
10
|
.24
|
|
Employment Agreement between Jack Remondi and The Company,
incorporated by reference to Exhibit 10.31 of the
Companys Quarterly Report on
Form 10-Q
filed on August 6, 2008.
|
|
10
|
.25
|
|
Sallie Mae Deferred Compensation Plan for Key Employees
Restatement Effective January 1, 2009, filed with this
Form 10-K.
|
|
10
|
.26
|
|
Sallie Mae Supplemental 401(k) Savings Plan, filed with this
Form 10-K.
|
|
10
|
.27
|
|
Sallie Mae Supplemental Cash Account Retirement Plan, filed with
this
Form 10-K.
|
|
10
|
.28
|
|
Amendment to the Note of Purchase and Security Agreement between
Phoenix Funding I, Sallie Mae, Bank of NY
Trust Company, Deutsche Bank Trust Company Americas,
UBS Real Estate Securities, UBS Securities LLC, incorporated by
reference to the Companys Quarterly Report on
Form 10-Q
filed on May 9, 2008; filed with this
Form 10-K.
|
|
10
|
.29
|
|
Amendment to the Note of Purchase and Security Agreement between
Rendezvous Funding I, Bank of America, JPMorgan Chase, Bank
of America Securities LLC, JP Morgan Securities, Barclays Bank
PLC, Royal Bank of Scotland, Deutsche Bank Securities, Credit
Suisse, Bank of NY Trust Co., Sallie Mae, incorporated by
reference to the Companys Quarterly Report on
Form 10-Q
filed on May 9, 2008; filed with this
Form 10-K.
|
|
10
|
.30
|
|
Amendment to the Note of Purchase and Security Agreement between
Bluemont Funding I, Bank of America, JPMorgan Chase, Bank
of America Securities LLC, JP Morgan Securities, Barclays Bank
PLC, Royal Bank of Scotland, Deutsche Bank Securities, Credit
Suisse, Bank of NY Trust Co., Sallie Mae, incorporated by
reference to the Companys Quarterly Report on
Form 10-Q
filed on May 9, 2008; filed with this
Form 10-K.
|
|
10
|
.31
|
|
Amendment to Schedule of Contracts Substantially Identical to
Exhibit 10.34 of the Companys Quarterly Report on
Form 10-Q
filed on May 9, 2008; filed with this
Form 10-K.
|
|
10
|
.32
|
|
SLM Corporation Incentive Stock Plan Stock Option Agreement,
Net-Settled, Performance Vested Options, 2009, filed with this
Form 10-K.
|
|
10
|
.33
|
|
SLM Corporation Incentive Plan Performance Stock Term Sheet,
Core Earnings Net Income Target -Sustained
Performance, 2009, filed with this Form 10-K.
|
|
14
|
|
|
Code of Business Conduct (Filed with the Securities and Exchange
Commission with the Company Annual Report on
Form 10-K
for the year ended December 31, 2003).
|
|
23
|
|
|
Consent of PricewaterhouseCoopers LLP (Filed with the Securities
and Exchange Commission with this
Form 10-K).
|
|
31
|
.1
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2003 (Filed with the Securities and Exchange Commission
with this
Form 10-K).
|
|
31
|
.2
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2003 (Filed with the Securities and Exchange Commission
with this
Form 10-K).
|
|
32
|
.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2003 (Filed with the Securities and Exchange Commission with
this
Form 10-K).
|
|
32
|
.2
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2003 (Filed with the Securities and Exchange Commission with
this
Form 10-K).
|
|
|
|
|
|
Management Contract or Compensatory
Plan or Arrangement
|
117
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: March 2, 2009
SLM CORPORATION
Albert L. Lord
Vice Chairman and Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of
1934, as amended, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Albert
L. Lord
Albert
L. Lord
|
|
Vice Chairman and Chief Executive Officer (Principal Executive
Officer)
|
|
March 2, 2009
|
|
|
|
|
|
/s/ John
F. Remondi
John
F. Remondi
|
|
Vice Chairman and Chief Financial Officer (Principal Financial
and Accounting Officer)
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Anthony
P. Terracciano
Anthony
P. Terracciano
|
|
Chairman of the Board of Directors
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Ann
Torre Bates
Ann
Torre Bates
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ William
M. Diefenderfer, III
William
M. Diefenderfer, III
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Diane
Suitt Gilleland
Diane
Suitt Gilleland
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Earl
A. Goode
Earl
A. Goode
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Ronald
F. Hunt
Ronald
F. Hunt
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Michael
E. Martin
Michael
E. Martin
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Barry
A. Munitz
Barry
A. Munitz
|
|
Director
|
|
March 2, 2009
|
118
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Howard
H. Newman
Howard
H. Newman
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ A.
Alexander Porter, Jr.
A.
Alexander Porter, Jr.
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Frank
C. Puleo
Frank
C. Puleo
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Wolfgang
Schoellkopf
Wolfgang
Schoellkopf
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Steven
L. Shapiro
Steven
L. Shapiro
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ J.
Terry Strange
J.
Terry Strange
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Barry
L. Williams
Barry
L. Williams
|
|
Director
|
|
March 2, 2009
|
119
CONSOLIDATED
FINANCIAL STATEMENTS
INDEX
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-8
|
|
|
|
|
F-9
|
|
F-1
MANAGEMENTS
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended). Under
the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, we assessed the effectiveness of our internal control
over financial reporting as of December 31, 2008. In making
this assessment, our management used the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Management also used an IT
governance framework that is based on the COSO framework,
Control Objectives for Information and related
Technology, which was issued by the Information Systems
Audit and Control Association and the IT Governance Institute.
Based on our assessment and those criteria, management concluded
that, as of December 31, 2008, our internal control over
financial reporting is effective.
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, audited the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2008, as stated in their report which appears
below.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
F-2
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of SLM Corporation:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of SLM Corporation and its subsidiaries
at December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2008, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Managements Annual Report on Internal Control
over Financial Reporting. Our responsibility is to express
opinions on these financial statements and on the Companys
internal control over financial reporting based on our
integrated audits. We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial
statements, the Company changed the manner in which it accounts
for retained interests in 2008.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
PricewaterhouseCoopers LLP
McLean, VA
March 2, 2009
F-3
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Assets
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans (net of allowance for
losses of $90,906 and $47,518, respectively)
|
|
$
|
44,025,361
|
|
|
$
|
35,726,062
|
|
FFELP Stafford Loans Held-for-Sale
|
|
|
8,450,976
|
|
|
|
|
|
FFELP Consolidation Loans (net of allowance for losses of
$46,637 and $41,211, respectively)
|
|
|
71,743,435
|
|
|
|
73,609,187
|
|
Private Education Loans (net of allowance for losses of
$1,308,043 and $1,003,963, respectively, as corrected)
|
|
|
20,582,298
|
|
|
|
14,817,725
|
|
Other loans (net of allowance for losses of $58,395 and $43,558,
respectively)
|
|
|
729,380
|
|
|
|
1,173,666
|
|
Investments
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
861,008
|
|
|
|
2,871,340
|
|
Other
|
|
|
180,397
|
|
|
|
93,040
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
1,041,405
|
|
|
|
2,964,380
|
|
Cash and cash equivalents
|
|
|
4,070,002
|
|
|
|
7,582,031
|
|
Restricted cash and investments
|
|
|
3,535,286
|
|
|
|
4,600,106
|
|
Retained Interest in off-balance sheet securitized loans
|
|
|
2,200,298
|
|
|
|
3,044,038
|
|
Goodwill and acquired intangible assets, net
|
|
|
1,249,219
|
|
|
|
1,300,689
|
|
Other assets
|
|
|
11,140,777
|
|
|
|
10,747,107
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
168,768,437
|
|
|
$
|
155,564,991
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
ED Participation Program
|
|
$
|
7,364,969
|
|
|
$
|
|
|
Term bank deposits
|
|
|
1,147,825
|
|
|
|
254,029
|
|
Other short-term borrowings
|
|
|
33,420,249
|
|
|
|
35,693,378
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings
|
|
|
41,933,043
|
|
|
|
35,947,407
|
|
Long-term borrowings
|
|
|
118,224,794
|
|
|
|
111,098,144
|
|
Other liabilities
|
|
|
3,604,260
|
|
|
|
3,284,545
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
163,762,097
|
|
|
|
150,330,096
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Minority interest in subsidiaries
|
|
|
7,270
|
|
|
|
11,360
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Preferred stock, par value $.20 per share, 20,000 shares
authorized
|
|
|
|
|
|
|
|
|
Series A: 3,300 and 3,300 shares issued, respectively,
at stated value of $50 per share
|
|
|
165,000
|
|
|
|
165,000
|
|
Series B: 4,000 and 4,000 shares issued, respectively,
at stated value of $100 per share
|
|
|
400,000
|
|
|
|
400,000
|
|
Series C, 7.25% mandatory convertible preferred stock;
1,150 and 1,000 shares, respectively, issued at liquidation
preference of $1,000 per share
|
|
|
1,149,770
|
|
|
|
1,000,000
|
|
Common stock, par value $.20 per share, 1,125,000 shares
authorized: 534,411 and 532,493 shares issued, respectively
|
|
|
106,883
|
|
|
|
106,499
|
|
Additional paid-in capital
|
|
|
4,684,112
|
|
|
|
4,590,174
|
|
Accumulated other comprehensive income (loss) (net of tax
benefit of $43,202 and expense of $124,468, respectively)
|
|
|
(76,476
|
)
|
|
|
236,364
|
|
Retained earnings
|
|
|
426,175
|
|
|
|
557,204
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity before treasury stock
|
|
|
6,855,464
|
|
|
|
7,055,241
|
|
Common stock held in treasury at cost: 66,958 and
65,951 shares, respectively
|
|
|
1,856,394
|
|
|
|
1,831,706
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
4,999,070
|
|
|
|
5,223,535
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
168,768,437
|
|
|
$
|
155,564,991
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
1,994,394
|
|
|
$
|
2,060,993
|
|
|
$
|
1,408,938
|
|
FFELP Consolidation Loans
|
|
|
3,178,692
|
|
|
|
4,343,138
|
|
|
|
3,545,857
|
|
Private Education Loans
|
|
|
1,737,554
|
|
|
|
1,456,471
|
|
|
|
1,021,221
|
|
Other loans
|
|
|
82,734
|
|
|
|
105,843
|
|
|
|
97,954
|
|
Cash and investments
|
|
|
276,264
|
|
|
|
707,577
|
|
|
|
503,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
7,269,638
|
|
|
|
8,674,022
|
|
|
|
6,576,972
|
|
Total interest expense
|
|
|
5,905,418
|
|
|
|
7,085,772
|
|
|
|
5,122,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
1,364,220
|
|
|
|
1,588,250
|
|
|
|
1,454,117
|
|
Less: provisions for loan losses
|
|
|
719,650
|
|
|
|
1,015,308
|
|
|
|
286,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provisions for loan losses
|
|
|
644,570
|
|
|
|
572,942
|
|
|
|
1,167,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on student loan securitizations
|
|
|
|
|
|
|
367,300
|
|
|
|
902,417
|
|
Servicing and securitization revenue
|
|
|
261,819
|
|
|
|
437,097
|
|
|
|
553,541
|
|
Losses on sales of loans and securities, net
|
|
|
(186,155
|
)
|
|
|
(95,492
|
)
|
|
|
(49,357
|
)
|
Gains (losses) on derivative and hedging activities, net
|
|
|
(445,413
|
)
|
|
|
(1,360,584
|
)
|
|
|
(339,396
|
)
|
Contingency fee revenue
|
|
|
340,140
|
|
|
|
335,737
|
|
|
|
396,830
|
|
Collections revenue (loss)
|
|
|
(64,038
|
)
|
|
|
271,547
|
|
|
|
239,829
|
|
Guarantor servicing fees
|
|
|
121,363
|
|
|
|
156,429
|
|
|
|
132,100
|
|
Other
|
|
|
392,076
|
|
|
|
385,075
|
|
|
|
338,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
419,792
|
|
|
|
497,109
|
|
|
|
2,174,271
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
610,020
|
|
|
|
734,777
|
|
|
|
703,210
|
|
Other operating expenses
|
|
|
746,835
|
|
|
|
794,565
|
|
|
|
642,942
|
|
Restructuring expenses
|
|
|
83,775
|
|
|
|
22,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,440,630
|
|
|
|
1,551,847
|
|
|
|
1,346,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest in net
earnings of subsidiaries
|
|
|
(376,268
|
)
|
|
|
(481,796
|
)
|
|
|
1,995,274
|
|
Income tax expense (benefit)
|
|
|
(167,574
|
)
|
|
|
412,283
|
|
|
|
834,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest in net earnings of
subsidiaries
|
|
|
(208,694
|
)
|
|
|
(894,079
|
)
|
|
|
1,160,963
|
|
Minority interest in net earnings of subsidiaries
|
|
|
3,932
|
|
|
|
2,315
|
|
|
|
4,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(212,626
|
)
|
|
|
(896,394
|
)
|
|
|
1,156,956
|
|
Preferred stock dividends
|
|
|
111,206
|
|
|
|
37,145
|
|
|
|
35,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stock
|
|
$
|
(323,832
|
)
|
|
$
|
(933,539
|
)
|
|
$
|
1,121,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
(.69
|
)
|
|
$
|
(2.26
|
)
|
|
$
|
2.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding
|
|
|
466,642
|
|
|
|
412,233
|
|
|
|
410,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
(.69
|
)
|
|
$
|
(2.26
|
)
|
|
$
|
2.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common and common equivalent shares outstanding
|
|
|
466,642
|
|
|
|
412,233
|
|
|
|
451,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share
|
|
$
|
|
|
|
$
|
.25
|
|
|
$
|
.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,156,956
|
|
|
|
|
|
|
|
1,156,956
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,953
|
)
|
|
|
|
|
|
|
|
|
|
|
(41,953
|
)
|
Change in unrealized gains (losses) on derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,990
|
|
|
|
|
|
|
|
|
|
|
|
4,990
|
|
Minimum pension liability adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(569
|
)
|
|
|
|
|
|
|
|
|
|
|
(569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,119,424
|
|
Adjustment to initially apply SFAS No. 158, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,733
|
|
|
|
|
|
|
|
|
|
|
|
18,733
|
|
Cash dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock ($.97 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(398,414
|
)
|
|
|
|
|
|
|
(398,414
|
)
|
Preferred stock, Series A ($3.48 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,500
|
)
|
|
|
|
|
|
|
(11,500
|
)
|
Preferred stock, Series B ($5.82 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,420
|
)
|
|
|
|
|
|
|
(23,420
|
)
|
Issuance of common shares
|
|
|
|
|
|
|
6,629,455
|
|
|
|
64,141
|
|
|
|
6,693,596
|
|
|
|
|
|
|
|
1,326
|
|
|
|
204,996
|
|
|
|
|
|
|
|
|
|
|
|
3,499
|
|
|
|
209,821
|
|
Issuance of preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
647
|
|
|
|
|
|
|
|
(647
|
)
|
|
|
|
|
|
|
|
|
Tax benefit related to employee stock option and purchase plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,522
|
|
Stock-based compensation cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,399
|
|
Repurchase of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open market repurchases
|
|
|
|
|
|
|
|
|
|
|
(2,159,827
|
)
|
|
|
(2,159,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100,000
|
)
|
|
|
(100,000
|
)
|
Equity forwards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement cost, cash
|
|
|
|
|
|
|
|
|
|
|
(5,395,979
|
)
|
|
|
(5,395,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(295,376
|
)
|
|
|
(295,376
|
)
|
(Gain)/loss on settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,907
|
|
|
|
10,907
|
|
Benefit plans
|
|
|
|
|
|
|
|
|
|
|
(1,657,788
|
)
|
|
|
(1,657,788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87,479
|
)
|
|
|
(87,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(896,394
|
)
|
|
|
|
|
|
|
(896,394
|
)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101,591
|
)
|
|
|
|
|
|
|
|
|
|
|
(101,591
|
)
|
Change in unrealized gains (losses) on derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,004
|
)
|
|
|
|
|
|
|
|
|
|
|
(15,004
|
)
|
Defined benefit pension plans adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,848
|
|
|
|
|
|
|
|
|
|
|
|
3,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,009,141
|
)
|
Cash dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock ($.25 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(102,658
|
)
|
|
|
|
|
|
|
(102,658
|
)
|
Preferred stock, Series A ($3.49 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,500
|
)
|
|
|
|
|
|
|
(11,500
|
)
|
Preferred stock, Series B ($6.25 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,796
|
)
|
|
|
|
|
|
|
(24,796
|
)
|
Preferred stock, Series C ($.20 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(201
|
)
|
|
|
|
|
|
|
(201
|
)
|
Restricted stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
(8
|
)
|
Issuance of common shares
|
|
|
|
|
|
|
99,380,099
|
|
|
|
9,816,534
|
|
|
|
109,196,633
|
|
|
|
|
|
|
|
19,876
|
|
|
|
1,940,708
|
|
|
|
|
|
|
|
(235,548
|
)
|
|
|
423,446
|
|
|
|
2,148,482
|
|
Issuance of preferred shares
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
(30,678
|
)
|
|
|
|
|
|
|
(648
|
)
|
|
|
|
|
|
|
968,674
|
|
Tax benefit related to employee stock option and purchase plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,016
|
|
Stock-based compensation cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,917
|
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,761
|
)
|
|
|
|
|
|
|
(5,761
|
)
|
Repurchase of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open market repurchases
|
|
|
|
|
|
|
|
|
|
|
(1,809,700
|
)
|
|
|
(1,809,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65,018
|
)
|
|
|
(65,018
|
)
|
Equity forward settlement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement cost, cash
|
|
|
|
|
|
|
|
|
|
|
(4,110,929
|
)
|
|
|
(4,110,929
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(164,437
|
)
|
|
|
(164,437
|
)
|
(Gain)/loss on settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,716
|
|
|
|
54,716
|
|
Equity forwards agreed to be settled:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement cost, cash
|
|
|
|
|
|
|
|
|
|
|
(44,039,890
|
)
|
|
|
(44,039,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,992,938
|
)
|
|
|
(1,992,938
|
)
|
(Gain)/loss on settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,105,975
|
|
|
|
1,105,975
|
|
Benefit plans
|
|
|
|
|
|
|
|
|
|
|
(3,311,239
|
)
|
|
|
(3,311,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(152,829
|
)
|
|
|
(152,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
8,300,000
|
|
|
|
532,493,081
|
|
|
|
(65,951,394
|
)
|
|
|
466,541,687
|
|
|
|
$1,565,000
|
|
|
$
|
106,499
|
|
|
$
|
4,590,174
|
|
|
$
|
236,364
|
|
|
$
|
557,204
|
|
|
$
|
(1,831,706
|
)
|
|
$
|
5,223,535
|
|
F-6
SLM
CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY
(Dollars in thousands, except share and per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Stock
|
|
|
Common Stock Shares
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Treasury
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Issued
|
|
|
Treasury
|
|
|
Outstanding
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Stock
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
8,300,000
|
|
|
|
532,493,081
|
|
|
|
(65,951,394
|
)
|
|
|
466,541,687
|
|
|
$
|
1,565,000
|
|
|
$
|
106,499
|
|
|
$
|
4,590,174
|
|
|
$
|
236,364
|
|
|
$
|
557,204
|
|
|
$
|
(1,831,706
|
)
|
|
$
|
5,223,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(212,626
|
)
|
|
|
|
|
|
|
(212,626
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45,360
|
)
|
|
|
|
|
|
|
|
|
|
|
(45,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71,412
|
)
|
|
|
|
|
|
|
|
|
|
|
(71,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,413
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(330,811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, Series A ($3.49 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,501
|
)
|
|
|
|
|
|
|
(11,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, Series B ($4.09 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,927
|
)
|
|
|
|
|
|
|
(15,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, Series C ($69.48 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83,128
|
)
|
|
|
|
|
|
|
(83,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,852
|
)
|
|
|
|
|
|
|
(1,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares
|
|
|
|
|
|
|
1,908,595
|
|
|
|
3,667
|
|
|
|
1,912,262
|
|
|
|
|
|
|
|
382
|
|
|
|
38,575
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
39,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of preferred shares
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
(4,005
|
)
|
|
|
|
|
|
|
(650
|
)
|
|
|
|
|
|
|
145,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred shares
|
|
|
(230
|
)
|
|
|
9,595
|
|
|
|
|
|
|
|
9,595
|
|
|
|
(230
|
)
|
|
|
2
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit related to employee stock option and purchase plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(194,655
|
)
|
|
|
194,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit plans
|
|
|
|
|
|
|
|
|
|
|
(1,010,673
|
)
|
|
|
(1,010,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,767
|
)
|
|
|
(24,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
8,449,770
|
|
|
|
534,411,271
|
|
|
|
(66,958,400
|
)
|
|
|
467,452,871
|
|
|
$
|
1,714,770
|
|
|
$
|
106,883
|
|
|
$
|
4,684,112
|
|
|
$
|
(76,476
|
)
|
|
$
|
426,175
|
|
|
$
|
(1,856,394
|
)
|
|
$
|
4,999,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(212,626
|
)
|
|
$
|
(896,394
|
)
|
|
$
|
1,156,956
|
|
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on student loan securitizations
|
|
|
|
|
|
|
(367,300
|
)
|
|
|
(902,417
|
)
|
Losses on loans and securities, net
|
|
|
186,155
|
|
|
|
95,492
|
|
|
|
49,357
|
|
Stock-based compensation cost
|
|
|
86,271
|
|
|
|
74,621
|
|
|
|
81,163
|
|
Unrealized (gains)/losses on derivative and hedging activities,
excluding equity forwards
|
|
|
559,895
|
|
|
|
(214,963
|
)
|
|
|
(128,529
|
)
|
Unrealized (gains)/losses on derivative and hedging
activities equity forwards
|
|
|
|
|
|
|
1,558,025
|
|
|
|
359,193
|
|
Provisions for loan losses
|
|
|
719,650
|
|
|
|
1,015,308
|
|
|
|
286,962
|
|
Minority interest, net
|
|
|
(2,674
|
)
|
|
|
(779
|
)
|
|
|
(2,461
|
)
|
Mortgage loans originated
|
|
|
(60,927
|
)
|
|
|
(546,773
|
)
|
|
|
(1,291,782
|
)
|
Proceeds from sales of mortgage loans
|
|
|
66,396
|
|
|
|
615,274
|
|
|
|
1,364,448
|
|
Decrease (increase) in purchased paper-mortgages, net
|
|
|
301,234
|
|
|
|
(618,117
|
)
|
|
|
(214,916
|
)
|
(Increase) in student loans held-for-sale
|
|
|
(7,787,869
|
)
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted cash other
|
|
|
96,617
|
|
|
|
(84,537
|
)
|
|
|
71,312
|
|
(Increase) in accrued interest receivable
|
|
|
(279,082
|
)
|
|
|
(1,046,124
|
)
|
|
|
(970,580
|
)
|
(Decrease) increase in accrued interest payable
|
|
|
(200,501
|
)
|
|
|
214,401
|
|
|
|
277,617
|
|
Adjustment for non-cash (income)/loss related to Retained
Interest
|
|
|
425,462
|
|
|
|
279,246
|
|
|
|
157,715
|
|
Decrease in other assets, goodwill and acquired intangible
assets, net
|
|
|
559,417
|
|
|
|
761,787
|
|
|
|
730,221
|
|
(Decrease) in other liabilities
|
|
|
(155,768
|
)
|
|
|
(890,464
|
)
|
|
|
(215,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
(5,485,724
|
)
|
|
|
845,097
|
|
|
|
(348,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(5,698,350
|
)
|
|
|
(51,297
|
)
|
|
|
808,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loans acquired
|
|
|
(23,337,946
|
)
|
|
|
(39,303,005
|
)
|
|
|
(36,364,686
|
)
|
Loans purchased from securitized trusts (primarily loan
consolidations)
|
|
|
(1,243,671
|
)
|
|
|
(4,448,766
|
)
|
|
|
(7,443,157
|
)
|
Reduction of student loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment payments, claims and other
|
|
|
10,333,901
|
|
|
|
11,413,044
|
|
|
|
10,617,867
|
|
Proceeds from securitization of student loans treated as sales
|
|
|
|
|
|
|
1,976,599
|
|
|
|
19,521,365
|
|
Proceeds from sales of student loans
|
|
|
496,183
|
|
|
|
1,013,295
|
|
|
|
101,212
|
|
Other loans originated
|
|
|
(1,138,355
|
)
|
|
|
(3,396,501
|
)
|
|
|
(2,082,670
|
)
|
Other loans repaid
|
|
|
1,542,307
|
|
|
|
3,420,187
|
|
|
|
1,834,471
|
|
Other investing activities, net
|
|
|
(135,041
|
)
|
|
|
(358,209
|
)
|
|
|
(210,969
|
)
|
Purchases of available-for-sale securities
|
|
|
(101,140,587
|
)
|
|
|
(90,087,504
|
)
|
|
|
(85,189,100
|
)
|
Proceeds from sales of available-for-sale securities
|
|
|
328,530
|
|
|
|
73,217
|
|
|
|
25,941
|
|
Proceeds from maturities of available-for-sale securities
|
|
|
102,436,912
|
|
|
|
89,353,103
|
|
|
|
85,015,345
|
|
Purchases of held-to-maturity and other securities
|
|
|
(500,255
|
)
|
|
|
(330,450
|
)
|
|
|
(1,066,290
|
)
|
Proceeds from maturities of held-to-maturity securities and
other securities
|
|
|
407,180
|
|
|
|
435,468
|
|
|
|
1,278,897
|
|
Decrease (increase) in restricted cash on-balance
sheet trusts
|
|
|
918,403
|
|
|
|
(1,293,846
|
)
|
|
|
(304,749
|
)
|
Return of investment from Retained Interest
|
|
|
403,020
|
|
|
|
276,996
|
|
|
|
140,435
|
|
Purchase of subsidiaries, net of cash acquired
|
|
|
(37,868
|
)
|
|
|
|
|
|
|
(339,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(10,667,287
|
)
|
|
|
(31,256,372
|
)
|
|
|
(14,465,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings collateralized by loans in trust issued
|
|
|
17,986,955
|
|
|
|
23,943,837
|
|
|
|
12,984,937
|
|
Borrowings collateralized by loans in trust repaid
|
|
|
(6,299,483
|
)
|
|
|
(6,429,648
|
)
|
|
|
(5,578,268
|
)
|
Asset-backed commercial paper conduits net activity
|
|
|
(1,649,287
|
)
|
|
|
21,073,857
|
|
|
|
(6,173
|
)
|
ED Participation Program
|
|
|
7,364,969
|
|
|
|
|
|
|
|
|
|
Other short-term borrowings issued
|
|
|
2,592,429
|
|
|
|
594,434
|
|
|
|
15,374,178
|
|
Other short-term borrowings repaid
|
|
|
(1,512,031
|
)
|
|
|
(2,342,953
|
)
|
|
|
(15,434,264
|
)
|
Other long-term borrowings issued
|
|
|
3,563,003
|
|
|
|
1,567,602
|
|
|
|
11,739,249
|
|
Other long-term borrowings repaid
|
|
|
(9,518,655
|
)
|
|
|
(3,188,249
|
)
|
|
|
(4,744,432
|
)
|
Other financing activities, net
|
|
|
284,659
|
|
|
|
901,263
|
|
|
|
202,452
|
|
Excess tax benefit from the exercise of stock-based awards
|
|
|
281
|
|
|
|
30,316
|
|
|
|
32,985
|
|
Common stock issued
|
|
|
5,979
|
|
|
|
2,125,111
|
|
|
|
192,520
|
|
Net settlements on equity forward contracts
|
|
|
|
|
|
|
(614,217
|
)
|
|
|
(66,925
|
)
|
Common stock repurchased
|
|
|
|
|
|
|
(2,222,394
|
)
|
|
|
(482,855
|
)
|
Common dividends paid
|
|
|
|
|
|
|
(102,658
|
)
|
|
|
(398,414
|
)
|
Preferred stock issued
|
|
|
145,345
|
|
|
|
968,674
|
|
|
|
|
|
Preferred dividends paid
|
|
|
(110,556
|
)
|
|
|
(36,497
|
)
|
|
|
(34,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
12,853,608
|
|
|
|
36,268,478
|
|
|
|
13,780,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(3,512,029
|
)
|
|
|
4,960,809
|
|
|
|
122,567
|
|
Cash and cash equivalents at beginning of year
|
|
|
7,582,031
|
|
|
|
2,621,222
|
|
|
|
2,498,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
4,070,002
|
|
|
$
|
7,582,031
|
|
|
$
|
2,621,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash disbursements made for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
5,721,408
|
|
|
$
|
6,897,773
|
|
|
$
|
4,512,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
699,364
|
|
|
$
|
1,097,340
|
|
|
$
|
770,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-8
SLM
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per share amounts, unless otherwise
stated)
|
|
1.
|
Organization
and Business
|
SLM Corporation (the Company) is a holding company
that operates through a number of subsidiaries. The Company was
formed 36 years ago as the Student Loan Marketing
Association, a federally chartered government-sponsored
enterprise (the GSE), with the goal of furthering
access to higher education by acting as a secondary market for
student loans. In 2004, the Company completed its transformation
to a private company through its wind-down of the GSE. The
GSEs outstanding obligations were placed into a Master
Defeasance Trust Agreement as of December 29, 2004,
which was fully collateralized by direct, noncallable
obligations of the United States.
The Companys primary business is to originate and hold
student loans by providing funding, delivery and servicing
support for education loans in the United States through its
participation in the Federal Family Education Loan Program
(FFELP) and through offering non-federally
guaranteed Private Education Loans. The Company primarily
markets its FFELP Stafford and Private Education Loans through
on-campus financial aid offices.
The Company has expanded into a number of fee-based businesses,
most notably its Asset Performance Group (APG),
formerly known as Debt Management Operations (DMO)
business, which is presented as a distinct segment in accordance
with the Financial Accounting Standards Boards
(FASB) Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures about
Segments of an Enterprise and Related Information. The
Companys APG business segment provides a wide range of
accounts receivable and collections services including student
loan default aversion services, defaulted student loan portfolio
management services, contingency collections services for
student loans and other asset classes, and accounts receivable
management and collection for purchased portfolios of
receivables that are delinquent or have been charged off by
their original creditors as well as
sub-performing
and non-performing mortgage loans. In 2008, the Company
concluded that its APG purchased paper business no longer
produces a mutual strategic fit. The Company finalized the sale
of its international purchased paper non-mortgage business in
the first quarter of 2009 and is winding down the domestic side
of its purchased paper non-mortgage and purchased paper
mortgage/properties businesses.
The Company also earns fees for a number of services including
student loan and guarantee servicing, loan default aversion and
defaulted loan collections, and for providing processing
capabilities and information technology to educational
institutions, as well as, 529 college savings plan program
management, transfer and servicing agent services, and
administration services through Upromise Investments, Inc.
(UII) and Upromise Investment Advisors, LLC
(UIA). The Company also operates a consumer savings
network through Upromise, Inc. (Upromise).
References in this Annual Report to Upromise refer
to Upromise and its subsidiaries, UII and UIA.
On April 16, 2007, the Company announced that a buyer group
(Buyer Group) led by J.C. Flowers & Co.
(J.C. Flowers), Bank of America, N.A. and JPMorgan
Chase, N.A. signed a definitive agreement (Merger
Agreement) to acquire the Company (the Proposed
Merger) for approximately $25.3 billion or $60.00 per
share of common stock. On January 25, 2008, the Company,
Mustang Holding Company Inc. (Mustang Holding),
Mustang Merger Sub, Inc. (Mustang Sub), J.C.
Flowers, Bank of America, N.A. and JPMorgan Chase Bank, N.A.
entered into a Settlement, Termination and Release Agreement
(the Agreement). Under the Agreement, the lawsuit
filed by the Company on October 8, 2007, related to the
Proposed Merger, as well as all counterclaims, was dismissed and
the Merger Agreement dated April 15, 2007, among the
Company, Mustang Holding and Mustang Sub was terminated on
January 25, 2008.
On February 26, 2009, the Administration issued their 2010
budget request to Congress, which included provisions that could
impact significantly the FFELP. The Presidents budget
overview states: FFEL processors would continue to receive
federal subsidies for new loans originated in the
2009-2010
academic
F-9
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
1. |
Organization and Business (Continued)
|
year and prior academic years under the regular FFEL program and
the emergency programs established by the Ensuring Continued
Access to Student Loans Act of 2008. The budget proposal
must be passed in the Congress, prior to enactment into law. The
Company will work with Congress and ED to assist them in
achieving the objectives outlined in the Administrations
2010 budget request.
|
|
2.
|
Significant
Accounting Policies
|
Consolidation
The consolidated financial statements include the accounts of
SLM Corporation and its subsidiaries, after eliminating the
effects of intercompany accounts and transactions.
Financial Interpretation (FIN) No. 46(R),
Consolidation of Variable Interest Entities,
requires Variable Interest Entities (VIEs) to be
consolidated by their primary beneficiaries. A VIE exists when
either the total equity investment at risk is not sufficient to
permit the entity to finance its activities by itself, or the
equity investors lack one of three characteristics associated
with owning a controlling financial interest. Those
characteristics are the direct or indirect ability to make
decisions about an entitys activities that have a
significant impact on the success of the entity, the obligation
to absorb the expected losses of an entity, and the rights to
receive the expected residual returns of the entity.
As further discussed in Note 8, Student Loan
Securitization, the Company does not consolidate any
qualifying special purpose entities (QSPEs) created
for securitization purposes in accordance with
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities a Replacement of
SFAS No. 125. All of the Companys
off-balance sheet securitizations meet the definition of a QSPE
and are not consolidated. The Companys accounting
treatment for its on-balance sheet securitizations, which are
not QSPEs, are governed by FIN No. 46(R) and are
consolidated in the accompanying financial statements as the
Company is the primary beneficiary.
Use of
Estimates
The Companys financial reporting and accounting policies
conform to generally accepted accounting principles in the
United States of America (GAAP). The preparation of
financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates. Key accounting policies that include significant
judgments and estimates include valuation and income recognition
related to allowance for loan losses, loan effective interest
rate method (student loan premiums and discounts), fair value
measurements, securitization activities (gain on sale and the
related retained interest), and derivative accounting.
Loans
Loans, consisting of federally insured student loans, Private
Education Loans, student loan participations, lines of credit,
academic facilities financings, and other private consumer and
mortgage loans that the Company has the ability and intent to
hold for the foreseeable future are classified as held for
investment and are carried at amortized cost. Amortized cost
includes the unamortized premiums, discounts, and capitalized
origination costs and fees, all of which are amortized to
interest income as further discussed below. Loans which are
held-for-investment
also have an allowance for loan loss as needed. Any loans the
Company has the ability and intent to sell are classified as
held for sale, and carried at the lower of cost or fair value.
Loans
F-10
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
2. |
Significant Accounting Policies (Continued)
|
which are
held-for-sale
do not have the associated premium, discount, and capitalized
origination costs and fees amortized into interest income and
there is also no related allowance for loan loss.
As market conditions warrant, the Company actively securitizes
loans but securitization is viewed as one of many different
sources of financing. At the time of a funding need, the most
advantageous funding source is identified and, if that source is
the securitization program, loans are selected based on the
required characteristics to structure the desired transaction
(e.g., type of loan, mix of interim vs. repayment status, credit
rating, maturity dates, etc.). The Company structures
securitizations to obtain the most favorable financing terms and
as a result, due to some of the structuring terms, certain
transactions qualify for sale treatment under
SFAS No. 140 while others do not qualify for sale
treatment and are recorded as financings. All student loans are
initially categorized as held for investment until there is
certainty as to each specific loans ultimate financing
because the Company does not securitize all loans and not all
securitizations qualify as sales. It is only when the Company
has selected the loans to securitize and that securitization
transaction qualifies as a sale under SFAS No. 140 has
the Company made the decision to sell such loans. At that time,
the loans selected are transferred into the
held-for-sale
classification and carried at the lower of cost or fair value.
If the Company anticipates recognizing a gain related to the
impending securitization, then the fair value of the loans is
higher than their respective cost basis and no valuation
allowance is needed.
Under the Ensuring Continued Access to Student Loans Act
of 2008, ED has implemented the Loan Purchase Commitment
Program (Purchase Program). Under the Purchase
Program, ED will purchase eligible FFELP loans at a set price by
September 30, 2009 at the option of the Company. The
Company is classifying all loans eligible to be sold to ED under
the Purchase Program as
held-for-sale.
The Company currently has the ability and intent to sell such
loans to ED under the Purchase Program due to the current
environment in the capital markets. These loans are included in
the FFELP Stafford
Held-for-Sale
Loans line on the consolidated balance sheets.
Student
Loan Income
The Company recognizes student loan interest income as earned,
adjusted for the amortization of premiums and capitalized direct
origination costs, accretion of discounts, and after giving
effect to borrower utilization of incentives for timely payment
(Repayment Borrower Benefits). These adjustments are
made in accordance with SFAS No. 91, Accounting
for Non-Refundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases, which
requires income to be recognized based upon the expected yield
of the loan over its life after giving effect to prepayments and
extensions, and to estimates related to Repayment Borrower
Benefits. As a result, for loans that are held for investment,
premiums, discounts, and capitalized direct origination costs
and fees are amortized over the estimated life of the loan,
which includes an estimate of prepayment speeds. The estimate of
the prepayment speed must consider the effect of consolidations,
voluntary prepayments and student loan defaults, all of which
shorten the life of loan. Prepayment speed estimates must also
consider the utilization of deferment and forbearance, which
lengthen the life of loan, coupled with managements
expectation of future activity. For Repayment Borrower Benefits,
the estimates of their effect on student loan yield are based on
analyses of historical payment behavior of borrowers who are
eligible for the incentives and its effect on the ultimate
qualification rate for these incentives. The Company
periodically evaluates the assumptions used to estimate its loan
life and the qualification rates used for Repayment Borrower
Benefits. In instances where there are changes to the
assumptions, amortization is adjusted on a cumulative basis to
reflect the change since the acquisition of the loan. The
Company pays an annual 105 basis point Consolidation Loan
Rebate Fee on FFELP Consolidation Loans which is netted against
student loan income. Additionally, interest earned on student
loans reflects
F-11
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
|
potential non-payment adjustments in accordance with the
Companys non-accrual policy as discussed further in
Allowance for Student Loan Losses below.
The Company recognizes certain fee income (primarily late fees
and forbearance fees) on student loans according to the
contractual provisions of the promissory notes, as well as the
Companys expectation of collectability. Student loan fee
income is recorded when earned in other income in
the consolidated statements of income.
Allowance
for Student Loan Losses
The Company has established an allowance for student loan losses
that is an estimate of probable losses incurred in the FFELP and
Private Education Loan portfolios at the balance sheet date. The
Company presents student loans net of the allowance on the
balance sheet. Estimated probable losses are expensed through
the provision for loan losses in the period that the loss event
occurs. Estimated probable losses contemplate expected
recoveries. As further discussed in Note 4, Allowance
for Loan Losses, the Company changed its charge-off
policy. Prior to December 31, 2008, when a default event
occurred, the face amount of the loan was charged to the
allowance for loan loss and the amount attributable to expected
recoveries would remain in the allowance for loan loss until
received. Effective December 31, 2008, charge-offs reflect
only the amount of the expected loss (i.e. face amount less
expected recovery) and amounts attributable to expected
recoveries remain in the balance of student loans.
In evaluating the adequacy of the allowance for losses on the
Private Education Loan portfolio, the Company considers several
factors including the credit profile of the borrower
and/or
cosigner, the loans payment status (e.g., whether the loan
is in repayment versus in a permitted non-paying status), months
since initially entering repayment, delinquency status, type of
program, trends in program completion/graduation rates, and
trends in defaults in the portfolio based on Company, industry
and economic data. When calculating the Private Education Loan
allowance for losses, the Companys methodology, based on a
migration analysis, divides the portfolio into categories of
similar risk characteristics based on loan program type,
underwriting criteria and the existence or absence of a
cosigner, with a further breakdown for each of the factors
mentioned above within these categories. The Company then
applies default and recovery rate projections to each category.
Once the quantitative calculation is performed, the Company
reviews adequacy of the allowance for loan losses and determines
if qualitative adjustments need to be considered. Private
Education Loan principal is charged off against the allowance
when the loan exceeds 212 days delinquency. The
Companys collection policies allow for periods of
nonpayment for borrowers experiencing temporary difficulty
meeting payment obligations which are referred to as forbearance.
FFELP loans are guaranteed (subject to legislative risk sharing
requirements) as to both principal and interest, and therefore
continue to accrued interest until such time that they are paid
by the guarantor. The Company uses a similar methodology
applying the same factors (where relevant) when estimating
losses for the Risk Sharing on FFELP loans.
The Companys non-accrual policy for Private Education
Loans relies on the same loan status migration methodology used
for its principal balances to estimate the amount of interest
income recognized in the current period that the Company does
not expect to collect in subsequent periods. The provision for
estimated losses on accrued interest is classified as a
reduction in student loan interest income.
When Private Education Loans in the Companys off-balance
sheet securitized trusts settling before September 30, 2005
become 180 days delinquent, the Company previously
exercised its contingent call option (the Company does not hold
the contingent call option for any trusts settling after
September 30, 2005) to repurchase these loans at par
value and record a loss for the difference in the par value paid
and the fair
F-12
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
|
market value of the loan at the time of purchase, in accordance
with the American Institute of Certified Public
Accountants (AICPA) Statement of Position
(SOP)
03-3,
Accounting for Certain Loans or Debt Securities Acquired
in a Transfer. Beginning in October 2008, the Company
decided to no longer exercise its contingent call option. The
losses recorded upon repurchase, pertaining to the contingent
call option and specialty claims, for the years ended
December 31, 2008, 2007, and 2006 were $141 million,
$123 million, and $48 million, respectively, and were
recorded in the Losses on loans and securities, net
line item in the consolidated statements of income. Subsequent
to buyback, the Company accounts for these loans under
SOP 03-3
in the same manner as discussed under Collections
Revenue for the Companys purchased paper
portfolio. The initial valuation at buyback uses a discount rate
similar to that used in valuing the Private Education Loan
Residual Interests as that rate takes into account the credit
and liquidity risks inherent in the loans being repurchased.
Interest income recognized is recorded as part of student loan
interest income.
Cash
and Cash Equivalents
Cash and cash equivalents includes term federal funds,
Eurodollar deposits, money market funds and bank deposits with
original terms to maturity of less than three months.
Restricted
Cash and Investments
Restricted cash primarily includes amounts for on-balance sheet
student loan securitizations and other secured borrowings. This
cash must be used to make payments related to trust obligations.
Amounts on deposit in these accounts are primarily the result of
timing differences between when principal and interest is
collected on the trust assets and when principal and interest is
paid on trust liabilities.
In connection with the Companys tuition payment plan
product, the Company receives cash from students and parents
that in turn is owed to schools. This cash, a majority of which
has been deposited at Sallie Mae Bank, is held in escrow for the
beneficial owners. In addition, the cash rebates that Upromise
members earn from qualifying purchases from Upromises
participating companies are held in trust for the benefit of
the members. This cash is restricted to certain investments
until distributed in accordance with the Upromise members
request and the terms of the Upromise service. Upromise, which
acts as the trustee for the trust, has deposited a majority of
the cash with Sallie Mae Bank pursuant to a money market deposit
account agreement between Sallie Mae Bank and the trust. Subject
to capital requirements and other laws, regulations and
restrictions applicable to Utah industrial banks, the cash that
is deposited with Sallie Mae Bank in connection with the tuition
payment plan and the Upromise rebates described above is not
restricted and, accordingly, is not included in restricted cash
and investments in the Companys consolidated financial
statements, as there is no restriction surrounding the use of
funds by the Company.
Securities pledged as collateral related to the Companys
derivative portfolio where the counterparty has rights of
rehypothecation, are classified as restricted. When the
counterparty does not have these rights, the security is
recorded in investments and disclosed as pledged collateral in
the notes. Cash balances that the Companys indentured
trusts deposit in guaranteed investment contracts that are held
in trust for the related note holders are classified as
restricted investments. Finally, cash received from lending
institutions that is invested pending disbursement for student
loans is restricted and cannot be disbursed for any other
purpose.
Investments
Investments are held to provide liquidity and to serve as a
source of income. The majority of the Companys investments
are classified as
available-for-sale
and such securities are carried at fair value, with the
temporary changes in fair value carried as a separate component
of stockholders equity. Changes in fair value for
available-for-sale
securities that have been designated as the hedged item in a
SFAS No. 133 fair
F-13
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
|
value hedge (as it relates to the hedged risks) are recorded in
the gains (losses) on derivative and hedging activities,
net line in the consolidated statements of income
offsetting changes in fair value of the derivative which is
hedging such investment. Temporary changes in fair value of the
security as it relates to non-hedged risks are carried as a
separate component of stockholders equity. The amortized
cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts, which are
amortized using the effective interest rate method. Impairment
is evaluated by considering several factors including the length
of time and extent to which the fair value has been less than
cost, the financial condition and near-term prospects of the
issuer, and the intent and ability to retain the investment in
order to allow for an anticipated recovery in fair value. If,
based on the analysis, it is determined that the impairment is
other than temporary, the investment is written down to fair
value and a loss is recognized through earnings. Securities
classified as trading are accounted for at fair value with
unrealized gains and losses included in investment income.
Securities that the Company has the intent and ability to hold
to maturity are classified as
held-to-maturity
and are accounted for at amortized cost.
The Company also has investments in leveraged leases, primarily
with U.S. commercial airlines, which are accounted for at
amortized cost net of impairments in other investments, and
insurance-related investments carried in other assets.
Interest
Expense
Interest expense is based upon contractual interest rates
adjusted for the amortization of debt issuance costs and
premiums and the accretion of discounts. The Companys
interest expense may also be adjusted for net payments/receipts
related to interest rate and foreign currency swap agreements
and interest rate futures contracts that qualify and are
designated as hedges under GAAP. Interest expense also includes
the amortization of deferred gains and losses on closed hedge
transactions that qualified as cash flow hedges. Amortization of
debt issue costs, premiums, discounts and terminated hedge basis
adjustments are recognized using the effective interest rate
method.
Transfer
of Financial Assets
The Company accounts for the transfer of financial assets under
SFAS No. 140, Accounting and Servicing of
Financial Assets and Extinguishments of Liabilities. The
primary activity which falls under SFAS No. 140 for
the Company is securitization accounting which is further
discussed below. The companys indentured trust debt, ABCP
borrowings and ED Participation Program facility were accounted
for as on-balance sheet secured borrowings under
SFAS No. 140 as the trusts were either not QSPEs
and/or the
Company controlled the transferred assets. See
Securitization Accounting below for further
discussion on the criteria assessed under SFAS No. 140
to determine whether a transfer of financial assets is a sale or
a secured borrowing.
Securitization
Accounting
To meet the sale criteria of SFAS No. 140, the
Companys securitizations use a two-step structure with a
QSPE that legally isolates the transferred assets from the
Company, even in the event of bankruptcy. Transactions receiving
sale treatment are also structured to ensure that the holders of
the beneficial interests issued by the QSPE are not constrained
from pledging or exchanging their interests, and that the
Company does not maintain effective control over the transferred
assets. If these criteria are not met, then the transaction is
accounted for as an on-balance sheet secured borrowing under
FIN No. 46(R), as the Company is the primary
beneficiary of the VIE. In all cases, irrespective of whether
they qualify as sales under SFAS No. 140,
F-14
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
|
the Companys securitizations are structured such that
legally they are sales of assets that isolate the transferred
assets from the Company.
The Company assesses the financial structure of each
securitization to determine whether the trust or other
securitization vehicle meets the sale criteria as defined in
SFAS No. 140 and accounts for the transaction
accordingly. To be a QSPE, the trust must meet all of the
following conditions:
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It is demonstrably distinct from the Company and cannot be
unilaterally dissolved by the Company and at least
10 percent of the fair value of its interests is held by
independent third parties.
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The permitted activities in which the trust can participate are
significantly limited. These activities must be entirely
specified in the legal documents at the inception of the QSPE.
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There are limits to the assets the QSPE can hold; specifically,
it can hold only financial assets transferred to it that are
passive in nature, passive derivative instruments pertaining to
the beneficial interests held by independent third parties,
servicing rights, temporary investments pending distribution to
security holders, and cash.
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It can only dispose of its assets in automatic response to the
occurrence of an event specified in the applicable legal
documents and must be outside the control of the Company.
|
In certain securitizations there are certain terms present
within the deal structure that result in such securitizations
not qualifying for sale treatment by failing to meet the
criteria required for the securitization entity (trust) to be a
QSPE. Accordingly, these securitization trusts are accounted for
as VIEs. Because the Company is considered the primary
beneficiary in such VIEs, the transfer is deemed a financing and
the trust is consolidated in the financial statements. The terms
present in these structures that prevent sale treatment are:
(1) the Company holds rights that can affect the
remarketing of specific trust bonds that are not significantly
limited, (2) the trust has the right to enter into interest
rate cap agreements after its settlement date that do not relate
to the reissuance of third-party beneficial interests and
(3) the Company may hold an unconditional call option
related to a certain percentage of trust assets.
Irrespective of whether a securitization receives sale treatment
or not, the Companys continuing involvement with its
securitization trusts is generally limited to:
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Owning the equity certificates of the trust.
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The servicing of the student loan assets within the
securitization trusts, on both a pre- and post-default basis.
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The Companys role as the administrator for the
securitization transactions it sponsored, which includes
remarketing certain bonds at future dates.
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The Companys responsibilities relative to representation
and warranty violations and the reimbursement of borrower
benefits.
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Certain
back-to-back
derivatives entered into by the Company contemporaneously with
the execution of derivatives by certain Private Education Loan
securitization trusts.
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The option held by the Company to buy certain delinquent loans
from certain Private Education Loan securitization trusts.
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The option to exercise the
clean-up
call and purchase the student loans from the trust when the
asset balance is 10 percent or less of the original loan
balance.
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The option (in certain trusts) to call rate reset notes in
instances where the remarketing process has failed.
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F-15
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
2. |
Significant Accounting Policies (Continued)
|
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. Generally, the only arrangements the
Company has to provide financial support to the trusts are:
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representation and warranty violations requiring the buybacks of
loans;
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the reimbursement to the trust of borrower benefits afforded the
borrowers of student loans that have been securitized; or
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funding specific cash accounts within certain trusts related to
the remarketing of certain bonds.
|
Under the terms of the transaction documents of certain trusts,
the Company has from time to time, exercised its options to
purchase delinquent loans from Private Education Loan trusts,
purchase the remaining loans from trusts once the loan balance
falls below 10 percent of the original amount, or call rate
reset notes. The Company has not provided any financial support
to the securitization trusts that it was not contractually
required to provide in the past. Certain trusts maintain
financial arrangements with third parties also typical of
securitization transactions, such as derivative contracts
(swaps) and bond insurance policies that, in the case of a
counterparty failure, could adversely impact the value of the
Companys Residual Interest.
Retained
Interest
The Company securitizes its student loan assets, and for
transactions qualifying as sales, retains Residual Interests and
servicing rights (as the Company retains the servicing
responsibilities), all of which are referred to as the
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.
When the Company qualifies for sale treatment on its
securitizations, it recognizes the resulting gain on student
loan securitizations in the consolidated statements of income.
This gain is based upon the difference between the allocated
cost basis of the assets sold and the relative fair value of the
assets received. The component in determining the fair value of
the assets received that involves the most judgment is the
valuation of the Residual Interest. The Company estimates the
fair value of the Residual Interest, both initially and each
subsequent quarter, based on the present value of future
expected cash flows using managements best estimates of
the following key assumptions credit losses,
prepayment speeds and discount rates commensurate with the risks
involved. Quoted market prices are not available. The Company
adopted SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an
Amendment of FASB Statement 115, effective January 1,
2008, whereby the Company elected to carry all Residual
Interests at fair value with subsequent changes in fair value
recorded in earnings, as further discussed below under
Recently Issued Accounting Policies The
Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
115.
The fair value of the Fixed Rate Embedded Floor Income is a
component of the Residual Interest and is determined both
initially at the time of the sale of the student loans and each
subsequent quarter. This estimate is based on an option
valuation and a discounted cash flow calculation that considers
the current borrower rate, Special Allowance Payment
(SAP) spreads and the term for which the loan is
eligible to earn Floor Income as well as time value, forward
interest rate curve and volatility factors. Variable Rate Floor
Income received is recorded as earned in securitization income.
The Company also receives income for servicing the loans in its
securitization trusts which is recognized as earned. The Company
assesses the amounts received as compensation for these
activities at inception and
F-16
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
|
on an ongoing basis to determine if the amounts received are
adequate compensation as defined in SFAS No. 140. To
the extent such compensation is determined to be no more or less
than adequate compensation, no servicing asset or obligation is
recorded at the time of securitization. Servicing rights are
subsequently carried at the lower of cost or market. At
December 31, 2008 and 2007, the Company did not have
servicing assets or liabilities recorded on the balance sheet.
Derivative
Accounting
The Company accounts for its derivatives, which include interest
rate swaps, cross-currency interest rate swaps, interest rate
futures contracts, interest rate cap contracts, Floor Income
Contracts and equity forward contracts in accordance with
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which requires that
every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded at fair
value on the balance sheet as either an asset or liability.
Derivative positions are recorded as net positions by
counterparty based on master netting arrangements (see
Note 9, Derivative Instruments, under Risk
Management Strategy) exclusive of accrued interest and cash
collateral held or pledged. The Company determines the fair
value for its derivative contracts primarily using pricing
models that consider current market conditions and the
contractual terms of the derivative contract. These factors
include interest rates, time value, forward interest rate curve,
volatility factors, forward foreign exchange rates, and the
closing price of the Companys stock (related to its equity
forward contracts). Inputs are generally from active financial
markets; however, adjustments are made to derivative valuations
for inputs from illiquid markets, and for credit for both when
the Company has an exposure to the counterparty net of
collateral held and when the counterparty has exposure to the
Company net of collateral pledged. The fair values of some
derivatives are determined using counterparty valuations.
Pricing models and their underlying assumptions impact the
amount and timing of unrealized gains and losses recognized with
regard to derivatives, and the use of different pricing models
or assumptions could produce different financial results. As a
matter of policy, the Company compares the fair values of its
derivatives that it calculates to those provided by its
counterparties. Any significant differences are identified and
resolved appropriately.
Many of the Companys derivatives, mainly interest rate
swaps hedging the fair value of fixed rate assets and
liabilities, cross-currency interest rate swaps, and certain
Eurodollar futures contracts, qualify as effective hedges under
SFAS No. 133. For these derivatives, the relationship
between the hedging instrument and the hedged items (including
the hedged risk and method for assessing effectiveness), as well
as the risk management objective and strategy for undertaking
various hedge transactions at the inception of the hedging
relationship, is documented. Each derivative is designated to
either a specific asset or liability on the balance sheet or
expected future cash flows, and designated as either a
fair value or a cash flow hedge. Fair
value hedges are designed to hedge the Companys exposure
to changes in fair value of a fixed rate or foreign denominated
asset or liability, while cash flow hedges are designed to hedge
the Companys exposure to variability of either a floating
rate assets or liabilitys cash flows or an expected
fixed rate debt issuance. For effective fair value hedges, both
the hedge and the hedged item (for the risk being hedged) are
marked-to-market
with any difference reflecting ineffectiveness and recorded
immediately in the statement of income. For effective cash flow
hedges, the change in the fair value of the derivative is
recorded in other comprehensive income, net of tax, and
recognized in earnings in the same period as the earnings
effects of the hedged item. The ineffective portion of a cash
flow hedge is recorded immediately through earnings. The
assessment of the hedges effectiveness is performed at
inception and on an ongoing basis, generally using regression
testing. When it is determined that a derivative is not
currently an effective hedge, ineffectiveness is recognized for
the full change in value of the derivative with no offsetting
mark-to-market
of the hedged item for the current period. If it is also
determined the hedge will not be effective in the future, the
Company
F-17
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
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2. |
Significant Accounting Policies (Continued)
|
discontinues the hedge accounting prospectively, ceases
recording changes in the fair value of the hedged item, and
begins amortization of any basis adjustments that exist related
to the hedged item.
The Company also has a number of derivatives, primarily Floor
Income Contracts and certain basis swaps, that the Company
believes are effective economic hedges but are not considered
hedges under SFAS No. 133. These derivatives are
classified as trading for GAAP purposes and as a
result they are
marked-to-market
through GAAP earnings with no consideration for the price
fluctuation of the economically hedged item.
Under SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity, equity forward contracts that allow a net
settlement option either in cash or the Companys stock are
required to be accounted for in accordance with
SFAS No. 133 as derivatives. Prior to 2008, the
Company used these contracts to lock-in the purchase price of
the Companys stock related to share repurchases. As a
result, the Company marks its equity forward contracts to market
through earnings in the gains (losses) on derivative and
hedging activities, net line item in the consolidated
statements of income along with the net settlement expense on
the contracts. See Note 11, Stockholders
Equity, for a discussion on the change in accounting
related to equity forward contracts as of December 31,
2007. As of January 2008, these contracts had been settled.
The gains (losses) on derivative and hedging activities,
net line item in the consolidated statements of income
includes the unrealized changes in the fair value of the
Companys derivatives (except effective cash flow hedges
which are recorded in other comprehensive income), the
unrealized changes in fair value of hedged items in qualifying
fair value hedges, as well as the realized changes in fair value
related to derivative net settlements and dispositions that do
not qualify for hedge accounting. Net settlement income/expense
on derivatives that qualify as hedges under
SFAS No. 133 are included with the income or expense
of the hedged item (mainly interest expense).
Goodwill
and Acquired Intangible Assets
The Company accounts for goodwill and acquired intangible assets
in accordance with SFAS No. 142, Goodwill and
Other Intangible Assets, pursuant to which goodwill is not
amortized. Goodwill is tested for impairment annually as of
September 30 at the reporting unit level, which is the same as
or one level below an operating segment as defined in
SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information. Goodwill is also
tested at interim periods if an event occurs or circumstances
change that would indicate the carrying amount may be impaired.
In accordance with SFAS No. 142, Step 1 of the
goodwill impairment analysis consists of a comparison of the
fair value of the reporting unit to its carrying value,
including goodwill. If the carrying value of the reporting unit
exceeds the fair value, Step 2 in the goodwill impairment
analysis is performed to measure the amount of impairment loss,
if any. Step 2 of the goodwill impairment analysis compares the
implied fair value of the reporting units goodwill to the
carrying value of the reporting units goodwill. The
implied fair value of goodwill is determined in a manner
consistent with determining goodwill in a business combination.
If the carrying amount of the reporting units goodwill
exceeds the implied fair value of the goodwill, an impairment
loss is recognized in an amount equal to that excess.
Other acquired intangible assets, which include but are not
limited to tradenames, customer and other relationships, and
non-compete agreements, are also accounted for in accordance
with SFAS No. 142. Acquired intangible assets with
definite or finite lives are amortized over their estimated
useful lives in proportion to their estimated economic benefit.
Finite-lived acquired intangible assets are reviewed for
impairment using an undiscounted cash flow analysis when an
event occurs or circumstances change
F-18
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
|
indicating the carrying amount of a finite-lived asset or asset
group may not be recoverable. An impairment loss would be
recognized if the carrying amount of the asset (or asset group)
exceeds the estimated undiscounted cash flows used to determine
the fair value of the asset or asset group. The impairment loss
recognized would be the difference between the carrying amount
and fair value. Indefinite-life acquired intangible assets are
not amortized. They are tested for impairment annually as of
September 30 or at interim periods if an event occurs or
circumstances change that would indicate the carrying value of
these assets may be impaired. The annual or interim impairment
test of indefinite-lived acquired intangible assets is based
primarily on a discounted cash flow analysis.
Guarantor
Servicing Fees
The Company provides a full complement of administrative
services to FFELP guarantors including guarantee issuance,
process, account maintenance, and guarantee fulfillment services
for guarantor agencies, the U.S. Department of Education
(ED), educational institutions and financial
institutions. The fees associated with these services are
recognized as earned based on contractually determined rates.
The Company is party to a guarantor servicing contract with
United Student Aid Funds, Inc. (USA Funds), which
accounted for 85 percent, 86 percent and
83 percent of guarantor servicing fees for the years ended
December 31, 2008, 2007, and 2006, respectively.
Contingency
Fee Revenue
The Company receives fees for collections of delinquent debt on
behalf of clients performed on a contingency basis. Revenue is
earned and recognized upon receipt of the borrower funds.
The Company also receives fees from guarantor agencies for
performing default aversion services on delinquent loans prior
to default. The fee is received when the loan is initially
placed with the Company and the Company is obligated to provide
such services for the remaining life of the loan for no
additional fee. In the event that the loan defaults, the Company
is obligated to rebate a portion of the fee to the guarantor
agency in proportion to the principal and interest outstanding
when the loan defaults. The Company recognizes fees received,
net of actual rebates for defaults, over the service period
which is estimated to be the life of the loan.
Collections
Revenue
The Company has purchased delinquent and charged off receivables
on various types of consumer debt with a primary emphasis on
charged off credit card receivables, and
sub-performing
and non-performing mortgage loans. The Company accounts for its
investments in charged off receivables and
sub-performing
and non-performing mortgage loans in accordance with
AICPAs
SOP 03-3,
Accounting for Certain Loans or Debt Securities Acquired
in a Transfer. Under
SOP 03-3,
the Company establishes static pools of each quarters
purchases and aggregates them based on common risk
characteristics. The pools when formed are initially recorded at
fair value, based on each pools estimated future cash
flows and internal rate of return. The Company recognizes income
each month based on each static pools effective interest
rate. The static pools are tested quarterly for impairment by
re-estimating the future cash flows to be received from the
pools. If the new estimated cash flows result in a pools
effective interest rate increasing, then this new yield is used
prospectively over the remaining life of the static pool. If the
new estimated cash flows result in a pools effective
interest rate decreasing, the pool is impaired and written down
through a valuation allowance to maintain the effective interest
rate. Net interest income earned, less any impairments
recognized, on the purchased portfolios is recorded as
collection revenue in the consolidated statements of income.
When mortgage loans default and the Company forecloses and owns
the underlying real estate, the Company carries
F-19
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
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such real estate at the lower of cost or fair value. Primarily
due to the weakening of the U.S. economy and declines in
real estate values, the Company recorded $368 million of
impairment in 2008 related to the purchased paper portfolios.
There is approximately $1.2 billion on the balance sheet as
of December 31, 2008 related to those assets.
Restructuring
Activities
The Company is restructuring its business in response to the
impact of the College Cost Reduction and Access Act of 2007
(CCRAA) and challenges in the capital markets.
One-time, involuntary benefit arrangements, disposal costs
(including contract termination costs and other exit costs), as
well as certain other costs that are incremental and incurred as
a direct result of the Companys restructuring plans, are
accounted for in accordance with the FASBs
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, and are classified as
restructuring expenses in the accompanying consolidated
statements of income.
In conjunction with its restructuring plans, the Company has
entered into one-time benefit arrangements with employees,
primarily senior executives, who have been involuntarily
terminated. The Company recognizes a liability when all of the
following conditions have been met and the benefit arrangement
has been communicated to the employees:
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Management, having the authority to approve the action, commits
to a plan of termination;
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The plan of termination identifies the number of employees to be
terminated, their job classifications or functions and their
locations and the expected completion date;
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The plan of termination establishes the terms of the benefit
arrangement, including the benefits that employees will receive
upon termination, in sufficient detail to enable employees to
determine the type and amount of benefits they will receive if
they are involuntarily terminated; and
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Actions required to complete the plan of termination indicate
that it is unlikely that significant changes to the plan of
termination will be made or that the plan of termination will be
withdrawn.
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Severance costs under such one-time termination benefit
arrangements may include all or some combination of severance
pay, medical and dental benefits, outplacement services, and
certain other costs.
Contract termination costs are expensed at the earlier of
(1) the contract termination date or (2) the cease use
date under the contract. Other exit costs are expensed as
incurred and classified as restructuring expenses if
(1) the cost is incremental to and incurred as a direct
result of planned restructuring activities, and (2) the
cost is not associated with or incurred to generate revenues
subsequent to the Companys consummation of the related
restructuring activities.
In addition to one-time involuntary benefit arrangements, the
Company sponsors the SLM Corporation Employee Severance Plan,
which provides severance benefits in the event of termination of
the Companys and its subsidiaries full-time
employees (with the exception of certain specified levels of
management and employees of the Companys APG subsidiaries)
and part-time employees who work at least 24 hours per
week. The Company also sponsors the DMO Employee Severance Plan,
which provides severance benefits to certain specified levels of
full-time management and full-time employees in the
Companys APG subsidiaries. The Employee Severance Plan and
the DMO Employee Severance Plan (collectively, the
Severance Plan) establishes specified benefits based
on base salary, job level immediately preceding termination and
years of service upon termination of employment due to
Involuntary Termination or a Job Abolishment, as defined in the
Severance Plan. The benefits payable under the Severance Plan
relate to past service and they accumulate
F-20
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
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and vest. Accordingly, the Company recognizes severance costs to
be paid pursuant to the Severance Plan in accordance with
SFAS No. 112, Employers Accounting for
Post Employment Benefits, when payment of such benefits is
probable and reasonably estimable. Such benefits, including
severance pay calculated based on the Severance Plan, medical
and dental benefits, outplacement services and continuation pay,
have been incurred during the year ended December 31, 2008
and the fourth quarter of 2007 as a direct result of the
Companys restructuring initiatives. Accordingly, such
costs are classified as restructuring expenses in the
accompanying consolidated statements of income. See Note 15
Restructuring Activities, for further information on
the restructuring activities.
Software
Development Costs
Certain direct development costs associated with internal-use
software are capitalized, including external direct costs of
services and payroll costs for employees devoting time to the
software projects. These costs are included in other assets and
are amortized over a period not to exceed five years beginning
when the asset is technologically feasible and substantially
ready for use. Maintenance costs and research and development
costs relating to software to be sold or leased are expensed as
incurred.
During the years ended December 31, 2008, 2007 and 2006,
the Company capitalized $23 million, $19 million and
$16 million, respectively, in costs related to software
development, and expensed $120 million, $126 million
and $131 million, respectively, related to routine
maintenance, betterments and amortization. At December 31,
2008 and 2007, the unamortized balance of capitalized internally
developed software included in other assets was $56 million
and $54 million, respectively. The Company amortizes
software development costs over three to five years.
Accounting
for Stock-Based Compensation
On January 1, 2006, the Company adopted the provisions of
SFAS No. 123(R), Share-Based Payment,
which is a revision of SFAS No. 123, Accounting
for Stock-Based Compensation, and began recognizing
stock-based compensation cost in its consolidated statements of
income using the fair value based method. Prior to 2006, the
Company accounted for its stock option plans using the intrinsic
value method of accounting provided under Accounting Principles
Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and no compensation cost
related to its stock option grants was recognized in its
consolidated statements of income.
The adoption of SFAS No. 123(R) reduced the
Companys net earnings by $47 million,
$36 million and $39 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
SFAS No. 123(R) requires that the excess (i.e.,
windfall) tax benefits from tax deductions on the exercise of
share-based payments exceeding the deferred tax assets from the
cumulative compensation cost previously recognized be classified
as cash inflows from financing activities in the consolidated
statement of cash flows. Prior to the adoption of
SFAS No. 123(R), the Company presented all excess tax
benefits resulting from the exercise of share-based payments as
operating cash flows. The excess tax benefit for the year ended
December 31, 2008 was $0.3 million.
Income
Taxes
Income taxes are recorded in accordance with
SFAS No. 109, Accounting for Income Taxes.
The asset and liability approach underlying
SFAS No. 109 requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences
of temporary differences between the carrying amounts and tax
basis
F-21
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
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of the Companys assets and liabilities. To the extent tax
laws change, deferred tax assets and liabilities are adjusted in
the period that the tax change is enacted.
Income tax expense includes (i) deferred tax
expense, which represents the net change in the deferred tax
asset or liability balance during the year plus any change in a
valuation allowance, and (ii) current tax expense, which
represents the amount of tax currently payable to or receivable
from a tax authority plus amounts accrued for unrecognized tax
benefits. Income tax expense excludes the tax effects related to
adjustments recorded in equity.
The Company adopted the provisions of the FASBs
FIN No. 48, Accounting for Uncertainty in Income
Taxes, on January 1, 2007. Under
FIN No. 48, an uncertain tax position is recognized
only if it is more likely than not to be sustained upon
examination based on the technical merits of the position. The
amount of tax benefit recognized in the financial statements is
the largest amount of benefit that is more than fifty percent
likely of being sustained upon ultimate settlement of the
uncertain tax position. The Company recognizes interest related
to unrecognized tax benefits in income tax expense, and
penalties, if any, in operating expenses.
Earnings
(Loss) per Common Share
The Company computes earnings (loss) per common share
(EPS) in accordance with SFAS No. 128,
Earnings per Share. See Note 12, Earnings
(Loss) per Common Share, for further discussion.
Foreign
Currency Transactions
The Company has financial services operations in foreign
countries. The financial statements of these foreign businesses
have been translated into U.S. dollars in accordance with
U.S. GAAP. The net investments of the parent in the foreign
subsidiary are translated at the current exchange rate at each
period-end through the other comprehensive income
component of stockholders equity for net investments
deemed to be long-term in nature or through net income if the
net investment is short-term in nature. Income statement items
are translated at the average exchange rate for the period
through income. Transaction gains and losses resulting from
exchange rate changes on transactions denominated in currencies
other than the entitys functional currency are included in
other operating income.
Statement
of Cash Flows
Included in the Companys financial statements is the
consolidated statement of cash flows. It is the policy of the
Company to include all derivative net settlements, irrespective
of whether the derivative is a qualifying hedge, in the same
section of the statement of cash flows that the derivative is
economically hedging.
As discussed above under Restricted Cash and
Investments, the Companys restricted cash
balances primarily relate to on-balance sheet securitizations.
This balance is primarily the result of timing differences
between when principal and interest is collected on the trust
assets and when principal and interest is paid on the trust
liabilities. As such, changes in this balance are reflected in
investing activities.
Reclassifications
Certain reclassifications have been made to the balances as of
and for the years ended December 31, 2007 and 2006, to be
consistent with classifications adopted for 2008.
F-22
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
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Recently
Issued Accounting Pronouncements
Fair
Value Measurements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This statement was
effective January 1, 2008 for the Company. 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 adoption of
SFAS No. 157 on January 1, 2008 did not have a
material impact on the Companys financial statements.
On February 12, 2008, the FASB issued FASB Staff Position
(FSP)
SFAS No. 157-2,
Effective Date of SFAS No. 157, which
defers the effective date of SFAS No. 157 for
nonfinancial assets and liabilities, except for items that are
recognized or disclosed at fair value in the financial
statements on a recurring basis. This FSP delayed the
implementation of SFAS No. 157 for the Companys
accounting of goodwill, acquired intangibles, and other
nonfinancial assets and liabilities that are measured at the
lower of cost or fair value until January 1, 2009.
In light of the recent economic turmoil occurring in the U.S.,
the FASB released FSP
SFAS No. 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active, on October 10,
2008. This FSP clarified, among other things, that quotes and
other market inputs need not be solely used to determine fair
value if they do not relate to an active market. The FSP points
out that when relevant observable market information is not
available, an approach that incorporates managements
judgments about the assumptions that market participants would
use in pricing the asset in a current sale transaction would be
acceptable (such as a discounted cash flow analysis). Regardless
of the valuation technique applied, entities must include
appropriate risk adjustments that market participants would
make, including adjustments for nonperformance risk (credit
risk) and liquidity risk.
The Fair
Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115
In February 2007, the FASB issued 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). 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 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 adopted SFAS No. 159 on January 1, 2008,
and elected the fair value option on all of its Residual
Interests effective January 1, 2008. The Company chose this
election in order to simplify the accounting for Residual
Interests by including all Residual Interests under one
accounting model. Prior to this election, Residual Interests
were accounted for either under SFAS No. 115 with
changes in fair value recorded through other comprehensive
income or under SFAS No. 155, Accounting for
Certain Hybrid Financial Instruments, with changes in fair
value recorded through income. At transition, the Company
recorded a pre-tax gain to retained earnings as a
cumulative-effect adjustment totaling $301 million
($195 million net of tax). This amount was in accumulated
other comprehensive income as of December 31, 2007, and as
a result, equity was not impacted at transition on
January 1,
F-23
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
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2008. Changes in fair value of Residual Interests on and after
January 1, 2008 are recorded through the statement of
income. The Company has not elected the fair value option for
any other financial instruments at this time.
Business
Combinations
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations. SFAS No. 141(R)
requires the acquiring entity in a business combination to
recognize the entire acquisition-date fair value of assets
acquired and liabilities assumed in both full and partial
acquisitions; changes the recognition of assets acquired and
liabilities assumed related to contingencies; changes the
recognition and measurement of contingent consideration;
requires expensing of most transaction and restructuring costs;
and requires additional disclosures to enable the users of the
financial statements to evaluate and understand the nature and
financial effect of the business combination.
SFAS No. 141(R) applies to all transactions or other
events in which the Company obtains control of one or more
businesses. SFAS No. 141(R) applies prospectively to
business combinations for which the acquisition date is on or
after the beginning of the reporting period beginning on or
after December 15, 2008, which for the Company is
January 1, 2009.
Noncontrolling
Interests in Consolidated Financial Statements an
Amendment of Accounting Research
Bulletin No. 51
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an Amendment of Accounting Research
Bulletin No. 51. SFAS No. 160 requires
reporting entities to present noncontrolling (minority)
interests as equity (as opposed to its current presentation as a
liability or mezzanine equity) and provides guidance on the
accounting for transactions between an entity and noncontrolling
interests. SFAS No. 160 applies prospectively for
reporting periods beginning on or after December 15, 2008,
which for the Company is January 1, 2009, except for the
presentation and disclosure requirements which will be applied
retrospectively for all periods presented. Adoption of this
standard will not be material to the Company.
Disclosures
about Derivative Investments and Hedging Activities
an Amendment of FASB Statement No. 133
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Investments and Hedging
Activities an Amendment of FASB Statement
No. 133. SFAS No. 161 requires enhanced
disclosures about an entitys derivative and hedging
activities, including (1) how and why an entity uses
derivative instruments, (2) how derivative instruments and
related hedged items are accounted for under
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and its related
interpretations, and (3) how derivative instruments and
related hedged items affect an entitys financial position,
financial performance, and cash flows. To meet those objectives,
SFAS No. 161 requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about
credit-risk-related contingent features in derivative
agreements. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning
after November 15, 2008, which for the Company is
January 1, 2009.
Determination
of the Useful Life of Intangible Assets
In April 2008, the FASB issued FSP
SFAS No. 142-3,
Determination of the Useful Life of Intangible
Assets, which amends SFAS No. 142 regarding the
factors that should be considered in developing the useful lives
for intangible assets with renewal or extension provisions. FSP
SFAS No. 142-3
requires an entity to
F-24
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
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consider its own historical experience in renewing or extending
similar arrangements, regardless of whether those arrangements
have explicit renewal or extension provisions, when determining
the useful life of an intangible asset. In the absence of such
experience, an entity shall consider the assumptions that market
participants would use about renewal or extension, adjusted for
entity-specific factors. FSP
SFAS No. 142-3
also requires an entity to disclose information regarding the
extent to which the expected future cash flows associated with
an intangible asset are affected by the entitys intent
and/or
ability to renew or extend the arrangement. FSP
SFAS No. 142-3
will be effective for qualifying intangible assets acquired by
the Company on or after January 1, 2009. The application of
FSP
SFAS No. 142-3
is not expected to have a material impact on the Companys
results of operations, cash flows or financial positions;
however, it could impact future transactions entered into by the
Company.
Accounting
for Hedging Activities An Amendment of FASB
Statement No. 133
In June 2008, the FASB issued an exposure draft to amend the
accounting for hedging activities in SFAS No. 133.
This proposed Statement is intended to simplify accounting for
hedging activities, improve the financial reporting of hedging
activities, resolve major practice issues related to hedge
accounting that have arisen under SFAS No. 133, and
address differences resulting from recognition and measurement
anomalies between the accounting for derivative instruments and
the accounting for hedged items or transactions. While the
amendment as currently written may simplify the Companys
accounting model for hedging activities under
SFAS No. 133, the Company does not expect it to
significantly impact its results of operations. The full impact
of this amendment, effective January 1, 2010, as currently
written, cannot be evaluated until the final statement is
issued, which is expected to occur sometime in 2009.
Qualifying
Special Purpose Entities (QSPEs) and Changes in the
FIN No. 46(R) Consolidation Model
In September 2008, the FASB issued two separate but related
exposure drafts for comment in connection with amendments to
(1) SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities a replacement of FASB Statement
No. 125, which would impact the accounting for QSPEs
and (2) FASBs FIN No. 46(R), Consolidation
of Variable Interest Entities an interpretation of
ARB No. 51.
Based on the Companys preliminary review of these exposure
drafts, it is likely that these changes will lead in general to
the consolidation of certain QSPEs that are currently not
consolidated by the Company. Assuming no changes to the
Companys current business model, the Company would most
likely consolidate its securitization trusts that are currently
off-balance sheet on January 1, 2010, based on these
exposure drafts as currently written. These proposed new
accounting rules would also be applied to new transactions
entered into from January 1, 2010 forward. However, the
impact to the Companys accounting for its QSPEs and VIEs
cannot be determined until the FASB issues the final amendments
to SFAS No. 140 and FIN No. 46(R) which is
expected sometime in 2009.
Disclosures
by Public Entities about Transfers of Financial Assets and
Interest in Variable Interest Entities
In December 2008, the FASB issued FSP
SFAS No. 140-4
and FIN No. 46(R)-8, Disclosures by Public
Entities about Transfers of Financial Assets and Interests in
Variable Interest Entities. This FSP significantly
increased disclosure requirements for transactions that fell
under SFAS No. 140 and Fin No. 46(R). These new
disclosure requirements are effective for 2008 and are included
as such.
F-25
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
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Employers
Disclosures about Postretirement Benefit Plan Assets
In December 2008, the FASB issued FSP
SFAS No. 132(R)-1, Employers Disclosures
about Postretirement Benefit Plan Assets, which requires
additional disclosures for employers pension and other
postretirement benefit plan assets. As pension and other
postretirement benefit plan assets were not included within the
scope of SFAS No. 157, FSP SFAS No. 132(R)-1
requires employers to disclose information about fair value
measurements of plan assets similar to the disclosures required
under SFAS No. 157, the investment policies and
strategies for the major categories of plan assets, and
significant concentrations of risk within plan assets. FSP
SFAS No. 132(R)-1 will be effective for the Company as
of December 31, 2009. As FSP SFAS No. 132(R)-1
provides only disclosure requirements, the adoption of this
standard will not have a material impact on the Companys
financial statements.
The FFELP is subject to comprehensive reauthorization every five
years and to frequent statutory and regulatory changes. The most
recent reauthorization of the student loan programs was the
Higher Education Reconciliation Act of 2005 (the
Reconciliation Legislation).
There are three principal categories of FFELP loans: Stafford,
PLUS, and FFELP Consolidation Loans. Generally, Stafford and
PLUS loans have repayment periods of between five and ten years.
FFELP Consolidation Loans have repayment periods of twelve to
thirty years. FFELP loans do not require repayment, or have
modified repayment plans, while the borrower is in-school and
during the grace period immediately upon leaving school. The
borrower may also be granted a deferment or forbearance for a
period of time based on need, during which time the borrower is
not considered to be in repayment. Interest continues to accrue
on loans in the in-school, deferment and forbearance period.
FFELP loans obligate the borrower to pay interest at a stated
fixed rate or a variable rate reset annually (subject to a cap)
on July 1 of each year depending on when the loan was originated
and the loan type. The Company earns interest at the greater of
the borrowers rate or a floating rate based on the SAP
formula, with the interest earned on the floating rate that
exceeds the interest earned from the borrower being paid
directly by ED. In low or certain declining interest rate
environments when student loans are earning at the fixed
borrower rate, and the interest on the funding for the loans is
variable and declining, the Company can earn additional spread
income that it refers to as Floor Income. For loans disbursed
after April 1, 2006, FFELP loans effectively only earn at
the SAP rate, as the excess interest earned when the borrower
rate exceeds the SAP rate (Floor Income) must be refunded to ED.
FFELP loans are guaranteed as to their principal and accrued
interest in the event of default subject to a Risk Sharing level
based on the date of loan disbursement. For loans disbursed
after October 1, 1993 and before July 1, 2006, the
Company receives 98 percent reimbursement on all qualifying
default claims. For loans disbursed on or after July 1,
2006, the Company receives 97 percent reimbursement. In
October of 2005, the Companys loan servicing division,
Sallie Mae Servicing, was designated as an Exceptional Performer
(EP) by ED which enabled the Company to receive
100 percent reimbursement on default claims filed from the
date of designation through June 30, 2006 for loans that
were serviced by Sallie Mae Servicing for a period of at least
270 days before the date of default. Legislation passed in
early 2006 decreased the rate of reimbursement under the EP
program from 100 percent to 99 percent for claims
filed on or after July 1, 2006. On September 27, 2007,
the CCRAA was enacted which resulted in the repeal of the EP
program and returned loans to their previous disbursement
date-based guarantee rates of 98 percent or 97 percent.
In addition to FFELP loan programs, which place statutory limits
on per year and total borrowing, the Company offers a variety of
Private Education Loans. Private Education Loans for
post-secondary education and loans for career training can be
subdivided into two main categories: loans that supplement FFELP
student loans primarily for higher and lifelong learning
programs and loans for career training. For the
F-26
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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3.
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Student
Loans (Continued)
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majority of the Private Education Loan portfolio, the Company
bears the full risk of any losses experienced and as a result,
these loans are underwritten and priced based upon standardized
consumer credit scoring criteria. In addition, students who do
not meet the Companys minimum underwriting standards are
generally required to obtain a credit-worthy cosigner.
Forbearance involves granting the borrower a temporary cessation
of payments (or temporary acceptance of smaller than scheduled
payments) for a specified period of time. Using forbearance in
this manner effectively extends the original term of the loan.
Forbearance does not grant any reduction in the total repayment
obligation (principal or interest). While a loan is in
forbearance status, interest continues to accrue and is
capitalized to principal when the loan re-enters repayment
status. The Companys forbearance policies 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, the Company requires
good-faith payments before granting the forbearance. Exceptions
to forbearance policies are permitted when such exceptions are
judged to increase the likelihood of ultimate collection of the
loan. Forbearance as a collection tool is used most effectively
when applied based on a borrowers unique situation,
including assumptions based on historical information and
judgments. The Company combines borrower information with a
risk-based segmentation model to assist in its decision making
as to who will be granted forbearance based on the
Companys expectation as to a borrowers ability and
willingness to repay their obligation. This strategy is aimed at
mitigating the overall risk of the portfolio as well as
encouraging cash resolution of delinquent loans.
Forbearance may be granted to borrowers who are exiting their
grace period to provide additional time to obtain employment and
income to support their obligations, or to current borrowers who
are faced with a hardship and request forbearance time to
provide temporary payment relief. In these circumstances, a
borrowers loan is placed into a forbearance status in
limited monthly increments and is reflected in the forbearance
status at month-end during this time. At the end of their
granted forbearance period, the borrower will enter repayment
status as current and is expected to begin making their
scheduled monthly payments on a go-forward basis.
Forbearance may also be granted to borrowers who are delinquent
in their payments. In these circumstances, the forbearance cures
the delinquency and the borrower is returned to a current
repayment status. In more limited instances, delinquent
borrowers will also be granted additional forbearance time. As
the Company has obtained further experience about the
effectiveness of forbearance, it has reduced the amount of time
a loan will spend in forbearance, thereby increasing its ongoing
contact with the borrower to encourage consistent repayment
behavior once the loan is returned to a current repayment status.
The Company may charge the borrower fees on certain Private
Education Loans, either at origination, when the loan enters
repayment, or both. Such fees are deferred and recognized into
income as a component of interest over the estimated average
life of the related pool of loans.
In December 2008, the Company sold approximately
$494 million (principal and accrued interest) of FFELP
loans to ED at a price of 97 percent of principal and
unpaid interest pursuant to EDs authority under the
Ensuring Continued Access to Student Loans Act of 2008
(ECASLA) to make such purchases, and recorded a loss
on the sale. Additionally, in early January 2009, the Company
sold an additional $486 million (principal and accrued
interest) in FFELP loans to ED under this program. The loss
related to this sale in January was recognized in 2008 as the
loans were classified as
held-for-sale
under GAAP. The total loss recognized on these two sales for the
year ended December 31, 2008 was $53 million and was
recorded in Losses on sales of loans and securities,
net in the consolidated statements of income.
As of December 31, 2008 and 2007, 56 percent and
58 percent, respectively, of the Companys on-balance
sheet student loan portfolio was in repayment.
F-27
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
3.
|
Student
Loans (Continued)
|
The estimated weighted average life of student loans in the
Companys portfolio was approximately 7.8 years and
9.0 years at December 31, 2008 and 2007, respectively.
The following table reflects the distribution of the
Companys student loan portfolio by program.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Year Ended
|
|
|
|
2008
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
|
|
|
|
Ending
|
|
|
% of
|
|
|
Average
|
|
|
Interest
|
|
|
|
Balance
|
|
|
Balance
|
|
|
Balance
|
|
|
Rate
|
|
|
FFELP Stafford and Other Student Loans,
net(1)
|
|
$
|
52,476,337
|
|
|
|
36
|
%
|
|
$
|
44,290,909
|
|
|
|
4.50
|
%
|
FFELP Consolidation Loans, net
|
|
|
71,743,435
|
|
|
|
50
|
|
|
|
73,091,087
|
|
|
|
4.35
|
|
Private Education Loans, net
|
|
|
20,582,298
|
|
|
|
14
|
|
|
|
19,276,067
|
|
|
|
9.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total student loans,
net(2)
|
|
$
|
144,802,070
|
|
|
|
100
|
%
|
|
$
|
136,658,063
|
|
|
|
5.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Year Ended
|
|
|
|
2007
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
|
|
|
|
Ending
|
|
|
% of
|
|
|
Average
|
|
|
Interest
|
|
|
|
Balance
|
|
|
Balance
|
|
|
Balance
|
|
|
Rate
|
|
|
FFELP Stafford and Other Student Loans,
net(1)
|
|
$
|
35,726,062
|
|
|
|
29
|
%
|
|
$
|
31,293,956
|
|
|
|
6.59
|
%
|
FFELP Consolidation Loans, net
|
|
|
73,609,187
|
|
|
|
59
|
|
|
|
67,918,046
|
|
|
|
6.39
|
|
Private Education Loans, net
|
|
|
14,817,725
|
|
|
|
12
|
|
|
|
12,506,662
|
|
|
|
11.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total student loans,
net(2)
|
|
$
|
124,152,974
|
|
|
|
100
|
%
|
|
$
|
111,718,664
|
|
|
|
7.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The FFELP category is primarily
Stafford loans, but also includes federally insured PLUS and
HEAL loans and $8.5 billion of Stafford loans held-for-sale
at December 31, 2008.
|
|
(2) |
|
The total student loan ending
balance includes net unamortized premiums/discounts of
$1,895,220 and $1,791,153 as of December 31, 2008 and 2007,
respectively.
|
|
|
4.
|
Allowance
for Loan Losses
|
The Companys provisions for loan losses represent the
periodic expense of maintaining an allowance sufficient to
absorb incurred losses, net of recoveries, 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 incurred in the student
loan portfolios.
F-28
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
4.
|
Allowance
for Loan Losses (Continued)
|
The following tables summarize the total loan loss provisions
for the years ended December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Private Education Loans
|
|
$
|
586,169
|
|
|
$
|
883,474
|
|
|
$
|
257,983
|
|
FFELP Stafford and Other Student Loans
|
|
|
105,568
|
|
|
|
89,083
|
|
|
|
13,907
|
|
Mortgage and consumer loans
|
|
|
27,913
|
|
|
|
42,751
|
|
|
|
15,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provisions for loan losses
|
|
$
|
719,650
|
|
|
$
|
1,015,308
|
|
|
$
|
286,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is changing its methodology used to present
charge-offs related to Private Education Loans to more clearly
reflect the expected loss. Net income, provision for loan loss
expense, the net loan balance, default rate and expected
recovery rate assumptions are not impacted by this change. Based
on the Companys historic experience, the Company expects
to recover a portion of loans that default. This expected
recovery is taken into account in arriving at the Companys
periodic provision for loan loss expense. Previously, once a
loan has been delinquent for 212 days, the Company had
charged off 100 percent of the loan balance, even though it
had provisioned for the estimated loss of the defaulted loan
balance, comprised of the full loan balance less the expected
recovery.
The Company is changing its methodology to charge off the
estimated loss of the defaulted loan balance to be consistent
with the amount included in the provision. Actual recoveries are
applied against the remaining loan balance that was not charged
off. If actual periodic recoveries are less than originally
expected, the difference results in immediate additional
provision expense and charge off of such amount.
This revised methodology results in a charge-off equal to the
amount provided for through the allowance for loan loss. As a
result, the Company believes that this methodology better
reflects the actual events occurring. Although there is
diversity in practice on how charge-offs are presented, this
method is more comparable to other financial institutions in how
charge-offs and the related charge-off and allowance ratios are
presented. The Company emphasizes that although the presentation
improves the various charge-off and allowance ratios, the change
does not reflect an improvement in the collectability of the
Companys loan portfolio.
As a result of this change, a $222 million receivable as of
December 31, 2008, is being reclassified from the allowance
for loan loss to the Private Education Loan balance. This amount
represents the expected future recoveries related to previously
defaulted loans (i.e., the amount not charged off when a loan
defaults that has not yet been collected). As of
December 31, 2008, the Company assumes it will collect, on
average, 27 percent of a defaulted loans balance over
an extended period of time. This recovery assumption is based on
historic recovery rates achieved and is updated, as appropriate,
on a quarterly basis.
The Company believes this change to be an immaterial correction
of previous disclosures. Following are tables depicting the
Allowance for Private Education Loan Losses as
previously presented and as corrected for this change.
The following table summarizes changes in the allowance for
Private Education Loan losses for the years ended
December 31, 2008, 2007 and 2006 as previously reported.
F-29
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
4.
|
Allowance
for Loan Losses (Continued)
|
Allowance
for Private Education Loan Losses Prior
Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Allowance at beginning of year
|
|
$
|
885,931
|
|
|
$
|
308,346
|
|
|
$
|
204,112
|
|
Total provision
|
|
|
586,169
|
|
|
|
883,474
|
|
|
|
257,983
|
|
Charge-offs
|
|
|
(460,214
|
)
|
|
|
(332,188
|
)
|
|
|
(159,560
|
)
|
Recoveries
|
|
|
35,643
|
|
|
|
32,079
|
|
|
|
22,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(424,571
|
)
|
|
|
(300,109
|
)
|
|
|
(136,961
|
)
|
Reclassification of interest
reserve(1)
|
|
|
38,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance before securitization of Private Education Loans
|
|
|
1,085,680
|
|
|
|
891,711
|
|
|
|
325,134
|
|
Reduction for securitization of Private Education Loans
|
|
|
|
|
|
|
(5,780
|
)
|
|
|
(16,788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of year
|
|
$
|
1,085,680
|
|
|
$
|
885,931
|
|
|
$
|
308,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs as a percentage of average loans in repayment
|
|
|
4.98
|
%
|
|
|
5.04
|
%
|
|
|
3.22
|
%
|
Net charge-offs as a percentage of average loans in repayment
and forbearance
|
|
|
4.39
|
%
|
|
|
4.54
|
%
|
|
|
2.99
|
%
|
Allowance as a percentage of the ending total loans, gross
|
|
|
4.89
|
%
|
|
|
5.48
|
%
|
|
|
2.96
|
%
|
Allowance as a percentage of the ending loans in repayment
|
|
|
9.71
|
%
|
|
|
12.57
|
%
|
|
|
6.36
|
%
|
Allowance coverage of net charge-offs
|
|
|
2.56
|
|
|
|
2.95
|
|
|
|
2.25
|
|
Ending total loans, gross
|
|
$
|
22,203,277
|
|
|
$
|
16,171,752
|
|
|
$
|
10,428,066
|
|
Average loans in repayment
|
|
$
|
8,533,356
|
|
|
$
|
5,949,007
|
|
|
$
|
4,256,780
|
|
Ending loans in repayment
|
|
$
|
11,182,053
|
|
|
$
|
7,046,709
|
|
|
$
|
4,851,305
|
|
|
|
|
(1) |
|
Represents the additional allowance
related to the amount of uncollectible interest reserved within
interest income that is transferred in the period to the
allowance for loan losses when interest is capitalized to a
loans principal balance. Prior to 2008, the interest
provision was reversed in interest income and then provided for
through provision within the allowance for loan loss. For the
years ended December 31, 2007 and 2006, this amount was
$21 million and $12 million, respectively.
|
F-30
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
4.
|
Allowance
for Loan Losses (Continued)
|
Activity
in the Allowance for Private Education Loan Losses
Corrected Presentation
The following table summarizes changes in the allowance for
Private Education Loan losses for the years ended
December 31, 2008, 2007 and 2006 as corrected and discussed
above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Allowance at beginning of year
|
|
$
|
1,003,963
|
|
|
$
|
372,612
|
|
|
$
|
250,250
|
|
Total provision
|
|
|
586,169
|
|
|
|
883,474
|
|
|
|
257,983
|
|
Charge-offs
|
|
|
(320,240
|
)
|
|
|
(246,343
|
)
|
|
|
(118,833
|
)
|
Reclassification of interest
reserve(1)
|
|
|
38,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance before securitization of Private Education Loans
|
|
|
1,308,043
|
|
|
|
1,009,743
|
|
|
|
389,400
|
|
Reduction for securitization of Private Education Loans
|
|
|
|
|
|
|
(5,780
|
)
|
|
|
(16,788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of year
|
|
$
|
1,308,043
|
|
|
$
|
1,003,963
|
|
|
$
|
372,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs as a percentage of average loans in repayment
|
|
|
3.75
|
%
|
|
|
4.14
|
%
|
|
|
2.79
|
%
|
Charge-offs as a percentage of average loans in repayment and
forbearance
|
|
|
3.31
|
%
|
|
|
3.72
|
%
|
|
|
2.59
|
%
|
Allowance as a percentage of the ending total loan
balance(2)
|
|
|
5.83
|
%
|
|
|
6.16
|
%
|
|
|
3.55
|
%
|
Allowance as a percentage of the ending loans in repayment
|
|
|
11.70
|
%
|
|
|
14.25
|
%
|
|
|
7.68
|
%
|
Allowance coverage of charge-offs
|
|
|
4.08
|
|
|
|
4.08
|
|
|
|
3.14
|
|
Ending total
loans(2)
|
|
$
|
22,425,640
|
|
|
$
|
16,289,784
|
|
|
$
|
10,492,332
|
|
Average loans in repayment
|
|
$
|
8,533,356
|
|
|
$
|
5,949,007
|
|
|
$
|
4,256,780
|
|
Ending loans in repayment
|
|
$
|
11,182,053
|
|
|
$
|
7,046,709
|
|
|
$
|
4,851,305
|
|
|
|
|
(1) |
|
Represents the additional allowance
related to the amount of uncollectible interest reserved within
interest income that is transferred in the period to the
allowance for loan losses when interest is capitalized to a
loans principal balance. Prior to 2008, the interest
provision was reversed in interest income and then provided for
through provision within the allowance for loan loss. For the
years ended December 31, 2007 and 2006, this amount was
$21 million and $12 million, respectively.
|
|
|
|
(2) |
|
Ending total loans represents gross
Private Education Loans, plus the receivable for partially
charged-off loans.
|
F-31
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
4.
|
Allowance
for Loan Losses (Continued)
|
The table below shows the Companys Private Education Loan
delinquency trends as of December 31, 2008, 2007 and 2006.
Delinquencies have the potential to adversely impact earnings if
the account charges off and results in increased servicing and
collection costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
10,159
|
|
|
|
|
|
|
$
|
8,151
|
|
|
|
|
|
|
$
|
5,218
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
862
|
|
|
|
|
|
|
|
974
|
|
|
|
|
|
|
|
359
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
9,748
|
|
|
|
87.2
|
%
|
|
|
6,236
|
|
|
|
88.5
|
%
|
|
|
4,214
|
|
|
|
86.9
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
551
|
|
|
|
4.9
|
|
|
|
306
|
|
|
|
4.3
|
|
|
|
250
|
|
|
|
5.1
|
|
Loans delinquent
61-90 days
|
|
|
296
|
|
|
|
2.6
|
|
|
|
176
|
|
|
|
2.5
|
|
|
|
132
|
|
|
|
2.7
|
|
Loans delinquent greater than 90 days
|
|
|
587
|
|
|
|
5.3
|
|
|
|
329
|
|
|
|
4.7
|
|
|
|
255
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans in repayment
|
|
|
11,182
|
|
|
|
100
|
%
|
|
|
7,047
|
|
|
|
100
|
%
|
|
|
4,851
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans, gross
|
|
|
22,203
|
|
|
|
|
|
|
|
16,172
|
|
|
|
|
|
|
|
10,428
|
|
|
|
|
|
Private Education Loan unamortized discount
|
|
|
(535
|
)
|
|
|
|
|
|
|
(468
|
)
|
|
|
|
|
|
|
(365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans
|
|
|
21,668
|
|
|
|
|
|
|
|
15,704
|
|
|
|
|
|
|
|
10,063
|
|
|
|
|
|
Private Education Loan receivable for partially charged-off loans
|
|
|
222
|
|
|
|
|
|
|
|
118
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
Private Education Loan allowance for losses
|
|
|
(1,308
|
)
|
|
|
|
|
|
|
(1,004
|
)
|
|
|
|
|
|
|
(372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Education Loans, net
|
|
$
|
20,582
|
|
|
|
|
|
|
$
|
14,818
|
|
|
|
|
|
|
$
|
9,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Private Education Loans in repayment
|
|
|
|
|
|
|
50.4
|
%
|
|
|
|
|
|
|
43.6
|
%
|
|
|
|
|
|
|
46.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
|
|
|
|
|
|
12.8
|
%
|
|
|
|
|
|
|
11.5
|
%
|
|
|
|
|
|
|
13.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
|
|
|
|
7.2
|
%
|
|
|
|
|
|
|
12.1
|
%
|
|
|
|
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 procedures and policies.
|
|
(3) |
|
The period of delinquency is based
on the number of days scheduled payments are contractually past
due.
|
F-32
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
4.
|
Allowance
for Loan Losses (Continued)
|
Allowance
for FFELP Student Loan Losses
The following table summarizes changes in the allowance for
student loan losses for federally insured student loan
portfolios for the years ended December 31, 2008, 2007, and
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Allowance at beginning of year
|
|
$
|
88,729
|
|
|
$
|
20,315
|
|
|
$
|
14,950
|
|
Provisions for student loan losses
|
|
|
105,568
|
|
|
|
89,083
|
|
|
|
13,907
|
|
Charge-offs
|
|
|
(57,510
|
)
|
|
|
(21,235
|
)
|
|
|
(5,040
|
)
|
Increase/decrease for student loan sales and securitizations
|
|
|
756
|
|
|
|
566
|
|
|
|
(3,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of year
|
|
$
|
137,543
|
|
|
$
|
88,729
|
|
|
$
|
20,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs as a percentage of average loans in repayment
|
|
|
.09
|
%
|
|
|
.04
|
%
|
|
|
.01
|
%
|
Charge-offs as a percentage of average loans in repayment and
forbearance
|
|
|
.07
|
%
|
|
|
.03
|
%
|
|
|
.01
|
%
|
Allowance as a percentage of the ending total loans, gross
|
|
|
.11
|
%
|
|
|
.08
|
%
|
|
|
.02
|
%
|
Allowance as a percentage of the ending loans in repayment
|
|
|
.20
|
%
|
|
|
.14
|
%
|
|
|
.04
|
%
|
Allowance coverage of charge-offs
|
|
|
2.39
|
|
|
|
4.18
|
|
|
|
4.03
|
|
Ending total loans, gross
|
|
$
|
121,926,798
|
|
|
$
|
107,164,729
|
|
|
$
|
84,621,952
|
|
Average loans in repayment
|
|
$
|
66,392,120
|
|
|
$
|
58,999,119
|
|
|
$
|
47,154,923
|
|
Ending loans in repayment
|
|
$
|
70,174,192
|
|
|
$
|
65,289,865
|
|
|
$
|
53,125,823
|
|
The Company maintains an allowance for Risk Sharing loan losses
on its FFELP portfolio. The level of Risk Sharing has varied for
the Company over the past few years primarily due to various
legislative changes. As of December 31, 2008,
48 percent of the on-balance sheet FFELP portfolio was
subject to 3 percent Risk Sharing, 51 percent was
subject to 2 percent Risk Sharing and the remainder is not
subject to any Risk Sharing requirement.
F-33
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
4.
|
Allowance
for Loan Losses (Continued)
|
The table below shows the Companys FFELP loan delinquency
trends as of December 31, 2008, 2007 and 2006.
Delinquencies have the potential to adversely impact earnings if
the account charges off and results in increased servicing and
collection costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
39,270
|
|
|
|
|
|
|
$
|
31,200
|
|
|
|
|
|
|
$
|
23,171
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
12,483
|
|
|
|
|
|
|
|
10,675
|
|
|
|
|
|
|
|
8,325
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
58,811
|
|
|
|
83.8
|
%
|
|
|
55,128
|
|
|
|
84.4
|
%
|
|
|
45,664
|
|
|
|
86.0
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
4,044
|
|
|
|
5.8
|
|
|
|
3,650
|
|
|
|
5.6
|
|
|
|
2,787
|
|
|
|
5.2
|
|
Loans delinquent
61-90 days
|
|
|
2,064
|
|
|
|
2.9
|
|
|
|
1,841
|
|
|
|
2.8
|
|
|
|
1,468
|
|
|
|
2.8
|
|
Loans delinquent greater than 90 days
|
|
|
5,255
|
|
|
|
7.5
|
|
|
|
4,671
|
|
|
|
7.2
|
|
|
|
3,207
|
|
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans in repayment
|
|
|
70,174
|
|
|
|
100
|
%
|
|
|
65,290
|
|
|
|
100
|
%
|
|
|
53,126
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans, gross
|
|
|
121,927
|
|
|
|
|
|
|
|
107,165
|
|
|
|
|
|
|
|
84,622
|
|
|
|
|
|
FFELP loan unamortized premium
|
|
|
2,431
|
|
|
|
|
|
|
|
2,259
|
|
|
|
|
|
|
|
1,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans
|
|
|
124,358
|
|
|
|
|
|
|
|
109,424
|
|
|
|
|
|
|
|
86,185
|
|
|
|
|
|
FFELP loan allowance for losses
|
|
|
(138
|
)
|
|
|
|
|
|
|
(89
|
)
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loans, net
|
|
$
|
124,220
|
|
|
|
|
|
|
$
|
109,335
|
|
|
|
|
|
|
$
|
86,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of FFELP loans in repayment
|
|
|
|
|
|
|
57.6
|
%
|
|
|
|
|
|
|
60.9
|
%
|
|
|
|
|
|
|
62.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of FFELP loans in repayment
|
|
|
|
|
|
|
16.2
|
%
|
|
|
|
|
|
|
15.6
|
%
|
|
|
|
|
|
|
14.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loans in forbearance as a percentage of loans in repayment
and forbearance
|
|
|
|
|
|
|
15.1
|
%
|
|
|
|
|
|
|
14.1
|
%
|
|
|
|
|
|
|
13.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, as well as, loans for borrowers
who have requested extension of grace period during employment
transition or who have temporarily ceased making full payments
due to hardship or other factors.
|
|
(2) |
|
Loans for borrowers who have used
their allowable deferment time or do not qualify for deferment,
that need additional time to obtain employment or who have
temporarily ceased making full payments due to hardship or other
factors.
|
|
(3) |
|
The period of delinquency is based
on the number of days scheduled payments are contractually past
due.
|
F-34
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
A summary of investments and restricted investments as of
December 31, 2008 and 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other U.S. government agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and other U.S. government agency
obligations
|
|
$
|
8,908
|
|
|
$
|
195
|
|
|
$
|
|
|
|
$
|
9,103
|
|
Other securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
40,907
|
|
|
|
13
|
|
|
|
(4,299
|
)
|
|
|
36,621
|
|
Commercial paper and asset-backed commercial paper
|
|
|
801,169
|
|
|
|
|
|
|
|
|
|
|
|
801,169
|
|
Municipal bonds
|
|
|
10,883
|
|
|
|
1,924
|
|
|
|
|
|
|
|
12,807
|
|
Other
|
|
|
1,673
|
|
|
|
|
|
|
|
(365
|
)
|
|
|
1,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
$
|
863,540
|
|
|
$
|
2,132
|
|
|
$
|
(4,664
|
)
|
|
$
|
861,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed investment contracts
|
|
$
|
31,914
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted investments
available-for-sale
|
|
$
|
31,914
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed investment contracts
|
|
$
|
5,500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,500
|
|
Other
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted investments
held-to-maturity
|
|
$
|
5,715
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
5.
|
Investments
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other U.S. government agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury backed securities
|
|
$
|
772,905
|
|
|
$
|
66,400
|
|
|
$
|
|
|
|
$
|
839,305
|
|
U.S. Treasury securities and other U.S. government agency
obligations
|
|
|
45,173
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
45,142
|
|
Other securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
600,000
|
|
Asset-backed securities
|
|
|
35,994
|
|
|
|
|
|
|
|
(146
|
)
|
|
|
35,848
|
|
Commercial paper and asset-backed commercial paper
|
|
|
1,349,367
|
|
|
|
|
|
|
|
|
|
|
|
1,349,367
|
|
Other
|
|
|
1,574
|
|
|
|
104
|
|
|
|
|
|
|
|
1,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
$
|
2,805,013
|
|
|
$
|
66,504
|
(1)
|
|
$
|
(177
|
)
|
|
$
|
2,871,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed investment contracts
|
|
$
|
76,734
|
|
|
|
|
|
|
|
|
|
|
$
|
76,734
|
|
Other
|
|
|
27,321
|
|
|
|
|
|
|
|
|
|
|
|
27,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted investments
available-for-sale
|
|
$
|
104,055
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
104,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed investment contracts
|
|
$
|
5,500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,500
|
|
Other securities
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted investments
held-to-maturity
|
|
$
|
5,715
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes unrealized gains totaling
$10 million for the investments designated as the hedged
items in a SFAS No. 133 fair value hedge. These gains have
been recorded in the gains (losses) on derivative hedging
activities, net line in the consolidated statements of
income along with the gain (loss) related to the derivatives
hedging such investments.
|
In addition to the restricted investments detailed above, at
December 31, 2008 and 2007, the Company had restricted cash
of $3.5 billion and $4.5 billion, respectively.
As of December 31, 2008 and 2007, $2 million and
$41 million of the net unrealized gain (after tax) related
to
available-for-sale
investments was included in accumulated other comprehensive
income. As of December 31, 2008 and 2007, $26 million
(none of which is in restricted cash and investments on the
balance sheet) and $196 million (none of which is in
restricted cash and investments on the balance sheet),
respectively, of
available-for-sale
investment securities were pledged as collateral.
F-36
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
5.
|
Investments
(Continued)
|
The Company sold
available-for-sale
securities with a fair value of $457 million,
$73 million and $26 million for the years ended
December 31, 2008, 2007, and 2006, respectively. There were
$14 million in realized gains (net of hedging losses
totaling $4 million) for the year ended December 31,
2008, no realized gains/(losses) for the year ended
December 31, 2007 and $1 million in realized losses
for the year ended December 31, 2006. The cost basis for
these securities was determined through specific identification
of the securities sold. Additionally, the Company recorded an
impairment of $8 million on its remaining $97 million
investment in the Reserve Primary Fund.
As of December 31, 2008, the stated maturities for the
investments (including restricted investments) are shown in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Held-to-
|
|
|
Available-for-
|
|
|
|
|
|
|
Maturity
|
|
|
Sale(1)
|
|
|
Other
|
|
|
Year of Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
|
|
|
$
|
811,815
|
|
|
$
|
98,368
|
|
2010
|
|
|
215
|
|
|
|
|
|
|
|
9,694
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
5,522
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
5,718
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
2014-2018
|
|
|
|
|
|
|
12,572
|
|
|
|
33,194
|
|
After 2018
|
|
|
5,500
|
|
|
|
68,535
|
|
|
|
27,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,715
|
|
|
$
|
892,922
|
|
|
$
|
180,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Available-for-sale
securities are stated at fair value.
|
At December 31, 2008 and 2007, the Company also had other
investments of $180 million and $93 million,
respectively. These investments included leveraged leases which
at December 31, 2008 and 2007, net of impairments, totaled
$76 million and $86 million, respectively, and direct
financing leases totaling $12 million and $14 million,
respectively, that are general obligations of American Airlines
and Federal Express Corporation. The direct financing leases are
carried in other assets on the balance sheet. At
December 31, 2008, other investments also included the
Companys remaining investment in The Reserve Primary Fund
totaling $97 million.
F-37
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
6.
|
Goodwill
and Acquired Intangible Assets
|
Goodwill
In accordance with SFAS No. 142, all acquisitions must
be assigned to a reporting unit or units. A reporting unit is
the same as or one level below an operating segment, as defined
in SFAS No. 131. The following table summarizes the
Companys allocation of goodwill to its reporting units.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
(Dollars in millions)
|
|
2008
|
|
|
2007
|
|
|
Lending
|
|
$
|
388
|
|
|
$
|
388
|
|
Asset Performance Group
|
|
|
401
|
|
|
|
377
|
|
Guarantor services
|
|
|
62
|
|
|
|
62
|
|
Upromise
|
|
|
140
|
|
|
|
137
|
|
Other
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
991
|
|
|
$
|
965
|
|
|
|
|
|
|
|
|
|
|
Impairment
Testing
In accordance with SFAS No. 142, the Company performs
goodwill impairment testing annually in the fourth quarter as of
a September 30 valuation date or more frequently if an event
occurs or circumstances change such that there is a potential
that the fair value of a reporting unit or reporting units may
be below their respective carrying values. In light of the
general downturn in the economy, the tight credit markets, the
Companys decline in market capitalization and the
Companys decision to wind down certain businesses and
product lines during the latter half of 2008, the Company
assessed goodwill for potential impairment in the third quarter
of 2008 concluding that there was no indicated impairment of
goodwill for any of its reporting units and performed its annual
goodwill impairment test during the fourth quarter as of a
September 30, 2008 valuation date.
The Company retained an appraisal firm to perform Step 1
impairment testing as prescribed in SFAS No. 142.
Accordingly, the Company engaged the appraisal firm to determine
the fair value of each of its four reporting units to which
goodwill was allocated as of September 30, 2008. The fair
value of each reporting unit was determined by weighting
different valuation approaches with the primary approach being
the income approach which measures the value of each reporting
unit based on the present value of its future economic benefit
determined based on discounted cash flows derived from the
Companys five-year cash flow projections for each
reporting unit. These projections incorporate assumptions of
balance sheet and income statement growth as well as cost
savings and planned dispositions or wind down activities
applicable to each reporting unit. Under the Companys
guidance, the appraisal firm developed an equity rate of return
(or discount rate) for each reporting unit incorporating such
factors as a risk free rate, a market rate of return, a measure
of volatility (Beta) and a Company specific and capital markets
risk premium to adjust for the unprecedented volatility and
general lack of liquidity in the credit markets as of
September 30, 2008. Resulting discount rates as of
September 30, 2008, which ranged from 13 percent to
17 percent, were higher than discount rates considered in
conjunction with impairment testing performed in prior years.
Management reviewed and approved these discount rates, including
the factors incorporated to develop the discount rates for each
reporting unit. The discount rates applicable to the individual
reporting units were applied to the respective reporting
units projected net cash flows and residual or terminal
values yielding the fair value of equity for the respective
reporting units.
F-38
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
6.
|
Goodwill
and Acquired Intangible Assets (Continued)
|
The guideline company or market approach as well as the publicly
traded stock approach were also considered for the
Companys reporting units, as applicable, with less
weighting placed on these approaches. The market approach
generally measures the value of a reporting unit as compared to
recent sales or offering of comparable companies. The secondary
market approach indicates value based on multiples calculated
using the market value of minority interests in publicly-traded
comparable companies or guideline companies. Whether analyzing
comparable transactions or the market value of minority
interests in publicly-trade guideline companies, consideration
is given to the line of business and the operating performance
or the comparable companies versus the reporting unit being
tested. Given current market conditions, the lack of recent
sales or offering in the market and the low correlation between
the operations of identified guideline companies to the
Companys reporting units, less emphasis is placed on the
market approach.
The Company acknowledges that its stock price (as well as that
of its peers) is a consideration in determining the value of its
reporting units and the Company as a whole. However, management
believes the income approach is a better measure of the value of
its reporting units in the present environment. During the third
and fourth quarters of 2008, the Company specifically noted a
trend of lower and very volatile market capitalization. Over
this period, the Companys stock prices fluctuated
significantly. During the fourth quarter of 2008, the high, low
and average prices for the Companys stock were $12.03,
$4.19 and $8.75, respectively. At September 30, 2008 and
December 31, 2008, the Companys share price was
$12.34 and $8.90, respectively. Based on these share prices
alone, the market capitalization of the Company was greater than
the carrying value of the reporting units. The Company believes
the stock price has been significantly reduced due to the
current credit and economic environment which should not be a
long term impact. In addition, the Companys appraisal firm
has estimated control premiums pertaining to the Companys
reporting units ranging from 10 percent to 30 percent.
As a result of this Step 1 impairment testing process, the
estimated fair value of each reporting unit exceeded the
reporting units respective book values based on the
methods and assumptions applicable to each reporting unit.
Management reviewed and approved the valuation prepared by the
appraisal firm for each reporting unit including the valuation
methods employed and the key assumptions such as the discount
rates, growth rates and control premiums applicable to each
reporting unit. Management also performed stress tests of key
assumptions using a wide range of discount rates and growth
rates. Based on the valuations performed in conjunction with
Step 1 impairment testing and these stress tests, there was no
indicated impairment for any reporting unit.
The recent economic slowdown could adversely affect the
operating results of the Companys four reporting units. In
addition, the decrease in the market price of the Companys
common stock resulting from the recent market turbulence has
reduced its total market capitalization. Both of these factors
adversely affect the fair value of the Companys reporting
units and this adverse effect could be material. If the
performance of the Companys reporting units does not
occur, or if the Companys stock price remains at a
depressed level or declines further resulting in continued
deterioration in the Companys total market capitalization,
the fair value of one or more of the reporting units could be
significantly reduced, and the Company may be required to record
a charge, which could be material, for an impairment of
goodwill. Management believes that the turbulence in the stock
market has resulted in a market price for the Companys
common stock that is not indicative of the true value of the
Companys reporting units.
As of September 30, 2007, annual impairment testing
indicated no impairment for any reporting units with the
exception of the mortgage and consumer lending reporting unit
due largely to the wind down of one of the Companys
mortgage operations. As a result, the Company recognized
goodwill impairment of approximately $20 million in the
fourth quarter of 2007.
F-39
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
6.
|
Goodwill
and Acquired Intangible Assets (Continued)
|
Annual goodwill impairment testing as of September 30, 2006
indicated no impairment of any reporting units as the estimated
fair value of each reporting unit exceeded the reporting
units respective book values.
Goodwill
by Reportable Segments
A summary of changes in the Companys goodwill by
reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Acquisitions/
|
|
|
December 31,
|
|
(Dollars in millions)
|
|
2007
|
|
|
Other
|
|
|
2008
|
|
|
Lending
|
|
$
|
388
|
|
|
$
|
|
|
|
$
|
388
|
|
Asset Performance Group
|
|
|
377
|
|
|
|
24
|
|
|
|
401
|
|
Corporate and Other
|
|
|
200
|
|
|
|
2
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
965
|
|
|
$
|
26
|
|
|
$
|
991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Acquisitions/
|
|
|
December 31,
|
|
(Dollars in millions)
|
|
2006
|
|
|
Other
|
|
|
2007
|
|
|
Lending
|
|
$
|
406
|
|
|
$
|
(18
|
)
|
|
$
|
388
|
|
Asset Performance Group
|
|
|
349
|
|
|
|
28
|
|
|
|
377
|
|
Corporate and Other
|
|
|
215
|
|
|
|
(15
|
)
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
970
|
|
|
$
|
(5
|
)
|
|
$
|
965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From September 2004 through January 2008, the Company acquired a
100 percent controlling interest in AFS Holdings, LLC
(AFS) through a series of transactions commencing
with the Companys September 2004 acquisition of a
64 percent controlling interest and annual exercise of
options to purchase successive 12 percent interests in the
Company from December 2005 through January 2008. AFS is a
full-service accounts receivable management company that
purchases charged off debt and performs third-party receivables
servicing across a number of consumer asset classes. As a result
of this series of transactions, the Companys APG
reportable segment and reporting unit recognized excess purchase
price over the fair value of net assets acquired, or goodwill,
of $226 million. The total purchase price associated with
the Companys acquisition of AFS was approximately
$324 million including cash consideration and certain
acquisition costs.
On August 22, 2006, the Company acquired Upromise for
approximately $308 million including cash consideration and
certain acquisition costs. Upromise markets and administers an
affinity marketing program and also provides program management,
transfer and service agent services, and administration services
for college savings plans. In the third quarter of 2007, the
Company finalized its purchase price allocation for Upromise
which resulted in an excess purchase price over the fair value
of net assets acquired, or goodwill, of approximately
$140 million, which amount was allocated to the
Companys other reportable segment.
F-40
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
6.
|
Goodwill
and Acquired Intangible Assets (Continued)
|
Acquired
Intangible Assets
Acquired intangible assets include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
As of December 31, 2008
|
|
|
|
Amortization
|
|
|
|
|
Accumulated
|
|
|
|
|
(Dollars in millions)
|
|
Period
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer, services, and lending relationships
|
|
13 years
|
|
$
|
332
|
|
|
$
|
(173
|
)
|
|
$
|
159
|
|
Software and technology
|
|
7 years
|
|
|
93
|
|
|
|
(85
|
)
|
|
|
8
|
|
Non-compete agreements
|
|
2 years
|
|
|
11
|
|
|
|
(10
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
436
|
|
|
|
(268
|
)
|
|
|
168
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name and trademark
|
|
Indefinite
|
|
|
91
|
|
|
|
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquired intangible assets
|
|
|
|
$
|
527
|
|
|
$
|
(268
|
)
|
|
$
|
259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
As of December 31, 2007
|
|
|
|
Amortization
|
|
|
|
|
Accumulated
|
|
|
|
|
(Dollars in millions)
|
|
Period
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer, services, and lending relationships
|
|
13 years
|
|
$
|
366
|
|
|
$
|
(160
|
)
|
|
$
|
206
|
|
Software and technology
|
|
7 years
|
|
|
95
|
|
|
|
(77
|
)
|
|
|
18
|
|
Non-compete agreements
|
|
2 years
|
|
|
12
|
|
|
|
(10
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
473
|
|
|
|
(247
|
)
|
|
|
226
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name and trademark
|
|
Indefinite
|
|
|
110
|
|
|
|
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquired intangible assets
|
|
|
|
$
|
583
|
|
|
$
|
(247
|
)
|
|
$
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded amortization of acquired intangible assets
totaling $54 million, $67 million, and
$65 million for the years ended December 31, 2008,
2007 and 2006, respectively. The Company will continue to
amortize its intangible assets with definite useful lives over
their remaining estimated useful lives. The Company estimates
amortization expense associated with these intangible assets
will be $39 million, $33 million, $26 million,
$19 million and $18 million for the years ended
December 31, 2009, 2010, 2011, 2012 and 2013, respectively.
As discussed in Note 2, Significant Accounting
Policies, the Company tests its indefinite life intangible
assets annually as of September 30 or during the course of the
year if an event occurs or circumstances change which indicate
potential impairment of these assets. The Company also assesses
whether an event or circumstance has occurred which may indicate
impairment of its definite life (amortizing) intangible assets
quarterly.
The Company recorded impairment of certain acquired intangible
assets of $36 million, $26 million and
$24 million, respectively, for the years ended
December 31, 2008, 2007 and 2006. In 2008, as discussed in
Note 20, Segment Reporting, the Company decided
to wind down its purchased paper businesses. As a result, in the
third quarter of 2008, the Company recorded an aggregate amount
of $36 million of impairment of acquired intangible assets,
of which $28 million related to the impairment of two trade
names and
F-41
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
6.
|
Goodwill
and Acquired Intangible Assets (Continued)
|
$8 million related to certain banking customer
relationships. In 2007, the Company recognized impairments
related principally to its mortgage origination and mortgage
purchased paper businesses including approximately
$10 million of value attributed to certain banking
relationships which amount was recorded as operating expense in
the APG reportable segment.
In connection with the Companys acquisition of Southwest
Student Services Corporation and Washington Transferee
Corporation, the Company acquired certain tax exempt bonds that
enabled the Company to earn a 9.5 percent SAP rate on
student loans funded by those bonds in indentured trusts. In
2007 and 2006, the Company recognized intangible impairments of
$9 million and $21 million, respectively, due to
changes in projected interest rates used to initially value the
intangible asset and to a regulatory change that restricts the
loans on which the Company is entitled to earn a
9.5 percent yield. These impairment charges were recorded
to operating expense in the Lending reportable segment.
Borrowings consist of secured borrowings issued through the
Companys securitization program, borrowings through
secured facilities and participation programs, unsecured notes
issued by the Company, term deposits at Sallie Mae Bank, as well
as other interest bearing liabilities related primarily to
obligations to return cash collateral held. To match the
interest rate and currency characteristics of its borrowings
with the interest rate and currency characteristics of its
assets, the Company enters into interest rate and foreign
currency swaps with independent parties. Under these agreements,
the Company makes periodic payments, generally indexed to the
related asset rates or rates which are highly correlated to the
asset rates, in exchange for periodic payments which generally
match the Companys interest obligations on fixed or
variable rate notes (see Note 9, Derivative Financial
Instruments). Payments and receipts on the Companys
interest rate and currency swaps are not reflected in the
following tables.
During 2008, the Company repurchased approximately
$1.9 billion of primarily short-term unsecured borrowings
and recognized a gain of $64 million, net of
hedging-related gains and losses.
Short-term
Borrowings
Short-term borrowings have a remaining term to maturity of one
year or less. The following tables summarize outstanding
short-term borrowings (secured and unsecured) at
December 31, 2008 and 2007, the weighted average interest
rates at the end of each period, and the related average
balances and weighted average interest rates during the periods.
A detailed discussion of secured borrowings follows in the
Secured Borrowings section of this note.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2008
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
|
|
Ending Balance
|
|
|
Interest Rate
|
|
|
Average Balance
|
|
|
Interest Rate
|
|
|
Term bank deposits
|
|
$
|
1,147,825
|
|
|
|
3.34
|
%
|
|
$
|
696,442
|
|
|
|
3.67
|
%
|
ABCP borrowings
|
|
|
24,767,825
|
|
|
|
3.05
|
|
|
|
24,692,143
|
|
|
|
3.16
|
|
ED Participation Program Facility
|
|
|
7,364,969
|
|
|
|
3.37
|
|
|
|
1,726,751
|
|
|
|
3.41
|
|
Short-term portion of long-term borrowings
|
|
|
6,821,846
|
|
|
|
3.60
|
|
|
|
6,879,459
|
|
|
|
3.69
|
|
Other interest bearing liabilities
|
|
|
1,830,578
|
|
|
|
0.55
|
|
|
|
2,064,547
|
|
|
|
2.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings
|
|
$
|
41,933,043
|
|
|
|
3.09
|
%
|
|
$
|
36,059,342
|
|
|
|
3.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum outstanding at any month end
|
|
$
|
41,933,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-42
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
7.
|
Borrowings
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2007
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
|
|
Ending Balance
|
|
|
Interest Rate
|
|
|
Average Balance
|
|
|
Interest Rate
|
|
|
Term bank deposits
|
|
$
|
254,029
|
|
|
|
4.77
|
%
|
|
$
|
166,013
|
|
|
|
4.94
|
%
|
ABCP borrowings
|
|
|
25,960,348
|
|
|
|
5.32
|
|
|
|
10,604,570
|
|
|
|
3.29
|
|
Short-term portion of long-term borrowings
|
|
|
8,451,163
|
|
|
|
4.86
|
|
|
|
4,975,380
|
|
|
|
4.86
|
|
Other interest bearing liabilities
|
|
|
1,281,867
|
|
|
|
3.06
|
|
|
|
638,927
|
|
|
|
4.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings
|
|
$
|
35,947,407
|
|
|
|
5.13
|
%
|
|
$
|
16,384,890
|
|
|
|
3.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum outstanding at any month end
|
|
$
|
36,980,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, the Company has $5.2 billion
in revolving credit facilities which provide liquidity support
for general corporate purposes including backup for its
commercial paper program. The Company has never drawn on these
facilities. The facilities include a $1.4 billion
5-year
revolving credit facility maturing in October 2009, a
$1.9 billion
5-year
revolving credit facility maturing in 2010, and a
$1.9 billion
5-year
revolving credit facility maturing in October 2011. They do not
include a $0.3 billion commitment from a subsidiary of
Lehman Brothers Holding, Inc. as discussed below. Interest on
these facilities is based on LIBOR plus a spread that is
determined by the amount of the facility utilized and the
Companys credit rating. The principal financial covenants
in the unsecured revolving credit facilities require the Company
to maintain tangible net worth of at least $1.38 billion at
all times. Consolidated tangible net worth as calculated for
purposes of this covenant was $3.2 billion as of
December 31, 2008. The covenants also require the Company
to meet either a minimum interest coverage ratio or a minimum
net adjusted revenue test based on the four preceding
quarters adjusted Core Earnings financial
performance. The Company was compliant with the minimum net
adjusted revenue test as of the quarter ended December 31,
2008. Failure to meet these covenants would result in the
facilities being withdrawn.
Lehman Brothers Bank, FSB, a subsidiary of Lehman Brothers
Holdings Inc., is a party to the Companys unsecured
revolving credit facilities under which they provide the Company
with a $308 million commitment excluded in the total above.
Lehman Brothers Holdings Inc., declared bankruptcy on
September 15, 2008. The Company is operating under the
assumption that the lending commitment of Lehman Brothers Bank,
FSB, will not be honored if drawn upon. While the Company
continues to explore various options, it does not anticipate
replacing its commitment from Lehman Brothers Bank, FSB.
F-43
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
7.
|
Borrowings
(Continued)
|
Long-term
Borrowings
The following tables summarize outstanding long-term borrowings
(secured and unsecured) at December 31, 2008 and 2007, the
weighted average interest rates at the end of the periods, and
the related average balances during the periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
Year Ended
|
|
|
|
|
|
|
Weighted
|
|
|
December 31,
|
|
|
|
|
|
|
Average
|
|
|
2008
|
|
|
|
Ending
|
|
|
Interest
|
|
|
Average
|
|
|
|
Balance(1)
|
|
|
Rate(2)
|
|
|
Balance
|
|
|
Floating rate notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar-denominated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing, due
2010-2047
|
|
$
|
79,212,638
|
|
|
|
4.12
|
%
|
|
$
|
76,604,044
|
|
Non-U.S. dollar-denominated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Australian dollar-denominated, due
2010-2011
|
|
|
462,022
|
|
|
|
7.45
|
|
|
|
523,837
|
|
Euro-denominated, due
2010-2041
|
|
|
8,713,084
|
|
|
|
4.40
|
|
|
|
8,876,737
|
|
Singapore dollar-denominated
|
|
|
|
|
|
|
|
|
|
|
4,508
|
|
Sterling-denominated, due
2010-2039
|
|
|
975,851
|
|
|
|
5.72
|
|
|
|
975,808
|
|
Japanese yen-denominated
|
|
|
|
|
|
|
|
|
|
|
8,687
|
|
Hong Kong dollar-denominated, due 2011
|
|
|
113,691
|
|
|
|
5.06
|
|
|
|
113,666
|
|
Swedish krona-denominated, due
2010-2011
|
|
|
154,780
|
|
|
|
4.35
|
|
|
|
252,540
|
|
Canadian dollar-denominated, due 2011
|
|
|
229,885
|
|
|
|
4.57
|
|
|
|
229,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total floating rate notes
|
|
|
89,861,951
|
|
|
|
4.19
|
|
|
|
87,589,712
|
|
Fixed rate notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar-denominated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing, due
2010-2043
|
|
|
14,749,681
|
|
|
|
5.08
|
|
|
|
12,473,864
|
|
Non-U.S.-dollar denominated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Australian dollar-denominated, due
2010-2012
|
|
|
247,928
|
|
|
|
7.37
|
|
|
|
407,308
|
|
Canadian dollar-denominated, due
2010-2011
|
|
|
635,274
|
|
|
|
4.49
|
|
|
|
972,215
|
|
Euro-denominated, due
2010-2039
|
|
|
6,874,043
|
|
|
|
2.86
|
|
|
|
4,807,924
|
|
Hong Kong dollar-denominated, due
2010-2016
|
|
|
189,860
|
|
|
|
4.14
|
|
|
|
167,518
|
|
Japanese yen-denominated, due
2010-2035
|
|
|
1,087,652
|
|
|
|
1.34
|
|
|
|
929,419
|
|
Singapore dollar-denominated, due 2014
|
|
|
80,576
|
|
|
|
2.95
|
|
|
|
58,884
|
|
Sterling-denominated, due
2010-2039
|
|
|
2,873,765
|
|
|
|
6.28
|
|
|
|
3,441,142
|
|
Swiss franc-denominated, due 2011
|
|
|
219,687
|
|
|
|
2.02
|
|
|
|
246,749
|
|
New Zealand dollar-denominated, due 2010
|
|
|
179,934
|
|
|
|
7.71
|
|
|
|
213,316
|
|
Mexican peso-denominated, due 2016
|
|
|
72,730
|
|
|
|
11.05
|
|
|
|
91,548
|
|
Swedish krona-denominated, due 2011
|
|
|
43,066
|
|
|
|
6.33
|
|
|
|
68,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed rate notes
|
|
|
27,254,196
|
|
|
|
4.51
|
|
|
|
23,877,997
|
|
Term bank deposits U.S. dollar-denominated, due
2010-2013
|
|
|
1,108,647
|
|
|
|
4.36
|
|
|
|
157,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term borrowings
|
|
$
|
118,224,794
|
|
|
|
4.26
|
%
|
|
$
|
111,624,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Ending balance expressed in U.S.
dollars at December 31, 2008 spot currency exchange rate.
|
|
(2) |
|
Weighted average interest rate is
stated rate relative to currency denomination of note.
|
F-44
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
7.
|
Borrowings
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
Year Ended
|
|
|
|
|
|
|
Weighted
|
|
|
December 31,
|
|
|
|
|
|
|
Average
|
|
|
2007
|
|
|
|
Ending
|
|
|
Interest
|
|
|
Average
|
|
|
|
Balance(1)
|
|
|
Rate(2)
|
|
|
Balance
|
|
|
Floating rate notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar-denominated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing, due
2009-2047
|
|
$
|
71,650,528
|
|
|
|
5.25
|
%
|
|
$
|
73,683,228
|
|
Non-U.S. dollar-denominated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Australian dollar-denominated, due
2009-2011
|
|
|
626,030
|
|
|
|
7.23
|
|
|
|
625,870
|
|
Euro-denominated, due
2009-2041
|
|
|
9,073,835
|
|
|
|
3.72
|
|
|
|
8,900,473
|
|
Singapore dollar-denominated, due 2009
|
|
|
30,000
|
|
|
|
2.69
|
|
|
|
30,000
|
|
Sterling-denominated, due
2009-2039
|
|
|
975,746
|
|
|
|
5.73
|
|
|
|
975,618
|
|
Japanese yen-denominated, due 2009
|
|
|
42,391
|
|
|
|
0.19
|
|
|
|
42,391
|
|
Hong Kong dollar-denominated, due 2011
|
|
|
113,641
|
|
|
|
4.38
|
|
|
|
113,616
|
|
Swedish krona-denominated, due
2009-2011
|
|
|
293,459
|
|
|
|
3.49
|
|
|
|
293,450
|
|
Canadian dollar-denominated, due 2011
|
|
|
229,885
|
|
|
|
5.32
|
|
|
|
229,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total floating rate notes
|
|
|
83,035,515
|
|
|
|
5.09
|
|
|
|
84,894,531
|
|
Fixed rate notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar-denominated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing, due
2009-2043
|
|
|
12,683,074
|
|
|
|
4.89
|
|
|
|
12,999,204
|
|
Non-U.S. dollar-denominated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Australian dollar-denominated, due
2009-2012
|
|
|
749,514
|
|
|
|
4.80
|
|
|
|
577,015
|
|
Canadian dollar-denominated, due
2009-2011
|
|
|
1,179,132
|
|
|
|
3.66
|
|
|
|
987,145
|
|
Euro-denominated, due
2009-2039
|
|
|
7,313,381
|
|
|
|
2.70
|
|
|
|
5,132,707
|
|
Hong Kong dollar-denominated, due
2010-2016
|
|
|
171,689
|
|
|
|
4.57
|
|
|
|
167,519
|
|
Japanese yen-denominated, due
2009-2035
|
|
|
1,036,625
|
|
|
|
1.63
|
|
|
|
1,052,326
|
|
Singapore dollar-denominated, due 2014
|
|
|
76,631
|
|
|
|
3.10
|
|
|
|
58,863
|
|
Sterling-denominated, due
2009-2039
|
|
|
4,084,309
|
|
|
|
4.42
|
|
|
|
3,439,887
|
|
Swiss franc-denominated, due
2009-2011
|
|
|
349,326
|
|
|
|
2.48
|
|
|
|
302,704
|
|
New Zealand dollar-denominated, due 2010
|
|
|
219,282
|
|
|
|
6.32
|
|
|
|
213,017
|
|
Mexican peso-denominated, due 2016
|
|
|
90,057
|
|
|
|
8.92
|
|
|
|
91,504
|
|
Swedish krona-denominated, due 2011
|
|
|
109,609
|
|
|
|
2.48
|
|
|
|
68,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed rate notes
|
|
|
28,062,629
|
|
|
|
4.05
|
|
|
|
25,089,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term borrowings
|
|
$
|
111,098,144
|
|
|
|
4.83
|
%
|
|
$
|
109,984,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Ending balance expressed in U.S.
dollars at December 31, 2007 spot currency exchange rate.
|
|
(2) |
|
Weighted average interest rate is
stated rate relative to currency denomination of note.
|
At December 31, 2008, the Company had outstanding long-term
borrowings with call features totaling $1.9 billion and
$100 million of outstanding long-term borrowings that are
putable by the investor to the Company prior to the stated
maturity date. Generally, these instruments are callable and
putable at the par
F-45
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
7.
|
Borrowings
(Continued)
|
amount. As of December 31, 2008, the stated maturities (for
putable debt, the stated maturity date is the put date) and
maturities if accelerated to the call dates for long-term
borrowings are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Stated
Maturity(1)
|
|
|
Maturity to Call
Date(1)
|
|
|
|
Unsecured
|
|
|
Term Bank
|
|
|
Secured
|
|
|
|
|
|
Unsecured
|
|
|
Term Bank
|
|
|
Secured
|
|
|
|
|
|
|
Borrowings
|
|
|
Deposits
|
|
|
Borrowings
|
|
|
Total
|
|
|
Borrowings
|
|
|
Deposits
|
|
|
Borrowings
|
|
|
Total
|
|
|
Year of Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,721,874
|
|
|
$
|
6,721,874
|
|
|
$
|
1,322,460
|
|
|
$
|
|
|
|
$
|
8,111,522
|
|
|
$
|
9,433,982
|
|
2010
|
|
|
7,091,836
|
|
|
|
624,248
|
|
|
|
7,130,332
|
|
|
|
14,846,416
|
|
|
|
7,205,102
|
|
|
|
624,248
|
|
|
|
7,066,784
|
|
|
|
14,896,134
|
|
2011
|
|
|
7,091,335
|
|
|
|
103,023
|
|
|
|
7,259,977
|
|
|
|
14,454,335
|
|
|
|
7,244,961
|
|
|
|
103,023
|
|
|
|
7,259,977
|
|
|
|
14,607,961
|
|
2012
|
|
|
2,329,048
|
|
|
|
82,599
|
|
|
|
6,765,332
|
|
|
|
9,176,979
|
|
|
|
2,374,496
|
|
|
|
82,599
|
|
|
|
6,765,332
|
|
|
|
9,222,427
|
|
2013
|
|
|
2,995,195
|
|
|
|
298,777
|
|
|
|
6,496,422
|
|
|
|
9,790,394
|
|
|
|
2,968,748
|
|
|
|
298,777
|
|
|
|
6,496,422
|
|
|
|
9,763,947
|
|
2014
|
|
|
5,360,369
|
|
|
|
|
|
|
|
6,287,831
|
|
|
|
11,648,200
|
|
|
|
5,457,677
|
|
|
|
|
|
|
|
6,287,831
|
|
|
|
11,745,508
|
|
2015-2047
|
|
|
6,313,716
|
|
|
|
|
|
|
|
41,910,911
|
|
|
|
48,224,627
|
|
|
|
4,608,055
|
|
|
|
|
|
|
|
40,584,811
|
|
|
|
45,192,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,181,499
|
|
|
|
1,108,647
|
|
|
|
82,572,679
|
|
|
|
114,862,825
|
|
|
|
31,181,499
|
|
|
|
1,108,647
|
|
|
|
82,572,679
|
|
|
|
114,862,825
|
|
SFAS No. 133 (gains) losses on derivative hedging
activities
|
|
|
2,489,764
|
|
|
|
|
|
|
|
872,205
|
|
|
|
3,361,969
|
|
|
|
2,489,764
|
|
|
|
|
|
|
|
872,205
|
|
|
|
3,361,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,671,263
|
|
|
$
|
1,108,647
|
|
|
$
|
83,444,884
|
|
|
$
|
118,224,794
|
|
|
$
|
33,671,263
|
|
|
$
|
1,108,647
|
|
|
$
|
83,444,884
|
|
|
$
|
118,224,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company views its on-balance
sheet securitization trust debt as long-term based on the
contractual maturity dates and projects the expected principal
paydowns based on the Companys current estimates regarding
loan prepayment speeds. The projected principal paydowns of
$6.7 billion shown in year 2009 relate to the on-balance
sheet securitization trust debt.
|
Secured
Borrowings
FIN No. 46(R), Consolidation of Variable
Interest Entities, requires VIEs to be consolidated by
their primary beneficiaries. A VIE exists when either the total
equity investment at risk is not sufficient to permit the entity
to finance its activities by itself, or the equity investors
lack one of three characteristics associated with owning a
controlling financial interest. Those characteristics are the
direct or indirect ability to make decisions about an
entitys activities that have a significant impact on the
success of the entity, the obligation to absorb the expected
losses of an entity, and the rights to receive the expected
residual returns of the entity.
The Company currently consolidates a number of financing
entities that are VIEs as a result of being the entities
primary beneficiary and as a result these financing VIEs are
accounted for as secured borrowings. The process of identifying
the primary beneficiary involves identifying all other parties
that hold variable interests in the entity and determining which
of the parties, including the Company, has the responsibility to
absorb the majority of the entitys expected losses or the
rights to its expected residual returns. The Company
F-46
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
7.
|
Borrowings
(Continued)
|
is the primary beneficiary of and currently consolidates the
following financing VIEs as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
(Dollars in millions)
|
|
Debt Outstanding
|
|
|
Carrying Amount of Assets Securing Debt Outstanding
|
|
|
|
Short
|
|
|
Long
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured Borrowings:
|
|
Term
|
|
|
Term
|
|
|
Total
|
|
|
Loans
|
|
|
Cash
|
|
|
Other Assets
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ED Participation Program
|
|
$
|
7,365
|
|
|
$
|
|
|
|
$
|
7,365
|
|
|
$
|
7,733
|
|
|
$
|
88
|
|
|
$
|
85
|
|
|
$
|
7,906
|
|
2008 Asset-Backed Financing Facilities
|
|
|
24,768
|
|
|
|
|
|
|
|
24,768
|
|
|
|
31,953
|
|
|
|
462
|
|
|
|
816
|
|
|
|
33,231
|
|
On-balance sheet securitizations
|
|
|
|
|
|
|
80,601
|
|
|
|
80,601
|
|
|
|
81,547
|
|
|
|
2,632
|
|
|
|
999
|
|
|
|
85,178
|
|
Indentured trusts
|
|
|
31
|
|
|
|
1,972
|
|
|
|
2,003
|
|
|
|
2,199
|
|
|
|
236
|
|
|
|
40
|
|
|
|
2,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,164
|
|
|
|
82,573
|
|
|
|
114,737
|
|
|
|
123,432
|
|
|
|
3,418
|
|
|
|
1,940
|
|
|
|
128,790
|
|
SFAS No. 133 fair value adjustment
|
|
|
|
|
|
|
872
|
|
|
|
872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,164
|
|
|
$
|
83,445
|
|
|
$
|
115,609
|
|
|
$
|
123,432
|
|
|
$
|
3,418
|
|
|
$
|
1,940
|
|
|
$
|
128,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under ECASLA, ED implemented the Loan Participation Program
(Participation Program) and Loan Purchase Commitment
Program (Purchase Program). Under the terms of the
Participation Program, ED provides short-term liquidity to FFELP
lenders by purchasing participation interests in pools of
eligible FFELP loans. Loans funded under the Participation
Program are charged at a rate of commercial paper plus .50% on
the principal amount of the participation interests outstanding.
The initial advance under the program was made in August 2008.
The Participation Program matures on September 30, 2009, at
which time the Company can either refinance the loans or sell
them to ED under the Purchase Program.
During the first quarter of 2008, the Company entered into three
new asset-backed financing facilities (the 2008
Asset-Backed Financing Facilities): (i) a
$26.0 billion FFELP student loan ABCP conduit facility;
(ii) a $5.9 billion Private Education Loan ABCP
conduit facility (collectively, the 2008 ABCP
Facilities); and (iii) a $2.0 billion secured
FFELP loan facility (the 2008 Asset-Backed Loan
Facility). The initial term of the 2008 Asset-Backed
Financing Facilities is 364 days. The underlying cost of
borrowing under the 2008 ABCP Facilities is approximately LIBOR
plus 0.68 percent for the FFELP loan facilities and LIBOR
plus 1.55 percent for the Private Education Loan facility,
excluding up-front and unused commitment fees. All-in pricing on
the 2008 ABCP Facilities varies based on usage. For the full
year 2008, the combined, all-in cost of borrowings related to
the 2008 Asset-Backed Financing Facilities, including amortized
up-front fees and unused commitment fees, was three-month LIBOR
plus 2.47 percent. The primary use of the 2008 Asset-Backed
Financing Facilities was to refinance comparable asset-backed
commercial paper facilities incurred in connection with the
Proposed Merger, with the expectation that outstanding balances
under the 2008 Asset-Backed Financing Facilities would be
reduced through securitization of the underlying student loan
collateral in the term ABS market. Funding under the 2008
Asset-Backed Financing Facilities is subject to usual and
customary conditions.
In the third quarter of 2008, the Company reduced the
commitments under its Private Education Loan ABCP conduit
facility by approximately $2.2 billion to $3.7 billion
and the commitments under its FFELP ABCP Facilities by
$4.1 billion to $21.9 billion. There were no changes
to interest rates, maturity or other terms of the facilities
made in connection with the reductions. The Company reduced
these commitments after an analysis of its ongoing liquidity
needs and following its acceptance and funding under EDs
Participation and Purchase Programs.
The maximum amount the Company may borrow under the 2008 ABCP
Facilities is limited based on certain factors, including market
conditions and the fair value of student loans in the facility.
As of December 31, 2008, the maximum borrowing amount was
approximately $20.9 billion under the FFELP ABCP Facilities
and $3.0 billion under the Private Education Loan ABCP
Facility. The 2008 Asset-Backed
F-47
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
7.
|
Borrowings
(Continued)
|
Financing Facilities are subject to termination under certain
circumstances, including the Companys failure to comply
with the principal financial covenants in its unsecured
revolving credit facilities.
Borrowings under the 2008 Asset-Backed Financing Facilities are
nonrecourse to the Company; however, the Company has indemnified
the other parties to the facilities in cases of breaches of
representations and warranties. As of December 31, 2008,
the Company had $24.8 billion outstanding in connection
with the 2008 Asset-Backed Financing Facilities. The book basis
of the assets securing these facilities as of December 31,
2008 was $33.2 billion. Loans within the facility are
periodically marked to market. The
mark-to-market
process could require the Company to post additional collateral
within one business day of receiving a margin call.
The 2008 Asset-Backed Financing Facilities were scheduled to
mature on February 28, 2009. On February 2, 2009, the
Company extended the maturity date of the 2008 ABCP Facilities
to April 28, 2009 for a $61 million upfront fee. The
other terms of the facilities remain materially unchanged. The
Company expects to refinance the 2008 ABCP Facilities at a lower
aggregate commitment than the $25.6 billion committed as of
December 31, 2008. If the Company does not pay off all
outstanding amounts of the 2008 ABCP Facilities at maturity, the
facilities will extend by 90 days with the interest rate
increasing each month during the
90-day
period. On February 27, 2009, the Company extended the
maturity date of the 2008 Asset-Backed Loan Facility from
February 28, 2009 to April 28, 2009 for a
$4 million upfront fee. The other terms of this facility
remain materially unchanged.
As disclosed, the Company has extended the 2008 Asset-Backed
Financing Facilities to mature on April 28, 2009. The
Company believes that it will be successful in its effort to
refinance the facility at a lower balance at such time. If the
Company is unable to refinance the 2008 Asset-Backed Financing
Facilities and if its obligation was settled through the lenders
possession of posted collateral the Company would incur a charge
of $8.4 billion, ($5.3 billion after tax) representing
the difference between the Companys cost basis in the
collateral and current borrowings under the facility as of
December 31, 2008. As a result, the Company would no longer
meet the covenants related to its lines of credit and its
ability to conduct business could be materially changed. While
the Company would still be able to originate loans into the ED
Participation and Purchase program, its ability to originate
Private Education Loans could be limited or curtailed. However,
even if the Company is unsuccessful in this renegotiation, it
believes that its current investment portfolio, when combined
with its net expected cash inflows (principally from loan
repayments) and the ED Conduit Program borrowing it expects to
begin using in the first quarter of 2009 will provide sufficient
liquidity to meet its short term obligations.
In certain of the Companys securitizations, there are
terms within the deal structure that result in such
securitization not qualifying for SFAS No. 140 sale
treatment and are accounted for as secured borrowings as a
result. 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. In certain of these on-balance sheet securitizations,
the Company holds the option of purchasing remarketing bonds
prior to a failed remarketing. The Company exercised this option
in 2008 and purchased $839 million of these notes.
In the fourth quarter of 2008, two of the Companys
off-balance sheet securitization trusts were re-evaluated using
the guidance in SFAS No. 140 and it was determined
that they no longer met the criteria to be considered QSPEs,
thus violating the sale criteria in SFAS No. 140.
These trusts were then evaluated as VIEs using the guidance in
FIN No. 46(R) and it was determined that they should
be consolidated and accounted for as secured borrowings as the
Company is the primary beneficiary. The trusts had reached their
10 percent
F-48
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
7.
|
Borrowings
(Continued)
|
clean-up
call levels but the call was not exercised by the Company. Under
SFAS No. 140, because the Company can now exercise
that option at their discretion going forward, the Company
effectively controls the assets of the trusts as the trusts are
not considered QSPEs. This resulted in the Company consolidating
at fair value $289 million in assets and $278 million
in liabilities related to these trusts.
The Company has secured assets and outstanding bonds in
indentured trusts resulting from the acquisition of various
student loan providers in prior periods. The indentures were
created and bonds issued to finance the acquisition of student
loans guaranteed under the Higher Education Act. The bonds are
limited obligations of the Company and are secured by and
payable from payments associated with the underlying secured
loans.
The Company had $1.0 billion of taxable and
$1.4 billion of tax-exempt auction rate securities
outstanding in on-balance sheet securitizations and indentured
trusts, respectively, at December 31, 2008. In February
2008, an imbalance of supply and demand in the auction rate
securities market as a whole led to failures of the auctions
pursuant to which certain of the Companys auction rate
securities interest rates are set. As a result, certain of
the Companys auction rate securities bear interest at the
maximum rate allowable under their terms. The maximum allowable
interest rate on the Companys $1.0 billion taxable
auction rate securities is generally LIBOR plus
1.50 percent. The maximum allowable interest rate on many
of the Companys $1.4 billion of tax-exempt auction
rate securities was amended to LIBOR plus 2.00 percent
through May 31, 2008. After May 31, 2008, the maximum
allowable rate on these securities reverted to a formula driven
rate, which produced various maximum rates up to 14 percent
during 2008 but averaged 1.60 percent at December 31,
2008.
F-49
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
8.
|
Student
Loan Securitization
|
The Company securitizes its FFELP Stafford loans, FFELP
Consolidation Loans and its Private Education 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.
Securitization
Activity
The following table summarizes the Companys securitization
activity for the years ended December 31, 2008, 2007 and
2006. Those securitizations listed as sales are off-balance
sheet transactions and those listed as financings remain
on-balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Loan
|
|
|
Pre-
|
|
|
|
|
|
|
|
|
Loan
|
|
|
Pre-
|
|
|
|
|
|
|
|
|
Loan
|
|
|
Pre-
|
|
|
|
|
|
|
No. of
|
|
|
Amount
|
|
|
Tax
|
|
|
Gain
|
|
|
No. of
|
|
|
Amount
|
|
|
Tax
|
|
|
Gain
|
|
|
No. of
|
|
|
Amount
|
|
|
Tax
|
|
|
Gain
|
|
(Dollars in millions)
|
|
Transactions
|
|
|
Securitized
|
|
|
Gain
|
|
|
%
|
|
|
Transactions
|
|
|
Securitized
|
|
|
Gain
|
|
|
%
|
|
|
Transactions
|
|
|
Securitized
|
|
|
Gain
|
|
|
%
|
|
|
Securitizations sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford/PLUS loans
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
|
|
2
|
|
|
$
|
5,004
|
|
|
$
|
17
|
|
|
|
.3
|
%
|
FFELP Consolidation Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
9,503
|
|
|
|
55
|
|
|
|
.6
|
|
Private Education Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
2,001
|
|
|
|
367
|
|
|
|
18.4
|
|
|
|
3
|
|
|
|
5,088
|
|
|
|
830
|
|
|
|
16.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations sales
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
%
|
|
|
1
|
|
|
|
2,001
|
|
|
$
|
367
|
|
|
|
18.4
|
%
|
|
|
9
|
|
|
|
19,595
|
|
|
$
|
902
|
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations financings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford/PLUS
loans(1)
|
|
|
9
|
|
|
|
18,546
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
8,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Consolidation
Loans(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
14,476
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
12,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations financings
|
|
|
9
|
|
|
|
18,546
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
23,431
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
12,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations
|
|
|
9
|
|
|
$
|
18,546
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
$
|
25,432
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
$
|
32,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In certain securitizations there
are terms within the deal structure that result in such
securitizations not qualifying for sale treatment and
accordingly, they are accounted for on-balance sheet as VIEs.
Terms that prevent sale treatment include: (1) allowing the
Company to hold certain rights that can affect the remarketing
of certain bonds, (2) allowing the trust to enter into
interest rate cap agreements after 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.
|
F-50
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
8.
|
Student
Loan Securitization (Continued)
|
Key economic assumptions used in estimating the fair value of
the Residual Interests at the date of securitization resulting
from the student loan securitization sale transactions completed
during the years ended December 31, 2008, 2007 and 2006
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
FFELP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stafford
|
|
FFELP
|
|
Private
|
|
FFELP
|
|
FFELP
|
|
Private
|
|
FFELP
|
|
FFELP
|
|
Private
|
|
|
and
|
|
Consolidation
|
|
Education
|
|
Stafford
|
|
Consolidation
|
|
Education
|
|
Stafford
|
|
Consolidation
|
|
Education
|
|
|
PLUS(1)
|
|
Loans(1)
|
|
Loans(1)
|
|
and
PLUS(1)
|
|
Loans(1)
|
|
Loans
|
|
and PLUS
|
|
Loans
|
|
Loans
|
|
Prepayment speed (annual
rate)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
6
|
%
|
|
|
4
|
%
|
Interim status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4-7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Life of loan repayment status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.4 y
|
rs.
|
|
|
3.7 y
|
rs.
|
|
|
8.2 yrs.
|
|
|
|
9.4 y
|
rs.
|
Expected credit losses (% of principal securitized)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.69
|
%
|
|
|
.15
|
%
|
|
|
.19
|
%
|
|
|
4.79
|
%
|
Residual cash flows discounted at (weighted average)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.5
|
%
|
|
|
12.4
|
%
|
|
|
10.8
|
%
|
|
|
12.9
|
%
|
|
|
|
(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 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.
|
|
* |
|
CPR of 20 percent for 2006,
15 percent for 2007, and 10 percent thereafter.
|
F-51
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
8.
|
Student
Loan Securitization (Continued)
|
The following table summarizes cash flows received from or paid
to the off-balance sheet securitization trusts during the years
ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(Dollars in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
Net proceeds from new securitizations completed during the period
|
|
$
|
|
|
|
$
|
1,977
|
|
|
$
|
19,521
|
|
Cash distributions from trusts related to Residual Interests
|
|
|
909
|
|
|
|
782
|
|
|
|
598
|
|
Servicing fees
received(1)
|
|
|
246
|
|
|
|
286
|
|
|
|
327
|
|
Purchases of previously transferred financial assets for
representation and warranty violations
|
|
|
(37
|
)
|
|
|
(33
|
)
|
|
|
(45
|
)
|
Reimbursements of borrower
benefits(2)
|
|
|
(29
|
)
|
|
|
(22
|
)
|
|
|
(24
|
)
|
Purchases of delinquent Private Education Loans from
securitization trusts using delinquent loan call option
|
|
|
(172
|
)
|
|
|
(162
|
)
|
|
|
(72
|
)
|
Purchases of loans using clean-up call option
|
|
|
(697
|
)
|
|
|
(1,500
|
)
|
|
|
(1,122
|
)
|
|
|
|
(1) |
|
The Company receives annual
servicing fees of 90 basis points, 50 basis points and
70 basis points of the outstanding securitized loan balance
related to its FFELP Stafford, FFELP Consolidation Loan and
Private Education Loan securitizations, respectively.
|
|
(2) |
|
Under the terms of the
securitizations, the transaction documents require that the
Company reimburse the trusts for any borrower benefits afforded
the borrowers of the underlying securitized loans.
|
F-52
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
8.
|
Student
Loan Securitization (Continued)
|
Residual
Interest in Securitized Receivables
The following tables summarize the fair value of the
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 December 31,
2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
FFELP
|
|
Consolidation
|
|
Private
|
|
|
|
|
Stafford and
|
|
Loan
|
|
Education
|
|
|
(Dollars in millions)
|
|
PLUS
|
|
Trusts(1)
|
|
Loan Trusts
|
|
Total
|
|
Fair value of Residual
Interests(2)
|
|
$
|
250
|
|
|
$
|
918
|
|
|
$
|
1,032
|
|
|
$
|
2,200
|
|
Underlying securitized loan balance
|
|
|
7,057
|
|
|
|
15,077
|
|
|
|
13,690
|
|
|
|
35,824
|
|
Weighted average life
|
|
|
3.0 yrs.
|
|
|
|
8.1 yrs.
|
|
|
|
6.4 yrs.
|
|
|
|
|
|
Prepayment speed (annual
rate)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim status
|
|
|
0
|
%
|
|
|
N/A
|
|
|
|
0
|
%
|
|
|
|
|
Repayment status
|
|
|
2-19
|
%
|
|
|
1-6
|
%
|
|
|
2-15
|
%
|
|
|
|
|
Life of loan repayment status
|
|
|
12
|
%
|
|
|
4
|
%
|
|
|
6
|
%
|
|
|
|
|
Expected credit losses (% of student loan
principal)(4)
|
|
|
.11
|
%
|
|
|
.23
|
%
|
|
|
5.22
|
%
|
|
|
|
|
Residual cash flows discount rate
|
|
|
13.1
|
%
|
|
|
11.9
|
%
|
|
|
26.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
FFELP
|
|
Consolidation
|
|
Private
|
|
|
|
|
Stafford and
|
|
Loan
|
|
Education
|
|
|
(Dollars in millions)
|
|
PLUS
|
|
Trusts(1)
|
|
Loan Trusts
|
|
Total
|
|
Fair value of Residual
Interests(2)
|
|
$
|
390
|
|
|
$
|
730
|
|
|
$
|
1,924
|
|
|
$
|
3,044
|
|
Underlying securitized loan balance
|
|
|
9,338
|
|
|
|
15,968
|
|
|
|
14,199
|
|
|
|
39,505
|
|
Weighted average life
|
|
|
2.7 yrs.
|
|
|
|
7.4 yrs.
|
|
|
|
7.0 yrs.
|
|
|
|
|
|
Prepayment speed (annual
rate)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim status
|
|
|
0
|
%
|
|
|
N/A
|
|
|
|
0
|
%
|
|
|
|
|
Repayment status
|
|
|
0-37
|
%
|
|
|
3-8
|
%
|
|
|
1-30
|
%
|
|
|
|
|
Life of loan repayment status
|
|
|
21
|
%
|
|
|
6
|
%
|
|
|
9
|
%
|
|
|
|
|
Expected credit losses (% of student loan
principal)(4)
|
|
|
.11
|
%
|
|
|
.21
|
%
|
|
|
5.28
|
%
|
|
|
|
|
Residual cash flows discount rate
|
|
|
12.0
|
%
|
|
|
9.8
|
%
|
|
|
12.9
|
%
|
|
|
|
|
|
|
|
(1) |
|
Includes $762 million and
$283 million related to the fair value of the Embedded
Floor Income as of December 31, 2008 and 2007,
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 December 31, 2007, the
Company had unrealized gains (pre-tax) in accumulated other
comprehensive income of $301 million that related to the
Retained Interests. There were no such gains at
December 31, 2008.
|
|
(3) |
|
The Company uses CPR curves for
Residual Interest valuations that are based on seasoning (the
number of months since entering repayment). Under this
methodology, a different CPR is applied to each year of a
loans seasoning. The repayment status CPR used is based on
the number of months since first entering repayment (seasoning).
Life of loan CPR is related to repayment status only and does
not include the impact of the loan while in interim status. The
CPR assumption used for all periods includes the impact of
projected defaults.
|
|
(4) |
|
Remaining expected credit losses as
of the respective balance sheet date.
|
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, 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. 159.
F-53
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
8.
|
Student
Loan Securitization (Continued)
|
The Company adopted SFAS No. 159 on January 1,
2008, and has elected the fair value option on all of the
Residual Interests effective January 1, 2008. The Company
chose this election in order to record all Residual Interests
under one accounting model. Prior to this election, Residual
Interests were accounted for either under SFAS No. 115
with changes in fair value recorded through other comprehensive
income, except if impaired in which case changes in fair value
were recorded through income, or under SFAS No. 155
with all changes in fair value recorded through income. Changes
in the fair value of Residual Interests from January 1,
2008 forward are recorded in the servicing and securitization
revenue line item of the consolidated statements of income.
As of December 31, 2008, the Company had changed the
following significant assumptions compared to those used as of
December 31, 2007, to determine the fair value of the
Residual Interests:
|
|
|
|
|
Prepayment speed assumptions were decreased for all three asset
types primarily as a result of a significant reduction in
prepayment activity experienced which is expected to continue
into the foreseeable future. The decrease in prepayment speeds
is primarily due to a reduction in third-party consolidation
activity as a result of the CCRAA (for FFELP only) and the
current U.S. economic and credit environment. This resulted
in a $114 million unrealized
mark-to-market
gain.
|
|
|
|
Life of loan default rate assumptions for Private Education
loans were increased as a result of the continued weakening of
the U.S. economy. This resulted in a $79 million
unrealized
mark-to-market
loss.
|
|
|
|
Cost of funds assumptions related to the underlying auction rate
securities bonds ($2.3 billion face amount of bonds) within
FFELP loan ($1.7 billion face amount of bonds) and Private
Education Loan ($0.6 billion face amount of bonds) trusts
were increased to take into account the expectations these
auction rate securities will continue to reset at higher rates
for an extended period of time. This resulted in a
$116 million unrealized
mark-to-market
loss.
|
|
|
|
The discount rate assumption related to the Private Education
Loan and FFELP Residual Interests was increased. The Company
assessed the appropriateness of the current risk premium, which
is added to the risk free rate for the purpose of arriving at a
discount rate, in light of the current economic and credit
uncertainty that exists in the market as of December 31,
2008. This discount rate is applied to the projected cash flows
to arrive at a fair value representative of the current economic
conditions. The Company increased the risk premium by
1,550 basis points and 390 basis points for Private
Education and FFELP, respectively, to take into account the
current level of cash flow uncertainty and lack of liquidity
that exists with the Residual Interests. This resulted in a
$904 million unrealized
mark-to-market
loss.
|
The Company recorded net unrealized
mark-to-market
losses related to the Residual Interests of $425 million
during the year ended December 31, 2008. The
mark-to-market
losses were primarily related to the increase in the discount
rate assumptions discussed above which resulted in a
$904 million
mark-to-market
loss. This was partially offset by an unrealized
mark-to-market
gain of $555 million related to the Floor Income component
of the Residual Interest primarily due to the significant
decrease in interest rates from December 31, 2007 to
December 31, 2008.
The Company recorded impairments to the Retained Interests of
$254 million and $157 million, respectively, for the
years ended December 31, 2007 and 2006. The impairment
charges were the result of FFELP loans prepaying faster than
projected through loan consolidations ($110 million and
$104 million for the years ended December 31, 2007 and
2006, respectively), impairment to the Floor Income component of
the Companys Retained Interest due to increases in
interest rates during the period ($24 million and
$53 million for the years ended December 31, 2007 and
2006, respectively), and increases in prepayments, defaults, and
the discount rate related to Private Education Loans
($120 million for the year ended December 31, 2007).
In addition, the Company recorded an unrealized
mark-to-market
loss under SFAS No. 155 of $25 million for the
year ended December 31, 2007.
F-54
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
8.
|
Student
Loan Securitization (Continued)
|
The following table reflects the sensitivity of the current fair
value of the Residual Interests to adverse changes in the key
economic assumptions used in the valuation of the Residual
Interest at December 31, 2008, discussed in detail in the
preceding table. The effect of a variation in a particular
assumption on the fair value of the Residual Interest is
calculated without changing any other assumption. In reality,
changes in one factor may result in changes in another (for
example, increases in market interest rates may result in lower
prepayments and increased credit losses), which might magnify or
counteract the sensitivities. These sensitivities are
hypothetical, as the actual results could be materially
different than these estimates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
FFELP
|
|
FFELP
|
|
|
|
|
Stafford/PLUS
|
|
Consolidation
|
|
Private Education
|
(Dollars in millions)
|
|
Loan
Trusts(5)
|
|
Loan
Trusts(5)
|
|
Loan
Trusts(5)
|
|
Fair value of Residual Interest
|
|
$
|
250
|
|
|
$
|
918
|
(1)
|
|
$
|
1,032
|
|
Weighted-average life
|
|
|
3.0 yrs.
|
|
|
|
8.1 yrs.
|
|
|
|
6.4 yrs.
|
|
Prepayment speed
assumptions(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim status
|
|
|
0
|
%
|
|
|
N/A
|
|
|
|
0
|
%
|
Repayment status
|
|
|
2-19
|
%
|
|
|
1-6
|
%
|
|
|
2-15
|
%
|
Life of loan repayment status
|
|
|
12
|
%
|
|
|
4
|
%
|
|
|
6
|
%
|
Impact on fair value of 5% absolute increase
|
|
$
|
(23
|
)
|
|
$
|
(151
|
)
|
|
$
|
(158
|
)
|
Impact on fair value of 10% absolute increase
|
|
$
|
(41
|
)
|
|
$
|
(265
|
)
|
|
$
|
(282
|
)
|
Expected credit losses (as a % of student loan principal)
|
|
|
.11
|
%
|
|
|
.23
|
%
|
|
|
5.22
|
%(3)
|
Impact on fair value of 5% absolute increase in default rate
|
|
$
|
(5
|
)
|
|
$
|
(7
|
)
|
|
$
|
(207
|
)
|
Impact on fair value of 10% absolute increase in default rate
|
|
$
|
(10
|
)
|
|
$
|
(14
|
)
|
|
$
|
(413
|
)
|
Residual cash flows discount rate
|
|
|
13.1
|
%
|
|
|
11.9
|
%
|
|
|
26.3
|
%
|
Impact on fair value of 5% absolute increase
|
|
$
|
(27
|
)
|
|
$
|
(158
|
)
|
|
$
|
(132
|
)
|
Impact on fair value of 10% absolute increase
|
|
$
|
(49
|
)
|
|
$
|
(275
|
)
|
|
$
|
(235
|
)
|
|
|
3 month LIBOR forward
curve
at December 31, 2008 plus contracted spreads
|
Difference between Asset and Funding underlying
indices(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on fair value of 0.25% absolute increase in funding index
compared to asset index
|
|
$
|
(46
|
)
|
|
$
|
(173
|
)
|
|
$
|
(3
|
)
|
Impact on fair value of 0.50% absolute increase in funding index
compared to asset index
|
|
$
|
(92
|
)
|
|
$
|
(346
|
)
|
|
$
|
(6
|
)
|
|
|
|
(1) |
|
Certain consolidation trusts have
$3.3 billion of
non-U.S.
dollar (Euro denominated) bonds outstanding. To convert these
non-U.S.
dollar denominated bonds into U.S. dollar liabilities, the
trusts have entered into foreign-currency swaps with certain
counterparties. Additionally, certain Private Education Loan
trusts contain interest rate swaps that hedge the basis and
reset risk between the Prime indexed assets and LIBOR index
notes. As of December 31, 2008, these swaps are in a
$959 million gain position (in the aggregate) and the
trusts had $716 million of exposure to counterparties (gain
position less collateral posted) primarily as a result of the
decline in the exchange rates between the U.S. dollar and the
Euro. This unrealized market value gain is not part of the fair
value of the Residual Interest in the table above. Not all
derivatives within the trusts require the swap counterparties to
post collateral to the respective trust for changes in market
value, unless the trusts swap counterpartys credit
rating has been withdrawn or has been downgraded below a certain
level. If the swap counterparty does not post the required
collateral or is downgraded further, the counterparty must find
a suitable replacement counterparty or provide the trust with a
letter of credit or a guaranty from an entity that has the
required credit ratings. Ultimately, the Companys exposure
related to a swap counterparty failing to make its payments is
limited to the fair value of the related trusts Residual
Interest which was $613 million as of December 31,
2008.
|
(2) |
|
See previous table for details on
CPR. Impact on fair value due to increase in prepayment speeds
only increases the repayment status speeds. Interim status CPR
remains 0%.
|
(3) |
|
Expected credit losses are used to
project future cash flows related to the Private Education Loan
securitizations Residual Interest. However, until the
fourth quarter of 2008 when it ceased this activity for all
trusts settling prior to September 30, 2005, the Company
purchased loans at par when the loans reach 180 days
delinquent prior to default under a contingent call option,
resulting in no credit losses at the trust nor related to the
Companys Residual Interest. When the Company exercises its
contingent call option and purchases the loan from the trust at
par, the Company records a loss related to these loans that are
now on the Companys balance sheet. The Company recorded
losses of $141 million, $123 million and
$48 million for the years ended December 31, 2008,
2007 and 2006, respectively, related to this activity and
specialty claims. For all trusts settling after October 1,
2005, the Company does not hold this contingent call option.
|
(4) |
|
Student loan assets are primarily
indexed to a Treasury bill, commercial paper or a prime index.
Funding within the trust is primarily indexed to a LIBOR index.
Sensitivity analysis increases funding indexes as indicated
while keeping asset underlying indexes fixed.
|
(6) |
|
In addition to the assumptions in
the table above, the Company also projects the reduction in
distributions that will result from the various benefit programs
that exist related to consecutive on-time payments by borrowers.
Related to the entire $2.2 billion Residual Interest, there
is $221 million (present value) of benefits projected which
reduce the fair value.
|
F-55
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
8.
|
Student
Loan Securitization (Continued)
|
The table below shows the Companys off-balance sheet
Private Education Loan delinquency trends as of
December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Private Education Loan Delinquencies
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
(Dollars in millions)
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
3,461
|
|
|
|
|
|
|
$
|
4,963
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
700
|
|
|
|
|
|
|
|
1,417
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
8,843
|
|
|
|
92.8
|
%
|
|
|
7,403
|
|
|
|
94.7
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
315
|
|
|
|
3.3
|
|
|
|
202
|
|
|
|
2.6
|
|
Loans delinquent
61-90 days
|
|
|
121
|
|
|
|
1.3
|
|
|
|
84
|
|
|
|
1.1
|
|
Loans delinquent greater than 90 days
|
|
|
251
|
|
|
|
2.6
|
|
|
|
130
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet Private Education Loans in repayment
|
|
|
9,530
|
|
|
|
100
|
%
|
|
|
7,819
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet Private Education Loans, gross
|
|
$
|
13,691
|
|
|
|
|
|
|
$
|
14,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
The following table summarizes net charge-off activity for
Private Education Loans in the off-balance sheet trusts for the
years ended December 31, 2008, 2007 and 2006 as previously
reported.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Dollars in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Charge-offs
|
|
$
|
(226
|
)
|
|
$
|
(107
|
)
|
|
$
|
(24
|
)
|
Recoveries
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(217
|
)
|
|
|
(107
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs as a percentage of average loans in repayment
|
|
|
2.68
|
%
|
|
|
1.46
|
%
|
|
|
.43
|
%
|
Net charge-offs as a percentage of average loans in repayment
and forbearance
|
|
|
2.31
|
%
|
|
|
1.27
|
%
|
|
|
.38
|
%
|
Ending off-balance sheet total Private Education Loans, gross
|
|
$
|
13,691
|
|
|
$
|
14,199
|
|
|
$
|
13,222
|
|
Average off-balance sheet Private Education Loans in repayment
|
|
$
|
8,088
|
|
|
$
|
7,305
|
|
|
$
|
5,721
|
|
Ending off-balance sheet Private Education Loans in repayment
|
|
$
|
9,530
|
|
|
$
|
7,819
|
|
|
$
|
6,792
|
|
F-56
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
8.
|
Student
Loan Securitization (Continued)
|
The following table summarizes charge-off activity for Private
Education Loans in the off-balance sheet trusts for the years
ended December 31, 2008, 2007 and 2006 as corrected and
discussed above in Note 4, Allowance for Loan
Losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
(Dollars in millions)
|
|
2008
|
|
2007
|
|
2006
|
|
Charge-offs
|
|
|
(153
|
)
|
|
|
(79
|
)
|
|
|
(24
|
)
|
Charge-offs as a percentage of average loans in repayment
|
|
|
1.90
|
%
|
|
|
1.09
|
%
|
|
|
.43
|
%
|
Charge-offs as a percentage of average loans in repayment and
forbearance
|
|
|
1.64
|
%
|
|
|
.94
|
%
|
|
|
.38
|
%
|
Ending off-balance sheet total Private Education
Loans(1)
|
|
$
|
13,782
|
|
|
$
|
14,227
|
|
|
$
|
13,222
|
|
Average off-balance sheet Private Education Loans in repayment
|
|
$
|
8,088
|
|
|
$
|
7,305
|
|
|
$
|
5,721
|
|
Ending off-balance sheet Private Education Loans in repayment
|
|
$
|
9,530
|
|
|
$
|
7,819
|
|
|
$
|
6,792
|
|
|
|
|
(1) |
|
Ending total loans represents gross
Private Education Loans, plus the receivable for partially
charged-off loans.
|
|
|
9.
|
Derivative
Financial Instruments
|
Risk
Management Strategy
The Company maintains an overall interest rate risk management
strategy that incorporates the use of derivative instruments to
minimize the economic effect of interest rate changes. The
Companys goal is to manage interest rate sensitivity by
modifying the repricing frequency and underlying index
characteristics of certain balance sheet assets and liabilities
(including the Residual Interest from off-balance sheet
securitizations) so that the net interest margin is not, on a
material basis, adversely affected by movements in interest
rates. The Company does not use derivative instruments to hedge
credit risk associated with debt issued by the Company. As a
result of interest rate fluctuations, hedged assets and
liabilities will appreciate or depreciate in market value.
Income or loss on the derivative instruments that are linked to
the hedged assets and liabilities will generally offset the
effect of this unrealized appreciation or depreciation for the
period the item is being hedged. The Company views this strategy
as a prudent management of interest rate sensitivity. In
addition, the Company utilizes derivative contracts to minimize
the economic impact of changes in foreign currency exchange
rates on certain debt obligations that are denominated in
foreign currencies. As foreign currency exchange rates
fluctuate, these liabilities will appreciate and depreciate in
value. These fluctuations, to the extent the hedge relationship
is effective, are offset by changes in the value of the
cross-currency interest rate swaps executed to hedge these
instruments. Management believes certain derivative transactions
entered into as hedges, primarily Floor Income Contracts, basis
swaps and Eurodollar futures contracts, are economically
effective; however, those transactions generally do not qualify
for hedge accounting under SFAS No. 133 (as discussed
below) and thus may adversely impact earnings.
Although the Company uses derivatives to offset (or minimize)
the risk of interest rate and foreign currency changes, the use
of derivatives does expose the Company to both market and credit
risk. Market risk is the chance of financial loss resulting from
changes in interest rates, foreign exchange rates and market
liquidity. Credit risk is the risk that a counterparty will not
perform its obligations under a contract and it is limited to
the loss of the fair value gain in a derivative that the
counterparty owes the Company. When the fair value of a
derivative contract is negative, the Company owes the
counterparty and, therefore, has no credit risk exposure to the
counterparty; however, the counterparty has exposure to the
Company. The Company minimizes the credit risk in derivative
instruments by entering into transactions with highly rated
F-57
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
9.
|
Derivative
Financial Instruments (Continued)
|
counterparties that are reviewed periodically by the
Companys credit department. The Company also maintains a
policy of requiring that all derivative contracts be governed by
an International Swaps and Derivative Association Master
Agreement. Depending on the nature of the derivative
transaction, bilateral collateral arrangements generally are
required as well. When the Company has more than one outstanding
derivative transaction with the counterparty, and there exists
legally enforceable netting provisions with the counterparty
(i.e. a legal right to offset receivable and payable derivative
contracts), the net
mark-to-market
exposure represents the netting of the positive and negative
exposures with the same counterparty. When there is a net
negative exposure, the Company considers its exposure to the
counterparty to be zero. At December 31, 2008 and 2007, the
Company had a net positive exposure (derivative gain positions
to the Company less collateral which has been posted by
counterparties to the Company) related to corporate derivatives
of $234 million and $463 million, respectively.
The Companys on-balance sheet securitization trusts have
$11.0 billion of Euro and British Pound Sterling
denominated bonds outstanding as of December 31, 2008. To
convert these
non-U.S. dollar
denominated bonds into U.S. dollar liabilities, the trusts
have entered into foreign-currency swaps with highly-rated
counterparties. As of December 31, 2008, the net positive
exposure on these swaps is $926 million. As previously
discussed, the Companys corporate derivatives contain
provisions which require collateral to be posted on a regular
basis for changes in market values. The on-balance sheet
trusts derivatives are structured such that swap
counterparties are required to post collateral if their credit
rating has been withdrawn or is below a certain level. If the
swap counterparty does not post the required collateral or is
downgraded further, the counterparty must find a suitable
replacement counterparty or provide the trust with a letter of
credit or a guaranty from an entity that has the required credit
ratings. In addition to the credit rating requirement, trusts
issued after November 2005 require the counterparty to post
collateral due to a net positive exposure on cross-currency
interest rate swaps, irrespective of their counterparty rating.
The trusts, however, are not required to post collateral to the
counterparty.
F-58
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
9.
|
Derivative
Financial Instruments (Continued)
|
Collateral
Collateral held and pledged at December 31, 2008 and 2007
related to derivative exposures between the Company and its
derivative counterparties are detailed in the following table:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
Collateral held:
|
|
|
|
|
|
|
|
|
Cash (obligation to return cash collateral is recorded in
short-term borrowings)
|
|
$
|
1,624
|
|
|
$
|
1,306
|
|
Securities at fair value corporate derivatives (not
recorded in financial
statements)(1)
|
|
|
689
|
|
|
|
|
|
Securities at fair value on-balance sheet
securitization derivatives (not recorded in financial
statements)(2)
|
|
|
688
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
Total collateral held
|
|
$
|
3,001
|
|
|
$
|
1,616
|
|
|
|
|
|
|
|
|
|
|
Derivative asset at fair value including accrued interest and
premium receivable
|
|
$
|
3,741
|
|
|
$
|
3,812
|
|
|
|
|
|
|
|
|
|
|
Collateral pledged to others:
|
|
|
|
|
|
|
|
|
Cash (right to receive return of cash collateral is recorded in
investments)
|
|
$
|
|
|
|
$
|
25
|
|
Securities at fair value (recorded in
investments)(3)
|
|
|
26
|
|
|
|
196
|
|
Securities at fair value re-pledged (not recorded in financial
statements)(4)(5)
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total collateral pledged
|
|
$
|
217
|
|
|
$
|
221
|
|
|
|
|
|
|
|
|
|
|
Derivative liability at fair value including accrued interest
and premium receivable
|
|
$
|
677
|
|
|
$
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In general, the Company has the
ability to sell or re-pledge securities it holds as collateral.
|
|
(2) |
|
The trusts do not have the ability
to sell or re-pledge securities they hold as collateral.
|
|
(3) |
|
Counterparty does not have the
right to sell or re-pledge securities.
|
|
(4) |
|
Counterparty has the right to sell
or re-pledge securities.
|
|
(5) |
|
Represents securities the Company
holds as collateral that have been pledged to other
counterparties.
|
Additionally, as of December 31, 2008 and 2007,
$340 million and $295 million, respectively, in
collateral relative to off-balance sheet trust derivatives were
held by these off-balance sheet trusts. Collateral posted by
third parties to the off-balance sheet trusts cannot be sold or
re-pledged by the trusts.
SFAS No. 133
Derivative instruments that are used as part of the
Companys interest rate and foreign currency risk
management strategy include interest rate swaps, basis swaps,
cross-currency interest rate swaps, interest rate futures
contracts, and interest rate floor and cap contracts with
indices that relate to the pricing of specific balance sheet
assets and liabilities including the Residual Interests from
off-balance sheet securitizations. In addition, prior to 2008,
the Company used equity forward contracts based on the
Companys stock. The Company accounts for its derivatives
under SFAS No. 133 which requires that every
derivative instrument, including certain derivative instruments
embedded in other contracts, be recorded in the balance sheet as
either
F-59
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
9.
|
Derivative
Financial Instruments (Continued)
|
an asset or liability measured at its fair value. As more fully
described below, if certain criteria are met, derivative
instruments are classified and accounted for by the Company as
either fair value or cash flow hedges. If these criteria are not
met, the derivative financial instruments are accounted for as
trading.
Fair
Value Hedges
Fair value hedges are generally used by the Company to hedge the
exposure to changes in fair value of a recognized fixed rate
asset or liability. The Company enters into interest rate swaps
to convert fixed rate assets into variable rate assets and fixed
rate debt into variable rate debt. The Company also enters into
cross-currency interest rate swaps to convert foreign currency
denominated fixed and floating debt to U.S. dollar
denominated variable debt. For fair value hedges, the Company
generally considers all components of the derivatives gain
and/or loss
when assessing hedge effectiveness (in some cases the Company
excludes time-value components) and generally hedges changes in
fair value due to interest rates or interest rates and foreign
currency exchange rates or the total change in fair value.
Cash Flow
Hedges
Cash flow hedges are used by the Company to hedge the exposure
to variability in cash flows for a forecasted debt issuance and
for exposure to variability in cash flows of floating rate debt.
This strategy is used primarily to minimize the exposure to
volatility from future changes in interest rates. Gains and
losses on the effective portion of a qualifying hedge are
accumulated in other comprehensive income and ineffectiveness is
recorded immediately to earnings. In the case of a forecasted
debt issuance, gains and losses are reclassified to earnings
over the period which the stated hedged transaction impacts
earnings. If the stated transaction is deemed probable not to
occur, gains and losses are reclassified immediately to
earnings. In assessing hedge effectiveness, generally all
components of each derivatives gains or losses are
included in the assessment. The Company generally hedges
exposure to changes in cash flows due to changes in interest
rates or total changes in cash flow.
Trading
Activities
When instruments do not qualify as hedges under
SFAS No. 133, they are accounted for as trading where
all changes in fair value of the derivatives are recorded
through earnings. The Company sells interest rate floors (Floor
Income Contracts) to hedge the Embedded Floor Income options in
student loan assets. The Floor Income Contracts are written
options which under SFAS No. 133 have a more stringent
effectiveness hurdle to meet. Therefore, these relationships do
not satisfy hedging qualifications under SFAS No. 133,
but are considered economic hedges for risk management purposes.
The Company uses this strategy to minimize its exposure to
changes in interest rates.
The Company also uses basis swaps to minimize earnings
variability caused by having different reset characteristics on
the Companys interest-earning assets and interest-bearing
liabilities. These swaps possess a term of up to 14 years
with a pay rate indexed to
91-day
Treasury bill,
3-month
commercial paper, 52-week Treasury bill, LIBOR, Prime, or
1-year
constant maturity Treasury rates. The specific terms and
notional amounts of the swaps are determined based on
managements review of its asset/liability structure, its
assessment of future interest rate relationships, and on other
factors such as short-term strategic initiatives.
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 flows of the asset and the change in the
cash flows of the liability. The Companys basis swaps
hedge variable interest rate risk; however, they generally do
not meet this effectiveness test because the index of the swap
does not exactly match the index of the hedged assets as
required by SFAS No. 133. Additionally, some of the
Companys FFELP student loans can earn at either a variable
or a
F-60
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
9.
|
Derivative
Financial Instruments (Continued)
|
fixed interest rate depending on market interest rates. The
Company also has 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 currently in the statement of income.
Prior to 2008, the Company entered into equity forward contracts
(see Note 11, Stockholders Equity, for a
further discussion of equity forward contracts and the
settlement of all equity forward contracts in January 2008). The
Company utilized the strategy to lock in the purchase price of
the Companys stock to better manage the cost of its share
repurchases. In order to qualify as a hedge under
SFAS No. 133, the hedged item must impact net income.
In this case, the repurchase of the Companys shares does
not impact net income; therefore, the equity forwards do not
qualify as a SFAS No. 133 hedge. Prior to
December 31, 2007, the Companys equity forward
contracts provided for physical, net share or net cash
settlement options. On December 31, 2007, the terms of the
contracts were changed to allow for physical settlement only.
This effectively changed the characteristics of the contracts so
they no longer were derivatives accounted for under
SFAS No. 133 and SFAS No. 150 and instead
were accounted for as a liability (recorded at the present value
of the repurchase price) under SFAS No. 150. All
contracts were settled in January 2008.
Summary
of Derivative Financial Statement Impact
The following tables summarize the fair values and notional
amounts or number of contracts of all derivative instruments at
December 31, 2008 and 2007, and their impact on other
comprehensive income and earnings for the years ended
December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Cash Flow
|
|
|
Fair Value
|
|
|
Trading
|
|
|
Total
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Fair
Values(1)
(Dollars in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(146
|
)
|
|
$
|
(34
|
)
|
|
$
|
1,529
|
|
|
$
|
102
|
|
|
$
|
(9
|
)
|
|
$
|
252
|
|
|
$
|
1,374
|
|
|
$
|
320
|
|
Floor/Cap contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,466
|
)
|
|
|
(442
|
)
|
|
|
(1,466
|
)
|
|
|
(442
|
)
|
Futures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
Cross currency interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
2,103
|
|
|
|
3,640
|
|
|
|
13
|
|
|
|
3
|
|
|
|
2,116
|
|
|
|
3,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(146
|
)
|
|
$
|
(34
|
)
|
|
$
|
3,632
|
|
|
$
|
3,742
|
|
|
$
|
(1,465
|
)
|
|
$
|
(187
|
)
|
|
$
|
2,021
|
|
|
$
|
3,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Value
(Dollars in
billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
4.8
|
|
|
$
|
3.1
|
|
|
$
|
13.4
|
|
|
$
|
14.7
|
|
|
$
|
159.3
|
|
|
$
|
199.5
|
|
|
$
|
177.5
|
|
|
$
|
217.3
|
|
Floor/Cap contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.4
|
|
|
|
38.9
|
|
|
|
32.4
|
|
|
|
38.9
|
|
Futures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.2
|
|
|
|
.6
|
|
|
|
.2
|
|
|
|
.6
|
|
Cross currency interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
23.1
|
|
|
|
23.8
|
|
|
|
.1
|
|
|
|
.1
|
|
|
|
23.2
|
|
|
|
23.9
|
|
Other(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.7
|
|
|
|
.7
|
|
|
|
.7
|
|
|
|
.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4.8
|
|
|
$
|
3.1
|
|
|
$
|
36.5
|
|
|
$
|
38.5
|
|
|
$
|
192.7
|
|
|
$
|
239.8
|
|
|
$
|
234.0
|
|
|
$
|
281.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fair values reported are exclusive
of collateral held and/or pledged and accrued interest.
|
|
(2) |
|
Other includes embedded
derivatives bifurcated from newly issued on-balance sheet
securitization debt, as a result of adopting
SFAS No. 155 (see Note 2, Significant
Accounting Policies Recently Issued Accounting
Pronouncements Accounting for Certain Hybrid
Financial Instruments).
|
F-61
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
9.
|
Derivative
Financial Instruments (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
Cash Flow
|
|
|
Fair Value
|
|
|
Trading
|
|
|
Total
|
|
(Dollars in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Change in fair value of cash flow hedges
|
|
$
|
(71
|
)
|
|
$
|
(16
|
)
|
|
$
|
(7
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(71
|
)
|
|
$
|
(16
|
)
|
|
$
|
(7
|
)
|
Amortization of effective
hedges(1)
|
|
|
|
|
|
|
1
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
12
|
|
Discontinued hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in accumulated other comprehensive income, net
|
|
$
|
(71
|
)
|
|
$
|
(15
|
)
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(71
|
)
|
|
$
|
(15
|
)
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of closed futures contracts gains/losses in
interest
expense(2)
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
(19
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
(19
|
)
|
Gains (losses) on derivative and hedging activities
Realized(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
|
|
|
|
(18
|
)
|
|
|
(109
|
)
|
|
|
115
|
|
|
|
(18
|
)
|
|
|
(109
|
)
|
Gains (losses) on derivative and hedging activities
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222
|
(4)
|
|
|
60
|
(4)
|
|
|
(13
|
)(4)
|
|
|
(782
|
)
|
|
|
(1,403
|
)
|
|
|
(243
|
)
|
|
|
(560
|
)
|
|
|
(1,343
|
)
|
|
|
(230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings impact
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
(19
|
)
|
|
$
|
222
|
|
|
$
|
60
|
|
|
$
|
(13
|
)
|
|
$
|
(667
|
)
|
|
$
|
(1,421
|
)
|
|
$
|
(352
|
)
|
|
$
|
(445
|
)
|
|
$
|
(1,363
|
)
|
|
$
|
(358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company expects to amortize
$.1 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 December 31, 2008.
|
|
(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 fair value of cash
flow and fair value hedges represents amounts related to
ineffectiveness.
|
The following table provides the detail of the Companys
other assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Ending
|
|
|
% of
|
|
|
Ending
|
|
|
% of
|
|
|
|
Balance
|
|
|
Balance
|
|
|
Balance
|
|
|
Balance
|
|
|
Derivatives at fair
value(1)
|
|
$
|
3,013,644
|
|
|
|
27
|
%
|
|
$
|
3,744,611
|
|
|
|
35
|
%
|
Accrued interest receivable
|
|
|
3,466,404
|
|
|
|
31
|
|
|
|
3,180,590
|
|
|
|
30
|
|
Federal income tax asset
|
|
|
1,661,039
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
APG purchased paper related receivables and Real Estate Owned
|
|
|
1,222,345
|
|
|
|
11
|
|
|
|
1,758,871
|
|
|
|
16
|
|
Accounts receivable collateral posted
|
|
|
|
|
|
|
|
|
|
|
867,427
|
|
|
|
8
|
|
Benefit-related investments
|
|
|
472,899
|
|
|
|
4
|
|
|
|
467,379
|
|
|
|
4
|
|
Fixed assets, net
|
|
|
313,059
|
|
|
|
3
|
|
|
|
315,260
|
|
|
|
3
|
|
Accounts receivable general
|
|
|
712,854
|
|
|
|
6
|
|
|
|
305,118
|
|
|
|
2
|
|
Other
|
|
|
278,533
|
|
|
|
3
|
|
|
|
107,851
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,140,777
|
|
|
|
100
|
%
|
|
$
|
10,747,107
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The derivative asset at fair value
net of cash collateral held at December 31, 2008 and 2007
is $1.4 billion and $2.4 billion, respectively.
|
F-62
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
10.
|
Other
Assets (Continued)
|
The derivatives at fair value line in the above
table represents the fair value of the Companys
derivatives in a gain position by counterparty exclusive of
accrued interest. At December 31, 2008 and 2007, these
balances primarily included cross-currency interest rate swaps
and interest rate swaps designated as fair value hedges that
were offset by an increase in interest-bearing liabilities
related to the hedged debt. As of December 31, 2008 and
2007, the cumulative
mark-to-market
adjustment to the hedged debt was $(3.4) billion and
$(3.6) billion, respectively.
Preferred
Stock
At December 31, 2008, the Company had outstanding
3.3 million shares of 6.97 percent Cumulative
Redeemable Preferred Stock, Series A (the
Series A Preferred Stock) and 4.0 million
shares of Floating-Rate Non-Cumulative Preferred Stock,
Series B (the Series B Preferred Stock).
Neither series has a maturity date but can be redeemed at the
Companys option beginning November 16, 2009 for
Series A Preferred Stock, and on any dividend payment date
on or after June 15, 2010 for Series B Preferred
Stock. Redemption would include any accrued and unpaid dividends
up to the redemption date. The shares have no preemptive or
conversion rights and are not convertible into or exchangeable
for any of the Companys other securities or property.
Dividends on both series are not mandatory and are paid
quarterly, when, as, and if declared by the Board of Directors.
Holders of Series A Preferred Stock are entitled to receive
cumulative, quarterly cash dividends at the annual rate of
$3.485 per share. Holders of Series B Preferred Stock are
entitled to receive quarterly dividends based on
3-month
LIBOR plus 70 basis points per annum in arrears, on and
until June 15, 2011, increasing to
3-month
LIBOR plus 170 basis points per annum in arrears after and
including the period beginning on June 15, 2011. Upon
liquidation or dissolution of the Company, holders of the
Series A and Series B Preferred Stock are entitled to
receive $50 and $100 per share, respectively, plus an amount
equal to accrued and unpaid dividends for the then current
quarterly dividend period, if any, pro rata, and before any
distribution of assets are made to holders of the Companys
common stock.
On December 31, 2008, the Company had outstanding
1.1 million shares of 7.25 percent Mandatory
Convertible Preferred Stock, Series C (the
Series C Preferred Stock). The Series C
Preferred Stock was issued on December 31, 2007, and
resulted in net proceeds of approximately $1.0 billion. An
additional 150,000 shares were issued on January 9,
2008, as a result of the underwriters exercising their
over-allotment option, and resulted in net proceeds of
$145.5 million. Each share of Series C Preferred Stock
has a $1,000 liquidation preference and is subject to mandatory
conversion on December 15, 2010. On the mandatory
conversion date, each share of the Series C Preferred Stock
will automatically convert into shares of the Companys
common stock based on a conversion rate calculated using the
average of the closing prices per share of the Companys
common stock during the 20 consecutive trading day period ending
on the third trading day immediately preceding the mandatory
conversion date. If the applicable market value on the mandatory
conversion date is (i) greater than $23.97, the conversion
rate is 41.7188 shares of the Companys common stock
per share of Series C Preferred Stock, (ii) less than
$19.65, the conversion rate is 50.8906 shares of the
Companys common stock per share of Series C Preferred
Stock, or (iii) equal to or less than $23.97 but greater than or
equal to $19.65, the conversion rate is $1,000 divided by the
applicable market value, which is between 41.7188 shares
and 50.8906 shares of the Companys common stock per
share of Series C Preferred Stock. At any time prior to December
15, 2010, the holder may elect optional conversion in whole or
in part at the minimum conversion rate of 41.7188 shares of
the Companys common stock per share of Series C Preferred
Stock. Series C Preferred Stock is not redeemable. Dividends are
not mandatory and are paid quarterly, when, as, and if declared
by the Board of Directors. Holders of Series C Preferred Stock
are entitled to receive cumulative, quarterly cash dividends at
the annual rate of 7.25 percent per share.
F-63
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
11.
|
Stockholders
Equity (Continued)
|
Common
Stock
The Companys shareholders have authorized the issuance of
1.1 billion shares of common stock (par value of $.20). At
December 31, 2008, 467.5 million shares were issued
and outstanding and 89 million shares were unissued but
encumbered for outstanding Series C Preferred Stock,
outstanding stock options for employee compensation, and
remaining authority for stock-based compensation plans. The
stock-based compensation plans are described in Note 13,
Stock-Based Compensation Plans and Arrangements.
On December 31, 2007, the Company issued
101,781,170 shares of its common stock at a price of $19.65
per share. Net proceeds from the sale were approximately
$1.9 billion. The Company used approximately
$2.0 billion of the net proceeds from the sale of
Series C Preferred Stock and the sale of its common stock
to settle its outstanding equity forward contract (see
Common Stock Repurchase Program and Equity Forward
Contracts below). The remaining proceeds are used for
general corporate purposes. The Company issued
9,781,170 shares of the 102 million share offering
from its treasury stock. These shares were removed from treasury
stock at an average cost of $43.13, resulting in a
$422 million decrease to the balance of treasury stock with
an offsetting $235 million decrease to retained earnings.
Common
Stock Repurchase Program and Equity Forward
Contracts
The Company has historically repurchased its common stock
through both open market purchases and settlement of equity
forward contracts. Beginning on November 29, 2007, the
Company amended or closed out certain equity forward contracts.
On December 19, 2007, the Company entered into a series of
transactions with its equity forward counterparties and
Citibank, N.A. (Citibank) to assign all of its
remaining equity forward contracts, covering
44,039,890 shares, to Citibank. In connection with the
assignment of the equity forward contracts, the Company and
Citibank amended the terms of the equity forward contract to
eliminate all stock price triggers (which had previously allowed
the counterparty to terminate the contracts prior to their
scheduled maturity date) and termination events based on the
Companys credit ratings. The strike price of the equity
forward contract on December 19, 2007, was $45.25 with a
maturity date of February 22, 2008. The new Citibank equity
forward contract was 100 percent collateralized with cash.
On December 31, 2007, the Company and Citibank agreed to
physically settle the contract and the Company paid Citibank
approximately $1.1 billion, the difference between the
contract purchase price and the previous market closing price on
the 44,039,890 shares. This effectively changed the
characteristics of the contract so it no longer was a derivative
accounted for under SFAS No. 133 and instead was a
liability (recorded at the present value of the repurchase
price) under SFAS No. 150. Consequently, the common
shares outstanding and shareholders equity on the
Companys year-end balance sheet reflect the shares issued
in the public offerings and the physical settlement of the
equity forward contract. As of December 31, 2007, the
44 million shares under this equity forward contract are
reflected in treasury stock. The Company paid Citibank the
remaining balance of approximately $0.9 billion due under
the contract on January 9, 2008. The Company has no
outstanding equity forward positions outstanding after the
contract settlement on January 9, 2008.
F-64
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
11.
|
Stockholders
Equity (Continued)
|
The following table summarizes the Companys common share
repurchases and issuances for the years ended December 31,
2008, 2007 and 2006. Equity forward activity for the years ended
December 31, 2007 and 2006 is also reported.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Shares in millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Common shares repurchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
Open market
|
|
|
|
|
|
|
1.8
|
|
|
|
2.2
|
|
Equity forward contracts
|
|
|
|
|
|
|
4.2
|
|
|
|
5.4
|
|
Equity forward contracts agreed to be
settled(1)
|
|
|
|
|
|
|
44.0
|
|
|
|
|
|
Benefit
plans(2)
|
|
|
1.0
|
|
|
|
3.3
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares repurchased
|
|
|
1.0
|
|
|
|
53.3
|
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average purchase price per share
|
|
$
|
24.51
|
|
|
$
|
44.59
|
|
|
$
|
52.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued
|
|
|
1.9
|
|
|
|
109.2
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period
|
|
|
|
|
|
|
48.2
|
|
|
|
42.7
|
|
New contracts
|
|
|
|
|
|
|
|
|
|
|
10.9
|
|
Settlements
|
|
|
|
|
|
|
(4.2
|
)
|
|
|
(5.4
|
)
|
Agreed to be
settled(1)
|
|
|
|
|
|
|
(44.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
|
|
|
|
|
|
|
|
48.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authority remaining at end of period for repurchases
|
|
|
38.8
|
|
|
|
38.8
|
|
|
|
15.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On December 31, 2007, the
Company and Citibank agreed to physically settle the contract as
detailed above. Consequently, the common shares outstanding and
shareholders equity on the Companys year-end balance
sheet reflect the physical settlement of the equity forward
contract. At December 31, 2007, the 44 million shares
under this equity forward contract were reflected in treasury
stock.
|
|
(2) |
|
Shares withheld from stock option
exercises and vesting of restricted stock for employees
tax withholding obligations and shares tendered by employees to
satisfy option exercise costs.
|
The closing price of the Companys common stock on
December 31, 2008 was $8.90.
F-65
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
11.
|
Stockholders
Equity (Continued)
|
Accumulated
Other Comprehensive Income
Accumulated other comprehensive income includes the after-tax
change in unrealized gains and losses on investments, unrealized
gains and losses on derivatives, and defined benefit pension
plans. The following table presents the cumulative balances of
the components of other comprehensive income for the years ended
December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net unrealized gains (losses) on
investments(1)
|
|
$
|
(1,243
|
)
|
|
$
|
238,772
|
|
|
$
|
340,363
|
|
Net unrealized (losses) on
derivatives(2)
|
|
|
(93,986
|
)
|
|
|
(22,574
|
)
|
|
|
(7,570
|
)
|
Defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net prior service cost
|
|
|
|
|
|
|
|
|
|
|
(24
|
)
|
Net gain
|
|
|
18,753
|
|
|
|
20,166
|
|
|
|
16,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total defined benefit pension
plans(3)
|
|
|
18,753
|
|
|
|
20,166
|
|
|
|
16,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income
|
|
$
|
(76,476
|
)
|
|
$
|
236,364
|
|
|
$
|
349,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of tax benefit of $750 as of
December 31, 2008 and a tax expense of $125,473 and
$179,244 as of December 31, 2007 and 2006, respectively.
|
|
(2) |
|
Net of tax benefit of $53,419,
$12,682 and $4,347 as of December 31, 2008, 2007 and 2006,
respectively.
|
|
(3) |
|
Net of tax expense of $10,967,
$11,677 and $8,787 as of December 31, 2008, 2007 and 2006,
respectively.
|
F-66
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
12.
|
Earnings
(Loss) per Common Share
|
Basic earnings (loss) per common share (EPS) are
calculated using the weighted average number of shares of common
stock outstanding during each period. A reconciliation of the
numerators and denominators of the basic and diluted EPS
calculations follows for the years ended December 31, 2008,
2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stock
|
|
$
|
(323,832
|
)
|
|
$
|
(933,539
|
)
|
|
$
|
1,121,389
|
|
Adjusted for dividends of convertible preferred stock
series C(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted for debt expense of convertible debentures
(Co-Cos),
net of
taxes(2)
|
|
|
|
|
|
|
|
|
|
|
67,274
|
|
Adjusted for non-taxable unrealized gains on equity
forwards(3)
|
|
|
|
|
|
|
|
|
|
|
(3,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stock, adjusted
|
|
$
|
(323,832
|
)
|
|
$
|
(933,539
|
)
|
|
$
|
1,185,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute basic EPS
|
|
|
466,642
|
|
|
|
412,233
|
|
|
|
410,805
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of convertible preferred stock series C
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of Co-Cos
|
|
|
|
|
|
|
|
|
|
|
30,312
|
|
Dilutive effect of stock options, non-vested deferred
compensation, non-vested restricted stock, restricted stock
units, Employee Stock Purchase Plan (ESPP) and
equity
forwards(4)
|
|
|
|
|
|
|
|
|
|
|
10,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common
shares(5)
|
|
|
|
|
|
|
|
|
|
|
40,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute diluted EPS
|
|
|
466,642
|
|
|
|
412,233
|
|
|
|
451,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
(.69
|
)
|
|
$
|
(2.26
|
)
|
|
$
|
2.73
|
|
Dilutive effect of convertible preferred stock series C
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of Co-Cos
|
|
|
|
|
|
|
|
|
|
|
(.03
|
)
|
Dilutive effect of equity forwards
|
|
|
|
|
|
|
|
|
|
|
(.01
|
)
|
Dilutive effect of stock options, non-vested deferred
compensation, non-vested restricted stock, restricted stock
units, and ESPP
|
|
|
|
|
|
|
|
|
|
|
(.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
(.69
|
)
|
|
$
|
(2.26
|
)
|
|
$
|
2.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Companys
7.25 percent mandatory convertible preferred stock
series C was issued on December 31, 2007. The
mandatory convertible preferred stock will automatically convert
on December 15, 2010, into between 48 million and
59 million shares of common stock, depending upon the
Companys stock price at that time.
|
|
(2) |
|
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. These Co-Cos were
called at par on July 25, 2007.
|
|
(3) |
|
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 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.
|
|
(4) |
|
Includes the potential dilutive
effect of additional common shares that are issuable upon
exercise of outstanding stock options, non-vested deferred
compensation, non-vested restricted stock, restricted stock
units, and the outstanding commitment to issue shares under the
ESPP, determined by the treasury stock method, and equity
forward contracts determined by the reverse treasury stock
method. The Company settled all of its outstanding equity
forward contracts in January 2008.
|
|
(5) |
|
For the years ended
December 31, 2008 and 2007, stock options covering
approximately 38 million and 37 million shares,
respectively, were outstanding but not included in the
computation of diluted earnings per share because they were
anti-dilutive due to the Companys net loss. For the year
ended December 31, 2006, stock options and equity forwards
covering approximately 57 million shares were outstanding
but not included in the computation of diluted earnings per
share because they were anti-dilutive.
|
F-67
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
13.
|
Stock-Based
Compensation Plans and Arrangements
|
As of December 31, 2008 the Company has two stock-based
compensation plans that provide for grants of stock, stock
options, restricted stock, and restricted stock units. The
Company also makes grants of stock-based awards under
individually negotiated arrangements.
The SLM Corporation Incentive Plan (the Incentive
Plan) was approved by shareholders in 2004 and was amended
in 2005 and 2006. A total of 17.7 million shares are
authorized to be issued from this plan. The Incentive Plan
expires on May 31, 2009.
The Company maintains the Employee Stock Purchase Plan (the
ESPP). The shares issued under the Incentive Plan
and the ESPP may be either shares reacquired by the Company or
shares that are authorized but unissued.
The Directors Stock Plan, under which stock options and
restricted stock were granted to non-employee members of the
board of directors, expired in May 2008. The Companys
non-employee directors are considered employees under the
provisions of SFAS No. 123(R).
The total stock-based compensation cost recognized in the
consolidated statements of income for the years ended
December 31, 2008, 2007 and 2006 was $86 million,
$75 million, and $81 million, respectively. The
related income tax benefit for the years ended December 31,
2008, 2007 and 2006 was $32 million, $28 million and
$30 million, respectively. As of December 31, 2008,
there was $37 million of total unrecognized compensation
cost related to stock-based compensation programs, which is
expected to be recognized over a weighted average period of
1.6 years.
Stock
Options
The maximum term for stock options is 10 years and the
exercise price must be equal to or greater than the market price
of the Companys common stock on the date of grant. Stock
options granted prior to 2008 to officers and management
employees generally vest upon the Companys common stock
price reaching a closing price equal to or greater than
20 percent above the fair market value of the common stock
on the date of grant for five days, but no earlier than
12 months from the grant date. Stock options granted in
2008 to officers and management employees are price-vested with
the grants vesting one-half upon the Companys common stock
price reaching a closing price equal to or greater than
20 percent above the fair market value of the common stock
on the date of grant for five days but no earlier than
12 months from the grant date, and the second one-half
vesting upon the Companys common stock price reaching a
closing price equal to 40 percent above the fair market
value of the common stock on the date of grant for five days but
no earlier than 24 months from the grant date. In any
event, all price-vested options vest upon the eighth anniversary
of their grant date. Options granted to
rank-and-file
employees are time-vested with the grants vesting one-half in
18 months from their grant date and the second one-half
vesting 36 months from their grant date.
Stock options granted to directors are generally subject to the
following vesting schedule: all options vest upon the
Companys common stock price reaching a closing price equal
to or greater than 20 percent above the fair market value
of the common stock on the date of grant for five days or the
directors election to the Board, whichever occurs later.
In any event, all options vest upon the fifth anniversary of
their grant date.
The fair values of the options granted in the years ended
December 31, 2008, 2007 and 2006 were estimated as of the
date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions.
F-68
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
13.
|
Stock-Based
Compensation Plans and Arrangements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Risk-free interest rate
|
|
|
2.50
|
%
|
|
|
4.88
|
%
|
|
|
4.75
|
%
|
Expected volatility
|
|
|
44.05
|
%
|
|
|
21.10
|
%
|
|
|
20.22
|
%
|
Expected dividend rate
|
|
|
0.00
|
%
|
|
|
2.20
|
%
|
|
|
1.72
|
%
|
Expected life of the option
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
3 years
|
|
The expected life of the options is based on observed historical
exercise patterns. Groups of employees that have received
similar option grant terms are considered separately for
valuation purposes. The expected volatility is based on implied
volatility from publicly-traded options on the Companys
stock at the date of grant and historical volatility of the
Companys stock. The risk-free interest rate is based on
the U.S. Treasury spot rate at the date of grant consistent
with the expected life of the option. The dividend yield is
based on the projected annual dividend payment per share based
on the dividend amount at the date of grant, divided by the
stock price at the date of grant.
As of December 31, 2008, there was $31 million of
unrecognized compensation cost related to stock options, which
is expected to be recognized over a weighted average period of
1.7 years.
The following table summarizes stock option activity for the
year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Price per
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Share
|
|
|
Term
|
|
|
Value
|
|
|
Outstanding at December 31, 2007
|
|
|
36,658,764
|
|
|
$
|
39.92
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
14,664,550
|
|
|
|
20.55
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(293,186
|
)
|
|
|
17.87
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(12,225,424
|
)
|
|
|
36.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2008(1)
|
|
|
38,804,704
|
|
|
$
|
33.90
|
|
|
|
6.40 yrs
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
22,179,634
|
|
|
$
|
37.42
|
|
|
|
4.86 yrs
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes gross number of
net-settled options awarded. Options granted in 2008 were
granted as net-settled options. Upon exercise of a net-settled
option, employees are entitled to receive the after-tax spread
shares only. The spread shares equal the gross number of options
granted less shares for the option cost. Shares for the option
cost equal the option price multiplied by the number of gross
options exercised divided by the fair market value of SLM common
stock at the time of exercise.
|
The weighted average fair value of options granted was $6.93,
$7.89 and $9.34 for the years ended December 31, 2008, 2007
and 2006, respectively. The total intrinsic value of options
exercised was $.8 million, $140 million and
$129 million for the years ended December 31, 2008,
2007 and 2006, respectively.
Cash received from option exercises was $2 million for the
year ended December 31, 2008. The actual tax benefit
realized for the tax deductions from option exercises totaled
$1 million for the year ended December 31, 2008.
Restricted
Stock
Restricted stock vests over a minimum of a
12-month
performance period. Performance criteria may include the
achievement of any of several financial and business goals, such
as Core Earnings earnings per share, loan volume,
expense reduction, or Core Earnings net income.
F-69
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
13.
|
Stock-Based
Compensation Plans and Arrangements (Continued)
|
Non-vested restricted stock granted prior to January 25,
2007 is entitled to dividend credits; non-vested restricted
stock granted on or after January 25, 2007 is not.
In accordance with SFAS No. 123(R), the fair value of
restricted stock awards is estimated on the date of grant based
on the market price of the stock and is amortized to
compensation cost on a straight-line basis over the related
vesting periods. As of December 31, 2008, there was
$6 million of unrecognized compensation cost related to
restricted stock, which is expected to be recognized over a
weighted average period of 1.4 years.
The following table summarizes restricted stock activity for the
year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Grant
|
|
|
|
Number of
|
|
|
Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Non-vested at December 31, 2007
|
|
|
419,151
|
|
|
$
|
48.02
|
|
Granted
|
|
|
639,500
|
|
|
|
20.39
|
|
Vested
|
|
|
(234,689
|
)
|
|
|
44.92
|
|
Canceled
|
|
|
(69,416
|
)
|
|
|
32.54
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2008
|
|
|
754,546
|
|
|
$
|
26.99
|
|
|
|
|
|
|
|
|
|
|
The total fair value of shares that vested during the years
ended December 31, 2008, 2007 and 2006, was
$11 million, $8 million and $3 million,
respectively.
Restricted
Stock Units
Restricted stock units (RSUs) are credits based on
the value of the Companys common stock. The fair value of
each grant is estimated on the date of grant based on the market
price of the stock and is amortized to compensation cost on a
straight-line basis over the related vesting periods. All
outstanding RSUs granted to executive management employees
vested in 2007 and were converted to common stock in January
2008.
In 2008, the Company began granting RSUs to non-executive
management employees with the same performance vesting criteria
as restricted stock. As of December 31, 2008, there was
$.1 million of unrecognized compensation cost related to
RSUs, which is expected to be recognized over a weighted average
period of 1.7 years.
The following table summarizes RSU activity for the year ended
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Grant
|
|
|
|
Number of
|
|
|
Date
|
|
|
|
RSUs
|
|
|
Fair Value
|
|
|
Outstanding at December 31, 2007
|
|
|
650,000
|
|
|
$
|
39.54
|
|
Granted
|
|
|
15,500
|
|
|
|
11.58
|
|
Canceled
|
|
|
|
|
|
|
|
|
Converted to common stock
|
|
|
(650,000
|
)
|
|
|
39.54
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
15,500
|
|
|
$
|
11.58
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
There were no dividend equivalents on outstanding RSUs at
December 31, 2008.
F-70
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
13.
|
Stock-Based
Compensation Plans and Arrangements (Continued)
|
The total fair value of RSUs that vested during the years ended
December 31, 2007 and 2006 was $26 million and
$15 million, respectively. No RSUs vested in 2008. The
total intrinsic value of RSUs converted to common stock during
the years ended December 31, 2008 and 2006 was
$26 million and $10 million, respectively. There were
no RSUs converted to common stock for the year ended
December 31, 2007.
Employee
Stock Purchase Plan
Under the ESPP, employees can purchase shares of the
Companys common stock at the end of a
12-month
offering period at a price equal to the share price at the
beginning of the
12-month
period, less 15 percent, up to a maximum purchase price of
$7,500 plus accrued interest. The purchase price for each
offering is determined at the beginning of the offering period.
The fair values of the stock purchase rights of the ESPP
offerings in the years ended December 31, 2008, 2007 and
2006 were calculated using a Black-Scholes option pricing model
with the following weighted average assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Risk-free interest rate
|
|
|
1.91
|
%
|
|
|
4.97
|
%
|
|
|
4.75
|
%
|
Expected volatility
|
|
|
57.59
|
%
|
|
|
22.67
|
%
|
|
|
20.41
|
%
|
Expected dividend rate
|
|
|
0.00
|
%
|
|
|
2.19
|
%
|
|
|
1.92
|
%
|
Expected life of the option
|
|
|
1 year
|
|
|
|
2 years
|
|
|
|
2 years
|
|
The expected volatility is based on implied volatility from
publicly-traded options on the Companys stock at the date
of grant and historical volatility of the Companys stock.
The risk-free interest rate is based on the U.S. Treasury
spot rate at the date of grant consistent with the expected
life. The dividend yield is based on the projected annual
dividend payment per share based on the current dividend amount
at the date of grant, divided by the stock price at the date of
grant.
The weighted average fair value of the stock purchase rights of
the ESPP offerings for the years ended December 31, 2008,
2007 and 2006 was $6.57, $10.41 and $11.31, respectively. The
fair value for 2008 was amortized to compensation cost on a
straight-line basis over a one-year vesting period. The fair
values for 2007 and 2006 were amortized to compensation cost on
a straight-line basis over a two-year vesting period. As of
December 31, 2008, there was $.1 million of
unrecognized compensation cost related to the ESPP, which is
expected to be recognized in January 2009.
During the years ended December 31, 2007 and 2006, plan
participants purchased 215,058 shares and
182,066 shares, respectively, of the Companys common
stock. No shares were purchased in 2008.
F-71
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
13.
|
Stock-Based
Compensation Plans and Arrangements (Continued)
|
Equity
Compensation Plans
The following table summarizes information as of
December 31, 2008, relating to equity compensation plans or
arrangements of the Company pursuant to which grants of options,
restricted stock, RSUs or other rights to acquire shares may be
granted from time to time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Average
|
|
|
Securities Remaining
|
|
|
|
|
|
Securities to be
|
|
|
Weighted Average
|
|
|
Remaining Life
|
|
|
Available for Future
|
|
|
|
|
|
Issued Upon Exercise
|
|
|
Exercise Price
|
|
|
(Years) of
|
|
|
Issuance Under
|
|
|
Types of
|
|
|
of Outstanding
|
|
|
of Outstanding
|
|
|
Options
|
|
|
Equity Compensation
|
|
|
Awards
|
Plan Category
|
|
Options and Rights
|
|
|
Options and Rights
|
|
|
Outstanding
|
|
|
Plans
|
|
|
Issuable(1)
|
|
Equity compensation plans approved by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors Stock Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NQ,ST
|
|
Traditional options
|
|
|
2,644,862
|
|
|
$
|
33.61
|
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
Net-settled options
|
|
|
|
|
|
|
17.83
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Directors Stock Plan
|
|
|
2,644,862
|
|
|
|
31.10
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
SLM Corporation Incentive
Plan(2)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NQ,ISO,RES, RSU
|
|
Traditional options
|
|
|
1,544,043
|
|
|
|
44.81
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
Net-settled options
|
|
|
2,764
|
|
|
|
35.10
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
|
15,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SLM Corporation Incentive Plan
|
|
|
1,562,307
|
|
|
|
35.73
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
Expired
Plans(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NQ,ISO,RES
|
|
Traditional options
|
|
|
7,584,832
|
|
|
|
32.40
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expired plans
|
|
|
7,584,832
|
|
|
|
32.40
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total approved by security holders
|
|
|
11,792,001
|
|
|
|
34.58
|
|
|
|
6.8
|
|
|
|
12,969,458
|
(4)
|
|
|
|
|
Equity compensation plans not approved by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
shares(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
502,934
|
|
|
|
NQ,ISO,RES, RSU
|
|
Compensation
arrangements(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NQ
|
|
Employee Stock Purchase
Plan(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,082,739
|
|
|
|
|
|
Expired
Plan(9)
|
|
|
4,098,196
|
|
|
|
28.08
|
|
|
|
3.2
|
|
|
|
|
|
|
|
NQ,RES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total not approved by security holders
|
|
|
4,098,196
|
|
|
|
28.08
|
|
|
|
3.2
|
|
|
|
1,585,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
15,890,197
|
|
|
$
|
33.90
|
|
|
|
6.4
|
|
|
|
14,555,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
NQ (Non-Qualified Stock Option),
ISO (Incentive Stock Option), RES (Restricted/Performance
Stock), RSU (Restricted Stock Unit), ST (Stock Grant).
|
|
(2) |
|
Options granted in 2006, 2007 and
2008 were granted as net-settled options. Also, certain
traditional options outstanding at April 29, 2006 were
converted to net-settled options in 2006. Upon exercise of a
net-settled option, employees are entitled to receive the
after-tax spread shares only. The spread shares equal the gross
number of options granted less shares for the option cost.
Shares for the option cost equal the option price multiplied by
the number of gross options exercised divided by the fair market
value of the Companys common stock at the time of
exercise. At December 31, 2008, the option price for the
vast majority of net-settled options was higher than the market
price. Accordingly, the Company was obligated to issue only
2,764 shares upon the exercise of all net-settled options
at December 31, 2008.
|
|
(3) |
|
The SLM Corporation Incentive Plan
is subject to an aggregate limit of 2,502,934 shares that
may be issued as restricted stock or RSUs. As of
December 31, 2008, 1,166,698 shares are remaining from
this authority.
|
|
(4) |
|
Securities remain available for
issuance under the SLM Corporation Incentive Plan based on
net-settlement of options.
|
|
(5) |
|
Expired plans for which unexercised
options remain outstanding are the Management Incentive Plan and
Board of Directors Stock Option Plan.
|
|
(6) |
|
The SLM Corporation Incentive Plan
assumed 502,934 shares from The Upromise Stock Plan in
October 2006 upon the Companys acquisition of Upromise.
These assumed shares were not approved by securities holders as
permitted by the rules of the NYSE.
|
|
(7) |
|
One million net-settled options
were awarded on January 8, 2008, to John F. Remondi as an
employment inducement award under NYSE rules. At
December 31, 2008, the option price of the award was higher
than the market price; therefore, the Company was not obligated
to issue any securities under the award.
|
|
(8) |
|
Number of shares available for
issuance under the ESPP.
|
|
(9) |
|
Expired plan for which unexercised
options remain outstanding is the Employee Stock Option Plan.
|
F-72
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
The following table summarizes the components of other
income in the consolidated statements of income for the
years ended December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Late fees and forbearance fees
|
|
$
|
142,958
|
|
|
$
|
135,627
|
|
|
$
|
120,651
|
|
Asset servicing and other transaction fees
|
|
|
108,292
|
|
|
|
110,215
|
|
|
|
42,053
|
|
Loan servicing fees
|
|
|
26,458
|
|
|
|
26,094
|
|
|
|
47,708
|
|
Gains on sales of mortgages and other loan fees
|
|
|
2,832
|
|
|
|
10,737
|
|
|
|
15,325
|
|
Other
|
|
|
111,536
|
|
|
|
102,402
|
|
|
|
112,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
$
|
392,076
|
|
|
$
|
385,075
|
|
|
$
|
338,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Late
Fees and Forbearance Fees
The Company recognizes late fees and forbearance fees on student
loans when earned according to the contractual provisions of the
promissory notes, as well as the Companys expectation of
collectability.
Asset
Servicing and Other Transaction Fees
The Companys Upromise subsidiary has a number of programs
that encourage consumers to save for the cost of college
education. Upromise has established a consumer savings network
which is designed to promote college savings by consumers who
are members of this program by encouraging them to purchase
goods and services from the companies that participate in the
program (Participating Companies). Participating
Companies generally pay Upromise transaction fees based on
member purchase volume, either online or in stores depending on
the contractual arrangement with the Participating Company.
Typically, a percentage of the purchase price of the consumer
members eligible purchases with Participating Companies is
set aside in an account maintained by Upromise on the behalf of
its members. The Company recognizes transaction fee revenue in
accordance with Staff Accounting Bulletin (SAB)
No. 104, Revenue Recognition, as marketing
services focused on increasing member purchase volume are
rendered based on contractually determined rates and member
purchase volumes.
Upromise, through its wholly owned subsidiaries, UII, a
registered broker-dealer, and UIA, a registered investment
advisor, provides program management, transfer and servicing
agent services, and administration services for various 529
college-savings plans. The fees associated with the provision of
these services are recognized in accordance with
SAB No. 104 based on contractually determined rates
which are a combination of fees based on the net asset value of
the investments within the 529 college-savings plans and the
number of accounts for which UII and UIA provide record-keeping
and account servicing functions.
|
|
15.
|
Restructuring
Activities
|
During the fourth quarter of 2007, the Company initiated a
restructuring program to reduce costs and improve operating
efficiencies in response to the impacts of the CCRAA and current
challenges in the capital markets. As part of this review the
Company has refocused its lending activities, exited certain
customer relationships and product lines, and is on target to
reduce its operating expenses by 20 percent by the year
ended December 31, 2009, as compared to the year ended
December 31, 2007, before adjusting for growth and other
investments. In addition, in the third quarter of 2008, the
Company concluded that its APG purchased paper businesses no
longer produce a strategic fit, and the Company decided to wind
down these businesses.
F-73
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
15.
|
Restructuring
Activities (Continued)
|
The following table summarizes the restructuring expenses
incurred to date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
Years Ended
|
|
|
Expense as of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Severance costs
|
|
$
|
62,858
|
|
|
$
|
22,505
|
|
|
$
|
85,363
|
|
Lease and other contract termination costs
|
|
|
9,081
|
|
|
|
|
|
|
|
9,081
|
|
Exit and other costs
|
|
|
11,834
|
|
|
|
|
|
|
|
11,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(1)(2)
|
|
$
|
83,773
|
|
|
$
|
22,505
|
|
|
$
|
106,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Aggregate restructuring expenses
incurred across the Companys reportable segments during
the years ended December 31, 2008 and 2007 totaled
$49 million and $19 million, respectively, in the
Companys Lending reportable segment, $12 million and
$2 million, respectively, in the Companys APG
reportable segment, and $23 million and $2 million,
respectively, in the Companys Corporate and Other
reportable segment.
|
|
(2) |
|
As of December 31, 2008, the
Company estimates an additional $8 million of restructuring
expenses associated with its current cost reduction efforts will
be incurred in future periods primarily related to position
eliminations and resulting employee terminations in its Lending
business segment.
|
As of December 31, 2008 and 2007, severance costs were
incurred in conjunction with aggregate completed and planned
position eliminations of approximately 2,900 and 400 positions,
respectively, across all of the Companys reportable
segments, with position eliminations ranging from senior
executives to servicing center personnel. Lease and other
contract termination costs and exit and other costs incurred
during the year ended December 31, 2008 related primarily
to terminated or abandoned facility leases and consulting costs
incurred in conjunction with various cost reduction and exit
strategies, respectively.
The following table summarizes the restructuring liability
balance, which is included in other liabilities in the
accompanying consolidated balance sheet at December 31,
2008, and related activity during year ended December 31,
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease and
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
Termination
|
|
|
Exit and
|
|
|
|
|
|
|
Costs
|
|
|
Costs
|
|
|
Other Costs
|
|
|
Total
|
|
|
Balance at December 31, 2007
|
|
$
|
18,329
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
18,329
|
|
Net accruals
|
|
|
62,858
|
|
|
|
9,081
|
|
|
|
11,834
|
|
|
|
83,773
|
|
Cash paid
|
|
|
(66,063
|
)
|
|
|
(6,283
|
)
|
|
|
(11,774
|
)
|
|
|
(84,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
15,124
|
|
|
$
|
2,798
|
|
|
$
|
60
|
|
|
$
|
17,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.
|
Fair
Values of Financial Instruments
|
The Company uses estimates of fair value as defined by
SFAS No. 157 in applying various accounting standards
for its financial statements. Under GAAP, fair value
measurements are used in one of four ways:
|
|
|
|
|
In the consolidated balance sheet with changes in fair value
recorded in the consolidated statement of income;
|
|
|
|
|
|
In the consolidated balance sheet with changes in fair value
recorded in the other comprehensive income section of
stockholders equity;
|
F-74
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
16.
|
Fair
Values of Financial Instruments (Continued)
|
|
|
|
|
|
In the consolidated balance sheet for instruments carried at
lower of cost or fair value with impairment charges recorded in
the consolidated statement of income; and
|
|
|
|
In the notes to the financial statements as required by
SFAS No. 107, Disclosures about Fair Value of
Financial Instruments.
|
Fair value under SFAS No. 157 is defined as the price
to sell an asset or transfer a liability in an orderly
transaction between willing and able market participants. In
general, the Companys policy in estimating fair values is
to first look at observable market prices for identical assets
and liabilities in active markets, where available. When these
are not available, other inputs are used to model fair value
such as prices of similar instruments, yield curves,
volatilities, prepayment speeds, default rates and credit
spreads (including for the Companys liabilities), relying
first on observable data from active markets. Additional
adjustments may be made for factors including liquidity, credit,
bid/offer spreads, etc., depending on current market conditions.
Transaction costs are not included in the determination of fair
value. When possible, the Company seeks to validate the
models output to market transactions. Depending on the
availability of observable inputs and prices, different
valuation models could produce materially different fair value
estimates. The values presented may not represent future fair
values and may not be realizable.
Under SFAS No. 157, the Company categorizes its fair
value estimates based on a hierarchical framework associated
with three levels of price transparency utilized in measuring
financial instruments at fair value. Classification is based on
the lowest level of input that is significant to the fair value
of the instrument. The three levels are as follows:
|
|
|
|
|
Level 1 Quoted prices (unadjusted) in active
markets for identical assets or liabilities that the reporting
entity has the ability to access at the measurement date. The
types of financial instruments included in level 1 are
highly liquid instruments with quoted prices;
|
|
|
|
Level 2 Inputs from active markets, other than
quoted prices for identical instruments, are used to model fair
value. Significant inputs are directly observable from active
markets for substantially the full term of the asset or
liability being valued; and
|
|
|
|
Level 3 Pricing inputs significant to the
valuation are unobservable. Inputs are developed based on the
best information available; however, significant judgment is
required by management in developing the inputs.
|
Student
Loans
The Companys FFELP loans and Private Education Loans are
accounted for at cost or at the lower of cost or market if the
loan is
held-for-sale
(see Note 2, Significant Accounting Policies
Loans, for a discussion of the
accounting treatment); however, the fair value is disclosed in
compliance with SFAS No. 107. FFELP loans classified
as held-for-sale are those which the Company has the ability and
intent to sell under various ED loan purchase programs. In
these instances, the FFELP loans are valued using the committed
sales price under the programs. For all other FFELP loans and
Private Education Loans, fair value was determined by modeling
loan level cash flows using stated terms of the assets and
internally-developed assumptions to determine aggregate
portfolio yield, net present value and average life. The
significant assumptions used to project cash flows are
prepayment speeds, default rates, cost of funds, required return
on equity, and expected Repayment Borrower Benefits to be
earned. In addition, the Floor Income component of the
Companys FFELP loan portfolio is valued through discounted
cash flow and option models using both observable market inputs
and internally developed inputs. Significant inputs into the
models are not observable.
F-75
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
16.
|
Fair
Values of Financial Instruments (Continued)
|
Other
Loans
Warehousing, facilities financings, and mortgage and consumer
loans held for investment are accounted for at cost with fair
values being disclosed as required by SFAS No. 107.
Mortgage loans held for sale are accounted for at lower of cost
or market. Fair value was determined with discounted cash flow
models using the stated terms of the loans and observable market
yield curves. In addition, adjustments and assumptions were made
for credit spreads, liquidity, prepayment speeds and defaults.
Significant inputs into the models are not observable.
Cash
and Investments (Including Restricted)
Cash and cash equivalents are carried at cost. Carrying value
approximated fair value for disclosure purposes. Investments
accounted for under SFAS No. 115 and classified as
trading or
available-for-sale
are carried at fair value in the financial statements.
Investments in U.S. Treasury securities and securities
issued by U.S. government agencies that are traded in
active markets were valued using observable market prices. Other
investments for which observable prices from active markets are
not available were valued through standard bond pricing models
using observable market yield curves adjusted for credit and
liquidity spreads. The fair value of investments in Commercial
Paper, Asset Backed Commercial Paper, or Demand Deposits that
have a remaining term of less than 90 days when purchased
are estimated at cost and when needed, adjustments for liquidity
and credit spreads are made depending on market conditions and
counterparty credit risks. These investments consist of mostly
overnight/weekly maturity instruments with highly-rated
counterparties.
Short-term
Borrowings and Long-term Borrowings
Borrowings are accounted for at cost in the financial statements
except when denominated in a foreign currency or when designated
as the hedged item in a fair value hedge relationship under
SFAS No. 133. When the hedged risk is the benchmark
interest rate and not full fair value, the cost basis is
adjusted for changes in value due to benchmark interest rates
only. Additionally, foreign currency denominated borrowings are
re-measured at current spot rates in the financial statements.
The full fair value of all borrowings are disclosed as required
by SFAS No. 107. Fair value was determined through
standard bond pricing models and option models (when applicable)
using the stated terms of the borrowings, and observable yield
curves, foreign currency exchange rates and volatilities from
active markets; or from quotes from broker-dealers. Credit
adjustments for unsecured corporate debt are made based on
indicative quotes from observable trades and spreads on credit
default swaps specific to the Company.
Derivative
Financial Instruments
All derivatives are accounted for at fair value in the financial
statements. The fair values of a majority of derivative
financial instruments, including swaps and floors, were
determined by standard derivative pricing and option models
using the stated terms of the contracts and observable yield
curves, forward foreign currency exchange rates and volatilities
from active markets. In some cases, management utilized
internally developed amortization streams to model the fair
value for swaps whose notional contractually amortizes with
securitized asset balances. Complex structured derivatives or
derivatives that trade in less liquid markets require
significant adjustments and judgment in determining fair value
that cannot be corroborated with market transactions. When
determining the fair value of derivatives, the Company takes
into account counterparty credit risk for positions where it is
exposed to the counterparty on a net basis by assessing exposure
net of collateral held. (See Note 9, Derivative
Financial Instruments Risk Management
Strategy, for further discussion of the Companys
derivative agreements and its policy to require legally
enforceable
F-76
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
16.
|
Fair
Values of Financial Instruments (Continued)
|
netting provisions and collateral agreements.) The net exposure
for each counterparty is adjusted based on market information
available for the specific counterparty including spreads from
credit default swaps. Additionally, when the counterparty has
exposure to the Company related to SLM Corporation derivatives,
the Company fully collateralizes the exposure minimizing the
adjustment necessary to the derivative valuations for the
Companys credit risk. While trusts that contain
derivatives are not required to post collateral to
counterparties, the credit quality and securitized nature of the
trusts minimizes any adjustments for the counterpartys
exposure to the trusts. It is the Companys policy to
compare its derivative fair values to those received by its
counterparties in order to validate the models outputs.
The carrying value of borrowings designated as the hedged item
in a SFAS No. 133 fair value hedge are adjusted for
changes in fair value due to benchmark interest rates and
foreign-currency exchange rates. These valuations are determined
through standard bond pricing models and option models (when
applicable) using the stated terms of the borrowings, and
observable yield curves, foreign currency exchange rates, and
volatilities.
During 2008, the bid/ask spread widened significantly for
certain interest rate indices for which the Company had
derivatives as a result of market inactivity. As such,
significant adjustments for the bid/ask spread and unobservable
inputs were used in the fair value calculation resulting in
these instruments being classified as level 3 in the
hierarchy.
Residual
Interests
The Residual Interests are carried at fair value in the
financial statements. No active market exists for student loan
Residual Interests; as such, the fair value is calculated using
discounted cash flow models and option models. Observable inputs
from active markets are used where available, including yield
curves and volatilities. Significant unobservable inputs such as
prepayment speeds, default rates, certain bonds costs of
funds and discount rates, are used in determining the fair value
and require significant judgment. These unobservable inputs are
internally determined based upon analysis of historical data and
expected industry trends. On a quarterly basis the Company back
tests its prepayment speed, default rates and costs of funds
assumptions by comparing those assumptions to actuals
experienced. Additionally, the Company uses non-binding broker
quotes and industry analyst reports which show changes in the
indicative prices of the asset-backed securities tranches
immediately senior to the Residual Interest as an indication of
potential changes in the discount rate used to value the
Residual Interests. Material changes in these significant
unobservable inputs can directly affect income by impacting the
amount of unrealized gain or loss recorded in servicing and
securitization revenue as a result of the adoption of
SFAS No. 159. An analysis of the impact of changes to
significant inputs is addressed further in Note 8,
Student Loan Securitization. In addition, market
transactions are not available to validate the models
results (see also Note 8, Student Loan
Securitization, for further discussion regarding these
assumptions).
F-77
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
16.
|
Fair
Values of Financial Instruments (Continued)
|
The following table summarizes the valuation of the
Companys financial instruments that are
marked-to-market
on a recurring basis in the financial statements as of
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring
|
|
|
|
Basis as of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
(Dollars in millions)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Collateral
|
|
|
Net
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale investments
|
|
$
|
|
|
|
$
|
861
|
|
|
$
|
|
|
|
$
|
861
|
|
|
$
|
|
|
|
$
|
861
|
|
Retained Interest in off-balance sheet securitized loans
|
|
|
|
|
|
|
|
|
|
|
2,200
|
|
|
|
2,200
|
|
|
|
|
|
|
|
2,200
|
|
Derivative
instruments(1)(2)
|
|
|
|
|
|
|
3,014
|
|
|
|
|
|
|
|
3,014
|
|
|
|
(1,624
|
)
|
|
|
1,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
|
|
|
$
|
3,875
|
|
|
$
|
2,200
|
|
|
$
|
6,075
|
|
|
$
|
(1,624
|
)
|
|
$
|
4,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
instruments(1)(2)
|
|
$
|
(3
|
)
|
|
$
|
(648
|
)
|
|
$
|
(341
|
)
|
|
$
|
(992
|
)
|
|
$
|
|
|
|
$
|
(992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
(3
|
)
|
|
$
|
(648
|
)
|
|
$
|
(341
|
)
|
|
$
|
(992
|
)
|
|
$
|
|
|
|
$
|
(992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fair value of derivative
instruments is comprised of market value less accrued interest
and excludes collateral.
|
|
(2) |
|
Level 1 derivatives include
euro-dollar futures contracts. Level 2 derivatives include
derivatives indexed to interest rate indices and currencies that
are considered liquid. Level 3 derivatives include
derivatives indexed to illiquid interest rate indices and
derivatives for which significant adjustments were made to
observable inputs.
|
|
(3) |
|
Borrowings which are the hedged
items in a fair value hedge relationship and which are adjusted
for changes in value due to benchmark interest rates only are
not carried at full fair value and are not reflected in this
table.
|
The following table summarizes the change in balance sheet
carrying value associated with Level 3 financial
instruments carried at fair value on a recurring basis during
the year ended December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2008
|
|
|
|
Residual
|
|
|
Derivative
|
|
|
|
|
(Dollars in millions)
|
|
Interests
|
|
|
Instruments
|
|
|
Total
|
|
|
Balance, beginning of period
|
|
$
|
3,044
|
|
|
$
|
(71
|
)
|
|
$
|
2,973
|
|
Total gains/(losses) (realized and unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
79
|
(1)
|
|
|
(314
|
)(2)
|
|
|
(235
|
)
|
Included in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances and settlements
|
|
|
(923
|
)
|
|
|
35
|
|
|
|
(888
|
)
|
Transfers in and/or out of Level 3
|
|
|
|
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
2,200
|
|
|
$
|
(341
|
)
|
|
$
|
1,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains/(losses) relating to instruments
still held at the reporting date
|
|
$
|
(424
|
)(1)
|
|
$
|
(298
|
)(2)
|
|
$
|
(722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Recorded in servicing and
securitization revenue.
|
|
(2) |
|
Recorded in gains (losses) on
derivative and hedging activities, net.
|
F-78
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
16.
|
Fair
Values of Financial Instruments (Continued)
|
The following table summarizes the valuation of the
Companys financial instruments that are
marked-to-market
on a non-recurring basis by the above SFAS No. 157
pricing observable levels as of December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Non-Recurring
|
|
|
|
Basis as of December 31, 2008
|
|
(Dollars in millions)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
FFELP Stafford Loans
Held-for-Sale(1)
|
|
$
|
462
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
462
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Level 1 valuations reflect
FFELP Stafford Loans Held-for-Sale under the various ED loan
purchase programs.
|
In accordance with the provisions of
SOP 01-6,
Accounting by Certain Entities (Including Entities with
Trade Receivables) That Lend to or Finance the Activities of
Others, FFELP Stafford Loans Held-for-Sale with a carrying
amount of $488 million were written down to their fair
value of $462 million, resulting in an impairment charge of
$26 million which was included in earnings for the period.
The following table summarizes the fair values of the
Companys financial assets and liabilities, including
derivative financial instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Fair
|
|
|
Carrying
|
|
|
|
|
|
Fair
|
|
|
Carrying
|
|
|
|
|
(Dollars in millions)
|
|
Value
|
|
|
Value
|
|
|
Difference
|
|
|
Value
|
|
|
Value
|
|
|
Difference
|
|
|
Earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loans
|
|
$
|
107,319
|
|
|
$
|
124,220
|
|
|
$
|
(16,901
|
)
|
|
$
|
111,552
|
|
|
$
|
109,335
|
|
|
$
|
2,217
|
|
Private Education Loans
|
|
|
14,141
|
|
|
|
20,582
|
|
|
|
(6,441
|
)
|
|
|
17,289
|
|
|
|
14,818
|
|
|
|
2,471
|
|
Other loans
|
|
|
619
|
|
|
|
729
|
|
|
|
(110
|
)
|
|
|
1,175
|
|
|
|
1,173
|
|
|
|
2
|
|
Cash and investments
|
|
|
8,646
|
|
|
|
8,646
|
|
|
|
|
|
|
|
15,146
|
|
|
|
15,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
130,725
|
|
|
|
154,177
|
|
|
|
(23,452
|
)
|
|
|
145,162
|
|
|
|
140,472
|
|
|
|
4,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
41,608
|
|
|
|
41,933
|
|
|
|
325
|
|
|
|
35,828
|
|
|
|
35,947
|
|
|
|
119
|
|
Long-term borrowings
|
|
|
93,462
|
|
|
|
118,225
|
|
|
|
24,763
|
|
|
|
105,227
|
|
|
|
111,099
|
|
|
|
5,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
135,070
|
|
|
|
160,158
|
|
|
|
25,088
|
|
|
|
141,055
|
|
|
|
147,046
|
|
|
|
5,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floor Income/Cap contracts
|
|
|
(1,466
|
)
|
|
|
(1,466
|
)
|
|
|
|
|
|
|
(442
|
)
|
|
|
(442
|
)
|
|
|
|
|
Interest rate swaps
|
|
|
1,374
|
|
|
|
1,374
|
|
|
|
|
|
|
|
320
|
|
|
|
320
|
|
|
|
|
|
Cross currency interest rate swaps
|
|
|
2,116
|
|
|
|
2,116
|
|
|
|
|
|
|
|
3,643
|
|
|
|
3,643
|
|
|
|
|
|
Futures contracts
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residual interest in securitized assets
|
|
|
2,200
|
|
|
|
2,200
|
|
|
|
|
|
|
|
3,044
|
|
|
|
3,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of net asset fair value over carrying value
|
|
|
|
|
|
|
|
|
|
$
|
1,636
|
|
|
|
|
|
|
|
|
|
|
$
|
10,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-79
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
17.
|
Commitments,
Contingencies and Guarantees
|
The Company offers a line of credit to certain financial
institutions and other institutions in the higher education
community for the purpose of originating student loans. In
connection with these agreements, the Company also enters into a
participation agreement with the institution to participate in
the loans as they are originated. In the event that a line of
credit is drawn upon, the loan is collateralized by underlying
student loans and is usually participated in on the same day.
The contractual amount of these financial instruments represents
the maximum possible credit risk should the counterparty draw
down the commitment, the Company not participate in the loan and
the counterparty subsequently fail to perform according to the
terms of its contract with the Company.
Commitments outstanding are summarized below:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Lines of credit
|
|
$
|
1,021,398
|
|
|
$
|
2,035,638
|
|
|
|
|
|
|
|
|
|
|
The following schedule summarizes expirations of commitments to
the earlier of call date or maturity date outstanding at
December 31, 2008.
|
|
|
|
|
|
|
Lines of
|
|
|
|
Credit
|
|
|
2009
|
|
$
|
221,398
|
|
2010
|
|
|
800,000
|
|
|
|
|
|
|
Total
|
|
$
|
1,021,398
|
|
|
|
|
|
|
In addition, the Company maintains forward contracts to purchase
loans from its lending partners at contractual prices. These
contracts typically have a maximum amount the Company is
committed to buy, but lack a fixed or determinable amount as it
ultimately is based on the lending partners origination
activity. FFELP forward purchase contracts typically contain
language relieving the Company of most of its responsibilities
under the contract due to, among other things, changes in
student loan legislation. These commitments are not accounted
for as derivatives under SFAS No. 133 as they do not
meet the definition of a derivative due to the lack of a fixed
and determinable purchase amount. At December 31, 2008,
there were $2.3 billion of originated loans (FFELP and
Private Education Loans) in the pipeline that the Company is
committed to purchase.
Investor
Litigation
On January 31, 2008, a putative class action lawsuit was
filed against the Company and certain officers in U.
S. District Court for the Southern District of New York.
This case and other actions arising out the same circumstances
and alleged acts have been consolidated and are now identified
as In Re SLM Corporation Securities Litigation. The case
purports to be brought on behalf of those who acquired common
stock of the Company between January 18, 2007 and
January 23, 2008 (the Securities
Class Period). The complaint alleges that the Company
and certain officers violated federal securities laws by issuing
a series of materially false and misleading statements and that
the statements had the effect of artificially inflating the
market price for the Companys securities. The complaint
alleges that defendants caused the Companys results for
year-end 2006 and for the first quarter of 2007 to be materially
misstated because the Company failed to adequately provide for
loan losses, which overstated the Companys net income, and
that the Company failed to adequately disclose allegedly known
trends and uncertainties with respect to its non-traditional
loan portfolio. On July 23, 2008, the court appointed
Westchester Capital Management (Westchester) Lead
Plaintiff. On December 8, 2008, Lead Plaintiff filed a
consolidated amended complaint. In addition to the prior
allegations, the consolidated amended complaint alleges that the
Company understated loan delinquencies and loan loss
F-80
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
17.
|
Commitments,
Contingencies and Guarantees (Continued)
|
reserves by promoting loan forbearances. On December 19,
2008, and December 31, 2008, two rejected lead plaintiffs
filed a challenge to Westchester as Lead Plaintiff. That motion
is pending. Lead Plaintiff seeks unspecified compensatory
damages, attorneys fees, costs, and equitable and
injunctive relief.
A similar case is pending against the Company, certain officers,
retirement plan fiduciaries, and the Board of Directors, In Re
SLM Corporation ERISA Litigation, also in the U.S. District
Court for the Southern District of New York. The proposed class
consists of participants in or beneficiaries of the Sallie Mae
401(K) Retirement Savings Plan (401K Plan) between
January 18, 2007 and the present whose accounts
included investments in Sallie Mae stock (401K
Class Period). The complaint alleges breaches of
fiduciary duties and prohibited transactions in violation of the
Employee Retirement Income Security Act arising out of alleged
false and misleading public statements regarding the
Companys business made during the 401(K) Class Period
and investments in the Companys common stock by
participants in the 401(K) Plan. On December 15, 2008,
Plaintiffs filed a Consolidated Class Action Complaint. The
plaintiffs seek unspecified damages, attorneys fees,
costs, and equitable and injunctive relief.
OIG
Investigation
The Office of the Inspector General (OIG) of the ED
has been conducting an audit of the Companys billing
practices for special allowance payments under what is known as
the 9.5 percent floor calculation since
September 2007. The audit covers the period from 2003 through
2006 and is focused on the Companys Nellie Mae
subsidiaries. While the audit is not yet complete and there has
been no definitive determination by the OIG auditors, initial
indications are that the OIG disagrees with the Companys
billing practices on an immaterial portion of the Companys
bills. The Company continues to believe that its practices are
consistent with longstanding ED guidance and all applicable
rules and regulations. A final audit report has not been filed.
Once a final report is filed, it will be presented to the
Secretary of ED for consideration. The OIG has audited other
industry participants on this issue and in certain cases the
Secretary of ED has disagreed with the OIGs recommendation.
Contingencies
In the ordinary course of business, the Company and its
subsidiaries are routinely defendants in or parties to pending
and threatened legal actions and proceedings including actions
brought on behalf of various classes of claimants. These actions
and proceedings may be based on alleged violations of consumer
protection, securities, employment and other laws. In certain of
these actions and proceedings, claims for substantial monetary
damage are asserted against the Company and its subsidiaries.
In the ordinary course of business, the Company and its
subsidiaries are subject to regulatory examinations, information
gathering requests, inquiries and investigations. In connection
with formal and informal inquiries in these cases, the Company
and its subsidiaries receive numerous requests, subpoenas and
orders for documents, testimony and information in connection
with various aspects of the Companys regulated activities.
In view of the inherent difficulty of predicting the outcome of
such litigation and regulatory matters, the Company cannot
predict what the eventual outcome of the pending matters will
be, what the timing or the ultimate resolution of these matters
will be, or what the eventual loss, fines or penalties related
to each pending matter may be.
In accordance with SFAS No. 5, Accounting for
Contingencies, the Company is required to establish
reserves for litigation and regulatory matters when those
matters present loss contingencies that are both probable and
estimable. When loss contingencies are not both probable and
estimable, the Company does not establish reserves.
F-81
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
17.
|
Commitments,
Contingencies and Guarantees (Continued)
|
Based on current knowledge, reserves have not been established
for any pending litigation or regulatory matters. Based on
current knowledge, management does not believe that loss
contingencies, if any, arising from pending litigation or
regulatory matters will have a material adverse effect on the
consolidated financial position or liquidity of the Company.
Pension
Plans
As of December 31, 2008, the Companys qualified and
supplemental pension plans (the Pension Plans) are
frozen with respect to new entrants and participants with less
than ten years of service on June 30, 2004. No further
benefits will accrue with respect to these participants under
the Pension Plans, other than interest accruals on cash balance
accounts. Participants with less than five years of service as
of June 30, 2004 were fully vested.
For those participants continuing to accrue benefits under the
Pension Plans until July 1, 2009, benefits are credited
using a cash balance formula. Under the formula, each
participant has an account, for record keeping purposes only, to
which credits are allocated each payroll period based on a
percentage of the participants compensation for the
current pay period. The applicable percentage is determined by
the participants number of years of service with the
Company. If an individual participated in the Companys
prior pension plan as of September 30, 1999 and met certain
age and service criteria, the participant will receive the
greater of the benefits calculated under the prior plan, which
uses a final average pay plan method, or the current plan under
the cash balance formula.
The Company adopted SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB
Statements Nos. 87, 88, 106 and 132(R), on
December 31, 2006. The Company does not provide other
postretirement benefits such as postretirement health care or
postretirement life insurance benefits.
F-82
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
18.
|
Benefit
Plans (Continued)
|
Qualified
and Nonqualified Plans
The following tables provide a reconciliation of the changes in
the qualified and nonqualified plan benefit obligations and fair
value of assets for the years ended December 31, 2008 and
2007, and a statement of the funded status as of December 31 of
both years based on a December 31 measurement date.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
227,651
|
|
|
$
|
222,606
|
|
Service cost
|
|
|
6,566
|
|
|
|
7,100
|
|
Interest cost
|
|
|
12,908
|
|
|
|
12,337
|
|
Actuarial (gain)/loss
|
|
|
(4,204
|
)
|
|
|
(1,777
|
)
|
Plan curtailment
|
|
|
114
|
|
|
|
|
|
Plan settlement
|
|
|
|
|
|
|
(2,615
|
)
|
Special termination benefits
|
|
|
|
|
|
|
912
|
|
Benefits paid
|
|
|
(36,148
|
)
|
|
|
(10,912
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
206,887
|
|
|
$
|
227,651
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
230,698
|
|
|
$
|
218,369
|
|
Actual return on plan assets
|
|
|
12,681
|
|
|
|
23,850
|
|
Employer contribution
|
|
|
5,326
|
|
|
|
3,466
|
|
Settlement loss
|
|
|
|
|
|
|
(2,615
|
)
|
Benefits paid
|
|
|
(36,148
|
)
|
|
|
(10,912
|
)
|
Administrative payments
|
|
|
(777
|
)
|
|
|
(1,460
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
211,780
|
|
|
$
|
230,698
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
4,893
|
|
|
$
|
3,047
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the statement of financial position
consist of:
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
$
|
27,402
|
|
|
$
|
30,322
|
|
Current liabilities
|
|
|
(2,895
|
)
|
|
|
(6,227
|
)
|
Noncurrent liabilities
|
|
|
(19,614
|
)
|
|
|
(21,048
|
)
|
|
|
|
|
|
|
|
|
|
Net amount recognized in statement of financial position under
SFAS No. 158
|
|
$
|
4,893
|
|
|
$
|
3,047
|
|
|
|
|
|
|
|
|
|
|
Amounts not yet recognized in net periodic pension cost and
included in accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
|
|
|
$
|
|
|
Accumulated gain
|
|
|
29,720
|
|
|
|
31,843
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
29,720
|
|
|
$
|
31,843
|
|
|
|
|
|
|
|
|
|
|
Amounts expected to be reflected in net periodic pension cost
during the next fiscal year:
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
|
|
|
$
|
|
|
Accumulated gain
|
|
|
1,366
|
|
|
|
1,450
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
1,366
|
|
|
$
|
1,450
|
|
|
|
|
|
|
|
|
|
|
Additional year-end information for plans with accumulated
benefit obligations in excess of plan assets:
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
22,509
|
|
|
$
|
27,275
|
|
Accumulated benefit obligation
|
|
|
22,448
|
|
|
|
26,592
|
|
Fair value of plan assets
|
|
|
|
|
|
|
|
|
The accumulated benefit obligations of the qualified and
nonqualified defined benefit plans were $206 million and
$221 million at December 31, 2008 and 2007,
respectively. There are no plan assets in the
F-83
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
18.
|
Benefit
Plans (Continued)
|
nonqualified plans due to the nature of the plans; the corporate
assets used to pay these benefits are included above in employer
contributions.
Components
of Net Periodic Pension Cost
Net periodic pension cost included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Service cost benefits earned during the period
|
|
$
|
6,566
|
|
|
$
|
7,100
|
|
|
$
|
8,291
|
|
Interest cost on project benefit obligations
|
|
|
12,908
|
|
|
|
12,337
|
|
|
|
11,445
|
|
Expected return on plan assets
|
|
|
(11,709
|
)
|
|
|
(17,975
|
)
|
|
|
(16,277
|
)
|
Curtailment loss
|
|
|
114
|
|
|
|
|
|
|
|
|
|
Settlement (gain)/loss
|
|
|
(5,074
|
)
|
|
|
1,265
|
|
|
|
|
|
Special termination benefits
|
|
|
|
|
|
|
912
|
|
|
|
|
|
Net amortization and deferral
|
|
|
(1,447
|
)
|
|
|
(719
|
)
|
|
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost (benefit)
|
|
$
|
1,358
|
|
|
$
|
2,920
|
|
|
$
|
3,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special accounting is required when lump sum payments exceed the
sum of the service and interest cost components, and when the
average future working lifetime of employees is significantly
curtailed. This special accounting requires an accelerated
recognition of unrecognized gains or losses and unrecognized
prior service costs, creating adjustments to the pension
expense. During the year ended December 31, 2008, the
Company recorded a net settlement gain associated with lump-sum
distributions from the qualified plan and a curtailment loss for
previously unrecognized losses associated with executive
non-qualified benefits. During the year ended December 31,
2007, the Company recorded net settlement losses, including a
portion related to employees who were involuntarily terminated
in the fourth quarter, associated with lump-sum distributions
from the supplemental pension plan. These amounts were recorded
in accordance with SFAS No. 88, Employers
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, which requires
that settlement losses be recorded once prescribed payment
thresholds have been reached.
Amortization of unrecognized net gains or losses are included as
a component of net periodic pension cost to the extent that the
unrecognized gain or loss exceeds 10 percent of the greater
of the projected benefit obligation or the market value of plan
assets. Gains or losses not yet includible in pension cost are
amortized over the average remaining service life of active
participants which is approximately 8 years.
Assumptions
The weighted average assumptions used to determine the projected
accumulated benefit obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
Discount rate
|
|
|
6.25
|
%
|
|
|
6.00
|
%
|
Expected return on plan assets
|
|
|
5.25
|
%
|
|
|
8.50
|
%
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
F-84
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
18.
|
Benefit
Plans (Continued)
|
The weighted average assumptions used to determine the net
periodic pension cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
Discount rate
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
Expected return on plan assets
|
|
|
5.25
|
%
|
|
|
8.50
|
%
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Management is assisted by third-party actuaries in measuring the
pension liabilities and expense through the use of various
assumptions including discount rate, expected return on plan
assets, salary increases, employee turnover rates and mortality
assumptions.
The year-end discount rate was selected based on a modeling
process intended to match expected cash flows from the plans to
a yield curve constructed from a portfolio of non-callable Aa
bonds with at least $250 million of outstanding issue.
Bonds are eliminated if they have maturities of less than six
months or are priced more than two standard errors from the
market average.
The return on plan assets is based on the strategic asset
allocation of the plan assets and a conservative investment
policy.
Assumption
Sensitivity
Changes in the discount rate and the expected rate of return on
plan assets impact expense. If the discount rate
increased/decreased by 50 basis points, expense would
decrease/increase $.8 million from the amount recorded at
December 31, 2008. If the expected long-term rate of return
on plan assets increased/decreased by 50 basis points,
expense would decrease/increase by $1 million.
Plan
Assets
The weighted average asset allocations at December 31, 2008
and 2007, by asset category, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Plan Assets
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Asset Category
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
%
|
|
|
|
%
|
Fixed income securities
|
|
|
73
|
|
|
|
62
|
|
Cash equivalents
|
|
|
27
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Investment
Policy and Strategy
The investment strategy was revised during 2007 with the
principal objective of preserving funding status. Based on the
current funded status of the plan and the ceasing of benefit
accruals effective mid-year 2009, the Investment Committee
recommended moving plan assets into fixed income securities with
the goal of removing funded status risk with investments that
better match the plan liability characteristics. This strategy
has proven particularly effective with the turbulent market
conditions of 2008. As of December 31, 2008, the plan is
invested 73 percent in high quality bonds with an average
credit rating of approximately AA and
F-85
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
18.
|
Benefit
Plans (Continued)
|
27 percent in cash which is invested in
U.S. government securities, the duration of which closely
matches that of the traditional and cash balance nature of plan
liabilities.
Cash
Flows
The Company did not contribute to its qualified pension plan in
2008 and does not expect to contribute in 2009. There are no
plan assets in the nonqualified plans due to the nature of the
plans, and benefits are paid from corporate assets when due to
the participant. It is estimated that approximately
$3 million will be paid in 2009 for these benefits. No plan
assets are expected to be returned to the employer during 2009.
Estimated
Future Benefit Payments
The following qualified and nonqualified plan benefit payments,
which reflect future service as appropriate, are expected to be
paid:
|
|
|
|
|
2009
|
|
$
|
18,350
|
|
2010
|
|
|
16,228
|
|
2011
|
|
|
16,490
|
|
2012
|
|
|
15,199
|
|
2013
|
|
|
14,533
|
|
2014 2018
|
|
|
73,904
|
|
401(k)
Plans
The Company maintains two safe harbor 401(k) savings plans as
defined contribution plans intended to qualify under
section 401(k) of the Internal Revenue Code. The Sallie Mae
401(k) Savings Plan covers substantially all employees of the
Company outside of Asset Performance Group hired before
August 1, 2007. Effective October 1, 2008 the Company
matches up to 100 percent on the first 3 percent of
contributions and 50 percent on the next 2 percent of
contributions after one year of service, and all eligible
employees receive a 1 percent core employer contribution.
Prior to October 1, 2008, up to 6 percent of employee
contributions were matched 100 percent by the Company after
one year of service and certain eligible employees received a
2 percent core employer contribution.
The Sallie Mae 401(k) Retirement Savings Plan covers
substantially all employees of Asset Performance Group, and
after August 1, 2007, the Retirement Savings Plan covers
substantially all new hires of the Company. Effective
October 1, 2008 the Company matches up to 100 percent
on the first 3 percent of contributions and 50 percent
on the next 2 percent of contributions after one year of
service, and all eligible employees receive a 1 percent
core employer contribution. Between August 1, 2007 and
September 30, 2008, the match formula was up to
100 percent on the first 5 percent of contributions
after one year of service. During 2006 until July 31, 2007
the match formula was up to 100 percent on the first
3 percent of contributions and 50 percent on the next
2 percent of contributions after one year of service.
The Company also maintains a non-qualified plan to ensure that
designated participants receive benefits not available under the
401(k) Plan due to compensation limits imposed by the Internal
Revenue Code.
Total expenses related to the 401(k) plans were
$21 million, $22 million and $21 million in 2008,
2007 and 2006, respectively.
F-86
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
Reconciliations of the statutory U.S. federal income tax
rates to the Companys effective tax rate follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Equity forward contracts
|
|
|
|
|
|
|
(113.2
|
)
|
|
|
6.3
|
|
State tax, net of federal benefit
|
|
|
4.5
|
|
|
|
(3.7
|
)
|
|
|
1.1
|
|
Capitalized transaction costs
|
|
|
3.3
|
|
|
|
(2.6
|
)
|
|
|
|
|
Other, net
|
|
|
1.7
|
|
|
|
(1.1
|
)
|
|
|
(.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
44.5
|
%
|
|
|
(85.6
|
)%
|
|
|
41.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense for the years ended December 31, 2008,
2007, and 2006 consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
401,409
|
|
|
$
|
1,027,087
|
|
|
$
|
747,573
|
|
State
|
|
|
32,736
|
|
|
|
53,865
|
|
|
|
49,399
|
|
Foreign
|
|
|
678
|
|
|
|
1,045
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
434,823
|
|
|
|
1,081,997
|
|
|
|
797,069
|
|
Deferred provision/(benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(543,151
|
)
|
|
|
(642,393
|
)
|
|
|
52,866
|
|
State
|
|
|
(58,900
|
)
|
|
|
(26,840
|
)
|
|
|
(15,617
|
)
|
Foreign
|
|
|
(346
|
)
|
|
|
(481
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision/(benefit)
|
|
|
(602,397
|
)
|
|
|
(669,714
|
)
|
|
|
37,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax expense/(benefit)
|
|
$
|
(167,574
|
)
|
|
$
|
412,283
|
|
|
$
|
834,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-87
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
19.
|
Income
Taxes (Continued)
|
At December 31, 2008 and 2007, the tax effect of temporary
differences that give rise to deferred tax assets and
liabilities include the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Loan reserves
|
|
$
|
1,212,653
|
|
|
$
|
867,840
|
|
Market value adjustments on student loans, investments and
derivatives
|
|
|
174,276
|
|
|
|
322,001
|
|
Purchased paper impairments
|
|
|
111,924
|
|
|
|
6,272
|
|
Deferred revenue
|
|
|
70,172
|
|
|
|
61,780
|
|
Stock-based compensation plans
|
|
|
62,325
|
|
|
|
54,137
|
|
Unrealized investment losses
|
|
|
42,838
|
|
|
|
|
|
Accrued expenses not currently deductible
|
|
|
38,330
|
|
|
|
60,821
|
|
Operating loss and credit carryovers
|
|
|
28,293
|
|
|
|
43,600
|
|
Warrants issuance
|
|
|
27,160
|
|
|
|
34,105
|
|
Partnership income
|
|
|
21,844
|
|
|
|
15,433
|
|
Sale of international non-mortgage purchased paper business
|
|
|
20,887
|
|
|
|
|
|
In-substance defeasance transactions
|
|
|
16,037
|
|
|
|
18,074
|
|
Other
|
|
|
29,186
|
|
|
|
31,688
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
1,855,925
|
|
|
|
1,515,751
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Securitization transactions
|
|
|
302,049
|
|
|
|
370,378
|
|
Unrealized investment gains recorded to other comprehensive
income
|
|
|
|
|
|
|
124,459
|
|
Leases
|
|
|
73,570
|
|
|
|
83,286
|
|
Depreciation/amortization
|
|
|
|
|
|
|
23,031
|
|
Other
|
|
|
12,883
|
|
|
|
7,247
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
388,502
|
|
|
|
608,401
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
1,467,423
|
|
|
$
|
907,350
|
|
|
|
|
|
|
|
|
|
|
Included in other deferred tax assets is a valuation allowance
of $4,901 and $7,635 as of December 31, 2008 and 2007,
respectively, against a portion of the Companys state and
international deferred tax assets. The ultimate realization of
the deferred tax assets is dependent upon the generation of
future taxable income during the period in which the temporary
differences become deductible. Management primarily considers
the scheduled reversals of deferred tax liabilities and the
history of positive taxable income in making this determination.
The valuation allowance primarily relates to state deferred tax
assets for which subsequently recognized tax benefits will be
allocated to goodwill.
As of December 31, 2008, the Company has federal net
operating loss carryforwards of $56,438 which begin to expire in
2022, apportioned state net operating loss carryforwards of
$69,068 which begin to expire in 2009, and federal and state
credit carryovers of $1,921 which begin to expire in 2021.
F-88
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
19.
|
Income
Taxes (Continued)
|
Accounting
for Uncertainty in Income Taxes
The Company adopted the provisions of the FASBs
FIN No. 48, Accounting for Uncertainty in Income
Taxes, on January 1, 2007. As a result of the
implementation of FIN No. 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. The total
amount of gross unrecognized tax benefits as of January 1,
2007 was $113 million. As of December 31, 2007, the
total amount of gross unrecognized tax benefits was
$175 million. Included in the $175 million are
$35 million of unrecognized tax benefits that if
recognized, would favorably impact the effective tax rate.
The following table summarizes changes in unrecognized tax
benefits for the years ended December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(Dollars in millions)
|
|
2008
|
|
|
2007
|
|
|
Unrecognized tax benefits at beginning of year
|
|
$
|
174.8
|
|
|
$
|
113.3
|
|
Increases resulting from tax positions taken during a prior
period
|
|
|
11.3
|
|
|
|
86.5
|
|
Decreases resulting from tax positions taken during a prior
period
|
|
|
(132.2
|
)
|
|
|
(30.0
|
)
|
Increases/(decreases) resulting from tax positions taken during
the current period
|
|
|
36.2
|
|
|
|
.3
|
|
Decreases related to settlements with taxing authorities
|
|
|
(.1
|
)
|
|
|
(30.0
|
)
|
Increases related to settlements with taxing authorities
|
|
|
|
|
|
|
42.3
|
|
Reductions related to the lapse of statute of limitations
|
|
|
(3.6
|
)
|
|
|
(7.6
|
)
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits at end of year
|
|
$
|
86.4
|
|
|
$
|
174.8
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, the gross unrecognized tax
benefits are $86 million. Included in the $86 million
are $21 million of unrecognized tax benefits that if
recognized, would favorably impact the effective tax rate. In
addition, unrecognized tax benefits of $2 million are
currently treated as a pending refund claim, reducing the
balance of unrecognized tax benefits that if recognized, would
impact the effective tax rate. During 2008, the Company adjusted
its federal unrecognized tax benefits to incorporate new
information received from the IRS as a part of the
2005-2006
exam cycle for several carryover issues related to the timing of
certain income and deduction items. Several other less
significant amounts of uncertain tax benefits were also added
during the year.
The Company recognizes interest related to unrecognized tax
benefits in income tax expense, and penalties, if any, in
operating expenses. The Company has accrued interest and
penalties, net of tax benefit, of $10 million and
$18 million as of December 31, 2008 and
December 31, 2007, respectively. The income tax expense for
the year ended December 31, 2008 includes a reduction in
the accrual of interest of $8 million, primarily related to
the reduction of uncertain tax benefits as a result of new
information received from the IRS as a part of the
2005-2006
exam cycle for several carryover issues related to the timing of
certain income and deduction items. The income tax expense for
the year ended December 31, 2007 includes an increase in
the accrual of interest of $1 million.
Reasonably
Possible Significant Increases/Decreases within Twelve
Months
The IRS issued a Revenue Agents Report (RAR)
during the second quarter of 2007 concluding the primary exam of
the Companys 2003 and 2004 U.S. federal tax returns.
However, the exam of these years remain open pending the
conclusion of the separate IRS audit of an entity in which the
Company is an
F-89
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
19.
|
Income
Taxes (Continued)
|
investor. In addition, during the third quarter of 2007, the
Company filed an administrative-level appeal related to one
unagreed item originating from the Companys 2004
U.S. federal tax return. The IRS is also currently
examining the Companys 2005 and 2006 federal income tax
returns. It is reasonably possible that there will be a decrease
in the Companys unrecognized tax benefits as a result of
the resolution of these items. When considering both tax and
interest amounts, the decrease could be approximately
$12 million to $18 million.
In the event that the Company is not contacted for exam by
additional tax authorities by the end of 2009, it is reasonably
possible that there will be a decrease in the Companys
unrecognized tax benefits as a result of the lapse of various
statute of limitations periods. When considering both tax and
interest amounts, the decrease could be approximately
$2 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
|
|
Florida
|
|
|
2000
|
|
Indiana
|
|
|
2000
|
|
Pennsylvania
|
|
|
2000
|
|
California
|
|
|
2002
|
|
Missouri
|
|
|
2003
|
|
New York
|
|
|
2004
|
|
North Carolina
|
|
|
2005
|
|
Texas
|
|
|
2004
|
|
The Company has two primary operating segments as defined in
SFAS No. 131, the Lending operating segment and the
APG (formerly known as DMO) operating segment. The Lending and
APG operating segments meet the quantitative thresholds for
reportable segments identified in SFAS No. 131.
Accordingly, the results of operations of the Companys
Lending and APG reportable segments are presented below. The
Company has smaller operating segments including the Guarantor
Servicing, Loan Servicing, and Upromise operating segments, as
well as certain other products and services 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 reportable 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 makers, 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
F-90
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
20.
|
Segment
Reporting (Continued)
|
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 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 years ended December 31, 2008, 2007 and 2006.
USA Funds is the Companys largest customer in both the APG
and Corporate and Other segments. During the years ended
December 31, 2008, 2007 and 2006, USA Funds accounted for
46 percent, 35 percent and 31 percent,
respectively, of the aggregate revenues generated by the
Companys APG and Corporate and Other business 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 operating segment, the Company
originates and acquires both FFELP loans and Private Education
Loans. As of December 31, 2008, the Company managed
$180.4 billion of student loans, of which
$146.9 billion or 81 percent are federally insured,
and has 10 million student and parent customers. In
addition to education lending, the Company also originates
mortgage and consumer loans with the intent of selling the
majority of such loans. In the year ended December 31,
2008, the Company originated $205 million in mortgage and
consumer loans and its mortgage and consumer loan portfolio
totaled $503 million at December 31, 2008.
Private Education Loans consist of two general types:
(1) those that are designed to bridge the gap between the
cost of higher education and the amount financed through either
capped federally insured loans or the borrowers resources,
and (2) those that are used to meet the needs of students
in alternative learning programs such as career training,
distance learning and lifelong learning programs. Most higher
education Private Education Loans are made in conjunction with a
FFELP loan and as such are marketed through the same channel as
FFELP loans by the same sales force. Unlike FFELP loans, Private
Education Loans are subject to the full credit risk of the
borrower. The Company manages this additional risk through
historical risk-performance underwriting strategies, the
addition of qualified cosigners and a combination of higher
interest rates and loan origination fees that compensate the
Company for the higher risk.
APG
The Companys APG operating segment provides a wide range
of accounts receivable and collections services including
student loan default aversion services, defaulted student loan
portfolio management services, contingency collections services
for student loans and other asset classes, and accounts
receivable management and collection for purchased portfolios of
receivables that are delinquent or have been charged off by
their original creditors, and
sub-performing
and non-performing mortgage loans. The Companys APG
operating segment serves the student
F-91
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
20.
|
Segment
Reporting (Continued)
|
loan marketplace through a broad array of default management
services 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 APG operating segment provides receivable
management and collection services for federal and state
agencies, and other holders of consumer debt.
The Company has also concluded that its APG operating
segments purchased paper businesses no longer produce a
strategic fit. As a result, the Company has decided to wind down
these businesses. In the first quarter of 2009, the Company
finalized the sale of its international purchased paper
non-mortgage business. At December 31, 2008, the net assets
associated with this business were classified as held-for-sale.
Accordingly, in 2008, the Company wrote down the net assets to
the estimated fair value and recognized a $51 million loss,
which was included in the collections revenue line
item in the accompanying consolidated statements of income.
Corporate
and Other
The Companys Corporate and Other segment includes the
aggregate activity of its smaller operating segments, primarily
its Guarantor Servicing, Loan Servicing, and Upromise operating
segments. Corporate and Other also includes several smaller
products and services, as well as corporate overhead.
In the Guarantor Servicing operating segment, the Company
provides a full complement of administrative services to FFELP
guarantors including guarantee issuance, account maintenance,
and guarantee fulfillment. In the Loan Servicing operating
segment, the Company provides a full complement of activities
required to service student loans on behalf of lenders who are
unrelated to the Company. Such servicing activities generally
commence once a loan has been fully disbursed and include
sending out payment coupons to borrowers, processing borrower
payments, originating and disbursing FFELP Consolidation Loans
on behalf of the lender, and other administrative activities
required by ED.
Upromise markets and administers a consumer savings network and
also provides program management, transfer and servicing agent
services, and administration services for 529 college-savings
plans. The 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 makers, evaluates the
Company on certain performance measures that the Company refers
to as Core Earnings performance measures for each
operating segment. While Core Earnings results are
not a substitute for reported results under GAAP, the Company
relies on 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.
F-92
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
20.
|
Segment
Reporting (Continued)
|
Segment
Results and Reconciliations to GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Total Core
|
|
|
|
|
|
Total
|
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Earnings
|
|
|
Adjustments(2)
|
|
|
GAAP
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
2,216
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,216
|
|
|
$
|
(221
|
)
|
|
$
|
1,995
|
|
FFELP Consolidation Loans
|
|
|
3,748
|
|
|
|
|
|
|
|
|
|
|
|
3,748
|
|
|
|
(569
|
)
|
|
|
3,179
|
|
Private Education Loans
|
|
|
2,752
|
|
|
|
|
|
|
|
|
|
|
|
2,752
|
|
|
|
(1,015
|
)
|
|
|
1,737
|
|
Other loans
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
83
|
|
Cash and investments
|
|
|
304
|
|
|
|
|
|
|
|
25
|
|
|
|
329
|
|
|
|
(53
|
)
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
9,103
|
|
|
|
|
|
|
|
25
|
|
|
|
9,128
|
|
|
|
(1,858
|
)
|
|
|
7,270
|
|
Total interest expense
|
|
|
6,665
|
|
|
|
25
|
|
|
|
19
|
|
|
|
6,709
|
|
|
|
(804
|
)
|
|
|
5,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
2,438
|
|
|
|
(25
|
)
|
|
|
6
|
|
|
|
2,419
|
|
|
|
(1,054
|
)
|
|
|
1,365
|
|
Less: provisions for loan losses
|
|
|
1,029
|
|
|
|
|
|
|
|
|
|
|
|
1,029
|
|
|
|
(309
|
)
|
|
|
720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
1,409
|
|
|
|
(25
|
)
|
|
|
6
|
|
|
|
1,390
|
|
|
|
(745
|
)
|
|
|
645
|
|
Contingency fee revenue
|
|
|
|
|
|
|
340
|
|
|
|
|
|
|
|
340
|
|
|
|
|
|
|
|
340
|
|
Collections revenue
|
|
|
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
(63
|
)
|
|
|
(1
|
)
|
|
|
(64
|
)
|
Guarantor servicing fees
|
|
|
|
|
|
|
|
|
|
|
121
|
|
|
|
121
|
|
|
|
|
|
|
|
121
|
|
Other income
|
|
|
180
|
|
|
|
|
|
|
|
199
|
|
|
|
379
|
|
|
|
(356
|
)
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
180
|
|
|
|
277
|
|
|
|
320
|
|
|
|
777
|
|
|
|
(357
|
)
|
|
|
420
|
|
Restructuring expenses
|
|
|
49
|
|
|
|
12
|
|
|
|
23
|
|
|
|
84
|
|
|
|
|
|
|
|
84
|
|
Operating expenses
|
|
|
589
|
|
|
|
398
|
|
|
|
277
|
|
|
|
1,264
|
|
|
|
93
|
|
|
|
1,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
638
|
|
|
|
410
|
|
|
|
300
|
|
|
|
1,348
|
|
|
|
93
|
|
|
|
1,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
951
|
|
|
|
(158
|
)
|
|
|
26
|
|
|
|
819
|
|
|
|
(1,195
|
)
|
|
|
(376
|
)
|
Income tax
expense(1)
|
|
|
336
|
|
|
|
(56
|
)
|
|
|
9
|
|
|
|
289
|
|
|
|
(456
|
)
|
|
|
(167
|
)
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
615
|
|
|
$
|
(106
|
)
|
|
$
|
17
|
|
|
$
|
526
|
|
|
$
|
(739
|
)
|
|
$
|
(213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Income taxes are based on a
percentage of net income before tax for the individual
reportable segment.
|
|
(2) |
|
Core Earnings
adjustments to GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
Net Impact
|
|
|
Net Impact
|
|
|
|
|
|
Net Impact
|
|
|
|
|
|
|
of
|
|
|
of
|
|
|
Net Impact
|
|
|
of
|
|
|
|
|
|
|
Securitization
|
|
|
Derivative
|
|
|
of
|
|
|
Acquired
|
|
|
|
|
(Dollars in millions)
|
|
Accounting
|
|
|
Accounting
|
|
|
Floor Income
|
|
|
Intangibles
|
|
|
Total
|
|
|
Net interest income (loss)
|
|
$
|
(837
|
)
|
|
$
|
(115
|
)
|
|
$
|
(102
|
)
|
|
$
|
|
|
|
$
|
(1,054
|
)
|
Less: provisions for loan losses
|
|
|
(309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
(528
|
)
|
|
|
(115
|
)
|
|
|
(102
|
)
|
|
|
|
|
|
|
(745
|
)
|
Contingency fee revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collections revenue
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Guarantor servicing fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
89
|
|
|
|
(445
|
)
|
|
|
|
|
|
|
|
|
|
|
(356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss)
|
|
|
88
|
|
|
|
(445
|
)
|
|
|
|
|
|
|
|
|
|
|
(357
|
)
|
Restructuring expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
91
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
91
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax Core Earnings adjustments to GAAP
|
|
$
|
(442
|
)
|
|
$
|
(560
|
)
|
|
$
|
(102
|
)
|
|
$
|
(91
|
)
|
|
|
(1,195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(456
|
)
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings adjustments to GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-93
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
20.
|
Segment
Reporting (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Total Core
|
|
|
|
|
|
Total
|
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Earnings
|
|
|
Adjustments(2)
|
|
|
GAAP
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
2,848
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,848
|
|
|
$
|
(787
|
)
|
|
$
|
2,061
|
|
FFELP Consolidation Loans
|
|
|
5,522
|
|
|
|
|
|
|
|
|
|
|
|
5,522
|
|
|
|
(1,179
|
)
|
|
|
4,343
|
|
Private Education Loans
|
|
|
2,835
|
|
|
|
|
|
|
|
|
|
|
|
2,835
|
|
|
|
(1,379
|
)
|
|
|
1,456
|
|
Other loans
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
106
|
|
|
|
|
|
|
|
106
|
|
Cash and investments
|
|
|
868
|
|
|
|
|
|
|
|
21
|
|
|
|
889
|
|
|
|
(181
|
)
|
|
|
708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
12,179
|
|
|
|
|
|
|
|
21
|
|
|
|
12,200
|
|
|
|
(3,526
|
)
|
|
|
8,674
|
|
Total interest expense
|
|
|
9,597
|
|
|
|
27
|
|
|
|
21
|
|
|
|
9,645
|
|
|
|
(2,559
|
)
|
|
|
7,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
2,582
|
|
|
|
(27
|
)
|
|
|
|
|
|
|
2,555
|
|
|
|
(967
|
)
|
|
|
1,588
|
|
Less: provisions for loan losses
|
|
|
1,394
|
|
|
|
|
|
|
|
1
|
|
|
|
1,395
|
|
|
|
(380
|
)
|
|
|
1,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
1,188
|
|
|
|
(27
|
)
|
|
|
(1
|
)
|
|
|
1,160
|
|
|
|
(587
|
)
|
|
|
573
|
|
Contingency fee revenue
|
|
|
|
|
|
|
336
|
|
|
|
|
|
|
|
336
|
|
|
|
|
|
|
|
336
|
|
Collections revenue
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
269
|
|
|
|
3
|
|
|
|
272
|
|
Guarantor servicing fees
|
|
|
|
|
|
|
|
|
|
|
156
|
|
|
|
156
|
|
|
|
|
|
|
|
156
|
|
Other income
|
|
|
194
|
|
|
|
|
|
|
|
218
|
|
|
|
412
|
|
|
|
(679
|
)
|
|
|
(267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
194
|
|
|
|
605
|
|
|
|
374
|
|
|
|
1,173
|
|
|
|
(676
|
)
|
|
|
497
|
|
Restructuring expenses
|
|
|
19
|
|
|
|
2
|
|
|
|
2
|
|
|
|
23
|
|
|
|
|
|
|
|
23
|
|
Operating expenses
|
|
|
690
|
|
|
|
388
|
|
|
|
339
|
|
|
|
1,417
|
|
|
|
112
|
|
|
|
1,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
709
|
|
|
|
390
|
|
|
|
341
|
|
|
|
1,440
|
|
|
|
112
|
|
|
|
1,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
673
|
|
|
|
188
|
|
|
|
32
|
|
|
|
893
|
|
|
|
(1,375
|
)
|
|
|
(482
|
)
|
Income tax
expense(1)
|
|
|
249
|
|
|
|
70
|
|
|
|
12
|
|
|
|
331
|
|
|
|
81
|
|
|
|
412
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
424
|
|
|
$
|
116
|
|
|
$
|
20
|
|
|
$
|
560
|
|
|
$
|
(1,456
|
)
|
|
$
|
(896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Income taxes are based on a
percentage of net income before tax for the individual
reportable segment.
|
|
(2) |
|
Core Earnings
adjustments to GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Net Impact
|
|
|
Net Impact
|
|
|
|
|
|
Net Impact
|
|
|
|
|
|
|
of
|
|
|
of
|
|
|
Net Impact
|
|
|
of
|
|
|
|
|
|
|
Securitization
|
|
|
Derivative
|
|
|
of
|
|
|
Acquired
|
|
|
|
|
(Dollars in millions)
|
|
Accounting
|
|
|
Accounting
|
|
|
Floor Income
|
|
|
Intangibles
|
|
|
Total
|
|
|
Net interest income (loss)
|
|
$
|
(816
|
)
|
|
$
|
18
|
|
|
$
|
(169
|
)
|
|
$
|
|
|
|
$
|
(967
|
)
|
Less: provisions for loan losses
|
|
|
(380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
(436
|
)
|
|
|
18
|
|
|
|
(169
|
)
|
|
|
|
|
|
|
(587
|
)
|
Contingency fee revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collections revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor servicing fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
683
|
|
|
|
(1,359
|
)
|
|
|
|
|
|
|
|
|
|
|
(676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss)
|
|
|
683
|
|
|
|
(1,359
|
)
|
|
|
|
|
|
|
|
|
|
|
(676
|
)
|
Restructuring expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax Core Earnings adjustments to GAAP
|
|
$
|
247
|
|
|
$
|
(1,341
|
)
|
|
$
|
(169
|
)
|
|
$
|
(112
|
)
|
|
|
(1,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings adjustments to GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-94
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
20.
|
Segment
Reporting (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Total Core
|
|
|
|
|
|
Total
|
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Earnings
|
|
|
Adjustments(2)
|
|
|
GAAP
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
2,771
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,771
|
|
|
$
|
(1,362
|
)
|
|
$
|
1,409
|
|
FFELP Consolidation Loans
|
|
|
4,690
|
|
|
|
|
|
|
|
|
|
|
|
4,690
|
|
|
|
(1,144
|
)
|
|
|
3,546
|
|
Private Education Loans
|
|
|
2,092
|
|
|
|
|
|
|
|
|
|
|
|
2,092
|
|
|
|
(1,071
|
)
|
|
|
1,021
|
|
Other loans
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
98
|
|
Cash and investments
|
|
|
705
|
|
|
|
|
|
|
|
7
|
|
|
|
712
|
|
|
|
(209
|
)
|
|
|
503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
10,356
|
|
|
|
|
|
|
|
7
|
|
|
|
10,363
|
|
|
|
(3,786
|
)
|
|
|
6,577
|
|
Total interest expense
|
|
|
7,877
|
|
|
|
23
|
|
|
|
12
|
|
|
|
7,912
|
|
|
|
(2,789
|
)
|
|
|
5,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
2,479
|
|
|
|
(23
|
)
|
|
|
(5
|
)
|
|
|
2,451
|
|
|
|
(997
|
)
|
|
|
1,454
|
|
Less: provisions for loan losses
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
|
303
|
|
|
|
(16
|
)
|
|
|
287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
2,176
|
|
|
|
(23
|
)
|
|
|
(5
|
)
|
|
|
2,148
|
|
|
|
(981
|
)
|
|
|
1,167
|
|
Contingency fee revenue
|
|
|
|
|
|
|
397
|
|
|
|
|
|
|
|
397
|
|
|
|
|
|
|
|
397
|
|
Collections revenue
|
|
|
|
|
|
|
239
|
|
|
|
|
|
|
|
239
|
|
|
|
1
|
|
|
|
240
|
|
Guarantor servicing fees
|
|
|
|
|
|
|
|
|
|
|
132
|
|
|
|
132
|
|
|
|
|
|
|
|
132
|
|
Other income
|
|
|
177
|
|
|
|
|
|
|
|
155
|
|
|
|
332
|
|
|
|
1,073
|
|
|
|
1,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
177
|
|
|
|
636
|
|
|
|
287
|
|
|
|
1,100
|
|
|
|
1,074
|
|
|
|
2,174
|
|
Operating expenses
|
|
|
645
|
|
|
|
358
|
|
|
|
250
|
|
|
|
1,253
|
|
|
|
93
|
|
|
|
1,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
1,708
|
|
|
|
255
|
|
|
|
32
|
|
|
|
1,995
|
|
|
|
|
|
|
|
1,995
|
|
Income tax
expense(1)
|
|
|
632
|
|
|
|
94
|
|
|
|
12
|
|
|
|
738
|
|
|
|
96
|
|
|
|
834
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,076
|
|
|
$
|
157
|
|
|
$
|
20
|
|
|
$
|
1,253
|
|
|
$
|
(96
|
)
|
|
$
|
1,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Income taxes are based on a
percentage of net income before tax for the individual
reportable segment.
|
|
(2) |
|
Core Earnings
adjustments to GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Net Impact of
|
|
|
Net Impact of
|
|
|
Net
|
|
|
Impact
|
|
|
|
|
|
|
Securitization
|
|
|
Derivative
|
|
|
Impact of
|
|
|
of Acquired
|
|
|
|
|
(Dollars in millions)
|
|
Accounting
|
|
|
Accounting
|
|
|
Floor Income
|
|
|
Intangibles
|
|
|
Total
|
|
|
Net interest income (loss)
|
|
$
|
(897
|
)
|
|
$
|
109
|
|
|
$
|
(209
|
)
|
|
$
|
|
|
|
$
|
(997
|
)
|
Less: provisions for loan losses
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
(881
|
)
|
|
|
109
|
|
|
|
(209
|
)
|
|
|
|
|
|
|
(981
|
)
|
Contingency fee revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collections revenue
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Guarantor servicing fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
1,411
|
|
|
|
(338
|
)
|
|
|
|
|
|
|
|
|
|
|
1,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss)
|
|
|
1,412
|
|
|
|
(338
|
)
|
|
|
|
|
|
|
|
|
|
|
1,074
|
|
Operating expenses
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax Core Earnings adjustments to GAAP
|
|
$
|
532
|
|
|
$
|
(229
|
)
|
|
$
|
(209
|
)
|
|
$
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings adjustments to GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-95
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
20.
|
Segment
Reporting (Continued)
|
Summary
of Core Earnings Adjustments to GAAP
The adjustments required to reconcile from the Companys
Core Earnings results to its GAAP results of
operations relate to differing treatments for securitization
transactions, derivatives, Floor Income, and certain other items
that management does not consider in evaluating the
Companys operating results. The following table reflects
aggregate adjustments associated with these areas for the years
ended December 31, 2008, 2007, and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
Core Earnings adjustments to GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact of securitization
accounting(1)
|
|
$
|
(442
|
)
|
|
$
|
247
|
|
|
$
|
532
|
|
Net impact of derivative
accounting(2)
|
|
|
(560
|
)
|
|
|
(1,341
|
)
|
|
|
(229
|
)
|
Net impact of Floor
Income(3)
|
|
|
(102
|
)
|
|
|
(169
|
)
|
|
|
(209
|
)
|
Net impact of acquired
intangibles(4)
|
|
|
(91
|
)
|
|
|
(112
|
)
|
|
|
(94
|
)
|
Net tax
effect(5)
|
|
|
456
|
|
|
|
(81
|
)
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings adjustments to GAAP
|
|
$
|
(739
|
)
|
|
$
|
(1,456
|
)
|
|
$
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Securitization accounting:
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 the
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 its 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 in the consolidated statements of
income 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 for the years ended
December 31, 2007 and 2006 includes the impact of the
exclusion of the permanent income tax impact of the equity
forward contracts. The Company settled all of its equity forward
contracts in January 2008.
|
F-96
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
21.
|
Quarterly
Financial Information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Net interest income
|
|
$
|
276,369
|
|
|
$
|
402,543
|
|
|
$
|
474,749
|
|
|
$
|
210,559
|
|
Less: provisions for loan losses
|
|
|
137,311
|
|
|
|
143,015
|
|
|
|
186,909
|
|
|
|
252,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
139,058
|
|
|
|
259,528
|
|
|
|
287,840
|
|
|
|
(41,856
|
)
|
Gains (losses) on derivative and hedging activities, net
|
|
|
(272,796
|
)
|
|
|
362,043
|
|
|
|
(241,757
|
)
|
|
|
(292,903
|
)
|
Other income
|
|
|
343,707
|
|
|
|
200,593
|
|
|
|
69,761
|
|
|
|
251,144
|
|
Restructuring expenses
|
|
|
20,678
|
|
|
|
46,740
|
|
|
|
10,508
|
|
|
|
5,849
|
|
Operating expenses
|
|
|
355,648
|
|
|
|
353,688
|
|
|
|
367,152
|
|
|
|
280,367
|
|
Income tax expense (benefit)
|
|
|
(62,488
|
)
|
|
|
153,074
|
|
|
|
(103,819
|
)
|
|
|
(154,341
|
)
|
Minority interest in net earnings of subsidiaries
|
|
|
(65
|
)
|
|
|
2,926
|
|
|
|
544
|
|
|
|
527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(103,804
|
)
|
|
|
265,736
|
|
|
|
(158,541
|
)
|
|
|
(216,017
|
)
|
Preferred stock dividends
|
|
|
29,025
|
|
|
|
27,391
|
|
|
|
27,474
|
|
|
|
27,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stock
|
|
$
|
(132,829
|
)
|
|
$
|
238,345
|
|
|
$
|
(186,015
|
)
|
|
$
|
(243,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
(.28
|
)
|
|
$
|
.51
|
|
|
$
|
(.40
|
)
|
|
$
|
(.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
(.28
|
)
|
|
$
|
.50
|
|
|
$
|
(.40
|
)
|
|
$
|
(.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Net interest income
|
|
$
|
413,816
|
|
|
$
|
398,653
|
|
|
$
|
441,310
|
|
|
$
|
334,471
|
|
Less: provisions for loan losses
|
|
|
150,330
|
|
|
|
148,200
|
|
|
|
142,600
|
|
|
|
574,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
263,486
|
|
|
|
250,453
|
|
|
|
298,710
|
|
|
|
(239,707
|
)
|
Gains (losses) on derivative and hedging activities, net
|
|
|
(356,969
|
)
|
|
|
821,566
|
|
|
|
(487,478
|
)
|
|
|
(1,337,703
|
)
|
Other income
|
|
|
876,829
|
|
|
|
398,672
|
|
|
|
285,433
|
|
|
|
296,759
|
|
Restructuring expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,505
|
|
Operating expenses
|
|
|
356,174
|
|
|
|
398,800
|
|
|
|
355,899
|
|
|
|
418,469
|
|
Income tax expense (benefit)
|
|
|
310,014
|
|
|
|
104,724
|
|
|
|
84,449
|
|
|
|
(86,904
|
)
|
Minority interest in net earnings of subsidiaries
|
|
|
1,005
|
|
|
|
696
|
|
|
|
77
|
|
|
|
537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
116,153
|
|
|
|
966,471
|
|
|
|
(343,760
|
)
|
|
|
(1,635,258
|
)
|
Preferred stock dividends
|
|
|
9,093
|
|
|
|
9,156
|
|
|
|
9,274
|
|
|
|
9,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stock
|
|
$
|
107,060
|
|
|
$
|
957,315
|
|
|
$
|
(353,034
|
)
|
|
$
|
(1,644,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
.26
|
|
|
$
|
2.32
|
|
|
$
|
(.85
|
)
|
|
$
|
(3.98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
.26
|
|
|
$
|
1.03
|
|
|
$
|
(.85
|
)
|
|
$
|
(3.98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Private Education Loan
allowance for loan loss balance at the end of each quarter in
2008 and 2007 and the Private Education Loan charge-off amounts
for each quarter in 2008
F-97
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
21.
|
Quarterly
Financial Information (unaudited) (Continued)
|
and 2007 on both a previously presented basis and corrected for
the change in methodology, discussed further in Note 4,
Allowance for Loan Losses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Prior Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Private Education Loan Losses
|
|
$
|
938,409
|
|
|
$
|
970,150
|
|
|
$
|
1,012,838
|
|
|
$
|
1,085,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs for Private Education Loan Losses
|
|
$
|
(74,227
|
)
|
|
$
|
(96,191
|
)
|
|
$
|
(101,518
|
)
|
|
$
|
(152,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrected Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Private Education Loan Losses
|
|
$
|
1,073,317
|
|
|
$
|
1,129,000
|
|
|
$
|
1,196,894
|
|
|
$
|
1,308,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs for Private Education Loan Losses
|
|
$
|
(57,352
|
)
|
|
$
|
(72,248
|
)
|
|
$
|
(76,312
|
)
|
|
$
|
(114,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Prior Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Private Education Loan Losses
|
|
$
|
369,072
|
|
|
$
|
427,904
|
|
|
$
|
454,100
|
|
|
$
|
885,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs for Private Education Loan Losses
|
|
$
|
(75,121
|
)
|
|
$
|
(79,947
|
)
|
|
$
|
(73,491
|
)
|
|
$
|
(71,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrected Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Private Education Loan Losses
|
|
$
|
444,569
|
|
|
$
|
519,361
|
|
|
$
|
559,142
|
|
|
$
|
1,003,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs for Private Education Loan Losses
|
|
$
|
(63,891
|
)
|
|
$
|
(63,987
|
)
|
|
$
|
(59,906
|
)
|
|
$
|
(58,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-98
APPENDIX A
FEDERAL
FAMILY EDUCATION LOAN PROGRAM
General
The Federal Family Education Loan Program, known as FFELP, under
Title IV of the Higher Education Act (HEA),
provides for loans to students who are enrolled in eligible
institutions, or to parents of dependent students, to finance
their educational costs. As further described below, payment of
principal and interest on the student loans is guaranteed by a
state or
not-for-profit
guarantee agency against:
|
|
|
|
|
default of the borrower;
|
|
|
|
the death, bankruptcy or permanent, total disability of the
borrower;
|
|
|
|
closing of the students school prior to the end of the
academic period;
|
|
|
|
false certification of the borrowers eligibility for the
loan by the school; and
|
|
|
|
an unpaid school refund.
|
Subject to conditions, a program of federal reinsurance under
the HEA entitles guarantee agencies to reimbursement from the
U.S. Department of Education (ED) for between
75 percent and 100 percent of the amount of each
guarantee payment. In addition to the guarantee, the holder of
student loans is entitled to receive interest subsidy payments
and special allowance payments from ED on eligible student
loans. Special allowance payments raise the yield to student
loan lenders when the statutory borrower interest rate is below
an indexed market value.
Four types of FFELP student loans are currently authorized under
the HEA:
|
|
|
|
|
Subsidized Federal Stafford Loans to students who demonstrate
requisite financial need;
|
|
|
|
Unsubsidized Federal Stafford Loans to students who either do
not demonstrate financial need or require additional loans to
supplement their Subsidized Stafford Loans;
|
|
|
|
Federal PLUS Loans to graduate or professional students
(effective July 1, 2006) or parents of dependent
students whose estimated costs of attending school exceed other
available financial aid; and
|
|
|
|
FFELP Consolidation Loans, which consolidate into a single loan
a borrowers obligations under various federally authorized
student loan programs.
|
Before July 1, 1994, the HEA also authorized loans called
Supplemental Loans to Students or SLS
Loans to independent students and, under some
circumstances, dependent undergraduate students, to supplement
their Subsidized Stafford Loans. The SLS program was replaced by
the Unsubsidized Stafford Loan program.
This appendix describes or summarizes the material provisions of
Title IV of the HEA, the FFELP and related statutes and
regulations. It, however, is not complete and is qualified in
its entirety by reference to each actual statute and regulation.
Both the HEA and the related regulations have been the subject
of extensive amendments over the years. The Company cannot
predict whether future amendments or modifications might
materially change any of the programs described in this appendix
or the statutes and regulations that implement them.
Legislative
Matters
The FFELP is subject to comprehensive reauthorization at least
every 5 years and to frequent statutory and regulatory
changes. The most recent reauthorization was the Higher
Education Opportunity Act of 2008 (HEOA 2008),
Public Law
110-315,
which the President signed into law August 14, 2008.
Other recent amendments since the program was previously
reauthorized by the Higher Education Reconciliation Act of 2005
(HERA 2005), which was signed into law
February 8, 2006, as part of the
A-1
Deficit Reduction Act, Public Law
109-171
include the Ensuring Continued Access to Student Loans Act of
2008, Public Law
110-227
(May 7, 2008) and the College Cost Reduction and
Access Act (CCRAA), Public Law
110-84 (September 27,
2007), and other ED amendments to the FFELP regulations on
November 1, 2007 and October 23, 2008.
Previous legislation includes the Ticket to Work and Work
Incentives Improvement Act of 1999, by Public Law
106-554
(December 21, 2000), the Consolidated Appropriations Act of
2001, by Public Law
107-139,
(February 8, 2002) by Public Law
108-98
(October 10, 2003), and by Public Law
108-409
(October 30, 2004). Since HERA 2005, the HEA was amended by
the Third Higher Education Extension Act of 2006
(THEEA), Public Law
109-292
(September 30, 2006).
In 1993 Congress created the William D. Ford Federal Direct Loan
Program (FDLP) under which Stafford, PLUS and
Consolidation Loans are funded directly by the
U.S. Department of Treasury. The school determines whether
it will participate in the FFELP or FDLP.
The 1998 reauthorization extended the principal provisions of
the FFELP and the FDLP to October 1, 2004. This
legislation, as modified by the 1999 act, lowered both the
borrower interest rate on Stafford Loans to a formula based on
the 91-day
Treasury bill rate plus 2.3 percent (1.7 percent
during in-school, grace and deferment periods) and the
lenders rate after special allowance payments to the
91-day
Treasury bill rate plus 2.8 percent (2.2 percent
during in-school, grace and deferment periods) for loans
originated on or after October 1, 1998. The borrower
interest rate on PLUS loans originated during this period is
equal to the
91-day
Treasury bill rate plus 3.1 percent.
The 1999 and 2001 acts changed the financial index on which
special allowance payments are computed on new loans from the
91-day
Treasury bill rate to the three-month commercial paper rate
(financial) for FFELP loans disbursed on or after
January 1, 2000. For these FFELP loans, the special
allowance payments to lenders are based upon the three-month
commercial paper (financial) rate plus 2.34 percent
(1.74 percent during in-school, grace and deferment
periods) for Stafford Loans and 2.64 percent for PLUS and
FFELP Consolidation Loans. The 1999 act did not change the rate
that the borrower pays on FFELP loans.
The 2000 act changed the financial index on which the interest
rate for some borrowers of SLS and PLUS loans are computed. The
index was changed from the
1-year
Treasury bill rate to the weekly average one-year constant
maturity Treasury yield. The 2002 act changed the interest rate
paid by borrowers beginning in fiscal year 2006 to a fixed rate
of 6.8 percent for Stafford loans and 7.9 percent for
PLUS loans, which has since been increased to 8.5 percent
by the HERA 2005.
The 1998 reauthorization and P.L.
107-139 set
the borrower interest rates on FFELP and FDLP Consolidation
Loans for borrowers whose applications are received before
July 1, 2003 at a fixed rate equal to the lesser of the
weighted average of the interest rates of the loans
consolidated, adjusted up to the nearest one-eighth of one
percent, and 8.25 percent. The 1998 legislation, as
modified by the 1999 and 2002 acts, sets the Special Allowance
Payment (SAP) rate for FFELP loans at the
three-month commercial paper rate plus 2.64 percent for
loans disbursed on or after January 1, 2000. Lenders of
FFELP Consolidation Loans pay a rebate fee of 1.05 percent
per annum to ED. All other guaranty fees may be passed on to the
borrower.
The 2004 act increased the teacher loan forgiveness level for
certain Stafford loan borrowers, and modified the special
allowance calculation for loans made with proceeds of tax-exempt
obligations.
The Higher Education Reconciliation Act of 2005 reauthorized the
loan programs of the HEA through September 30, 2012. Major
provisions, which became effective July 1, 2006 (unless
stated otherwise), include:
|
|
|
|
|
Change to a fixed 6.8 percent interest rate for Stafford
loans.
|
|
|
|
Increases the scheduled change to a fixed PLUS interest rate
from 7.9 percent to 8.5 percent.
|
|
|
|
Permanently modifies the minimum special allowance calculation
for loans made with proceeds of tax-exempt obligations.
|
|
|
|
Requires submission of floor income to the government on loans
made on or after April 1, 2006.
|
A-2
|
|
|
|
|
Repeals limitations on special allowance for PLUS loans made on
and after January 1, 2000.
|
|
|
|
Increases first and second year Stafford loan limits from $2,625
and $3,500 to $3,500 and $4,500 respectively (effective
July 1, 2007).
|
|
|
|
Increases graduate and professional student unsubsidized
Stafford loan limits from $10,000 to $12,000 (effective
July 1, 2007).
|
|
|
|
Authorizes graduate and professional students to borrow PLUS
loans.
|
|
|
|
Reduces insurance from 98 percent to 97 percent for
new loans beginning July 1, 2006.
|
|
|
|
Phases out the Stafford loan origination fee by 2010.
|
|
|
|
Reduces insurance for Exceptional Performers from
100 percent to 99 percent.
|
|
|
|
Repeals in-school consolidation, spousal consolidation,
reconsolidation, and aligns loan consolidation terms in the
FFELP and FDLP.
|
|
|
|
Mandates the deposit of a one percent federal default fee into a
guaranty agencys Federal Fund, which may be deducted from
loan proceeds.
|
|
|
|
Repeals the guaranty agency Account Maintenance Fee cap
(effective FY 2007).
|
|
|
|
Reduces guarantor retention of collection fees on defaulted
FFELP Consolidation Loans from 18.5 percent to
10 percent (effective October 1, 2006).
|
|
|
|
Provides a discharge for loans that are falsely certified as a
result of identity theft.
|
|
|
|
Provides 100 percent insurance on ineligible loans due to
false or erroneous information on loans made on or after
July 1, 2006.
|
|
|
|
Allows for a
3-year
military deferment for a borrowers loans made on or after
July 1, 2001.
|
|
|
|
Reduces the monthly payment remittance needed to rehabilitate
defaulted loans from 12 to 9.
|
|
|
|
Increases from 10 percent to 15 percent the amount of
disposable pay a guaranty agency may garnish without borrower
consent.
|
|
|
|
Streamlines mandatory forbearances to accommodate verbal
requests.
|
The changes made by THEEA include:
|
|
|
|
|
Restrictions on the use of eligible lender trustees by schools
that make FFELP loans;
|
|
|
|
New discharge provisions for Title IV loans for the
survivors of eligible public servants and certain other eligible
victims of the terrorist attacks on the United States on
September 11, 2001; and
|
|
|
|
A technical modification to the HEA provision governing account
maintenance fees that are paid to guaranty agencies in the FFELP.
|
Major changes made by the CCRAA, which were effective
October 1, 2007 (unless stated otherwise), include:
|
|
|
|
|
Reduces special allowance payments to for-profit lenders and
not-for-profit
lenders for both Stafford and Consolidation Loans disbursed on
or after October 1, 2007 by 0.55 percentage points and
0.40 percentage points, respectively;
|
|
|
|
Reduces special allowance payments to for-profit lenders and
not-for-profit
lenders for PLUS loans disbursed on or after October 1,
2007 by 0.85 percentage points and 0.70 percentage
points, respectively;
|
|
|
|
Reduces fixed interest rates on subsidized Stafford loans to
undergraduates from the current 6.8% to 6.0% for loans disbursed
beginning July 1, 2008, to 5.6% for loans disbursed
beginning July 1, 2009, to 4.5% for loans disbursed
beginning July 1, 2010, and to 3.4% for loans disbursed
between July 1,
|
A-3
|
|
|
|
|
2011 and June 30, 2012. Absent any other legislative
changes, the rates would revert to 6.8% for loans disbursed on
or after July 1, 2012;
|
|
|
|
|
|
Increases the lender loan fees on all loan types, from
0.5 percent to 1.0 percent;
|
|
|
|
Reduces default insurance to 95 percent of the unpaid
principal and accrued interest for loans first disbursed on or
after October 1, 2012;
|
|
|
|
Eliminates Exceptional Performer designation (and the monetary
benefit associated with it) effective October 1, 2007.
|
|
|
|
Reduces default collections retention by guaranty agencies from
23 percent to 16 percent.
|
|
|
|
Reduces the guaranty agency account maintenance fee from
0.10 percent to 0.06 percent.
|
|
|
|
Requires ED to develop and implement a pilot auction for
participation in the FFELP Parent PLUS loan program, by state,
effective July 1, 2009.
|
|
|
|
Provides loan forgiveness for all FDLP borrowers, and FFELP
borrowers that consolidate in the FDLP, in certain public
service jobs who make 120 monthly payments.
|
|
|
|
Expands the deferment authority for borrowers due to an economic
hardship and military service.
|
|
|
|
Establishes a new income-based repayment program starting
July 1, 2009 for all loans except for parent PLUS loans or
Consolidation loans that discharged such loans which includes
the potential for loan forgiveness after 25 years.
|
The ECASLA provisions, which were effective May 5, 2008
(unless stated otherwise), include:
|
|
|
|
|
Increases Unsubsidized Stafford loan limits for undergraduate
students for loans first disbursed on or after July 1,
2008
|
|
|
|
|
|
by $2,000 for the annual limit
|
|
|
|
and to $31,000 and $57,500 as the aggregate limits for dependent
students and independent students respectively.
|
|
|
|
|
|
Requires, effective for loans first disbursed on or after
July 1, 2008, that repayment of a parent PLUS loan begin no
later than 60 days after the final disbursement with
interest accrued prior to the beginning of repayment added to
the loan principal, or the day after 6 months from the date
the dependent student is no longer enrolled at least half time,
in which case interest accrued prior to the beginning of
repayment may be paid monthly or quarterly, or capitalized no
more frequently than quarterly, if agreed by the borrower and
lender.
|
|
|
|
Removes specification that the repayment period of a PLUS loan
begins on the date of the final disbursement and excludes
deferment and forbearance periods for loans first disbursed on
or after July 1, 2008.
|
|
|
|
Allows extenuating circumstances for credit requirement purposes
for a PLUS loan if the applicant is up to 180 days
delinquent on mortgage or medical bill payments or not more than
89 days delinquent on any other debt during the period
January 1, 2007, through December 31, 2009.
|
|
|
|
Broadens lender of last resort (LLR) provisions so they include
subsidized and unsubsidized Stafford loans and PLUS loans,
prohibits LLR loans with terms and conditions more favorable
than those for non-LLR loans, and subjects lenders and
guarantors serving as LLRs to prohibitions on inducements and to
prohibitions regarding advertising, marketing or promoting LLR
loans.
|
|
|
|
Gives the Secretary authority until July 1, 2009
(subsequently extended to July 1, 2010 by Public Law
110-350
enacted October 7, 2008), if there is inadequate loan
capital, to purchase or enter into forward purchase commitments
for Stafford and PLUS loans first disbursed on or after
October 1, 2003 and before July 1, 2009, and makes
funds available. Any purchase must be without a net cost to the
federal government (including the cost of servicing purchased
loans), and funds paid to a lender must be used
|
A-4
|
|
|
|
|
for the lenders continued FFELP participations and making
of FFELP loans. Authorizes the Secretary to contract for the
servicing of purchased FFELP loans, including with selling
lenders, as long as the cost is not more than it would be
otherwise.
|
The Higher Education Opportunity Act of 2008 reauthorized the
loan programs of the HEA through September 30, 2014. Major
provisions, which became effective August 14, 2008 (unless
stated otherwise), include:
|
|
|
|
|
Clarifies the repayment period and the terms for commencement of
repayment of PLUS loans made on or after July 1, 2008,
(superseding ECASLA provisions) and makes available in-school
deferment to parent borrowers when the student beneficiary is
enrolled and a
6-month
post-enrollment deferment to all PLUS borrowers following any
period of enrollment of the borrower or the student beneficiary.
|
|
|
|
Makes Section 207 of the Servicemembers Civil Relief Act
applicable to FFELP loans, upon borrower request, reducing the
interest rate on such loans to 6% (which encompasses certain
fees and other charges), and establishes that as the applicable
rate for calculating special allowance payments (for loans made
on or after July 1, 2008).
|
|
|
|
Expands the criteria for disability discharge, including
qualifying borrowers with a permanent disability rating from the
Veterans Administration.
|
|
|
|
Requires a lender to provide information on the impact of
interest capitalization when granting deferment on for an
unsubsidized Stafford loan or forbearance for any FFELP loan
and, for forbearance, to provide the borrower with specific
information about interest and capitalization at least every
180 days during the forbearance.
|
|
|
|
Adds items that the lender must disclose before disbursement and
items that the lender must disclose before repayment.
|
|
|
|
Requires a lender to provide a bill or statement that
corresponds to each payment installment time period and include
specific disclosures (for loans with a first payment due on or
after July 1, 2009).
|
|
|
|
Requires a lender to provide specified information to borrowers
who notify the lender of difficulty in paying (for loans with a
first payment due on or after July 1, 2009) and to
borrowers who become 60 days delinquent (for loans that
become delinquent on or after July 1, 2009).
|
|
|
|
Eliminates guarantor and Department obligations for insurance
and reinsurance in instances of nondisclosure.
|
|
|
|
Adds income-based repayment to plans the lender must offer
(except for parent PLUS loans or Consolidation loans that
discharged such loans) and adds income-based repayment for FFELP
borrowers to repay defaulted loans to ED.
|
|
|
|
Permits borrower eligibility for in-school deferment to be based
on National Student Loan Data System information.
|
|
|
|
Adds prohibited inducements that can subject lenders and
guarantors to disqualification from the program and clarifies
that both lenders and guarantors may provide technical
assistance comparable to that provided to schools by the
Department.
|
|
|
|
Allows FFELP borrowers to consolidate directly into the FDLP
program to use the zero interest feature available to
servicemembers.
|
|
|
|
Requires a consolidation lender to provide disclosures regarding
any loss of benefits, availability of repayment plans, and
certain other information.
|
|
|
|
Requires the guarantor to notify a borrower twice of options to
remove a loan from default.
|
|
|
|
Limits a borrower to loan rehabilitation once and, upon
successful rehabilitation, provides for financial and economic
education materials to be available to the borrower and for
removal of the default from the borrowers credit report.
|
A-5
|
|
|
|
|
Mandates that both the transferor and transferee notify the
borrower of certain transfer information when a loan transfer
changes the party with which the borrower needs to communicate
or send payments.
|
|
|
|
Introduces a forgiveness program to repay FFELP loans and to
cancel FDLP (except no parent PLUS loans) at $2000 per year up
to an aggregate of $10,000, for non-defaulted borrowers employed
full time in areas of national need (replacing the Child Care
Loan Forgiveness Program). Subject to appropriations.
|
|
|
|
Authorizes repayment of FFELP loans (except parent PLUS loans)
at $6,000 per year up to an aggregate of $40,000 for attorneys
employed full time as civil legal assistance attorneys. Subject
to appropriations.
|
|
|
|
Requires reporting to consumer reporting agencies to indicate
that a loan is an education loan and to provide information on
repayment status.
|
|
|
|
Requires guarantors to develop educational programs for
budgeting and financial management.
|
|
|
|
Raises to 30% the school cohort default rate for ineligibility
effective in 2012.
|
|
|
|
Increases to 15% the maximum cohort default rate for exempting
loans from rules that would otherwise require multiple
disbursement or delayed disbursement.
|
Eligible
Lenders, Students and Educational Institutions
Lenders eligible to make loans under the FFELP generally include
banks, savings and loan associations, credit unions, pension
funds and, under some conditions, schools and guarantors. A
student loan may be made to, or on behalf of, a qualified
student. A qualified student is an individual
who
|
|
|
|
|
is a United States citizen, national or permanent resident;
|
|
|
|
has been accepted for enrollment or is enrolled and maintaining
satisfactory academic progress at a participating educational
institution; and
|
|
|
|
is carrying at least one-half of the normal full-time academic
workload for the course of study the student is pursuing.
|
A student qualifies for a subsidized Stafford loan if his family
meets the financial need requirements for the particular loan
program. Only PLUS loan borrowers have to meet credit standards.
Eligible schools include institutions of higher education,
including proprietary institutions, meeting the standards
provided in the HEA. For a school to participate in the program,
ED must approve its eligibility under standards established by
regulation.
Financial
Need Analysis
Subject to program limits and conditions, student loans
generally are made in amounts sufficient to cover the
students estimated costs of attending school, including
tuition and fees, books, supplies, room and board,
transportation and miscellaneous personal expenses as determined
by the institution. Generally, each loan applicant (and parents
in the case of a dependent child) must undergo a financial need
analysis. This requires the applicant (and parents in the case
of a dependent child) to submit financial data to a federal
processor. The federal processor evaluates the parents and
students financial condition under federal guidelines and
calculates the amount that the student and the family are
expected to contribute towards the students cost of
education. After receiving information on the family
contribution, the institution then subtracts the family
contribution from the students estimated costs of
attending to determine the students need for financial
aid. Some of this need may be met by grants, scholarships,
institutional loans and work assistance. A students
unmet need is further reduced by the amount of loans
for which the borrower is eligible.
A-6
Special
Allowance Payments (SAP)
The HEA provides for quarterly special allowance payments to be
made by ED to holders of student loans to the extent necessary
to ensure that they receive at least specified market interest
rates of return. The rates for special allowance payments depend
on formulas that vary according to the type of loan, the date
the loan was made and the type of funds, tax-exempt or taxable,
used to finance the loan. ED makes a SAP for each calendar
quarter.
The SAP equals the average unpaid principal balance, including
interest which has been capitalized, of all eligible loans held
by a holder during the quarterly period multiplied by the
special allowance percentage.
For student loans disbursed before January 1, 2000, the
special allowance percentage is computed by:
(1) determining the average of the bond equivalent rates of
91-day
Treasury bills auctioned for that quarter;
(2) subtracting the applicable borrower interest rate;
(3) adding the applicable special allowance margin
described in the table below; and
(4) dividing the resultant percentage by 4.
If the result is negative, the SAP is zero.
|
|
|
Date of First Disbursement
|
|
Special Allowance Margin
|
|
Before 10/17/86
|
|
3.50%
|
From 10/17/86 through 09/30/92
|
|
3.25%
|
From 10/01/92 through 06/30/95
|
|
3.10%
|
From 07/01/95 through 06/30/98
|
|
2.50% for Stafford Loans that are in In-School, Grace or
Deferment 3.10% for Stafford Loans that are in Repayment and all
other loans
|
From 07/01/98 through 12/31/99
|
|
2.20% for Stafford Loans that are in In-School, Grace or
Deferment 2.80% for Stafford Loans that are in Repayment 3.10%
for PLUS, SLS and FFELP Consolidation Loans
|
For student loans disbursed on or after January 1, 2000,
the special allowance percentage is computed by:
(1) determining the average of the bond equivalent rates of
3-month
commercial paper (financial) rates quoted for that quarter;
(2) subtracting the applicable borrower interest rate;
(3) adding the applicable special allowance margin
described in the table below; and
(4) dividing the resultant percentage by 4.
If the result is negative, the SAP is zero.
A-7
|
|
|
Date of First Disbursement
|
|
Special Allowance Margin
|
|
From 01/01/00 through 09/30/07
|
|
1.74% for Stafford Loans that are in In-School, Grace or
Deferment
|
|
|
2.34% for Stafford Loans that are in Repayment
|
|
|
2.64% for PLUS and FFELP Consolidation Loans
|
From 10/01/07 and after
|
|
1.19% for Stafford Loans that are in In-School, Grace or
Deferment
|
|
|
1.79% for Stafford Loans that are in Repayment and PLUS
|
|
|
2.09% for FFELP Consolidation Loans
|
|
|
Note: The margins for loans held by an eligible not-for-profit
holder is higher by 15 basis points.
|
|
|
|
|
|
Special Allowance Payments are available on variable rate PLUS
Loans and SLS Loans only if the variable rate, which is reset
annually, exceeds the applicable maximum borrower rate.
Effective July 1, 2006, this limitation on special
allowance for PLUS loans made on and after January 1, 2000
is repealed. The variable rate is based on the weekly average
one-year constant maturity Treasury yield for loans made before
July 1, 1998 and based on the
91-day
Treasury bill for loans made on or after July 1, 1998. The
maximum borrower rate for these loans is between 9 percent
and 12 percent.
|
Fees
Origination Fee. An origination fee must be
paid to ED for all Stafford and PLUS loans originated in the
FFELP. An origination fee is not paid on a Consolidation loan.
A 3% origination fee must be deducted from the amount of each
PLUS loan.
An origination fee may be, but is not required to be deducted
from the amount of a Stafford loan according to the following
table:
|
|
|
|
|
Date of First Disbursement
|
|
Maximum Origination Fee
|
|
Before 07/01/06
|
|
|
3
|
%
|
From 7/01/06 through 06/30/07
|
|
|
2
|
%
|
From 7/01/07 through 06/30/08
|
|
|
1.5
|
%
|
From 7/01/08 through 06/30/09
|
|
|
1
|
%
|
From 7/01/09 through 06/30/10
|
|
|
.5
|
%
|
From 7/01/10 and after
|
|
|
0
|
%
|
Federal Default Fee. A federal default fee up
to 1% (previously called an insurance premium) may be, but is
not required to be deducted from the amount of a Stafford and
PLUS loan. A federal default fee is not deducted from the amount
of a Consolidation loan.
Lender Loan Fee. A lender loan fee is paid to
ED on the amount of each loan disbursement of all FFELP loans.
For loans disbursed from October 1, 1993 to
September 30, 2007, the fee was .50% of the loan amount.
The fee increased to 1.0% of the loan amount for loans disbursed
on or after October 1, 2007.
Loan Rebate Fee. A loan rebate fee of 1.05% is
paid annually on the unpaid principal and interest of each
Consolidation loan disbursed on or after October 1, 1993.
This fee was reduced to .62% for loans made from October 1,
1998 to January 31, 1999.
Stafford
Loan Program
For Stafford Loans, the HEA provides for:
|
|
|
|
|
federal reinsurance of Stafford Loans made by eligible lenders
to qualified students;
|
A-8
|
|
|
|
|
federal interest subsidy payments on Subsidized Stafford Loans
paid by ED to holders of the loans in lieu of the
borrowers making interest payments during in-school, grace
and deferment periods; and
|
|
|
|
special allowance payments representing an additional subsidy
paid by ED to the holders of eligible Stafford Loans.
|
We refer to all three types of assistance as federal
assistance.
Interest. The borrowers interest rate on
a Stafford Loan can be fixed or variable. Variable rates are
reset annually each July 1 based on the bond equivalent rate of
91-day
Treasury bills auctioned at the final auction held before the
preceding June 1. Stafford Loan interest rates are
presented below.
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
Trigger Date
|
|
Borrower Rate
|
|
Borrower Rate
|
|
Interest Rate Margin
|
|
Before 01/01/81
|
|
7%
|
|
7%
|
|
N/A
|
From 01/01/81 through 09/12/83
|
|
9%
|
|
9%
|
|
N/A
|
From 09/13/83 through 06/30/88
|
|
8%
|
|
8%
|
|
N/A
|
From 07/01/88 through 09/30/92
|
|
8% for 48 months; thereafter, 91-day Treasury + Interest
Rate Margin
|
|
8% for 48 months, then 10%
|
|
3.25% for loans made before 7/23/92 and for loans made on or
before 10/1/92 to new student borrowers; 3.10% for loans made
after 7/23/92 and before 7/1/94 to borrowers with outstanding
FFELP loans
|
From 10/01/92 through 06/30/94
|
|
91-day Treasury + Interest Rate Margin
|
|
9%
|
|
3.10%
|
From 07/01/94 through 06/30/95
|
|
91-day Treasury + Interest Rate Margin
|
|
8.25%
|
|
3.10%
|
From 07/01/95 through 06/30/98
|
|
91-day Treasury + Interest Rate Margin
|
|
8.25%
|
|
2.50% (In-School, Grace or Deferment); 3.10% (Repayment)
|
From 07/01/98 through 06/30/06
|
|
91-day Treasury + Interest Rate Margin
|
|
8.25%
|
|
1.70% (In-School, Grace or Deferment); 2.30% (Repayment)
|
From 07/01/06 through 06/30/08
|
|
6.8%
|
|
6.8%
|
|
N/A
|
From 07/01/08 through 06/30/09
|
|
6.0% for undergraduate subsidized loans; and 6.8% for
unsubsidized loans and graduate subsidized loans.
|
|
6.0%, 6.8%
|
|
N/A
|
From 07/01/09 through 06/30/10
|
|
5.6% for undergraduate subsidized loans; and 6.8% for
unsubsidized loans and graduate subsidized loans.
|
|
5.6%, 6.8%
|
|
N/A
|
From 07/01/10 through 06/30/11
|
|
4.5% for undergraduate subsidized loans; and 6.8% for
unsubsidized loans and graduate subsidized loans.
|
|
4.5%, 6.8%
|
|
N/A
|
From 07/01/11 through 06/30/12
|
|
3.4% for undergraduate subsidized loans; and 6.8% for
unsubsidized loans and graduate subsidized loans.
|
|
3.4%, 6.8%
|
|
N/A
|
From 07/01/12 and after
|
|
6.8%
|
|
6.8%
|
|
N/A
|
A-9
The trigger date for Stafford Loans made before October 1,
1992 is the first day of the enrollment period for which the
borrowers first Stafford Loan is made. The trigger date
for Stafford Loans made on or after October 1, 1992 is the
date of the disbursement of the borrowers Stafford Loan.
Interest Subsidy Payments. ED is responsible
for paying interest on Subsidized Stafford Loans:
|
|
|
|
|
while the borrower is a qualified student,
|
|
|
|
during the grace period, and
|
|
|
|
during prescribed deferral periods.
|
ED makes quarterly interest subsidy payments to the owner of a
Subsidized Stafford Loan in an amount equal to the interest that
accrues on the unpaid balance of that loan before repayment
begins or during any deferral periods. The HEA provides that the
owner of an eligible Subsidized Stafford Loan has a contractual
right against the United States to receive interest subsidy and
special allowance payments.
However, receipt of interest subsidy and special allowance
payments is conditioned on compliance with the requirements of
the HEA.
Lenders generally receive interest subsidy and special allowance
payments within 45 days to 60 days after submitting
the applicable data for any given calendar quarter to ED.
However, there can be no assurance that payments will, in fact,
be received from ED within that period.
If the loan is not held by an eligible lender in accordance with
the requirements of the HEA and the applicable guarantee
agreement, the loan may lose its federal assistance.
Loan Limits. The HEA generally requires that
lenders disburse student loans in at least two equal
disbursements. The HEA limits the amount a student can borrow in
any academic year. The following chart shows loan limits
applicable to loans first disbursed on or after July 1,
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dependent Student
|
|
|
Independent Student
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
Subsidized and
|
|
|
Additional
|
|
|
Annual Total
|
|
|
Subsidized and
|
|
|
Additional
|
|
|
Annual Total
|
|
Borrower Academic Level
|
|
Unsubsidized
|
|
|
Unsubsidized
|
|
|
Amount
|
|
|
Unsubsidized
|
|
|
Unsubsidized
|
|
|
Amount
|
|
|
Undergraduate (per year)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st year
|
|
$
|
3,500
|
|
|
$
|
2,000
|
|
|
$
|
5,500
|
|
|
$
|
3,500
|
|
|
$
|
6,000
|
|
|
$
|
9,500
|
|
2nd year
|
|
$
|
4,500
|
|
|
$
|
2,000
|
|
|
$
|
6,500
|
|
|
$
|
4,500
|
|
|
$
|
6,000
|
|
|
$
|
10,500
|
|
3rd year
and above
|
|
$
|
5,500
|
|
|
$
|
2,000
|
|
|
$
|
7,500
|
|
|
$
|
5,500
|
|
|
$
|
7,000
|
|
|
$
|
12,500
|
|
Aggregate Limit
|
|
$
|
23,000
|
|
|
$
|
8,000
|
|
|
$
|
31,000
|
|
|
$
|
23,000
|
|
|
$
|
34,500
|
|
|
$
|
57,500
|
|
Graduate (per year)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
8,500
|
|
|
$
|
12,000
|
|
|
$
|
20,500
|
|
Aggregate Limit (includes undergraduate)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
65,500
|
|
|
$
|
73,000
|
|
|
$
|
138,500
|
|
The following charts show historic loan limits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dependent Student
|
|
|
Independent Student
|
|
|
|
Subsidized and
|
|
|
Subsidized and
|
|
|
Additional
|
|
|
|
|
|
|
Unsubsidized
|
|
|
Unsubsidized
|
|
|
Unsubsidized
|
|
|
|
|
|
|
On or After
|
|
|
On or After
|
|
|
On or After
|
|
|
Maximum Annual
|
|
Borrower Academic Level
|
|
07/1/07
|
|
|
07/1/07
|
|
|
07/1/07
|
|
|
Total Amount
|
|
|
Undergraduate (per year)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st year
|
|
$
|
3,500
|
|
|
$
|
3,500
|
|
|
$
|
4,000
|
|
|
$
|
7,500
|
|
2nd year
|
|
$
|
4,500
|
|
|
$
|
4,500
|
|
|
$
|
4,000
|
|
|
$
|
8,500
|
|
3rd year
and above
|
|
$
|
5,500
|
|
|
$
|
5,500
|
|
|
$
|
5,000
|
|
|
$
|
10,500
|
|
Aggregate Limit
|
|
$
|
23,000
|
|
|
$
|
23,000
|
|
|
$
|
23,000
|
|
|
$
|
46,000
|
|
Graduate (per year)
|
|
|
N/A
|
|
|
$
|
8,500
|
|
|
$
|
12,000
|
|
|
$
|
20,500
|
|
Aggregate Limit (includes undergraduate)
|
|
|
N/A
|
|
|
$
|
65,500
|
|
|
$
|
73,000
|
|
|
$
|
138,500
|
|
A-10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent Students
|
|
|
|
|
|
|
|
|
|
All Students
|
|
|
Additional
|
|
|
|
|
|
|
|
Borrowers Academic Level Base
|
|
Subsidized
|
|
|
Subsidized and
|
|
|
Unsubsidized
|
|
|
|
|
|
|
|
Amount Subsidized and Unsubsidized
|
|
On or After
|
|
|
Unsubsidized On
|
|
|
Only On or
|
|
|
Maximum Annual
|
|
|
|
|
On or After 10/1/93
|
|
1/1/87
|
|
|
or After 10/1/93
|
|
|
After 7/1/94
|
|
|
Total Amount
|
|
|
|
|
|
Undergraduate (per year):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st year
|
|
$
|
2,625
|
|
|
$
|
2,625
|
|
|
$
|
4,000
|
|
|
$
|
6,625
|
|
|
|
|
|
2nd year
|
|
$
|
2,625
|
|
|
$
|
3,500
|
|
|
$
|
4,000
|
|
|
$
|
7,500
|
|
|
|
|
|
3rd year and above
|
|
$
|
4,000
|
|
|
$
|
5,500
|
|
|
$
|
5,000
|
|
|
$
|
10,500
|
|
|
|
|
|
Graduate (per year)
|
|
$
|
7,500
|
|
|
$
|
8,500
|
|
|
$
|
10,000
|
|
|
$
|
18,500
|
|
|
|
|
|
Aggregate Limit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undergraduate
|
|
$
|
17,250
|
|
|
$
|
23,000
|
|
|
$
|
23,000
|
|
|
$
|
46,000
|
|
|
|
|
|
Graduate (including undergraduate)
|
|
$
|
54,750
|
|
|
$
|
65,500
|
|
|
$
|
73,000
|
|
|
$
|
138,500
|
|
|
|
|
|
For the purposes of the tables above:
|
|
|
|
|
The loan limits include both FFELP and FDLP loans.
|
|
|
|
The amounts in the columns labeled Subsidized and
Unsubsidized represent the combined maximum loan amount
per year between Subsidized and Unsubsidized Stafford Loans.
Accordingly, the maximum amount that a student may borrow under
an Unsubsidized Stafford Loan is the difference between the
combined maximum loan amount and the amount the student received
in the form of a Subsidized Stafford Loan.
|
Independent undergraduate students, graduate students and
professional students may borrow the additional amounts shown in
the next to last columns in the charts above. Dependent
undergraduate students may also receive these additional loan
amounts if their parents are unable to provide the family
contribution amount and it is unlikely that they will qualify
for a PLUS Loan.
|
|
|
|
|
Students attending certain medical schools are eligible for
higher annual and aggregate loan limits.
|
|
|
|
The annual loan limits are sometimes reduced when the student is
enrolled in a program of less than one academic year or has less
than a full academic year remaining in his program.
|
Repayment. Repayment of a Stafford Loan begins
6 months after the student ceases to be enrolled at least
half time. In general, each loan must be scheduled for repayment
over a period of not more than 10 years after repayment
begins. New borrowers on or after October 7, 1998 who
accumulate outstanding loans under the FFELP totaling more than
$30,000 are entitled to extend repayment for up to
25 years, subject to minimum repayment amounts and FFELP
Consolidation Loan borrowers may be scheduled for repayment up
to 30 years depending on the borrowers indebtedness.
The HEA currently requires minimum annual payments of $600,
unless the borrower and the lender agree to lower payments,
except that negative amortization is not allowed. The Act and
related regulations require lenders to offer the choice of a
standard, graduated, income-sensitive and extended repayment
schedule, if applicable, to all borrowers entering repayment.
The 2007 legislation introduces an income-based repayment plan
on July 1, 2009 that a student borrower may elect during a
period of partial financial hardship and have annual payments
that do not exceed 15% of the amount by which adjusted gross
income exceeds 150% of the poverty line. The Secretary repays or
cancels any outstanding principal and interest under certain
criteria after 25 years.
Grace Periods, Deferral Periods and Forbearance
Periods. After the borrower stops pursuing at
least a half-time course of study, he must begin to repay
principal of a Stafford Loan following the grace period.
However, no principal repayments need be made, subject to some
conditions, during deferment and forbearance periods.
A-11
For borrowers whose first loans are disbursed on or after
July 1, 1993, repayment of principal may be deferred while
the borrower returns to school at least half-time. Additional
deferrals are available, when the borrower is:
|
|
|
|
|
enrolled in an approved graduate fellowship program or
rehabilitation program; or
|
|
|
|
seeking, but unable to find, full-time employment (subject to a
maximum deferment of 3 years); or
|
|
|
|
having an economic hardship, as defined in the Act (subject to a
maximum deferment of 3 years); or
|
|
|
|
serving on active duty during a war or other military operation
or national emergency, or performing qualifying National Guard
duty during a war or other military operation or national
emergency (subject to a maximum deferment of 3 years, and
effective July 1, 2006 on loans made on or after
July 1, 2001).
|
The HEA also permits, and in some cases requires,
forbearance periods from loan collection in some
circumstances. Interest that accrues during forbearance is never
subsidized. Interest that accrues during deferment periods may
be subsidized.
PLUS and
SLS Loan Programs
The HEA authorizes PLUS Loans to be made to graduate or
professional students (effective July 1, 2006) and
parents of eligible dependent students and previously authorized
SLS Loans to be made to the categories of students now served by
the Unsubsidized Stafford Loan program. Borrowers who have no
adverse credit history or who are able to secure an endorser
without an adverse credit history are eligible for PLUS Loans,
as well as some borrowers with extenuating circumstances. The
basic provisions applicable to PLUS and SLS Loans are similar to
those of Stafford Loans for federal insurance and reinsurance.
However, interest subsidy payments are not available under the
PLUS and SLS programs and, in some instances, special allowance
payments are more restricted.
Parent PLUS Loan Auction Pilot Program. The
2007 legislation creates a pilot program for parent PLUS loans
on July 1, 2009. The Secretary will administer an auction
for each state every two years with two winning eligible
lenders. Competing lenders will bid based on the amount of SAP
the lender is willing to receive from the Secretary, not to
exceed CP plus 1.79%. Winning lenders will originate parent PLUS
loans to institutions in the state. The Secretary will guarantee
99% of principal and interest against losses from default. PLUS
loans will be exempt from lender loan fees. Originating lenders
may consolidate PLUS loans and be exempt from paying a
consolidation rebate fee.
Loan Limits. PLUS and SLS Loans disbursed
before July 1, 1993 were limited to $4,000 per academic
year with a maximum aggregate amount of $20,000.
The annual and aggregate amounts of PLUS Loans first disbursed
on or after July 1, 1993 are limited only to the difference
between the cost of the students education and other
financial aid received, including scholarship, grants and other
student loans.
Interest. The interest rate for a PLUS or SLS
Loan depends on the date of disbursement and period of
enrollment. The interest rates for PLUS Loans and SLS Loans are
presented in the following chart. Until July 1, 2001, the
1-year index
was the bond equivalent rate of 52-week Treasury bills auctioned
at the final auction held prior to each June 1. Beginning
July 1, 2001, the
1-year index
is the weekly average
1-year
constant maturity Treasury yield determined the preceding
June 26.
A-12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Maximum
|
|
Rate
|
|
Trigger Date
|
|
Borrower Rate
|
|
Borrower Rate
|
|
Margin
|
|
|
Before 10/01/81
|
|
9%
|
|
9%
|
|
|
N/A
|
|
From 10/01/81 through 10/30/82
|
|
14%
|
|
14%
|
|
|
N/A
|
|
From 11/01/82 through 06/30/87
|
|
12%
|
|
12%
|
|
|
N/A
|
|
From 07/01/87 through 09/30/92
|
|
1-year Index + Interest Rate Margin
|
|
12%
|
|
|
3.25
|
%
|
From 10/01/92 through 06/30/94
|
|
1-year Index + Interest Rate Margin
|
|
PLUS 10%, SLS 11%
|
|
|
3.10
|
%
|
From 07/01/94 through 06/30/98
|
|
1-year Index + Interest Rate Margin
|
|
9%
|
|
|
3.10
|
%
|
From 6/30/98 through 06/30/06
|
|
91-day Treasury + Interest Rate Margin
|
|
9%
|
|
|
3.10
|
%
|
From 07/01/06 and after
|
|
8.5%
|
|
8.5%
|
|
|
N/A
|
|
For PLUS and SLS Loans made before October 1, 1992, the
trigger date is the first day of the enrollment period for which
the loan was made. For PLUS and SLS Loans made on or after
October 1, 1992, the trigger date is the date of the
disbursement of the loan.
A holder of a PLUS or SLS Loan is eligible to receive special
allowance payments during any quarter if:
|
|
|
|
|
the borrower rate is set at the maximum borrower rate and
|
|
|
|
the sum of the average of the bond equivalent rates of
3-month
Treasury bills auctioned during that quarter and the applicable
interest rate margin exceeds the maximum borrower rate.
|
Effective July 1, 2006, this limitation on special
allowance for PLUS loans made on and after January 1, 2000
is repealed.
Repayment, Deferments. Borrowers begin to
repay principal of their PLUS and SLS Loans no later than
60 days after the final disbursement unless they use
deferment available for the in-school period and the
6-month post
enrollment period. Deferment and forbearance provisions, maximum
loan repayment periods, repayment plans and minimum payment
amounts for PLUS and SLS Loans are generally the same as those
for Stafford Loans.
Consolidation
Loan Program
The HEA also authorizes a program under which borrowers may
consolidate one or more of their student loans into a single
FFELP Consolidation Loan that is insured and reinsured on a
basis similar to Stafford and PLUS Loans. FFELP Consolidation
Loans are made in an amount sufficient to pay outstanding
principal, unpaid interest, late charges and collection costs on
all federally reinsured student loans incurred under the FFELP
that the borrower selects for consolidation, as well as loans
made under various other federal student loan programs and loans
made by different lenders. In general, a borrowers
eligibility to consolidate FFELP student loans ends upon receipt
of a FFELP Consolidation Loan. Under certain circumstances, a
FFELP borrower may obtain a Consolidation Loan under the FDLP.
FFELP Consolidation Loans made on or after July 1, 1994
have no minimum loan amount, although FFELP Consolidation Loans
for less than $7,500 do not enjoy an extended repayment period.
Applications for FFELP Consolidation Loans received on or after
January 1, 1993 but before July 1, 1994 were available
only to borrowers who had aggregate outstanding student loan
balances of at least $7,500. For applications received before
January 1, 1993, FFELP Consolidation Loans were available
only to borrowers who had aggregate outstanding student loan
balances of at least $5,000.
To obtain a FFELP Consolidation Loan, the borrower must be
either in repayment status or in a grace period before repayment
begins. In addition, for applications received before
January 1, 1993, the borrower must not have been delinquent
by more than 90 days on any student loan payment. Prior to
July 1, 2006, married couples who were eligible to
consolidate agreed to be jointly and severally liable and were
treated as one borrower for purposes of loan consolidation
eligibility.
A-13
FFELP Consolidation Loans bear interest at a fixed rate equal to
the greater of the weighted average of the interest rates on the
unpaid principal balances of the consolidated loans and
9 percent for loans originated before July 1, 1994.
For FFELP Consolidation Loans made on or after July 1, 1994
and for which applications were received before
November 13, 1997, the weighted average interest rate is
rounded up to the nearest whole percent. FFELP Consolidation
Loans made on or after July 1, 1994 for which applications
were received on or after November 13, 1997 through
September 30, 1998 bear interest at the annual variable
rate applicable to Stafford Loans subject to a cap of
8.25 percent. FFELP Consolidation Loans for which the
application is received on or after October 1, 1998 bear
interest at a fixed rate equal to the weighted average interest
rate of the loans being consolidated rounded up to the nearest
one-eighth of one percent, subject to a cap of 8.25 percent.
Interest on FFELP Consolidation Loans accrues and, for
applications received before January 1, 1993, is paid
without interest subsidy by ED. For FFELP Consolidation Loans
for which applications were received between January 1 and
August 10, 1993, all interest of the borrower is paid
during deferral periods. FFELP Consolidation Loans for which
applications were received on or after August 10, 1993 are
only subsidized if all of the underlying loans being
consolidated were Subsidized Stafford Loans. In the case of
FFELP Consolidation Loans made on or after November 13,
1997, the portion of a Consolidation Loan that is comprised of
Subsidized FFELP Loans and Subsidized FDLP Loans retains subsidy
benefits during deferral periods.
No insurance premium is charged to a borrower or a lender in
connection with a Consolidation Loan. However, lenders must pay
a monthly rebate fee to ED at an annualized rate of
1.05 percent on principal and interest on FFELP
Consolidation Loans for loans disbursed on or after
October 1, 1993, and at an annualized rate of
0.62 percent for Consolidation Loan applications received
between October 1, 1998 and January 31, 1999. The rate
for special allowance payments for FFELP Consolidation Loans is
determined in the same manner as for other FFELP loans.
A borrower must begin to repay his Consolidation Loan within
60 days after his consolidated loans have been discharged.
For applications received on or after January 1, 1993,
repayment schedule options include standard, graduated,
income-sensitive, extended (for new borrowers on or after
October 7, 1998), and income-based (effective July 1,
2009) repayment plans, and loans are repaid over periods
determined by the sum of the Consolidation Loan and the amount
of the borrowers other eligible student loans outstanding.
The maximum maturity schedule is 30 years for indebtedness
of $60,000 or more.
Guarantee
Agencies under the FFELP
Under the FFELP, guarantee agencies guarantee (or insure) loans
made by eligible lending institutions. Student loans are
guaranteed as to 100 percent of principal and accrued
interest against death or discharge. Guarantee agencies also
guarantee lenders against default. For loans that were made
before October 1, 1993, lenders are insured for
100 percent of the principal and unpaid accrued interest.
From October 1, 1993 to June 30, 2006, lenders are
insured for 98 percent of principal and all unpaid accrued
interest or 100 percent of principal and all unpaid accrued
interest if it receives an Exceptional Performance designation
by ED. Insurance for loans made on or after July 1, 2006
was reduced from 98 percent to 97 percent, and
insurance for claim requests on or after July 1, 2006 under
an Exceptional Performance designation was reduced from
100 percent to 99 percent. The Exceptional Performance
designation was eliminated (and the monetary benefit associated
with it) effective October 1, 2007. Default insurance will
be reduced to 95 percent of the unpaid principal and
accrued interest for loans first disbursed on or after
October 1, 2012.
ED reinsures guarantors for amounts paid to lenders on loans
that are discharged or defaulted. The reimbursement on
discharged loans is for 100 percent of the amount paid to
the holder. The reimbursement rate for defaulted loans decreases
as a guarantors default rate increases. The first trigger
for a lower reinsurance rate is when the amount of defaulted
loan reimbursements exceeds 5 percent of the amount of all
loans guaranteed by the agency in repayment status at the
beginning of the federal fiscal year. The second
A-14
trigger is when the amount of defaults exceeds 9 percent of
the loans in repayment. Guarantee agency reinsurance rates are
presented in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims Paid Date
|
|
Maximum
|
|
|
5% Trigger
|
|
|
9% Trigger
|
|
|
Before October 1, 1993
|
|
|
100%
|
|
|
|
90%
|
|
|
|
80%
|
|
October 1, 1993 September 30, 1998
|
|
|
98%
|
|
|
|
88%
|
|
|
|
78%
|
|
On or after October 1, 1998
|
|
|
95%
|
|
|
|
85%
|
|
|
|
75%
|
|
After ED reimburses a guarantor for a default claim, the
guarantor attempts to collect the loan from the borrower.
However, ED requires that the defaulted guaranteed loans be
assigned to it when the guarantor is not successful. A guarantor
also refers defaulted guaranteed loans to ED to
offset any federal income tax refunds or other
federal reimbursement which may be due the borrowers. Some
states have similar offset programs.
To be eligible for federal reinsurance, guaranteed loans must
meet the requirements of the HEA and regulations issued under
the HEA. Generally, these regulations require that lenders
determine whether the applicant is an eligible borrower
attending an eligible institution, explain to borrowers their
responsibilities under the loan, ensure that the promissory
notes evidencing the loan are executed by the borrower; and
disburse the loan proceeds as required. After the loan is made,
the lender must establish repayment terms with the borrower,
properly administer deferrals and forbearances, credit the
borrower for payments made, and report the loans status to
credit reporting agencies. If a borrower becomes delinquent in
repaying a loan, a lender must perform collection procedures
that vary depending upon the length of time a loan is
delinquent. The collection procedures consist of telephone
calls, demand letters, skiptracing procedures and requesting
assistance from the guarantor.
A lender may submit a default claim to the guarantor after a
student loan has been delinquent for at least 270 days. The
guarantor must review and pay the claim within 90 days
after the lender filed it. The guarantor will pay the lender
interest accrued on the loan for up to 450 days after
delinquency. The guarantor must file a reimbursement claim with
ED within 45 days (reduced to 30 days July 1,
2006) after the guarantor paid the lender for the default
claim. Following payment of claims, the guarantor endeavors to
collect the loan. Guarantors also must meet statutory and
regulatory requirements for collecting loans.
Student
Loan Discharges
FFELP loans are not generally dischargeable in bankruptcy. Under
the United States Bankruptcy Code, before a student loan may be
discharged, the borrower must demonstrate that repaying it would
cause the borrower or his family undue hardship. When a FFELP
borrower files for bankruptcy, collection of the loan is
suspended during the time of the proceeding. If the borrower
files under the wage earner provisions of the
Bankruptcy Code or files a petition for discharge on the ground
of undue hardship, then the lender transfers the loan to the
guarantee agency which then participates in the bankruptcy
proceeding. When the proceeding is complete, unless there was a
finding of undue hardship, the loan is transferred back to the
lender and collection resumes.
Student loans are discharged if the borrower died or becomes
totally and permanently disabled. A physician must certify
eligibility for a total and permanent disability discharge.
Effective January 29, 2007, discharge eligibility was
extended to survivors of eligible public servants and certain
other eligible victims of the terrorist attacks on the United
States on September 11, 2001.
If a school closes while a student is enrolled, or within
90 days after the student withdrew, loans made for that
enrollment period are discharged. If a school falsely certifies
that a borrower is eligible for the loan, the loan may be
discharged. And if a school fails to make a refund to which a
student is entitled, the loan is discharged to the extent of the
unpaid refund.
A-15
Rehabilitation
of Defaulted Loans
ED is authorized to enter into agreements with the guarantor
under which the guarantor may sell defaulted loans that are
eligible for rehabilitation to an eligible lender. For a loan to
be eligible for rehabilitation, the guarantor must have received
reasonable and affordable payments for 12 months (reduced
to 9 payments in 10 months effective July 1, 2006),
then the borrower may request that the loan be rehabilitated.
Because monthly payments are usually greater after
rehabilitation, not all borrowers opt for rehabilitation. Upon
rehabilitation, a borrower is again eligible for all the
benefits under the HEA for which he or she is not eligible as a
default, such as new federal aid, and the negative credit record
is expunged. No student loan may be rehabilitated more than once.
Guarantor
Funding
In addition to providing the primary guarantee on FFELP loans,
guarantee agencies are charged with responsibility for
maintaining records on all loans on which they have issued a
guarantee (account maintenance), assisting lenders
to prevent default by delinquent borrowers (default
aversion), post-default loan administration and
collections and program awareness and oversight. These
activities are funded by revenues from the following statutorily
prescribed sources plus earnings on investments.
|
|
|
Source
|
|
Basis
|
|
Insurance Premium (Changed to Federal Default Fee July 1,
2006)
|
|
Up to 1% of the principal amount guaranteed, withheld from the
proceeds of each loan disbursement.
|
Loan Processing and Issuance Fee
|
|
.4% of the principal amount guaranteed in each fiscal year, paid
by ED
|
Account Maintenance Fee
|
|
.10% (reduced to .06% on October 1, 2007) of the original
principal amount of loans outstanding, paid by ED.
|
Default Aversion Fee
|
|
1% of the outstanding amount of loans submitted by a lender for
default aversion assistance, minus 1% of the unpaid principal
and interest paid on default claims, which is, paid once per
loan by transfers out of the Student Loan Reserve Fund.
|
Collection Retention
|
|
23% (reduced to 16% on October 1, 2007) of the amount collected
on loans on which reinsurance has been paid (18.5% collected for
a defaulted loan that is purchased by a lender for
rehabilitation or consolidation), withheld from gross receipts.
Guarantor retention of collection fees on defaulted FFELP
Consolidation Loans is reduced from 18.5% to 10% (effective
October 1, 2006), and reduced to zero beginning October 1, 2009
on default consolidations that exceed 45 percent of an
agencys total collections on defaulted loans.
|
The Act requires guaranty agencies to establish two funds: a
Student Loan Reserve Fund and an Agency Operating Fund. The
Student Loan Reserve Fund contains the reinsurance payments
received from ED, Insurance Premiums and the complement of the
reinsurance on recoveries. The fund is federal property and its
assets may only be used to pay insurance claims and to pay
Default Aversion Fees. Recoveries on defaulted loans are
deposited into the Agency Operating Fund. The Agency Operating
Fund is the guarantors property and is not subject to as
strict limitations on its use.
If ED determines that a guarantor is unable to meet its
insurance obligations, the holders of loans guaranteed by that
guarantor may submit claims directly to ED and ED is required to
pay the full guarantee payments due, in accordance with
guarantee claim processing standards no more stringent than
those applied by the terminated guarantor. However, EDs
obligation to pay guarantee claims directly in this fashion is
contingent upon its making the determination referred to above.
A-16
GLOSSARY
Listed below are definitions of key terms that are used
throughout this document. See also APPENDIX A,
FEDERAL FAMILY EDUCATION LOAN PROGRAM, for a further
discussion of the FFELP.
2008 Asset-Backed Financing Facilities
Financing facilities entered into during the first quarter of
2008: (i) a $26.0 billion FFELP student loan
asset-backed commercial paper (ABCP) conduit
facility; (ii) a $5.9 billion Private Education Loan
ABCP conduit facility (collectively, the 2008 ABCP
Facilities); and (iii) a $2.0 billion secured
FFELP loan facility (the 2008 Asset-Backed Loan
Facility). The 2008 Asset-Backed Financing Facilities
replaced the $30.0 billion Interim ABCP Facility (defined
below) and $6.0 billion ABCP facility in the first quarter
of 2008. During the third quarter of 2008, the Company reduced
the commitments under its Private Education Loan ABCP conduit
facility by approximately $2.2 billion to
$3.7 billion; and the Company reduced the commitments under
its FFELP ABCP Facilities by $4.1 billion to
$21.9 billion. There were no changes to interest rates,
maturity or other terms of the facilities made in connection
with the reductions. On February 2, 2009, the Company
extended the maturity date of the 2008 ABCP Facilities from
February 28, 2009 to April 28, 2009 for an upfront
fee. On February 27, 2009, the Company extended the
maturity date of the 2008 Asset-Backed Loan Facility
from February 28, 2009 to April 28, 2009 for an
upfront fee. The other terms of the 2008 Asset-Backed Financing
Facilities remain materially unchanged.
Consolidation Loan Rebate Fee All holders of
FFELP Consolidation Loans are required to pay to the
U.S. Department of Education (ED) an annual
105 basis point Consolidation Loan Rebate Fee on all
outstanding principal and accrued interest balances of FFELP
Consolidation Loans purchased or originated after
October 1, 1993, except for loans for which consolidation
applications were received between October 1, 1998 and
January 31, 1999, where the Consolidation Loan Rebate Fee
is 62 basis points.
Constant Prepayment Rate (CPR) A
variable in
life-of-loan
estimates that measures the rate at which loans in the portfolio
prepay before their stated maturity. The CPR is directly
correlated to the average life of the portfolio. CPR equals the
percentage of loans that prepay annually as a percentage of the
beginning of period balance.
Core Earnings In accordance with
the rules and regulations of the SEC, the Company prepares
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. The Company refers to managements basis of
evaluating its segment results as Core Earnings
presentations for each business segment and refers to these
performance measures in its presentations with credit rating
agencies and lenders. While Core Earnings results
are not a substitute for reported results under GAAP, the
Company relies on Core Earnings performance measures
in operating each business segment because it believes these
measures provide additional information regarding the
operational and performance indicators that are most closely
assessed by management.
Core Earnings performance measures are the primary
financial performance measures used by management to evaluate
performance and to allocate resources. Accordingly, financial
information is reported to management on a Core
Earnings basis by reportable segment, as these are the
measures used regularly by the Companys chief operating
decision makers. Core Earnings performance measures
are used in developing the Companys financial plans,
tracking results, and establishing corporate performance targets
and incentive compensation. Management believes this information
provides additional insight into the financial performance of
the Companys core business activities. Core
Earnings performance measures are not defined terms within
GAAP and may not be comparable to similarly titled measures
reported by other companies. Core Earnings net
income reflects only current period adjustments to GAAP net
income. Accordingly, the Companys Core
Earnings presentation does not represent another
comprehensive basis of accounting.
G-1
See Note 20, Segment Reporting, to the
consolidated financial statements and MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS BUSINESS SEGMENTS Limitations
of Core Earnings and
Pre-tax Differences between Core
Earnings and GAAP by Business Segment for further
discussion of the differences between Core Earnings
and GAAP, as well as reconciliations between Core
Earnings and GAAP.
In prior filings with the SEC of SLM Corporations Annual
Report on
Form 10-K
and quarterly reports on
Form 10-Q,
Core Earnings has been labeled as
Core net income or Managed net
income in certain instances.
ED The U.S. Department of Education.
Embedded Floor Income Embedded Floor Income
is Floor Income (see definition below) that is earned on
off-balance sheet student loans that are in securitization
trusts sponsored by the Company. At the time of the
securitization, the value of Embedded Fixed-Rate Floor Income is
included in the initial valuation of the Residual Interest (see
definition below) and the gain or loss on sale of the student
loans. Embedded Floor Income is also included in the quarterly
fair value adjustments of the Residual Interest.
Exceptional Performer (EP) The EP
designation is determined by ED in recognition of a servicer
meeting certain performance standards set by ED in servicing
FFELP Loans. Upon receiving the EP designation, the EP servicer
receives reimbursement on default claims higher than the
legislated Risk Sharing (see definition below) levels on
federally guaranteed student loans for all loans serviced for a
period of at least 270 days before the date of default. The
EP servicer is entitled to receive this benefit as long as it
remains in compliance with the required servicing standards,
which are assessed on an annual and quarterly basis through
compliance audits and other criteria. The annual assessment is
in part based upon subjective factors which alone may form the
basis for an ED determination to withdraw the designation. If
the designation is withdrawn, Risk Sharing may be applied
retroactively to the date of the occurrence that resulted in
noncompliance. The College Cost Reduction Act of 2007
(CCRAA) eliminated the EP designation effective
October 1, 2007. See also Appendix A, FEDERAL
FAMILY EDUCATION LOAN PROGRAM.
FDLP The William D. Ford Federal Direct Loan
Program.
FFELP The Federal Family Education Loan
Program, formerly the Guaranteed Student Loan Program.
FFELP Consolidation Loans Under the FFELP,
borrowers with multiple eligible student loans may consolidate
them into a single student loan with one lender at a fixed-rate
for the life of the loan. The new loan is considered a FFELP
Consolidation Loan. Typically a borrower may consolidate his
student loans only once unless the borrower has another eligible
loan to consolidate with the existing FFELP Consolidation Loan.
The borrower rate on a FFELP Consolidation Loan is fixed for the
term of the loan and is set by the weighted average interest
rate of the loans being consolidated, rounded up to the nearest
1/8th of a percent, not to exceed 8.25 percent. In low
interest rate environments, FFELP Consolidation Loans provide an
attractive refinancing opportunity to certain borrowers because
they allow borrowers to consolidate variable rate loans into a
long-term fixed-rate loan. Holders of FFELP Consolidation Loans
are eligible to earn interest under the Special Allowance
Payment (SAP) formula (see definition below). In
April 2008, the Company suspended its participation in the FFELP
Consolidation Loan program.
FFELP Stafford and Other Student Loans
Education loans to students or parents of students that are
guaranteed or reinsured under FFELP. The loans are primarily
Stafford loans but also include PLUS and HEAL loans.
Fixed-Rate Floor Income The Company refers to
Floor Income (see definition below) associated with student
loans with borrower rates that are fixed to term (primarily
FFELP Consolidation Loans and Stafford Loans originated on or
after July 1, 2006) as Fixed-Rate Floor Income.
Floor Income FFELP loans generally earn
interest at the higher of either the borrower rate, which is
fixed over a period of time, or a floating rate based on the SAP
formula (see definition below). The Company generally finances
its student loan portfolio with floating rate debt whose
interest is matched closely to the
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floating nature of the applicable SAP formula. If interest rates
decline to a level at which the borrower rate exceeds the SAP
formula rate, the Company continues to earn interest on the loan
at the fixed borrower rate while the floating rate interest on
our debt continues to decline. In these interest rate
environments, the Company refers to the additional spread it
earns between the fixed borrower rate and the SAP formula rate
as Floor Income. Depending on the type of student loan and when
it was originated, the borrower rate is either fixed to term or
is reset to a market rate each July 1. As a result, for
loans where the borrower rate is fixed to term, the Company may
earn Floor Income for an extended period of time, and for those
loans where the borrower interest rate is reset annually on
July 1, the Company may earn Floor Income to the next reset
date. In accordance with legislation enacted in 2006, lenders
are required to rebate Floor Income to ED for all FFELP loans
disbursed on or after April 1, 2006.
The following example shows the mechanics of Floor Income for a
typical fixed-rate FFELP Consolidation Loan (with a commercial
paper-based SAP spread of 2.64 percent):
|
|
|
|
|
Fixed Borrower Rate
|
|
|
7.25
|
%
|
SAP Spread over Commercial Paper Rate
|
|
|
(2.64
|
)%
|
|
|
|
|
|
Floor Strike
Rate(1)
|
|
|
4.61
|
%
|
|
|
|
|
|
|
|
|
(1) |
|
The interest rate at which the
underlying index (Treasury bill or commercial paper) plus the
fixed SAP spread equals the fixed borrower rate. Floor Income is
earned anytime the interest rate of the underlying index
declines below this rate.
|
Based on this example, if the quarterly average commercial paper
rate is over 4.61 percent, the holder of the student loan
will earn at a floating rate based on the SAP formula, which in
this example is a fixed spread to commercial paper of
2.64 percent. On the other hand, if the quarterly average
commercial paper rate is below 4.61 percent, the SAP
formula will produce a rate below the fixed borrower rate of
7.25 percent and the loan holder earns at the borrower rate
of 7.25 percent.
Graphic
Depiction of Floor Income:
Floor Income Contracts The Company enters
into contracts with counterparties under which, in exchange for
an upfront fee representing the present value of the Floor
Income that the Company expects to earn on a notional amount of
underlying student loans being economically hedged, the Company
will pay the counterparties the Floor Income earned on that
notional amount over the life of the Floor Income Contract.
Specifically, the Company agrees to pay the counterparty the
difference, if positive, between the fixed borrower rate less
the SAP (see definition below) spread and the average of the
applicable interest rate index
G-3
on that notional amount, regardless of the actual balance of
underlying student loans, over the life of the contract. The
contracts generally do not extend over the life of the
underlying student loans. This contract effectively locks in the
amount of Floor Income the Company will earn over the period of
the contract. Floor Income Contracts are not considered
effective hedges under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, and
each quarter the Company must record the change in fair value of
these contracts through income.
Front-End Borrower Benefits Financial
incentives offered to borrowers at origination. Front-End
Borrower Benefits primarily represent the Companys payment
on behalf of borrowers for required FFELP fees, including the
federal origination fee and federal default fee. The Company
accounts for these Front-End Borrower Benefits as loan premiums
amortized over the estimated life of the loans as an adjustment
to the loans yield.
Gross Floor Income Floor Income earned before
payments on Floor Income Contracts.
Guarantors State agencies or non-profit
companies that guarantee (or insure) FFELP loans made by
eligible lenders under The Higher Education Act of 1965
(HEA), as amended.
Interim ABCP Facility An aggregate of
$30 billion asset-backed commercial paper conduit
facilities that the Company entered into on April 30, 2007
in connection with the April 16, 2007 announcement of a
proposed acquisition of the Company by J.C. Flowers &
Co., Bank of America, N.A., and JPMorgan Chase, N.A., which was
terminated on January 25, 2008.
Lender Partners Lender Partners are lenders
who originate loans under forward purchase commitments under
which the Company owns the loans from inception or, in most
cases, acquires the loans soon after origination.
Managed Basis The Company generally analyzes
the performance of its student loan portfolio on a Managed
Basis. The Company views both on-balance sheet student loans and
off-balance sheet student loans owned by the securitization
trusts as a single portfolio, and the related on-balance sheet
financings are combined with off-balance sheet debt. When the
term Managed is capitalized in this document, it is referring to
Managed Basis.
Private Education Loans Education loans to
students or parents of students that are not guaranteed under
the FFELP. Private Education Loans include loans for higher
education (undergraduate and graduate degrees) and for
alternative education, such as career training, private
kindergarten through secondary education schools and tutorial
schools. Higher education loans have repayment terms similar to
FFELP loans, whereby repayments begin after the borrower leaves
school. The Companys higher education Private Education
Loans are not dischargeable in bankruptcy, except in certain
limited circumstances. Repayment for alternative education
generally begins immediately.
In the context of the Companys Private Education Loan
business, the Company uses the term non-traditional
loans to describe education loans made to certain
borrowers that have or are expected to have a high default rate
as a result of a number of factors, including having a lower
tier credit rating, low program completion and graduation rates
or, where the borrower is expected to graduate, a low expected
income relative to the borrowers cost of attendance.
Preferred Channel Originations Preferred
Channel Originations are comprised of: 1) loans that are
originated by internally marketed Sallie Mae brands, and
2) student loans that are originated by Lender Partners
(defined above).
Proposed Merger On April 16, 2007, the
Company announced that a buyer group (Buyer Group)
led by J.C. Flowers & Co.
(J.C. Flowers), Bank of America, N.A. and
JPMorgan Chase, N.A. (the Merger) signed a
definitive agreement (Merger Agreement) to acquire
the Company for approximately $25.3 billion or
$60.00 per share of common stock. (See also Merger
Agreement filed with the SEC on the Companys Current
Report on
Form 8-K,
dated April 18, 2007.) On January 25, 2008, the
Company, Mustang Holding Company Inc. (Mustang
Holding), Mustang Merger Sub, Inc. (Mustang
Sub), J.C. Flowers, Bank of America, N.A. and
JPMorgan Chase Bank, N.A. entered into a Settlement, Termination
and Release
G-4
Agreement (the Agreement). Under the Agreement, a
lawsuit filed by the Company related to the Merger, as well as
all counterclaims, was dismissed.
Repayment Borrower Benefits Financial
incentives offered to borrowers based on pre-determined
qualifying factors, which are generally tied directly to making
on-time monthly payments. The impact of Repayment Borrower
Benefits is dependent on the estimate of the number of borrowers
who will eventually qualify for these benefits and the amount of
the financial benefit offered to the borrower. The Company
occasionally changes Repayment Borrower Benefits programs in
both amount and qualification factors. These programmatic
changes must be reflected in the estimate of the Repayment
Borrower Benefits discount when made.
Residual Interest When the Company
securitizes student loans, it retains the right to receive cash
flows from the student loans sold to trusts that it sponsors in
excess of amounts needed to pay servicing, derivative costs (if
any), other fees, and the principal and interest on the bonds
backed by the student loans. The Residual Interest, which may
also include reserve and other cash accounts, is the present
value of these future expected cash flows, which includes the
present value of any Embedded Fixed-Rate Floor Income described
above. The Company values the Residual Interest at the time of
sale of the student loans to the trust and as of the end of each
subsequent quarter.
Retained Interest The Retained Interest
includes the Residual Interest (defined above) and servicing
rights (as the Company retains the servicing responsibilities)
for our securitization transactions accounted for as sales.
Risk Sharing When a FFELP loan first
disbursed on and after July 1, 2006 defaults, the federal
government guarantees 97 percent of the principal balance
plus accrued interest (98 percent on loans disbursed before
July 1, 2006) and the holder of the loan is at risk
for the remaining amount not guaranteed as a Risk Sharing loss
on the loan. FFELP loans originated after October 1, 1993
are subject to Risk Sharing on loan default claim payments
unless the default results from the borrowers death,
disability or bankruptcy. FFELP loans serviced by a servicer
that has Exceptional Performer designation from ED were subject
to one-percent Risk Sharing for claims filed on or after
July 1, 2006 and before October 1, 2007. The CCRAA
reduces default insurance to 95 percent of the unpaid
principal and accrued interest for loans first disbursed on or
after October 1, 2012.
Special Allowance Payment (SAP)
FFELP loans disbursed prior to April 1, 2006 (with the
exception of certain PLUS and SLS loans discussed below)
generally earn interest at the greater of the borrower rate or a
floating rate determined by reference to the average of the
applicable floating rates
(91-day
Treasury bill rate or commercial paper) in a calendar quarter,
plus a fixed spread that is dependent upon when the loan was
originated and the loans repayment status. If the
resulting floating rate exceeds the borrower rate, ED pays the
difference directly to the Company. This payment is referred to
as the Special Allowance Payment or SAP and the formula used to
determine the floating rate is the SAP formula. The Company
refers to the fixed spread to the underlying index as the SAP
spread. For loans disbursed after April 1, 2006, FFELP
loans effectively only earn at the SAP rate, as the excess
interest earned when the borrower rate exceeds the SAP rate
(Floor Income) must be refunded to ED.
Variable rate PLUS Loans and SLS Loans earn SAP only if the
variable rate, which is reset annually, exceeds the applicable
maximum borrower rate. For PLUS loans disbursed on or after
January 1, 2000, this limitation on SAP was repealed
effective April 1, 2006.
A schedule of SAP rates is set forth on
pages A-7
and A-8 of
the Companys 2008 Annual Report on
Form 10-K.
Variable Rate Floor Income For FFELP Stafford
loans whose borrower interest rate resets annually on
July 1, the Company 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. The Company refers to this as Variable Rate Floor
Income because Floor Income is earned only through the next
reset date.
G-5
Wholesale Consolidation Loans During 2006,
the Company implemented a loan acquisition strategy under which
it began purchasing a significant amount of FFELP Consolidation
Loans, primarily via the spot market, which augmented its
in-house FFELP Consolidation Loan origination process. Wholesale
Consolidation Loans are considered incremental volume to the
Companys core acquisition channels, which are focused on
the retail marketplace with an emphasis on the Companys
brand strategy. In 2008, the Company ceased acquiring Wholesale
Consolidation Loans.
G-6