e10vk
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, 2007 or
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file 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
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Smaller reporting
company o
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(Do
not check if a smaller reporting company)
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, 2007 was
$23.6 billion (based on closing sale price of $57.58 per
share as reported for the New York Stock Exchange
Composite Transactions).
As of January 31, 2008, there were 466,570,624 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 8, 2008 are incorporated by reference into
Part III of this Report.
FORWARD-LOOKING
AND CAUTIONARY STATEMENTS
This report contains forward-looking statements and information
that are 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. These forward-looking
statements are subject to risks, uncertainties, assumptions and
other factors that may cause the actual results to be materially
different from those reflected in such forward-looking
statements. These factors include, among others, the occurrence
of any event, change or other circumstances that could give rise
to our ability to cost-effectively refinance the aggregate
interim $30 billion asset-backed commercial paper conduit
facilities (collectively, the Interim ABCP Facility)
extended to SLM Corporation, more commonly known as Sallie Mae,
and its subsidiaries (collectively, the Company) by
Bank of America, N.A. and JPMorgan Chase, N.A. in connection
with the Merger Agreement (defined in the Glossary below),
including any potential foreclosure on the student loans under
those facilities following their termination, increased
financing costs and more limited liquidity; any adverse outcomes
in any significant litigation to which we are a party; our
derivative counterparties may terminate their positions with the
Company if its credit ratings fall to certain levels and the
Company could incur substantial additional costs to replace any
terminated positions; changes in the terms of student loans and
the educational credit marketplace arising from the
implementation of applicable laws and regulations and from
changes in these laws and regulations, which, among other
things, may reduce the volume, average term and yields on
student loans under the Federal Family Education Loan Program
(FFELP) or result in loans being originated or
refinanced under non-FFELP programs or may affect the terms upon
which banks and others agree to sell FFELP loans to the Company.
In addition, a larger than expected increase in third-party
consolidations of our FFELP loans could materially adversely
affect our results of operations. The Company could also be
affected by changes in the demand for educational financing or
in financing preferences of lenders, educational institutions,
students and their families; incorrect estimates or assumptions
by management in connection with the preparation of our
consolidated financial statements; changes in the composition of
our Managed FFELP and Private Education Loan portfolios; changes
in the general interest rate environment and in the
securitization markets for education loans, which may increase
the costs or limit the availability of financings necessary to
initiate, purchase or carry education loans; 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.
1
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 and The College Cost Reduction and
Access Act of 2007.
CCRAA The College Cost Reduction and Access
Act of 2007.
Consolidation Loan Rebate Fee All holders of
FFELP Consolidation Loans are required to pay to the
U.S. Department of Education (ED) an annual
105 basis point Consolidation Loan Rebate Fee on all
outstanding principal and accrued interest balances of FFELP
Consolidation Loans purchased or originated after
October 1, 1993, except for loans for which consolidation
applications were received between October 1, 1998 and
January 31, 1999, where the Consolidation Loan Rebate Fee
is 62 basis points.
Constant Prepayment Rate (CPR) A
variable in life of loan estimates that measures the rate at
which loans in the portfolio pay before their stated maturity.
The CPR is directly correlated to the average life of the
portfolio. CPR equals the percentage of loans that prepay
annually as a percentage of the beginning of period balance.
Core Earnings In accordance with
the Rules and Regulations of the Securities and Exchange
Commission (SEC), we prepare financial statements in
accordance with generally accepted accounting principles in the
United States of America (GAAP). In addition to
evaluating the Companys GAAP-based financial information,
management evaluates the Companys business segments on a
basis that, as allowed under the Financial Accounting Standards
Boards (FASB) Statement of Financial
Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related
Information, differs from GAAP. We refer to
managements basis of evaluating our segment results as
Core Earnings presentations for each business
segment and we refer to these performance measures in our
presentations with credit rating agencies and lenders. While
Core Earnings results are not a substitute for
reported results under GAAP, we rely on Core
Earnings performance measures in operating each business
segment because we believe these measures provide additional
information regarding the operational and performance indicators
that are most closely assessed by management.
Our Core Earnings performance measures are the
primary financial performance measures used by management to
evaluate performance and to allocate resources. Accordingly,
financial information is reported to management on a Core
Earnings basis by reportable segment, as these are the
measures used regularly by our chief operating decision makers.
Our Core Earnings performance measures are used in
developing our financial plans and tracking results, and also in
establishing corporate performance targets and determining
incentive compensation. Management believes this information
provides additional insight into the financial performance of
the Companys core business activities. Our Core
Earnings performance measures are not defined terms within
GAAP and may not be comparable to similarly titled measures
reported by other companies. Core Earnings net
income reflects only current period adjustments to GAAP net
income. Accordingly, the Companys Core
Earnings presentation does not represent another
comprehensive basis of accounting.
See Note 20 to the consolidated financial
statements,Segment Reporting, and
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS BUSINESS
SEGMENTS Limitations of Core
Earnings for further discussion of the differences
between Core Earnings and GAAP, as well as
reconciliations between Core Earnings and GAAP.
In prior filings with the SEC of SLM Corporations Annual
Report on
Form 10-K
and quarterly report on
Form 10-Q,
Core Earnings has been labeled as
Core net income or Managed net
income in certain instances.
Direct Loans Student loans originated
directly by ED under the FDLP.
ED The U.S. Department of Education.
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Embedded Fixed Rate/Variable Rate Floor
Income Embedded Floor Income is Floor Income
(see definition below) that is earned on off-balance sheet
student loans that are in securitization trusts sponsored by us.
At the time of the securitization, the value of Embedded Fixed
Rate Floor Income is included in the initial valuation of the
Residual Interest (see definition below) and the gain or loss on
sale of the student loans. Embedded Floor Income is also
included in the quarterly fair value adjustments of the Residual
Interest.
Exceptional Performer (EP)
Designation The EP designation is determined by
ED in recognition of a servicer meeting certain performance
standards set by ED in servicing FFELP Loans. Upon receiving the
EP designation, the EP servicer receives 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 eliminated the EP designation effective
October 1, 2007. See also Appendix A, FEDERAL FAMILY
EDUCATION LOAN PROGRAM.
FDLP The William D. Ford Federal Direct
Student Loan Program.
FFELP The Federal Family Education Loan
Program, formerly the Guaranteed Student Loan Program.
FFELP Consolidation Loans Under the Federal
Family Education Loan Program (FFELP), borrowers
with multiple eligible student loans may consolidate them into a
single student loan with one lender at a fixed rate for the life
of the loan. The new note is considered a FFELP Consolidation
Loan. Typically a borrower may consolidate his student loans
only once unless the borrower has another eligible loan to
consolidate with the existing FFELP Consolidation Loan. The
borrower rate on a FFELP Consolidation Loan is fixed for the
term of the loan and is set by the weighted average interest
rate of the loans being consolidated, rounded up to the nearest
1/8th of a percent, not to exceed 8.25 percent. In low
interest rate environments, FFELP Consolidation Loans provide an
attractive refinancing opportunity to certain borrowers because
they allow borrowers to consolidate variable rate loans into a
long-term fixed rate loan. Holders of FFELP Consolidation Loans
are eligible to earn interest under the Special Allowance
Payment (SAP) formula (see definition below).
FFELP Stafford and Other Student Loans
Education loans to students or parents of students that are
guaranteed or reinsured under the FFELP. The loans are primarily
Stafford loans but also include PLUS and HEAL loans.
Fixed Rate Floor Income We refer to Floor
Income (see definition below) associated with student loans
whose borrower rate is fixed to term (primarily FFELP
Consolidation Loans and Stafford Loans originated on or after
July 1, 2006) as Fixed Rate Floor Income.
Floor Income FFELP student loans generally
earn interest at the higher of a floating rate based on the
Special Allowance Payment or SAP formula (see definition below)
set by ED and the borrower rate, which is fixed over a period of
time. We generally finance our student loan portfolio with
floating rate debt over all interest rate levels. In low
and/or
declining interest rate environments, when the fixed borrower
rate is higher than the rate produced by the SAP formula, our
student loans earn at a fixed rate while the interest on our
floating rate debt continues to decline. In these interest rate
environments, we earn additional spread income that we refer to
as Floor Income. Depending on the type of the student loan and
when it was originated, the borrower rate is either fixed to
term or is reset to a market rate each July 1. As a result,
for loans where the borrower rate is fixed to term, we may earn
Floor Income for an extended period of time, and for those loans
where the borrower interest rate is reset annually on
July 1, we may earn Floor Income to the next reset date.
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In accordance with new legislation enacted in 2006, lenders are
required to rebate Floor Income to ED for all new FFELP loans
disbursed on or after April 1, 2006.
The following example shows the mechanics of Floor Income for a
typical fixed rate FFELP Consolidation Loan (with a commercial
paper-based SAP spread of 2.64 percent):
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Fixed Borrower Rate
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7.25
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SAP Spread over Commercial Paper Rate
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(2.64
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Floor Strike
Rate(1)
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4.61
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%
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(1)
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The interest rate at which the underlying index (Treasury bill
or commercial paper) plus the fixed SAP spread equals the fixed
borrower rate. Floor Income is earned anytime the interest rate
of the underlying index declines below this rate.
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Based on this example, if the quarterly average commercial paper
rate is over 4.61 percent, the holder of the student loan
will earn at a floating rate based on the SAP formula, which in
this example is a fixed spread to commercial paper of
2.64 percent. On the other hand, if the quarterly average
commercial paper rate is below 4.61 percent, the SAP
formula will produce a rate below the fixed borrower rate of
7.25 percent and the loan holder earns at the borrower rate
of 7.25 percent. The difference between the fixed borrower
rate and the lenders expected yield based on the SAP
formula is referred to as Floor Income. Our student loan assets
are generally funded with floating rate debt, so when student
loans are earning at the fixed borrower rate, decreases in
interest rates may increase Floor Income.
Graphic
Depiction of Floor Income:
Floor Income Contracts We enter into
contracts with counterparties under which, in exchange for an
upfront fee representing the present value of the Floor Income
that we expect to earn on a notional amount of underlying
student loans being economically hedged, we will pay the
counterparties the Floor Income earned on that notional amount
over the life of the Floor Income Contract. Specifically, we
agree to pay the counterparty the difference, if positive,
between the fixed borrower rate less the SAP (see definition
below) spread and the average of the applicable interest rate
index on that notional amount, regardless of the actual balance
of underlying student loans, over the life of the contract. The
contracts generally do not extend over the life of the
underlying student loans. This contract effectively locks in the
amount of Floor Income we will earn over the period of the
contract. Floor Income Contracts are not considered effective
hedges under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and each
quarter we must record the change in fair value of these
contracts through income.
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Front-End Borrower Benefits Financial
incentives offered to borrowers at origination. Front-End
Borrower Benefits primarily represent our payment on behalf of
borrowers for required FFELP fees, including the federal
origination fee and federal default fee. We account 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.
GSE The Student Loan Marketing Association
was a federally chartered government-sponsored enterprise and
wholly owned subsidiary of SLM Corporation that was dissolved
under the terms of the Privatization Act (see definition below)
on December 29, 2004.
Guarantors State agencies or non-profit
companies that guarantee (or insure) FFELP student loans made by
eligible lenders under the HEA.
HEA The Higher Education Act of 1965, as
amended.
Interim ABCP Facility An aggregate of
$30 billion asset-backed commercial paper conduit
facilities that we entered into on April 30, 2007 in
connection with the Merger (defined below under Merger
Agreement).
Lender Partners Lender Partners are lenders
who originate loans under forward purchase commitments to Sallie
Mae where we own the loans from inception or, in most cases,
acquire the loans soon after origination.
Managed Basis We generally analyze the
performance of our student loan portfolio on a Managed Basis,
under which we view both on-balance sheet student loans and
off-balance sheet student loans owned by the securitization
trusts as a single portfolio, and the related on-balance sheet
financings are combined with off-balance sheet debt. When the
term Managed is capitalized in this document, it is referring to
Managed Basis.
Merger Agreement 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 Agreement (the Agreement). Under the
Agreement, a lawsuit filed by the Company related to the Merger,
as well as all counterclaims, was dismissed.
Preferred Lender List Most higher education
institutions select a small number of lenders to recommend to
their students and parents. This recommended list is referred to
as the Preferred Lender List.
Preferred Channel Originations Preferred
Channel Originations are comprised of: 1) loans that are
originated by internally marketed Sallie Mae brands, and
2) student loans that are originated by lenders with
forward purchase commitment agreements with Sallie Mae and are
committed for sale to Sallie Mae, such that we either own them
from inception or, in most cases, acquire them soon after
origination.
Private Education Consolidation Loans
Borrowers with multiple Private Education Loans (defined below)
may consolidate them into a single loan with Sallie Mae (Private
Consolidation
Loans®).
The interest rate on the new loan is variable rate with the
spread set at the lower of the average weighted spread of the
underlying loans (available only to Sallie Mae customers) or a
new spread as a result of favorable underwriting criteria.
5
Private Education Loans Education loans to
students or parents of students that are not guaranteed or
reinsured under the FFELP or any other federal or private
student loan program. Private Education Loans include loans for
higher education (undergraduate and graduate degrees) and for
alternative education, such as career training, private
kindergarten through secondary education schools and tutorial
schools. Higher education loans have repayment terms similar to
FFELP loans, whereby repayments begin after the borrower leaves
school. Our higher education Private Education Loans to students
attending Title IV Schools are not dischargeable in
bankruptcy, except in certain limited circumstances. Repayment
for alternative education generally begins immediately.
In the context of our Private Education Loan business, we use
the term non-traditional loans to describe education
loans made to certain borrowers that have or are expected to
have a high default rate as a result of a number of factors,
including having a lower tier credit rating, low program
completion and graduation rates or, where the borrower is
expected to graduate, a low expected income relative to the
borrowers cost of attendance.
Privatization Act The Student Loan Marketing
Association Reorganization Act of 1996.
Reconciliation Legislation The Higher
Education Reconciliation Act of 2005, which reauthorized the
student loan programs of the HEA and generally became effective
as of July 1, 2006.
Repayment Borrower Benefits Financial
incentives offered to borrowers based on pre-determined
qualifying factors, which are generally tied directly to making
on-time monthly payments. The impact of Repayment Borrower
Benefits is dependent on the estimate of the number of borrowers
who will eventually qualify for these benefits and the amount of
the financial benefit offered to the borrower. We occasionally
change Repayment Borrower Benefits programs in both amount and
qualification factors. These programmatic changes must be
reflected in the estimate of the Repayment Borrower Benefits
discount when made.
Residual Interest When we securitize student
loans, we retain the right to receive cash flows from the
student loans sold to trusts we sponsor in excess of amounts
needed to pay servicing, derivative costs (if any), other fees,
and the principal and interest on the bonds backed by the
student loans. The Residual Interest, which may also include
reserve and other cash accounts, is the present value of these
future expected cash flows, which includes the present value of
Embedded Fixed Rate Floor Income described above. We value the
Residual Interest at the time of sale of the student loans to
the trust and at the end of each subsequent quarter.
Retained Interest The Retained Interest
includes the Residual Interest (defined above) and servicing
rights (as the Company retains the servicing responsibilities).
Risk Sharing When a FFELP loan defaults, the
federal government guarantees 97 percent of the principal
balance plus accrued interest (98 percent on loans
disbursed before July 1, 2006) and the holder of the
loan is at risk for the remaining amount not guaranteed as a
Risk Sharing loss on the loan. FFELP student loans originated
after October 1, 1993 are subject to Risk Sharing on loan
default claim payments unless the default results from the
borrowers death, disability or bankruptcy. FFELP loans
serviced by a servicer that has EP designation (see definition
above) from ED are subject to one-percent Risk Sharing for
claims filed on or after July 1, 2006 and before
October 1, 2007.
Special Allowance Payment (SAP)
FFELP student loans originated 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 us. This payment is referred to as the
Special Allowance Payment or SAP and the formula used to
determine the floating rate is the SAP formula. We refer to the
fixed spread to the underlying index as the SAP spread. For
loans disbursed after April 1, 2006, FFELP loans
effectively only
6
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.
Title IV Programs and Title IV
Loans Student loan programs created under
Title IV of the HEA, including the FFELP and the FDLP, and
student loans originated under those programs, respectively.
Variable Rate Floor Income For FFELP Stafford
student loans whose borrower interest rate resets annually on
July 1, we may earn Floor Income or Embedded Floor Income
(see definitions above) based on a calculation of the difference
between the borrower rate and the then current interest rate. We
refer to this as Variable Rate Floor Income because Floor Income
is earned only through the next reset date.
Wholesale Consolidation Loans During 2006, we
implemented a loan acquisition strategy under which we began
purchasing a significant amount of FFELP Consolidation Loans,
primarily via the spot market, which augments our in-house FFELP
Consolidation Loan origination process. Wholesale Consolidation
Loans are considered incremental volume to our core acquisition
channels, which are focused on the retail marketplace with an
emphasis on our brand strategy.
7
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).
Our primary business is to originate and hold 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 own non-federally guaranteed Private Education Loan
programs. We primarily market our FFELP Stafford loans and
Private Education Loans through on-campus financial aid offices.
We have also expanded into direct-to-consumer marketing,
primarily for Private Education Loans, to reach those students
and families that choose not to consult with the financial aid
office.
We have used both internal growth and strategic acquisitions to
attain our leadership position in the education finance
marketplace. Our sales force, which delivers our products on
campuses across the country, is the largest in the student loan
industry. The core of our marketing strategy is to promote our
on-campus brands, which generate student loan originations
through our Preferred Channel. Loans generated through our
Preferred Channel are more profitable than loans acquired
through other acquisition channels because we own them earlier
in the student loans life and generally incur lower costs
to acquire such loans. We have built brand leadership through
the Sallie Mae name, the brands of our subsidiaries and those of
our lender partners. These sales and marketing efforts are
supported by the largest and most diversified servicing
capabilities in the industry.
We have expanded into a number of fee-based businesses, most
notably, our Asset Performance Group (APG) business
(formerly, Debt Management Operations (DMO)). We
also earn fees for a number of services including student loan
and guarantee servicing, 529 college-savings plan administration
services, and for providing processing capabilities and
information technology to educational institutions. We also
operate an affinity marketing program through Upromise, Inc.
(Upromise). References in this Annual Report to
Upromise refer to Upromise and its subsidiaries.
At December 31, 2007, we had approximately
11,000 employees.
CURRENT
BUSINESS STRATEGY
On September 27, 2007, the College Cost Reduction and
Access Act of 2007 (CCRAA) was signed into law by
the President, resulting in, among other things, a reduction in
the yield received by the Company on FFELP loans originated on
or after October 1, 2007. In the summer of 2007, the global
capital markets began to experience a severe dislocation that
has persisted to 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 enjoyed in the past and a
substantial increase in its cost of newly obtained funding.
Our management team is evaluating certain aspects of our
business in light of the impact of the CCRAA and the current
challenges in the capital markets. The CCRAA has a number of
important implications for the profitability of our FFELP loan
business, including a reduction in Special Allowance Payments,
the elimination of the Exceptional Performer designation and the
corresponding reduction in default payments to 97 percent
through 2012 and 95 percent thereafter, an increase in the
lender paid origination fees for certain loan types and a
reduction in default collection retention fees and account
maintenance fees related to guaranty agency activities. As a
result, we expect that the CCRAA will significantly reduce and,
combined with higher financing costs, could possibly eliminate
the profitability of new FFELP loan originations, while also
increasing our Risk Sharing in connection with our FFELP loan
portfolio.
8
We plan to curtail less profitable student loan origination and
acquisition activities that have less strategic value, including
originations of Private Education Loans for high default rate
and lower-tier credit borrowers, as well as spot purchases and
Wholesale Consolidation Loan purchases, all of which will also
reduce our funding needs. We expect to minimize incremental
FFELP Consolidation Loan volume as a result of significant
margin erosion for FFELP Consolidation Loans created by the
combined effect of the CCRAA and elevated funding costs.
However, we will continue our efforts to protect select FFELP
assets existing in our portfolio. We expect to continue to
aggressively pursue other FFELP-related fee income opportunities
such as FFELP loan servicing, guarantor servicing and
collections. In addition, we plan to reduce and, over time, to
no longer offer certain borrower benefits in connection with
both our FFELP loans and our Private Education Loans.
We expect to continue to focus on generally higher-margin
Private Education Loans, originated both through our school
channel and our direct-to-consumer channel, with particular
attention to upholding our more stringent underwriting
standards. In January 2008, we notified some of our school
customers whose students have non-traditional loans that we were
curtailing certain high default rate lending programs and
reviewing the pricing of others. Actual credit performance at
these programs was materially below our original expectations.
Charge-offs at these non-traditional schools are largely driven
by low program completion and graduation rates. The
non-traditional
portfolio is also particularly impacted by the weakening U.S.
economy. We also expect to adjust our Private Education Loan
pricing at all schools to reflect the current financing and
market conditions.
We expect to see lenders exit the student loan industry in
response to the CCRAA and current conditions in the credit
markets and, as a result, expect to partially offset declining
loan volumes caused by our more selective lending policies with
increased market share assumed from participants exiting the
industry.
The impacts of the CCRAA as well as the challenges we are facing
in the capital markets are also requiring us to rationalize our
business operations and reduce our costs. We are undertaking a
thorough review of all of our business units with a goal of
achieving appropriate risk-adjusted returns across all of our
business segments and providing cost-effective services. As a
result, we aim to reduce our operating expenses by up to
20 percent as compared to 2007 operating expenses by
year-end 2009, before adjusting for growth and other
investments. Since year-end 2007, we have reduced our work force
by approximately three percent.
BUSINESS
SEGMENTS
We provide an array of 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. These defined business
segments operate in distinct business environments and have
unique characteristics and face different opportunities and
challenges. They are considered reportable segments under the
Financial Accounting Standards Boards (FASB)
Statement of Financial Accounting Standards (SFAS)
No. 131, Disclosures about Segments of an Enterprise
and Related Information, based on quantitative thresholds
applied to the Companys financial statements. 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 subsidiary.
In accordance with SFAS No. 131, we include in
Note 20 to our consolidated financial statements,
Segment Reporting, separate financial information
about our operating segments.
Management, including the Companys chief operating
decision makers, evaluates the performance of the Companys
operating segments based on their profitability as measured by
Core Earnings. Accordingly, we provide information
regarding the Companys reportable segments in this report
based on Core Earnings. 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 generally accepted
accounting principles in the United States (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
9
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. (See
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS BUSINESS
SEGMENTS for a detailed discussion of our Core
Earnings, including a table that summarizes the pre-tax
differences between Core Earnings and GAAP by
business segment and the limitations to this presentation. )
We generate most of our Core Earnings earnings in
our Lending business from the spread between the yield we
receive on our Managed portfolio of student loans and the cost
of funding these loans less the provisions for loan losses. We
incur servicing, selling and administrative expenses in
providing these products and services, and provide for loan
losses. On our consolidated statement of income, prepared in
accordance with GAAP, this spread income is reported as
net interest income for on-balance sheet loans, and
as gains on student loan securitizations and
servicing and securitization revenue for off-balance
sheet loans for which we have a Retained Interest. Total
Core Earnings revenues for this segment were
$1.4 billion in 2007.
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.
LENDING
BUSINESS SEGMENT
In our Lending business segment, we originate and acquire both
federally guaranteed student loans (FFELP loans), which are
administered by the U.S. Department of Education
(ED), and Private Education Loans, which are not
federally guaranteed. 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,
serving over 10 million student and parent customers
through our ownership and management of $163.6 billion in
Managed student loans as of December 31, 2007, of which
$135.2 billion or 83 percent are federally insured. We
serve a diverse range of clients that includes over 6,000
educational and financial institutions and state agencies. We
are the largest servicer of student loans, servicing a portfolio
of $127.4 billion of FFELP loans and $32.6 billion of
Private Education Loans as of December 31, 2007. We also
market student loans, both federal and private, directly to the
consumer. In addition to education lending, we originate
mortgage and consumer loans. In 2007 we originated
$848 million in mortgage and consumer loans. Our mortgage
and consumer loan portfolio totaled $545 million at
December 31, 2007, of which $19 million are mortgages
in the held-for-sale portfolio.
10
Student
Lending Marketplace
The following chart shows estimated sources of funding for
attending two-year and four-year colleges for the academic year
(AY) ending June 30, 2008 (AY
2007-2008).
Approximately 36 percent of the funding comes from
federally guaranteed student loans and Private Education Loans.
Parent/student contributions consist of savings/investments,
current period earnings and other loans obtained through the
normal financial aid process.
Sources
of Funding for College Attendance AY
2007-2008(1)
Total
Projected Cost $258 Billion
(dollars
in billions)
|
|
|
(1)
|
|
Source: Based on estimates by
Octameron Associates, Dont Miss Out, 32nd
Edition; College Board, 2007 Trends in Student Aid;
and Sallie Mae. Includes tuition, room, board, transportation
and miscellaneous costs for two and four year college
degree-granting programs.
|
Federally
Guaranteed Student Lending Programs
There are two competing programs that provide student loans
where the ultimate credit risk lies with the federal government:
the FFELP and the Federal Direct Lending 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 funded by taxpayers and
provided to borrowers directly by ED on terms similar to student
loans in the FFELP. In addition to these government guaranteed
programs, financial institutions also make Private Education
Loans, where the lender or holder assumes the credit risk of the
borrower.
For the federal fiscal year (FFY) ended
September 30, 2007 (FFY 2007), ED estimated that the
FFELPs market share in federally guaranteed student loans
was 80 percent, up from 79 percent in FFY 2006. (See
LENDING BUSINESS SEGMENT Competition.)
Total FFELP and FDLP volume for FFY 2007 grew by 7 percent,
with the FFELP portion growing 8 percent.
The Higher Education Act (the HEA) includes
regulations that cover every aspect of the servicing of a
federally guaranteed student loan, 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 (95 percent after 2012) 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 student loans principal and
accrued interest.
11
FFELP student loans are guaranteed by state agencies or
non-profit companies called 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 being 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
reimburses us for principal and accrued interest subject to the
Risk Sharing (See APPENDIX A, FEDERAL FAMILY
EDUCATION LOAN PROGRAM, to this document for a more
complete 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 and purchase loans made under
such programs to bridge the gap between the cost of education
and a students resources. The majority of our higher
education 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. In 2004, we expanded our
direct-to-consumer loan marketing channel with our Tuition
Answersm
loan program under which we originate and purchase loans outside
of the traditional financial aid process. We also originate and
purchase Private Education Loans marketed by our SLM Financial
subsidiary to career training, technical and trade schools,
tutorial and learning centers, and private kindergarten through
secondary education schools. These loans are primarily made at
schools not eligible for Title IV loans. Private Education
Loans are discussed in more detail below.
Drivers
of Growth in the Student Loan Industry
The growth in our Managed student loan portfolio is driven by
the growth in the overall student loan marketplace, 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
$29.0 billion in FFY 1997 to $64.3 billion in FFY 2007.
According to the College Board, tuition and fees at four-year
public institutions and four-year private institutions have
increased 54 percent and 33 percent, respectively, in
constant, inflation-adjusted dollars, since AY
1997-1998.
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 when freshman and
sophomore limits were increased to $3,500 and $4,500 from $2,625
and $3,500, respectively. The fact that guaranteed student loan
limits have not kept pace with tuition increases has driven more
students and parents to Private Education Loans to meet an
increasing portion of their education financing needs.
Loans both federal and private as a
percentage of total student aid were 53 percent of total
student aid in AY
1996-1997
and 52 percent in AY
2006-2007.
Private Education Loans accounted for 24 percent of total
student loans both federally guaranteed and Private
Education Loans in AY
2006-2007,
compared to 7 percent in AY
1997-1998.
The National Center for Education Statistics predicts that the
college-age population will increase approximately 14 percent
from 2007 to 2016. Demand for education credit will also
increase due to the rise in students not attending college
directly from high school and adult education.
12
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
|
|
|
(1) |
|
Cost of attendance is in current
dollars and includes
tuition, fees and on-campus room and board.
|
Sallie
Maes Lending Business
Our primary marketing point-of-contact is the schools
financial aid office where we focus on delivering flexible and
cost-effective products to the school and its students. Our
sales force is the largest in the industry and currently markets
the following internal lender brands: Academic Management
Services (AMS), Nellie Mae, Sallie Mae Education
Trust, SLM Financial, Student Loan Funding Resources
(SLFR), Southwest Student Services
(Southwest) and Student Loan Finance Association
(SLFA). We also actively market the loan guarantee
of United Student Aid Funds, Inc. (USA Funds) and
its affiliate, Northwest Education Loan Association
(NELA), through a separate sales force.
We acquire student loans from two principal sources: our
Preferred Channel and strategic acquisitions.
In 2007, we originated $25.5 billion in student loans
through our Preferred Channel, of which a total of
$16.6 billion or 65 percent was originated through our
internal lending brands. The mix of Preferred Channel
Originations marks a significant shift from the past, when our
internal lending brands were the smallest component of our
Preferred Channel Originations. Internal lending brand growth is
a key factor to our long-
13
term market penetration. This positions us to control our future
volume as well as the costs to originate new assets. Our
internal lending brand loans are our most valuable loans because
we do not pay a premium other than to ED to originate them. The
adverse impact of the CCRAA on FFELP loan profitability has
further increased the importance of our internal lending brands
as a vehicle for achieving appropriate risk-adjusted returns.
Preferred Channel Originations growth has been fueled by new
business from schools leaving the FDLP or other FFELP lending
relationships, same school sales growth, and growth in the
for-profit sector. Since 1999, we have partnered with over 300
schools that have chosen to return to the FFELP from the FDLP.
Our FFELP loan originations at these schools totaled over
$2.4 billion in 2007. In addition to working with new
schools, we have also forged broader relationships with many of
our existing school clients. Our FFELP and private originations
at for-profit schools have grown faster than at not-for-profit
schools due to enrollment trends as well as our increased market
share of lending to these institutions. We expect that in 2008
and in subsequent years this trend will be reversed. Many of our
for-profit school customers have programs for which we offer
non-traditional loans. As we cut back on Private Education Loan
programs to this non-traditional segment of our customer base,
we expect to lose FFELP loan volume originated through these
schools as well. Similarly, as we reduce premiums for lender
partner and school-as-lender purchases, we expect to lose FFELP
volume. Accordingly, we expect volume in both FFELP loan and
Private Education Loan originations to decline in 2008 relative
to 2007.
Consolidation
Loans
Between 2003 and 2006, we experienced a surge in consolidation
activity as a result of aggressive marketing and historically
low interest rates. This growth has contributed to the changing
composition of our student loan portfolio. FFELP Consolidation
Loans earn a lower yield than FFELP Stafford Loans due primarily
to the Consolidation Loan Rebate Fee. The Consolidation Loan
margin was 75 basis points lower than a FFELP Stafford loan
in repayment as a result of this fee. This negative impact is
somewhat mitigated by the longer average life of FFELP
Consolidation Loans. FFELP Consolidation Loans now represent
67 percent of both our on-balance sheet federally
guaranteed student loan portfolio and Managed federally
guaranteed portfolio, respectively.
We expect the percentage of our portfolio consisting of
Consolidation Loans will decline steadily over time. The CCRAA
dramatically reduced the margin on new FFELP Consolidation Loans
and, as a result these loans are only marginally profitable for
high balance loans and are not profitable for lower loan
balances. Legislation passed in 2006 provided for all FFELP
loans to bear a fixed rate to the borrower, thereby eliminating
the potential for the borrower to lock in a more beneficial
interest rate on post-July 1, 2006 loans in a low interest
rate environment. This had a significant adverse impact on the
Consolidation Loan industry that developed as a result of the
low interest rate environment that existed between 2000 and
2004. Accordingly, we are no longer buying Wholesale
Consolidation Loans or actively marketing Consolidation Loans to
our customer base. Finally, under the HEA, borrowers with loan
balances exceeding $30,000 can extend their repayment term
without consolidating their loans. As a result of all of these
factors, we believe that FFELP loans will have a much lower
propensity to consolidate in the future. We intend to
accommodate those borrowers who have high loan balances and who
wish to consolidate their loans. We will also direct borrowers
wishing to extend their loans term to the FFELP extended
repayment product, which we believe will be an attractive
alternative to a Consolidation Loan for borrowers seeking a
lower monthly payment.
GradPLUS
The Deficit Reduction Act of 2005 expanded the existing Federal
PLUS loan program to include graduate and professional students
(GradPLUS Loans). Previously, PLUS loans were
restricted to parents of dependent, undergraduate students.
GradPLUS Loans generally have a lower rate of interest than our
Private Education Loans and they allow graduate and professional
students to borrow up to the full cost of their education
(tuition, room and board),
14
less other financial aid received. In 2007, we originated
$606 million of GradPLUS loans which represented two
percent of our Preferred Channel Originations.
Private
Education Loans
The rising cost of education has led students and their parents
to seek additional private sources to finance their education.
Private Education Loans are often packaged as supplemental or
companion products to FFELP loans. Over the last several years,
the growth of Private Education Loans has continued due to
tuition increasing faster than the rate of inflation coupled
with stagnant FFELP lending limits. This growth combined with
the relatively higher spreads has 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 in part due to margin erosion for FFELP
student loans. In 2007, Private Education Loans contributed
36 percent of our overall Core Earnings net
interest income before provisions for loan losses plus other
income, up from 29 percent in 2006.
The Higher Education Reconciliation Act of 2005 increased FFELP
loan limits on July 1, 2007 for freshman and sophomores.
This, along with the introduction of GradPLUS Loans discussed
above, will somewhat offset the rate of growth in Private
Education Loans in the future. We believe this loss of future
Private Education Loan volume for graduate students will be
replaced by an increase in federally insured loans.
Since we bear the full credit risk for Private Education Loans,
they are underwritten and priced according to credit risk based
upon customized consumer credit scoring criteria. We mitigate
some of this credit risk by providing price and eligibility
incentives for students to obtain a credit-worthy cosigner, and
52 percent of our Managed Private Education Loans have a
cosigner. Due to their higher risk profile, Private Education
Loans earn higher spreads than their FFELP loan counterparts. In
2007, Private Education Loans earned an average Core
Earnings spread (before provisions for loan losses and the
Interim ABCP Facility Fees) of 5.15 percent versus an
average Core Earnings spread of 1.04 percent
for FFELP loans (before provisions for loan losses and the
Interim ABCP Facility Fees).
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®
and, Sallie Mae Medical School
Loans®
and Sallie Mae
DENTALoans®
programs. Generally, these loans do not require borrowers to
begin repaying their loans until after graduation and allow a
grace period from six to nine months.
In 2004 we began to offer Tuition
Answer®
loans directly to the consumer through targeted direct mail
campaigns and Web-based initiatives. Under the Tuition Answer
loan program, creditworthy parents, sponsors and students may
borrow between $1,500 and $40,000 per year to cover any
qualified higher education expense, but now capped at the full
cost of tuition and board at the school they attend. No school
certification is required, although a borrower must provide
enrollment documentation. At December 31, 2007, we had
$3.3 billion of Tuition Answer loans outstanding in our
Managed student loan portfolio.
We also offer alternative Private Education Loans for
information technology, cosmetology, mechanics,
medical/dental/lab, culinary and broadcasting education
programs. On average, these career training programs typically
last fewer than 12 months. These loans require the borrower
to begin repaying the loan immediately; however, students can
opt to make relatively small payments while enrolled. At
December 31, 2007, we had $2.4 billion of career
training loans outstanding.
Acquisitions
We have acquired several companies in the student loan industry
that have increased our sales and marketing capabilities, added
significant new brands and greatly enhanced our product
offerings. The following
15
table provides a timeline of strategic acquisitions that have
played a major role in the growth of our Lending business.
Lending
Segment Timeline
Financing
Prior to the announcement of the Merger, the Company funded its
loan originations primarily with a combination of term
asset-backed securitizations and unsecured debt. Upon the
announcement of the Merger on April 17, 2007, credit
spreads on our unsecured debt widened considerably,
significantly increasing our cost of accessing the unsecured
debt markets. As a result, in the near term, we expect to fund
our operations primarily through the issuance of student loan
asset-backed securities and borrowings under secured student
loan financing facilities, as further described below. We
historically have been a regular issuer of term asset-backed
securities in the domestic and international capital markets.
(See also MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS LIQUIDITY AND CAPITAL
RESOURCES.) For the reasons described above,
securitization is currently and is likely to continue to be our
principal source of cost-effective financing. We expect
approximately 90 percent or more of our funding needs in
2008 will be satisfied through asset-backed securitizations.
The Company has engaged J.P. Morgan Securities, Inc.
(JPMorgan) and Banc of America Securities, LLC
(BAS) as Lead Arrangers and Joint Bookrunners along
with Barclays Capital, The Royal Bank of Scotland, plc and
Deutsche Bank Securities, Inc. as Co-Lead Arrangers and Credit
Suisse, New York Branch, as Arranger to underwrite and arrange
up to $28.0 billion of secured FFELP loan facilities and a
$7.0 billion secured private credit student loans facility
(together, the Facilities).
As of February 28, 2008, we anticipate closing on
$23.4 billion of FFELP student loan ABCP conduit facilities
and $5.9 billion of Private Education Loan ABCP conduit
facilities on February 29, 2008, or as soon as practical
thereafter. Also on that date, we anticipate closing on an
additional $2.0 billion secured FFELP loan facility. In
addition, we anticipate closing on an additional
$2.5 billion of student loan ABCP conduit facilities by mid
March 2008. The new $33.8 billion of financing facilities
we expect to close on, which may ultimately be increased to up
to $35 billion in aggregate, will replace our
$30 billion Interim ABCP Facility and $6 billion ABCP
facility. The initial term of each of the new facilities will be
364 days. These new facilities will provide funding for
certain of our FFELP loans and Private Education Loans until
such time as these loans are refinanced in the term ABS markets.
In the event amounts outstanding under the Interim ABCP Facility
are not repaid by the Company in full, the Interim ABCP Facility
will terminate on April 24, 2008.
In connection with our financing programs, we undertake regular
investor development efforts intended to continually expand and
diversify our pool of investors.
One of our major objectives when financing our business is to
minimize interest rate risk by matching the interest rate and
term characteristics of our Managed assets with our Managed
liabilities, generally on a pooled
16
basis, to the extent practical. To achieve this objective, we
use derivative financial instruments extensively to reduce our
interest rate and foreign currency exposure. Match funding and
interest rate risk management also help stabilize our student
loan spread in various interest rate environments.
On February 4, 2008, Standard & Poors
Ratings Services announced that it lowered our credit ratings to
BBB-/A-3
from
BBB+/A-2.
Standard & Poors also announced that our rating
remains on CreditWatch with negative implications, pending the
closing of the new asset-backed commercial paper conduit
discussed above. Notwithstanding the lowering of our credit
rating, we believe that we have taken several steps in the last
several months to further strengthen the company and position it
for ratings improvement in the future. These steps include
raising more than $3.0 billion in equity capital, securing
commitments for $33.8 billion in financing from some of the
worlds largest financial institutions, eliminating our
equity forward positions and curtailing certain private
education lending programs to students attending schools where
loan performance is materially below our original expectations.
We intend to continue to work with Standard &
Poors and the other rating agencies to demonstrate our
financial strength and stability.
Sallie
Mae Bank
On November 3, 2005, we announced that the Utah Department
of Financial Institutions approved our application for an
industrial bank charter. Beginning in February and August 2006,
Sallie Mae Bank (the Bank) began funding and
originating Private Education Loans and FFELP Consolidation
Loans, respectively, made by Sallie Mae to students and families
nationwide. This allows us to capture the full economics of
these loans from origination. In addition, the industrial bank
charter allows us to expand the products and services we can
offer to students and families. Funds received in connection
with our tuition payment plan product are deposited and held in
escrow with the Bank. In addition, cash rebates that Upromise
members earn from qualifying purchases from Upromises
participating companies are held by the Bank. These deposits are
used by the Bank for a low cost source of funding.
Competition
Our primary competitor for federally guaranteed student loans is
the FDLP, which in its first four years of existence (FFYs
1994-1997)
grew its market share of the total federally sponsored student
loan market from four percent in FFY 1994 to a peak of
34 percent in FFY 1997. The FDLPs market share has
steadily declined since then to 20 percent in FFY 2007.
Historically, we have also 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 lenders has also decreased dramatically.
Many of the lenders that remain in the business have been
rationalizing pricing by reducing borrower benefits. 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 2007 FFELP Preferred Channel Originations totaled
$17 billion, representing a 27 percent market share.
ASSET
PERFORMANCE GROUP BUSINESS SEGMENT
In our APG segment, we provide a wide range of 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. We also provide accounts
receivable management and collections services on consumer and
mortgage receivable portfolios that we purchase. The table below
presents a timeline of key acquisitions that have fueled the
growth of our APG business, including: General Revenue
Corporation (GRC) and Pioneer Credit Recovery
(PCR), concentrated in the student loan industry;
AFS Holdings, LLC, the parent company of Arrow Financial
Services, LLC (collectively, AFS), a debt management
company that purchases and services distressed debt in several
industries including and outside of education receivables; and
GRP/AG Holdings, LLC (GRP), a debt
management company that acquires and manages portfolios of
sub-performing and non-performing mortgage loans.
17
In recent years we have diversified our APG contingency revenue
stream into the purchase of distressed and defaulted receivables
to complement our student loan business. We now have the
expertise to acquire and manage portfolios of sub-performing and
non-performing mortgage loans, substantially all of which are
secured by one-to-four family residential real estate. We also
have a servicing platform and a disciplined portfolio pricing
approach to several consumer debt asset classes.
APG
Segment Timeline
In 2007, our APG business segment had revenues totaling
$605 million and net income of $116 million. Our
largest customer, USA Funds, accounted for 28 percent of
our revenue in 2007.
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 and other debt on behalf of various
clients including guarantors, federal agencies, schools, credit
card issuers, utilities, and other retail clients. We earn fees
that are contingent on the amounts collected. We provide
collection services for ED and now have approximately
11 percent of the total market for such services. We have
relationships with more than 900 colleges and universities to
provide collection services for delinquent student loans and
other receivables from various campus-based programs.
Collection
of Purchased Receivables
In our APG business, we also purchase delinquent and defaulted
receivables from credit originators and other holders of
receivables at a significant discount from the face value of the
debt instruments. In addition, we purchase sub-performing and
non-performing mortgage receivables at a discount usually
calculated as a percentage of the underlying collateral. We use
a combination of internal collectors and outside collection
agencies to collect on these portfolios, seeking to attain the
highest cost/benefit for our overall collection strategy. We
recognize revenue primarily using the effective yield method,
though we use the cost recovery
18
method when appropriate, in certain circumstances. A major
success factor in the purchased receivables business is the
ability to effectively price the portfolios. We conduct both
quantitative and qualitative analysis to appropriately price
each portfolio to yield a return consistent with our APG
financial targets.
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. Although
the scale, diversification, and performance of our APG business
has been a competitive advantage, the trend in the collections
industry is for credit grantors to sell portfolios rather than
to manage contingency collections.
In the purchased paper business, the marketplace is trending
more toward open market competitive bidding rather than
solicitation by sellers to a select group of potential buyers.
Price inflation and the availability of capital in the sector
contribute to this trend. Unlike many of our competitors, our
APG business does not rely solely on purchased portfolio
revenue. This enables us to maintain pricing discipline and
purchase only those portfolios that are expected to meet our
profitability and strategic goals. Portfolios are purchased
individually on a spot basis or through contractual
relationships with sellers to periodically purchase portfolios
at set prices. We compete primarily on price, and additionally
on the basis of our reputation and industry experience.
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.
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 on 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 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
2006-2007,
we processed $17.9 billion in new FFELP loan guarantees, of
which $14.2 billion was for USA Funds, the nations
largest guarantor. We processed guarantees for approximately 32
percent of the FFELP loan market in AY
2006-2007.
Guarantor servicing fee revenue, which includes guarantee
issuance and account maintenance fees, was $156 million for
the year ended December 31, 2007, 86 percent of which
we earned from services performed on behalf of USA Funds. Under
some of our guarantee services agreements, including our
agreement with USA Funds, we receive certain scheduled fees for
the services that we provide under such agreements. The
19
payment for these services includes a contractually agreed upon
set 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 a 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 has a number of programs that encourage consumers to
save for the cost of college education. Upromise has established
an affinity marketing program which is designed to increase
consumer purchases of merchant goods and services and to promote
saving for college by consumers who are members of this program.
Merchant partners generally pay Upromise transaction fees based
on member purchase volume, either online or in stores depending
on the contractual arrangement with the merchant partner. A
percentage of the consumer members purchases is set aside
in an account maintained by Upromise on the members behalf.
Upromise, through its wholly owned subsidiaries, Upromise
Investments, Inc. (UII), a registered
broker-dealer,
and Upromise Investment Advisors, LLC (UIA),
provides transfer and servicing agent services and program
management associated with various 529 college-savings plans.
Upromise manages $19 billion in 529 college-savings plans.
REGULATION
Like other participants in the FFELP, the Company is subject to
the HEA and, from time to time, to review of its student loan
operations by ED and guarantee agencies. ED is authorized under
its regulations to limit, suspend or terminate lenders from
participating in the FFELP, as well as impose civil penalties if
lenders violate program regulations. The laws relating to the
FFELP are subject to revision. In addition, Sallie Mae, Inc., as
a servicer of federal student loans, is subject to certain ED
regulations regarding financial responsibility and
administrative capability that govern all third-party servicers
of insured student loans. Failure to satisfy such standards may
result in the loss of the government guarantee of the payment of
principal and accrued interest on defaulted FFELP loans. Also,
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. Failure to comply with these regulations or
the provisions of these agreements may result in the termination
of the Secretary of Educations reimbursement obligation.
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 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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In addition, our APG business 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.
Finally, Upromises affiliates, which administer 529
college-savings plans, are subject to regulation by the
Municipal Securities Rulemaking Board, 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
and our quarterly reports on
Form 10-Q
are available on our website as soon as reasonably practicable
after we electronically file such reports with the SEC.
Investors and other interested parties can also access these
reports at www. salliemae.com/about/investors.
Our Code of Business Conduct, which applies to Board members and
all employees, including our Chief Executive Officer and Chief
Financial Officer, is also available, free of charge, on our
website at www.salliemae.com/about/business_code. htm. We intend
to disclose any amendments to or waivers from our Code of
Business Conduct (to the extent applicable to our Chief
Executive Officer or Chief Financial Officer) by posting such
information on our website.
In 2007, 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 year ended December 31, 2006 and to this Annual
Report on
Form 10-K,
the certifications required under Section 302 of the
Sarbanes-Oxley Act of 2002.
21
LENDING
BUSINESS SEGMENT FFELP STUDENT LOANS
Because
of the new FFELP economics resulting from the College Cost
Reduction and Access Act of 2007 and the increased funding
spreads in the current capital markets, we have made significant
changes to our business strategy, but there can be no assurance
that such changes will be effective in meeting these
challenges.
On September 27, 2007, the College Cost Reduction and
Access Act of 2007 (CCRAA) was signed into law by
the President. The CCRAA substantially reduced the profitability
of our FFELP business, including a reduction in Special
Allowance Payments, the elimination of the Exceptional Performer
designation and the corresponding reduction in default payments
to 97 percent through 2012 and 95 percent thereafter,
an increase in the lender paid origination fees for certain loan
types, and reduction in default collections retention fees and
account maintenance fees related to guaranty agency activities.
As a result, assuming no reductions to borrower benefits or to
our operating and servicing costs, we expect that the CCRAA will
reduce substantially our pre-tax yield on FFELP loans. This
reduction combined with higher financing costs resulting from
the severe dislocations in the global capital markets, could
possibly eliminate the profitability of new FFELP loan
originations, while increasing our Risk Sharing in connection
with our FFELP loan portfolio. We also expect that low-balance
FFELP Consolidation Loans will no longer be profitable.
As a result of these developments, management has revised its
business strategy to:
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Focus on origination and acquisition activities for both FFELP
loans and Private Education Loans that generate acceptable
returns under the new FFELP economics;
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Curtail unprofitable originations that have less strategic
value, including:
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Education loans made to certain borrowers that have or are
expected to have a high default rate
(see GLOSSARY Private Education
Loans); and
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Wholesale Consolidation Loan acquisitions and low-balance FFELP
Consolidation Loan originations.
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Adjust the pricing of Private Education Loan products to reflect
market conditions; and
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Reduce or, over time, eliminate borrower benefits on FFELP loans.
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In addition, we have reduced the premium that we pay for FFELP
loan volume at certain school-as-lender clients. We also
anticipate reducing the premium that we pay for FFELP loan
volume with certain of our lender partners. These actions are
likely to effectively end our school-as-lender relationships and
to result in certain of our lender partners either exiting the
FFELP business or seeking others with whom to partner. These
actions could also adversely affect the growth in our guarantee
and APG collection businesses.
We also will undertake a comprehensive review of all of our
business units with a goal of achieving appropriate
risk-adjusted returns across all of our business segments and
providing cost-effective services. In addition, we aim to reduce
our operating expenses by up to 20 percent as compared to
2007 operating expenses by year-end 2009, before adjusting for
growth and other investments. Since year-end 2007, as part of
this expense reduction effort, we have reduced our work force by
approximately three percent. Accordingly, we could lose
management that are key to managing operational risk.
There can be no assurance that changes we are making or may make
in the future to address these developments will be successful
in meeting the significant challenges of the new FFELP economics
and the increased funding spreads in the current capital markets.
A
larger than expected increase in third-party consolidation
activity may reduce our loan spreads, materially impair our
Retained Interest, reduce our interest earning assets and
otherwise materially adversely affect our results of
operations.
If third-party consolidation activity increases beyond
managements expectations, our student loan spread may be
adversely affected; our Retained Interest may be materially
impaired; our future earnings may be reduced from the loss of
interest earning assets; and our results of operations may be
adversely affected. Our student loan spread may be adversely
affected because third-party consolidators generally target our
highest yielding FFELP Loans and an increased run-off of Private
Education Loans, which generally have higher
22
yields than our FFELP loans, would change the overall mix within
our portfolio resulting in a reduction to our weighted-average
loan spread. Our Retained Interest may be materially impaired if
consolidation activity reaches levels not anticipated by
management. We may also incur impairment charges if we increase
our expected future Constant Prepayment Rate (CPR)
assumptions used to value the Residual Interest as a result of
such unanticipated levels of consolidation. The potentially
material adverse affect on our operating results related to
FFELP loans also relates to our hedging activities in connection
with Floor Income. We enter into certain Floor Income Contracts
under which we receive an upfront fee in exchange for our
payment of the Floor Income earned on a notional amount of
underlying FFELP Loans over the life of the Floor Income
Contract. If third-party consolidation activity that involves
refinancing a Sallie Mae managed existing FFELP Loan with a new
third-party owned FFELP Loan increases substantially, then the
Floor Income that we are obligated to pay under such Floor
Income Contracts may exceed the Floor Income actually generated
from the underlying FFELP loans, possibly to a material extent.
In such a scenario, we would either close out the related Floor
Income Contracts or purchase an offsetting hedge. In either
case, the adverse impact on both our GAAP and Core
Earnings could be material. (See MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS LENDING BUSINESS SEGMENT
Floor Income Managed Basis.)
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. (See
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS CRITICAL
ACCOUNTING POLICIES AND ESTIMATES.) For example, for both
our federally insured and Private Education Loans, the
unamortized portion of premiums and discounts is included in the
carrying value of the student loan on the consolidated balance
sheet. We recognize income on our student loan portfolio based
on the expected yield of the student loan after giving effect to
the amortization of purchase premiums and accretion of student
loan income discounts, as well as the impact of Repayment
Borrower Benefits. In arriving at the expected yield, we make a
number of estimates that when changed are reflected as a
cumulative
catch-up
from the inception of the student loan. The most sensitive
estimate for premium and discount amortization is the estimate
of the CPR, which measures the rate at which loans in the
portfolio pay before their stated maturity. The CPR is used in
calculating the average life of the portfolio. A number of
factors can affect the CPR estimate such as the rate of
consolidation activity and default rates. If we make an
incorrect CPR estimate, the previously recognized income on our
student loan portfolio based on the expected yield of the
student loan will need to be adjusted in the current period.
The amount of loan loss reserves also depends on estimates. We
maintain an allowance for loan losses at an amount believed to
be sufficient to absorb losses incurred in our FFELP loan and
Private Education Loan portfolios based on estimated probable
net credit losses as of the reporting date. We analyze those
portfolios to determine the effects that the various stages of
delinquency have on borrower default behavior and ultimate
charge-off. 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, repayment, forbearance, delinquency),
underwriting criteria, existence or absence of a cosigner, and
aging. We use historical experience coupled with qualitative
factors regarding changes in portfolio mix, macroeconomic
indicators, policies, procedures, laws, regulations,
underwriting, and other factors to estimate default and
collection rate projections. We then apply these default and
collection rate projections to each category of loan to estimate
the necessary allowance balance. Because the process relies on
historical experience, if current or future loan loss experience
varies significantly from the past, our allowance could be
deemed inadequate to cover incurred losses in the portfolio.
Additionally, since the allowance estimate is also reliant on
other qualitative factors, managements ability to
determine which qualitative factors are relevant to the
allowance and our ability to accurately incorporate these
factors into our estimates can have a material impact on the
allowance.
23
In addition, the impact of our Repayment Borrower Benefits
programs, which provide incentives to borrowers to make timely
payments on their loans by allowing for reductions in future
interest rates as well as rebates on outstanding balances, is
dependent on the number of borrowers who will eventually qualify
for these benefits. For example, we offer borrowers an incentive
program that reduces their interest rate by a specified
percentage per year or reduces their loan balance after they
have made a specified initial number of scheduled payments on
time and for so long as they continue to make subsequent
scheduled payments on time. We regularly estimate the
qualification rates for Repayment Borrower Benefits programs and
book a level yield adjustment based upon that estimate. If our
estimate of the qualification rates is lower than the actual
rates, both the yield on our student loan portfolio and our net
interest income will be lower than estimated and a cumulative
adjustment will be made to reduce income, possibly to a material
extent. Such an underestimation may also adversely affect the
value of our Retained Interest because one of the assumptions
made in assessing its value is the amount of Repayment Borrower
Benefits expected to be earned by borrowers. Finally, we
continue to look at new ways to improve borrower payment
behavior. These efforts as well as the actions of competing
lenders may lead to the addition or modification of Repayment
Borrower Benefits programs.
LENDING
BUSINESS SEGMENT PRIVATE EDUCATION LOANS
Changes
in the composition of our Managed student loan portfolio will
increase the risk profile of our asset base and our capital
requirements.
As of December 31, 2007, 17 percent of our Managed
student loans were Private Education Loans. Private Education
Loans are unsecured and are not guaranteed or reinsured under
the FFELP or any other federal student loan program and are not
insured by any private insurance program. Accordingly, we bear
the full risk of loss on these loans if the borrower and
cosigner, if applicable, default. Events beyond our control such
as a prolonged economic downturn could make it difficult for
Private Education Loan borrowers to meet their payment
obligations for a variety of reasons, including job loss and
unemployment, which could lead to higher levels of delinquencies
and defaults. Private Education Loans now account for
36 percent of our Core Earnings net interest
income before provisions for loan losses plus other income. We
expect that Private Education Loans will become an increasingly
higher percentage of both our margin and our Managed student
loan portfolio, which will increase the risk profile of our
asset base and raise our capital requirements because Private
Education Loans have significantly higher capital requirements
than FFELP loans. This may adversely affect the availability of
capital for other purposes. In addition, the comparatively
larger spreads on Private Education Loans, which historically
have compensated for the narrowing FFELP spreads, may narrow as
competition increases.
As a component of our Private Education Loan program, we made
available to numerous schools various tailored loan programs
that were designed to help finance the education of students who
were academically qualified but did not meet our standard credit
criteria. Management has recently taken specific steps to
terminate these lending programs because the performance of
these loans is materially different from originally expected,
and from the rest of the Companys Private Education Loan
programs. In the fourth quarter of 2007, the Company recorded
provision expense of $667 million related to its Managed
Private Education Loan portfolio. This significant increase in
provision primarily related to the non-traditional lending
programs described above which are particularly impacted by the
weakening U.S. economy. However, there can be no assurance
that the Companys non-traditional loans outstanding will
not require additional significant loan provisions or have any
further adverse effect on the overall credit quality of the
Companys Managed Private Education Loan portfolio.
Past
charge-off rates on our Private Education Loans may not be
indicative of future charge-off rates because, among other
things, we use forbearance policies and our failure to
adequately predict and reserve for charge-offs may adversely
impact our results of operations.
We have established forbearance policies for our Private
Education Loans under which we provide to the borrower temporary
relief from payment of principal and/or interest in exchange for
a processing fee paid by the borrower, which is waived under
certain circumstances. At the end of each forbearance period,
generally
24
granted in six-month increments, interest that the borrower
otherwise would have paid is typically capitalized. At
December 31, 2007, approximately 14 percent of our
Managed Private Education Loans in repayment and forbearance
were in forbearance. Forbearance is used most heavily when the
borrowers loan enters repayment; however, borrowers may
apply for forbearance multiple times and a significant number of
Private Education Loan borrowers have taken advantage of this
option. When a borrower ends forbearance and enters repayment,
the account is considered current. Accordingly, a borrower who
may have been delinquent in his payments or may not have made
any recent payments on his account will be accounted for as a
borrower in a current repayment status when the borrower exits
the forbearance period. In addition, past charge-off rates on
our Private Education Loans may not be indicative of future
charge-off rates because of, among other things, the use of
forbearance and the effect of future changes to the forbearance
policies. If our forbearance policies prove over time to be less
effective on cash collections than we expect or if we limit the
circumstances under which forbearance may be granted under our
forbearance policies, the amount of future charge-offs could be
materially adversely affected which could materially impact the
ultimate default rate used to calculate loan loss reserves which
could have a material adverse effect on our results of
operations. (See MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LENDING BUSINESS SEGMENT Total Loan Net
Charge-offs.)
In addition, our loss estimates include losses to be incurred
generally over a two-year loss emergence period. The two-year
estimate of the allowance for loan losses is subject to a number
of assumptions about future borrower behavior that may prove
incorrect. For example, we use a migration analysis of
historical charge-off experience and combine that with
qualitative measures to project future trends. However, future
charge-off rates can be higher than anticipated due to a variety
of factors such as downturns in the economy, regulatory or
operational changes in asset performance management
effectiveness, and other unforeseeable future trends. If actual
future performance in charge-offs and delinquency is worse 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.
If a
school with which we have a business arrangement with respect to
student loans closes or otherwise does not provide the borrower
the promised education, the borrower could raise the same claims
and defenses against us as the lender as it could against the
school. As a result, our ability to collect loan amounts could
be materially impaired.
The FTC Holder Rule provides that borrowers, under certain
circumstances, may assert the same claims and defenses against
repayment of a student loan used to finance an education at a
school as that borrower may have against the school itself.
Specifically, if a school with whom we have a business
arrangement with respect to student loans closes or otherwise
does not provide the borrower the promised education, the
borrower could raise the same claims and defenses that the
borrower has against the school against repayment of a student
loan used to finance an education at that school. With the
current dislocations in the capital markets, certain for-profit
schools may be unable to secure lending for its students, which
could lead to serious financial difficulties and, possibly, to
the school closing before its students complete their education.
In such cases, borrowers could assert claims and defenses
against repayment of their loans from us up to the total amount
of the loan depending upon how far along they were in their
program of study. In addition, school closings result in an
increase in defaults for the borrowers still in attendance at
those schools at the time they closed and a significant increase
in school closings could materially increase our allowance for
loan losses.
25
ASSET
PERFORMANCE GROUP BUSINESS SEGMENT
Our
APG business segment may not be able to purchase defaulted
consumer receivables at prices that management believes to be
appropriate, and a decrease in our ability to purchase
portfolios of receivables could adversely affect our net
income.
If our APG business segment is not able to purchase defaulted
consumer receivables at planned levels and at prices that
management believes to be appropriate, we could experience
short-term and long-term decreases in income.
The availability of receivables portfolios at prices which
generate an appropriate return on our investment depends on a
number of factors both within and outside of our control,
including the following:
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the continuation of current growth trends in the levels of
consumer obligations;
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sales of receivables portfolios by debt owners;
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competitive factors affecting potential purchasers and credit
originators of receivables; and
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the ability to continue to service portfolios to yield an
adequate return.
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Because of the length of time involved in collecting defaulted
consumer receivables on acquired portfolios and the volatility
in the timing of our collections, we may not be able to identify
trends and make changes in our purchasing strategies in a timely
manner.
LIQUIDITY
AND CAPITAL RESOURCES
Future
sales or issuances of our common stock may dilute the ownership
interest of existing shareholders and depress the trading price
of our common stock.
Future sales or issuances of our common stock may dilute the
ownership interests of our existing shareholders. In addition,
future sales or issuances of substantial amounts of our common
stock may be at prices below current market prices and may
adversely impact the market price of our common stock. Our
mandatory convertible preferred stock, Series C has
dividend and liquidation preference over our common stock.
The
7.25 percent mandatory convertible preferred stock,
Series C may adversely affect the market price of our
common stock.
The market price of our common stock is likely to be influenced
by the 7.25 percent mandatory convertible preferred stock,
Series C. For example, the market price of our common stock
could become more volatile and could be depressed by:
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investors anticipation of the potential resale in the
market of a substantial number of additional shares of our
common stock received upon conversion of the 7.25 percent
mandatory convertible preferred stock, Series C;
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possible sales of our common stock by investors who view the
7.25 percent mandatory convertible preferred stock,
Series C as a more attractive means of equity participation
in us than owning shares of our common stock; and
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hedging or arbitrage trading activity that may develop involving
the 7.25 percent mandatory convertible preferred stock,
series C and our common stock.
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We do
not currently pay regular dividends on our common
stock.
We have not paid dividends on our common stock since the
execution of the Merger Agreement with the Buyer Group in April
2007. While the restriction on the payment of dividends under
the Merger Agreement has been terminated, we expect to continue
not paying dividends in the near term in order to focus on
balance sheet improvement and expect to re-examine our dividend
policy in the second half of 2008. Subject to
26
Delaware law, our board of directors will determine the payment
of future dividends on our common stock, if any, and the amount
of any dividends in light of any applicable contractual
restrictions limiting our ability to pay dividends, our earnings
and cash flows, our capital requirements, our financial
condition, regulatory requirements and other factors our board
of directors deems relevant.
There
can be no assurance the commitments we announced that we secured
on January 28, 2008, for $31.3 billion of
364-day
financing from a consortium of banks will ultimately be funded,
or if they are not funded our credit rating will not be further
downgraded.
On January 28, 2008, we announced that we secured
$31.3 billion of
364-day
financing from a consortium of banks led by Bank of America,
JPMorgan Chase, Barclays Capital, Deutsche Bank, Credit Suisse
and The Royal Bank of Scotland, and from UBS. The commitments
are intended to replace the $30.0 billion asset-backed
commercial paper conduit facilities that we entered into with
Bank of America and JPMorgan Chase in connection with the now
terminated Merger as well as the $6.0 billion asset-backed
commercial paper conduit facility. Funding under the commitments
is subject to various conditions and there can be no assurance
that all such conditions will be satisfied. In its
February 4, 2008 announcement that our counterparty credit
rating was lowered to BBB-, Standard & Poors
Ratings Services noted that the decision to leave us on
CreditWatch Negative reflects that the funding of the
commitments is still subject to various conditions and that if
the commitments do not close our ratings could be reduced
further.
We are
exposed to interest rate risk in the form of basis risk and
repricing risk because the interest rate characteristics of our
earning assets do not always match exactly the interest rate
characteristics of the funding.
Depending on economic and other factors, we may fund our assets
with debt that has a different index
and/or reset
frequency than the asset, but generally only where we believe
there is a high degree of correlation between the interest rate
movement of the two indices. For example, we use daily reset
3-month
LIBOR to fund a large portion of our daily reset
3-month
commercial paper indexed assets. We also use different index
types and index reset frequencies to fund various other assets.
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 may reset at different
frequencies, or will not move in the same direction or with the
same magnitude. While these indices are short-term with rate
movements that are highly correlated over a long period of time,
there can be no assurance that this high correlation will not be
disrupted by capital market dislocations or other factors not
within our control. In such circumstances, our earnings could be
adversely affected, possibly to a material extent. During the
second half of 2007, the spread between
3-month
commercial paper and
3-month
LIBOR became very volatile and widened significantly due to the
deterioration of the broad credit markets, which increased our
cost of funds. This level of volatility had not been seen
previously. We still believe there is a high level of
correlation between
3-month
commercial paper and
3-month
LIBOR over the long term. In addition, we fund a limited amount
of daily reset 3-month commercial paper, T-bill indexed and
Prime indexed assets with auction rate securities and
asset-backed commercial paper borrowings. Auction rate
securities and asset-backed commercial paper borrowings do not
reset to an explicit underlying index.
At December 31, 2007, we had $3.3 billion of taxable
and $1.7 billion of tax-exempt auction rate securities
outstanding on a Managed Basis. 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 our auction rate securities interest rates are set. As
a result, certain of our auction rate securities bear 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 our $1.7 billion of tax-exempt auction rate securities
was recently amended to LIBOR plus 2.00 percent through
May 31, 2008. After May 31, 2008, the maximum
allowable rate on these securities will revert to a formula
driven rate, which, if in effect as of February 28, 2008,
would have produced various maximum rates ranging up to
5.26 percent.
27
In the past, we employed reset rate note structures in
conjunction with the issuance of certain tranches of our term
asset-backed securities. Reset rate notes are subject to
periodic remarketing, at which time the interest rates on the
reset rate notes are reset. In the event a reset rate note
cannot be remarketed on its remarketing date, the interest rate
generally steps up to and remains LIBOR plus 0.75 percent,
until such time as the bonds are successfully remarketed. The
Company also has the option to repurchase the reset rate note
upon a failed remarketing and hold it as an investment until
such time it can be remarketed. 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. As
of December 31, 2007, on a Managed Basis, the Company had
$2.6 billion, $2.1 billion and $2.5 billion of
reset rate notes due to be remarketed in 2008, 2009 and 2010,
and an additional $8.5 billion to be remarketed thereafter.
We may
face limited availability of financing, variation in our funding
costs and uncertainty in our securitization
financing.
In general, the amount, type and cost of our funding, including
securitization and unsecured financing from the capital markets
and borrowings from financial institutions, have a direct impact
on our operating expenses and financial results and can limit
our ability to grow our assets.
A number of factors could make such securitization and unsecured
financing more difficult, more expensive or unavailable on any
terms both domestically and internationally (where funding
transactions may be on terms more or less favorable than in the
United States), including, but not limited to, financial results
and losses, changes within our organization, specific events
that have an adverse impact on our reputation, changes in the
activities of our business partners, disruptions in the capital
markets, specific events that have an adverse impact on the
financial services industry, counterparty availability, changes
affecting our assets, our corporate and regulatory structure,
interest rate fluctuations, ratings agencies actions,
general economic conditions and the legal, regulatory,
accounting and tax environments governing our funding
transactions. In addition, our ability to raise funds is
strongly affected by the general state of the U.S. and
world economies, and may become increasingly difficult due to
economic and other factors. Finally, we compete for funding with
other industry participants, some of which are publicly traded.
Competition from these institutions may increase our cost of
funds.
We are dependent on term asset-backed securities market for the
long-term financing of student loans. We expect securitizations
to provide approximately 90 percent or more of our funding
needs in 2008. If the term asset-backed securities market were
to experience a prolonged disruption, if our asset quality were
to deteriorate or if our debt ratings were to be downgraded, we
may be unable to securitize our student loans or to do so on
favorable pricing and terms. If we were unable to continue to
securitize our student loans at current pricing levels or on
favorable terms, we would need to use alternative funding
sources to fund new student loan originations and meet our other
liquidity needs. If we were unable to find cost-effective and
stable funding alternatives, our funding capabilities and
liquidity would be negatively impacted and our cost of funds
could increase, adversely affecting our results of operations
and ability to originate student loans.
In addition, the occurrence of certain events such as
consolidations and reconsolidations may cause certain of our
securitization transactions to amortize earlier than scheduled,
which could accelerate the need for additional funding to the
extent that we effected the refinancing.
The
rating agencies could downgrade the ratings on our senior
unsecured debt, which could increase our cost of
funds.
Securitizations are the primary source of our long-term
financing and liquidity. Our ability to access the
securitization market and the ratings on our asset-backed
securities are not directly or fully dependent upon the
Companys general corporate credit ratings. The Company
also utilizes senior unsecured long-term and short-term debt,
which is dependent upon rating agency scoring. As of
February 28, 2008, our senior unsecured long-term debt was
rated Baa1, BBB−, and BBB and senior unsecured short-term
debt was rated
P-2,
A-3 and F-3
by Moodys Investors Service, Inc., Standard and
Poors Ratings Services, a division of The McGraw-Hill
Companies, Inc., and Fitch Ratings, respectively, and all three
rating agencies ratings were under review for possible
downgrade. If any or all of these ratings were downgraded for
any reason, our overall cost of issuing senior unsecured debt
could increase.
28
Our
derivative counterparties may terminate their positions with the
Company if its credit ratings fall to certain levels and the
Company could incur substantial additional costs to replace any
terminated positions.
The majority of our ISDA Master Agreements provide that the
counterparty may declare a Termination Event and
terminate its positions if a Designated Event occurs
and the Companys unsecured and unsubordinated long-term
debt rating fall to either of the pre-determined levels, which
are typically Baa3 for Moodys and
BBB- from S&P. For purposes of these ISDA
Master Agreements, the execution of the Merger Agreement
constituted a Designated Event. On February 4,
2008, Standard & Poors Ratings Services
announced that it lowered our long-term debt rating to
BBB-/A-3
from
BBB+/A-2.
Standard & Poors also announced that our rating
remains on CreditWatch with negative implications. As of
February 28, 2008, 92 percent of the counterparties
(on a notional basis) have agreed in writing to waive their
rights (or do not have the rights) to declare a
Termination Event arising from the Company executing
the Merger Agreement and the resulting ratings downgrade. The
remainder of the counterparties have agreed verbally to waive
their rights at this time. Depending upon interest rates and
exchange rates, the Company could be liable for substantial
payments to terminate these positions if the counterparties
exercise their right to terminate at any point in the future. It
would be the Companys intent to replace any terminated
positions with derivatives executed with other counterparties,
however, the Company may not be able to readily replace any
terminated positions or may incur substantial additional costs
to do so. Our liquidity could be adversely affected by these
additional payments and costs. In addition, prior to the recent
ratings downgrade, we had the use of cash collateral posted by
these counterparties. As a result of our recent ratings
downgrade, our ability to use that cash collateral may become
restricted. We are currently in negotiations with our
counterparties to waive these restrictions so that use of such
cash collateral once again becomes unrestricted. If not waived,
these cash collateral balances will appear in the
Restricted cash and investments line of our
consolidated balance sheet.
If our
securitization trusts experience shortfalls on the assets which
would result in the noteholders not receiving expected interest
or principal payments, we may step in and make an advance to the
trust to enable the trust to make these expected
payments.
The investors in our securitization trusts have no recourse to
the Companys other assets should there be a failure of the
trusts to pay when due and as a result we have no obligation
related to these securitization trusts to fund any type of
shortfall to the bondholders. To date, there have not been any
noteholder payment shortfalls and we currently do not expect any
payment shortfalls. In addition, we currently do not have any
intent to fund shortfalls that might arise. We may decide,
however, that it is in the best interest of the Company to fund
any such shortfall. For example, by funding any shortfalls it
may make it more cost effective to issue new securitizations in
the future. Funding any shortfalls would reduce the amount of
cash and liquidity we have on balance sheet and could result in
a loss and reduction of equity as well. In addition, if we
funded a shortfall related to an off-balance sheet trust, we
would re-examine our accounting treatment to determine whether
the trust would still be considered a Qualified Special
Purpose Entity under SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities a Replacement of
SFAS No. 125. As a result, we may determine that
we are required to consolidate that trust on our balance sheet
as of the date we funded any shortfall. We might also conclude
that such actions could result in consolidation of all our
off-balance sheet trusts onto our balance sheet.
GENERAL
Our
business is subject to a number of risks, uncertainties and
conditions, some of which are not within our control, including
general economic conditions, increased competition, adverse
changes in the laws and regulations that govern our businesses
and failure to successfully identify, consummate and integrate
strategic acquisitions.
Our business is subject to a number of risks, uncertainties and
conditions, some of which we cannot control. For example, if the
U.S. economy were to sustain a prolonged economic downturn,
a number of our businesses including our fastest
growing businesses, Private Education Loan business and Asset
Performance Group could be adversely affected. We
bear the full risk of loss on our portfolio of Private Education
Loans. A prolonged economic downturn could make it difficult for
borrowers to meet their payment
29
obligations for a variety of reasons, including job loss and
underemployment. In addition, a prolonged economic downturn
could extend the amortization period on APGs purchased
receivables.
Our principal business is comprised of acquiring, originating,
holding and servicing education loans made and guaranteed under
the FFELP. Most significant aspects of our principal business
are governed by the HEA. We must also meet various requirements
of the guaranty agencies, which are private not-for-profit
organizations or state agencies that have entered into federal
reinsurance contracts with ED, to maintain the federal guarantee
on our FFELP loans. These requirements establish origination and
servicing requirements, procedural guidelines and school and
borrower eligibility criteria. The federal guarantee of FFELP
loans is conditioned on loans being originated, disbursed or
serviced in accordance with ED regulations.
If we fail to comply with any of the above requirements, we
could incur penalties or lose the federal guarantee on some or
all of our FFELP loans. In addition, our marketing practices are
subject to the HEAs prohibited inducement provision and
our failure to comply with such regulation could subject us to a
limitation, suspension or termination of our eligible lender
status. Even if we comply with the above requirements, a failure
to comply by third parties with whom we conduct business could
result in us incurring penalties or losing the federal guarantee
on some or all of our FFELP loans. If we experience a high rate
of servicing deficiencies, we could incur costs associated with
remedial servicing, and, if we are unsuccessful in curing such
deficiencies, the eventual losses on the loans that are not
cured could be material. Failure to comply with these laws and
regulations could result in our liability to borrowers and
potential class action suits, all of which could adversely
affect our future growth rates.
Because of the risks, uncertainties and conditions described
above, there can be no assurance that we can maintain our future
growth rates at rates consistent with our historic growth rates.
Our
GAAP earnings are highly susceptible to changes in interest
rates because most of our derivatives do not qualify for hedge
accounting treatment under SFAS No. 133.
Changes in interest rates can cause volatility in our GAAP
earnings as a result of changes in the market value of our
derivatives that do not qualify for hedge accounting treatment
under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. Under
SFAS No. 133, changes in derivative market values are
recognized immediately in earnings. If a derivative instrument
does not qualify for hedge accounting treatment under
SFAS No. 133, there is no corresponding change in the
fair value of the hedged item recognized in earnings. As a
result, gain or loss recognized on a derivative will not be
offset by a corresponding gain or loss on the underlying hedged
item. Because most of our derivatives do not qualify for hedge
accounting treatment, when interest rates change significantly,
our GAAP earnings may fluctuate significantly.
For a discussion of operational, market and interest rate, and
liquidity risks, see MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS RISKS.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
30
The following table lists the principal facilities owned by the
Company:
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
Location
|
|
Function
|
|
Square Feet
|
|
|
Reston, VA
|
|
Headquarters
|
|
|
240,000
|
|
Fishers, IN
|
|
Loan Servicing and Data Center
|
|
|
450,000
|
|
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
|
|
Marianna,
FL(2)
|
|
Back-up/Disaster Recovery Facility for Loan Servicing
|
|
|
94,000
|
|
Big Flats, NY
|
|
Asset Performance Group and Collections Center
|
|
|
60,000
|
|
Gilbert, AZ
|
|
Southwest Student Services Headquarters
|
|
|
60,000
|
|
Arcade,
NY(3)
|
|
Asset Performance Group and Collections Center
|
|
|
46,000
|
|
Perry,
NY(3)
|
|
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)
|
Facility listed for sale in October 2006. Vacated and no longer
considered a disaster recovery site.
|
|
|
(3)
|
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, 2007:
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
Location
|
|
Function
|
|
Square Feet
|
|
|
Niles, IL
|
|
AFS Headquarters
|
|
|
84,000
|
|
Newton, MA
|
|
Upromise
|
|
|
78,000
|
|
Cincinnati, Ohio
|
|
GRC Headquarters and Debt Management and Collections
Center
|
|
|
59,000
|
|
Muncie, IN
|
|
SLM APG
|
|
|
54,000
|
|
Mt. Laurel, New Jersey
|
|
SLM Financial Headquarters and Operations
|
|
|
42,000
|
|
Moorestown, NJ
|
|
Pioneer Credit Recovery
|
|
|
30,000
|
|
Novi,
MI(1)
|
|
Sallie Mae Home Loans
|
|
|
27,000
|
|
Braintree, MA
|
|
Nellie Mae Headquarters
|
|
|
27,000
|
|
White Plains, NY
|
|
GRP
|
|
|
26,000
|
|
Gaithersburg,
MD(2)
|
|
Arrow Financial
|
|
|
24,000
|
|
Seattle, WA
|
|
NELA
|
|
|
22,000
|
|
Whitewater, WI
|
|
AFS Operations
|
|
|
16,000
|
|
Las Vegas, NV
|
|
Asset Performance Group and Collections Center
|
|
|
16,000
|
|
West Valley, NY
|
|
Pioneer Credit Recovery
|
|
|
14,000
|
|
Batavia, NY
|
|
Pioneer Credit Recovery
|
|
|
13,000
|
|
Perry, NY
|
|
Pioneer Credit Recovery
|
|
|
12,000
|
|
Gainesville, FL
|
|
SLMLSC
|
|
|
11,000
|
|
Cincinnati, OH
|
|
Student Loan Funding
|
|
|
9,000
|
|
Washington, D.C.
|
|
Government Relations
|
|
|
5,000
|
|
|
|
|
|
(1)
|
Space vacated in September 2007; the Company is actively
searching for subtenants.
|
|
|
(2)
|
Space vacated in September 2006; the Company is actively
searching for subtenants.
|
31
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.
|
|
Item 3.
|
Legal
Proceedings
|
On April 6, 2007, the Company was served with a putative
class action suit by several borrowers in federal court in the
Central District of California (Anne Chae et. al., v.
SLM Corporation et. al.). The complaint, which was amended
on April 12, 2007, alleges violations of California
Business & Professions Code 17200, breach of contract,
breach of covenant of good faith and fair dealing, violation of
consumer legal remedies act and unjust enrichment. The complaint
challenges the Companys FFELP billing practices as they
relate to use of the simple daily interest method for
calculating interest. On June 19, 2007, the Company filed
the Companys Motion to Dismiss the amended complaint. On
September 14, 2007, the court entered an order denying
Sallie Maes Motion to Dismiss. The court did not comment
on the merits of the allegations or the plaintiffs case
but instead merely determined that the allegations stated a
claim sufficient under the Federal Rules of Civil Procedure. The
Company filed an answer on September 28, 2007 and on
November 26, 2007 filed a motion for judgment on the
pleadings. On January 4, 2008, the court entered an order
denying the Companys motion without ruling on the merits
of plaintiffs claims. On September 17, 2007, the
court entered a scheduling order that set July 8, 2008, as
the start date for the trial. Discovery has commenced and is
scheduled to continue through May 30, 2008. The Company
believes these allegations lack merit and will continue to
vigorously defend itself in this case, and notes that ED and the
applicable guarantor of plaintiffs loans have confirmed
that simple daily interest is the proper method for calculating
interest under the FFELP.
On September 11, 2007, the Office of the Inspector General
(OIG), of ED, confirmed that they planned to conduct
an audit to determine if the Company billed for special
allowance payments, under the 9.5 percent floor
calculation, in compliance with the Higher Education Act,
regulations and guidance issued by ED. The audit covers the
period from 2003 through 2006, and is currently confined to the
Companys Nellie Mae subsidiaries. We ceased billing under
the 9.5 percent floor calculation at the end of 2006. We
believe that our billing practices were consistent with
longstanding ED guidance, but there can be no assurance that the
OIG will not advocate an interpretation that differs from the
EDs previous guidance. The OIG has audited other industry
participants who billed for 9.5 percent SAP and in
certain cases ED has disagreed with the OIGs
recommendation.
In August 2005, Rhonda Salmeron (the Plaintiff)
filed a qui tam whistleblower case under the False Claims Act
against collection company Enterprise Recovery Systems, Inc., or
ERS. In the fall of 2006, Plaintiff amended her complaint and
added USA Funds, as a defendant. On September 17, 2007,
Plaintiff filed a second amended complaint adding USA Group
Guarantee Services Inc., USA Servicing Corp., Sallie Mae
Servicing L.P. and Scott J. Nicholson, an officer and employee
of ERS as defendants. On February 5, 2008, Plaintiff filed
a Third Amended Complaint. Plaintiff alleges that the various
defendants submitted false claims
and/or
created false records to support claims in connection with
collection activity on federally guaranteed student loans. The
allegations against USA Funds and Sallie Mae are that they
allowed the creation of false records and the submission of
false claims by failing to take adequate measures in connection
with audits of ERS. At this time, we intend to vigorously defend
the case. Plaintiff claims that the U.S. government has
been damaged in an amount greater than $12 million. The
False Claims Act provides for the award of treble damages and
$5,500 to $11,000 per false claim in successful qui tam
lawsuits. We intend to vigorously defend this action.
On December 17, 2007, Sasha Rodriguez and Cathelyn Gregoire
filed a putative class action claim on behalf of themselves and
persons similarly situated against us in the United States
District Court for the District of Connecticut, alleging an
intentional violation of civil rights laws (42 U.S.C.
§ 1981, 1982), the Equal Credit Opportunity Act and
the Truth in Lending Act. Plaintiffs allege that we engaged in
underwriting practices on private loans which resulted, among
other things, in certain applicants being directed into
substandard and more expensive student loans on the basis of
race. No amount in controversy is stated in the complaint. We
intend to vigorously defend this action.
32
On January 31, 2008, a putative securities class action
lawsuit was filed against the Company and three senior officers
in federal court in the Southern District of New York
(Burch v. SLM Corporation, Albert L. Lord, C.E. Andrews,
and Robert S. Autor). The case has been assigned to the
Honorable William H. Pauley, III. The case purports to be
brought on behalf of all persons who purchased or otherwise
acquired the Common stock of the Company between
January 18, 2007 and January 3, 2008. The complaint
alleges that the Company and the named officers violated federal
securities laws by issuing a series of materially false and
misleading statements to the market throughout the
Class Period, which statements allegedly had the effect of
artificially inflating the market price of the Companys
securities. The complaint alleges that defendants caused the
Companys results for year-end 2006 and for the first three
quarters of 2007 to be materially misstated because the Company
failed to adequately accrue its loan loss provisions, 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. The complaint alleges violations of the Securities
Exchange Act of 1934 § 10(b) and § 20(a) and
Rule 10b-5.
The Company was served on February 5, 2008 and the case is
pending. A class has not yet been certified in the above action.
The Company is aware of press reports that other similar actions
may be filed, but has not been served with any other complaints.
We intend to vigorously assert our defenses.
On February 11, 2008, the Company received a subpoena from
the Attorney General of the State of New York that seeks
documents and information relating to our direct-to-consumer
Tuition Answer product. We intend to cooperate with the Attorney
Generals office.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
Nothing to report.
33
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, 2008 was 714. 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
|
|
|
2007
|
|
|
High
|
|
|
$
|
49.96
|
|
|
$
|
57.96
|
|
|
$
|
58.00
|
|
|
$
|
53.65
|
|
|
|
|
Low
|
|
|
|
40.30
|
|
|
|
40.60
|
|
|
|
41.73
|
|
|
|
18.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
High
|
|
|
$
|
58.35
|
|
|
$
|
55.21
|
|
|
$
|
53.07
|
|
|
$
|
52.09
|
|
|
|
|
Low
|
|
|
|
51.86
|
|
|
|
50.05
|
|
|
|
45.76
|
|
|
|
44.65
|
|
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.
Issuer
Purchases of Equity Securities
The following table summarizes the Companys common share
repurchases during 2007 pursuant to the stock repurchase program
(see Note 12 to the consolidated financial statements,
Stockholders Equity) first authorized in
September 1997 by the Board of Directors. Since the inception of
the program, which has no expiration date, the Board of
Directors has authorized the purchase of up to
342.5 million shares as of December 31, 2007. Included
in this total are 25 million additional shares authorized
for repurchase by the Board in November 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
of Shares that
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
May Yet Be
|
|
|
|
Total Number
|
|
|
Average Price
|
|
|
as Part of Publicly
|
|
|
Purchased Under
|
|
|
|
of Shares
|
|
|
Paid per
|
|
|
Announced Plans
|
|
|
the Plans or
|
|
|
|
Purchased(1)
|
|
|
Share
|
|
|
or Programs
|
|
|
Programs(2)
|
|
|
(Common shares in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1 March 31, 2007
|
|
|
.2
|
|
|
$
|
45.87
|
|
|
|
|
|
|
|
15.7
|
|
April 1 June 30, 2007
|
|
|
.8
|
|
|
|
41.18
|
|
|
|
|
|
|
|
15.7
|
|
July 1 September 30, 2007
|
|
|
2.1
|
|
|
|
48.47
|
|
|
|
|
|
|
|
15.7
|
|
October 1 October 31, 2007
|
|
|
.1
|
|
|
|
48.10
|
|
|
|
|
|
|
|
15.7
|
|
November 1 November 30, 2007
|
|
|
1.1
|
|
|
|
39.75
|
|
|
|
1.0
|
|
|
|
39.6
|
|
December 1 December 31,
2007(3)
|
|
|
49.0
|
|
|
|
44.57
|
|
|
|
49.0
|
|
|
|
38.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fourth quarter
|
|
|
50.2
|
|
|
|
44.48
|
|
|
|
50.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
|
53.3
|
|
|
$
|
44.59
|
|
|
|
50.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The total number of shares
purchased includes: i) shares purchased under the stock
repurchase program discussed above, and ii) shares
purchased in connection with the exercise of stock options and
vesting of performance stock to satisfy minimum statutory tax
withholding obligations and shares tendered by employees to
satisfy option exercise costs (which combined totaled
3.3 million shares for 2007).
|
|
(2) |
|
Reduced by outstanding equity
forward contracts.
|
|
(3) |
|
Includes 44 million shares
under an equity forward contract that the Company agreed to
physically settle with Citibank, N.A., on December 31, 2007.
|
34
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,
2002 and reinvestment of dividends through December 31,
2007.
Five Year
Cumulative Total Shareholder Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company/Index
|
|
12/31/02
|
|
12/31/03
|
|
12/31/04
|
|
12/31/05
|
|
12/31/06
|
|
12/31/07
|
SLM Corporation
|
|
$
|
100.0
|
|
|
$
|
110.4
|
|
|
$
|
158.6
|
|
|
$
|
166.2
|
|
|
$
|
150.0
|
|
|
$
|
62.7
|
|
S&P Financials Index
|
|
|
100.0
|
|
|
|
130.6
|
|
|
|
144.6
|
|
|
|
153.7
|
|
|
|
182.7
|
|
|
|
149.6
|
|
S&P 500 Index
|
|
|
100.0
|
|
|
|
128.4
|
|
|
|
142.1
|
|
|
|
149.0
|
|
|
|
172.3
|
|
|
|
181.7
|
|
Source: Bloomberg Total Return
Analysis
35
|
|
Item 6.
|
Selected
Financial Data
|
Selected
Financial Data
2003-2007
(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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
1,588
|
|
|
$
|
1,454
|
|
|
$
|
1,451
|
|
|
$
|
1,299
|
|
|
$
|
1,326
|
|
Net income (loss)
|
|
|
(896
|
)
|
|
|
1,157
|
|
|
|
1,382
|
|
|
|
1,914
|
|
|
|
1,534
|
|
Basic earnings (loss) per common share, before cumulative effect
of accounting change
|
|
|
(2.26
|
)
|
|
|
2.73
|
|
|
|
3.25
|
|
|
|
4.36
|
|
|
|
3.08
|
|
Basic earnings (loss) per common share, after cumulative effect
of accounting change
|
|
|
(2.26
|
)
|
|
|
2.73
|
|
|
|
3.25
|
|
|
|
4.36
|
|
|
|
3.37
|
|
Diluted earnings (loss) per common share, before cumulative
effect of accounting change
|
|
|
(2.26
|
)
|
|
|
2.63
|
|
|
|
3.05
|
|
|
|
4.04
|
|
|
|
2.91
|
|
Diluted earnings (loss) per common share, after cumulative
effect of accounting change
|
|
|
(2.26
|
)
|
|
|
2.63
|
|
|
|
3.05
|
|
|
|
4.04
|
|
|
|
3.18
|
|
Dividends per common share
|
|
|
.25
|
|
|
|
.97
|
|
|
|
.85
|
|
|
|
.74
|
|
|
|
.59
|
|
Return on common stockholders equity
|
|
|
(22
|
)%
|
|
|
32
|
%
|
|
|
45
|
%
|
|
|
73
|
%
|
|
|
66
|
%
|
Net interest margin
|
|
|
1.26
|
|
|
|
1.54
|
|
|
|
1.77
|
|
|
|
1.92
|
|
|
|
2.53
|
|
Return on assets
|
|
|
(.71
|
)
|
|
|
1.22
|
|
|
|
1.68
|
|
|
|
2.80
|
|
|
|
2.89
|
|
Dividend payout ratio
|
|
|
(11
|
)
|
|
|
37
|
|
|
|
28
|
|
|
|
18
|
|
|
|
19
|
|
Average equity/average assets
|
|
|
3.51
|
|
|
|
3.98
|
|
|
|
3.82
|
|
|
|
3.73
|
|
|
|
4.19
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loans, net
|
|
$
|
124,153
|
|
|
$
|
95,920
|
|
|
$
|
82,604
|
|
|
$
|
65,981
|
|
|
$
|
50,047
|
|
Total assets
|
|
|
155,565
|
|
|
|
116,136
|
|
|
|
99,339
|
|
|
|
84,094
|
|
|
|
64,611
|
|
Total borrowings
|
|
|
147,046
|
|
|
|
108,087
|
|
|
|
91,929
|
|
|
|
78,122
|
|
|
|
58,543
|
|
Stockholders equity
|
|
|
5,224
|
|
|
|
4,360
|
|
|
|
3,792
|
|
|
|
3,102
|
|
|
|
2,630
|
|
Book value per common share
|
|
|
7.84
|
|
|
|
9.24
|
|
|
|
7.81
|
|
|
|
6.93
|
|
|
|
5.51
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet securitized student loans, net
|
|
$
|
39,423
|
|
|
$
|
46,172
|
|
|
$
|
39,925
|
|
|
$
|
41,457
|
|
|
$
|
38,742
|
|
36
|
|
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,
2005-2007
(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
We are the largest source of funding, delivery and servicing
support for education loans in the United States. Our primary
business is to originate, acquire and hold both federally
guaranteed student loans and Private Education Loans, which are
not federally guaranteed or privately insured. The primary
source of our earnings is from net interest income earned on
those student loans as well as gains on the sales of such loans
in securitization transactions. We also earn fees for
pre-default and post-default receivables management services on
student loans, such that we are engaged in every phase of the
student loan life cycle from originating and
servicing student loans to default prevention and ultimately the
collection on defaulted student loans. Through recent
acquisitions, we have expanded our receivables management
services to a number of different asset classes outside of
student loans. We also provide a wide range of other financial
services, processing capabilities and information technology to
meet the needs of educational institutions, lenders, students
and their families, and guarantee agencies. SLM Corporation,
more commonly known as Sallie Mae, is a holding company that
operates through a number of subsidiaries. References in this
report to the Company refer to SLM Corporation and
its subsidiaries.
We have used both internal growth and strategic acquisitions to
attain our leadership position in the education finance
marketplace. Our sales force, which delivers our products on
campuses across the country, is the largest in the student loan
industry. The core of our marketing strategy is to promote our
on-campus brands, which generate student loan originations
through our Preferred Channel. Loans generated through our
Preferred Channel are more profitable than loans acquired
through other acquisition channels because we own them earlier
in the student loans life and generally incur lower costs
to acquire such loans. We have built brand leadership through
the Sallie Mae name, the brands of our subsidiaries and those of
our lender partners. These sales and marketing efforts are
supported by the largest and most diversified servicing
capabilities in the industry. In recent years, borrowers have
been consolidating their FFELP Stafford loans into FFELP
Consolidation Loans in much greater numbers such that FFELP
Consolidation Loans now constitute 55 percent of our
Managed loan portfolio.
We have expanded into a number of fee-based businesses, most
notably, our Asset Performance Group (APG), formerly
known as Debt Management Operations (DMO) business.
Our APG business provides a wide range of accounts receivable
and collections services including student loan default aversion
services, defaulted student loan portfolio management services,
contingency collections services for student loans and other
asset classes, and accounts receivable management and collection
for purchased portfolios of receivables that are delinquent or
have been charged off by their original creditors. We also
purchase and manage portfolios of sub-performing and
non-performing mortgage loans.
We also earn fees for a number of services including student
loan and guarantee servicing, 529 college-savings plan
administration services, and for providing processing
capabilities and information technology to educational
institutions. We also operate an affinity marketing program
through Upromise, Inc. (Upromise).
37
We manage our business through two primary operating segments:
the Lending operating segment and the APG operating segment.
Accordingly, the results of operations of the Companys
Lending and APG operating segments are presented separately
below under BUSINESS SEGMENTS. These operating
segments are considered reportable segments under the Financial
Accounting Standards Boards (FASB) Statement
of Financial Accounting Standards (SFAS)
No. 131, Disclosures about Segments of an Enterprise
and Related Information, based on quantitative thresholds
applied to the Companys financial statements.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
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). 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. We base our estimates and judgments on historical
experience and on various other factors that we believe are
reasonable under the circumstances. Actual results may differ
from these estimates under varying assumptions or conditions.
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.
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. These estimates relate to the following
accounting policies that are discussed in more detail below:
application of the effective interest method for loans
(premiums, discounts and Repayment Borrower Benefits),
securitization accounting and Retained Interests, allowance for
loan losses, and derivative accounting. In recent years, we have
frequently updated a number of estimates to account for the
continued high level of FFELP Consolidation Loan activity. Also,
a number of these estimates affect life-of-loan calculations.
Since our student loans have long average lives, the cumulative
effect of relatively small changes in estimates can be material.
Premiums,
Discounts and Repayment Borrower Benefits
For both federally insured and Private Education Loans, we
account for premiums paid, discounts received, capitalized
direct origination costs incurred on the origination of student
loans, and the impact of Repayment Borrower Benefits in
accordance with SFAS No. 91, Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases. The
unamortized portion of the premiums and 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 of the student loan
after giving effect to the amortization of purchase premiums and
accretion of student loan discounts, as well as the impact of
Repayment Borrower Benefits. Premiums, capitalized direct
origination costs and discounts received are amortized over the
estimated life of the loan, which includes an estimate of
prepayment speeds. Estimates for future prepayments are
incorporated in an estimated Constant Prepayment Rate
(CPR), which is primarily based upon the historical
prepayments due to consolidation and defaults, extensions from
the utilization of forbearance, as well as, managements
expectation of future prepayments and extensions. 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 the
evaluation of the ultimate qualification rate for these
incentives. We periodically evaluate the assumptions used to
estimate the loan life and qualification rates, and in instances
where there are modifications to the assumptions, amortization
is adjusted on a cumulative basis to reflect the change.
The estimate of the CPR measures the rate at which loans in the
portfolio pay before their stated maturity. A number of factors
can affect the CPR estimate such as the rate of consolidation
activity and default rates. Changes in CPR estimates are
discussed in more detail below. The impact of Repayment Borrower
Benefits is dependent on the estimate of the number of borrowers
who will eventually qualify for these benefits. For competitive
purposes, we occasionally change Repayment Borrower Benefits
programs in both amount and qualification factors. These
programmatic changes are reflected in the estimate of the
Repayment Borrower Benefits discount when made.
38
Securitization
Accounting and Retained Interests
We regularly engage in securitization transactions as part of
our 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. The primary
judgment in determining the fair value of the assets received is
the valuation of the Residual Interest.
The Residual Interests in each of our securitizations are
treated as either (1) available-for-sale securities in
accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities, and
therefore must be marked-to-market with temporary unrealized
gains and losses recognized, net of tax, in accumulated other
comprehensive income in stockholders equity or
(2) securities marked-to-market through earnings under
SFAS No. 155 Accounting for Certain Hybrid
Financial Instruments. Since there are no quoted market
prices for our Residual Interests, we estimate their fair value
both initially and each subsequent quarter using the key
assumptions listed below:
|
|
|
|
|
the projected net interest yield from the underlying securitized
loans, which can be impacted by the forward yield curve, cost of
funds for auction rate securities as well as the Repayment
Borrower Benefits program;
|
|
|
|
the calculation of the Embedded Floor Income associated with the
securitized loan portfolio;
|
|
|
|
the CPR;
|
|
|
|
the expected credit losses from the underlying securitized loan
portfolio; and
|
|
|
|
the discount rate used, which is intended to be commensurate
with the risks involved.
|
We recognize interest income and periodically evaluate our
Residual Interests for other than temporary impairment in
accordance with the Emerging Issues Task Force
(EITF) Issue
No. 99-20,
Recognition of Interest Income and Impairment on Purchased
and Residual Beneficial Interests in Securitized Financial
Assets. Under this standard, each quarter we estimate the
remaining cash flows to be received from our Retained Interests
and use these revised cash flows to prospectively calculate a
yield for income recognition. In cases where our estimate of
future cash flows results in a lower yield from that used to
recognize interest income in the prior quarter, the Residual
Interest is written down to fair value, first to the extent of
any unrealized gain in accumulated other comprehensive income,
then through earnings as an other than temporary impairment, and
the yield used to recognize subsequent income from the trust is
negatively impacted.
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.
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. We analyze
those portfolios to determine the effects that the various
stages of delinquency have on borrower default behavior and
ultimate charge-off. We estimate the allowance for loan losses
for our Managed loan portfolio using a migration analysis of
delinquent and current accounts. A migration analysis is a
technique used to estimate the likelihood that a loan receivable
may progress through the various delinquency stages and
ultimately charge-off, and is a widely used reserving
methodology in the consumer finance industry. We also use the
migration analysis to estimate the amount of uncollectible
accrued interest on Private Education Loans and write off that
amount against current period interest income.
39
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, repayment, forbearance, delinquency),
underwriting criteria, existence or absence of a cosigner, and
aging. We use historical experience coupled with qualitative
factors regarding changes in portfolio mix, macroeconomic
indicators, policies, procedures, laws, regulations,
underwriting, and other factors to estimate default and
collection rate projections. We then apply default and
collection rate projections to each category. The vast majority
of our Private Education Loan programs do not require the
borrowers to begin repayment until six months after they have
graduated or otherwise have left school. Consequently, our loss
estimates for these programs are generally low while the
borrower is in school. At December 31, 2007,
43 percent of the principal balance in the higher education
Managed Private Education Loan portfolio is related to borrowers
who are still in-school or grace 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 with the percentage of borrowers in repayment.
Our loss estimates are based on a loss emergence period of
generally two years. 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 majority of forbearance occurs early in the
repayment term when borrowers are starting their careers (see
LENDING BUSINESS SEGMENT Private Education
Loans Private Education Loan
Delinquencies). At December 31, 2007, 13.9
percent of the Managed Private Education Loan portfolio in
repayment and forbearance was in forbearance status. The loss
emergence 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. Recoveries on loans charged off are considered when
calculating the allowance for loan losses, and actual cash
recoveries are therefore recorded directly to the allowance.
FFELP loans are guaranteed as to their principal and accrued
interest in the event of default subject to a Risk Sharing level
set based on the date of loan disbursement. For loans disbursed
after October 1, 1993, and before July 1, 2006, the
Company receives 98 percent reimbursement on all qualifying
default claims. For loans disbursed on or after July 1,
2006, the Company receives 97 percent reimbursement. In
October 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. As a result of this amended
reimbursement level, the Company established an allowance at
December 31, 2005 for loans that were subject to the
one-percent Risk Sharing. The College Cost Reduction and
Access Act of 2007 (CCRAA) repealed the EP program
and returned loans to their previous disbursement date-based
guarantee rates of 98 percent or 97 percent. In
reaction, the Company increased its provision for FFELP loans to
cumulatively increase the allowance for loan losses to cover
these higher Risk Sharing levels.
The evaluation of the provisions for loan losses is inherently
subjective, as it requires material estimates that may be
susceptible to significant changes. Management believes that the
allowance for loan losses is appropriate to cover probable
losses in the student loan portfolio.
Effects
of Consolidation Activity on Estimates
Between 2003 and 2006, we experienced a surge in consolidation
activity as a result of aggressive marketing and historically
low interest rates. This, in turn, has had a significant effect
on a number of accounting estimates in recent years. We updated
our assumptions that are affected primarily by consolidation
activity and updated the estimates used in developing the cash
flows and effective yield calculations as they relate to the
amortization of student loan premiums and discounts, Repayment
Borrower Benefits, Residual Interest income and the valuation of
the Residual Interest.
40
Consolidation activity affects each estimate 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.
The estimate of the CPR also affects the estimate of the average
life of securitized trusts and therefore affects the valuation
of the Residual Interest. Prepayments shorten the average life
of the trust, and if all other factors remain equal, will reduce
the value of the Residual Interest, the securitization gain on
sale and the effective yield used to recognize interest income.
Prepayments on student loans in our securitized trusts are
significantly impacted by the rate at which securitized loans
are consolidated. When a loan is consolidated from the trust
either by us or a third party, the loan is treated as a
prepayment. In cases where the loan is consolidated by us, it
will be recorded as an on-balance sheet asset. We discuss the
effects of changes in our CPR estimates in LIQUIDITY AND
CAPITAL RESOURCES Securitization Activities and
Liquidity Risk and Funding Long-Term.
The increased activity in FFELP Consolidation Loans has 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. Consolidation of Private
Education Loans from off-balance sheet Private Education Loan
trusts will increase the CPR used to value the Residual Interest.
Effect
of Consolidation Activity
The schedule below summarizes the impact of loan consolidation
on each affected financial statement line item.
On-Balance
Sheet Student Loans
|
|
|
|
|
|
|
|
|
|
|
Consolidating
|
|
|
|
|
|
|
Estimate
|
|
Lender
|
|
Effect on Estimate
|
|
CPR
|
|
Accounting Effect
|
|
Premium
|
|
Sallie Mae
|
|
Term extension
|
|
Decrease
|
|
Estimate
Adjustment(1)
increase unamortized balance of premium. Reduced amortization
expense going forward.
|
Premium
|
|
Other lenders
|
|
Loan prepaid
|
|
Increase
|
|
Estimate
Adjustment(1)
decrease unamortized balance of premium or accelerated
amortization of premium.
|
Repayment Borrower Benefits
|
|
Sallie Mae
|
|
Term extension
|
|
N/A
|
|
Existing Repayment Borrower Benefits reserve reversed into
income new FFELP Consolidation Loan benefit
amortized over a longer
term.(2)
|
Repayment Borrower Benefits
|
|
Other lenders
|
|
Loan prepaid
|
|
N/A
|
|
Repayment Borrower Benefits reserve reversed into
income.(2)
|
|
|
|
(1) |
|
As estimates are updated, in
accordance with SFAS No. 91, the premium balance must
be adjusted from inception to reflect the new expected term of
the loan, as if it had been in place from inception.
|
|
(2) |
|
Consolidation estimates also affect
the estimates of borrowers who will eventually qualify for
Repayment Borrower Benefits.
|
41
Off-Balance
Sheet Student Loans
|
|
|
|
|
|
|
|
|
|
|
Consolidating
|
|
|
|
|
|
|
Estimate
|
|
Lender
|
|
Effect on Estimate
|
|
CPR
|
|
Accounting Effect
|
|
Residual Interest
|
|
Sallie Mae or other lenders
|
|
Loan prepaid
|
|
Increase
|
|
Reduction in fair market value of Residual Interest
resulting in either an impairment charge or reduction in prior
unrealized market value gains recorded in other comprehensive
income.
|
|
|
|
|
|
|
|
|
Decrease in prospective effective yield used to
recognize interest income.
|
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. In addition, we use equity forward
contracts (see Note 12, Stockholders
Equity, to the financial statements for further
discussion) to lock-in our future purchase price of the
Companys stock to better manage share repurchases. 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,
optionality, forward interest rate curves, volatility factors,
forward foreign exchange rates, and the closing price of the
Companys stock (related to our equity forward contracts).
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; 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.
42
SELECTED
FINANCIAL DATA
Condensed
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
Years Ended December 31,
|
|
|
2007 vs. 2006
|
|
|
2006 vs. 2005
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Net interest income
|
|
$
|
1,588
|
|
|
$
|
1,454
|
|
|
$
|
1,451
|
|
|
$
|
134
|
|
|
|
9
|
%
|
|
$
|
3
|
|
|
|
|
%
|
Less: provisions for loan losses
|
|
|
1,015
|
|
|
|
287
|
|
|
|
203
|
|
|
|
728
|
|
|
|
254
|
|
|
|
84
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provisions for loan losses
|
|
|
573
|
|
|
|
1,167
|
|
|
|
1,248
|
|
|
|
(594
|
)
|
|
|
(51
|
)
|
|
|
(81
|
)
|
|
|
(6
|
)
|
Gains on student loan securitizations
|
|
|
367
|
|
|
|
902
|
|
|
|
552
|
|
|
|
(535
|
)
|
|
|
(59
|
)
|
|
|
350
|
|
|
|
63
|
|
Servicing and securitization revenue
|
|
|
437
|
|
|
|
553
|
|
|
|
357
|
|
|
|
(116
|
)
|
|
|
(21
|
)
|
|
|
196
|
|
|
|
55
|
|
Losses on loans and securities, net
|
|
|
(95
|
)
|
|
|
(49
|
)
|
|
|
(64
|
)
|
|
|
(46
|
)
|
|
|
(94
|
)
|
|
|
15
|
|
|
|
23
|
|
Gains (losses) on derivative and hedging activities, net
|
|
|
(1,361
|
)
|
|
|
(339
|
)
|
|
|
247
|
|
|
|
(1,022
|
)
|
|
|
(301
|
)
|
|
|
(586
|
)
|
|
|
(237
|
)
|
Guarantor servicing fees
|
|
|
156
|
|
|
|
132
|
|
|
|
115
|
|
|
|
24
|
|
|
|
18
|
|
|
|
17
|
|
|
|
15
|
|
Contingency fee revenue
|
|
|
336
|
|
|
|
397
|
|
|
|
360
|
|
|
|
(61
|
)
|
|
|
(15
|
)
|
|
|
37
|
|
|
|
10
|
|
Collections revenue
|
|
|
272
|
|
|
|
240
|
|
|
|
167
|
|
|
|
32
|
|
|
|
13
|
|
|
|
73
|
|
|
|
44
|
|
Other income
|
|
|
385
|
|
|
|
338
|
|
|
|
273
|
|
|
|
47
|
|
|
|
14
|
|
|
|
65
|
|
|
|
24
|
|
Operating expenses
|
|
|
1,552
|
|
|
|
1,346
|
|
|
|
1,138
|
|
|
|
206
|
|
|
|
15
|
|
|
|
208
|
|
|
|
18
|
|
Income taxes
|
|
|
412
|
|
|
|
834
|
|
|
|
729
|
|
|
|
(422
|
)
|
|
|
(51
|
)
|
|
|
105
|
|
|
|
14
|
|
Minority interest in net earnings of subsidiaries
|
|
|
2
|
|
|
|
4
|
|
|
|
6
|
|
|
|
(2
|
)
|
|
|
(50
|
)
|
|
|
(2
|
)
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(896
|
)
|
|
|
1,157
|
|
|
|
1,382
|
|
|
|
(2,053
|
)
|
|
|
(177
|
)
|
|
|
(225
|
)
|
|
|
(16
|
)
|
Preferred stock dividends
|
|
|
37
|
|
|
|
36
|
|
|
|
22
|
|
|
|
1
|
|
|
|
3
|
|
|
|
14
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stock
|
|
$
|
(933
|
)
|
|
$
|
1,121
|
|
|
$
|
1,360
|
|
|
$
|
(2,054
|
)
|
|
|
(183
|
)%
|
|
$
|
(239
|
)
|
|
|
(18
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
(2.26
|
)
|
|
$
|
2.73
|
|
|
$
|
3.25
|
|
|
$
|
(4.99
|
)
|
|
|
(183
|
)%
|
|
$
|
(.52
|
)
|
|
|
(16
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
(2.26
|
)
|
|
$
|
2.63
|
|
|
$
|
3.05
|
|
|
$
|
(4.89
|
)
|
|
|
(186
|
)%
|
|
$
|
(.42
|
)
|
|
|
(14
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share
|
|
$
|
.25
|
|
|
$
|
.97
|
|
|
$
|
.85
|
|
|
$
|
(.72
|
)
|
|
|
(74
|
)%
|
|
$
|
.12
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
Condensed
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
December 31,
|
|
|
2007 vs. 2006
|
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans, net
|
|
$
|
35,726
|
|
|
$
|
24,841
|
|
|
$
|
10,885
|
|
|
|
44
|
%
|
FFELP Consolidation Loans, net
|
|
|
73,609
|
|
|
|
61,324
|
|
|
|
12,285
|
|
|
|
20
|
|
Private Education Loans, net
|
|
|
14,818
|
|
|
|
9,755
|
|
|
|
5,063
|
|
|
|
52
|
|
Other loans, net
|
|
|
1,174
|
|
|
|
1,309
|
|
|
|
(135
|
)
|
|
|
(10
|
)
|
Cash and investments
|
|
|
10,546
|
|
|
|
5,185
|
|
|
|
5,361
|
|
|
|
103
|
|
Restricted cash and investments
|
|
|
4,600
|
|
|
|
3,423
|
|
|
|
1,177
|
|
|
|
34
|
|
Retained Interest in off-balance sheet securitized loans
|
|
|
3,044
|
|
|
|
3,341
|
|
|
|
(297
|
)
|
|
|
(9
|
)
|
Goodwill and acquired intangible assets, net
|
|
|
1,301
|
|
|
|
1,372
|
|
|
|
(71
|
)
|
|
|
(5
|
)
|
Other assets
|
|
|
10,747
|
|
|
|
5,586
|
|
|
|
5,161
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
155,565
|
|
|
$
|
116,136
|
|
|
$
|
39,429
|
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
35,947
|
|
|
$
|
3,528
|
|
|
$
|
32,419
|
|
|
|
919
|
%
|
Long-term borrowings
|
|
|
111,098
|
|
|
|
104,559
|
|
|
|
6,539
|
|
|
|
6
|
|
Other liabilities
|
|
|
3,285
|
|
|
|
3,680
|
|
|
|
(395
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
150,330
|
|
|
|
111,767
|
|
|
|
38,563
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in subsidiaries
|
|
|
11
|
|
|
|
9
|
|
|
|
2
|
|
|
|
22
|
|
Stockholders equity before treasury stock
|
|
|
7,055
|
|
|
|
5,401
|
|
|
|
1,654
|
|
|
|
31
|
|
Common stock held in treasury
|
|
|
1,831
|
|
|
|
1,041
|
|
|
|
790
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
5,224
|
|
|
|
4,360
|
|
|
|
864
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
155,565
|
|
|
$
|
116,136
|
|
|
$
|
39,429
|
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESULTS
OF OPERATIONS
We present the results of operations first on a consolidated
basis followed by a presentation of the net interest margin with
accompanying analysis presented in accordance with GAAP. As
discussed in detail above in the OVERVIEW section,
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 results of our operations 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.
44
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 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, including the impact of Wholesale
Consolidation Loans (see Student Loan Spread
Student Loan Spread Analysis 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. Operating expenses increased by
$206 million year-over-year. This increase in operating
expenses was primarily due to $56 million in Merger-related
expenses and $23 million in severance costs incurred in
2007. As part of the Companys cost reduction efforts,
these severance costs were related to the elimination of
approximately 350 positions (representing three percent of the
overall employee population) across all areas of the Company.
Operating expenses in 2007 also included $93 million
related to a full year of expenses for Upromise compared to
$33 million incurred in 2006 subsequent to the August 2006
acquisition of this subsidiary.
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 $25.5 billion of student loans through our
Preferred Channel, an increase of 9 percent over the
$23.4 billion originated in the year-ago period.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
For the year ended December 31, 2006, net income was
$1.2 billion ($2.63 diluted earnings per share), a
16 percent decrease from the $1.4 billion in net
income ($3.05 diluted earnings per share) for the year ended
45
December 31, 2005. On a pre-tax basis, year-to-date
2006 net income of $2.0 billion was a 6 percent
decrease from the $2.1 billion in pre-tax net income earned
in the year ended December 31, 2005. The larger percentage
decrease in year-over-year, after-tax net income versus pre-tax
net income is driven by the tax accounting permanent impact of
excluding $360 million in unrealized equity forward losses
from 2006 taxable income and excluding $121 million of
unrealized equity forward gains from 2005 taxable income.
Fluctuations in the effective tax rate were primarily driven by
the permanent tax impact of excluding non-taxable gains and
losses on equity forward contracts as discussed above. The net
effect from excluding non-taxable gains and losses on equity
forward contracts from taxable income was an increase in the
effective tax rate from 34 percent in the year ended
December 31, 2005 to 42 percent in the year ended
December 31, 2006.
Year-over-year net interest income is roughly unchanged as the
$12 billion increase in average interest earning assets was
offset by a 23 basis point decrease in the net interest
margin. The year-over-year decrease in the net interest margin
is due to higher average interest rates which reduced Floor
Income by $155 million, and to the increase in the average
balance of lower yielding cash and investments.
Securitization gains increased by $350 million in the year
ended December 31, 2006 versus 2005. The securitization
gains for 2006 were primarily driven by the three off-balance
sheet Private Education Loan securitizations, which had total
pre-tax gains of $830 million or 16 percent of the
amount securitized, versus two off-balance sheet Private
Education Loan securitizations in 2005, which had pre-tax gains
of $453 million or 15 percent of the amount
securitized.
For the year ended December 31, 2006, servicing and
securitization revenue increased by $196 million to
$553 million. The increase in servicing and securitization
revenue can be attributed to $103 million in lower
impairments on our Retained Interests and the growth in the
average balance of off-balance sheet student loans. Impairments
are primarily caused by the effect of FFELP Consolidation Loan
activity on our FFELP Stafford securitization trusts. Pre-tax
impairments on our Retained Interests in securitizations totaled
$157 million for the year ended December 31, 2006
versus $260 million for the year ended December 31,
2005.
In 2006, net losses on derivative and hedging activities were
$339 million, a decrease of $586 million from the net
gains of $247 million in 2005. This decrease primarily
relates to $230 million of unrealized losses in 2006,
versus unrealized gains of $634 million in the prior year,
which resulted in a year-over-year reduction in pre-tax income
of $864 million. The effect of the unrealized losses was
partially offset by a $278 million reduction in realized
losses on derivatives and hedging activities on instruments that
were not accounted for as hedges. The decrease in unrealized
gains was primarily due to the impact of a lower SLM stock price
on our equity forward contracts which resulted in a
mark-to-market unrealized loss of $360 million in 2006
versus an unrealized gain of $121 million in the year-ago
period, and to a decrease of $305 million in unrealized
gains on Floor Income Contracts. The smaller unrealized gains on
our Floor Income Contracts were primarily caused by the
relationship between the Floor Income Contracts strike
prices versus the estimated forward interest rates during 2006
versus 2005.
Fee and other income and collections revenue increased
$192 million from $915 million for the year ended
December 31, 2005 to $1.1 billion for the year ended
December 31, 2006. Operating expenses increased by
$208 million year-over-year. This increase in operating
expenses can primarily be attributed to $63 million of
stock option compensation expense, due to the implementation of
SFAS No. 123(R) in the first quarter of 2006 and to
$33 million related to expenses for Upromise, acquired in
August 2006.
Our Managed student loan portfolio grew by $19.6 billion
(or 16 percent), from $122.5 billion at
December 31, 2005 to $142.1 billion at
December 31, 2006. In 2006 we acquired $37.4 billion
of student loans, a 24 percent increase over the
$30.2 billion acquired in the year-ago period. The 2006
acquisitions included $8.4 billion in Private Education
Loans, a 31 percent increase over the $6.4 billion
acquired in 2005. In the year ended December 31, 2006, we
originated $23.4 billion of student loans through our
Preferred Channel, an increase of 9 percent over the
$21.4 billion originated in the year-ago period.
46
Average
Balance Sheets
The following table reflects the rates earned on interest
earning assets and paid on interest bearing liabilities for the
years ended December 31, 2007, 2006 and 2005. This table
reflects the net interest margin for the entire Company for our
on-balance sheet assets. It is included in the Lending segment
discussion because that segment includes substantially all
interest earning assets and interest bearing liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Average Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
31,294
|
|
|
|
6.59
|
%
|
|
$
|
21,152
|
|
|
|
6.66
|
%
|
|
$
|
20,720
|
|
|
|
4.90
|
%
|
FFELP Consolidation Loans
|
|
|
67,918
|
|
|
|
6.39
|
|
|
|
55,119
|
|
|
|
6.43
|
|
|
|
47,082
|
|
|
|
5.31
|
|
Private Education Loans
|
|
|
12,507
|
|
|
|
11.65
|
|
|
|
8,585
|
|
|
|
11.90
|
|
|
|
6,922
|
|
|
|
9.16
|
|
Other loans
|
|
|
1,246
|
|
|
|
8.49
|
|
|
|
1,155
|
|
|
|
8.48
|
|
|
|
1,072
|
|
|
|
7.89
|
|
Cash and investments
|
|
|
12,710
|
|
|
|
5.57
|
|
|
|
8,824
|
|
|
|
5.70
|
|
|
|
6,662
|
|
|
|
4.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
125,675
|
|
|
|
6.90
|
%
|
|
|
94,835
|
|
|
|
6.94
|
%
|
|
|
82,458
|
|
|
|
5.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest earning assets
|
|
|
9,715
|
|
|
|
|
|
|
|
8,550
|
|
|
|
|
|
|
|
6,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
135,390
|
|
|
|
|
|
|
$
|
103,385
|
|
|
|
|
|
|
$
|
89,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
16,385
|
|
|
|
5.74
|
%
|
|
$
|
3,902
|
|
|
|
5.33
|
%
|
|
$
|
4,517
|
|
|
|
3.93
|
%
|
Long-term borrowings
|
|
|
109,984
|
|
|
|
5.59
|
|
|
|
91,461
|
|
|
|
5.37
|
|
|
|
77,958
|
|
|
|
3.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
126,369
|
|
|
|
5.61
|
%
|
|
|
95,363
|
|
|
|
5.37
|
%
|
|
|
82,475
|
|
|
|
3.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities
|
|
|
4,272
|
|
|
|
|
|
|
|
3,912
|
|
|
|
|
|
|
|
3,555
|
|
|
|
|
|
Stockholders equity
|
|
|
4,749
|
|
|
|
|
|
|
|
4,110
|
|
|
|
|
|
|
|
3,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
135,390
|
|
|
|
|
|
|
$
|
103,385
|
|
|
|
|
|
|
$
|
89,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
1.26
|
%
|
|
|
|
|
|
|
1.53
|
%
|
|
|
|
|
|
|
1.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate/Volume
Analysis
The following rate/volume analysis shows the relative
contribution of changes in interest rates and asset volumes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
Attributable to
|
|
|
|
|
|
|
Change in
|
|
|
|
Increase
|
|
|
Rate
|
|
|
Volume
|
|
|
2007 vs. 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
2,096
|
|
|
$
|
(98
|
)
|
|
$
|
2,194
|
|
Interest expense
|
|
|
1,962
|
|
|
|
301
|
|
|
|
1,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
134
|
|
|
$
|
(399
|
)
|
|
$
|
533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
2,067
|
|
|
$
|
1,370
|
|
|
$
|
697
|
|
Interest expense
|
|
|
2,064
|
|
|
|
1,589
|
|
|
|
475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
3
|
|
|
$
|
(219
|
)
|
|
$
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
The changes in net interest income are primarily due to
fluctuations in the student loan spread discussed below, as well
as the growth of our student loan portfolio and the level of
cash and investments we may hold on our balance sheet for
liquidity purposes. In connection with the Merger Agreement, we
increased our liquidity portfolio to higher than historical
levels. The liquidity portfolio has a negative net interest
margin and, as a result, the increase in this portfolio reduced
net interest income by $18 million for the year ended
December 31, 2007.
Student
Loans
For both federally insured and Private Education Loans, we
account for premiums paid, discounts received and certain
origination costs incurred on the origination and acquisition of
student loans in accordance with SFAS No. 91,
Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of
Leases. The unamortized portion of the premiums and
discounts is included in the carrying value of the student loan
on the consolidated balance sheet. We recognize income on our
student loan portfolio based on the expected yield of the
student loan after giving effect to the amortization of purchase
premiums and the accretion of student loan discounts, as well as
interest rate reductions and rebates expected to be earned
through Repayment Borrower Benefits programs. Discounts on
Private Education Loans are deferred and accreted to income over
the lives of the student loans. In the table below, this
accretion of discounts is netted with the amortization of the
premiums.
Student
Loan Spread
An important performance measure closely monitored by management
is the student loan spread. The student loan spread is the
difference between the income earned on the student loan assets
and the interest paid on the debt funding those assets. A number
of factors can affect the overall student loan spread, such as:
|
|
|
|
|
the mix of student loans in the portfolio, with FFELP
Consolidation Loans having the lowest spread and Private
Education Loans having the highest spread;
|
|
|
|
the premiums paid, borrower fees charged and capitalized costs
incurred to acquire student loans, which impact the spread
through subsequent amortization;
|
|
|
|
the type and level of Repayment Borrower Benefits programs for
which the student loans are eligible;
|
|
|
|
the level of Floor Income and, when considering the Core
Earnings spread, the amount of Floor Income-eligible loans
that have been hedged through Floor Income Contracts; and
|
|
|
|
funding and hedging costs.
|
48
Student
Loan Spread Analysis On-Balance Sheet
The following table analyzes the reported earnings from
on-balance sheet student loans. For an analysis of our student
loan spread for the entire portfolio of Managed student loans on
a similar basis to the on-balance sheet analysis, see
LENDING BUSINESS SEGMENT Student Loan
Spread Analysis Core Earnings
Basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
On-Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loan yield, before Floor Income
|
|
|
7.96
|
%
|
|
|
7.94
|
%
|
|
|
6.22
|
%
|
Gross Floor Income
|
|
|
.05
|
|
|
|
.04
|
|
|
|
.25
|
|
Consolidation Loan Rebate Fees
|
|
|
(.60
|
)
|
|
|
(.67
|
)
|
|
|
(.65
|
)
|
Repayment Borrower Benefits
|
|
|
(.12
|
)
|
|
|
(.12
|
)
|
|
|
(.11
|
)
|
Premium and discount amortization
|
|
|
(.16
|
)
|
|
|
(.14
|
)
|
|
|
(.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loan net yield
|
|
|
7.13
|
|
|
|
7.05
|
|
|
|
5.55
|
|
Student loan cost of funds
|
|
|
(5.56
|
)
|
|
|
(5.36
|
)
|
|
|
(3.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loan spread, before Interim ABCP Facility
Fees(1)(2)
|
|
|
1.57
|
%
|
|
|
1.69
|
%
|
|
|
1.86
|
%
|
Interim ABCP Facility
Fees(3)
|
|
|
(.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loan
spread(1)
|
|
|
1.53
|
%
|
|
|
1.69
|
%
|
|
|
1.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet student
loans(1)
|
|
$
|
104,740
|
|
|
$
|
84,173
|
|
|
$
|
74,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Excludes
the effect of the Wholesale Consolidation Loan portfolio on the
student loan spread and average balance for the years ended
December 31, 2007 and 2006.
|
(2) Student
loan spread including the effect of Wholesale Consolidation
Loans
|
|
|
1.44
|
%
|
|
|
1.68
|
%
|
|
|
1.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) The
Interim ABCP Facility Fees are the commitment and liquidity fees
related to a financing facility in connection with the Merger
Agreement.
|
The table above shows the various items that impact our student
loan spread. Gross Floor Income (Floor Income earned before
payments on Floor Income Contracts) is impacted by the level of
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 amount
of 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 we pay 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 decrease in our student loan spread, before Interim ABCP
Facility Fees and the effect of Wholesale Consolidation Loans,
for the year ended December 31, 2007 versus 2006 was
primarily due to an increase in our cost of funds. Our cost of
funds for on-balance sheet student loans excludes the impact of
basis swaps that economically hedge the re-pricing and basis
mismatch between our funding and student loan asset indices, but
do not receive hedge accounting treatment under
SFAS No. 133. We use basis swaps extensively 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 in the consolidated statement of
income, 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 above table, and in
times of volatile movements of interest rates like those
experienced in the second half of 2007, the student loan spread
in the above table can significantly change. See LENDING
BUSINESS SEGMENT Student Loan Spread
Analysis Core Earnings Basis,
which reflects these basis swaps in interest expense, and
demonstrates the economic hedge effectiveness of these basis
swaps. The
49
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 LENDING BUSINESS
SEGMENT Student Loan Spread Analysis
Core Earnings Basis.)
The decrease in the student loan spread before the effect of
Wholesale Consolidation Loans in the year ended
December 31, 2006 versus 2005 was primarily due to the
reduction in Gross Floor Income earned. A primary driver of
fluctuations in our on-balance sheet student loan spread when
interest rates significantly change from period to period can be
the level of Gross Floor Income earned in the period.
Interest rates increased significantly between 2005 and 2006
which reduced Gross Floor Income earned. We believe that we have
economically hedged most of the long-term Floor Income through
the sale of Floor Income Contracts, under which we receive an
upfront fee and agree to pay the counterparty the Floor Income
earned on a notional amount of student loans. These contracts do
not qualify for hedge accounting treatment and as a result the
payments on the Floor Income Contracts are included in the
consolidated statement of income with gains (losses) on
derivative and hedging activities, net rather than in
student loan interest income, where the offsetting Floor Income
is recorded.
In the second half of 2006, we implemented a new loan
acquisition strategy under which we began purchasing FFELP
Consolidation Loans outside of our normal origination channels,
primarily via the spot market. We refer to this volume as our
Wholesale Consolidation Channel. FFELP Consolidation Loans
acquired through this channel are considered incremental volume
to our core acquisition channels, which are focused on the
retail marketplace with an emphasis on our internal brand
strategy. Wholesale Consolidation Loans generally command
significantly higher premiums than our originated FFELP
Consolidation Loans, and as a result, Wholesale Consolidation
Loans have lower spreads. Since Wholesale Consolidation Loans
are acquired outside of our core loan acquisition channels and
have different yields and return expectations than the rest of
our FFELP Consolidation Loan portfolio, we have excluded the
impact of the Wholesale Consolidation Loan volume from the
student loan spread analysis to provide more meaningful
period-over-period comparisons on the performance of our student
loan portfolio. We are no longer buying Wholesale Consolidation
Loans.
FEDERAL
AND STATE TAXES
The Company is subject to federal and state income taxes. Our
effective tax rate for the years ended December 31, 2007,
2006 and 2005 was (86) percent, 42 percent and
34 percent, respectively. The effective tax rate reflects
the permanent impact of the exclusion of gains and losses on
equity forward contracts with respect to the Companys
stock for tax purposes. These permanent differences were a
$1.6 billion loss in 2007, a $360 million loss in
2006, and a $121 million gain in 2005.
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 through smaller
operating segments that do not meet such thresholds and are
aggregated in the Corporate and Other reportable segment for
financial reporting purposes. These products and services
include guarantor and loan servicing, 529 college-savings plan
administration, and the operation of an affinity marketing
program.
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 makers,
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
50
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. Our operating segments are defined by the products
and services they offer or the types of customers they serve,
and they reflect the manner in which financial information is
currently evaluated by management. Intersegment revenues and
expenses are netted within the appropriate financial statement
line items consistent with the income statement presentation
provided to management. Changes in management structure or
allocation methodologies and procedures may result in changes in
reported segment financial information.
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, we rely on Core Earnings in operating our
business because Core Earnings permit management to
make meaningful period-to-period comparisons of the operational
and performance indicators that are most closely assessed by
management. Management believes this information provides
additional insight into the financial performance of the core
business activities of our operating segments. Accordingly, the
tables presented below reflect Core Earnings which
are reviewed and utilized by management to manage the business
for each of our 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.
51
The Lending operating segment includes all discussion of income
and related expenses associated with the net interest margin,
the student loan spread and its components, the provisions for
loan losses, and other fees earned on our Managed portfolio of
student loans. The APG operating segment reflects the fees
earned and expenses incurred in providing accounts receivable
management and collection services. Our Corporate and Other
reportable segment includes our remaining fee businesses and
other corporate expenses that do not pertain directly to the
primary segments identified above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
Guarantor serving fees
|
|
|
|
|
|
|
|
|
|
|
156
|
|
Collections revenue
|
|
|
|
|
|
|
269
|
|
|
|
|
|
Other income
|
|
|
194
|
|
|
|
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
194
|
|
|
|
605
|
|
|
|
374
|
|
Operating
expenses(1)
|
|
|
709
|
|
|
|
390
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
673
|
|
|
|
188
|
|
|
|
32
|
|
Income tax
expense(2)
|
|
|
249
|
|
|
|
70
|
|
|
|
12
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income
|
|
$
|
424
|
|
|
$
|
116
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating expenses for the Lending,
APG, and Corporate and Other reportable segments include
$31 million, $11 million, and $15 million,
respectively, of stock option compensation expense, and
$19 million, $2 million and $2 million,
respectively, of severance expense.
|
|
(2) |
|
Income taxes are based on a
percentage of net income before tax for the individual
reportable segment.
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
Guarantor servicing fees
|
|
|
|
|
|
|
|
|
|
|
132
|
|
Collections revenue
|
|
|
|
|
|
|
239
|
|
|
|
|
|
Other income
|
|
|
177
|
|
|
|
|
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
177
|
|
|
|
636
|
|
|
|
287
|
|
Operating
expenses(1)
|
|
|
645
|
|
|
|
358
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
1,708
|
|
|
|
255
|
|
|
|
32
|
|
Income tax
expense(2)
|
|
|
632
|
|
|
|
94
|
|
|
|
12
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income
|
|
$
|
1,076
|
|
|
$
|
157
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating expenses for the Lending,
APG, and Corporate and Other reportable segments include
$34 million, $12 million, and $17 million,
respectively, of stock option compensation expense.
|
|
(2) |
|
Income taxes are based on a
percentage of net income before tax for the individual
reportable segment.
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
2,298
|
|
|
$
|
|
|
|
$
|
|
|
FFELP Consolidation Loans
|
|
|
3,014
|
|
|
|
|
|
|
|
|
|
Private Education Loans
|
|
|
1,160
|
|
|
|
|
|
|
|
|
|
Other loans
|
|
|
85
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
|
396
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
6,953
|
|
|
|
|
|
|
|
5
|
|
Total interest expense
|
|
|
4,798
|
|
|
|
19
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
2,155
|
|
|
|
(19
|
)
|
|
|
(1
|
)
|
Less: provisions for loan losses
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
2,017
|
|
|
|
(19
|
)
|
|
|
(1
|
)
|
Contingency fee revenue
|
|
|
|
|
|
|
360
|
|
|
|
|
|
Guarantor serving fees
|
|
|
|
|
|
|
|
|
|
|
115
|
|
Collections revenue
|
|
|
|
|
|
|
167
|
|
|
|
|
|
Other income
|
|
|
111
|
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
111
|
|
|
|
527
|
|
|
|
240
|
|
Operating expenses
|
|
|
547
|
|
|
|
288
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
1,581
|
|
|
|
220
|
|
|
|
4
|
|
Income tax
expense(1)
|
|
|
586
|
|
|
|
81
|
|
|
|
1
|
|
Minority interest in net earnings of subsidiaries
|
|
|
2
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income
|
|
$
|
993
|
|
|
$
|
135
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 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
54
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 determining incentive compensation. Management
believes this information provides additional insight into the
financial performance of the Companys core business
activities. Core Earnings net income reflects only
current period adjustments to GAAP net income, as described in
the more detailed discussion of the differences between
Core Earnings and GAAP that follows, which includes
further detail on each specific adjustment required to reconcile
our Core Earnings segment presentation to our GAAP
earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Core Earnings adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact of securitization accounting
|
|
$
|
247
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
532
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(60
|
)
|
|
$
|
|
|
|
$
|
|
|
Net impact of derivative accounting
|
|
|
217
|
|
|
|
|
|
|
|
(1,558
|
)
|
|
|
131
|
|
|
|
|
|
|
|
(360
|
)
|
|
|
516
|
|
|
|
|
|
|
|
121
|
|
Net impact of Floor Income
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
(209
|
)
|
|
|
|
|
|
|
|
|
|
|
(204
|
)
|
|
|
|
|
|
|
|
|
Net impact of acquired intangibles
|
|
|
(55
|
)
|
|
|
(28
|
)
|
|
|
(29
|
)
|
|
|
(49
|
)
|
|
|
(34
|
)
|
|
|
(11
|
)
|
|
|
(42
|
)
|
|
|
(15
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings adjustments to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
|
|
$
|
240
|
|
|
$
|
(28
|
)
|
|
$
|
(1,587
|
)
|
|
$
|
405
|
|
|
$
|
(34
|
)
|
|
$
|
(371
|
)
|
|
$
|
210
|
|
|
$
|
(15
|
)
|
|
$
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the interest income,
provisions for loan losses, and interest expense as they are
earned or incurred on the securitization loans. We also exclude
transactions with our off-balance sheet trusts from Core
Earnings as they are considered intercompany transactions
on a Core Earnings basis.
55
The following table summarizes Core Earnings
securitization adjustments for the Lending operating segment for
the years ended December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Core Earnings securitization adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on securitized loans, before provisions for
loan losses and before intercompany transactions
|
|
$
|
(818
|
)
|
|
$
|
(896
|
)
|
|
$
|
(870
|
)
|
Provisions for loan losses
|
|
|
380
|
|
|
|
16
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on securitized loans, after provisions for
loan losses, before intercompany transactions
|
|
|
(438
|
)
|
|
|
(880
|
)
|
|
|
(935
|
)
|
Intercompany transactions with off-balance sheet trusts
|
|
|
(119
|
)
|
|
|
(43
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on securitized loans, after provisions for
loan losses
|
|
|
(557
|
)
|
|
|
(923
|
)
|
|
|
(969
|
)
|
Gains on student loan securitizations
|
|
|
367
|
|
|
|
902
|
|
|
|
552
|
|
Servicing and securitization revenue
|
|
|
437
|
|
|
|
553
|
|
|
|
357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings securitization adjustments
|
|
$
|
247
|
|
|
$
|
532
|
|
|
$
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany transactions with off-balance sheet
trusts in the above table relates primarily to the losses
incurred through the repurchase of delinquent loans out of our
off-balance sheet securitization trusts. When Private Education
Loans in our securitization trusts settling before
September 30, 2005, become 180 days delinquent, we
typically exercise our contingent call option to repurchase
these loans at par value out of the trust and record a loss for
the difference in the par value paid and the fair market value
of the loan at the time of purchase. The significant increase in
these intercompany transactions from 2006 to 2007 was driven
primarily by the increase in delinquency trends and charge-offs
during 2007 associated with our Private Education Loan
portfolio. We do not hold the contingent call option for any
trusts settled after September 30, 2005.
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 in our Corporate and Other reportable segment as it
relates to equity forwards. 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 paydown of principal of
the student loans underlying the Floor Income embedded in those
student loans does not exactly match the change in the notional
amount of our written Floor Income Contracts. Under
SFAS No. 133, the upfront payment is deemed a
liability and changes in fair value are recorded through income
throughout the life of the contract. The
56
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 3 month
LIBOR debt. SFAS No. 133 requires that when using
basis swaps, the change in the cash flows of the hedge
effectively offset both the change in the cash 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 most of
our FFELP student loans can earn at either a variable or a fixed
interest rate depending on market interest rates. We also have
basis swaps that do not meet the SFAS No. 133
effectiveness test that economically hedge off-balance sheet
instruments. As a result, under GAAP these swaps are recorded at
fair value with changes in fair value reflected 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 table below quantifies the adjustments for derivative
accounting under SFAS No. 133 on our net income for
the years ended December 31, 2007, 2006 and 2005, when
compared with the accounting principles employed in all years
prior to the SFAS No. 133 implementation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
Core Earnings derivative adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on derivative and hedging activities, net,
included in other
income(1)
|
|
$
|
(1,361
|
)
|
|
$
|
(339
|
)
|
|
$
|
247
|
|
|
|
|
|
Less: Realized losses on derivative and hedging activities,
net(1)
|
|
|
18
|
|
|
|
109
|
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on derivative and hedging activities,
net
|
|
|
(1,343
|
)
|
|
|
(230
|
)
|
|
|
634
|
|
|
|
|
|
Other pre-SFAS No. 133 accounting adjustments
|
|
|
2
|
|
|
|
1
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net impact of SFAS No. 133 derivative accounting
|
|
$
|
(1,341
|
)
|
|
$
|
(229
|
)
|
|
$
|
637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
57
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, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Reclassification of realized gains (losses) on derivative and
hedging activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net settlement expense on Floor Income Contracts reclassified to
net interest income
|
|
$
|
(67
|
)
|
|
$
|
(50
|
)
|
|
$
|
(259
|
)
|
Net settlement income (expense) on interest rate swaps
reclassified to net interest income
|
|
|
47
|
|
|
|
(59
|
)
|
|
|
(123
|
)
|
Net realized gains (losses) on terminated derivative contracts
reclassified to other income
|
|
|
2
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications of realized losses on derivative and
hedging activities
|
|
|
(18
|
)
|
|
|
(109
|
)
|
|
|
(387
|
)
|
Add: Unrealized gains (losses) on derivative and hedging
activities,
net(1)
|
|
|
(1,343
|
)
|
|
|
(230
|
)
|
|
|
634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on derivative and hedging activities, net
|
|
$
|
(1,361
|
)
|
|
$
|
(339
|
)
|
|
$
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unrealized gains (losses) on
derivative and hedging activities, net comprises the
following unrealized mark-to-market gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Floor Income Contracts
|
|
$
|
(209
|
)
|
|
$
|
176
|
|
|
$
|
481
|
|
Equity forward contracts
|
|
|
(1,558
|
)
|
|
|
(360
|
)
|
|
|
121
|
|
Basis swaps
|
|
|
360
|
|
|
|
(58
|
)
|
|
|
40
|
|
Other
|
|
|
64
|
|
|
|
12
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrealized gains (losses) on derivative and hedging
activities, net
|
|
$
|
(1,343
|
)
|
|
$
|
(230
|
)
|
|
$
|
634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains and losses on Floor Income Contracts are
primarily caused by changes in interest rates. In general, an
increase in interest rates results in an unrealized gain and
vice versa. Unrealized gains and losses on equity forward
contracts fluctuate with changes in the Companys stock
price. Unrealized gains and losses on basis swaps result from
changes in the spread between indices, primarily as it relates
to Consumer Price Index (CPI) swaps economically
hedging debt issuances indexed to CPI and on changes in the
forward interest rate curves that impact basis swaps hedging
repricing risk between quarterly reset debt and daily reset
assets.
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 fair value
adjustments on the Floor Income Contracts and futures
economically hedging Floor Income and include the amortization
of net premiums received in income.
58
The following table summarizes the Floor Income adjustments in
our Lending operating segment for the years ended
December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Core earnings Floor Income adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Floor Income earned on Managed loans, net of payments on Floor
Income Contracts
|
|
$
|
|
|
|
$
|
|
|
|
$
|
19
|
|
Amortization of net premiums on Floor Income Contracts and
futures in net interest income
|
|
|
(169
|
)
|
|
$
|
(209
|
)
|
|
$
|
(223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings Floor Income adjustments
|
|
$
|
(169
|
)
|
|
$
|
(209
|
)
|
|
$
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4) Acquired intangibles: Our Core
Earnings exclude goodwill and intangible impairment and
the amortization of acquired intangibles. For the years ended
December 31, 2007, 2006 and 2005, goodwill and intangible
impairment and the amortization of acquired intangibles totaled
$112 million, $94 million and $61 million,
respectively. The changes from year to year are mostly due to
the amounts of impairment recognized. 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
attributed 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, which are administered by
the U.S. Department of Education (ED), and
Private Education Loans, which are not federally or privately
guaranteed. The majority of our Private Education Loans is made
in conjunction with a FFELP Stafford loan and as a result is
marketed through the same marketing channels as FFELP Stafford
Loans. While FFELP student loans and Private Education Loans
have different overall risk profiles due to the federal
guarantee of the FFELP student loans, they share many of the
same characteristics, such as similar repayment terms, the same
marketing channel and sales force, and are serviced on the same
servicing platform. Finally, where possible, the borrower
receives a single bill for both the federally guaranteed and
privately underwritten loans.
The earnings growth in our Lending business segment is primarily
derived from the growth in our Managed portfolio of student
loans. In 2007, the total Managed portfolio grew by
$21.5 billion (15 percent) from $142.1 billion at
December 31, 2006 to $163.6 billion at
December 31, 2007. At December 31, 2007, our Managed
FFELP student loan portfolio was $135.2 billion or
83 percent of our total Managed student loans. In addition,
our Managed portfolio of Private Education Loans grew to
$28.3 billion from $22.6 billion. Private Education
Loans are not insured by the federal government and are
underwritten in accordance with the Companys credit
policies. Our Managed FFELP loans are high quality assets with
minimal credit risk as they are guaranteed by the federal
government for at least 97 percent. (See Item 1.
Business BUSINESS SEGMENTS LENDING
BUSINESS SEGMENT.)
59
The following table includes the Core Earnings
results of operations for our Lending business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
% Increase (Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs. 2006
|
|
|
2006 vs. 2005
|
|
|
Core Earnings interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
2,848
|
|
|
$
|
2,771
|
|
|
$
|
2,298
|
|
|
|
3
|
%
|
|
|
21
|
%
|
FFELP Consolidation Loans
|
|
|
5,522
|
|
|
|
4,690
|
|
|
|
3,014
|
|
|
|
18
|
|
|
|
56
|
|
Private Education Loans
|
|
|
2,835
|
|
|
|
2,092
|
|
|
|
1,160
|
|
|
|
36
|
|
|
|
80
|
|
Other loans
|
|
|
106
|
|
|
|
98
|
|
|
|
85
|
|
|
|
8
|
|
|
|
15
|
|
Cash and investments
|
|
|
868
|
|
|
|
705
|
|
|
|
396
|
|
|
|
23
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings interest income
|
|
|
12,179
|
|
|
|
10,356
|
|
|
|
6,953
|
|
|
|
18
|
|
|
|
49
|
|
Total Core Earnings interest expense
|
|
|
9,597
|
|
|
|
7,877
|
|
|
|
4,798
|
|
|
|
22
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Core Earnings interest income
|
|
|
2,582
|
|
|
|
2,479
|
|
|
|
2,155
|
|
|
|
4
|
|
|
|
15
|
|
Less: provisions for loan losses
|
|
|
1,394
|
|
|
|
303
|
|
|
|
138
|
|
|
|
360
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Core Earnings interest income after provisions
for loan losses
|
|
|
1,188
|
|
|
|
2,176
|
|
|
|
2,017
|
|
|
|
45
|
|
|
|
8
|
|
Other income
|
|
|
194
|
|
|
|
177
|
|
|
|
111
|
|
|
|
10
|
|
|
|
59
|
|
Operating expenses
|
|
|
709
|
|
|
|
645
|
|
|
|
547
|
|
|
|
10
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
673
|
|
|
|
1,708
|
|
|
|
1,581
|
|
|
|
(61
|
)
|
|
|
8
|
|
Income taxes
|
|
|
249
|
|
|
|
632
|
|
|
|
586
|
|
|
|
(61
|
)
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest in net earnings of subsidiaries
|
|
|
424
|
|
|
|
1,076
|
|
|
|
995
|
|
|
|
(61
|
)
|
|
|
8
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income
|
|
$
|
424
|
|
|
$
|
1,076
|
|
|
$
|
993
|
|
|
|
(61
|
)%
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in net interest income are primarily due to
fluctuations in the student loan spread discussed below, as well
as the growth in our student loan portfolio and the level of
cash and investments we may hold on our balance sheet for
liquidity purposes. In connection with the Merger Agreement, we
increased our liquidity portfolio to higher than historical
levels. The liquidity portfolio has a negative net interest
margin, and as a result, the increase in this portfolio reduced
net interest income by $18 million for the year ended
December 31, 2007.
60
Summary
of our Managed Student Loan Portfolio
The following tables summarize the components of our Managed
student loan portfolio and show the changing composition of our
portfolio.
Ending
Balances (net of allowance for loan losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 allowance for losses
|
|
|
(48
|
)
|
|
|
(41
|
)
|
|
|
(89
|
)
|
|
|
(886
|
)
|
|
|
(975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 allowance for losses
|
|
|
(20
|
)
|
|
|
(9
|
)
|
|
|
(29
|
)
|
|
|
(334
|
)
|
|
|
(363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Total
|
|
|
On-balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-school
|
|
$
|
9,745
|
|
|
$
|
|
|
|
$
|
9,745
|
|
|
$
|
4,353
|
|
|
$
|
14,098
|
|
Grace and repayment
|
|
|
14,530
|
|
|
|
60,348
|
|
|
|
74,878
|
|
|
|
6,075
|
|
|
|
80,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet, gross
|
|
|
24,275
|
|
|
|
60,348
|
|
|
|
84,623
|
|
|
|
10,428
|
|
|
|
95,051
|
|
On-balance sheet unamortized premium/(discount)
|
|
|
575
|
|
|
|
988
|
|
|
|
1,563
|
|
|
|
(365
|
)
|
|
|
1,198
|
|
On-balance sheet allowance for losses
|
|
|
(9
|
)
|
|
|
(12
|
)
|
|
|
(21
|
)
|
|
|
(308
|
)
|
|
|
(329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet, net
|
|
|
24,841
|
|
|
|
61,324
|
|
|
|
86,165
|
|
|
|
9,755
|
|
|
|
95,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-school
|
|
|
2,047
|
|
|
|
|
|
|
|
2,047
|
|
|
|
3,892
|
|
|
|
5,939
|
|
Grace and repayment
|
|
|
12,747
|
|
|
|
17,817
|
|
|
|
30,564
|
|
|
|
9,330
|
|
|
|
39,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet, gross
|
|
|
14,794
|
|
|
|
17,817
|
|
|
|
32,611
|
|
|
|
13,222
|
|
|
|
45,833
|
|
Off-balance sheet unamortized premium/(discount)
|
|
|
244
|
|
|
|
497
|
|
|
|
741
|
|
|
|
(303
|
)
|
|
|
438
|
|
Off-balance sheet allowance for losses
|
|
|
(10
|
)
|
|
|
(3
|
)
|
|
|
(13
|
)
|
|
|
(86
|
)
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet, net
|
|
|
15,028
|
|
|
|
18,311
|
|
|
|
33,339
|
|
|
|
12,833
|
|
|
|
46,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
|
|
$
|
39,869
|
|
|
$
|
79,635
|
|
|
$
|
119,504
|
|
|
$
|
22,588
|
|
|
$
|
142,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of on-balance sheet FFELP
|
|
|
29
|
%
|
|
|
71
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Managed FFELP
|
|
|
33
|
%
|
|
|
67
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of total
|
|
|
28
|
%
|
|
|
56
|
%
|
|
|
84
|
%
|
|
|
16
|
%
|
|
|
100
|
%
|
|
|
|
(1) |
|
FFELP category is primarily
Stafford loans and also includes federally insured PLUS and HEAL
loans.
|
61
Average
Balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
|
|
|
Education
|
|
|
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
Total FFELP
|
|
|
Loans
|
|
|
Total
|
|
|
On-balance sheet
|
|
$
|
20,720
|
|
|
$
|
47,082
|
|
|
$
|
67,802
|
|
|
$
|
6,922
|
|
|
$
|
74,724
|
|
Off-balance sheet
|
|
|
24,182
|
|
|
|
9,800
|
|
|
|
33,982
|
|
|
|
7,238
|
|
|
|
41,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
|
|
$
|
44,902
|
|
|
$
|
56,882
|
|
|
$
|
101,784
|
|
|
$
|
14,160
|
|
|
$
|
115,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of on-balance sheet FFELP
|
|
|
31
|
%
|
|
|
69
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Managed FFELP
|
|
|
44
|
%
|
|
|
56
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of total
|
|
|
39
|
%
|
|
|
49
|
%
|
|
|
88
|
%
|
|
|
12
|
%
|
|
|
100
|
%
|
|
|
|
(1) |
|
FFELP category is primarily
Stafford loans and also includes federally insured PLUS and HEAL
loans.
|
Student
Loan Spread Analysis Core Earnings
Basis
The following table analyzes the earnings from our portfolio of
Managed student loans on a Core Earnings basis (see
BUSINESS SEGMENTS Limitations of Core
Earnings Pre-tax Differences between
Core Earnings and GAAP by Business
Segment). The Core Earnings Basis Student
Loan Spread Analysis presentation and certain components used in
the calculation differ from the On-Balance Sheet Student Loan
Spread Analysis presentation. The Core Earnings
basis presentation, when compared to our on-balance sheet
presentation, is different in that it:
|
|
|
|
|
includes the net interest margin related to our off-balance
sheet student loan securitization trusts. This includes any
related fees or costs such as the Consolidation Loan Rebate
Fees, premium/discount amortization and 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 item in the consolidated
statement of income and are
|
62
therefore not recognized in the 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 basis student loan spread, this
would primarily include: (a) reclassifying the net
settlement amounts related to our written Floor Income Contracts
to student loan interest income and (b) reclassifying the
net settlement amounts related to certain of our basis swaps to
debt interest expense;
|
|
|
|
|
excludes unhedged Floor Income earned on the Managed student
loan portfolio; and
|
|
|
|
includes the amortization of upfront payments on Floor Income
Contracts in student loan income that we believe are
economically hedging the Floor Income.
|
The student loan spread is highly susceptible to liquidity,
funding and interest rate risk. These risks are discussed
separately at LIQUIDITY AND CAPITAL RESOURCES and in
the RISK FACTORS discussion at the front of the
document.
As discussed above, these differences result in the Core
Earnings basis student loan spread not being a GAAP-basis
presentation. Management relies on this measure to manage our
Lending business segment. Specifically, management uses the
Core Earnings basis student loan spread to evaluate
the overall economic effect that certain factors have on our
student loans either on- or off-balance sheet. These factors
include the overall mix of student loans in our portfolio,
acquisition costs, borrower benefits program costs, Floor Income
and funding and hedging costs. Management believes that it is
important to evaluate all of these factors on a Core
Earnings basis to gain additional information about the
economic effect of these factors on our student loans under
management. Management believes that this additional information
assists us in making strategic decisions about the
Companys business model for the Lending business segment,
including among other factors, how we acquire or originate
student loans, how we fund acquisitions and originations, what
borrower benefits we offer and what type of loans we purchase or
originate. While management believes that the Core
Earnings basis student loan spread is an important tool
for evaluating the Companys performance for the reasons
described above, it is subject to certain general and specific
limitations that investors should carefully consider. See
BUSINESS SEGMENTS Limitations of Core
Earnings. One specific limitation is that the
63
Core Earnings basis student loan spread includes the
spread on loans that we have sold to securitization trusts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Core Earnings basis student loan yield
|
|
|
8.16
|
%
|
|
|
8.09
|
%
|
|
|
6.32
|
%
|
Consolidation Loan Rebate Fees
|
|
|
(.55
|
)
|
|
|
(.55
|
)
|
|
|
(.50
|
)
|
Repayment Borrower Benefits
|
|
|
(.11
|
)
|
|
|
(.09
|
)
|
|
|
(.07
|
)
|
Premium and discount amortization
|
|
|
(.16
|
)
|
|
|
(.16
|
)
|
|
|
(.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings basis student loan net yield
|
|
|
7.34
|
|
|
|
7.29
|
|
|
|
5.58
|
|
Core Earnings basis student loan cost of funds
|
|
|
(5.57
|
)
|
|
|
(5.45
|
)
|
|
|
(3.80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings basis student loan spread, before
Interim ABCP Facility
Fees(1)(2)
|
|
|
1.77
|
%
|
|
|
1.84
|
%
|
|
|
1.78
|
%
|
Interim ABCP Facility
Fees(2)
|
|
|
(.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings basis student loan
spread(1)(3)
|
|
|
1.74
|
%
|
|
|
1.84
|
%
|
|
|
1.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings basis student loan spreads by
product:
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Loan Spreads, before Interim ABCP Facility Fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stafford
|
|
|
1.17
|
%
|
|
|
1.40
|
%
|
|
|
1.48
|
%
|
Consolidation
|
|
|
1.00
|
|
|
|
1.18
|
|
|
|
1.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP Loan Spread, before Interim ABCP Facility
Fees(1)(2)
|
|
|
1.04
|
|
|
|
1.26
|
|
|
|
1.39
|
|
Private Education Loan Spread, before Interim ABCP Facility
Fees(2)
|
|
|
5.15
|
|
|
|
5.13
|
|
|
|
4.62
|
|
Private Education Loan Spread, after provision and before
Interim ABCP Facility
Fees(2)
|
|
|
.44
|
|
|
|
3.75
|
|
|
|
3.88
|
|
Average Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet student
loans(1)
|
|
$
|
104,740
|
|
|
$
|
84,173
|
|
|
$
|
74,724
|
|
Off-balance sheet student loans
|
|
|
42,411
|
|
|
|
46,336
|
|
|
|
41,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed student loans
|
|
$
|
147,151
|
|
|
$
|
130,509
|
|
|
$
|
115,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Excludes
the effect of the Wholesale Consolidation Loan portfolio on the
student loan spread and average balances for the years ended
December 31, 2007 and 2006.
|
(2) The
Interim ABCP Facility Fees are the commitment and liquidity fees
related to a financing facility in connection with the Merger
Agreement.
|
(3) Core
Earnings basis student loan spread, including the effect
of Wholesale Consolidation Loans
|
|
|
1.67
|
%
|
|
|
1.84
|
%
|
|
|
1.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys Core Earnings basis student loan
spread before Interim ABCP Facility Fees and the effect of
Wholesale Consolidation Loans decreased 7 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 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, we
had a similar rise in the estimate of uncollectable accrued
interest receivable. The Company experienced a higher cost of
funds in 2007 primarily due to the disruption in the credit
markets, as previously discussed. This was mostly offset by the
growth in the Private Education Loan portfolio which earns a
higher margin (before considering provision).
The Companys Core Earnings basis student loan
spread before Interim ABCP Facility Fees and the effect of
Wholesale Consolidation Loans remained relatively consistent
over all periods presented above,
64
excluding the impact of the interest reserving method discussed
above. The primary drivers of changes in the spread are changes
in portfolio composition, borrower benefits, premium
amortization, and cost of funds. The FFELP loan spread declined
over all periods presented above primarily due to increased cost
of funds, Front-End Borrower Benefits (Stafford), and a decline
in hedged Floor Income (Consolidation). The Private Education
Loan spreads before provision, excluding the impact of the
interest reserving method discussed above, continued to increase
due primarily to a change in the mix of the portfolio to more
direct-to-consumer loans (Tuition Answer loans). The changes in
the Private Education Loan spreads after provision for all
periods was primarily due to the timing and amount of provision
associated with our allowance for Private Education Loan Losses
as discussed below in Private Education Loans.
Floor
Income Managed Basis
The following table analyzes the ability of the FFELP student
loans in our Managed student loan portfolio to earn Floor Income
after December 31, 2007 and 2006, based on interest rates
as of those dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
|
|
|
Borrower
|
|
|
Borrower
|
|
|
|
|
|
Borrower
|
|
|
Borrower
|
|
|
|
|
|
|
Rate
|
|
|
Rate
|
|
|
Total
|
|
|
Rate
|
|
|
Rate
|
|
|
Total
|
|
(Dollars in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loans eligible to earn Floor Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet student loans
|
|
$
|
89.3
|
|
|
$
|
17.1
|
|
|
$
|
106.4
|
|
|
$
|
63.0
|
|
|
$
|
18.3
|
|
|
$
|
81.3
|
|
Off-balance sheet student loans
|
|
|
15.9
|
|
|
|
9.2
|
|
|
|
25.1
|
|
|
|
17.8
|
|
|
|
14.5
|
|
|
|
32.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed student loans eligible to earn Floor Income
|
|
|
105.2
|
|
|
|
26.3
|
|
|
|
131.5
|
|
|
|
80.8
|
|
|
|
32.8
|
|
|
|
113.6
|
|
Less: Post March 31, 2006 disbursed loans required to rebate
Floor Income
|
|
|
(45.9
|
)
|
|
|
(1.5
|
)
|
|
|
(47.4
|
)
|
|
|
(20.5
|
)
|
|
|
(1.3
|
)
|
|
|
(21.8
|
)
|
Less: notional amount of Floor Income Contracts
|
|
|
(15.7
|
)
|
|
|
(17.4
|
)
|
|
|
(33.1
|
)
|
|
|
(16.4
|
)
|
|
|
|
|
|
|
(16.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Managed student loans eligible to earn Floor Income
|
|
$
|
43.6
|
|
|
$
|
7.4
|
|
|
$
|
51.0
|
|
|
$
|
43.9
|
|
|
$
|
31.5
|
|
|
$
|
75.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Managed student loans earning Floor Income as of
December 31,
|
|
$
|
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 whose Fixed Rate Floor
Income has already been economically hedged through Floor Income
Contracts for the period January 1, 2008 to March 31,
2010. These loans are both on and off-balance sheet and the
related hedges do not qualify under SFAS No. 133
accounting as effective hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
(Dollars in billions)
|
|
|
|
|
|
|
|
|
|
|
Average balance of FFELP Consolidation Loans whose Floor Income
is economically hedged (Managed Basis)
|
|
$
|
15
|
|
|
$
|
10
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Education Loans
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.
65
The following table summarizes changes in the allowance for
Private Education Loan losses for the years ended
December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Allowance at beginning of period
|
|
$
|
308
|
|
|
$
|
204
|
|
|
$
|
172
|
|
|
$
|
86
|
|
|
$
|
78
|
|
|
$
|
143
|
|
|
$
|
394
|
|
|
$
|
282
|
|
|
$
|
315
|
|
Provision for Private Education Loan losses
|
|
|
884
|
|
|
|
258
|
|
|
|
186
|
|
|
|
349
|
|
|
|
15
|
|
|
|
3
|
|
|
|
1,233
|
|
|
|
273
|
|
|
|
189
|
|
Change in net loss estimates
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
|
884
|
|
|
|
258
|
|
|
|
177
|
|
|
|
349
|
|
|
|
15
|
|
|
|
(73
|
)
|
|
|
1,233
|
|
|
|
273
|
|
|
|
104
|
|
Charge-offs
|
|
|
(332
|
)
|
|
|
(160
|
)
|
|
|
(154
|
)
|
|
|
(107
|
)
|
|
|
(24
|
)
|
|
|
(2
|
)
|
|
|
(439
|
)
|
|
|
(184
|
)
|
|
|
(156
|
)
|
Recoveries
|
|
|
32
|
|
|
|
23
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
23
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(300
|
)
|
|
|
(137
|
)
|
|
|
(135
|
)
|
|
|
(107
|
)
|
|
|
(24
|
)
|
|
|
(2
|
)
|
|
|
(407
|
)
|
|
|
(161
|
)
|
|
|
(137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance before securitization of Private Education Loans
|
|
|
892
|
|
|
|
325
|
|
|
|
214
|
|
|
|
328
|
|
|
|
69
|
|
|
|
68
|
|
|
|
1,220
|
|
|
|
394
|
|
|
|
282
|
|
Reduction for securitization of Private Education Loans
|
|
|
(6
|
)
|
|
|
(17
|
)
|
|
|
(10
|
)
|
|
|
6
|
|
|
|
17
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period
|
|
$
|
886
|
|
|
$
|
308
|
|
|
$
|
204
|
|
|
$
|
334
|
|
|
$
|
86
|
|
|
$
|
78
|
|
|
$
|
1,220
|
|
|
$
|
394
|
|
|
$
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs as a percentage of average loans in repayment
|
|
|
5.04
|
%
|
|
|
3.22
|
%
|
|
|
4.14
|
%
|
|
|
1.46
|
%
|
|
|
.43
|
%
|
|
|
.07
|
%
|
|
|
3.07
|
%
|
|
|
1.62
|
%
|
|
|
1.89
|
%
|
Net charge-offs as a percentage of average loans in repayment
and forbearance
|
|
|
4.54
|
%
|
|
|
2.99
|
%
|
|
|
3.86
|
%
|
|
|
1.27
|
%
|
|
|
.38
|
%
|
|
|
.06
|
%
|
|
|
2.71
|
%
|
|
|
1.47
|
%
|
|
|
1.72
|
%
|
Allowance as a percentage of the ending total loan balance
|
|
|
5.64
|
%
|
|
|
3.06
|
%
|
|
|
2.56
|
%
|
|
|
2.41
|
%
|
|
|
.66
|
%
|
|
|
.89
|
%
|
|
|
4.13
|
%
|
|
|
1.71
|
%
|
|
|
1.69
|
%
|
Allowance as a percentage of ending loans in repayment
|
|
|
12.57
|
%
|
|
|
6.36
|
%
|
|
|
5.57
|
%
|
|
|
4.28
|
%
|
|
|
1.26
|
%
|
|
|
1.68
|
%
|
|
|
8.21
|
%
|
|
|
3.38
|
%
|
|
|
3.40
|
%
|
Average coverage of net charge-offs
|
|
|
2.95
|
|
|
|
2.25
|
|
|
|
1.52
|
|
|
|
3.13
|
|
|
|
3.46
|
|
|
|
29.75
|
|
|
|
3.00
|
|
|
|
2.44
|
|
|
|
2.06
|
|
Average total loans
|
|
$
|
12,507
|
|
|
$
|
8,585
|
|
|
$
|
6,922
|
|
|
$
|
13,683
|
|
|
$
|
11,138
|
|
|
$
|
7,238
|
|
|
$
|
26,190
|
|
|
$
|
19,723
|
|
|
$
|
14,160
|
|
Ending total loans
|
|
$
|
15,704
|
|
|
$
|
10,063
|
|
|
$
|
7,961
|
|
|
$
|
13,844
|
|
|
$
|
12,919
|
|
|
$
|
8,758
|
|
|
$
|
29,548
|
|
|
$
|
22,982
|
|
|
$
|
16,719
|
|
Average loans in repayment
|
|
$
|
5,949
|
|
|
$
|
4,257
|
|
|
$
|
3,252
|
|
|
$
|
7,305
|
|
|
$
|
5,721
|
|
|
$
|
4,002
|
|
|
$
|
13,254
|
|
|
$
|
9,978
|
|
|
$
|
7,254
|
|
Ending loans in repayment
|
|
$
|
7,047
|
|
|
$
|
4,851
|
|
|
$
|
3,662
|
|
|
$
|
7,819
|
|
|
$
|
6,792
|
|
|
$
|
4,653
|
|
|
$
|
14,866
|
|
|
$
|
11,643
|
|
|
$
|
8,315
|
|
On-Balance
Sheet versus Managed Presentation
All Private Education Loans are initially acquired on-balance
sheet. When we securitize Private Education Loans, we no longer
legally own the loans and they are accounted for off-balance
sheet. For our Managed presentation in the table above, when
loans are securitized, we reduce the on-balance sheet allowance
for amounts previously provided and then provide for these loans
off-balance sheet with the total of both on and off-balance
sheet being the Managed allowance.
When Private Education Loans in our securitized trusts settling
before September 30, 2005, become 180 days delinquent,
we typically exercise our contingent call option to repurchase
these loans at par value out of the trust and record a loss for
the difference in the par value paid and the fair market value
of the loan at the time of purchase. If these loans reach the
212-day
delinquency, a charge-off for the remaining balance of the loan
is triggered. On a Managed Basis, the losses recorded under GAAP
for loans repurchased at day 180
66
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 is lower than the on-balance sheet
percentage because of the different mix of loans on-balance
sheet and off-balance sheet, as described above.
Managed
Basis Private Education Loan Loss Allowance
Discussion
As the Private Education Loan portfolio seasons and due to
shifts in its mix and certain economic factors, we expected and
have seen charge-off rates increase from the historically low
levels experienced in prior years. Additionally, this increase
was significantly impacted by other factors. Toward the end of
2006 and through mid-2007, we experienced lower pre-default
collections, resulting in increased levels of charge-off
activity in our Private Education Loan portfolio. In the second
half of 2006, we relocated responsibility for certain Private
Education Loan collections from our Nevada call center to a new
call center in Indiana. This transfer presented us with
unexpected operational challenges that resulted in lower
collections that have negatively impacted the Private Education
Loan portfolio. In addition, in late 2006, we revised certain
procedures, including our use of forbearance, to better optimize
our long-term collection strategies. These developments resulted
in lower pre-default collections, increased later stage
delinquency levels and higher charge-offs. Due to the remedial
actions in place, we anticipate the negative trends caused by
the operational difficulties will improve in 2008.
In the fourth quarter of 2007 the Company recorded provision
expense of $667 million related to the Managed Private
Education Loan portfolio. This significant increase in provision
primarily relates 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 the Company
had been expanding over the past few years. The non-traditional
portfolio is particularly impacted by the weakening
U.S. economy, as evidenced by recently released economic
indicators, certain credit-related trends in the Companys
portfolio and a further tightening of forbearance practices. The
Company has recently taken actions 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 the Companys Private Education Loan
programs. The Company charges off loans after 212 days of
delinquency. Accordingly, the Company believes that charge-offs
occurring late in 2007 represent losses incurred at the onset of
the current economic downturn and do not incorporate the
full-effect of the general economic downturn that became evident
in the fourth quarter of 2007. In addition, the Company has
historically been able to mitigate its losses during varying
economic environments through the use of forbearance and other
collection management strategies. With the continued weakening
of the U.S. economy, and the projected continued
recessionary conditions, the Company believes that those
strategies as they relate to the non-traditional portion of the
loan portfolio will not be as effective as they have been in the
past. For these reasons, the Company recorded additional
provision in the fourth quarter of 2007.
67
The following table provides the detail for the traditional and
non-traditional Managed Private Education Loans at
December 31, 2007. As noted above, we have not used these
terms in prior filings with the SEC in our Annual Report on
Form 10-K
and quarterly reports on
Form 10-Q,
but believe these new measures will provide additional
information regarding the actual and projected performance of
the Private Education Loan portfolios that include
non-traditional loans. Because we have not measured or reported
the performance of our Managed Private Education Loans in terms
of traditional and non-traditional loans in the past, we have
extrapolated the data for 2006 based upon our recent analyses
solely for comparative purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Traditional
|
|
|
Traditional
|
|
|
Total
|
|
|
Traditional
|
|
|
Traditional
|
|
|
Total
|
|
|
Ending total loans (before allowance)
|
|
$
|
25,092
|
|
|
$
|
4,456
|
|
|
$
|
29,548
|
|
|
$
|
19,533
|
|
|
$
|
3,449
|
|
|
$
|
22,982
|
|
Private Education Loan allowance for losses
|
|
|
438
|
|
|
|
782
|
|
|
|
1,220
|
|
|
|
179
|
|
|
|
215
|
|
|
|
394
|
|
Net charge-offs as a percentage of average loans in repayment
|
|
|
1.50
|
%
|
|
|
11.93
|
%
|
|
|
3.07
|
%
|
|
|
.63
|
%
|
|
|
7.17
|
%
|
|
|
1.62
|
%
|
Allowance as a percentage of total ending loan balance
|
|
|
1.75
|
%
|
|
|
17.56
|
%
|
|
|
4.13
|
%
|
|
|
.91
|
%
|
|
|
6.24
|
%
|
|
|
1.71
|
%
|
Allowance as a percentage of ending loans in repayment
|
|
|
3.45
|
%
|
|
|
36.30
|
%
|
|
|
8.21
|
%
|
|
|
1.82
|
%
|
|
|
11.82
|
%
|
|
|
3.38
|
%
|
Average coverage of net charge-offs
|
|
|
2.58
|
|
|
|
3.30
|
|
|
|
3.00
|
|
|
|
3.33
|
|
|
|
2.01
|
|
|
|
2.44
|
|
68
Private
Education Loan Delinquencies
The table below presents our Private Education Loan delinquency
trends as of December 31, 2007, 2006 and 2005.
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
8,151
|
|
|
|
|
|
|
$
|
5,218
|
|
|
|
|
|
|
$
|
4,301
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
974
|
|
|
|
|
|
|
|
359
|
|
|
|
|
|
|
|
303
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
6,236
|
|
|
|
88.5
|
%
|
|
|
4,214
|
|
|
|
86.9
|
%
|
|
|
3,311
|
|
|
|
90.4
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
306
|
|
|
|
4.3
|
|
|
|
250
|
|
|
|
5.1
|
|
|
|
166
|
|
|
|
4.5
|
|
Loans delinquent
61-90 days(3)
|
|
|
176
|
|
|
|
2.5
|
|
|
|
132
|
|
|
|
2.7
|
|
|
|
77
|
|
|
|
2.1
|
|
Loans delinquent greater than
90 days(3)
|
|
|
329
|
|
|
|
4.7
|
|
|
|
255
|
|
|
|
5.3
|
|
|
|
108
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans in repayment
|
|
|
7,047
|
|
|
|
100
|
%
|
|
|
4,851
|
|
|
|
100
|
%
|
|
|
3,662
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans, gross
|
|
|
16,172
|
|
|
|
|
|
|
|
10,428
|
|
|
|
|
|
|
|
8,266
|
|
|
|
|
|
Private Education Loan unamortized discount
|
|
|
(468
|
)
|
|
|
|
|
|
|
(365
|
)
|
|
|
|
|
|
|
(305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans
|
|
|
15,704
|
|
|
|
|
|
|
|
10,063
|
|
|
|
|
|
|
|
7,961
|
|
|
|
|
|
Private Education Loan allowance for losses
|
|
|
(886
|
)
|
|
|
|
|
|
|
(308
|
)
|
|
|
|
|
|
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Education Loans, net
|
|
$
|
14,818
|
|
|
|
|
|
|
$
|
9,755
|
|
|
|
|
|
|
$
|
7,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Private Education Loans in repayment
|
|
|
|
|
|
|
43.6
|
%
|
|
|
|
|
|
|
46.5
|
%
|
|
|
|
|
|
|
44.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
|
|
|
|
|
|
11.5
|
%
|
|
|
|
|
|
|
13.1
|
%
|
|
|
|
|
|
|
9.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
|
|
|
|
12.1
|
%
|
|
|
|
|
|
|
6.9
|
%
|
|
|
|
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loans for borrowers who still may
be attending school or engaging in other permitted educational
activities and are not yet required to make payments on 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.
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Private Education
|
|
|
|
Loan Delinquencies
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
4,963
|
|
|
|
|
|
|
$
|
5,608
|
|
|
|
|
|
|
$
|
3,679
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
1,417
|
|
|
|
|
|
|
|
822
|
|
|
|
|
|
|
|
614
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
7,403
|
|
|
|
94.7
|
%
|
|
|
6,419
|
|
|
|
94.5
|
%
|
|
|
4,446
|
|
|
|
95.6
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
202
|
|
|
|
2.6
|
|
|
|
222
|
|
|
|
3.3
|
|
|
|
136
|
|
|
|
2.9
|
|
Loans delinquent
61-90 days(3)
|
|
|
84
|
|
|
|
1.1
|
|
|
|
60
|
|
|
|
.9
|
|
|
|
35
|
|
|
|
.7
|
|
Loans delinquent greater than
90 days(3)
|
|
|
130
|
|
|
|
1.6
|
|
|
|
91
|
|
|
|
1.3
|
|
|
|
36
|
|
|
|
.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans in repayment
|
|
|
7,819
|
|
|
|
100
|
%
|
|
|
6,792
|
|
|
|
100
|
%
|
|
|
4,653
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans, gross
|
|
|
14,199
|
|
|
|
|
|
|
|
13,222
|
|
|
|
|
|
|
|
8,946
|
|
|
|
|
|
Private Education Loan unamortized discount
|
|
|
(355
|
)
|
|
|
|
|
|
|
(303
|
)
|
|
|
|
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans
|
|
|
13,844
|
|
|
|
|
|
|
|
12,919
|
|
|
|
|
|
|
|
8,758
|
|
|
|
|
|
Private Education Loan allowance for losses
|
|
|
(334
|
)
|
|
|
|
|
|
|
(86
|
)
|
|
|
|
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Education Loans, net
|
|
$
|
13,510
|
|
|
|
|
|
|
$
|
12,833
|
|
|
|
|
|
|
$
|
8,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Private Education Loans in repayment
|
|
|
|
|
|
|
55.1
|
%
|
|
|
|
|
|
|
51.4
|
%
|
|
|
|
|
|
|
52.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
|
|
|
|
|
|
5.3
|
%
|
|
|
|
|
|
|
5.5
|
%
|
|
|
|
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
|
|
|
|
15.3
|
%
|
|
|
|
|
|
|
10.8
|
%
|
|
|
|
|
|
|
11.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Basis Private Education
|
|
|
|
Loan Delinquencies
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
13,114
|
|
|
|
|
|
|
$
|
10,826
|
|
|
|
|
|
|
$
|
7,980
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
2,391
|
|
|
|
|
|
|
|
1,181
|
|
|
|
|
|
|
|
917
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
13,639
|
|
|
|
91.7
|
%
|
|
|
10,633
|
|
|
|
91.3
|
%
|
|
|
7,757
|
|
|
|
93.3
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
508
|
|
|
|
3.4
|
|
|
|
472
|
|
|
|
4.0
|
|
|
|
302
|
|
|
|
3.6
|
|
Loans delinquent
61-90 days(3)
|
|
|
260
|
|
|
|
1.8
|
|
|
|
192
|
|
|
|
1.7
|
|
|
|
112
|
|
|
|
1.4
|
|
Loans delinquent greater than
90 days(3)
|
|
|
459
|
|
|
|
3.1
|
|
|
|
346
|
|
|
|
3.0
|
|
|
|
144
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans in repayment
|
|
|
14,866
|
|
|
|
100
|
%
|
|
|
11,643
|
|
|
|
100
|
%
|
|
|
8,315
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans, gross
|
|
|
30,371
|
|
|
|
|
|
|
|
23,650
|
|
|
|
|
|
|
|
17,212
|
|
|
|
|
|
Private Education Loan unamortized discount
|
|
|
(823
|
)
|
|
|
|
|
|
|
(668
|
)
|
|
|
|
|
|
|
(493
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans
|
|
|
29,548
|
|
|
|
|
|
|
|
22,982
|
|
|
|
|
|
|
|
16,719
|
|
|
|
|
|
Private Education Loan allowance for losses
|
|
|
(1,220
|
)
|
|
|
|
|
|
|
(394
|
)
|
|
|
|
|
|
|
(282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Education Loans, net
|
|
$
|
28,328
|
|
|
|
|
|
|
$
|
22,588
|
|
|
|
|
|
|
$
|
16,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Private Education Loans in repayment
|
|
|
|
|
|
|
48.9
|
%
|
|
|
|
|
|
|
49.2
|
%
|
|
|
|
|
|
|
48.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
|
|
|
|
|
|
8.3
|
%
|
|
|
|
|
|
|
8.7
|
%
|
|
|
|
|
|
|
6.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
|
|
|
|
13.9
|
%
|
|
|
|
|
|
|
9.2
|
%
|
|
|
|
|
|
|
9.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 policies and procedures.
|
|
(3) |
|
The period of delinquency is based
on the number of days scheduled payments are contractually past
due.
|
Forbearance
Managed Basis Private Education Loans
Private Education Loans are made to parent and student borrowers
in accordance with our underwriting policies. These loans
generally supplement federally guaranteed student loans, which
are subject to federal lending caps. Private Education Loans are
not federally guaranteed or insured against any loss of
principal or interest. Student borrowers use the proceeds of
these loans to obtain higher education, which increases the
likelihood of obtaining employment at higher income levels than
would be available without the additional education. As a
result, the borrowers repayment capability improves
between the time the loan is made and the time they enter the
post-education work force. We generally allow the loan repayment
period on most higher education Private Education Loans to begin
six months after the borrower leaves school (consistent with our
federally regulated FFELP loans). This provides the borrower
time after graduation to obtain a job to service the debt. For
borrowers that need more time or experience other hardships, we
permit additional delays in payment or partial payments (both
referred to as forbearances) when we believe additional time
will improve the borrowers ability to repay the loan.
Forbearance is also granted to borrowers who may experience
71
temporary hardship after entering repayment, when we believe
that it will increase the likelihood of ultimate collection of
the loan. Forbearance can be requested by the borrower or
initiated by the Company and is granted within established
policies that include limits on the number of forbearance months
granted consecutively and limits on the total number of
forbearance months granted over the life of the loan. In some
instances of forbearance, we require good-faith payments or
continuing partial payments. Exceptions to forbearance policies
are permitted in limited circumstances and only when such
exceptions are judged to increase the likelihood of ultimate
collection of the loan.
Forbearance does not grant any reduction in the total repayment
obligation (principal or interest) but does allow for the
temporary cessation of borrower payments (on a prospective
and/or
retroactive basis) or a reduction in monthly payments for an
agreed period of time. The forbearance period extends the
original term of the loan. While the loan is in forbearance,
interest continues to accrue and is capitalized as principal
upon the loan re-entering repayment status. Loans exiting
forbearance into repayment status are considered current
regardless of their previous delinquency status.
Forbearance is used most heavily immediately after the loan
enters repayment. As indicated in the tables below that show the
composition and status of the Managed Private Education Loan
portfolio by number of months aged from the first date of
repayment, the percentage of loans in forbearance decreases the
longer the loans have been in repayment. At December 31,
2007, loans in forbearance as a percentage of loans in repayment
and forbearance is 17.2 percent for loans that have been in
repayment one to twenty-four months. The percentage drops to
5.8 percent for loans that have been in repayment more than
48 months. Approximately 74 percent of our Managed
Private Education Loans in forbearance have been in repayment
less than 24 months. These borrowers are essentially
extending their grace period as they transition to the workforce.
Forbearance policies were tightened in late 2006 and again in
late 2007. The increase in use of forbearance is attributed to
both a weakening of the U.S. economy, as previously
discussed, as well as improved borrower contact procedures. In
the majority of situations forbearance continues to be a
positive collection tool for Private Education Loans as we
believe it can provide the borrower with sufficient time to
obtain employment and income to support his or her obligation.
Our experience has consistently shown that two years after being
granted a first forbearance, close to 75 percent of the
loans are current, paid in full, or receiving an in-school grace
or deferment, and only five percent have charged off. However,
as discussed earlier, we believe that forbearance will be less
effective for non-traditional loans during a weakened
U.S. economy. Loans in forbearance are reserved
commensurate with the default expectation of this specific loan
status.
72
The tables below show the composition and status of the Private
Education Loan portfolio by number of months aged from the first
date of repayment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months Since Entering Repayment
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
|
|
1 to 24
|
|
|
25 to 48
|
|
|
More than
|
|
|
Dec. 31,
|
|
|
|
|
|
|
months
|
|
|
months
|
|
|
48 months
|
|
|
2007(1)
|
|
|
Total
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in-school/grace/deferment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,114
|
|
|
$
|
13,114
|
|
Loans in forbearance
|
|
|
1,770
|
|
|
|
461
|
|
|
|
160
|
|
|
|
|
|
|
|
2,391
|
|
Loans in repayment current
|
|
|
7,885
|
|
|
|
3,348
|
|
|
|
2,406
|
|
|
|
|
|
|
|
13,639
|
|
Loans in repayment delinquent
31-60 days
|
|
|
277
|
|
|
|
145
|
|
|
|
86
|
|
|
|
|
|
|
|
508
|
|
Loans in repayment delinquent
61-90 days
|
|
|
144
|
|
|
|
78
|
|
|
|
38
|
|
|
|
|
|
|
|
260
|
|
Loans in repayment delinquent greater than
90 days
|
|
|
221
|
|
|
|
160
|
|
|
|
78
|
|
|
|
|
|
|
|
459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,297
|
|
|
$
|
4,192
|
|
|
$
|
2,768
|
|
|
$
|
13,114
|
|
|
$
|
30,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(823
|
)
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed Private Education Loans, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
17.2
|
%
|
|
|
11.0
|
%
|
|
|
5.8
|
%
|
|
|
|
%
|
|
|
13.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes all loans
in-school/grace/deferment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months Since Entering Repayment
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
|
|
1 to 24
|
|
|
25 to 48
|
|
|
More than
|
|
|
Dec. 31,
|
|
|
|
|
|
|
months
|
|
|
months
|
|
|
48 months
|
|
|
2006(1)
|
|
|
Total
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in-school/grace/deferment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,826
|
|
|
$
|
10,826
|
|
Loans in forbearance
|
|
|
898
|
|
|
|
209
|
|
|
|
74
|
|
|
|
|
|
|
|
1,181
|
|
Loans in repayment current
|
|
|
6,273
|
|
|
|
2,477
|
|
|
|
1,883
|
|
|
|
|
|
|
|
10,633
|
|
Loans in repayment delinquent
31-60 days
|
|
|
271
|
|
|
|
119
|
|
|
|
82
|
|
|
|
|
|
|
|
472
|
|
Loans in repayment delinquent
61-90 days
|
|
|
109
|
|
|
|
49
|
|
|
|
34
|
|
|
|
|
|
|
|
192
|
|
Loans in repayment delinquent greater than
90 days
|
|
|
157
|
|
|
|
117
|
|
|
|
72
|
|
|
|
|
|
|
|
346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,708
|
|
|
$
|
2,971
|
|
|
$
|
2,145
|
|
|
$
|
10,826
|
|
|
$
|
23,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(668
|
)
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed Private Education Loans, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
11.7
|
%
|
|
|
7.1
|
%
|
|
|
3.4
|
%
|
|
|
|
%
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes all loans
in-school/grace/deferment.
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months Since Entering Repayment
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
|
|
1 to 24
|
|
|
25 to 48
|
|
|
More than
|
|
|
Dec. 31,
|
|
|
|
|
|
|
months
|
|
|
months
|
|
|
48 months
|
|
|
2005(1)
|
|
|
Total
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in-school/grace/deferment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,980
|
|
|
$
|
7,980
|
|
Loans in forbearance
|
|
|
667
|
|
|
|
173
|
|
|
|
77
|
|
|
|
|
|
|
|
917
|
|
Loans in repayment current
|
|
|
4,508
|
|
|
|
1,796
|
|
|
|
1,453
|
|
|
|
|
|
|
|
7,757
|
|
Loans in repayment delinquent
31-60 days
|
|
|
168
|
|
|
|
78
|
|
|
|
56
|
|
|
|
|
|
|
|
302
|
|
Loans in repayment delinquent
61-90 days
|
|
|
63
|
|
|
|
30
|
|
|
|
19
|
|
|
|
|
|
|
|
112
|
|
Loans in repayment delinquent greater than
90 days
|
|
|
72
|
|
|
|
44
|
|
|
|
28
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,478
|
|
|
$
|
2,121
|
|
|
$
|
1,633
|
|
|
$
|
7,980
|
|
|
$
|
17,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(493
|
)
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed Private Education Loans, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
12.2
|
%
|
|
|
8.2
|
%
|
|
|
4.7
|
%
|
|
|
|
%
|
|
|
9.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes all loans
in-school/grace/deferment.
|
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, 5 percent of
loans currently in forbearance have cumulative forbearance of
more than 24 months.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Forbearance
|
|
|
% of
|
|
|
Forbearance
|
|
|
% of
|
|
|
Forbearance
|
|
|
% of
|
|
|
|
|
|
|
Balance
|
|
|
Total
|
|
|
Balance
|
|
|
Total
|
|
|
Balance
|
|
|
Total
|
|
|
|
|
|
Cumulative number of months borrower has used forbearance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Up to 12 months
|
|
$
|
1,641
|
|
|
|
69
|
%
|
|
$
|
870
|
|
|
|
74
|
%
|
|
$
|
686
|
|
|
|
75
|
%
|
|
|
|
|
13 to 24 months
|
|
|
629
|
|
|
|
26
|
|
|
|
262
|
|
|
|
22
|
|
|
|
165
|
|
|
|
18
|
|
|
|
|
|
More than 24 months
|
|
|
121
|
|
|
|
5
|
|
|
|
49
|
|
|
|
4
|
|
|
|
66
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,391
|
|
|
|
100
|
%
|
|
$
|
1,181
|
|
|
|
100
|
%
|
|
$
|
917
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
FFELP
Loans
Delinquencies
The table below presents our FFELP loan delinquency trends as of
December 31, 2007, 2006 and 2005. 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 FFELP
|
|
|
|
Loan Delinquencies
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(Dollars in millions)
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
31,200
|
|
|
|
|
|
|
$
|
23,171
|
|
|
|
|
|
|
$
|
18,685
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
10,675
|
|
|
|
|
|
|
|
8,325
|
|
|
|
|
|
|
|
9,643
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
55,128
|
|
|
|
84.4
|
%
|
|
|
45,664
|
|
|
|
86.0
|
%
|
|
|
39,544
|
|
|
|
87.2
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
3,650
|
|
|
|
5.6
|
|
|
|
2,787
|
|
|
|
5.2
|
|
|
|
2,072
|
|
|
|
4.6
|
|
Loans delinquent
61-90 days
|
|
|
1,841
|
|
|
|
2.8
|
|
|
|
1,468
|
|
|
|
2.8
|
|
|
|
1,190
|
|
|
|
2.6
|
|
Loans delinquent greater than 90 days
|
|
|
4,671
|
|
|
|
7.2
|
|
|
|
3,207
|
|
|
|
6.0
|
|
|
|
2,514
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans in repayment
|
|
|
65,290
|
|
|
|
100
|
%
|
|
|
53,126
|
|
|
|
100
|
%
|
|
|
45,320
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans, gross
|
|
|
107,165
|
|
|
|
|
|
|
|
84,622
|
|
|
|
|
|
|
|
73,648
|
|
|
|
|
|
FFELP loan unamortized premium
|
|
|
2,259
|
|
|
|
|
|
|
|
1,563
|
|
|
|
|
|
|
|
1,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans
|
|
|
109,424
|
|
|
|
|
|
|
|
86,185
|
|
|
|
|
|
|
|
74,862
|
|
|
|
|
|
FFELP loan allowance for losses
|
|
|
(89
|
)
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loans, net
|
|
$
|
109,335
|
|
|
|
|
|
|
$
|
86,165
|
|
|
|
|
|
|
$
|
74,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of FFELP loans in repayment
|
|
|
|
|
|
|
60.9
|
%
|
|
|
|
|
|
|
62.8
|
%
|
|
|
|
|
|
|
61.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of FFELP loans in repayment
|
|
|
|
|
|
|
15.6
|
%
|
|
|
|
|
|
|
14.0
|
%
|
|
|
|
|
|
|
12.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loans in forbearance as a percentage of loans in repayment
and forbearance
|
|
|
|
|
|
|
14.1
|
%
|
|
|
|
|
|
|
13.5
|
%
|
|
|
|
|
|
|
17.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loans for borrowers who still may
be attending school or engaging in other permitted educational
activities and are not yet required to make payments on the
loans, e.g., residency periods for medical students or a grace
period for bar exam preparation.
|
|
(2) |
|
Loans for borrowers who have
requested extension of grace period generally during employment
transition or who have temporarily ceased making full payments
due to hardship or other factors, consistent with the
established loan program servicing procedures and policies.
|
|
(3) |
|
The period of delinquency is based
on the number of days scheduled payments are contractually past
due.
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet FFELP
|
|
|
|
Loan Delinquencies
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(Dollars in millions)
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
5,060
|
|
|
|
|
|
|
$
|
7,392
|
|
|
|
|
|
|
$
|
7,859
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
2,950
|
|
|
|
|
|
|
|
3,789
|
|
|
|
|
|
|
|
4,781
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
13,703
|
|
|
|
79.2
|
%
|
|
|
16,655
|
|
|
|
77.7
|
%
|
|
|
13,694
|
|
|
|
76.1
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
1,017
|
|
|
|
5.9
|
|
|
|
1,278
|
|
|
|
6.0
|
|
|
|
1,136
|
|
|
|
6.3
|
|
Loans delinquent
61-90 days
|
|
|
577
|
|
|
|
3.3
|
|
|
|
777
|
|
|
|
3.6
|
|
|
|
749
|
|
|
|
4.2
|
|
Loans delinquent greater than 90 days
|
|
|
1,999
|
|
|
|
11.6
|
|
|
|
2,721
|
|
|
|
12.7
|
|
|
|
2,425
|
|
|
|
13.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans in repayment
|
|
|
17,296
|
|
|
|
100
|
%
|
|
|
21,431
|
|
|
|
100
|
%
|
|
|
18,004
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans, gross
|
|
|
25,306
|
|
|
|
|
|
|
|
32,612
|
|
|
|
|
|
|
|
30,644
|
|
|
|
|
|
FFELP loan unamortized premium
|
|
|
636
|
|
|
|
|
|
|
|
741
|
|
|
|
|
|
|
|
611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans
|
|
|
25,942
|
|
|
|
|
|
|
|
33,353
|
|
|
|
|
|
|
|
31,255
|
|
|
|
|
|
FFELP loan allowance for losses
|
|
|
(29
|
)
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loans, net
|
|
$
|
25,913
|
|
|
|
|
|
|
$
|
33,339
|
|
|
|
|
|
|
$
|
31,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of FFELP loans in repayment
|
|
|
|
|
|
|
68.4
|
%
|
|
|
|
|
|
|
65.7
|
%
|
|
|
|
|
|
|
58.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of FFELP loans in repayment
|
|
|
|
|
|
|
20.8
|
%
|
|
|
|
|
|
|
22.3
|
%
|
|
|
|
|
|
|
23.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loans in forbearance as a percentage of loans in repayment
and forbearance
|
|
|
|
|
|
|
14.6
|
%
|
|
|
|
|
|
|
15.0
|
%
|
|
|
|
|
|
|
21.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
|
(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.
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Basis FFELP
|
|
|
|
Loan Delinquencies
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(Dollars in millions)
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
36,260
|
|
|
|
|
|
|
$
|
30,563
|
|
|
|
|
|
|
$
|
26,544
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
13,625
|
|
|
|
|
|
|
|
12,114
|
|
|
|
|
|
|
|
14,424
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
68,831
|
|
|
|
83.3
|
%
|
|
|
62,319
|
|
|
|
83.6
|
%
|
|
|
53,238
|
|
|
|
84.1
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
4,667
|
|
|
|
5.7
|
|
|
|
4,065
|
|
|
|
5.5
|
|
|
|
3,208
|
|
|
|
5.1
|
|
Loans delinquent
61-90 days
|
|
|
2,418
|
|
|
|
2.9
|
|
|
|
2,245
|
|
|
|
3.0
|
|
|
|
1,939
|
|
|
|
3.0
|
|
Loans delinquent greater than 90 days
|
|
|
6,670
|
|
|
|
8.1
|
|
|
|
5,928
|
|
|
|
7.9
|
|
|
|
4,939
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans in repayment
|
|
|
82,586
|
|
|
|
100
|
%
|
|
|
74,557
|
|
|
|
100
|
%
|
|
|
63,324
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans, gross
|
|
|
132,471
|
|
|
|
|
|
|
|
117,234
|
|
|
|
|
|
|
|
104,292
|
|
|
|
|
|
FFELP loan unamortized premium
|
|
|
2,895
|
|
|
|
|
|
|
|
2,304
|
|
|
|
|
|
|
|
1,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans
|
|
|
135,366
|
|
|
|
|
|
|
|
119,538
|
|
|
|
|
|
|
|
106,117
|
|
|
|
|
|
FFELP loan allowance for losses
|
|
|
(118
|
)
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loans, net
|
|
$
|
135,248
|
|
|
|
|
|
|
$
|
119,504
|
|
|
|
|
|
|
$
|
106,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of FFELP loans in repayment
|
|
|
|
|
|
|
62.3
|
%
|
|
|
|
|
|
|
63.6
|
%
|
|
|
|
|
|
|
60.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of FFELP loans in repayment
|
|
|
|
|
|
|
16.7
|
%
|
|
|
|
|
|
|
16.4
|
%
|
|
|
|
|
|
|
15.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loans in forbearance as a percentage of loans in repayment
and forbearance
|
|
|
|
|
|
|
14.2
|
%
|
|
|
|
|
|
|
14.0
|
%
|
|
|
|
|
|
|
18.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loans for borrowers who still may
be attending school or engaging in other permitted educational
activities and are not yet required to make payments on 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.
|
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, 2007, 2006 and 2005.
Total
on-balance sheet loan provisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Private Education Loans
|
|
$
|
884
|
|
|
$
|
258
|
|
|
$
|
177
|
|
FFELP Stafford and Other Student Loans
|
|
|
89
|
|
|
|
14
|
|
|
|
11
|
|
Mortgage and consumer loans
|
|
|
42
|
|
|
|
15
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet provisions for loan losses
|
|
$
|
1,015
|
|
|
$
|
287
|
|
|
$
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
Total
Managed Basis loan provisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Private Education Loans
|
|
$
|
1,233
|
|
|
$
|
273
|
|
|
$
|
105
|
|
FFELP Stafford and Other Student Loans
|
|
|
121
|
|
|
|
17
|
|
|
|
21
|
|
Mortgage and consumer loans
|
|
|
40
|
|
|
|
13
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed Basis provisions for loan losses
|
|
$
|
1,394
|
|
|
$
|
303
|
|
|
$
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision expense for Private Education Loans was previously
discussed above (see Managed Basis Private Education
Loan Loss Allowance Discussion).
The 2007 FFELP provision included $30 million and
$44 million for on-balance sheet and Managed student loans,
respectively, related to 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. These amounts are additional,
non-recurring provision expenses required to cumulatively
increase the allowance for loan losses for the increase in the
Companys Risk Sharing percentage related to the
Companys loans as of September 30, 2007. The 2007
FFELP provision also included $19 million and
$27 million for on-balance sheet student loans and Managed
student loans, respectively, related to the increase in our
default expectations due to an increase in recent delinquencies
and charge-offs. The remaining increase over 2006 primarily
relates to an increased rate of provisioning for our Risk
Sharing exposure in the post CCRAA environment, coupled with the
growth of the portfolio.
The increase in provisions related to mortgage and consumer
loans primarily relates to a weakening U.S. economy and the
deterioration of certain real estate markets related to our
mortgage portfolio. As of December 31, 2007, our mortgage
portfolio totaled $289 million.
Total
Loan Net Charge-offs
The following tables summarize the net charge-offs for all loan
types on-balance sheet and on a Managed Basis for the years
ended December 31, 2007, 2006 and 2005.
Total
on-balance sheet loan net charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Private Education Loans
|
|
$
|
300
|
|
|
$
|
137
|
|
|
$
|
135
|
|
FFELP Stafford and Other Student Loans
|
|
|
21
|
|
|
|
5
|
|
|
|
4
|
|
Mortgage and consumer loans
|
|
|
11
|
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet loan net charge-offs
|
|
$
|
332
|
|
|
$
|
147
|
|
|
$
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Managed Basis loan net charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Private Education Loans
|
|
$
|
407
|
|
|
$
|
161
|
|
|
$
|
137
|
|
FFELP Stafford and Other Student Loans
|
|
|
36
|
|
|
|
8
|
|
|
|
4
|
|
Mortgage and consumer loans
|
|
|
11
|
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed loan net charge-offs
|
|
$
|
454
|
|
|
$
|
174
|
|
|
$
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
The increase in net charge-offs on FFELP Stafford and Other
student loans for the year ended December 31, 2007 versus
the year ended December 31, 2006 was primarily the result
of legislatives changes occurring in 2006 and again in 2007,
which have ultimately lowered the federal guaranty on claims
filed to either 97 percent or 98 percent (depending on
date of disbursement). See Managed Basis Private
Education Loan Loss Allowance Discussion 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Volume
|
|
|
Rate
|
|
|
Volume
|
|
|
Rate
|
|
|
Student loan premiums paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sallie Mae brands
|
|
$
|
15,737
|
|
|
|
1.45
|
%
|
|
$
|
12,271
|
|
|
|
.94
|
%
|
|
$
|
8,430
|
|
|
|
.38
|
%
|
Lender partners
|
|
|
9,728
|
|
|
|
2.92
|
|
|
|
11,738
|
|
|
|
1.97
|
|
|
|
12,463
|
|
|
|
1.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Preferred Channel
|
|
|
25,465
|
|
|
|
2.01
|
|
|
|
24,009
|
|
|
|
1.44
|
|
|
|
20,893
|
|
|
|
1.21
|
|
Other
purchases(1)
|
|
|
8,473
|
|
|
|
4.16
|
|
|
|
6,228
|
|
|
|
4.39
|
|
|
|
2,479
|
|
|
|
3.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal base purchases
|
|
|
33,938
|
|
|
|
2.54
|
|
|
|
30,237
|
|
|
|
2.05
|
|
|
|
23,372
|
|
|
|
1.47
|
|
Consolidation originations
|
|
|
2,441
|
|
|
|
2.72
|
|
|
|
4,188
|
|
|
|
2.54
|
|
|
|
4,672
|
|
|
|
2.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,379
|
|
|
|
2.56
|
%
|
|
$
|
34,425
|
|
|
|
2.11
|
%
|
|
$
|
28,044
|
|
|
|
1.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Primarily includes spot purchases
(including Wholesale Consolidation Loans), other commitment
clients, and subsidiary acquisitions.
|
The increase in premiums paid as a percentage of principal
balance for Sallie Mae brands is primarily due to the increase
in loans where we pay the origination fee
and/or
federal default fee on behalf of borrowers, a practice we call
zero-fee lending. Premiums paid on lender partners were
similarly impacted by zero-fee lending. The borrower origination
fee will be gradually phased out by the Reconciliation
Legislation from 2007 to 2010.
The other purchases category includes the
acquisition of Wholesale Consolidation Loans which totaled
$7.0 billion at an average premium percentage of
4.5 percent for the year ended December 31, 2007.
Wholesale Consolidation Loans are discussed in more detail at
Student Loan Spread Wholesale Consolidation
Loans.
Included in Consolidation originations is the .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.
79
Student
Loan Acquisitions
The following tables summarize the components of our student
loan acquisition activity for the years ended December 31,
2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2007
|
|
|
|
FFELP
|
|
|
Private
|
|
|
Total
|
|
|
Preferred Channel
|
|
$
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2006
|
|
|
|
FFELP
|
|
|
Private
|
|
|
Total
|
|
|
Preferred Channel
|
|
$
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2005
|
|
|
|
FFELP
|
|
|
Private
|
|
|
Total
|
|
|
Preferred Channel
|
|
$
|
14,847
|
|
|
$
|
6,046
|
|
|
$
|
20,893
|
|
Other commitment clients
|
|
|
500
|
|
|
|
56
|
|
|
|
556
|
|
Spot purchases
|
|
|
1,880
|
|
|
|
|
|
|
|
1,880
|
|
Consolidations from third parties
|
|
|
4,671
|
|
|
|
1
|
|
|
|
4,672
|
|
Consolidations and clean-up calls of off-balance sheet
securitized loans
|
|
|
9,487
|
|
|
|
|
|
|
|
9,487
|
|
Acquisition of Idaho Transferee Corporation
|
|
|
43
|
|
|
|
|
|
|
|
43
|
|
Capitalized interest, premiums and discounts
|
|
|
1,364
|
|
|
|
(10
|
)
|
|
|
1,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet student loan acquisitions
|
|
|
32,792
|
|
|
|
6,093
|
|
|
|
38,885
|
|
Consolidations and clean-up calls of off-balance sheet
securitized loans
|
|
|
(9,487
|
)
|
|
|
|
|
|
|
(9,487
|
)
|
Capitalized interest, premiums and discounts
off-balance sheet securitized loans
|
|
|
533
|
|
|
|
275
|
|
|
|
808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed student loan acquisitions
|
|
$
|
23,838
|
|
|
$
|
6,368
|
|
|
$
|
30,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As shown on the above table, off-balance sheet FFELP Stafford
loans that consolidate with us become an on-balance sheet
interest earning asset. This activity results in impairments of
our Retained Interests in securitizations, but this is offset by
an increase in on-balance sheet interest earning assets, for
which we do not record an offsetting gain.
The following table includes on-balance sheet asset information
for our Lending business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
FFELP Stafford and Other Student Loans, net
|
|
$
|
35,726
|
|
|
$
|
24,841
|
|
|
$
|
19,988
|
|
FFELP Consolidation Loans, net
|
|
|
73,609
|
|
|
|
61,324
|
|
|
|
54,859
|
|
Managed Private Education Loans, net
|
|
|
14,818
|
|
|
|
9,755
|
|
|
|
7,757
|
|
Other loans, net
|
|
|
1,174
|
|
|
|
1,309
|
|
|
|
1,138
|
|
Investments(1)
|
|
|
14,870
|
|
|
|
8,175
|
|
|
|
7,748
|
|
Residual Interest in off-balance sheet securitized loans
|
|
|
3,044
|
|
|
|
3,341
|
|
|
|
2,406
|
|
Other(2)
|
|
|
8,953
|
|
|
|
4,859
|
|
|
|
3,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
152,194
|
|
|
$
|
113,604
|
|
|
$
|
97,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
Preferred
Channel Originations
In 2007, we originated $25.5 billion in student loan volume
through our Preferred Channel, a 9 percent increase over
the $23.4 billion originated in 2006. In 2007, we grew the
internal lending brand Preferred Channel Originations by
27 percent and our own brands now constitute
65 percent of our Preferred Channel Originations, up from
56 percent in 2006. At the same time, the JPMorgan Chase
volume decreased by 41 percent and was 8 percent of
our Preferred Channel Originations, down from 16 percent in
2005. The pipeline of loans that we currently service and are
committed to purchase was $5.4 billion and
$5.4 billion at
81
December 31, 2007 and 2006, respectively. The following
tables further break down our Preferred Channel Originations by
type of loan and source.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Preferred Channel Originations Type of Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
Stafford
|
|
$
|
14,651
|
|
|
$
|
13,184
|
|
|
$
|
12,547
|
|
PLUS
|
|
|
2,325
|
|
|
|
2,540
|
|
|
|
2,570
|
|
GradPLUS
|
|
|
606
|
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP
|
|
|
17,582
|
|
|
|
15,970
|
|
|
|
15,117
|
|
Private Education Loans
|
|
|
7,915
|
|
|
|
7,411
|
|
|
|
6,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,497
|
|
|
$
|
23,381
|
|
|
$
|
21,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Increase (Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs. 2006
|
|
|
2006 vs. 2005
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
FFELP
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
FFELP Preferred Channel
Originations Source
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal lending brands
|
|
$
|
9,341
|
|
|
$
|
6,939
|
|
|
$
|
4,803
|
|
|
$
|
2,402
|
|
|
|
35
|
%
|
|
$
|
2,136
|
|
|
|
44
|
%
|
Other lender partners
|
|
|
6,223
|
|
|
|
5,770
|
|
|
|
5,400
|
|
|
|
453
|
|
|
|
8
|
|
|
|
370
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before JPMorgan Chase
|
|
|
15,564
|
|
|
|
12,709
|
|
|
|
10,203
|
|
|
|
2,855
|
|
|
|
22
|
|
|
|
2,506
|
|
|
|
25
|
|
JPMorgan Chase
|
|
|
2,018
|
|
|
|
3,261
|
|
|
|
4,914
|
|
|
|
(1,243
|
)
|
|
|
(38
|
)
|
|
|
(1,653
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,582
|
|
|
$
|
15,970
|
|
|
$
|
15,117
|
|
|
$
|
1,612
|
|
|
|
10
|
%
|
|
$
|
853
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
|
|
|
Private
|
|
|
Private
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Private Preferred Channel
Originations Source
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal lending brands
|
|
$
|
7,267
|
|
|
$
|
6,129
|
|
|
$
|
4,306
|
|
|
$
|
1,138
|
|
|
|
19
|
%
|
|
$
|
1,823
|
|
|
|
42
|
%
|
Other lender partners
|
|
|
501
|
|
|
|
861
|
|
|
|
942
|
|
|
|
(360
|
)
|
|
|
(42
|
)
|
|
|
(81
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before JPMorgan Chase
|
|
|
7,768
|
|
|
|
6,990
|
|
|
|
5,248
|
|
|
|
778
|
|
|
|
11
|
|
|
|
1,742
|
|
|
|
33
|
|
JPMorgan Chase
|
|
|
147
|
|
|
|
421
|
|
|
|
988
|
|
|
|
(274
|
)
|
|
|
(65
|
)
|
|
|
(567
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,915
|
|
|
$
|
7,411
|
|
|
$
|
6,236
|
|
|
$
|
504
|
|
|
|
7
|
%
|
|
$
|
1,175
|
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
Total
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Total Preferred Channel
Originations Source
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal lending brands
|
|
$
|
16,608
|
|
|
$
|
13,068
|
|
|
$
|
9,109
|
|
|
$
|
3,540
|
|
|
|
27
|
%
|
|
$
|
3,959
|
|
|
|
43
|
%
|
Other lender partners
|
|
|
6,724
|
|
|
|
6,631
|
|
|
|
6,342
|
|
|
|
93
|
|
|
|
1
|
|
|
|
289
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before JPMorgan Chase
|
|
|
23,332
|
|
|
|
19,699
|
|
|
|
15,451
|
|
|
|
3,633
|
|
|
|
18
|
|
|
|
4,248
|
|
|
|
27
|
|
JPMorgan Chase
|
|
|
2,165
|
|
|
|
3,682
|
|
|
|
5,902
|
|
|
|
(1,517
|
)
|
|
|
(41
|
)
|
|
|
(2,220
|
)
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,497
|
|
|
$
|
23,381
|
|
|
$
|
21,353
|
|
|
$
|
2,116
|
|
|
|
9
|
%
|
|
$
|
2,028
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
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, 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
|
|
|
|
35,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
45,198
|
|
|
$
|
90,050
|
|
|
$
|
135,248
|
|
|
$
|
28,328
|
|
|
$
|
163,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
Acquisitions(3)
|
|
$
|
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 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.
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Balance Sheet
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
FFELP
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Stafford
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
Total On-
|
|
|
|
and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Balance Sheet
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
18,965
|
|
|
$
|
41,596
|
|
|
$
|
60,561
|
|
|
$
|
5,420
|
|
|
$
|
65,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
4,671
|
|
|
|
4,671
|
|
|
|
1
|
|
|
|
4,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidations to third parties
|
|
|
(1,236
|
)
|
|
|
(1,180
|
)
|
|
|
(2,416
|
)
|
|
|
(11
|
)
|
|
|
(2,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(1,236
|
)
|
|
|
3,491
|
|
|
|
2,255
|
|
|
|
(10
|
)
|
|
|
2,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
16,837
|
|
|
|
1,795
|
|
|
|
18,632
|
|
|
|
6,091
|
|
|
|
24,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
15,601
|
|
|
|
5,286
|
|
|
|
20,887
|
|
|
|
6,081
|
|
|
|
26,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal consolidations
|
|
|
(5,604
|
)
|
|
|
14,020
|
|
|
|
8,416
|
|
|
|
|
|
|
|
8,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet securitizations
|
|
|
(6,561
|
)
|
|
|
(4,044
|
)
|
|
|
(10,605
|
)
|
|
|
(2,791
|
)
|
|
|
(13,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments/claims/resales/other
|
|
|
(2,413
|
)
|
|
|
(1,999
|
)
|
|
|
(4,412
|
)
|
|
|
(953
|
)
|
|
|
(5,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
19,988
|
|
|
$
|
54,859
|
|
|
$
|
74,847
|
|
|
$
|
7,757
|
|
|
$
|
82,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
FFELP
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Stafford
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
Total Off-
|
|
|
|
and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Balance Sheet
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
27,825
|
|
|
$
|
7,570
|
|
|
$
|
35,395
|
|
|
$
|
6,062
|
|
|
$
|
41,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidations to third parties
|
|
|
(1,853
|
)
|
|
|
(400
|
)
|
|
|
(2,253
|
)
|
|
|
(18
|
)
|
|
|
(2,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(1,853
|
)
|
|
|
(400
|
)
|
|
|
(2,253
|
)
|
|
|
(18
|
)
|
|
|
(2,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
361
|
|
|
|
175
|
|
|
|
536
|
|
|
|
275
|
|
|
|
811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
(1,492
|
)
|
|
|
(225
|
)
|
|
|
(1,717
|
)
|
|
|
257
|
|
|
|
(1,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(8,407
|
)
|
|
|
(9
|
)
|
|
|
(8,416
|
)
|
|
|
|
|
|
|
(8,416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet securitizations
|
|
|
6,561
|
|
|
|
4,044
|
|
|
|
10,605
|
|
|
|
2,791
|
|
|
|
13,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments/claims/resales/other
|
|
|
(3,817
|
)
|
|
|
(805
|
)
|
|
|
(4,622
|
)
|
|
|
(430
|
)
|
|
|
(5,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
20,670
|
|
|
$
|
10,575
|
|
|
$
|
31,245
|
|
|
$
|
8,680
|
|
|
$
|
39,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Portfolio
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
FFELP
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Stafford
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Total Managed
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Basis Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
46,790
|
|
|
$
|
49,166
|
|
|
$
|
95,956
|
|
|
$
|
11,482
|
|
|
$
|
107,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
4,671
|
|
|
|
4,671
|
|
|
|
1
|
|
|
|
4,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidations to third parties
|
|
|
(3,089
|
)
|
|
|
(1,580
|
)
|
|
|
(4,669
|
)
|
|
|
(29
|
)
|
|
|
(4,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(3,089
|
)
|
|
|
3,091
|
|
|
|
2
|
|
|
|
(28
|
)
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
17,198
|
|
|
|
1,970
|
|
|
|
19,168
|
|
|
|
6,366
|
|
|
|
25,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
14,109
|
|
|
|
5,061
|
|
|
|
19,170
|
|
|
|
6,338
|
|
|
|
25,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(14,011
|
)
|
|
|
14,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments/claims/resales/other
|
|
|
(6,230
|
)
|
|
|
(2,804
|
)
|
|
|
(9,034
|
)
|
|
|
(1,383
|
)
|
|
|
(10,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
40,658
|
|
|
$
|
65,434
|
|
|
$
|
106,092
|
|
|
$
|
16,437
|
|
|
$
|
122,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
Acquisitions(3)
|
|
$
|
17,198
|
|
|
$
|
6,641
|
|
|
$
|
23,839
|
|
|
$
|
6,367
|
|
|
$
|
30,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 increase in consolidations to third parties in 2006 reflects
FFELP lenders reconsolidating FFELP Consolidation Loans using
the Direct Loan program 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 and 2007 also reflect the
effect of the repeal of the single-holder rule, which was
effective for
85
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, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Late fees
|
|
$
|
134
|
|
|
$
|
119
|
|
|
$
|
96
|
|
Gains on sales of mortgages and other loan fees
|
|
|
11
|
|
|
|
15
|
|
|
|
18
|
|
Gains on sales of student loans
|
|
|
24
|
|
|
|
2
|
|
|
|
4
|
|
Leveraged lease impairment
|
|
|
|
|
|
|
|
|
|
|
(39
|
)
|
Private Education Loan warehousing fees
|
|
|
2
|
|
|
|
16
|
|
|
|
12
|
|
Other
|
|
|
23
|
|
|
|
25
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
$
|
194
|
|
|
$
|
177
|
|
|
$
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 decrease in Private Education
Loan warehousing fees for the year ended December 31,
2007 versus the years ended December 31, 2006 and 2005, is
primarily due to the shift of origination volume to Sallie Mae
Bank. Prior to this shift, we earned servicing fees for
originated Private Education Loans on behalf of third-party
lenders prior to our acquisition of those loans. The decline in
this revenue stream is offset by capturing the net interest
income earned by acquiring these loans earlier.
The $39 million leveraged lease impairment in 2005 is for
an aircraft leased to Northwest Airlines. At December 31,
2007, we had investments in leveraged and direct financing
leases, net of impairments, totaling $100 million that are
the general obligations of American Airlines and Federal Express
Corporation. Based on an analysis of the potential losses on
certain leveraged leases plus the increase in current tax
obligations related to the forgiveness of debt obligations
and/or the
taxable gain on the sale of the aircraft, our remaining
after-tax accounting exposure from our investment in leveraged
leases was $63 million at December 31, 2007, of which
$46 million relates to American Airlines.
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, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Sales and originations
|
|
$
|
351
|
|
|
$
|
327
|
|
|
$
|
285
|
|
Servicing
|
|
|
227
|
|
|
|
201
|
|
|
|
193
|
|
Corporate overhead
|
|
|
131
|
|
|
|
117
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
709
|
|
|
$
|
645
|
|
|
$
|
547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses for our Lending business segment include
costs incurred to service our Managed student loan portfolio and
acquire student loans, as well as other general and
administrative expenses. For the
86
years ended December 31, 2007 and 2006, operating expenses
for the Lending business segment also included $31 million
and $34 million, respectively, of stock option compensation
expense.
2007
versus 2006
Operating expenses for the year ended December 31, 2007,
increased by 10 percent to $709 million versus
$645 million for the year ended December 31, 2006. The
increase is primarily due to increased consolidation and higher
education sales and marketing expenses, Private Education
Loan collection costs, and severance-related expenses.
2006
versus 2005
Operating expenses for the year ended December 31, 2006,
increased by 18 percent to $645 million versus
$547 million for the year ended December 31, 2005. The
increase is primarily due to sales and marketing expenses
related to our direct to consumer initiatives and to higher
sales expenses for higher education loan products. The increase
was also due to an increase in origination and servicing costs,
consistent with the increase in origination volume and the
number of borrowers. In 2006, corporate overhead includes
$34 million of stock option compensation expense, due to
the implementation of SFAS No. 123(R).
87
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.
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 with credit card collections being the most
competitive in both contingency collections and purchased paper
activities. 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.
The following table includes the Core Earnings
results of operations for our APG business segment.
Condensed
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Increase
|
|
|
|
Years Ended
|
|
|
(Decrease)
|
|
|
|
December 31,
|
|
|
2007 vs.
|
|
|
2006 vs.
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Contingency fee revenue
|
|
|
288
|
|
|
|
341
|
|
|
|
313
|
|
|
|
(16
|
)%
|
|
|
9
|
%
|
Other fee income
|
|
|
48
|
|
|
|
56
|
|
|
|
47
|
|
|
|
(14
|
)
|
|
|
19
|
|
Collections revenue
|
|
|
269
|
|
|
|
239
|
|
|
|
167
|
|
|
|
13
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
605
|
|
|
|
636
|
|
|
|
527
|
|
|
|
(5
|
)
|
|
|
21
|
|
Operating expenses
|
|
|
390
|
|
|
|
358
|
|
|
|
288
|
|
|
|
9
|
|
|
|
24
|
|
Net interest expense
|
|
|
27
|
|
|
|
23
|
|
|
|
19
|
|
|
|
17
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
188
|
|
|
|
255
|
|
|
|
220
|
|
|
|
(26
|
)
|
|
|
16
|
|
Income taxes
|
|
|
70
|
|
|
|
94
|
|
|
|
81
|
|
|
|
(26
|
)
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest in net earnings of subsidiaries
|
|
|
118
|
|
|
|
161
|
|
|
|
139
|
|
|
|
(27
|
)
|
|
|
16
|
|
Minority interest in net earnings of subsidiaries
|
|
|
2
|
|
|
|
4
|
|
|
|
4
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income
|
|
$
|
116
|
|
|
$
|
157
|
|
|
$
|
135
|
|
|
|
(26
|
)%
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from United Student Aid Funds, Inc.
(USA Funds) represented 28 percent,
32 percent and 34 percent, respectively, of total APG
revenue in 2007, 2006 and 2005. The percentage of revenue
generated from services provided to USA Funds decreased due to
the full year impact of recent acquisitions and the continued
diversification into new asset classes in the purchased paper
business.
Contingency
Fee Revenue
The $53 million decrease in contingency fee revenue for the
year ended December 31, 2007 over 2006 was primarily due to
a 2006 legislative change that reduced fees paid for collections
via loan consolidation and direct 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.
88
The $28 million increase in contingency fee revenue for the
year ended December 31, 2006 over 2005 can be primarily
attributed to a change in the federal regulations governing the
rehabilitation loan policy along with the growth in guaranty
agency collections. Under this change, the number of payments to
qualify for a rehabilitated loan was reduced to nine months from
twelve months, so all loans with nine to eleven consecutive
payments at the time of change immediately qualified as a
rehabilitated loan.
Contingency
Inventory
The following table presents the outstanding inventory of
receivables serviced through our APG business. These assets are
not on our balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Contingency:
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loans
|
|
$
|
8,195
|
|
|
$
|
6,971
|
|
|
$
|
7,205
|
|
Other
|
|
|
1,509
|
|
|
|
1,667
|
|
|
|
2,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,704
|
|
|
$
|
8,638
|
|
|
$
|
9,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
Paper
The consistent increase in collections revenue for the years
ended December 31, 2005 to 2007 was primarily due to the
growth in purchased paper asset balances, resulting in an
increase in yield income. Declines in real estate values and the
weakening U.S. economy as well as lengthening the assumed
lifetime collection period have resulted in write-downs related
to the mortgage purchased paper portfolio. Specifically, the
mortgage purchased paper portfolio had impairments of
$25 million and $8 million for the years ended
December 31, 2007 and 2006, respectively. General economic
uncertainty has also resulted in lengthening the assumed
lifetime collection period related to our non-mortgage,
purchased paper portfolio.
Our purchased paper collection business is comprised of the
purchase of delinquent and charged-off consumer receivables,
primarily credit cards and the purchase of distressed mortgage
receivables. Since these businesses operate in different
segments of the marketplace with the primary distinguishing
factor being the existence of collateral for the mortgage
receivable, we have broken out their results separately in the
presentations below.
Purchased
Paper Non-Mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Face value of purchases for the period
|
|
$
|
6,111
|
|
|
$
|
3,438
|
|
|
$
|
2,826
|
|
Purchase price for the period
|
|
|
556
|
|
|
|
278
|
|
|
|
198
|
|
% of face value purchased
|
|
|
9.1
|
%
|
|
|
8.1
|
%
|
|
|
7.0
|
%
|
Gross cash collections (GCC)
|
|
$
|
463
|
|
|
$
|
348
|
|
|
$
|
250
|
|
Collections revenue
|
|
|
217
|
|
|
|
199
|
|
|
|
157
|
|
Collections revenue as a % of GCC
|
|
|
47
|
%
|
|
|
56
|
%
|
|
|
63
|
%
|
Carrying value of purchases
|
|
$
|
587
|
|
|
$
|
274
|
|
|
$
|
158
|
|
The amount of face value of purchases in any quarter is a
function of a combination of factors including the amount of
receivables available for purchase in the marketplace, average
age of each portfolio, the asset class of the receivables, and
competition in the marketplace. As a result, the percentage of
face value purchased will vary from quarter to quarter. The
decrease in collections revenue as a percentage of GCC versus
the prior year can primarily be attributed to the increase in
new portfolio purchases in the second half of 2007. Typically,
revenue recognition based on a portfolios effective
interest rate is a lower percentage of cash collections in the
early stages of servicing a portfolio.
89
Purchased
Paper Mortgage/Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Face value of purchases for the period
|
|
$
|
1,307
|
|
|
$
|
556
|
|
|
$
|
165
|
|
Collections revenue, net of impairments
|
|
|
52
|
|
|
|
40
|
|
|
|
10
|
|
Collateral value of purchases
|
|
|
1,171
|
|
|
|
607
|
|
|
|
195
|
|
Purchase price for the period
|
|
|
855
|
|
|
|
462
|
|
|
|
141
|
|
Purchase price as a % of collateral value
|
|
|
73
|
%
|
|
|
76
|
%
|
|
|
72
|
%
|
Carrying value of purchases
|
|
$
|
1,162
|
|
|
$
|
518
|
|
|
$
|
298
|
|
Carrying value of purchases as a % of collateral value
|
|
|
77
|
%
|
|
|
75
|
%
|
|
|
66
|
%
|
The purchase price for
sub-performing
and non-performing mortgage loans is generally determined as a
percentage of the underlying collateral, but we also consider a
number of factors in pricing mortgage loan portfolios to attain
a targeted yield. Therefore, the purchase price as a percentage
of collateral value can fluctuate depending on the mix of
sub-performing
versus non-performing mortgages in the portfolio, the projected
timeline to resolution of loans in the portfolio and the level
of private mortgage insurance associated with particular assets.
The increase in the Carrying value of purchases as a
percentage of collateral value in the table above is
reflective of the impact on the loan portion of year-over-year
declines in real estate values in specific markets as well as a
shift in the portfolio to a higher percentage of Real Estate
Owned (REO) assets versus loans, due to current
economic conditions. In relation to collateral value, REO assets
are generally carried at a higher basis compared to loans, since
a loan is adjusted, generally upward, to a collateral-based fair
value when it becomes REO.
On August 31, 2005, we acquired 100 percent of GRP/AG
Holdings, LLC and its subsidiaries (collectively,
GRP), a debt management company that acquires and
manages portfolios of
sub-performing
and non-performing mortgage loans, substantially all of which
are secured by
one-to-four
family residential real estate. GRP was purchased in August
2005, so the results for that year ended reflect only four
months of activity.
Operating
Expenses APG Business Segment
Operating expenses for the APG business segment for the years
ended December 31, 2007, 2006 and 2005 totaled:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Total operating expenses
|
|
$
|
390
|
|
|
$
|
358
|
|
|
$
|
288
|
|
Operating expenses increased by $32 million, or
9 percent, to $390 million for the year ended
December 31, 2007. The increase is primarily due to
increased expenses for outsourced collections and overall growth
in the purchased paper business. For the year ended
December 31, 2007, operating expenses for this segment
included $11 million of stock option compensation.
The increase in 2006 operating expenses versus the prior year
was primarily due to the increase in accounts serviced and to
higher expenses for outsourced collections and recovery costs.
Also, 2006 includes a full year of GRP expenses and
$12 million of stock option compensation expense, due to
the implementation of SFAS No. 123(R).
At December 31, 2007, 2006 and 2005, the APG business
segment had total assets of $2.6 billion, $1.5 billion
and $1.1 billion, respectively.
90
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 administration
services and operate an affinity marketing program.
Condensed
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
December 31,
|
|
|
% Increase (Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs. 2006
|
|
|
2006 vs. 2005
|
|
|
Net interest income (loss) after provisions for losses
|
|
$
|
(1
|
)
|
|
$
|
(5
|
)
|
|
$
|
(1
|
)
|
|
|
80
|
%
|
|
|
400
|
%
|
Guarantor servicing fees
|
|
|
156
|
|
|
|
132
|
|
|
|
115
|
|
|
|
18
|
|
|
|
15
|
|
Loan servicing fees
|
|
|
23
|
|
|
|
29
|
|
|
|
44
|
|
|
|
(21
|
)
|
|
|
(34
|
)
|
Upromise
|
|
|
124
|
|
|
|
43
|
|
|
|
|
|
|
|
188
|
|
|
|
100
|
|
Other
|
|
|
71
|
|
|
|
83
|
|
|
|
81
|
|
|
|
(14
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
374
|
|
|
|
287
|
|
|
|
240
|
|
|
|
30
|
|
|
|
20
|
|
Operating expenses
|
|
|
341
|
|
|
|
250
|
|
|
|
235
|
|
|
|
36
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
32
|
|
|
|
32
|
|
|
|
4
|
|
|
|
|
|
|
|
700
|
|
Income tax expense
|
|
|
12
|
|
|
|
12
|
|
|
|
1
|
|
|
|
|
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income
|
|
$
|
20
|
|
|
$
|
20
|
|
|
$
|
3
|
|
|
|
|
%
|
|
|
567
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USA Funds, the nations largest guarantee agency, accounted
for 86 percent, 83 percent, and 82 percent,
respectively, of guarantor servicing fees and 16 percent,
25 percent, and 27 percent, respectively, of revenues
associated with other products and services for the years ended
December 31, 2007, 2006 and 2005.
2007
versus 2006
The increase in guarantor servicing fees versus the year-ago
period 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
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 the acquisition of Upromise in August 2006.
2006
versus 2005
The increase in guarantor servicing fees in 2006 versus 2005 is
primarily due to a negotiated settlement with USA Funds such
that USA Funds was able to pay account maintenance fees that
were previously held up by the cap on payments from ED to
guarantors in 2005. This cap was removed by legislation
reauthorizing the student loan programs of the Higher Education
Act on October 1, 2006.
91
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Operating expenses
|
|
$
|
109
|
|
|
$
|
148
|
|
|
$
|
149
|
|
Upromise
|
|
|
94
|
|
|
|
33
|
|
|
|
|
|
General and administrative expenses
|
|
|
138
|
|
|
|
69
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
341
|
|
|
$
|
250
|
|
|
$
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses include direct costs incurred to perform
guarantor servicing on behalf of guarantor agencies and to
service loans for unrelated third parties, as well as
information technology expenses related to these functions.
General and administrative expenses include unallocated
corporate overhead expenses for centralized headquarters
functions such as executive management, accounting and finance,
human resources and marketing.
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 $69 million in 2007 compared to the year-ago
period, primarily due to Merger-related expenses of
$56 million. In 2007, operating expenses in the Corporate
and Other business segment include $15 million of stock
option compensation expense, and a full year of expenses of
Upromise, acquired in August 2006.
2006
versus 2005
In 2006, operating expenses in the Corporate and Other business
segment include $17 million of stock option compensation
expense, due to the implementation of SFAS No. 123(R)
and the expenses of Upromise, acquired in August 2006. The
decrease in general and administrative expenses is due to a
$14 million net settlement in the College Loan Corporation
(CLC) lawsuit and to lower corporate information
technology expenses.
At December 31, 2007, 2006 and 2005, the Corporate and
Other business segment had total assets of $780 million,
$999 million and $719 million, respectively.
LIQUIDITY
AND CAPITAL RESOURCES
Except in the case of acquisitions, which are discussed
separately, our APG and Corporate and Other business segments
are not capital intensive businesses and as such a minimal
amount of debt and equity capital is allocated to these
segments. Therefore, the following LIQUIDITY AND CAPITAL
RESOURCES discussion is concentrated on our Lending
business segment.
Prior to the announcement of the Merger, the Company funded its
loan originations primarily with a combination of term
asset-backed securitizations and unsecured debt. Upon the
announcement of the Merger on April 17, 2007, credit
spreads on our unsecured debt widened considerably,
significantly increasing our cost of accessing the unsecured
debt markets. As a result, in the near term, we expect to fund
our operations primarily through the issuance of student loan
asset-backed securities and secured student loan financing
facilities, as further described below. We historically have
been a regular issuer of term asset-backed securities in the
domestic and international capital markets. We securitized
$25.4 billion in student loans in nine transactions in the
year ended December 31, 2007, compared to
$32.1 billion in thirteen transactions in the year-ago
period. Secured borrowings, including securitizations,
asset-backed commercial paper (ABCP) borrowings and
indentured trusts, comprised 75 percent of our Managed debt
outstanding at December 31, 2007, versus 69 percent at
December 31, 2006.
92
More recently, adverse conditions in the securitization markets
increased the cost of borrowing in the market for student loan
asset-backed securities (ABS). In the third quarter
of 2007, we completed one $2.5 billion securitization
transaction, compared to four securitization transactions
totaling $13.0 billion in the first quarter of 2007, the
last full quarter before we entered into the Merger Agreement.
In the fourth quarter of 2007, we completed three securitization
transactions totaling $4.9 billion. Although we expect ABS
financing to remain our primary source of funding, we expect our
transaction volumes to be more limited and pricing less
favorable than in the past, with significantly reduced
opportunities to issue subordinated tranches of ABS.
The Company has not recently and does not intend to rely on the
auction rate securities market as a source of funding. At
December 31, 2007, we had $3.3 billion of taxable and
$1.7 billion of tax-exempt auction rate securities
outstanding on a Managed Basis. 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 our auction rate securities interest rates are set. As
a result, certain of our auction rate securities bear 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 our $1.7 billion of tax-exempt auction rate securities
was recently amended to LIBOR plus 2.00 percent through May 31,
2008. After May 31, 2008, the maximum allowable rate on these
securities will revert to a formula driven rate, which, if in
effect as of February 28, 2008, would have produced various
maximum rates ranging from up to 5.26 percent. The Company
is currently exploring various options to refinance its auction
rate securities, if necessary.
In the past, we employed reset rate note structures in
conjunction with the issuance of certain tranches of our term
asset-backed securities. Reset rate notes are subject to
periodic remarketing, at which time the interest rates on the
reset rate notes are reset. In the event a reset rate note
cannot be remarketed on its remarketing date, the interest rate
generally steps up to and remains LIBOR plus 0.75 percent,
until such time as the bonds are successfully remarketed. The
Company also has the option to repurchase the reset rate note
upon a failed remarketing and hold it as an investment until
such time it can be remarketed. 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. As
of December 31, 2007, on a Managed Basis, the Company had
$2.6 billion, $2.1 billion and $2.5 billion of
reset rate notes due to be remarketed in 2008, 2009 and 2010,
and an additional $8.5 billion to be remarketed thereafter.
In order to meet our financing needs, we are exploring other
sources of funding, including unsecured debt, a financing source
we have not used to fund our core businesses since the
announcement of the Merger. We expect the terms and conditions
of new unsecured debt issues, including pricing and covenant
requirements, will be less favorable to us than our recent ABS
financings and unsecured debt we incurred in the past. Our
ability to access the unsecured debt market on attractive terms,
or at all, will depend on our credit rating and prevailing
market conditions.
On April 30, 2007, in connection with the Merger Agreement,
we entered into an aggregate interim $30.0 billion
asset-backed commercial paper conduit facilities (collectively,
the Interim ABCP Facility) with Bank of America,
N.A., and JPMorgan Chase, N.A., which provided us with
significant additional liquidity. The Merger agreement
contemplated a significant amount of whole loan sales as a main
source of repayment for this Interim ABCP Facility.
The Company has engaged J.P. Morgan Securities, Inc.
(JPMorgan) and Banc of America Securities, LLC
(BAS) as Lead Arrangers and Joint Bookrunners along
with Barclays Capital, The Royal Bank of Scotland, plc and
Deutsche Bank Securities, Inc. as
Co-Lead
Arrangers and Credit Suisse, New York Branch, as Arranger to
underwrite and arrange up to $28.0 billion of secured FFELP
loan facilities and a $7.0 billion secured private credit
student loans facility (together, the Facilities).
On January 28, 2008, we announced that we had received
commitments for $31.3 billion of
364-day
financing from a consortium of banks led by Bank of America,
N.A., JPMorgan Chase, N.A., Barclays Capital, Deutsche Bank,
Credit Suisse, and The Royal Bank of Scotland, and from UBS.
Funding under the commitments is subject to various conditions.
As of February 28, 2008, we anticipate closing on
$23.4 billion of FFELP student loan ABCP conduit facilities
93
and $5.9 billion of Private Education Loan ABCP conduit
facilities on February 29, 2008, or as soon as practical
thereafter. Also on that date, we anticipate closing on an
additional $2.0 billion secured FFELP loan facility. In
addition, we anticipate closing on an additional
$2.5 billion of student loan ABCP conduit facilities by mid
March 2008. The new $33.8 billion of financing facilities
we expect to close on, which may ultimately be increased to up
to $35 billion in aggregate, will replace our
$30 billion Interim ABCP Facility and $6 billion ABCP
facility. The initial term of each of the new facilities will be
364 days. These new facilities will provide funding for
certain of our FFELP loans and Private Education Loans until
such time as these loans are refinanced in the term ABS markets.
As part of this new financing arrangement, the lawsuit filed by
the Company related to the Merger, as well as all counterclaims,
was dismissed and the Merger Agreement was terminated on
January 25, 2008.
On February 14, 2008, we reached agreement with Bank of
America and JPMorgan Chase to extend the date upon which
outstanding advances under the $30.0 billion Interim ABCP
Facility step up to a penalty rate. Under our agreement with
Bank of America and JPMorgan Chase, the
step-up date
was extended from February 15, 2008 to a date that is the
later to occur of (i) March 1, 2008 or (ii) if
the Companys new ABCP facilities, also being arranged by
Bank of America and JPMorgan Chase, is closed prior to
March 1, 2008, the date that is the earlier of (x) 15
Business Days after the date the initial advance is made under
those new facilities and (y) 15 Business Days prior to
April 24, 2008. In the event amounts outstanding under the
Interim ABCP Facility are not repaid by the Company in full, the
Interim ABCP Facility will terminate on April 24, 2008.
During 2007, we also funded our liquidity needs through our
existing $6.0 billion ABCP facility, our cash and
investment portfolio and by selectively selling FFELP student
loans in the secondary market. In addition, to supplement our
funding sources, we maintain $6.5 billion in unsecured
revolving credit facilities. We have not in the past relied
upon, and do not expect to rely on, 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.
Our ability to access our unsecured revolving credit facilities
will depend upon our ability to meet financial covenants set
forth in the credit agreements, including a covenant to maintain
consolidated tangible net worth of at least $1.38 billion,
compliance with which will be affected by a variety of factors,
including
mark-to-market
accounting adjustments applied principally to our derivatives
and our residual interests in off-balance sheet securitized
loans. If we fail to comply with the consolidated tangible net
worth covenant (or any other covenants) in our revolving credit
facilities at that date or in the future, the banks party to the
facilities (which include Bank of America and JPMorgan Chase, as
lenders and agents under the facilities) may elect to terminate
their commitments, and if they did elect to terminate the
facilities, our available liquidity could be materially
impaired. Our tangible net worth for covenant purposes at
December 31, 2007 was $3.5 billion.
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, we closed public offerings of our
common stock and 7.25 percent mandatory convertible
preferred stock, Series C, resulting in total net proceeds
of approximately $2.9 billion. We sold
101,781,170 shares of our common stock at a price of $19.65
per share and 1,000,000 shares of our 7.25 percent
mandatory convertible preferred stock, Series C. Each share
of mandatory convertible preferred stock, Series C, has a
$1,000 liquidation preference and is subject to mandatory
conversion on December 15, 2010, into between 41.7188 and
50.8906 shares of the companys common stock, unless
previously converted
94
at the option of the holder. On January 9, 2008, we closed
a second public offering of our 7.25 percent mandatory
convertible preferred stock, Series C, as a result of the
underwriters exercising their overallotment option. We sold
150,000 shares of the preferred stock related to this
overallotment and the closing resulted in net proceeds of
$145.5 million. We used approximately $2.0 billion of
the net proceeds of the December 31, 2007 closings to
settle our outstanding equity forward contract with Citibank and
repurchase the 44,039,890 shares of common stock
deliverable to us under the contract. 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 million 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. The remaining proceeds from the public
offerings were used for general corporate purposes.
The following table details our primary sources of liquidity and
the available capacity at December 31, 2007 and
December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Available Capacity
|
|
|
Available Capacity
|
|
|
|
|
|
Sources of primary liquidity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestricted cash and liquid investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,582
|
|
|
$
|
2,621
|
|
|
|
|
|
U.S. Treasury-backed securities
|
|
|
643
|
|
|
|
1,098
|
|
|
|
|
|
Commercial paper and asset-backed commercial paper
|
|
|
1,349
|
|
|
|
943
|
|
|
|
|
|
Certificates of deposit
|
|
|
600
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
83
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrestricted cash and liquid
investments(1)
|
|
|
10,257
|
|
|
|
4,720
|
|
|
|
|
|
Unused commercial paper and bank lines of credit
|
|
|
6,500
|
|
|
|
6,500
|
|
|
|
|
|
ABCP borrowing capacity
|
|
|
5,933
|
|
|
|
1,047
|
|
|
|
|
|
Interim ABCP Facility borrowing capacity
|
|
|
4,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sources of primary liquidity
|
|
|
26,730
|
|
|
|
12,267
|
|
|
|
|
|
Sources of stand-by liquidity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unencumbered FFELP loans
|
|
|
18,731
|
|
|
|
28,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sources of primary and stand-by liquidity
|
|
$
|
45,461
|
|
|
$
|
40,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes $196 million and
$365 million of investments pledged as collateral related
to certain derivative positions and $93 million and
$99 million of other non-liquid investments classified at
December 31, 2007 and December 31, 2006, respectively,
as cash and investments on our balance sheet in accordance with
GAAP.
|
We believe our unencumbered FFELP loan portfolio provides a
viable source of potential or stand-by liquidity because of the
well-developed market for securitizations and whole loan sales
of government guaranteed student loans. 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, 2007, we had a total of $51.7 billion of
unencumbered assets, including goodwill and acquired intangibles.
In addition to liquidity, a major objective when financing our
business is to minimize interest rate risk by aligning the
interest rate and reset characteristics of our Managed assets
and liabilities, generally on a pooled basis, to the extent
practicable. In this process we use derivative financial
instruments extensively to reduce our interest rate and foreign
currency exposure. This interest rate risk management helps us
to stabilize our student loan spread in various and changing
interest rate environments. (See also RISKS
Interest Rate Risk Management below.)
95
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, 2007, 2006 and 2005. 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
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
|
|
$
|
8,551
|
|
|
$
|
36,796
|
|
|
$
|
45,347
|
|
|
$
|
3,187
|
|
|
$
|
45,501
|
|
|
$
|
48,688
|
|
|
$
|
3,784
|
|
|
$
|
37,944
|
|
|
$
|
41,728
|
|
Indentured trusts (on-balance sheet)
|
|
|
100
|
|
|
|
2,481
|
|
|
|
2,581
|
|
|
|
93
|
|
|
|
2,852
|
|
|
|
2,945
|
|
|
|
23
|
|
|
|
3,372
|
|
|
|
3,395
|
|
ABCP facilities (on-balance sheet)
|
|
|
25,960
|
|
|
|
67
|
|
|
|
26,027
|
|
|
|
|
|
|
|
4,953
|
|
|
|
4,953
|
|
|
|
|
|
|
|
4,960
|
|
|
|
4,960
|
|
Securitizations (on-balance sheet)
|
|
|
|
|
|
|
68,048
|
|
|
|
68,048
|
|
|
|
|
|
|
|
50,147
|
|
|
|
50,147
|
|
|
|
|
|
|
|
42,275
|
|
|
|
42,275
|
|
Securitizations (off-balance sheet)
|
|
|
|
|
|
|
42,088
|
|
|
|
42,088
|
|
|
|
|
|
|
|
49,865
|
|
|
|
49,865
|
|
|
|
|
|
|
|
43,138
|
|
|
|
43,138
|
|
Other
|
|
|
1,342
|
|
|
|
|
|
|
|
1,342
|
|
|
|
248
|
|
|
|
|
|
|
|
248
|
|
|
|
3
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,953
|
|
|
$
|
149,480
|
|
|
$
|
185,433
|
|
|
$
|
3,528
|
|
|
$
|
153,318
|
|
|
$
|
156,846
|
|
|
$
|
3,810
|
|
|
$
|
131,689
|
|
|
$
|
135,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Unsecured borrowings
|
|
|
46,261
|
|
|
|
5.58
|
%
|
|
|
43,755
|
|
|
|
5.50
|
%
|
|
|
37,841
|
|
|
|
3.98
|
%
|
Indentured trusts (on-balance sheet)
|
|
|
2,768
|
|
|
|
4.90
|
|
|
|
3,252
|
|
|
|
4.57
|
|
|
|
4,782
|
|
|
|
3.27
|
|
ABCP facilities (on-balance sheet)
|
|
|
13,938
|
|
|
|
5.85
|
|
|
|
4,874
|
|
|
|
5.36
|
|
|
|
4,533
|
|
|
|
3.64
|
|
Securitizations (on-balance sheet)
|
|
|
62,765
|
|
|
|
5.55
|
|
|
|
43,310
|
|
|
|
5.40
|
|
|
|
35,180
|
|
|
|
3.73
|
|
Securitizations (off-balance sheet)
|
|
|
45,733
|
|
|
|
5.68
|
|
|
|
50,112
|
|
|
|
5.49
|
|
|
|
44,545
|
|
|
|
3.77
|
|
Other
|
|
|
637
|
|
|
|
4.85
|
|
|
|
172
|
|
|
|
5.03
|
|
|
|
139
|
|
|
|
3.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
172,102
|
|
|
|
5.60
|
%
|
|
$
|
145,475
|
|
|
|
5.44
|
%
|
|
$
|
127,020
|
|
|
|
3.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
On-Balance Sheet Financing Activities
The following table presents the senior unsecured credit ratings
assigned by major rating agencies as of February 28, 2008.
Each of the rating agencies has the Companys current
ratings on review for potential downgrade.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P
|
|
|
Moodys
|
|
|
Fitch
|
|
|
Short-term unsecured debt
|
|
|
A-3
|
|
|
|
P-2
|
|
|
|
F3
|
|
Long-term senior unsecured debt
|
|
|
BBB−
|
|
|
|
Baa1
|
|
|
|
BBB
|
|
96
The table below presents our unsecured on-balance sheet funding
by funding source for the years ended December 31, 2007 and
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Issued
|
|
|
|
|
|
|
For The Years
|
|
|
Outstanding at
|
|
|
|
Ended December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Convertible debentures
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,997
|
|
Retail notes
|
|
|
59
|
|
|
|
535
|
|
|
|
4,192
|
|
|
|
4,137
|
|
Foreign currency denominated
notes(1)
|
|
|
161
|
|
|
|
3,862
|
|
|
|
12,805
|
|
|
|
12,635
|
|
Extendible notes
|
|
|
|
|
|
|
1,499
|
|
|
|
5,749
|
|
|
|
5,746
|
|
Global notes (Institutional)
|
|
|
1,348
|
|
|
|
5,843
|
|
|
|
21,750
|
|
|
|
22,375
|
|
Medium-term notes (Institutional)
|
|
|
|
|
|
|
|
|
|
|
597
|
|
|
|
1,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(2)
|
|
$
|
1,568
|
|
|
$
|
11,739
|
|
|
$
|
45,093
|
|
|
$
|
48,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
All foreign currency denominated notes are hedged using
derivatives that exchange the foreign denomination for U.S.
dollars.
|
|
|
(2)
|
Excludes December 31, 2007 brokered deposits balance of
$254 million. There were no brokered deposits outstanding
at December 31, 2006.
|
In addition to the term issuances reflected in the table above,
in the past we also used our commercial paper program for
short-term liquidity purposes. The average balance of commercial
paper outstanding and the maximum daily amount outstanding for
the year ended December 31, 2006 were $82 million and
$2.2 billion, respectively. There was no commercial paper
outstanding during 2007.
Securitization
Activities
Securitization
Program
Our FFELP Stafford, Private Education Loan and FFELP
Consolidation Loan securitizations are structured such that they
are legal sales of assets using a two-step transaction with a
special purpose entity that legally isolates the transferred
assets from the Company and its creditors, even in the event of
bankruptcy. The holders of the beneficial interests issued by
the special purpose entity are not constrained from pledging or
exchanging their interests. In all of our securitizations, we
retain the right to receive cash flows from the student loans
and reserve accounts in excess of the amounts needed to pay
servicing costs, derivative costs (if any), administration and
other fees, and the principal and interest on the bonds backed
by the student loans. The investors of the securitization trusts
have no recourse to the Companys other assets should there
be a failure of the securities backed by student loans to pay
when due. Some of our securitizations meet the requirements for
sale treatment under GAAP, according to the criteria of
SFAS No. 140. In these transactions we use a two-step
sale to a qualifying special purpose entity (QSPE),
such that we do not maintain effective control over the
transferred assets. Accordingly, these transactions are
accounted for off-balance sheet.
We recognize a gain on sales related to securitizations that
qualify as off-balance sheet transactions. The gain is
calculated as the difference between the allocated cost basis of
the assets sold and the relative fair value of the assets
received. The carrying value of the student loan portfolio being
securitized includes the applicable accrued interest,
unamortized student loan premiums or discounts, loan loss
reserves and Repayment Borrower Benefits reserves. The fair
value of the Residual Interest is determined using a discounted
cash flow methodology using assumptions discussed in more detail
below. The ongoing earnings from our off-balance sheet
securitizations are recognized in servicing and securitization
revenue.
97
The following table summarizes our securitization activity for
the years ended December 31, 2007, 2006 and 2005. Those
securitizations listed as sales are off-balance sheet
transactions and those listed as financings remain on-balance
sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
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
|
|
|
%
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford/PLUS loans
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
|
|
2
|
|
|
$
|
5,004
|
|
|
$
|
17
|
|
|
|
.3
|
%
|
|
|
3
|
|
|
$
|
6,533
|
|
|
$
|
68
|
|
|
|
1.1
|
%
|
FFELP Consolidation Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
9,503
|
|
|
|
55
|
|
|
|
.6
|
|
|
|
2
|
|
|
|
4,011
|
|
|
|
31
|
|
|
|
.8
|
|
Private Education Loans
|
|
|
1
|
|
|
|
2,001
|
|
|
|
367
|
|
|
|
18.4
|
|
|
|
3
|
|
|
|
5,088
|
|
|
|
830
|
|
|
|
16.3
|
|
|
|
2
|
|
|
|
3,005
|
|
|
|
453
|
|
|
|
15.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations sales
|
|
|
1
|
|
|
|
2,001
|
|
|
$
|
367
|
|
|
|
18.4
|
%
|
|
|
9
|
|
|
|
19,595
|
|
|
$
|
902
|
|
|
|
4.6
|
%
|
|
|
7
|
|
|
|
13,549
|
|
|
$
|
552
|
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations financings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford/PLUS
loans(1)
|
|
|
3
|
|
|
|
8,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Consolidation
Loans(1)
|
|
|
5
|
|
|
|
14,476
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
12,506
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
12,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations financings
|
|
|
8
|
|
|
|
23,431
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
12,506
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
12,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations
|
|
|
9
|
|
|
$
|
25,432
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
$
|
32,101
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
$
|
26,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
The increase in the Private Education Loans gain as a percentage
of loans securitized from 16.3 percent for the year ended
December 31, 2006 to 18.4 percent for the year ended
December 31, 2007 is primarily due to a higher spread
earned on the assets securitized.
The decrease in the FFELP Stafford/PLUS loans gain as a
percentage of loans securitized from 1.1 percent for the
year ended December 31, 2005 to .3 percent for the
year ended December 31, 2006 is primarily due to:
1) an increase in the CPR assumption to account for
continued high levels of FFELP Consolidation Loan activity;
2) an increase in the discount rate to reflect higher
long-term interest rates; 3) the re-introduction of Risk
Sharing with the Reconciliation Legislation during 2005
reauthorizing the student loan programs of the Higher Education
Act; and 4) an increase in the amount of student loan
premiums included in the carrying value of the loans sold. The
higher premiums also affected FFELP Consolidation Loan
securitizations and were primarily due to the securitization of
loans previously acquired through business combinations. These
loans carried higher premiums based on the allocation of the
purchase price through purchase accounting. Higher premiums were
also due to loans acquired through zero-fee lending and the
school-as-lender channels.
98
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,
2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
FFELP
|
|
|
Consolidation
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Loan
|
|
|
Education
|
|
|
|
|
(Dollars in millions)
|
|
PLUS
|
|
|
Trusts(1)
|
|
|
Loan
Trusts(5)
|
|
|
Total
|
|
|
Fair value of Residual
Interests(2)
|
|
$
|
390
|
|
|
$
|
730
|
|
|
$
|
1,924
|
|
|
$
|
3,044
|
|
Underlying securitized loan
balance(3)
|
|
|
9,338
|
|
|
|
15,968
|
|
|
|
14,199
|
|
|
|
39,505
|
|
Weighted average life
|
|
|
2.7 yrs.
|
|
|
|
7.4 yrs.
|
|
|
|
7.0 yrs
|
|
|
|
|
|
Prepayment speed (annual
rate)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
.11
|
%
|
|
|
.21
|
%
|
|
|
5.28
|
%
|
|
|
|
|
Residual cash flows discount rate
|
|
|
12.0
|
%
|
|
|
9.8
|
%
|
|
|
12.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
FFELP
|
|
|
Consolidation
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Loan
|
|
|
Education
|
|
|
|
|
(Dollars in millions)
|
|
PLUS
|
|
|
Trusts(1)
|
|
|
Loan Trusts
|
|
|
Total
|
|
|
Fair value of Residual
Interests(2)
|
|
$
|
701
|
|
|
$
|
676
|
|
|
$
|
1,965
|
|
|
$
|
3,342
|
|
Underlying securitized loan
balance(3)
|
|
|
14,794
|
|
|
|
17,817
|
|
|
|
13,222
|
|
|
|
45,833
|
|
Weighted average life
|
|
|
2.9 yrs.
|
|
|
|
7.3 yrs.
|
|
|
|
7.2 yrs
|
|
|
|
|
|
Prepayment speed (annual
rate)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim status
|
|
|
0
|
%
|
|
|
n/a
|
|
|
|
0
|
%
|
|
|
|
|
Repayment status
|
|
|
0-43
|
%
|
|
|
3-9
|
%
|
|
|
4-7
|
%
|
|
|
|
|
Life of loan repayment status
|
|
|
24
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
|
|
Expected credit losses (% of student loan principal)
|
|
|
.06
|
%
|
|
|
.07
|
%
|
|
|
4.36
|
%
|
|
|
|
|
Residual cash flows discount rate
|
|
|
12.6
|
%
|
|
|
10.5
|
%
|
|
|
12.6
|
%
|
|
|
|
|
|
|
|
|
(1)
|
Includes $283 million and $151 million related to the
fair value of the Embedded Floor Income as of December 31,
2007 and 2006, respectively. Changes in the fair value of the
Embedded Floor Income are primarily due to changes in the
interest rates and the paydown of the underlying loans.
|
|
(2)
|
At December 31, 2007 and 2006, we had unrealized gains
(pre-tax) in accumulated other comprehensive income of
$301 million and $389 million, respectively, that
related to the Residual Interests.
|
|
(3)
|
In addition to student loans in off-balance sheet trusts, the
Company had $65.5 billion and $48.6 billion of
securitized student loans outstanding (face amount) as of
December 31, 2007 and 2006, respectively, in on-balance
sheet FFELP loan securitization trusts.
|
|
(4)
|
Effective December 31, 2006, we implemented 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, we
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, we used a vector approach in applying
the CPR. The change in CPR methodology resulted in an immaterial
change in the fair value of the Residual Interest. The CPR
assumption used for all periods includes the impact of projected
defaults.
|
|
(5)
|
The Company adopted SFAS No. 155, effective
January 1, 2007. As a result, the Company elected to carry
the Residual Interest on the Private Education Loan
securitization which settled in the first quarter of 2007 at
fair value with subsequent changes in fair value recorded in
earnings. The fair value of this Residual Interest at
December 31, 2007 was $363 million inclusive of a net
$25 million fair value loss adjustment recorded since
settlement.
|
99
Off-Balance
Sheet Net Assets
The following table summarizes our off-balance sheet net assets
at December 31, 2007 and 2006 on a basis equivalent to our
GAAP on-balance sheet trusts, which presents the assets and
liabilities in the off-balance sheet trusts as if they were
being accounted for on-balance sheet rather than off-balance
sheet. This presentation, therefore, includes a theoretical
calculation of the premiums on student loans, the allowance for
loan losses, and the discounts and deferred financing costs on
the debt. This presentation is not, nor is it intended to be, a
liquidation basis of accounting. (See also LENDING
BUSINESS SEGMENT Summary of our Managed Student Loan
Portfolio Ending Balances (net of allowance for
loan losses) and LIQUIDITY AND CAPITAL
RESOURCES Managed Borrowings Ending
Balances, earlier in this section.)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Off-Balance Sheet Assets:
|
|
|
|
|
|
|
|
|
Total student loans, net
|
|
$
|
39,423
|
|
|
$
|
46,172
|
|
Restricted cash and investments
|
|
|
2,706
|
|
|
|
4,269
|
|
Accrued interest receivable
|
|
|
1,413
|
|
|
|
1,467
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet assets
|
|
|
43,542
|
|
|
|
51,908
|
|
Off-Balance Sheet Liabilities:
|
|
|
|
|
|
|
|
|
Debt, par value
|
|
|
42,192
|
|
|
|
50,058
|
|
Debt unamortized discount and deferred issuance costs
|
|
|
(104
|
)
|
|
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
42,088
|
|
|
|
49,865
|
|
Accrued interest payable
|
|
|
305
|
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet liabilities
|
|
|
42,393
|
|
|
|
50,270
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Net Assets
|
|
$
|
1,149
|
|
|
$
|
1,638
|
|
|
|
|
|
|
|
|
|
|
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. Interest income recognized on the Residual Interest is
based on our anticipated yield determined by estimating future
cash flows each quarter.
100
The following table summarizes the components of servicing and
securitization revenue for the years ended December 31,
2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Servicing revenue
|
|
$
|
285
|
|
|
$
|
336
|
|
|
$
|
323
|
|
Securitization revenue, before Net Embedded Floor Income,
impairment and unrealized fair value adjustment
|
|
|
419
|
|
|
|
368
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing and securitization revenue, before Net Embedded Floor
Income, impairment and unrealized fair value adjustment
|
|
|
704
|
|
|
|
704
|
|
|
|
593
|
|
Embedded Floor Income
|
|
|
20
|
|
|
|
14
|
|
|
|
81
|
|
Less: Floor Income previously recognized in gain calculation
|
|
|
(9
|
)
|
|
|
(8
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Embedded Floor Income
|
|
|
11
|
|
|
|
6
|
|
|
|
24
|
|
Servicing and securitization revenue, before impairment and
unrealized fair value adjustment
|
|
|
715
|
|
|
|
710
|
|
|
|
617
|
|
Unrealized fair value
adjustment(1)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
Retained Interest impairment
|
|
|
(254
|
)
|
|
|
(157
|
)
|
|
|
(260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing and securitization revenue
|
|
$
|
437
|
|
|
$
|
553
|
|
|
$
|
357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average off-balance sheet student loans
|
|
$
|
42,411
|
|
|
$
|
46,336
|
|
|
$
|
41,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance of Retained Interest
|
|
$
|
3,385
|
|
|
$
|
3,101
|
|
|
$
|
2,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing and securitization revenue as a percentage of the
average balance of off-balance sheet student loans (annualized)
|
|
|
1.03
|
%
|
|
|
1.19
|
%
|
|
|
.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company adopted
SFAS No. 155 on January 1, 2007.
SFAS No. 155 requires the Company to identify and
bifurcate embedded derivatives from the Residual Interest.
However, SFAS No. 155 does allow the Company to elect
to carry the entire Residual Interest at fair value through
earnings rather than bifurcate such embedded derivatives. For
the off-balance sheet securitizations that settled in the year
ended December 31, 2007, the Company elected to carry the
entire Residual Interest recorded at fair value through
earnings. As a result of this election, all changes in the fair
value of the Residual Interests for that securitization are
recorded through earnings. Management anticipates electing to
carry future Residual Interests at fair value through earnings.
For securitizations settling prior to January 1, 2007,
changes in the fair value of Residual Interest were recorded in
other comprehensive income, unless impaired, for the years
presented. Effective with the Companys adoption of
SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including
an Amendment of FASB Statement No. 115, the Company
has elected the fair value option on all of its Residual
Interests and will record future change in fair value through
income beginning on January 1, 2008.
|
Servicing and securitization revenue is primarily driven by the
average balance of off-balance sheet student loans, the amount
of and the difference in the timing of Embedded Floor Income
recognition on off-balance sheet student loans, Retained
Interest impairments, and the fair value adjustment related to
those Residual Interests where the Company has elected to carry
such Residual Interests at fair value through earnings under
SFAS No. 155 as discussed in the above table. The
increase in securitization revenue, before Net Embedded Floor
Income, impairment and unrealized fair value adjustment, from
2005 to 2007, is primarily due to the continued increase in the
amount of Private Education Loan Residual Interests as a
percentage of the total Residual Interests. Private Education
Loan Residual Interests generate a higher yield than FFELP loan
Residual Interests.
The Company recorded impairments to the Retained Interests of
$254 million, $157 million and $260 million,
respectively, for the years ended December 31, 2007, 2006,
and 2005. The impairment charges were the result of FFELP loans
prepaying faster than projected through loan consolidations
($110 million, $104 million and $256 million for
the years ended December 31, 2007, 2006 and 2005,
respectively), impairment to the Floor Income component of the
Companys Retained Interest due to increases in interest
rates during the period ($24 million, $53 million and
$4 million for the years ended December 31, 2007,
2006, and 2005, respectively), and increases in prepayments,
defaults, and the discount rate related to Private Education
Loans ($120 million for the year ended December 31,
2007).
101
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, 2007. 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 100 basis points (to LIBOR plus 850 basis
points) to better take into account the current level of cash
flow uncertainty and lack of liquidity that exists with the
Private Education Residual Interests. During 2007, the Company
increased its loan loss allowance related to the non-traditional
or higher-risk loans within our Private Education Loan portfolio
that the Company does not generally securitize. As a result, the
Company does not expect the default rates used for the Residual
Interest valuations to correspond with the expected default
rates contemplated by the provision expense related to the
non-traditional Private Education Loans recorded in 2007.
CONTRACTUAL
CASH OBLIGATIONS
The following table provides a summary of our obligations
associated with long-term notes and equity forward contracts at
December 31, 2007. For further discussion of these
obligations, see Note 8, Long-Term Borrowings,
Note 10, Derivative Financial Instruments, and
Note 12, 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(1)(2)
|
|
$
|
6,841
|
|
|
$
|
27,090
|
|
|
$
|
20,461
|
|
|
$
|
53,000
|
|
|
$
|
107,392
|
|
Equity forward
contract(3)
|
|
|
865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
7,706
|
|
|
$
|
27,090
|
|
|
$
|
20,461
|
|
|
$
|
53,000
|
|
|
$
|
108,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Only includes principal
obligations and specifically excludes SFAS No. 133
derivative market value adjustments of $3.7 billion for
long-term notes.
|
|
(2) |
|
Includes Financial Interpretation
(FIN) No. 46 long-term beneficial interests of
$68.1 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.
|
|
(3) |
|
Includes remaining balance of
equity forward contract paid to Citibank on January 9,
2008. The Company has no outstanding equity forward positions
outstanding after the contract settlement on January 9,
2008. See Note 12, Stockholders Equity,
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, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
2 to 3
|
|
|
4 to 5
|
|
|
Over
|
|
|
|
|
|
|
or Less
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Total
|
|
|
Lines of credit
|
|
$
|
486
|
|
|
$
|
1,350
|
|
|
$
|
200
|
|
|
$
|
|
|
|
$
|
2,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have issued lending-related financial instruments including
lines of credit to meet the financing needs of our customers.
The contractual amount of these financial instruments represents
the maximum possible credit risk should the counterparty draw
down the commitment 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 $2.0 billion. We do not believe that these
instruments are representative of our actual future credit
exposure or funding requirements. To the extent that the lines
of credit are drawn upon, the balance outstanding is
collateralized by student loans. At December 31, 2007,
draws on lines of credit were approximately $379 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
102
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. As a result of the legislative changes effective
October 1, 2007, we are currently reviewing our forward
purchase contracts. At December 31, 2007, there were
$5.4 billion originated loans (FFELP and Private Education
Loans) in the pipeline that the Company is committed to purchase.
RISKS
Overview
Managing risks is an essential part of successfully operating a
financial services company. Our most prominent risk exposures
are operational, market and interest rate, political and
regulatory, liquidity, credit, and Consolidation Loan
refinancing risk. We discuss these and other risks in the
Risk Factors section (Item 1A) of this
document. The discussion that follows enhances that disclosure
by discussing the risk management strategies that we employ to
mitigate these risks.
Operational
Risk
Operational risk can result from regulatory compliance errors,
servicing errors (see further discussion below), technology
failures, breaches of the internal control system, and the risk
of fraud or unauthorized transactions by employees or persons
outside the Company. This risk of loss also includes the
potential legal actions that could arise as a result of an
operational deficiency or as a result of noncompliance with
applicable regulatory standards and contractual commitments,
adverse business decisions or their implementation, and customer
attrition due to potential negative publicity. In addition, as
described in BUSINESS Current Business
Strategy, as a result of the CCRAA as well as the
challenges we are facing in the capital markets, we aim to
reduce our operating expenses by up to 20 percent as
compared to 2007 operating expenses by year-end 2009, before
adjusting for growth and other investments. To date we have
reduced our work force by approximately three percent.
The federal guarantee on our student loans is conditioned on
compliance with origination and servicing standards set by ED
and guarantor agencies. A mitigating factor is our ability to
cure servicing deficiencies and historically our losses have
been small. Should we experience a high rate of servicing
deficiencies, the cost of remedial servicing or the eventual
losses on the student loans that are not cured could be
material. Our servicing and operating processes are highly
dependent on our information system infrastructure, and we face
the risk of business disruption should there be extended
failures of our information systems, any number of which could
have a material impact on our business. To mitigate these risks
we have a number of
back-up and
recovery plans in the event of systems failures, which are
regularly tested and monitored.
We manage operational risk through our risk management and
internal control processes, which involve each business line
including independent cost centers, such as servicing, as well
as executive management. The business lines have direct and
primary responsibility and accountability for identifying,
controlling, and monitoring operational risk, and each business
line manager maintains a system of controls with the objective
of providing proper transaction authorization and execution,
proper system operations, safeguarding of assets from misuse or
theft, and ensuring the reliability of financial and other data.
We have centralized certain staff functions such as accounting,
human resources and legal to further strengthen our operational
controls. While we believe that we have designed effective
methods to minimize operational risks, our operations remain
vulnerable to natural disasters, human error, technology and
communication system breakdowns and fraud.
Market
and Interest Rate Risk
Market and interest rate risk is the risk of loss from adverse
changes in market prices, interest rates,
and/or
foreign currency exchange rates of our financial instruments.
Our primary market risk is from changes in interest rates and
interest spreads. We have an active interest rate risk
management program that is designed to reduce our exposure to
changes in interest rates and maintain consistent earning
spreads in all interest rate environments. We use derivative
instruments extensively to hedge our interest rate exposure, but
there still is a risk that we are not hedging all potential
interest rate exposures or that the hedges do not perform as
designed. 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
103
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. (See also
Interest Rate Risk Management.)
As discussed in more detail under BUSINESS
SEGMENTS Limitations of Core
Earnings, even though we believe our
derivatives are economic hedges, some of them do not qualify for
hedge accounting treatment under SFAS No. 133.
Therefore, changes in interest rates can cause volatility in
those earnings for the market value of our derivatives. Under
SFAS No. 133, these changes in derivative market
values are recorded through earnings with no consideration for
the corresponding change in the fair value of the hedged item.
Changes in interest rates can also have a material effect on the
amount of Floor Income earned in our student loan portfolio and
the valuation of our Retained Interest asset. Our earnings can
also be materially affected by changes in our estimate of the
rate at which loans may prepay in our portfolios as measured by
the CPR. The value of the Retained Interests on FFELP Stafford
securitizations is particularly affected by the level of
Consolidation Loan activity. We face a number of other
challenges and risks that can materially affect our future
results such as changes in:
|
|
|
|
|
applicable laws and regulations, which may change the volume,
average term, effective yields and refinancing options of
student loans under the FFELP or provide advantages to competing
FFELP and
non-FFELP
loan providers;
|
|
|
|
demand and competition for education financing;
|
|
|
|
financing preferences of students and their families;
|
|
|
|
borrower default rates on Private Education Loans;
|
|
|
|
continued access to the capital markets for funding at favorable
spreads particularly for our non-federally insured Private
Education Loan portfolio; and
|
|
|
|
our operating execution and efficiencies, including errors,
omissions, and effectiveness of internal control.
|
Our 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.
Political/Regulatory
Risk
Because we operate in a federally sponsored loan program, we are
subject to political and regulatory risk. The Higher Education
Act of 1965 (HEA) which authorizes the FFELP, is
subject to comprehensive reauthorization every five years and to
frequent statutory and regulatory changes. Past changes included
reduced loan yields paid to lenders in 1993 and 1998, increased
fees paid by lenders in 1993, decreased level of the government
guaranty in 1993 and reduced fees to guarantors and collectors,
among others. The Secretary of Education oversees and implements
the HEA and periodically issues regulations and interpretations
that may impact our business.
The HEA expired in 2003 and has since been extended by a series
of temporary measures. Most recently, the Third Higher Education
Extension Act of 2007 extended the HEA programs through
March 31, 2008. The student loan programs under the HEA
were reauthorized by the Higher Education Reconciliation Act
(HERA), which was enacted February 8, 2006. In
addition, the president signed into law the College Cost
Reduction and Access Act (CCRAA) on
September 27, 2007, and the Department of Education amended
the FFELP regulations on November 1, 2007. The statutory
and regulatory changes included in the above could have a
material impact on the Company. See RECENT
DEVELOPMENTS for additional discussion.
Liquidity
Risk (See LIQUIDITY AND CAPITAL RESOURCES)
Credit
Risk
We bear the full risk of borrower and closed school losses
experienced in our Private Education Loan portfolio. These loans
are underwritten and priced according to risk, generally
determined by a commercially
104
available 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 will
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.
Our higher education Private Education Loans to students
attending Title IV schools are not dischargeable in bankruptcy,
except in certain limited circumstances.
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 the economy, and a
prolonged economic downturn may have an adverse effect on its
credit performance. Management believes that it has provided
sufficient allowances to cover the incurred losses estimated to
be inherent in both the federally guaranteed and Private
Education Loan portfolio. In addition, losses may be incurred
for student borrowers who have not completed their education as
a result of a drop-out or a school closing, and who may have
deferred repayment on all or on part of their loans. We have
provided for these potential losses in our allowance for loan
losses. There is, however, no guarantee that such allowances are
sufficient enough to account for actual losses. (See
LENDING BUSINESS SEGMENT Private Education
Loans Activity in the Allowance for Private
Education Loan Losses.)
In limited instances in our Private Education Loan portfolio, we
have third-party guarantors or have entered into arrangements
with schools whereby they bear a portion of the student loan
default exposure. In these instances, we are exposed to credit
risk related to these third parties. We perform financial
performance reviews of these third parties upon entering
agreements and monitor their financial performance on an ongoing
basis.
FFELP loans are guaranteed by state agencies or non-profit
companies called guarantors, with ED providing reinsurance to
the guarantor. 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. As a result, we have credit exposure on FFELP
loans for the remaining non-guaranteed portion which is referred
to as the Risk Sharing component. The performance of the FFELP
loan portfolio may be affected by the economy, and a prolonged
economic downturn may have an adverse effect on its payment
performance. Management believes that it has provided sufficient
allowances to cover the incurred losses estimated to be inherent
in the FFELP loan portfolio. There is, however, no guarantee
that such allowances are sufficient enough to account for actual
losses. (See LENDING BUSINESS SEGMENT FFELP
Loans.)
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 one commercial airline and Federal
Express Corporation related to our portfolio of leveraged leases.
Consolidation
Loan Refinancing Risk
The process of consolidating FFELP Stafford loans into FFELP
Consolidation loans can have detrimental effects. Student loans
in our portfolio can be consolidated away from us by other
lenders at par. Additionally, FFELP Consolidation Loans have
lower net yields than the FFELP Stafford loans they replace,
which is somewhat offset by the longer average lives of FFELP
Consolidation Loans.
When FFELP Stafford loans in our securitization trusts
consolidate, they are a prepayment for the trust. In periods of
high consolidation activity, the prepayments can be greater than
we have anticipated which can result in an impairment of our
on-balance
sheet Retained Interest in those trusts due to its shorter life.
See
105
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Effects of Consolidation Activity on Estimates. Also, we
must maintain sufficient, short-term liquidity to enable us to
cost-effectively refinance previously securitized FFELP loans as
they are consolidated back on to our balance sheet.
Interest
Rate Risk Management
Asset
and Liability Funding Gap
The tables below present our assets and liabilities (funding)
arranged by underlying indices as of December 31, 2007. In
the following GAAP presentation, the funding gap only includes
derivatives that qualify as effective SFAS No. 133
hedges (those derivatives which are reflected in net interest
margin, as opposed to those reflected in the
gains/(losses) on derivatives and hedging activities,
net line in the consolidated statement of income). The
difference between the asset and the funding is the funding gap
for the specified index. This represents our exposure to
interest rate risk in the form of basis risk and repricing risk,
which is the risk that the different indices may reset at
different frequencies or may not move in the same direction or
at the same magnitude.
Management analyzes interest rate risk 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
|
|
daily
|
|
$
|
98.6
|
|
|
$
|
|
|
|
$
|
98.6
|
|
3 month Treasury bill
|
|
weekly
|
|
|
7.8
|
|
|
|
.2
|
|
|
|
7.6
|
|
Prime
|
|
annual
|
|
|
.6
|
|
|
|
|
|
|
|
.6
|
|
Prime
|
|
quarterly
|
|
|
1.5
|
|
|
|
|
|
|
|
1.5
|
|
Prime
|
|
monthly
|
|
|
13.6
|
|
|
|
|
|
|
|
13.6
|
|
PLUS Index
|
|
annual
|
|
|
1.6
|
|
|
|
|
|
|
|
1.6
|
|
3-month LIBOR
|
|
daily
|
|
|
|
|
|
|
|
|
|
|
|
|
3-month LIBOR
|
|
quarterly
|
|
|
1.0
|
|
|
|
104.0
|
|
|
|
(103.0
|
)
|
1-month
LIBOR(2)
|
|
monthly
|
|
|
.1
|
|
|
|
14.3
|
|
|
|
(14.2
|
)
|
CMT/CPI index
|
|
monthly/quarterly
|
|
|
|
|
|
|
3.8
|
|
|
|
(3.8
|
)
|
Non Discrete
reset(3)
|
|
monthly
|
|
|
|
|
|
|
2.8
|
|
|
|
(2.8
|
)
|
Non Discrete
reset(4)
|
|
daily/weekly
|
|
|
14.0
|
|
|
|
16.5
|
|
|
|
(2.5
|
)
|
Fixed
Rate(5)
|
|
|
|
|
16.8
|
|
|
|
14.0
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
155.6
|
|
|
$
|
155.6
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Funding includes all derivatives
that qualify as hedges under SFAS No. 133.
|
(2) |
|
Funding includes a portion of
Interim ABCP Facility.
|
(3) |
|
Funding includes auction rate
securities.
|
(4) |
|
Assets include restricted and
non-restricted cash equivalents and other overnight type
instruments. Funding includes a portion of Interim ABCP Facility.
|
(5) |
|
Assets include receivables and
other assets (including Retained Interests, goodwill and
acquired intangibles). Funding includes other liabilities and
stockholders equity (excluding Series B Preferred
Stock).
|
The Funding Gaps in the above table are primarily
interest rate mismatches in short-term indices between our
assets and liabilities. We address this issue typically through
the use of basis swaps that typically convert quarterly
3-month
LIBOR to other indices that are more correlated to our asset
indices. These basis swaps do not qualify as effective hedges
under SFAS No. 133 and as a result the effect on the
funding index is not included in our interest margin and is
therefore excluded from the GAAP presentation.
106
Managed
Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frequency of
|
|
|
|
|
|
|
|
|
|
Index
|
|
Variable
|
|
|
|
|
|
|
|
Funding
|
|
(Dollars in billions)
|
|
Resets
|
|
Assets
|
|
|
Funding(1)
|
|
|
Gap
|
|
|
3 month Commercial paper
|
|
daily
|
|
$
|
120.2
|
|
|
$
|
12.1
|
|
|
$
|
108.1
|
|
3 month Treasury bill
|
|
weekly
|
|
|
11.2
|
|
|
|
9.6
|
|
|
|
1.6
|
|
Prime
|
|
annual
|
|
|
1.0
|
|
|
|
.3
|
|
|
|
.7
|
|
Prime
|
|
quarterly
|
|
|
7.0
|
|
|
|
6.0
|
|
|
|
1.0
|
|
Prime
|
|
monthly
|
|
|
21.2
|
|
|
|
16.3
|
|
|
|
4.9
|
|
PLUS Index
|
|
annual
|
|
|
2.6
|
|
|
|
2.6
|
|
|
|
|
|
3-month
LIBOR(2)
|
|
daily
|
|
|
|
|
|
|
104.4
|
|
|
|
(104.4
|
)
|
3-month LIBOR
|
|
quarterly
|
|
|
.9
|
|
|
|
2.3
|
|
|
|
(1.4
|
)
|
1-month
LIBOR(3)
|
|
monthly
|
|
|
.1
|
|
|
|
9.6
|
|
|
|
(9.5
|
)
|
Non Discrete
reset(4)
|
|
monthly
|
|
|
|
|
|
|
2.5
|
|
|
|
(2.5
|
)
|
Non Discrete
reset(5)
|
|
daily/weekly
|
|
|
16.8
|
|
|
|
16.0
|
|
|
|
.8
|
|
Fixed
Rate(6)
|
|
|
|
|
11.9
|
|
|
|
11.2
|
|
|
|
.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
192.9
|
|
|
$
|
192.9
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $2.5 billion
of auction rate securities.
|
|
(3) |
|
Funding includes a portion of
Interim ABCP Facility.
|
|
(4) |
|
Funding includes auction rate
securities.
|
|
(5) |
|
Assets include restricted and
non-restricted cash equivalents and other overnight type
instruments. Funding includes a portion of Interim ABCP Facility.
|
|
(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).
|
To the extent possible, we generally fund our assets with debt
(in combination with derivatives) that has the same underlying
index (index type and index reset frequency). When it is more
economical, we also fund our assets with debt that has a
different index
and/or reset
frequency than the asset, but only in instances where we believe
there is a high degree of correlation between the interest rate
movement of the two indices. For example, we use daily reset
3-month
LIBOR to fund a large portion of our daily reset
3-month
commercial paper indexed assets. In addition, we use quarterly
reset
3-month
LIBOR to fund a portion of our quarterly reset Prime rate
indexed Private Education Loans. We also use our monthly Non
Discrete reset and
1-month
LIBOR funding (asset-backed commercial paper program and auction
rate securities) to fund various asset types. In using different
index types and different index reset frequencies to fund our
assets, we are exposed to interest rate risk in the form of
basis risk and repricing risk, which is the risk that the
different indices that may reset at different frequencies will
not move in the same direction or at the same magnitude. 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 in the second half
of 2007 with the commercial paper and LIBOR indices. We use
interest rate swaps and other derivatives to achieve our risk
management objectives.
When compared with the GAAP presentation, the Managed basis
presentation includes all of our off-balance sheet assets and
funding, and also includes basis swaps that primarily convert
quarterly
3-month
LIBOR to other indices that are more correlated to our asset
indices.
107
Weighted
Average Life
The following table reflects the weighted average life for our
Managed earning assets and liabilities at December 31, 2007.
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|
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|
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|
|
|
|
|
|
|
|
On-Balance
|
|
|
Off-Balance
|
|
|
|
|
(Averages in Years)
|
|
Sheet
|
|
|
Sheet
|
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|
Managed
|
|
|
Earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loans
|
|
|
9.0
|
|
|
|
6.0
|
|
|
|
8.9
|
|
Other loans
|
|
|
5.0
|
|
|
|
|
|
|
|
5.0
|
|
Cash and investments
|
|
|
.2
|
|
|
|
.1
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
8.0
|
|
|
|
5.6
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
.2
|
|
|
|
|
|
|
|
.2
|
|
Long-term borrowings
|
|
|
6.6
|
|
|
|
6.0
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
5.0
|
|
|
|
6.0
|
|
|
|
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.
COMMON
STOCK
The following table summarizes the Companys common share
repurchase, issuance and equity forward activity for the years
ended December 31, 2007, 2006 and 2005.
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|
|
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|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Shares in millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Common shares repurchased:
|
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|
|
|
|
|
|
|
|
|
|
|
Open market
|
|
|
1.8
|
|
|
|
2.2
|
|
|
|
|
|
Equity forward contracts
|
|
|
4.2
|
|
|
|
5.4
|
|
|
|
17.3
|
|
Equity forward contracts agreed to be
settled(1)
|
|
|
44.0
|
|
|
|
|
|
|
|
|
|
Benefit
plans(2)
|
|
|
3.3
|
|
|
|
1.6
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares repurchased
|
|
|
53.3
|
|
|
|
9.2
|
|
|
|
18.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average purchase price per
share(3)
|
|
$
|
44.59
|
|
|
$
|
52.41
|
|
|
$
|
49.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued
|
|
|
109.2
|
|
|
|
6.7
|
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period
|
|
|
48.2
|
|
|
|
42.7
|
|
|
|
42.8
|
|
New contracts
|
|
|
|
|
|
|
10.9
|
|
|
|
17.2
|
|
Settlements
|
|
|
(4.2
|
)
|
|
|
(5.4
|
)
|
|
|
(17.3
|
)
|
Agreed to be
settled(1)
|
|
|
(44.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
|
|
|
|
48.2
|
|
|
|
42.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authority remaining at end of period to repurchase or enter into
equity forwards
|
|
|
38.8
|
|
|
|
15.7
|
|
|
|
18.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 performance stock for employees
tax withholding obligations and shares tendered by employees to
satisfy option exercise costs.
|
|
(3) |
|
For equity forward contracts, the
average purchase price per share for 2005 is calculated based on
the average strike price of all equity forward contracts
including those whose strike prices were amended and were net
settled in cashless transactions. There were no such cashless
transactions in 2006 or 2007.
|
108
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, after deducting
underwriting fees and other fees and expenses of the offering,
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
Note 12, Stockholders Equity, for further
discussion). The remaining proceeds will be 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, 2007 was $20.14.
RECENT
DEVELOPMENTS
Higher
Education Reauthorization
On October 30, 2007, the House and Senate passed S. 2258,
The Third Higher Education Extension Act of 2007,
which extends the authorization of the Higher Education Act
through March 31, 2008. The reauthorization of the Higher
Education Act remains one of the outstanding issues for this
Congress.
On July 24, 2007, the Senate passed the full HEA
reauthorization bill, S. 1642. The Senate bill includes some
provisions that would affect the student loan programs. The
Senate bill includes provisions that would regulate gifts,
travel, entertainment, and services provided to institutions of
higher education by guarantors and lenders. It includes new
disclosure requirements on lenders and would prohibit schools
from designating preferred lender lists. The Senate bill would
allow schools to keep standard lists of lenders but would
require the schools to include any lender on the list that
requested inclusion. The bill would also eliminate
school-as-lender, effective June 30, 2011.
On February 7, 2008, the House of Representatives passed
H.R. 4137, the College Opportunity and Affordability Act of
2007, its version of the Higher Education Act Reauthorization.
The legislation includes the previously-passed Student Loan
Sunshine Act (H.R. 890). In addition, the House legislation
includes provisions similar to Senate Banking Committee
legislation, Private Student Loan Transparency, which provides
for certain disclosures and prohibits certain activities in
connection with Private Education Loans. Once House action is
completed, it is expected that the House and Senate will resolve
the differences between the two bills in conference committee
and complete action on reauthorization prior to the expiration
of the latest temporary extension.
109
Student
Loan Sunshine Act
On May 9, 2007, the House of Representatives passed H.R.
890, a bipartisan version of the Student Loan Sunshine
Act. The bill would establish greater disclosure
requirements on schools and lenders for both FFELP loans and
Private Education Loans. The legislation would require higher
education institutions to establish codes of conduct
that would include prohibition on many areas that have been
cited as creating conflicts of interest. Areas specified by the
legislation include gifts, consulting or other fees paid by
lenders to financial aid officers and other school officials,
fees or other material benefits, including profit or revenue
sharing to institutions or their staff, staffing assistance,
opportunity loans, and advisory councils. The legislation would
require that schools include at least three unaffiliated lenders
on any Preferred Lender List and disclose the rationale for
recommending such lenders.
Private
Student Loan Transparency and Improvement Act of 2007
On August 1, 2007, the Senate Committee on Banking,
Housing, and Urban Affairs approved the Private Student Loan
Transparency and Improvement Act of 2007, legislation initially
introduced by Senator Christopher Dodd (D-CT) on June 8,
2007. The bill provides for certain disclosures and prohibits
certain activities in connection with private education loans.
The bills disclosure requirements would:
|
|
|
|
|
Require all private education loan applications and
solicitations to include a disclosure that includes the range of
interest rates and fees available, in addition to other
information regarding the terms and conditions of the loan;
|
|
|
|
Require lenders to provide a clear and concise disclosure of the
rate, terms and conditions of a private education loan that has
been approved for a student borrower and provide borrowers with
a cooling off period after the borrower receives the
required disclosure documents within which to accept the terms
of the loan and consummate the transaction;
|
|
|
|
Provide for a right to cancel a private education loan without
penalty within three business days of consummation;
|
|
|
|
Require that private education lenders provide additional
disclosures at the time of loan and its consummation; and
|
|
|
|
Apply Truth in Lending Act (TILA) provisions to all private
student loans.
|
The bill would also prohibit:
|
|
|
|
|
Private education lenders from offering or providing any gift to
a covered educational institution or its employees and bar such
institutions and their officers and employees from receiving
such gift in exchange for any advantage or consideration
provided to the lender related to its private education loan
activities;
|
|
|
|
Private education lenders from engaging in revenue sharing with
a covered educational institution;
|
|
|
|
Private education lenders from co-branding their private
education loans in any way that implies that the covered
educational institution endorses the private education loans
offered by the lender;
|
|
|
|
Private education loan lenders from imposing a fee or penalty
for early repayment or prepayment of any private education
loans; and
|
|
|
|
Financial aid office employees at covered educational
institutions who serve on a private education lender advisory
board from receiving anything of value from the private
education lender other than the reimbursement of reasonable
expenses incurred in connection with their service on the
advisory board.
|
110
Other
Legislative Developments
On October 10, 2007, The House of Representatives passed
H.R. 3056, the Tax Collection Responsibility Act of 2007. If
enacted, this legislation would repeal the authority of the
Internal Revenue Service (the IRS) to contract with
private collection agencies for certain federal tax collections.
The Companys subsidiary, Pioneer Credit Recovery, is one
of two agencies participating in the IRS pilot, testing the use
of private collectors in improving federal tax collections. The
Senate is not expected to act on corresponding repeal
legislation this year. On December
17-18, 2007,
the House and Senate passed an FY 2008 omnibus spending bill
that did not eliminate or reduce funding for private debt
collection, effectively keeping the program alive. Fee income
generated from federal tax collections activity is currently de
minimis to our APG business segment results of operations.
Merger-Related
Developments
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 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 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.
Ratings
Our management team intends to focus on maintaining, and
ultimately improving, our credit ratings. Our credit ratings may
affect, among other things, our cost of funding, especially in
the unsecured debt markets, and, to a lesser extent, the volume
and price of securitization transactions we can execute. Also,
as discussed in Item 1A. Risk Factors, a
decrease in our credit ratings may affect the ability of
counterparties to terminate our swap contracts. We cannot
provide any assurance that our recent offerings of common stock
and Series C preferred stock, or any other amount of equity
capital will be sufficient to maintain our ratings at any
particular level. We may issue additional equity in the form of
common stock as we deem necessary to maintain, and ultimately
improve, our credit ratings.
Dividends
We have not paid dividends on our common stock since the
execution of the Merger Agreement with the Buyer Group in April
2007. While the restriction on the payment of dividends under
the Merger Agreement has been terminated, we expect to continue
not paying dividends in the near term in order to focus on
balance sheet improvement and expect to re-examine our dividend
policy in the second half of 2008.
Management
Changes and Sales of Securities
On December 12, 2007, the Company announced that Kevin F.
Moehn, executive vice president, sales and originations, and
June M. McCormack, executive vice president, servicing,
technology and sales marketing, would be leaving the Company.
On December 14, 2007, we announced that our Board of
Directors added the Chief Executive Officer title and
responsibilities to our Executive Chairman Albert L. Lord. C.E.
Andrews, our previous CEO, assumed the role of President.
On the same date, we announced we had opened our trading window
for directors and executive officers for the first time since we
commenced discussions with the Buyer Group in March 2007.
Mr. Lord sold approximately 1.3 million shares of our
common stock, or approximately 97 percent of the common
stock that he owned before the sale, on the open market on
December 14, 2007. Also on December 14, 2007,
Mr. Charles
111
Daley, a director, sold approximately 80,023 shares of our
common stock or approximately 68 percent of the common
stock that he owned before the sale. Messrs. Lord and Daley
have advised us that these actions were required under their
respective borrowing arrangements.
On December 19, 2007, the Corporation and Mr. Moehn
agreed on the terms and conditions of a separation agreement.
The material terms of the separation agreement are detailed in
the Companys
Form 8-K
filed with the SEC on December 26, 2007.
On December 22, 2007, the Company and Ms. McCormack
agreed on the terms and conditions of a separation agreement.
The material terms of the separation agreement are detailed in
the Companys
Form 8-K
filed with the SEC on December 28, 2007.
On January 7, 2008, the Board of Directors of the Company
appointed Anthony P. Terracciano as Chairman of the Board.
Mr. Terracciano was also appointed Chairman of the
Executive Committee of the Board. Albert L. Lord was appointed
Vice Chairman of the Board and its Executive Committee and
continues to serve as Chief Executive Officer. In addition, the
Board announced the appointment of John (Jack) F. Remondi as
Vice Chairman and Chief Financial Officer, effective
January 8, 2008.
On January 17, 2008, the SEC requested that the Company
provide information and documents regarding disclosures and
actions taken by the Company in December 2007 before and after
stock sales of SLM Corporation common stock by Company directors
and executives. We are cooperating with the SEC in order to
provide the requested information and documents.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 2 to the consolidated financial statements,
Significant Accounting Policies Recently
Issued Accounting Pronouncements.
112
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Interest
Rate Sensitivity Analysis
The effect of short-term movements in interest rates on our
results of operations and financial position has been limited
through our interest rate risk management. The following tables
summarize the effect on earnings for the years ended
December 31, 2007 and 2006 and the effect on fair values at
December 31, 2007 and 2006, based upon a sensitivity
analysis performed by management assuming a hypothetical
increase in market interest rates of 100 basis points and
300 basis points while funding spreads remain constant.
Additionally, as it relates to the effect on earnings, a
sensitivity analysis was performed assuming the LIBOR index
increased 25 basis points while other indices remained
constant. Both of these analyses do not consider any potential
impairment to our Residual Interests that may result from a
higher discount rate that would be used to compute the present
value of the cash flows if long-term interest rates increased.
See Note 9 to the consolidated financial statements,
Student Loan Securitization, which details the
potential decrease to fair value that could occur.
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Interest Rates:
|
|
|
|
|
|
|
Change from
|
|
|
Change from
|
|
|
LIBOR index to other indices
|
|
|
|
Increase of
|
|
|
Increase of
|
|
|
Increase
|
|
|
|
100 Basis
|
|
|
300 Basis
|
|
|
25 Basis
|
|
|
|
Points
|
|
|
Points
|
|
|
Points
|
|
(Dollars in millions, except per share amounts)
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Effect on Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in pre-tax net income before unrealized
gains (losses) on derivative and hedging activities
|
|
$
|
11
|
|
|
|
1
|
%
|
|
$
|
32
|
|
|
|
4
|
%
|
|
$
|
(196
|
)
|
|
|
(23
|
)%
|
Unrealized gains (losses) on derivative and hedging activities
|
|
|
213
|
|
|
|
16
|
|
|
|
375
|
|
|
|
28
|
|
|
|
80
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in net income before taxes
|
|
$
|
224
|
|
|
|
46
|
%
|
|
$
|
407
|
|
|
|
85
|
%
|
|
$
|
(116
|
)
|
|
|
(24
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in diluted earnings per share
|
|
$
|
.361
|
|
|
|
16
|
%
|
|
$
|
.674
|
|
|
|
30
|
%
|
|
$
|
(.281
|
)
|
|
|
(12
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
Interest Rates:
|
|
|
LIBOR index
|
|
|
|
Change from
|
|
|
Change from
|
|
|
to other indices
|
|
|
|
Increase of
|
|
|
Increase of
|
|
|
Increase
|
|
|
|
100 Basis
|
|
|
300 Basis
|
|
|
25 Basis
|
|
|
|
Points
|
|
|
Points
|
|
|
Points
|
|
(Dollars in millions, except per share amounts)
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Effect on Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in pre-tax net income before unrealized
gains (losses) on derivative and hedging activities
|
|
$
|
(4
|
)
|
|
|
|
%
|
|
$
|
(20
|
)
|
|
|
(1
|
)%
|
|
$
|
(120
|
)
|
|
|
(14
|
)%
|
Unrealized gains (losses) on derivative and hedging activities
|
|
|
136
|
|
|
|
59
|
|
|
|
215
|
|
|
|
93
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in net income before taxes
|
|
$
|
132
|
|
|
|
7
|
%
|
|
$
|
195
|
|
|
|
10
|
%
|
|
$
|
(124
|
)
|
|
|
(26
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in diluted earnings per share
|
|
$
|
.213
|
|
|
|
8
|
%
|
|
$
|
.352
|
|
|
|
13
|
%
|
|
$
|
(.275
|
)
|
|
|
(12
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006
|
|
|
|
|
|
|
Interest Rates:
|
|
|
|
|
|
|
Change from
|
|
|
Change from
|
|
|
|
|
|
|
Increase of
|
|
|
Increase of
|
|
|
|
|
|
|
100 Basis
|
|
|
300 Basis
|
|
|
|
|
|
|
Points
|
|
|
Points
|
|
(Dollars in millions)
|
|
Fair Value
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Effect on Fair Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP student loans
|
|
$
|
87,797
|
|
|
$
|
(182
|
)
|
|
|
|
%
|
|
$
|
(313
|
)
|
|
|
|
%
|
Private Education Loans
|
|
|
12,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other earning assets
|
|
|
9,950
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
(109
|
)
|
|
|
(1
|
)
|
Other assets
|
|
|
10,299
|
|
|
|
(436
|
)
|
|
|
(4
|
)
|
|
|
(750
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
120,109
|
|
|
$
|
(656
|
)
|
|
|
(1
|
)%
|
|
$
|
(1,172
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
$
|
108,142
|
|
|
$
|
(1,427
|
)
|
|
|
(1
|
)%
|
|
$
|
(3,610
|
)
|
|
|
(3
|
)%
|
Other liabilities
|
|
|
3,680
|
|
|
|
877
|
|
|
|
24
|
|
|
|
2,613
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
111,822
|
|
|
$
|
(550
|
)
|
|
|
|
%
|
|
$
|
(997
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A primary objective in our funding is to minimize our
sensitivity to changing interest rates by generally funding our
floating rate student loan portfolio with floating rate debt.
However, as discussed under LENDING BUSINESS
SEGMENT Summary of our Managed Student Loan
Portfolio Floor Income, we can have a
fixed versus floating mismatch in funding if the student loan
earns at the fixed borrower rate and the funding remains
floating. In addition, we can have a mismatch in the index of
floating rate debt versus floating rate assets.
During the year ended December 31, 2007 and 2006, certain
FFELP student loans were earning Floor Income and we locked in a
portion of that Floor Income through the use of futures and
Floor Income Contracts. The result of these hedging transactions
was to convert a portion of the fixed rate nature of student
loans to variable rate, and to fix the relative spread between
the student loan asset rate and the variable rate liability.
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
114
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) our
unhedged on-balance sheet loans not currently having significant
Floor Income due to a higher interest rate environment, which
results in these loans being more variable rate; (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 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.
Items (ii) and (iii) had a bigger impact in both
scenarios than item (i) for the year ended
December 31, 2006 due to the higher interest rate
environment that existed.
Under the scenario in the tables above, where the LIBOR index
increases 25 basis points while other indices remain
constant, 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 RISKS Interest Rate
Risk Management Asset and Liability Funding
Gap for a further discussion.
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, 2007. Based
on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of December 31, 2007,
our disclosure controls and procedures were effective to ensure
that information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is
(a) recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms and
(b) accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer as appropriate to allow timely decisions regarding
required disclosure.
Changes
in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as
defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934, as amended) occurred
during the fiscal quarter ended December 31, 2007 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
Nothing to report.
115
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 8, 2008 (the 2008 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 2008 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 2008 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 2008 Proxy
Statement is incorporated by reference in this section.
|
|
Item 11.
|
Executive
Compensation
|
The information set forth under the caption Executive
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 14 to the consolidated
financial statements, Stock-Based Compensation Plans and
Arrangements, 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
Proposal 2 Ratification of the
Appointment of Independent Registered Public Accounting
Firm in the Proxy Statement is incorporated by reference
in this section.
116
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, 2007 and 2006
|
|
|
F-4
|
|
Consolidated Statements of Income for the years ended
December 31, 2007, 2006 and 2005
|
|
|
F-5
|
|
Consolidated Statements of Changes in Stockholders Equity
for the years ended December 31, 2007, 2006 and 2005
|
|
|
F-6
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2007, 2006 and 2005
|
|
|
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.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are
filed or incorporated by reference as part of this Annual Report.
The Company will furnish at cost a copy of any exhibit filed
with or incorporated by reference into this Annual Report. Oral
or written requests for copies of any exhibits should be
directed to the Corporate Secretary.
4. Appendices
Appendix A Federal Family Education Loan Program
|
|
|
|
|
|
*2
|
|
|
Agreement and Plan of Reorganization by and among the Student
Loan Marketing Association, SLM Holding Corporation, and Sallie
Mae Merger Company
|
|
**3
|
.1
|
|
Amended and Restated Certificate of Incorporation of the
Registrant, incorporated by reference to Exhibit 4.1 of SLM
Corporations Current Report on Form 8-K dated January 2,
2008.
|
|
**3
|
.2
|
|
Amended By-Laws of the Registrant
|
|
*10
|
.3
|
|
Deferred Compensation Plan for Directors
|
|
*10
|
.4
|
|
Incentive Performance Plan
|
|
*10
|
.7
|
|
Supplemental Pension Plan
|
|
*10
|
.8
|
|
Supplemental Employees Thrift & Savings Plan
(Sallie Mae 401(K) Supplemental Savings Plan)
|
|
***10
|
.9
|
|
Directors Stock Plan
|
|
***10
|
.10
|
|
Management Incentive Plan
|
|
10
|
.11
|
|
Employee Stock Option Plan
|
|
10
|
.12
|
|
Amended and Restated Employees Stock Purchase Plan
|
|
10
|
.13
|
|
Employment Agreement between the Registrant and Albert L. Lord,
Vice Chairman of the Board of Directors and Chief Executive
Officer, dated as of January 1, 2003
|
117
|
|
|
|
|
|
10
|
.14
|
|
Employment Agreement between the Registrant and Thomas J.
Fitzpatrick, President and Chief Operating Officer, dated as of
January 1, 2003
|
|
10
|
.15(*)
|
|
Employment Agreement between the Registrant and C.E. Andrews,
Executive Vice President, Accounting and Risk Management, dated
as of February 24, 2004
|
|
10
|
.16
|
|
Named Executive Officer Compensation
|
|
10
|
.17
|
|
Summary of Non-Employee Director Compensation
|
|
10
|
.18
|
|
Limited Liability Company Agreement of Education First Marketing
LLC
|
|
10
|
.19
|
|
Limited Liability Company Agreement of Education First Finance
LLC
|
|
10
|
.20
|
|
Settlement Agreement and Release(1)
|
|
10
|
.21
|
|
First Amendment to Settlement Agreement and Release(1)
|
|
10
|
.22
|
|
Second Amendment to Settlement Agreement and Release(1)
|
|
10
|
.23
|
|
Employment Agreement between Registrant and Thomas J.
Fitzpatrick, President and Chief Executive Officer, effective as
of June 1, 2005
|
|
++10
|
.24
|
|
Sallie Mae Deferred Compensation Plan for Key Employees
Restatement Effective January 1, 2005
|
|
++10
|
.25
|
|
SLM Corporation Incentive Plan Performance Stock Term Sheet
Core Net Income Target
|
|
++10
|
.26
|
|
Stock Option Agreement SLM Corporation Incentive Plan
Net-Settled, Price-Vested Options 1 year
minimum 2006
|
|
++10
|
.27
|
|
SLM Corporation Change in Control Severance Plan for Senior
Officers
|
|
+10
|
.28
|
|
Confidential Agreement and Release between the Registrant and
Kevin F. Moehn, dated December 19, 2007
|
|
+10
|
.29
|
|
Confidential Agreement and Release between the Registrant and
June M. McCormack, dated December 22, 2007
|
|
14
|
|
|
Code of Business Conduct
|
|
*21
|
|
|
Subsidiaries of the Registrant
|
|
+23
|
|
|
Consent of PricewaterhouseCoopers LLP
|
|
+31
|
.1
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2003
|
|
+31
|
.2
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2003
|
|
+32
|
.1
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2003
|
|
+32
|
.2
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2003
|
|
|
|
*
|
|
Incorporated by reference to the
correspondingly numbered exhibits to the Registrants
Registration Statement on
Form S-4,
as amended (File
No. 333-21217)
|
|
** |
|
Incorporated by reference to the
correspondingly numbered exhibits to the Registrants
Registration on
Form S-1
(File
No. 333-38391)
|
|
*** |
|
Incorporated by reference to the
Registrants Definitive Proxy Statement on
Schedule 14A, as filed with the Securities and Exchange
Commission on April 10, 1998 (File
No. 001-13251)
|
|
|
|
Filed with the Securities and
Exchange Commission with the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2003
|
|
|
|
Management Contract or Compensatory
Plan or Arrangement
|
|
|
|
Filed with the Securities and
Exchange Commission with the Registrants Quarterly Report
on
Form 10-Q
for the quarter ended March 31, 2003
|
|
(*) |
|
Filed with the Securities and
Exchange Commission with the Registrants Quarterly Report
on
Form 10-Q
for the quarter ended March 31, 2004
|
|
|
|
Filed with the Securities and
Exchange Commission with the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2004
|
|
|
|
Filed with the Securities and
Exchange Commission with the Registrants Quarterly Report
on
Form 10-Q
for the quarter ended March 31, 2005
|
|
|
|
Filed with the Securities and
Exchange Commission with the Registrants Quarterly Report
on
Form 10-Q
for the quarter ended September 30, 2005
|
|
++ |
|
Filed with the Securities and
Exchange Commission with the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2005.
|
|
+ |
|
Filed with the Securities and
Exchange Commission with this
Form 10-K
|
|
(1) |
|
Confidential Treatment has been
requested as to certain portions of these exhibits. Such
portions have been omitted. We separately filed with the
Securities and Exchange Commission a complete set of these
exhibits, including the portions omitted in our filing.
|
118
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: February 29, 2008
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)
|
|
February 29, 2008
|
|
|
|
|
|
/s/ John
F. Remondi
John
F. Remondi
|
|
Vice Chairman and Chief Financial Officer (Principal Financial
and Accounting Officer)
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Anthony
P. Terracciano
Anthony
P. Terracciano
|
|
Chairman of the Board of Directors
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Ann
Torre Bates
Ann
Torre Bates
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Charles
L. Daley
Charles
L. Daley
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ William
M. Diefenderfer, III
William
M. Diefenderfer, III
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Diane
Suitt Gilleland
Diane
Suitt Gilleland
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Earl
A. Goode
Earl
A. Goode
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Ronald
F. Hunt
Ronald
F. Hunt
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Benjamin
J. Lambert, III
Benjamin
J. Lambert, III
|
|
Director
|
|
February 29, 2008
|
119
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Barry
A. Munitz
Barry
A. Munitz
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ A.
Alexander Porter, Jr.
A.
Alexander Porter, Jr.
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Wolfgang
Schoellkopf
Wolfgang
Schoellkopf
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Steven
L. Shapiro
Steven
L. Shapiro
|
|
Director
|
|
February 29, 2008
|
|
|
|
|
|
/s/ Barry
L. Williams
Barry
L. Williams
|
|
Director
|
|
February 29, 2008
|
120
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, 2007. 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, 2007, 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, 2007, 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 index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of SLM Corporation
and its subsidiaries at December 31, 2007 and 2006, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2007 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, 2007, 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.
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
February 29, 2008
F-3
SLM CORPORATION
(Dollars and shares in thousands, except per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Assets
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans (net of allowance for
losses of $47,518 and $8,701, respectively)
|
|
$
|
35,726,062
|
|
|
$
|
24,840,464
|
|
FFELP Consolidation Loans (net of allowance for losses of
$41,211 and $11,614, respectively)
|
|
|
73,609,187
|
|
|
|
61,324,008
|
|
Private Education Loans (net of allowance for losses of $885,931
and $308,346, respectively)
|
|
|
14,817,725
|
|
|
|
9,755,289
|
|
Other loans (net of allowance for losses of $47,004 and $20,394,
respectively)
|
|
|
1,173,666
|
|
|
|
1,308,832
|
|
Investments
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
2,871,340
|
|
|
|
2,464,121
|
|
Other
|
|
|
93,040
|
|
|
|
99,330
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
2,964,380
|
|
|
|
2,563,451
|
|
Cash and cash equivalents
|
|
|
7,582,031
|
|
|
|
2,621,222
|
|
Restricted cash and investments
|
|
|
4,600,106
|
|
|
|
3,423,326
|
|
Retained Interest in off-balance sheet securitized loans
|
|
|
3,044,038
|
|
|
|
3,341,591
|
|
Goodwill and acquired intangible assets, net
|
|
|
1,300,689
|
|
|
|
1,371,606
|
|
Other assets
|
|
|
10,747,107
|
|
|
|
5,585,943
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
155,564,991
|
|
|
$
|
116,135,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
35,947,407
|
|
|
$
|
3,528,263
|
|
Long-term borrowings
|
|
|
111,098,144
|
|
|
|
104,558,531
|
|
Other liabilities
|
|
|
3,284,545
|
|
|
|
3,679,781
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
150,330,096
|
|
|
|
111,766,575
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in subsidiaries
|
|
|
11,360
|
|
|
|
9,115
|
|
|
|
|
|
|
|
|
|
|
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;
Series B: 4,000 and 4,000 shares issued, respectively,
at stated value of $100 per share
|
|
|
565,000
|
|
|
|
565,000
|
|
Series C, 7.25% mandatory convertible preferred stock,
1,150 shares authorized; 1,000 and 0 shares issued,
respectively, at liquidation preference of $1,000 per share
|
|
|
1,000,000
|
|
|
|
|
|
Common stock, par value $.20 per share, 1,125,000 shares
authorized: 532,493 and 433,113 shares issued, respectively
|
|
|
106,499
|
|
|
|
86,623
|
|
Additional paid-in capital
|
|
|
4,590,174
|
|
|
|
2,565,211
|
|
Accumulated other comprehensive income (net of tax of $124,468
and $183,684, respectively)
|
|
|
236,364
|
|
|
|
349,111
|
|
Retained earnings
|
|
|
557,204
|
|
|
|
1,834,718
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity before treasury stock
|
|
|
7,055,241
|
|
|
|
5,400,663
|
|
Common stock held in treasury at cost: 65,951 and
22,496 shares, respectively
|
|
|
1,831,706
|
|
|
|
1,040,621
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
5,223,535
|
|
|
|
4,360,042
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
155,564,991
|
|
|
$
|
116,135,732
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
SLM
CORPORATION
(Dollars and shares in thousands, except per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
2,060,993
|
|
|
$
|
1,408,938
|
|
|
$
|
1,014,851
|
|
FFELP Consolidation Loans
|
|
|
4,343,138
|
|
|
|
3,545,857
|
|
|
|
2,500,008
|
|
Private Education Loans
|
|
|
1,456,471
|
|
|
|
1,021,221
|
|
|
|
633,884
|
|
Other loans
|
|
|
105,843
|
|
|
|
97,954
|
|
|
|
84,664
|
|
Cash and investments
|
|
|
707,577
|
|
|
|
503,002
|
|
|
|
276,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
8,674,022
|
|
|
|
6,576,972
|
|
|
|
4,510,163
|
|
Total interest expense
|
|
|
7,085,772
|
|
|
|
5,122,855
|
|
|
|
3,058,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
1,588,250
|
|
|
|
1,454,117
|
|
|
|
1,451,445
|
|
Less: provisions for loan losses
|
|
|
1,015,308
|
|
|
|
286,962
|
|
|
|
203,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provisions for loan losses
|
|
|
572,942
|
|
|
|
1,167,155
|
|
|
|
1,248,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on student loan securitizations
|
|
|
367,300
|
|
|
|
902,417
|
|
|
|
552,546
|
|
Servicing and securitization revenue
|
|
|
437,097
|
|
|
|
553,541
|
|
|
|
356,730
|
|
Losses on loans and securities, net
|
|
|
(95,492
|
)
|
|
|
(49,357
|
)
|
|
|
(63,955
|
)
|
Gains (losses) on derivative and hedging activities, net
|
|
|
(1,360,584
|
)
|
|
|
(339,396
|
)
|
|
|
246,548
|
|
Guarantor servicing fees
|
|
|
156,429
|
|
|
|
132,100
|
|
|
|
115,477
|
|
Contingency fee revenue
|
|
|
335,737
|
|
|
|
396,830
|
|
|
|
359,907
|
|
Collections revenue
|
|
|
271,547
|
|
|
|
239,829
|
|
|
|
166,840
|
|
Other
|
|
|
385,075
|
|
|
|
338,307
|
|
|
|
273,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
497,109
|
|
|
|
2,174,271
|
|
|
|
2,007,352
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
773,863
|
|
|
|
703,210
|
|
|
|
625,024
|
|
Other
|
|
|
777,984
|
|
|
|
642,942
|
|
|
|
513,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,551,847
|
|
|
|
1,346,152
|
|
|
|
1,138,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest in net
earnings of subsidiaries
|
|
|
(481,796
|
)
|
|
|
1,995,274
|
|
|
|
2,117,463
|
|
Income tax expense
|
|
|
412,283
|
|
|
|
834,311
|
|
|
|
728,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest in net earnings of
subsidiaries
|
|
|
(894,079
|
)
|
|
|
1,160,963
|
|
|
|
1,388,696
|
|
Minority interest in net earnings of subsidiaries
|
|
|
2,315
|
|
|
|
4,007
|
|
|
|
6,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(896,394
|
)
|
|
|
1,156,956
|
|
|
|
1,382,284
|
|
Preferred stock dividends
|
|
|
37,145
|
|
|
|
35,567
|
|
|
|
21,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stock
|
|
$
|
(933,539
|
)
|
|
$
|
1,121,389
|
|
|
$
|
1,360,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
(2.26
|
)
|
|
$
|
2.73
|
|
|
$
|
3.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding
|
|
|
412,233
|
|
|
|
410,805
|
|
|
|
418,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
(2.26
|
)
|
|
$
|
2.63
|
|
|
$
|
3.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common and common equivalent shares outstanding
|
|
|
412,233
|
|
|
|
451,170
|
|
|
|
460,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share
|
|
$
|
.25
|
|
|
$
|
.97
|
|
|
$
|
.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
SLM CORPORATION
(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, 2004
|
|
|
3,300,000
|
|
|
|
483,266,408
|
|
|
|
(59,634,019
|
)
|
|
|
423,632,389
|
|
|
$
|
165,000
|
|
|
$
|
96,654
|
|
|
$
|
1,905,460
|
|
|
$
|
440,672
|
|
|
$
|
2,521,740
|
|
|
$
|
(2,027,222
|
)
|
|
$
|
3,102,304
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,382,284
|
|
|
|
|
|
|
|
1,382,284
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85,058
|
)
|
|
|
|
|
|
|
|
|
|
|
(85,058
|
)
|
Change in unrealized gains (losses) on derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,098
|
|
|
|
|
|
|
|
|
|
|
|
13,098
|
|
Minimum pension liability adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(802
|
)
|
|
|
|
|
|
|
|
|
|
|
(802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,309,522
|
|
Cash dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock ($.85 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(355,368
|
)
|
|
|
|
|
|
|
(355,368
|
)
|
Preferred stock, Series A ($3.48 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,511
|
)
|
|
|
|
|
|
|
(11,511
|
)
|
Preferred stock, Series B ($2.28 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,025
|
)
|
|
|
|
|
|
|
(10,025
|
)
|
Issuance of common shares
|
|
|
|
|
|
|
8,217,119
|
|
|
|
79,122
|
|
|
|
8,296,241
|
|
|
|
|
|
|
|
1,643
|
|
|
|
250,171
|
|
|
|
|
|
|
|
|
|
|
|
4,097
|
|
|
|
255,911
|
|
Retirement of common stock in treasury
|
|
|
|
|
|
|
(65,000,000
|
)
|
|
|
65,000,000
|
|
|
|
|
|
|
|
|
|
|
|
(13,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,415,010
|
)
|
|
|
2,428,010
|
|
|
|
|
|
Issuance of preferred shares
|
|
|
4,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
Preferred stock issuance costs and related amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,888
|
)
|
|
|
|
|
|
|
(367
|
)
|
|
|
|
|
|
|
(3,255
|
)
|
Tax benefit related to employee stock option and purchase plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,500
|
|
Stock-based compensation cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,404
|
|
Repurchase of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity forwards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement cost, cash
|
|
|
|
|
|
|
|
|
|
|
(13,114,120
|
)
|
|
|
(13,114,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(655,433
|
)
|
|
|
(655,433
|
)
|
Settlement cost, net settlement
|
|
|
|
|
|
|
|
|
|
|
(4,154,183
|
)
|
|
|
(4,154,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(227,400
|
)
|
|
|
(227,400
|
)
|
(Gain)/loss on settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,315
|
)
|
|
|
(17,315
|
)
|
Benefit plans
|
|
|
|
|
|
|
|
|
|
|
(1,523,517
|
)
|
|
|
(1,523,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76,909
|
)
|
|
|
(76,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Preferred stock issuance costs and related amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
647
|
|
|
|
|
|
|
|
(647
|
)
|
|
|
|
|
|
|
|
|
Tax benefit related to employee stock option and purchase plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-7
SLM
CORPORATION
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(896,394
|
)
|
|
$
|
1,156,956
|
|
|
$
|
1,382,284
|
|
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on student loan securitizations
|
|
|
(367,300
|
)
|
|
|
(902,417
|
)
|
|
|
(552,546
|
)
|
Losses on loans and securities, net
|
|
|
95,492
|
|
|
|
49,357
|
|
|
|
63,955
|
|
Stock-based compensation cost
|
|
|
74,621
|
|
|
|
81,163
|
|
|
|
19,592
|
|
Unrealized (gains)/losses on derivative and hedging activities,
excluding equity forwards
|
|
|
(214,963
|
)
|
|
|
(128,529
|
)
|
|
|
(514,362
|
)
|
Unrealized (gains)/losses on derivative and hedging
activities equity forwards
|
|
|
1,558,025
|
|
|
|
359,193
|
|
|
|
(120,433
|
)
|
Provisions for loan losses
|
|
|
1,015,308
|
|
|
|
286,962
|
|
|
|
203,006
|
|
Minority interest, net
|
|
|
(779
|
)
|
|
|
(2,461
|
)
|
|
|
(7,835
|
)
|
Mortgage loans originated
|
|
|
(546,773
|
)
|
|
|
(1,291,782
|
)
|
|
|
(1,746,986
|
)
|
Proceeds from sales of mortgage loans
|
|
|
615,274
|
|
|
|
1,364,448
|
|
|
|
1,692,923
|
|
(Increase) in purchased paper-mortgages, net
|
|
|
(618,117
|
)
|
|
|
(214,916
|
)
|
|
|
(88,638
|
)
|
(Increase) decrease in restricted cash other
|
|
|
(84,537
|
)
|
|
|
71,312
|
|
|
|
18,640
|
|
(Increase) in accrued interest receivable
|
|
|
(1,046,124
|
)
|
|
|
(970,580
|
)
|
|
|
(788,819
|
)
|
Increase in accrued interest payable
|
|
|
214,401
|
|
|
|
277,617
|
|
|
|
260,505
|
|
Adjustment for non-cash (income)/loss related to Retained
Interest
|
|
|
279,246
|
|
|
|
157,715
|
|
|
|
258,351
|
|
Decrease in other assets, goodwill and acquired intangible
assets, net
|
|
|
761,787
|
|
|
|
730,221
|
|
|
|
307,543
|
|
(Decrease) increase in other liabilities
|
|
|
(890,464
|
)
|
|
|
(215,838
|
)
|
|
|
371,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
845,097
|
|
|
|
(348,535
|
)
|
|
|
(623,454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(51,297
|
)
|
|
|
808,421
|
|
|
|
758,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loans acquired
|
|
|
(39,303,005
|
)
|
|
|
(36,364,686
|
)
|
|
|
(29,463,704
|
)
|
Loans purchased from securitized trusts (primarily loan
consolidations)
|
|
|
(4,326,221
|
)
|
|
|
(7,394,655
|
)
|
|
|
(9,491,668
|
)
|
Reduction of student loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Installment payments, claims and other
|
|
|
11,290,499
|
|
|
|
10,569,365
|
|
|
|
8,503,141
|
|
Proceeds from securitization of student loans treated as sales
|
|
|
1,976,599
|
|
|
|
19,521,365
|
|
|
|
13,520,208
|
|
Proceeds from sales of student loans
|
|
|
1,013,295
|
|
|
|
101,212
|
|
|
|
167,410
|
|
Other loans originated
|
|
|
(3,396,501
|
)
|
|
|
(2,082,670
|
)
|
|
|
(565,070
|
)
|
Other loans repaid
|
|
|
3,420,187
|
|
|
|
1,834,471
|
|
|
|
523,473
|
|
Other investing activities, net
|
|
|
(358,209
|
)
|
|
|
(210,969
|
)
|
|
|
(192,684
|
)
|
Purchases of available-for-sale securities
|
|
|
(90,087,504
|
)
|
|
|
(85,189,100
|
)
|
|
|
(66,259,431
|
)
|
Proceeds from sales of available-for-sale securities
|
|
|
73,217
|
|
|
|
25,941
|
|
|
|
624,960
|
|
Proceeds from maturities of available-for-sale securities
|
|
|
89,353,103
|
|
|
|
85,015,345
|
|
|
|
66,700,950
|
|
Purchases of held-to-maturity and other securities
|
|
|
(330,450
|
)
|
|
|
(1,066,290
|
)
|
|
|
(903,328
|
)
|
Proceeds from maturities of held-to-maturity securities and
other securities
|
|
|
435,468
|
|
|
|
1,278,897
|
|
|
|
904,179
|
|
(Increase) in restricted cash on-balance sheet trusts
|
|
|
(1,293,846
|
)
|
|
|
(304,749
|
)
|
|
|
(990,961
|
)
|
Return of investment from Retained Interest
|
|
|
276,996
|
|
|
|
140,435
|
|
|
|
256,712
|
|
Purchase of subsidiaries, net of cash acquired
|
|
|
|
|
|
|
(339,836
|
)
|
|
|
(237,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(31,256,372
|
)
|
|
|
(14,465,924
|
)
|
|
|
(16,903,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings issued
|
|
|
7,773,453
|
|
|
|
16,803,116
|
|
|
|
59,820,213
|
|
Short-term borrowings repaid
|
|
|
(8,581,112
|
)
|
|
|
(16,618,913
|
)
|
|
|
(59,907,574
|
)
|
Long-term borrowings issued
|
|
|
1,567,602
|
|
|
|
11,739,249
|
|
|
|
10,250,879
|
|
Long-term borrowings repaid
|
|
|
(3,188,249
|
)
|
|
|
(4,744,432
|
)
|
|
|
(1,835,538
|
)
|
Borrowings collateralized by loans in trust issued
|
|
|
23,943,837
|
|
|
|
12,984,937
|
|
|
|
12,913,991
|
|
Borrowings collateralized by loans in trust repaid
|
|
|
(6,429,648
|
)
|
|
|
(5,578,268
|
)
|
|
|
(6,673,974
|
)
|
Asset-backed commercial paper conduits net activity
|
|
|
21,073,857
|
|
|
|
(6,173
|
)
|
|
|
1,314,645
|
|
Other financing activities, net
|
|
|
(39,597
|
)
|
|
|
(41,837
|
)
|
|
|
(119,050
|
)
|
Excess tax benefit from the exercise of stock-based awards
|
|
|
30,316
|
|
|
|
32,985
|
|
|
|
|
|
Common stock issued
|
|
|
2,125,111
|
|
|
|
192,520
|
|
|
|
249,944
|
|
Net settlements on equity forward contracts
|
|
|
(614,217
|
)
|
|
|
(66,925
|
)
|
|
|
(52,965
|
)
|
Common stock repurchased
|
|
|
(2,222,394
|
)
|
|
|
(482,855
|
)
|
|
|
(732,342
|
)
|
Common dividends paid
|
|
|
(102,658
|
)
|
|
|
(398,414
|
)
|
|
|
(355,368
|
)
|
Preferred stock issued
|
|
|
968,674
|
|
|
|
|
|
|
|
396,745
|
|
Preferred dividends paid
|
|
|
(36,497
|
)
|
|
|
(34,920
|
)
|
|
|
(21,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
36,268,478
|
|
|
|
13,780,070
|
|
|
|
15,248,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
4,960,809
|
|
|
|
122,567
|
|
|
|
(896,832
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
2,621,222
|
|
|
|
2,498,655
|
|
|
|
3,395,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
7,582,031
|
|
|
$
|
2,621,222
|
|
|
$
|
2,498,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash disbursements made for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
6,897,773
|
|
|
$
|
4,512,737
|
|
|
$
|
2,587,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
1,097,340
|
|
|
$
|
770,004
|
|
|
$
|
476,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 35 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. In recent years, there has been
a surge in FFELP Consolidation Loans which are marketed directly
to FFELP Stafford borrowers. The Company has also expanded its
marketing of direct-to-consumer Private Education Loans.
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 provides a wide range of accounts
receivable and collections services including student loan
default aversion services, defaulted student loan portfolio
management services, contingency collections services for
student loans and other asset classes, and accounts receivable
management and collection for purchased portfolios of
receivables that are delinquent or have been charged off by
their original creditors as well as sub-performing and
non-performing mortgage loans.
The Company also earns fees for a number of services including
student loan and guarantee servicing, 529
college-savings
plan administration services, and for providing processing
capabilities and information technology to educational
institutions. The Company also operates a consumer savings
network through Upromise, Inc. (Upromise).
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 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 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.
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2.
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Significant
Accounting Policies
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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 if they do not
effectively disperse
F-9
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
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risks among parties involved. 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 9, 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 securitization activities (gain on sale and the
related retained interest), loan effective interest method
(student loan premiums, discounts and Borrower Benefits),
provisions for loan losses, and derivative accounting.
Consolidation activity has a significant effect on a number of
accounting estimates. Accordingly, the Company has continually
updated its estimates used to develop the cash flows and
effective yield calculations as they relate to the amortization
of student loan premiums and discounts, Borrower Benefits and
the valuation and income recognition of the Residual Interest.
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, are generally carried at amortized cost, which
includes unamortized premiums, unearned discounts and
capitalized origination costs and fees.
If the Company has the ability and intent to hold loans for the
foreseeable future, such loans are held for investment and
therefore carried at amortized cost. Any loans held for sale are
carried at the lower of cost or fair value. 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
F-10
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
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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.
Private Education Loans which are not guaranteed by the federal
government are charged off against the allowance for loan loss
at 212 days past due and any subsequent recoveries are
recorded directly to the allowance. FFELP loans are guaranteed
(subject to legislative risk sharing requirements) as to both
principal and interest, and therefore continue to accrue
interest until such time that they are paid by the guarantor.
Loans in forbearance or deferment status are not considered past
due.
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. Premiums, discounts, and capitalized direct
origination costs 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 modifications 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 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. When a charge-off event occurs, the carrying value
of the loan is charged to the
F-11
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
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allowance for loan loss. The amount attributable to expected
recoveries remains in the allowance for loan loss until received.
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. (See also Note 4, Allowance for
Loan Losses.) When calculating the Private Education Loan
allowance for losses, the Companys methodology 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. Private Education Loan principal is charged off
against the allowance when the loan exceeds 212 days
delinquency. Subsequent recoveries on loans charged off are
recorded directly to the allowance. The Companys
collection policies allow for periods of nonpayment for
borrowers experiencing temporary difficulty meeting payment
obligations which are referred to as forbearance.
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 will typically
exercise its contingent call option (the Company does not hold
the contingent call option for any trusts settling after
September 30, 2005) to repurchase these loans at par
value and record a loss for the difference in the par value paid
and the fair market value of the loan at the time of purchase,
in accordance with 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. The losses recorded upon repurchase,
pertaining to the contingent call option and speciality claims,
for the years ended December 31, 2007, 2006, and 2005 were
$123 million, $48 million, and $32 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. 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.
F-12
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
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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 (the 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 the Bank pursuant to a
money market deposit account agreement between the 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 the Bank in connection
with the tuition payment plan and the Upromise rebates described
above is not restricted and, accordingly, is not included in
restricted cash and investments in 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 and not classified as restricted (due to
the counterparty not having rights of rehypothecation) are
disclosed as such. Additionally, the Companys indentured
trusts deposit cash balances in guaranteed investment contracts
that are held in trust for the related note holders and 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 market value, with the temporary changes in market
value carried as a separate component of stockholders
equity. Changes in the market value for available-for-sale
securities that have been designated as the hedged item in a
SFAS No. 133 fair value hedge (as it relates to the
hedged risks) are recorded in the gains (losses) on
derivative and hedging activities, net line in the
consolidated statements of income offsetting changes in fair
value of the derivative which is hedging such investment.
Temporary changes in market 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 considering
several factors including the length of time and extent to which
the market 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 market 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 market 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
F-13
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
|
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.
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. In all
cases, irrespective of whether they qualify as sales under
SFAS No. 140, the Companys securitizations are
structured such that they are legally 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.
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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 variable interest entities (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.
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
F-14
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
|
student loans. The investors of the securitization trusts have
no recourse to the Companys other assets should there be a
failure of the trusts to pay when due.
When the Company qualifies for GAAP 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, the forward interest rate curve and discount
rates commensurate with the risks involved. Quoted market prices
are not available. The Company accounts for the majority of the
Residual Interests as available-for-sale securities.
Accordingly, those Residual Interests are reflected at market
value with temporary changes in market value reflected as a
component of accumulated other comprehensive income in
stockholders equity. The Company adopted
SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments, effective January 1, 2007,
whereby the Company elected to carry the Residual Interest on
the Private Education Loan securitization which settled in the
first quarter of 2007 at fair value with subsequent changes in
fair value recorded in earnings.
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 records interest income and periodically evaluates
its Residual Interests for other than temporary impairment in
accordance with the Emerging Issues Task Force
(EITF) Issue
No. 99-20
Recognition of Interest Income and Impairment on Purchased
and Retained Beneficial Interests in Securitized Financial
Assets. Under this guidance, each quarter, the Company
estimates the cash flows to be received from its Residual
Interests which are used prospectively to calculate a yield for
income recognition. In cases where the Companys estimate
of future cash flows results in a decrease in the yield used to
recognize interest income compared to the prior quarter, the
Residual Interest is written down to fair value, first to the
extent of any unrealized gain in accumulated other comprehensive
income, then through earnings as an other than temporary
impairment.
The Company also receives income for servicing the loans in its
securitization trusts which is recognized as earned. The Company
assesses the amounts received as compensation for these
activities at inception and on an ongoing basis to determine if
the amounts received are adequate compensation as defined in
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, 2007 and 2006, 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
F-15
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
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contracts, be recorded at fair value on the balance sheet as
either an asset or liability. 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). 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 (fair
value hedge), 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 (cash flow hedge). 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 income statement. 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 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. These contracts
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 12
Stockholders Equity for a discussion on the
change in accounting related to equity forward contracts as of
December 31, 2007.
F-16
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
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2. |
Significant Accounting Policies (Continued)
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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 Intangible Assets
The Company accounts for goodwill and other intangible assets in
accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, pursuant to which goodwill and
intangible assets with indefinite lives are not amortized but
are tested for impairment annually or more frequently if an
event indicates that the asset(s) might be impaired, employing
standard industry appraisal methodologies, principally the
discounted cash flow method. Such assets are impaired when the
estimated fair value is less than the current carrying value.
Intangible assets with finite lives are amortized over their
estimated useful lives. Such assets are amortized in proportion
to the estimated economic benefit using the straight line method
or another acceptable amortization method depending on the asset
class. Finite lived intangible assets are reviewed for
impairment using an undiscounted cash flow analysis when an
event occurs that indicates the asset(s) may be impaired.
Guarantor
Servicing Fees
The Company provides a full complement of administrative
services to FFELP guarantors including guarantee issuance,
process, account maintenance, and guarantee fulfillment services
for guarantor agencies, the U.S. Department of Education
(ED), educational institutions and financial
institutions. The fees associated with these services are
recognized as earned based on contractually determined rates.
The Company is party to a guarantor servicing contract with
United Student Aid Funds, Inc. (USA Funds), which
accounted for 86 percent, 83 percent and
82 percent of guarantor servicing fees for the years ended
December 31, 2007, 2006, and 2005, 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 purchases 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
F-17
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
2. |
Significant Accounting Policies (Continued)
|
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 on the accompanying income statement.
Recognition
of Severance Costs
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 employee base salary, job level
immediately preceding termination and years of service for
individuals whose employment is terminated due to an Involuntary
Termination or a Job Abolishment, as defined in the Severance
Plan. The benefits payable under the Severance Plan relate to
past service and they accumulate and vest. Accordingly, the
Company recognizes severance costs to be paid pursuant to the
Severance Plan in accordance with SFAS No. 112,
Employers Accounting for Post Employment
Benefits, when payment of such benefits is probable and
reasonably estimable. Such benefits include severance pay
calculated based on the Severance Plan, medical and dental
benefits, outplacement services and continuation pay.
F-18
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
2. |
Significant Accounting Policies (Continued)
|
From time to time, the Company enters into one-time benefit
arrangements with employees, primarily senior executives, who
are involuntarily terminated. The Company recognizes the cost
associated with these one-time employee termination benefits in
accordance with SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. A
liability is recognized when all of the following conditions
have been met and the benefit arrangement has been communicated
to the employees:
|
|
|
|
|
Management, having the authority to approve the action, commits
to a plan of termination;
|
|
|
|
The plan of termination identifies the number of employees to be
terminated, their job classifications or functions and their
locations and the expected completion date;
|
|
|
|
The plan of termination establishes the terms of the benefit
arrangement, including the benefits that employees will receive
upon termination and in sufficient detail to enable employees to
determine the type and amount of benefits they will receive if
they are involuntarily terminated; and
|
|
|
|
Actions required to complete the plan of termination indicate
that it is unlikely that significant changes to the plan of
termination will be made or that the plan of termination will be
withdrawn.
|
Severance costs under a one-time termination benefit arrangement
may include all or some combination of severance pay, medical
and dental benefits, outplacement services, and certain other
costs.
In conjunction with cost reduction efforts, during the fourth
quarter of 2007, the Company recorded severance costs totaling
$23 million associated with the elimination of
approximately 350 positions across all areas of the
Company. These severance costs were recorded in operating
expense, of which $19 million, $2 million and
$2 million were recorded in the Companys Lending, APG
and Corporate and Other reportable segments, respectively. At
December 31, 2007, $18 million of such costs were
included in other liabilities in the consolidated balance sheet
and will be paid in 2008.
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, 2007, 2006 and 2005,
the Company capitalized $19 million, $16 million and
$22 million, respectively, in costs related to software
development, and expensed $126 million, $131 million
and $112 million, respectively, related to routine
maintenance, betterments and amortization. At December 31,
2007 and 2006, the unamortized balance of capitalized internally
developed software included in other assets was $54 million
for both periods. 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
F-19
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
2. |
Significant Accounting Policies (Continued)
|
Employees, and no compensation cost related to its stock
option grants was recognized in its consolidated statements of
income.
Because the Company adopted SFAS No. 123(R) on a
modified prospective basis, financial statements for the year
ended December 31, 2005 have not been restated. The
following table provides pro forma net income and earnings per
share had the Company applied the fair value based method of
SFAS No. 123(R) for the year ended December 31,
2005.
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Net income attributable to common stock
|
|
$
|
1,360,381
|
|
Add: Total stock-based compensation expense included in net
income, net of tax
|
|
|
12,343
|
|
Less: Total stock-based compensation expense determined under
fair value based method for all awards, net of tax
|
|
|
(51,842
|
)
|
|
|
|
|
|
Pro forma net income attributable to common stock
|
|
$
|
1,320,882
|
|
|
|
|
|
|
Reported basic earnings per common share
|
|
$
|
3.25
|
|
|
|
|
|
|
Pro forma basic earnings per common share
|
|
$
|
3.16
|
|
|
|
|
|
|
Reported diluted earnings per common share
|
|
$
|
3.05
|
|
|
|
|
|
|
Pro forma diluted earnings per common share
|
|
$
|
2.97
|
|
|
|
|
|
|
The adoption of SFAS No. 123(R) reduced the
Companys net earnings by $36 million and
$39 million for the years ended December 31, 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, 2007 was
$30 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 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 expected tax
deficiencies (including both tax, interest, and penalties).
Income tax expense excludes the tax effects related to
adjustments recorded in equity.
F-20
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
2. |
Significant Accounting Policies (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.
FIN No. 48, amends SFAS No. 109,
Accounting for Income Taxes, and includes the
following interpretations:
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|
|
|
|
Changes historical methods of recording the impact to the
financial statements of uncertain tax positions from a model
based upon probable liabilities to be owed, to a model based
upon the tax benefit most likely to be sustained.
|
|
|
|
Prescribes a threshold for the financial statement recognition
of tax positions taken or expected to be taken in a tax return,
based upon whether it is more likely than not that a tax
position will be sustained upon examination.
|
|
|
|
Provides rules on the measurement in the financial statements of
tax positions that meet this recognition threshold, requiring
that the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate
settlement to be recorded.
|
|
|
|
Requires new disclosures regarding uncertain tax positions.
|
Minority
Interest in Subsidiaries
At December 31, 2007 and 2006, minority interest in
subsidiaries represents interests held by minority shareholders
in AFS Holdings, LLC, of approximately 12 percent for both
years.
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 13, 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 in the Restricted Cash and Investments section of
this note, the Companys restricted cash balances primarily
relate to on-balance sheet securitizations. This balance is
primarily the result of timing
F-21
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
2. |
Significant Accounting Policies (Continued)
|
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, 2006 and 2005, to be
consistent with classifications adopted for 2007.
Recently
Issued Accounting Pronouncements
Accounting
for Servicing of Financial Assets
In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets, which
amends SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities. This statement was effective for the Company
beginning January 1, 2007.
This statement:
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|
|
|
|
Requires an entity to recognize a servicing asset or liability
each time it undertakes an obligation to service a financial
asset as the result of i) a transfer of the servicers
financial assets that meet the requirement for sale accounting;
ii) a transfer of the servicers financial assets to a
qualifying special-purpose entity in a guaranteed mortgage
securitization in which the transferor retains all of the
resulting securities and classifies them as either
available-for-sale or trading securities in accordance with
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities; or iii) an acquisition
or assumption of an obligation to service a financial asset that
does not relate to financial assets of the servicer or its
consolidated affiliates.
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|
|
|
Requires all separately recognized servicing assets or
liabilities to be initially measured at fair value, if
practicable.
|
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|
Permits an entity to either i) amortize servicing assets or
liabilities in proportion to and over the period of estimated
net servicing income or loss and assess servicing assets or
liabilities for impairment or increased obligation based on fair
value at each reporting date (amortization method); or
ii) measure servicing assets or liabilities at fair value
at each reporting date and report changes in fair value in
earnings in the period in which the changes occur (fair value
measurement method). The method must be chosen for each
separately recognized class of servicing asset or liability.
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|
At its initial adoption, permits a one-time reclassification of
available-for-sale securities to trading securities by entities
with recognized servicing rights, without calling into question
the treatment of other available-for-sale securities under
SFAS No. 115, provided that the available-for-sale
securities are identified in some manner as offsetting the
entitys exposure to changes in fair value of servicing
assets or liabilities that a servicer elects to subsequently
measure at fair value.
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|
Requires separate presentation of servicing assets and
liabilities subsequently measured at fair value in the statement
of financial position and additional disclosures for all
separately recognized servicing assets and liabilities.
|
The adoption of SFAS No. 156 did not have a material
impact on the Companys financial statements as the Company
did not elect to carry its servicing rights at fair value
through earnings.
F-22
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
2. |
Significant Accounting Policies (Continued)
|
Accounting
for Certain Hybrid Financial Instruments
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments,
which amends SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and
SFAS No. 140. This statement was effective for the
Company beginning January 1, 2007.
This statement:
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|
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|
Requires that all interests in securitized financial assets be
evaluated to determine if the interests are free standing
derivatives or if the interests contain an embedded derivative;
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|
Clarifies which interest-only strips and principal-only strips
are exempt from the requirements of SFAS No. 133;
|
|
|
|
Clarifies that the concentrations of credit risk in the form of
subordination are not an embedded derivative;
|
|
|
|
Allows a hybrid financial instrument containing an embedded
derivative that would have required bifurcation under
SFAS No. 133 to be measured at fair value as one
instrument on a case by case basis; and
|
|
|
|
Amends SFAS Statement No. 140 to eliminate the
prohibition of a qualifying special purpose entity from holding
a derivative financial instrument that pertains to beneficial
interests other than another derivative financial instrument.
|
In January 2007, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, Implementation Issues No. B39,
Embedded Derivatives: Application of Paragraph 13(b)
to Call Options That Are Exercisable Only by the Debtor
(Amended), and No. B40, Embedded Derivatives:
Application of Paragraph 13(b) to Securitized Interests in
Prepayable Financial Assets. The guidance clarifies
various aspects of SFAS No. 155 and will require the
Company to either (1) separately record embedded
derivatives that may reside in the Companys Residual
Interest and on-balance sheet securitization debt, or
(2) if embedded derivatives exist that require bifurcation,
record the entire Residual Interest at fair value with changes
in the fair value of the Companys Residual Interest and
on-balance sheet securitization debt in their entirety. This
standard is prospectively applied in 2007 for new
securitizations and does not apply to the Companys
existing Residual Interest or on-balance sheet securitization
debt that settled prior to 2007.
In the first quarter of 2007, the Company elected this option
related to the Private Education Loan securitization which
settled in the first quarter of 2007 and as a result, has
recorded related unrealized gains/losses through earnings that,
prior to the adoption of SFAS No. 155, would have been
recorded through other comprehensive income (except for any
impairment required to be recognized).
The Company has concluded, based on its current securitization
deal structures, that its on-balance sheet securitization debt
will not be materially impacted upon the adoption of
SFAS No. 155 as embedded derivatives will not have a
material value. Accordingly, there was no impact for the year
ended December 31, 2007, as it relates to on-balance sheet
securitization debt.
Fair
Value Measurements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This statement is effective
for financial statements issued for fiscal years beginning after
November 15, 2007. This statement defines fair value,
establishes a framework for measuring fair value within GAAP,
and expands disclosures about fair value measurements. This
statement applies to other accounting pronouncements that
require or
F-23
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
2. |
Significant Accounting Policies (Continued)
|
permit fair value measurements. Accordingly, this statement does
not change which types of instruments are carried at fair value,
but rather establishes the framework for measuring fair value.
The Company does not expect the adoption of
SFAS No. 157 to have a material impact on its
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 will delay 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 market until January 1, 2009.
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 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 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 with changes in fair value recorded
through other comprehensive income or under
SFAS No. 155 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 ($198 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, 2008. Changes in value of
Residual Interests in future periods will be recorded in the
income statement. The Company has not selected 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. Early adoption is not permitted.
F-24
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
2. |
Significant Accounting Policies (Continued)
|
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.
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. As a result of this amended
reimbursement level, the Company established an allowance at
December 31, 2005 for loans that were subject to the
one-percent Risk Sharing. On September 27, 2007, the
College Cost Reduction and Access Act of 2007
(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. As a result, the Company increased its
provision for FFELP loans to cumulatively increase the allowance
for loan losses to cover these higher Risk Sharing levels.
F-25
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
3.
|
Student
Loans (Continued)
|
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 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. Approximately
52 percent of the Companys Private Education Loans
have a cosigner.
Private Education Loans are not federally guaranteed nor insured
against any loss of principal or interest. Student borrowers use
the proceeds of these loans to obtain higher education. The
Company believes the borrowers repayment capability
improves between the time the loan is made and the time they
enter the post-education work force. The Company generally
allows the loan repayment period on higher education Private
Education Loans to begin six months after the borrower leaves
school (consistent with FFELP loans). This provides the borrower
time after graduation to obtain a job to service the debt. For
borrowers that need more time or experience other hardships, the
Company permits additional delays in payment or partial payments
(both referred to as forbearances) when it believes additional
time will improve the borrowers ability to repay the loan.
Forbearance is also granted to borrowers who may experience
temporary hardship after entering repayment, when the Company
believes that it will increase the likelihood of ultimate
collection of the loan. Loans for career training require
repayment while the borrower is still in school.
Forbearance does not grant any reduction in the total repayment
obligation (principal or interest) but does allow for the
temporary cessation of borrower payments (on a prospective
and/or
retroactive basis) or a reduction in monthly payments for an
agreed period of time. The forbearance period extends the
original term of the loan. While the loan is in forbearance,
interest continues to accrue and is recorded in interest income
in the accompanying consolidated financial statements, and is
capitalized as principal upon the loan re-entering repayment
status. Loans exiting forbearance into repayment status are
considered current regardless of their previous delinquency
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.
As of December 31, 2007 and 2006, 58 percent and
61 percent, respectively, of the Companys on-balance
sheet student loan portfolio was in repayment.
F-26
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 9.0 years and
9.7 years at December 31, 2007 and 2006, respectively.
The following table reflects the distribution of the
Companys student loan portfolio by program.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Year Ended
|
|
|
|
2006
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
|
|
|
|
Ending
|
|
|
% of
|
|
|
Average
|
|
|
Interest
|
|
|
|
Balance
|
|
|
Balance
|
|
|
Balance
|
|
|
Rate
|
|
|
FFELP Stafford and Other Student Loans,
net(1)
|
|
$
|
24,840,464
|
|
|
|
26
|
%
|
|
$
|
21,151,871
|
|
|
|
6.66
|
%
|
FFELP Consolidation Loans, net
|
|
|
61,324,008
|
|
|
|
64
|
|
|
|
55,119,011
|
|
|
|
6.43
|
|
Private Education Loans, net
|
|
|
9,755,289
|
|
|
|
10
|
|
|
|
8,585,270
|
|
|
|
11.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total student loans,
net(2)
|
|
$
|
95,919,761
|
|
|
|
100
|
%
|
|
$
|
84,856,152
|
|
|
|
7.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The FFELP category is primarily
Stafford loans, but also includes federally insured PLUS and
HEAL loans.
|
|
(2) |
|
The total student loan ending
balance includes net unamortized premiums/discounts of
$1,791,153 and $1,198,404 as of December 31, 2007 and 2006,
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.
The following tables summarize the total loan provisions for the
years ended December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Private Education Loans
|
|
$
|
883,474
|
|
|
$
|
257,983
|
|
|
$
|
176,782
|
|
FFELP Stafford and Other Student Loans
|
|
|
89,083
|
|
|
|
13,907
|
|
|
|
10,911
|
|
Mortgage and consumer loans
|
|
|
42,751
|
|
|
|
15,072
|
|
|
|
15,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provisions for loan losses
|
|
$
|
1,015,308
|
|
|
$
|
286,962
|
|
|
$
|
203,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
4.
|
Allowance
for Loan Losses (Continued)
|
Allowance
for Private Education Loan Losses
The Companys allowance for Private Education Loan losses
is an estimate of losses incurred in the portfolio at the
balance sheet date that will be charged off in subsequent
periods. The maturing of the Companys Private Education
Loan portfolios has provided more historical data on borrower
default behavior such that those portfolios can now be analyzed
to determine the effects that the various stages of delinquency
have on borrower default behavior and ultimate charge-off. In
2005, the Company changed its estimate of the allowance for loan
losses to include a migration analysis of delinquent and current
accounts, in addition to other considerations. 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. Additionally, other factors
are considered, including external factors and forecasting data,
which can result in adjustments to the formula-based migration
analysis. Prior to 2005, the Company calculated its allowance
for Private Education Loan losses by estimating the probable
losses in the portfolio based primarily on loan characteristics
and where pools of loans were in their life with less emphasis
on current delinquency status of the loan. Also, in the prior
methodology for calculating the allowance, some loss rates were
based on proxies and extrapolations of FFELP loan loss data.
Also in 2005, the Company transitioned to a migration analysis
to revise its estimates pertaining to its non-accrual policy for
interest income. Under this methodology, the amount of
uncollectible accrued interest on Private Education Loans is
estimated and written off against current period interest
income. Under the Companys prior methodology, Private
Education Loans continued to accrue interest, including in
periods of forbearance, until they were charged off, at which
time, the loans were placed on non-accrual status and all
previously accrued interest was reversed against income in the
month of charge-off. The allowance for loan losses provided for
a portion of the probable losses in accrued interest receivable
prior to charge-off.
F-28
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
4.
|
Allowance
for Loan Losses (Continued)
|
The following table summarizes changes in the allowance for
student loan losses for Private Education Loans for the years
ended December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Allowance at beginning of year
|
|
$
|
308,346
|
|
|
$
|
204,112
|
|
|
$
|
171,886
|
|
Total provision
|
|
|
883,474
|
|
|
|
257,983
|
|
|
|
176,782
|
|
Charge-offs
|
|
|
(332,188
|
)
|
|
|
(159,560
|
)
|
|
|
(153,994
|
)
|
Recoveries
|
|
|
32,079
|
|
|
|
22,599
|
|
|
|
19,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(300,109
|
)
|
|
|
(136,961
|
)
|
|
|
(134,628
|
)
|
Balance before securitization of Private Education Loans
|
|
|
891,711
|
|
|
|
325,134
|
|
|
|
214,040
|
|
Reduction for securitization of Private Education Loans
|
|
|
(5,780
|
)
|
|
|
(16,788
|
)
|
|
|
(9,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of year
|
|
$
|
885,931
|
|
|
$
|
308,346
|
|
|
$
|
204,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs as a percentage of average loans in repayment
|
|
|
5.04
|
%
|
|
|
3.22
|
%
|
|
|
4.14
|
%
|
Net charge-offs as a percentage of average loans in repayment
and forbearance
|
|
|
4.54
|
%
|
|
|
2.99
|
%
|
|
|
3.86
|
%
|
Allowance as a percentage of the ending total loan balance
|
|
|
5.64
|
%
|
|
|
3.06
|
%
|
|
|
2.56
|
%
|
Allowance as a percentage of the ending loans in repayment
|
|
|
12.57
|
%
|
|
|
6.36
|
%
|
|
|
5.57
|
%
|
Allowance coverage of net charge-offs
|
|
|
2.95
|
|
|
|
2.25
|
|
|
|
1.52
|
|
Average total loans
|
|
$
|
12,506,662
|
|
|
$
|
8,585,270
|
|
|
$
|
6,921,975
|
|
Ending total loans
|
|
$
|
15,703,656
|
|
|
$
|
10,063,635
|
|
|
$
|
7,960,882
|
|
Average loans in repayment
|
|
$
|
5,949,007
|
|
|
$
|
4,256,780
|
|
|
$
|
3,252,238
|
|
Ending loans in repayment
|
|
$
|
7,046,709
|
|
|
$
|
4,851,305
|
|
|
$
|
3,662,255
|
|
As the Private Education Loan portfolio seasons and due to
shifts in its mix and certain economic factors, the Company
expected and has seen charge-off rates increase in 2007 from the
historically low levels experienced in prior years.
Additionally, this increase was significantly impacted by other
factors. Toward the end of 2006 and through mid-2007, the
Company experienced lower pre-default collections, resulting in
increased levels of charge-off activity in its Private Education
Loan portfolio. In the second half of 2006, the Company
relocated responsibility for certain Private Education Loan
collections from its Nevada call center to a new call center in
Indiana. This transfer presented the Company with unexpected
operational challenges that resulted in lower collections that
have negatively impacted the Private Education Loan portfolio.
In addition, in late 2006, the Company revised certain
procedures, including its use of forbearance, to better optimize
the Companys long-term collection strategies. These
developments resulted in lower pre-default collections,
increased later stage delinquency levels and higher charge-offs.
In the fourth quarter of 2007 the Company recorded provision
expense of $503 million related to the Private Education
Loan portfolio. This significant increase in provision primarily
relates to the non-traditional portion of its loan portfolio
(education loans made to certain borrowers that have or are
expected to have a high default rate) which the Company had been
expanding over the past few years. The non-traditional
F-29
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
4.
|
Allowance
for Loan Losses (Continued)
|
portfolio is particularly impacted by the weakening
U.S. economy, as evidenced by recently released economic
indicators, certain credit-related trends in the Companys
portfolio and a further tightening of forbearance policies. The
Company has recently taken actions to terminate these
non-traditional loan programs because the performance of these
loans is materially different from the Companys original
expectations and from the rest of the Companys Private
Education Loan programs. The Company charges off loans after
212 days of delinquency. Accordingly, the Company believes
that charge-offs occurring late in 2007 represent losses
incurred at the onset of the current economic downturn and do
not incorporate the full-effect of the general economic downturn
that became evident in the fourth quarter of 2007. In addition,
the Company has historically been able to mitigate its losses
during varying economic environments through the use of
forbearance and other collection management strategies. With the
continued weakening of the U.S. economy, and the projected
continued recessionary conditions, the Company believes that
those strategies as they relate to the non-traditional portion
of the loan portfolio will not be as effective as they have been
in the past. For these reasons, the Company recorded additional
provision in the fourth quarter of 2007.
The table below shows the Companys Private Education Loan
delinquency trends as of December 31, 2007, 2006 and 2005.
Delinquencies have the potential to adversely impact earnings if
the account charges off and results in increased servicing and
collection costs.
F-30
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
4.
|
Allowance
for Loan Losses (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
8,151
|
|
|
|
|
|
|
$
|
5,218
|
|
|
|
|
|
|
$
|
4,301
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
974
|
|
|
|
|
|
|
|
359
|
|
|
|
|
|
|
|
303
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
6,236
|
|
|
|
88.5
|
%
|
|
|
4,214
|
|
|
|
86.9
|
%
|
|
|
3,311
|
|
|
|
90.4
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
306
|
|
|
|
4.3
|
|
|
|
250
|
|
|
|
5.1
|
|
|
|
166
|
|
|
|
4.5
|
|
Loans delinquent
61-90 days
|
|
|
176
|
|
|
|
2.5
|
|
|
|
132
|
|
|
|
2.7
|
|
|
|
77
|
|
|
|
2.1
|
|
Loans delinquent greater than 90 days
|
|
|
329
|
|
|
|
4.7
|
|
|
|
255
|
|
|
|
5.3
|
|
|
|
108
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans in repayment
|
|
|
7,047
|
|
|
|
100
|
%
|
|
|
4,851
|
|
|
|
100
|
%
|
|
|
3,662
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans, gross
|
|
|
16,172
|
|
|
|
|
|
|
|
10,428
|
|
|
|
|
|
|
|
8,266
|
|
|
|
|
|
Private Education Loan unamortized discount
|
|
|
(468
|
)
|
|
|
|
|
|
|
(365
|
)
|
|
|
|
|
|
|
(305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans
|
|
|
15,704
|
|
|
|
|
|
|
|
10,063
|
|
|
|
|
|
|
|
7,961
|
|
|
|
|
|
Private Education Loan allowance for losses
|
|
|
(886
|
)
|
|
|
|
|
|
|
(308
|
)
|
|
|
|
|
|
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Education Loans, net
|
|
$
|
14,818
|
|
|
|
|
|
|
$
|
9,755
|
|
|
|
|
|
|
$
|
7,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Private Education Loans in repayment
|
|
|
|
|
|
|
43.6
|
%
|
|
|
|
|
|
|
46.5
|
%
|
|
|
|
|
|
|
44.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
|
|
|
|
|
|
11.5
|
%
|
|
|
|
|
|
|
13.1
|
%
|
|
|
|
|
|
|
9.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
|
|
|
|
12.1
|
%
|
|
|
|
|
|
|
6.9
|
%
|
|
|
|
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Loans for borrowers who still may be attending school or
engaging in other permitted educational activities and are not
yet required to make payments on 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-31
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 2007, 2006, and
2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Allowance at beginning of year
|
|
$
|
20,315
|
|
|
$
|
14,950
|
|
|
$
|
7,778
|
|
Provisions for student loan losses
|
|
|
89,083
|
|
|
|
13,907
|
|
|
|
10,911
|
|
Net charge-offs
|
|
|
(21,235
|
)
|
|
|
(5,040
|
)
|
|
|
(3,739
|
)
|
Increase/decrease for student loan sales and securitizations
|
|
|
566
|
|
|
|
(3,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of year
|
|
$
|
88,729
|
|
|
$
|
20,315
|
|
|
$
|
14,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2007,
38 percent of the on-balance sheet FFELP portfolio was
subject to 3 percent Risk Sharing, 60 percent was
subject to 2 percent Risk Sharing and the remainder is not
subject to any Risk Sharing requirement.
The 2007 FFELP provision included $30 million related to
the repeal of the EP program (and the resulting increase in the
Companys Risk Sharing percentage) due to the passage of
the CCRAA which was effective October 1, 2007. These
amounts are additional provision expenses required to
cumulatively increase the allowance for loan losses for the
increase in the Companys Risk Sharing percentage related
to the Companys loans as of September 30, 2007. The
FFELP provision also included $19 million related to the
increase in the Companys default expectations due to an
increase in recent delinquencies and charge-offs. The remaining
increase over 2006 primarily relates to an increased rate of
provisioning for the Companys Risk Sharing exposure in the
post-CCRAA environment coupled with the growth in the portfolio.
F-32
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 2007, 2006 and 2005.
Delinquencies have the potential to adversely impact earnings if
the account charges off and results in increased servicing and
collection costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
31,200
|
|
|
|
|
|
|
$
|
23,171
|
|
|
|
|
|
|
$
|
18,685
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
10,675
|
|
|
|
|
|
|
|
8,325
|
|
|
|
|
|
|
|
9,643
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
55,128
|
|
|
|
84.4
|
%
|
|
|
45,664
|
|
|
|
86.0
|
%
|
|
|
39,544
|
|
|
|
87.2
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
3,650
|
|
|
|
5.6
|
|
|
|
2,787
|
|
|
|
5.2
|
|
|
|
2,072
|
|
|
|
4.6
|
|
Loans delinquent
61-90 days
|
|
|
1,841
|
|
|
|
2.8
|
|
|
|
1,468
|
|
|
|
2.8
|
|
|
|
1,190
|
|
|
|
2.6
|
|
Loans delinquent greater than 90 days
|
|
|
4,671
|
|
|
|
7.2
|
|
|
|
3,207
|
|
|
|
6.0
|
|
|
|
2,514
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans in repayment
|
|
|
65,290
|
|
|
|
100
|
%
|
|
|
53,126
|
|
|
|
100
|
%
|
|
|
45,320
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans, gross
|
|
|
107,165
|
|
|
|
|
|
|
|
84,622
|
|
|
|
|
|
|
|
73,648
|
|
|
|
|
|
FFELP loan unamortized premium
|
|
|
2,259
|
|
|
|
|
|
|
|
1,563
|
|
|
|
|
|
|
|
1,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP loans
|
|
|
109,424
|
|
|
|
|
|
|
|
86,185
|
|
|
|
|
|
|
|
74,862
|
|
|
|
|
|
FFELP loan allowance for losses
|
|
|
(89
|
)
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loans, net
|
|
$
|
109,335
|
|
|
|
|
|
|
$
|
86,165
|
|
|
|
|
|
|
$
|
74,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of FFELP loans in repayment
|
|
|
|
|
|
|
60.9
|
%
|
|
|
|
|
|
|
62.8
|
%
|
|
|
|
|
|
|
61.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of FFELP loans in repayment
|
|
|
|
|
|
|
15.6
|
%
|
|
|
|
|
|
|
14.0
|
%
|
|
|
|
|
|
|
12.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loans in forbearance as a percentage of loans in repayment
and forbearance
|
|
|
|
|
|
|
14.1
|
%
|
|
|
|
|
|
|
13.5
|
%
|
|
|
|
|
|
|
17.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Loans for borrowers who still may be attending school or
engaging in other permitted educational activities and are not
yet required to make payments on the loans, e.g., residency
periods for medical students or a grace period for bar exam
preparation.
|
|
|
(2)
|
Loans for borrowers who have requested extension of grace period
generally during employment transition or who have temporarily
ceased making full payments due to hardship or other factors,
consistent with the established loan program servicing
procedures and policies.
|
|
|
(3)
|
The period of delinquency is based on the number of days
scheduled payments are contractually past due.
|
F-33
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
A summary of investments and restricted investments as of
December 31, 2007 and 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
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
available-for-sale
restricted investments
|
|
$
|
104,055
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
104,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed investment contracts
|
|
$
|
5,500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,500
|
|
Other securities
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
held-to-maturity
restricted investments
|
|
$
|
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.
|
F-34
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
5.
|
Investments
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other U.S. government agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury backed securities
|
|
$
|
1,292,121
|
|
|
$
|
137,317
|
|
|
$
|
|
|
|
$
|
1,429,438
|
|
U.S. Treasury securities and other U.S. government agency
obligations
|
|
|
41,237
|
|
|
|
|
|
|
|
(536
|
)
|
|
|
40,701
|
|
Other securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
46,291
|
|
|
|
159
|
|
|
|
|
|
|
|
46,450
|
|
Commercial paper and asset-backed commercial paper
|
|
|
943,306
|
|
|
|
|
|
|
|
|
|
|
|
943,306
|
|
Other
|
|
|
4,177
|
|
|
|
50
|
|
|
|
(1
|
)
|
|
|
4,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available-for-sale
|
|
$
|
2,327,132
|
|
|
$
|
137,526
|
(1)
|
|
$
|
(537
|
)
|
|
$
|
2,464,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and other U.S. government agency obligations
|
|
$
|
77,837
|
|
|
$
|
47
|
|
|
$
|
(1,185
|
)
|
|
$
|
76,699
|
|
Third-party repurchase agreements
|
|
|
83,800
|
|
|
|
|
|
|
|
|
|
|
|
83,800
|
|
Guaranteed investment contracts
|
|
|
91,662
|
|
|
|
|
|
|
|
|
|
|
|
91,662
|
|
Corporate notes
|
|
|
9,933
|
|
|
|
|
|
|
|
(28
|
)
|
|
|
9,905
|
|
Asset-backed securities
|
|
|
28,209
|
|
|
|
55
|
|
|
|
|
|
|
|
28,264
|
|
Other
|
|
|
13,373
|
|
|
|
74
|
|
|
|
|
|
|
|
13,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale restricted investments
|
|
$
|
304,814
|
|
|
$
|
176
|
|
|
$
|
(1,213
|
)
|
|
$
|
303,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed investment contracts
|
|
$
|
7,190
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,190
|
|
Other securities
|
|
|
406
|
|
|
|
|
|
|
|
|
|
|
|
406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held-to-maturity restricted investments
|
|
$
|
7,596
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes unrealized gains totaling
$8 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, 2007 and 2006, the Company had restricted cash
of $4.5 billion and $3.1 billion, respectively.
As of December 31, 2007 and 2006, $41 million and
$87 million of the net unrealized gain (after tax) related
to available-for-sale investments was included in accumulated
other comprehensive income. As of
F-35
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
5.
|
Investments
(Continued)
|
December 31, 2007 and 2006, $196 million (none of
which is in restricted cash and investments on the balance
sheet) and $418 million (of which $53 million is in
restricted cash and investments on the balance sheet),
respectively, of available-for-sale investment securities were
pledged as collateral.
The Company sold available-for-sale securities with a fair value
of $73 million, $26 million, and $625 million for
the years ended December 31, 2007, 2006, and 2005,
respectively. There were no realized gains/(losses) for the year
ended December 31, 2007 and $1 million realized loss
and $1 million realized gain for the years ended
December 31, 2006, and 2005, respectively. The cost basis
for these securities was determined through specific
identification of the securities sold.
As of December 31, 2007, the stated maturities for the
investments (including restricted investments) are shown in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Held-to-
|
|
|
Available-for-
|
|
|
|
|
|
|
maturity
|
|
|
Sale(1)
|
|
|
Other
|
|
|
Year of Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
|
|
|
$
|
2,397,165
|
|
|
$
|
|
|
2009
|
|
|
|
|
|
|
465,648
|
|
|
|
|
|
2010
|
|
|
215
|
|
|
|
|
|
|
|
12,382
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
7,400
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
6,902
|
|
2013-2017
|
|
|
|
|
|
|
|
|
|
|
38,934
|
|
After 2017
|
|
|
5,500
|
|
|
|
112,582
|
|
|
|
27,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,715
|
|
|
$
|
2,975,395
|
|
|
$
|
93,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Available-for-sale securities are
stated at fair value.
|
At December 31, 2007 and 2006, the Company also had other
investments of $93 million and $99 million,
respectively. These investments included leveraged leases
discussed below.
At December 31, 2007 and 2006, the Company had investments
in leveraged leases, net of impairments, totaling
$86 million and $93 million, respectively, and direct
financing leases totaling $14 million and $16 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. In 2005, the
Company recorded an after-tax impairment of $25 million to
reflect the impairment of an aircraft leased to Northwest
Airlines.
F-36
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
6.
|
Goodwill
and Acquired Intangible Assets
|
Intangible assets include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
As of December 31, 2006
|
|
|
|
Amortization
|
|
|
|
|
|
Accumulated
|
|
|
|
|
(Dollars in millions)
|
|
Period
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer, services, and lending relationships
|
|
|
12 years
|
|
|
$
|
367
|
|
|
$
|
(115
|
)
|
|
$
|
252
|
|
Tax exempt bond funding
|
|
|
10 years
|
|
|
|
46
|
|
|
|
(37
|
)
|
|
|
9
|
|
Software and technology
|
|
|
7 years
|
|
|
|
94
|
|
|
|
(62
|
)
|
|
|
32
|
|
Non-compete agreements
|
|
|
2 years
|
|
|
|
12
|
|
|
|
(9
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
519
|
|
|
|
(223
|
)
|
|
|
296
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name and trademark
|
|
|
Indefinite
|
|
|
|
106
|
|
|
|
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquired intangible assets
|
|
|
|
|
|
$
|
625
|
|
|
$
|
(223
|
)
|
|
$
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded intangible amortization of acquired
intangibles totaling $67 million, $65 million, and
$60 million for the years ended December 31, 2007,
2006 and 2005, 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 $52 million, $37 million, $31 million,
$22 million and $16 million for the years ended
December 31, 2008, 2009, 2010, 2011 and 2012, respectively.
The Company also recorded impairment of goodwill and certain
acquired intangible assets of $45 million, $29 million
and $1 million, respectively, for the years ended
December 31, 2007, 2006 and 2005. In 2007, the Company
recognized impairments related principally to its mortgage
origination and mortgage purchased paper businesses including
approximately $20 million of goodwill and $10 million
of value attributed to certain banking relationships which
amounts were recorded as operating expense in the Lending and
APG operating segments.
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
F-37
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
6.
|
Goodwill
and Acquired Intangible Assets (Continued)
|
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 operating segment.
A summary of changes in the Companys goodwill by
reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Acquisitions/
|
|
|
December 31,
|
|
(Dollars in millions)
|
|
2005
|
|
|
Other
|
|
|
2006
|
|
|
Lending
|
|
$
|
410
|
|
|
$
|
(4
|
)
|
|
$
|
406
|
|
Asset Performance Group
|
|
|
299
|
|
|
|
50
|
|
|
|
349
|
|
Corporate and Other
|
|
|
64
|
|
|
|
151
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
773
|
|
|
$
|
197
|
|
|
$
|
970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the terms of the September 2004 purchase agreement
pursuant to which the Company acquired a 64 percent
controlling interest in AFS Holdings, LLC (AFS), the
Company exercised its options on December 29, 2006 and
December 22, 2005, to acquire additional 12 percent
interests in AFS for approximately $61 million and
$59 million, respectively, including cash consideration and
certain acquisition costs, increasing the Companys
interest in AFS to 88 percent and 76 percent, as of
December 31, 2006 and 2005, respectively. 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. In the
third quarter of 2007 and 2006, the Company finalized its
purchase price allocations associated with the December 29,
2006 and December 22, 2005 acquisitions of the additional
12 percent interests in AFS resulting in excess purchase
price over the fair value of net assets acquired, or goodwill,
of $45 million and $53 million, respectively, and
increasing the aggregate goodwill associated with the
Companys acquisition of AFS to $207 million and
$162 million, respectively. Subsequent to December 31,
2007, the Company exercised its option to acquire the remaining
12 percent minority interest in AFS on January 3, 2008
for a purchase price of approximately $38 million
increasing the Companys total purchase price for its
100 percent interest to 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 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
$137 million.
On August 31, 2005, the Company acquired 100 percent
controlling interest in GRP/AG Holdings, LLC and its
subsidiaries (collectively, GRP) for a purchase
price of approximately $138 million including cash
consideration and certain acquisition costs. GRP engages in the
acquisition and resolution of distressed residential mortgage
loans and foreclosed residential properties. In the third
quarter of 2006, the Company finalized its purchase price
allocation for GRP, which resulted in an excess purchase price
over the fair value of net assets acquired, or goodwill, of
$53 million.
In 2007 and 2006, the Company also adjusted goodwill for certain
earnout payments associated with prior acquisitions.
F-38
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
Short-term borrowings have a remaining term to maturity of one
year or less. The following tables summarize outstanding
short-term borrowings at December 31, 2007 and 2006, the
weighted average interest rates at the end of each period, and
the related average balances and weighted average interest rates
during the periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2007
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Ending
|
|
|
Interest
|
|
|
Average
|
|
|
Interest
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Short-term deposits
|
|
$
|
254,029
|
|
|
|
4.77
|
%
|
|
$
|
166,013
|
|
|
|
4.94
|
%
|
Interim ABCP Facility
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2006
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Ending
|
|
|
Interest
|
|
|
Average
|
|
|
Interest
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Short-term deposits
|
|
$
|
|
|
|
|
|
%
|
|
$
|
992
|
|
|
|
4.68
|
%
|
Commercial paper
|
|
|
|
|
|
|
|
|
|
|
81,678
|
|
|
|
4.44
|
|
Short-term portion of long-term borrowings
|
|
|
3,279,528
|
|
|
|
5.51
|
|
|
|
3,644,479
|
|
|
|
4.75
|
|
Other interest bearing liabilities
|
|
|
248,735
|
|
|
|
5.17
|
|
|
|
174,606
|
|
|
|
5.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings
|
|
$
|
3,528,263
|
|
|
|
5.48
|
%
|
|
$
|
3,901,755
|
|
|
|
4.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum outstanding at any month end
|
|
$
|
4,819,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 10, Derivative
Financial Instruments). Payments and receipts on the
Companys interest rate and currency swaps are not
reflected in the above tables.
On April 30, 2007, in connection with the Merger, the
Company entered into an aggregate interim $30 billion
asset-backed commercial paper conduit facility (collectively,
the Interim ABCP Facility). This facility
effectively terminates on April 24, 2008.
As of December 31, 2007, the Company has $6.5 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 $1.0 billion
5-year
revolving credit facility maturing in October 2008, a
$1.5 billion
5-year
revolving credit facility maturing in October 2009, a
$2.0 billion
5-year
revolving credit facility maturing in October 2010, and a
$2.0 billion
5-year
revolving credit facility maturing in October 2011. Interest on
these facilities is based on LIBOR plus a spread that is
F-39
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
7.
|
Short-Term
Borrowings (Continued)
|
determined by the amount of the facility utilized and the
Companys credit rating. In addition to other general
operating covenants contained in the facilities, certain
financial covenants must be maintained related to tangible net
worth, interest coverage and net revenue. Failure to maintain
these thresholds could result in the facilities being withdrawn.
The following tables summarize outstanding long-term borrowings
at December 31, 2007 and 2006, the weighted average
interest rates at the end of the periods, and the related
average balances during the periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
Year Ended
|
|
|
|
|
|
|
Weighted
|
|
|
December 31,
|
|
|
|
|
|
|
Average
|
|
|
2007
|
|
|
|
Ending
|
|
|
Interest
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
8.
|
Long-Term
Borrowings (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
Year Ended
|
|
|
|
|
|
|
Weighted
|
|
|
December 31,
|
|
|
|
|
|
|
Average
|
|
|
2006
|
|
|
|
Ending
|
|
|
Interest
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Floating rate notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar denominated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing, due
2008-2047
|
|
$
|
66,762,440
|
|
|
|
5.37
|
%
|
|
$
|
57,790,533
|
|
Non U.S. dollar denominated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Australian dollar-denominated, due
2009-2011
|
|
|
625,708
|
|
|
|
6.73
|
|
|
|
400,155
|
|
Euro-denominated, due
2008-2041
|
|
|
8,402,868
|
|
|
|
3.76
|
|
|
|
6,842,358
|
|
Singapore dollar-denominated, due 2009
|
|
|
30,000
|
|
|
|
3.76
|
|
|
|
30,000
|
|
Sterling-denominated, due
2008-2039
|
|
|
975,191
|
|
|
|
5.36
|
|
|
|
887,042
|
|
Japanese yen-denominated, due 2009
|
|
|
42,391
|
|
|
|
.55
|
|
|
|
35,423
|
|
Hong Kong dollar-denominated, due 2011
|
|
|
113,592
|
|
|
|
4.38
|
|
|
|
51,967
|
|
Swedish krona-denominated, due
2009-2011
|
|
|
293,441
|
|
|
|
3.22
|
|
|
|
82,371
|
|
Canadian dollar-denominated, due 2011
|
|
|
229,885
|
|
|
|
4.57
|
|
|
|
38,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total floating rate notes
|
|
|
77,475,516
|
|
|
|
5.19
|
|
|
|
66,158,268
|
|
Fixed rate notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. dollar denominated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing, due
2008-2043
|
|
|
13,418,722
|
|
|
|
4.96
|
|
|
|
13,612,920
|
|
Non U.S. dollar denominated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Australian dollar-denominated, due
2009-2012
|
|
|
624,790
|
|
|
|
5.76
|
|
|
|
576,201
|
|
Canadian dollar-denominated, due
2009-2011
|
|
|
977,318
|
|
|
|
4.41
|
|
|
|
869,329
|
|
Euro-denominated, due
2008-2039
|
|
|
6,425,413
|
|
|
|
3.36
|
|
|
|
5,383,844
|
|
Hong Kong dollar-denominated, due
2010-2016
|
|
|
170,110
|
|
|
|
4.62
|
|
|
|
150,946
|
|
Japanese yen-denominated, due
2009-2035
|
|
|
962,307
|
|
|
|
1.75
|
|
|
|
871,446
|
|
Singapore dollar-denominated, due 2014
|
|
|
68,944
|
|
|
|
3.44
|
|
|
|
58,843
|
|
Sterling-denominated, due
2008-2039
|
|
|
3,883,777
|
|
|
|
4.64
|
|
|
|
3,355,913
|
|
Swiss franc-denominated, due 2009
|
|
|
162,872
|
|
|
|
2.61
|
|
|
|
161,568
|
|
New Zealand dollar-denominated, due 2010
|
|
|
204,886
|
|
|
|
6.75
|
|
|
|
212,718
|
|
Mexican peso-denominated, due 2016
|
|
|
95,619
|
|
|
|
8.40
|
|
|
|
34,585
|
|
Swedish krona-denominated, due 2011
|
|
|
88,257
|
|
|
|
3.08
|
|
|
|
14,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed rate notes
|
|
|
27,083,015
|
|
|
|
4.42
|
|
|
|
25,302,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term borrowings
|
|
$
|
104,558,531
|
|
|
|
4.99
|
%
|
|
$
|
91,460,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 and 2006, the Company had
$68.1 billion and $55.1 billion, respectively, of
long-term debt outstanding (cost basis), which is on-balance
sheet secured securitization trust debt (including asset-backed
commercial paper). The Company also had $2.5 billion and
$2.9 billion of long-term debt outstanding as of
December 31, 2007 and 2006, respectively, related to
additional secured, limited obligation or non-recourse
borrowings related to several indenture trusts. The face value
of on-balance sheet student loans that secured this debt was
$68.1 billion and $55.9 billion as of
December 31, 2007 and 2006, respectively.
F-41
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
8.
|
Long-Term
Borrowings (Continued)
|
To match the interest rate and currency characteristics of its
long-term 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 and foreign
currency obligations on fixed or variable rate borrowings (see
Note 10, Derivative Financial Instruments).
Payments and receipts on the Companys interest rate and
foreign currency swaps are not reflected in the tables above.
The Company swaps all foreign currency denominated debt to U.S
dollars except when funding foreign denominated assets.
The Company had $1.0 billion of taxable and
$1.7 billion of tax-exempt auction rate securities
outstanding at December 31, 2007. 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 $1.7 billion of tax-exempt auction
rate securities was recently amended to LIBOR plus
2.00 percent through May 31, 2008. After May 31,
2008, the maximum allowable rate on these securities will revert
to a formula driven rate, which, if in effect as of
February 28, 2008, would have produced various maximum
rates ranging up to 5.26 percent.
At December 31, 2007, the Company had outstanding long-term
borrowings with call features totaling $3.8 billion, and
had $131 million of outstanding long-term borrowings that
are putable by the investor to the Company prior to the stated
maturity date. Generally, these instruments are callable and
putable at the par amount. As of December 31, 2007, 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, 2007
|
|
|
|
Stated
Maturity(1)
|
|
|
Maturity to Call
Date(1)
|
|
|
|
Unsecured
|
|
|
Secured
|
|
|
|
|
|
Unsecured
|
|
|
Secured
|
|
|
|
|
|
|
Borrowings
|
|
|
Borrowings
|
|
|
Total
|
|
|
Borrowings
|
|
|
Borrowings
|
|
|
Total
|
|
|
Year of Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
|
|
|
$
|
6,840,770
|
|
|
$
|
6,840,770
|
|
|
$
|
774,038
|
|
|
$
|
8,566,332
|
|
|
$
|
9,340,370
|
|
2009
|
|
|
7,952,375
|
|
|
|
6,007,623
|
|
|
|
13,959,998
|
|
|
|
8,503,235
|
|
|
|
6,003,573
|
|
|
|
14,506,808
|
|
2010
|
|
|
7,087,011
|
|
|
|
6,043,316
|
|
|
|
13,130,327
|
|
|
|
7,200,277
|
|
|
|
5,943,449
|
|
|
|
13,143,726
|
|
2011
|
|
|
7,188,472
|
|
|
|
5,681,403
|
|
|
|
12,869,875
|
|
|
|
7,342,286
|
|
|
|
5,681,403
|
|
|
|
13,023,689
|
|
2012
|
|
|
2,341,200
|
|
|
|
5,249,587
|
|
|
|
7,590,787
|
|
|
|
2,386,648
|
|
|
|
5,249,587
|
|
|
|
7,636,235
|
|
2013
|
|
|
2,993,819
|
|
|
|
4,953,136
|
|
|
|
7,946,955
|
|
|
|
2,967,162
|
|
|
|
4,953,136
|
|
|
|
7,920,298
|
|
2014-2047
|
|
|
9,233,148
|
|
|
|
35,820,039
|
|
|
|
45,053,187
|
|
|
|
7,622,379
|
|
|
|
34,198,394
|
|
|
|
41,820,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,796,025
|
|
|
|
70,595,874
|
|
|
|
107,391,899
|
|
|
|
36,796,025
|
|
|
|
70,595,874
|
|
|
|
107,391,899
|
|
SFAS No. 133 (gains) losses on derivative hedging
activities
|
|
|
1,781,993
|
|
|
|
1,924,252
|
|
|
|
3,706,245
|
|
|
|
1,781,993
|
|
|
|
1,924,252
|
|
|
|
3,706,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,578,018
|
|
|
$
|
72,520,126
|
|
|
$
|
111,098,144
|
|
|
$
|
38,578,018
|
|
|
$
|
72,520,126
|
|
|
$
|
111,098,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
$6.8 billion shown in year 2008 relate to the on-balance
sheet securitization trust debt.
|
F-42
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
9.
|
Student
Loan Securitization
|
Securitization
Activity
The Company securitizes its student loan assets and for
transactions qualifying as sales retains a Residual Interest and
servicing rights (as the Company retains the servicing
responsibilities), all of which are referred to as the
Companys Retained Interest in off-balance sheet
securitized loans. The Residual Interest is the right to receive
cash flows from the student loans and reserve accounts in excess
of the amounts needed to pay servicing, derivative costs (if
any), other fees, and the principal and interest on the bonds
backed by the student loans. The investors of the securitization
trusts have no recourse to the Companys other assets
should there be a failure of the trusts to pay when due.
The following table summarizes the Companys securitization
activity for the years ended December 31, 2007, 2006 and
2005. Those securitizations listed as sales are off-balance
sheet transactions and those listed as financings remain
on-balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
Loan
|
|
|
|
|
|
|
|
Loan
|
|
|
|
|
|
|
|
Loan
|
|
|
|
|
|
|
No. of
|
|
Amount
|
|
Pre-Tax
|
|
Gain
|
|
No. of
|
|
Amount
|
|
Pre-Tax
|
|
Gain
|
|
No. of
|
|
Amount
|
|
Pre-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
|
%
|
|
|
3
|
|
|
$
|
6,533
|
|
|
$
|
68
|
|
|
|
1.1
|
%
|
FFELP Consolidation Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
9,503
|
|
|
|
55
|
|
|
|
.6
|
|
|
|
2
|
|
|
|
4,011
|
|
|
|
31
|
|
|
|
.8
|
|
Private Education Loans
|
|
|
1
|
|
|
|
2,001
|
|
|
|
367
|
|
|
|
18.4
|
|
|
|
3
|
|
|
|
5,088
|
|
|
|
830
|
|
|
|
16.3
|
|
|
|
2
|
|
|
|
3,005
|
|
|
|
453
|
|
|
|
15.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations sales
|
|
|
1
|
|
|
|
2,001
|
|
|
$
|
367
|
|
|
|
18.4
|
%
|
|
|
9
|
|
|
|
19,595
|
|
|
$
|
902
|
|
|
|
4.6
|
%
|
|
|
7
|
|
|
|
13,549
|
|
|
$
|
552
|
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitizations financings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford/PLUS
loans(1)
|
|
|
3
|
|
|
|
8,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Consolidation
Loans(1)
|
|
|
5
|
|
|
|
14,476
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
12,506
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
12,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations financings
|
|
|
8
|
|
|
|
23,431
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
12,506
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
12,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations
|
|
|
9
|
|
|
$
|
25,432
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
$
|
32,101
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
$
|
26,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
F-43
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
9. |
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, 2007, 2006 and 2005
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
FFELP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stafford
|
|
|
FFELP
|
|
|
Private
|
|
|
FFELP
|
|
|
FFELP
|
|
|
Private
|
|
|
FFELP
|
|
|
FFELP
|
|
|
Private
|
|
|
|
and
|
|
|
Consolidation
|
|
|
Education
|
|
|
Stafford
|
|
|
Consolidation
|
|
|
Education
|
|
|
Stafford
|
|
|
Consolidation
|
|
|
Education
|
|
|
|
PLUS(1)
|
|
|
Loans(1)
|
|
|
Loans
|
|
|
and PLUS
|
|
|
Loans
|
|
|
Loans
|
|
|
and PLUS
|
|
|
Loans
|
|
|
Loans
|
|
|
Prepayment speed
(annual
rate)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
6
|
%
|
|
|
4
|
%
|
|
|
**
|
|
|
|
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 y
|
rs.
|
|
|
9.4 y
|
rs.
|
|
|
3.8 y
|
rs.
|
|
|
7.9 yrs.
|
|
|
|
8.9 y
|
rs.
|
Expected credit losses (% of principal securitized)
|
|
|
|
|
|
|
|
|
|
|
4.69
|
%
|
|
|
.15
|
%
|
|
|
.19
|
%
|
|
|
4.79
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
4.41
|
%
|
Residual cash flows discounted at (weighted average)
|
|
|
|
|
|
|
|
|
|
|
12.5
|
%
|
|
|
12.4
|
%
|
|
|
10.8
|
%
|
|
|
12.9
|
%
|
|
|
12.2
|
%
|
|
|
10.1
|
%
|
|
|
12.3
|
%
|
|
|
|
(1) |
|
No securitizations qualified for
sale treatment in the period.
|
|
(2) |
|
Effective December 31, 2006,
the Company implemented Constant Prepayment Rates
(CPR) curves for Residual Interest valuations that
are based on the number of months since entering repayment that
better reflect the CPR as the loan seasons. Under this
methodology, a different CPR is applied to each year of a
loans seasoning. Previously, the Company applied a CPR
that was based on a static life of loan assumption, irrespective
of seasoning, or, in the case of FFELP Stafford and PLUS loans,
the Company used a vector approach in applying the CPR. The
repayment status CPR depends on the number of months since first
entering repayment or as the loans seasons through the
portfolio. Life of loan CPR is related to repayment status only
and does not include the impact of the loan while in interim
status. The CPR assumption used for all periods includes the
impact of projected defaults.
|
|
* |
|
CPR of 20 percent for 2006,
15 percent for 2007, and 10 percent thereafter.
|
|
** |
|
Securitizations through August 2005
used a CPR of 20 percent for 2005, 15 percent for 2006
and 6 percent thereafter. Securitizations from September
2005 through December 2005 used a CPR of 30 percent for
2005, 20 percent for 2006, 15 percent for 2007 and
10 percent thereafter.
|
The following table summarizes cash flows received from or paid
to the off-balance sheet securitization trusts during the years
ended December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from new securitizations completed during the period
|
|
$
|
1,977
|
|
|
$
|
19,521
|
|
|
$
|
13,523
|
|
Purchases of Private Education Loans from securitization trusts
|
|
|
(162
|
)
|
|
|
(72
|
)
|
|
|
(63
|
)
|
Servicing fees
received(1)
|
|
|
286
|
|
|
|
327
|
|
|
|
320
|
|
Cash distributions from trusts related to Residual Interests
|
|
|
782
|
|
|
|
598
|
|
|
|
630
|
|
|
|
|
(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.
|
F-44
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
9. |
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, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
FFELP
|
|
|
Consolidation
|
|
|
Private
|
|
|
|
|
|
|
|
|
|
Stafford and
|
|
|
Loan
|
|
|
Education
|
|
|
|
|
|
|
|
|
|
PLUS
|
|
|
Trusts(1)
|
|
|
Loan
Trusts(5)
|
|
|
Total
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of Residual
Interests(2)
|
|
$
|
390
|
|
|
$
|
730
|
|
|
$
|
1,924
|
|
|
$
|
3,044
|
|
|
|
|
|
Underlying securitized loan
balance(3)
|
|
|
9,338
|
|
|
|
15,968
|
|
|
|
14,199
|
|
|
|
39,505
|
|
|
|
|
|
Weighted average life
|
|
|
2.7 yrs.
|
|
|
|
7.4 yrs.
|
|
|
|
7.0 yrs.
|
|
|
|
|
|
|
|
|
|
Prepayment speed (annual
rate)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
.11
|
%
|
|
|
.21
|
%
|
|
|
5.28
|
%
|
|
|
|
|
|
|
|
|
Residual cash flows discount rate
|
|
|
12.0
|
%
|
|
|
9.8
|
%
|
|
|
12.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
FFELP
|
|
|
Consolidation
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Loan
|
|
|
Education
|
|
|
|
|
|
|
PLUS
|
|
|
Trusts(1)
|
|
|
Loan Trusts
|
|
|
Total
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of Residual
Interests(2)
|
|
$
|
701
|
|
|
$
|
676
|
|
|
$
|
1,965
|
|
|
$
|
3,342
|
|
Underlying securitized loan
balance(3)
|
|
|
14,794
|
|
|
|
17,817
|
|
|
|
13,222
|
|
|
|
45,833
|
|
Weighted average life
|
|
|
2.9 yrs.
|
|
|
|
7.3 yrs.
|
|
|
|
7.2 yrs.
|
|
|
|
|
|
Prepayment speed (annual
rate)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim status
|
|
|
0
|
%
|
|
|
N/A
|
|
|
|
0
|
%
|
|
|
|
|
Repayment status
|
|
|
0-43
|
%
|
|
|
3-9
|
%
|
|
|
4-7
|
%
|
|
|
|
|
Life of loan repayment status
|
|
|
24
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
|
|
Expected credit losses (% of student loan principal)
|
|
|
.06
|
%
|
|
|
.07
|
%
|
|
|
4.36
|
%
|
|
|
|
|
Residual cash flows discount rate
|
|
|
12.6
|
%
|
|
|
10.5
|
%
|
|
|
12.6
|
%
|
|
|
|
|
|
|
|
(1) |
|
Includes $283 million and
$151 million related to the fair value of the Embedded
Floor Income as of December 31, 2007 and 2006,
respectively. Changes in the fair value of the Embedded Floor
Income are primarily due to changes in the interest rates and
the paydown of the underlying loans.
|
(2) |
|
At December 31, 2007 and 2006,
the Company had unrealized gains (pre-tax) in accumulated other
comprehensive income of $301 million and $389 million,
respectively, that related to the Retained Interests.
|
(3) |
|
In addition to student loans in
off-balance sheet trusts, the Company had $65.5 billion and
$48.6 billion of securitized student loans outstanding
(face amount) as of December 31, 2007 and 2006,
respectively, in on-balance sheet securitization trusts.
|
(4) |
|
Effective December 31, 2006,
the Company implemented CPR curves for Residual Interest
valuations that are based on seasoning (the number of months
since entering repayment). Under this methodology, a different
CPR is applied to each year of a loans seasoning.
Previously, the Company applied a CPR that was based on a static
life of loan assumption, and, in the case of FFELP Stafford and
PLUS loans, the Company applied a vector approach, irrespective
of seasoning. Repayment status CPR used is based on the number
of months since first entering repayment (seasoning). Life of
loan CPR is related to repayment status only and does not
include the impact of the loan while in interim status. The CPR
assumption used for all periods includes the impact of projected
defaults.
|
(5) |
|
The Company adopted
SFAS No. 155, effective January 1, 2007. As a
result, the Company elected to carry the Residual Interest on
the Private Education Loan securitization which settled in the
first quarter of 2007 at fair value with subsequent changes in
fair value recorded in earnings. The fair value of this Residual
Interest at December 31, 2007 was $363 million
inclusive of a net $25 million fair value loss adjustment
recorded since settlement.
|
The Company recorded impairment charges to the Retained
Interests of $254 million, $157 million and
$260 million, respectively, for the years ended
December 31, 2007, 2006 and 2005. The impairment charges
were the result of FFELP loans prepaying faster than projected
through loan consolidation ($110 million,
F-45
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
9. |
Student Loan Securitization (Continued)
|
$104 million and $256 million for the years ended
December 31, 2007, 2006 and 2005, respectively), impairment
to the Floor Income component of the Companys Retained
Interest due to increases in interest rates during the period
($24 million, $53 million and $4 million for the
years ended December 31, 2007, 2006 and 2005,
respectively), and increases in prepayments, defaults and the
discount rate related to Private Education Loans
($120 million for the year ended December 31, 2007).
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, 2007. 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 100 basis points (to LIBOR plus 850 basis points) to
better take into account the current level of cash flow
uncertainty and lack of liquidity that exists with the Private
Education Residual Interests. During 2007, the Company increased
its loan loss allowance related to the non-traditional or
higher-risk loans within the Companys Private Education
Loan portfolio that the Company does not generally securitize.
As a result, the Company does not expect the default rates used
for the Residual Interest valuations to correspond with the
expected default rates contemplated by the provision expense
related to the non-traditional Private Education Loans recorded
in 2007.
F-46
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
9. |
Student Loan Securitization (Continued)
|
The following table reflects the sensitivity of the current fair
value of the Retained Interests to adverse changes in the key
economic assumptions used in the valuation of the Retained
Interest at December 31, 2007, discussed in detail in the
preceding table. The effect of a variation in a particular
assumption on the fair value of the Retained 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, 2007
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
|
Stafford/PLUS
|
|
|
Consolidation
|
|
|
Private Education
|
|
(Dollars in millions)
|
|
Loan Trusts
|
|
|
Loan Trusts
|
|
|
Loan Trusts
|
|
|
Fair value of Residual
Interest(1)
|
|
$
|
390
|
|
|
$
|
730
|
(2)
|
|
$
|
1,924
|
|
Weighted-average life
|
|
|
2.7
|
yrs.
|
|
|
7.4
|
yrs.
|
|
|
7.0
|
yrs.
|
Prepayment speed
assumptions(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim status
|
|
|
0
|
%
|
|
|
N/A
|
|
|
|
0
|
%
|
Repayment status
|
|
|
0-37
|
%
|
|
|
3-8
|
%
|
|
|
1-30
|
%
|
Life of loan repayment status
|
|
|
21
|
%
|
|
|
6
|
%
|
|
|
9
|
%
|
Impact on fair value of 5% absolute increase
|
|
$
|
(33
|
)
|
|
$
|
(115
|
)
|
|
$
|
(393
|
)
|
Impact on fair value of 10% absolute increase
|
|
$
|
(58
|
)
|
|
$
|
(196
|
)
|
|
$
|
(684
|
)
|
Expected credit losses (as a% of student loan
principal)
|
|
|
.11
|
%
|
|
|
.21
|
%
|
|
|
5.28
|
%(4)
|
Impact on fair value of 5% absolute increase in default rate
|
|
$
|
(6
|
)
|
|
$
|
(15
|
)
|
|
$
|
(344
|
)
|
Impact on fair value of 10% absolute increase in default rate
|
|
$
|
(16
|
)
|
|
$
|
(28
|
)
|
|
$
|
(688
|
)
|
Residual cash flows discount rate
|
|
|
12.0
|
%
|
|
|
9.8
|
%
|
|
|
12.9
|
%
|
Impact on fair value of 5% absolute increase
|
|
$
|
(29
|
)
|
|
$
|
(127
|
)
|
|
$
|
(368
|
)
|
Impact on fair value of 10% absolute increase
|
|
$
|
(54
|
)
|
|
$
|
(220
|
)
|
|
$
|
(629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Difference between Asset and Funding underlying
indices(5)(6)
|
|
3 month LIBOR forward curve at
December 31, 2007 plus contracted spreads
|
Impact on fair value of 0.25% absolute increase in funding index
compared to asset index
|
|
$
|
(60
|
)
|
|
$
|
(187
|
)
|
|
$
|
(6
|
)
|
Impact on fair value of 0.50% absolute increase in funding index
compared to asset index
|
|
$
|
(120
|
)
|
|
$
|
(373
|
)
|
|
$
|
(13
|
)
|
|
|
|
(1) |
|
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 $3.0 billion Residual Interest there
is $227 million (present value) of benefits projected which
reduce the fair value.
|
(2) |
|
Certain consolidation trusts have
$3.4 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
highly-rated counterparties. These swaps are in a
$963 million gain position (in the aggregate) and
$315 million position net of collateral posted 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 $404 million as of December 31,
2007.
|
(3) |
|
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%.
|
(4) |
|
Expected credit losses are used to
project future cash flows related to the Private Education Loan
securitizations Residual Interest. However, for all trusts
settling prior to September 30, 2005, the Company, to date,
has 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 $123 million, $48 million, and
$32 million for the years ended December 31, 2007,
2006 and 2005, respectively, related to this activity and
speciality claims. For all trusts settling after October 1,
2005 the Company does not hold this contingent call option.
Credit losses, net of recoveries, for these trusts where the
Company does not hold the contingent call option, were
$21.5 million and $2.1 million for the years ended
December 31, 2007 and 2006, respectively.
|
(5) |
|
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) |
|
At December 31, 2007, the
Company had $2.3 billion of auction rate securities
outstanding in its off-balance sheet trusts. 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 currently bear
interest at the maximum rate allowable under their terms. The
maximum allowable interest rate on these auction rate securities
is generally LIBOR plus 1.50 percent, with limited
exceptions.
|
F-47
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
9. |
Student Loan Securitization (Continued)
|
The table below shows the Companys off-balance sheet
Private Education Loan delinquency trends as of
December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Private Education Loan Delinquencies
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(Dollars in millions)
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
4,963
|
|
|
|
|
|
|
$
|
5,608
|
|
|
|
|
|
|
$
|
3,679
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
1,417
|
|
|
|
|
|
|
|
822
|
|
|
|
|
|
|
|
614
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
7,403
|
|
|
|
94.7
|
%
|
|
|
6,419
|
|
|
|
94.5
|
%
|
|
|
4,446
|
|
|
|
95.6
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
202
|
|
|
|
2.6
|
|
|
|
222
|
|
|
|
3.3
|
|
|
|
136
|
|
|
|
2.9
|
|
Loans delinquent
61-90 days
|
|
|
84
|
|
|
|
1.1
|
|
|
|
60
|
|
|
|
.9
|
|
|
|
35
|
|
|
|
.7
|
|
Loans delinquent greater than 90 days
|
|
|
130
|
|
|
|
1.6
|
|
|
|
91
|
|
|
|
1.3
|
|
|
|
36
|
|
|
|
.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet Private Education Loans in repayment
|
|
|
7,819
|
|
|
|
100
|
%
|
|
|
6,792
|
|
|
|
100
|
%
|
|
|
4,653
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet Private Education Loans, gross
|
|
$
|
14,199
|
|
|
|
|
|
|
$
|
13,222
|
|
|
|
|
|
|
$
|
8,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
|
|
10.
|
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 and
basis swaps and Eurodollar futures contracts, are
F-48
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
10.
|
Derivative
Financial Instruments (Continued)
|
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/or stock
prices. 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. The Company
minimizes the credit risk in derivative instruments by entering
into transactions with highly rated 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 a 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, 2007 and 2006,
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 $463 million and $97 million,
respectively.
The majority of the Companys ISDA Master Agreements
provide that the counterparty may declare a Termination
Event and terminate its positions if a Designated
Event occurs and the Companys unsecured and
unsubordinated long-term debt rating fall to either of the
pre-determined levels, which is typically Baa3 for
Moodys and BBB- from S&P. For purposes of
these ISDA Master Agreements, the execution of the Merger
Agreement constituted a Designated Event. On
February 4, 2008, Standard & Poors Ratings
Services announced that it lowered the Companys long-term
debt rating to
BBB-/A-3
from
BBB+/A-2.
Standard & Poors also announced that the
Companys rating remains on CreditWatch with negative
implications. As of February 28, 2008, 92 percent of
the counterparties (on a notional basis) have agreed in writing
to waive their rights (or do not have the rights) to declare a
Termination Event arising from the Company executing
the Merger Agreement and the resulting ratings downgrade.
Depending upon interest rates and exchange rates, the Company
could be liable for substantial payments to terminate these
positions if the counterparties exercise their right to
terminate at any point in the future. It would be the
Companys intent to replace any terminated positions with
derivatives executed with other counterparties, however, the
Company may not be able to readily replace any terminated
positions or may incur substantial additional costs to do so.
The Companys liquidity could be adversely affected by
these additional payments and costs. In addition, prior to the
recent ratings downgrade, the Company had the use of cash
collateral posted by these counterparties. As a result of the
Companys recent ratings downgrade, its ability to use that
cash collateral will become restricted unless the counterparties
waive these restrictions. The Company is currently in
negotiations with its counterparties to waive these restrictions
so that use of such cash collateral once again becomes
unrestricted. If not waived, these cash collateral balances will
appear in the Restricted cash and investments line
of the consolidated balance sheet.
The Companys on-balance sheet securitization trusts have
$11.0 billion of Euro and British Pound Sterling
denominated bonds outstanding as of December 31, 2007. 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
F-49
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
10.
|
Derivative
Financial Instruments (Continued)
|
counterparties. As of December 31, 2007, the net positive
exposure on these swaps is $1.7 billion. 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. As of December 31, 2007, counterparties have
posted $310 million of collateral due to a net positive
exposure from changes in market value and have not posted any
collateral related to any credit rating downgrade as no
downgrade triggers have been met. Ultimately, the Companys
exposure related to a swap counterparty failing to make its
required payments is limited to the trust assets (primarily
student loans and cash) which collateralize the outstanding
bonds in the trust. Because the bonds outstanding generally are
at parity with the assets that collateralize the bonds, even in
periods of great stress in the foreign currency markets, the
likelihood of a material loss is remote.
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, the Company uses
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 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
F-50
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
10.
|
Derivative
Financial Instruments (Continued)
|
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 usually 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 most of the Companys
FFELP student loans can earn at either a variable or a fixed
interest rate depending on market interest rates. The Company
also has basis swaps that do not meet the 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.
In addition, the Company enters into equity forward contracts
(see Note 12, Stockholders Equity, for a
further discussion of equity forward contracts and the
settlement of all equity forward contracts in January 2008). The
Company utilizes 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.
F-51
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
10.
|
Derivative
Financial Instruments (Continued)
|
Summary
of Derivative Financial Statement Impact
The following tables summarize the fair values and notional
amounts or number of contracts of all derivative instruments at
December 31, 2007 and 2006, and their impact on other
comprehensive income and earnings for the years ended
December 31, 2007, 2006 and 2005. At December 31, 2007
and 2006, $196 million (none of which is in restricted cash
and investments on the balance sheet) and $418 million (of
which $53 million is in restricted cash and investments on
the balance sheet) fair value, respectively, of
available-for-sale investment securities and $890 million
and $28 million, respectively, of cash were pledged as
collateral against these derivative instruments. In addition,
$1.3 billion and $275 million of cash was held as
collateral at December 31, 2007 and 2006, respectively, for
derivative counterparties where we have exposure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Cash Flow
|
|
|
Fair Value
|
|
|
Trading
|
|
|
Total
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Fair
Values(1)
(Dollars in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(34
|
)
|
|
$
|
(9
|
)
|
|
$
|
102
|
|
|
$
|
(355
|
)
|
|
$
|
252
|
|
|
$
|
(111
|
)
|
|
$
|
320
|
|
|
$
|
(475
|
)
|
Floor/Cap contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(442
|
)
|
|
|
(200
|
)
|
|
|
(442
|
)
|
|
|
(200
|
)
|
Futures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
forwards(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(213
|
)
|
|
|
|
|
|
|
(213
|
)
|
Cross currency interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
3,640
|
|
|
|
1,440
|
|
|
|
3
|
|
|
|
|
|
|
|
3,643
|
|
|
|
1,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(34
|
)
|
|
$
|
(9
|
)
|
|
$
|
3,742
|
|
|
$
|
1,085
|
|
|
$
|
(187
|
)
|
|
$
|
(524
|
)
|
|
$
|
3,521
|
|
|
$
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Value
(Dollars in
billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
3.1
|
|
|
$
|
2.1
|
|
|
$
|
14.7
|
|
|
$
|
15.6
|
|
|
$
|
199.5
|
|
|
$
|
162.0
|
|
|
$
|
217.3
|
|
|
$
|
179.7
|
|
Floor/Cap contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38.9
|
|
|
|
21.5
|
|
|
|
38.9
|
|
|
|
21.5
|
|
Futures
|
|
|
|
|
|
|
.1
|
|
|
|
|
|
|
|
|
|
|
|
.6
|
|
|
|
.6
|
|
|
|
.6
|
|
|
|
.7
|
|
Cross currency interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
23.8
|
|
|
|
23.0
|
|
|
|
.1
|
|
|
|
|
|
|
|
23.9
|
|
|
|
23.0
|
|
Other(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.7
|
|
|
|
2.0
|
|
|
|
.7
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3.1
|
|
|
$
|
2.2
|
|
|
$
|
38.5
|
|
|
$
|
38.6
|
|
|
$
|
239.8
|
|
|
$
|
186.1
|
|
|
$
|
281.4
|
|
|
$
|
226.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts
(Shares in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
forwards(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48.2
|
|
|
|
|
|
|
|
48.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fair values reported are exclusive
of collateral held and/or pledged.
|
|
(2) |
|
As of December 31, 2007, the
equity forward contract was amended to allow for only physical
settlement. Effective with this change, the contract was no
longer considered a derivative under SFAS No. 150 and
SFAS No. 133, but rather accounted for as a liability
(recorded at the present value of the repurchase price) under
SFAS No. 150. See Note 12,
Stockholders Equity for further discussion.
|
|
(3) |
|
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). In addition, for December 31,
2006, other consisted of an embedded derivative
($2 billion notional) bifurcated from the convertible
debenture issuance that relates primarily to certain contingent
interest and conversion features of the debt. All of the
embedded derivatives have had a de minimis fair value since
bifurcation.
|
F-52
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
10.
|
Derivative
Financial Instruments (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
Cash Flow
|
|
|
Fair Value
|
|
|
Trading
|
|
|
Total
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of cash flow hedges
|
|
$
|
(16
|
)
|
|
$
|
(7
|
)
|
|
$
|
(27
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(16
|
)
|
|
$
|
(7
|
)
|
|
$
|
(27
|
)
|
Amortization of effective
hedges(1)
|
|
|
1
|
|
|
|
12
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
12
|
|
|
|
25
|
|
Discontinued hedges
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in accumulated other comprehensive income, net
|
|
$
|
(15
|
)
|
|
$
|
5
|
|
|
$
|
13
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(15
|
)
|
|
$
|
5
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of closed futures contracts gains/losses in
interest
expense(2)
|
|
$
|
(2
|
)
|
|
$
|
(19
|
)
|
|
$
|
(39
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
(19
|
)
|
|
$
|
(39
|
)
|
Gains (losses) on derivative and hedging activities
Realized(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
(109
|
)
|
|
|
(387
|
)
|
|
|
(18
|
)
|
|
|
(109
|
)
|
|
|
(387
|
)
|
Gains (losses) on derivative and hedging activities
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
(4)
|
|
|
13
|
(4)
|
|
|
(3
|
)(4)
|
|
|
(1,403
|
)
|
|
|
(243
|
)
|
|
|
637
|
|
|
|
(1,343
|
)
|
|
|
(230
|
)
|
|
|
634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings impact
|
|
$
|
(2
|
)
|
|
$
|
(19
|
)
|
|
$
|
(39
|
)
|
|
$
|
60
|
|
|
$
|
13
|
|
|
$
|
(3
|
)
|
|
$
|
(1,421
|
)
|
|
$
|
(352
|
)
|
|
$
|
250
|
|
|
$
|
(1,363
|
)
|
|
$
|
(358
|
)
|
|
$
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2007.
|
|
(2) |
|
For futures contracts that qualify
as SFAS No. 133 hedges where the hedged transaction
occurs.
|
|
(3) |
|
Includes net settlement
income/expense related to trading derivatives and realized gains
and losses related to derivative dispositions.
|
|
(4) |
|
The change in fair value of cash
flow and fair value hedges represents amounts related to
ineffectiveness.
|
11. Other
Assets
The following table provides the detail of the Companys
other assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Ending
|
|
|
% of
|
|
|
Ending
|
|
|
% of
|
|
|
|
Balance
|
|
|
Balance
|
|
|
Balance
|
|
|
Balance
|
|
|
Derivatives at fair value
|
|
$
|
3,744,611
|
|
|
|
35
|
%
|
|
$
|
1,353,820
|
|
|
|
24
|
%
|
Accrued interest receivable
|
|
|
3,180,590
|
|
|
|
30
|
|
|
|
2,226,758
|
|
|
|
40
|
|
APG related receivables and Real Estate Owned
|
|
|
1,758,871
|
|
|
|
16
|
|
|
|
794,867
|
|
|
|
14
|
|
Accounts receivable collateral posted
|
|
|
867,427
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
Benefit-related investments
|
|
|
467,379
|
|
|
|
4
|
|
|
|
446,602
|
|
|
|
8
|
|
Fixed assets, net
|
|
|
315,260
|
|
|
|
3
|
|
|
|
323,778
|
|
|
|
6
|
|
Accounts receivable general
|
|
|
305,118
|
|
|
|
2
|
|
|
|
370,679
|
|
|
|
6
|
|
Other
|
|
|
107,851
|
|
|
|
2
|
|
|
|
69,439
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,747,107
|
|
|
|
100
|
%
|
|
$
|
5,585,943
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Derivatives at fair value line in the above
table represents the fair value of the Companys
derivatives in a gain position by counterparty. For the years
ended December 31, 2007 and 2006, these balances primarily
included cross-currency interest rate swaps designated as fair
value hedges that were offset by an increase in interest-bearing
liabilities related to the hedged foreign currency-denominated
debt. For the
F-53
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
years ended December 31, 2007 and 2006, a net
ineffectiveness gain (loss) of $70 million and
($23) million, respectively, was recorded in the
Gains (losses) on derivatives and hedging activities,
net line in the consolidated statement of income related
to the
cross-currency
interest rate swap hedge relationships.
12. Stockholders
Equity
Preferred
Stock
At December 31, 2007, 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, and on any dividend payment date on or after
June 15, 2010 for Series B. 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, 2007, the Company issued 1.0 million
shares of 7.25 percent Mandatory Convertible Preferred
Stock, Series C (the Series C Preferred
Stock). Net proceeds from the sale, after deducting
underwriting fees and other fees and expenses of the offering,
were approximately $1.0 billion. 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 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. On January 9, 2008, the
Company issued an additional 150,000 shares of
Series C Preferred Stock as a result of the underwriters
exercising their over-allotment option, which resulted in net
proceeds of $145.5 million.
F-54
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
12. 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, 2007, 466.5 million shares were issued
and outstanding and 97 million shares were unissued but
encumbered for outstanding Series C Preferred Stock,
outstanding options, and remaining authority for stock-based
compensation plans. The stock-based compensation plans are
described in Note 14, 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, after deducting
underwriting fees and other fees and expenses of the offering,
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 will be 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-55
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
12. Stockholders
Equity (Continued)
The following table summarizes the Companys common share
repurchase, issuance and equity forward activity for the years
ended December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
(Shares in millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Common shares repurchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
Open market
|
|
|
1.8
|
|
|
|
2.2
|
|
|
|
|
|
Equity forward contracts
|
|
|
4.2
|
|
|
|
5.4
|
|
|
|
17.3
|
|
Equity forward contracts agreed to be
settled(1)
|
|
|
44.0
|
|
|
|
|
|
|
|
|
|
Benefit
plans(2)
|
|
|
3.3
|
|
|
|
1.6
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares repurchased
|
|
|
53.3
|
|
|
|
9.2
|
|
|
|
18.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average purchase price per
share(3)
|
|
$
|
44.59
|
|
|
$
|
52.41
|
|
|
$
|
49.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued
|
|
|
109.2
|
|
|
|
6.7
|
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period
|
|
|
48.2
|
|
|
|
42.7
|
|
|
|
42.8
|
|
New contracts
|
|
|
|
|
|
|
10.9
|
|
|
|
17.2
|
|
Settlements
|
|
|
(4.2
|
)
|
|
|
(5.4
|
)
|
|
|
(17.3
|
)
|
Agreed to be
settled(1)
|
|
|
(44.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
|
|
|
|
48.2
|
|
|
|
42.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authority remaining at end of period to repurchase or enter into
equity forwards
|
|
|
38.8
|
|
|
|
15.7
|
|
|
|
18.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. 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 performance stock for employees
tax withholding obligations and shares tendered by employees to
satisfy option exercise costs.
|
|
(3) |
|
For equity forward contracts, the
average purchase price per share for 2005 is calculated based on
the average strike price of all equity forward contracts
including those whose strike prices were amended and were net
settled in cashless transactions. There were no such cashless
transactions in 2006 or 2007.
|
The closing price of the Companys common stock on
December 31, 2007 was $20.14.
F-56
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
12. Stockholders
Equity (Continued)
Accumulated
Other Comprehensive Income
Accumulated other comprehensive income includes the after-tax
change in unrealized gains and losses on investments (which
includes the Retained Interest in off-balance sheet securitized
loans), unrealized gains and losses on derivatives, defined
benefit pension plans for 2007 and 2006 and minimum pension
liability for 2005. The following table presents the cumulative
balances of the components of other comprehensive income for the
years ended December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net unrealized gains on
investments(1)
|
|
$
|
238,772
|
|
|
$
|
340,363
|
|
|
$
|
382,316
|
|
Net unrealized (losses) on
derivatives(2)
|
|
|
(22,574
|
)
|
|
|
(7,570
|
)
|
|
|
(12,560
|
)
|
Defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net prior service cost
|
|
|
|
|
|
|
(24
|
)
|
|
|
|
|
Net gain
|
|
|
20,166
|
|
|
|
16,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total defined benefit pension
plans(3)
|
|
|
20,166
|
|
|
|
16,318
|
|
|
|
|
|
Minimum pension
liability(4)
|
|
|
|
|
|
|
|
|
|
|
(1,846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income
|
|
$
|
236,364
|
|
|
$
|
349,111
|
|
|
$
|
367,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of tax expense of $125,473,
$179,244 and $203,495 for the years ended December 31,
2007, 2006 and 2005, respectively.
|
|
(2) |
|
Net of tax benefit of $12,682,
$4,347 and $4,667 for the years ended December 31, 2007,
2006 and 2005, respectively.
|
|
(3) |
|
Net of tax expense of $11,677 and
$8,787 for the years ended December 31, 2007 and 2006.
|
|
(4) |
|
Net of tax benefit of $994 for the
year ended December 31, 2005.
|
F-57
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
13. Earnings
(Loss) per Common Share
Basic earnings (loss) per common share (EPS) is
calculated using the weighted average number of shares of common
stock outstanding during each period. A reconciliation of the
numerators and denominators of the basic and diluted EPS
calculations is as follows for the years ended December 31,
2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stock
|
|
$
|
(933,539
|
)
|
|
$
|
1,121,389
|
|
|
$
|
1,360,381
|
|
Adjusted for debt expense of convertible debentures
(Co-Cos), net of
taxes(1)
|
|
|
|
|
|
|
67,274
|
|
|
|
44,572
|
|
Adjusted for non-taxable unrealized gains on equity
forwards(2)
|
|
|
|
|
|
|
(3,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stock, adjusted
|
|
$
|
(933,539
|
)
|
|
$
|
1,185,135
|
|
|
$
|
1,404,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute basic EPS
|
|
|
412,233
|
|
|
|
410,805
|
|
|
|
418,374
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of Co-Cos
|
|
|
|
|
|
|
30,312
|
|
|
|
30,312
|
|
Dilutive effect of stock options, nonvested restricted stock,
restricted stock units, Employee Stock Purchase Plan
(ESPP) and equity
forwards(2)(3)(4)
|
|
|
|
|
|
|
10,053
|
|
|
|
11,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common
shares(5)
|
|
|
|
|
|
|
40,365
|
|
|
|
41,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute diluted EPS
|
|
|
412,233
|
|
|
|
451,170
|
|
|
|
460,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
(2.26
|
)
|
|
$
|
2.73
|
|
|
$
|
3.25
|
|
Dilutive effect of
Co-Cos(1)
|
|
|
|
|
|
|
(.03
|
)
|
|
|
(.11
|
)
|
Dilutive effect of equity
forwards(2)(4)
|
|
|
|
|
|
|
(.01
|
)
|
|
|
|
|
Dilutive effect of stock options, nonvested restricted stock,
restricted stock units, and
ESPP(3)
|
|
|
|
|
|
|
(.06
|
)
|
|
|
(.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
(2.26
|
)
|
|
$
|
2.63
|
|
|
$
|
3.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Emerging Issues Task Force
(EITF) Issue
No. 04-8,
The Effect of Contingently Convertible Debt on Diluted
Earnings per Share, requires the shares underlying Co-Cos
to be included in diluted EPS computations regardless of whether
the market price trigger or the conversion price has been met,
using the if-converted method.
|
|
(2) |
|
SFAS No. 128,
Earnings per Share, and the additional guidance
provided by EITF Topic
No. D-72,
Effect of Contracts That May Be Settled in Stock or Cash
on the Computation of Diluted Earnings per Share, require
both the denominator and the numerator to be adjusted in
calculating the potential impact of the Companys equity
forward contracts on diluted EPS. Under this guidance, when
certain conditions are satisfied, the impact can be dilutive
when the combination of the average share price during the
period is lower than the respective strike prices on the
Companys equity forward contracts, and the reversal of an
unrealized gain or loss on derivative and hedging activities
related to its equity forward contracts results in a lower EPS
calculation.
|
|
(3) |
|
Includes the potential dilutive
effect of additional common shares that are issuable upon
exercise of outstanding stock options, nonvested restricted
stock, restricted stock units, and the outstanding commitment to
issue shares under the ESPP, determined by the treasury stock
method.
|
|
(4) |
|
Includes the potential dilutive
effect of equity forward contracts, determined by the reverse
treasury stock method.
|
|
(5) |
|
For the year ended
December 31, 2007, stock options covering approximately
37 million shares 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 years
ended December 31, 2006 and 2005, stock options and equity
forwards covering approximately 57 million shares and
30 million shares, respectively, were outstanding but not
included in the computation of diluted earnings per share
because they were anti-dilutive.
|
F-58
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
14. Stock-Based
Compensation Plans and Arrangements
The Company has various stock-based compensation plans which
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 amended in
2005 and 2006. A total of 17.7 million shares are
authorized to be issued from this plan. Upon approval of the
Incentive Plan, the Company discontinued the Employee Stock
Option Plan (the ESOP) and Management Incentive Plan
(the MIP). Shares available for future issuance
under the ESOP and MIP were canceled; however, terms of
outstanding grants remain unchanged. Also, commitments made to
certain option holders to receive replacement options under the
MIP will be honored.
Awards under the Incentive Plan may be in the form of stock,
stock options, restricted stock and restricted stock units.
The Company also maintains the Employee Stock Purchase Plan (the
ESPP).
Stock-based compensation is granted to non-employee directors of
the Company under the shareholder-approved Directors Stock Plan.
A total of 9.3 million shares are authorized to be issued
from this plan and awards may be in the form of stock and stock
options. The Companys non-employee directors are
considered employees under the provisions of
SFAS No. 123(R). The shares issued under the Incentive
Plan, the Directors Stock Plan and the ESPP may be either shares
reacquired by the Company or shares that are authorized but
unissued.
An amount equal to dividends payable on the Companys
common stock (dividend equivalents) is credited on
full value stock-based compensation awards, which
are nonvested restricted stock and restricted stock units, and
on share amounts credited under deferred compensation
arrangements. Dividend equivalents are not credited on stock
option awards.
The total stock-based compensation cost recognized in the
consolidated statements of income for the years ended
December 31, 2007 and 2006 was $75 million and
$81 million, respectively. The related income tax benefit
for the years ended December 31, 2007 and 2006 was
$28 million and $30 million, respectively. As of
December 31, 2007, there was $19 million of total
unrecognized compensation cost related to stock-based
compensation programs, which is expected to be recognized over a
weighted average period of 1.1 years.
Stock
Options
Under the Incentive Plan, ESOP and MIP, the maximum term for
stock options is 10 years and the exercise price must be
equal to or greater than the market price of SLM common stock on
the date of grant. Stock options granted to officers and
management employees under the plans 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 to the chief executive officer have included more
difficult price vesting targets. 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.
F-59
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
14. Stock-Based
Compensation Plans and Arrangements (Continued)
Under the Directors Stock Plan, 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 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, 2007, 2006 and 2005 were estimated as of the
date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Risk-free interest rate
|
|
|
4.88
|
%
|
|
|
4.75
|
%
|
|
|
3.87
|
%
|
Expected volatility
|
|
|
21.10
|
%
|
|
|
20.22
|
%
|
|
|
21.48
|
%
|
Expected dividend rate
|
|
|
2.20
|
%
|
|
|
1.72
|
%
|
|
|
1.58
|
%
|
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 were 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 term 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, 2007, there was $13 million of
unrecognized compensation cost related to stock options, which
is expected to be recognized over a weighted average period of
.8 years.
The following table summarizes stock option activity for the
year ended December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Price per
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Share
|
|
|
Term
|
|
|
Value
|
|
|
Outstanding at December 31, 2006
|
|
|
41,022,878
|
|
|
$
|
37.85
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,784,600
|
|
|
|
45.41
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6,635,644
|
)
|
|
|
27.66
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(1,513,070
|
)
|
|
|
51.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2007(1)
|
|
|
36,658,764
|
|
|
$
|
39.92
|
|
|
|
6.09 yrs
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
25,357,909
|
|
|
$
|
35.14
|
|
|
|
5.20 yrs
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes gross number of
net-settled options awarded. Options granted in 2007 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 $7.89,
$9.34 and $8.69 for the years ended December 31, 2007, 2006
and 2005, respectively. The total intrinsic value of options
exercised was
F-60
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
14. Stock-Based
Compensation Plans and Arrangements (Continued)
$140 million, $129 million and $158 million for
the years ended December 31, 2007, 2006 and 2005,
respectively.
Cash received from option exercises was $96 million for the
year ended December 31, 2007. The actual tax benefit
realized for the tax deductions from option exercises totaled
$52 million for the year ended December 31, 2007.
Restricted
Stock
To date, restricted stock granted under the Incentive Plan has
been subject to performance vesting criteria. This restricted
stock must vest 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,
market share, overhead or other expense reduction, or Core
Earnings net income. The Company pays or credits dividends
on nonvested restricted stock.
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, 2007, there was
$6 million of unrecognized compensation cost related to
restricted stock, which is expected to be recognized over a
weighted average period of 1.7 years.
The following table summarizes restricted stock activity for the
year ended December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average Grant
|
|
|
|
|
|
|
Number of
|
|
|
Date
|
|
|
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
|
|
Nonvested at December 31, 2006
|
|
|
403,726
|
|
|
$
|
49.68
|
|
|
|
|
|
Granted
|
|
|
226,483
|
|
|
|
45.41
|
|
|
|
|
|
Vested
|
|
|
(165,408
|
)
|
|
|
48.97
|
|
|
|
|
|
Canceled
|
|
|
(45,650
|
)
|
|
|
46.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007
|
|
|
419,151
|
|
|
$
|
48.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total fair value of shares that vested during the years
ended December 31, 2007, 2006 and 2005, was
$8 million, $3 million and $16 million,
respectively.
Restricted
Stock Units
The Company has granted restricted stock units
(RSUs) to certain executive management employees.
Conversion of vested RSUs to common stock is deferred until the
employees retirement or termination of employment. 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. As of December 31, 2007, there was no
unrecognized compensation cost related to RSUs.
F-61
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
14. Stock-Based
Compensation Plans and Arrangements (Continued)
The following table summarizes RSU activity for the year ended
December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average Grant
|
|
|
|
|
|
|
Number of
|
|
|
Date
|
|
|
|
|
|
|
RSUs
|
|
|
Fair Value
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
640,000
|
|
|
$
|
39.45
|
|
|
|
|
|
Granted
|
|
|
10,000
|
|
|
|
45.41
|
|
|
|
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
Converted to common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
650,000
|
|
|
$
|
39.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested(1)
|
|
|
650,000
|
|
|
$
|
39.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All outstanding RSUs vested in 2007
but were not converted to common stock until January 2008.
|
There were 39,071 dividend equivalents on outstanding RSUs at
December 31, 2007.
The total fair value of RSUs that vested during the years ended
December 31, 2007, 2006 and 2005 was $26 million,
$15 million and $10 million, respectively. The total
intrinsic value of RSUs converted to common stock during the
year ended December 31, 2006 was $10 million. There
were no RSUs converted to common stock for the years ended
December 31, 2007 and December 31, 2005.
Employee
Stock Purchase Plan
Under the Companys ESPP, employees could purchase shares
of the Companys common stock at the end of a
24-month
offering period at a price equal to the share price at the
beginning of the
24-month
period, less 15 percent, up to a maximum purchase price of
$10,000 plus accrued interest. The purchase price for each
offering was 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, 2007 and 2006
were calculated using a Black-Scholes option pricing model with
the following weighted average assumptions.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Risk free interest rate
|
|
|
4.97
|
%
|
|
|
4.75
|
%
|
Expected volatility
|
|
|
22.67
|
%
|
|
|
20.41
|
%
|
Expected dividend rate
|
|
|
2.19
|
%
|
|
|
1.92
|
%
|
Expected life
|
|
|
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
term. 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, 2007
and 2006 was $10.41 and $11.31, respectively. The fair value was
amortized to compensation cost on a straight-line basis over a
two-year vesting period. As of December 31, 2007, there was
no unrecognized compensation cost related to the ESPP.
F-62
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
14. Stock-Based
Compensation Plans and Arrangements (Continued)
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.
Equity
Compensation Plans
The following table summarizes information as of
December 31, 2007, 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
|
|
|
2,559,062
|
|
|
$
|
33.99
|
|
|
|
5.0
|
|
|
|
734,427
|
|
|
|
NQ,ST
|
|
SLM Corporation Incentive
Plan(2)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NQ,ISO,RES, RSU
|
|
Traditional options
|
|
|
2,119,794
|
|
|
|
44.80
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
Net-settled options
|
|
|
|
|
|
|
51.12
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
Full value awards
|
|
|
551,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total SLM Corporation Incentive Plan
|
|
|
2,670,840
|
|
|
|
50.29
|
|
|
|
8.0
|
|
|
|
12,603,582
|
|
|
|
|
|
Expired
Plans(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NQ,ISO,RES
|
|
Traditional options
|
|
|
12,663,054
|
|
|
|
32.82
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
Full value awards
|
|
|
41,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expired plans
|
|
|
12,704,754
|
|
|
|
32.82
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total approved by security holders
|
|
|
17,934,656
|
|
|
|
41.92
|
|
|
|
6.4
|
|
|
|
13,338,009
|
|
|
|
|
|
Equity compensation plans not approved by security holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
shares(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
502,934
|
|
|
|
NQ,ISO,RES, RSU
|
|
Compensation arrangements
|
|
|
483,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSU
|
|
Employee Stock Purchase
Plan(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,118,454
|
|
|
|
|
|
Expired
Plan(7)
|
|
|
5,248,248
|
|
|
|
27.98
|
|
|
|
4.1
|
|
|
|
|
|
|
|
NQ,RES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total not approved by security holders
|
|
|
5,731,375
|
|
|
|
27.98
|
|
|
|
4.1
|
|
|
|
1,621,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
23,666,031
|
|
|
$
|
39.92
|
|
|
|
6.1
|
|
|
|
14,959,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 and 2007
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 SLM common
stock at the time of exercise. At December 31, 2007, the
option price for all net-settled options was higher than the
market price. Accordingly, the Company was not obligated to
issue shares upon the exercise of all net-settled options at
December 31, 2007.
|
|
(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, 2007, 1,372,794 shares are remaining from
this authority.
|
|
(4) |
|
Expired plans for which
unexercised options remain outstanding are the
1993-1998
Stock Option Plan, Management Incentive Plan and Board of
Directors Stock Option Plan.
|
|
(5) |
|
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.
|
|
(6) |
|
Number of shares available for
issuance under the ESPP.
|
|
(7) |
|
Expired plan for which unexercised
options remain outstanding is the Employee Stock Option Plan.
|
F-63
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Late fees and forbearance fees
|
|
$
|
135,627
|
|
|
$
|
120,651
|
|
|
$
|
97,862
|
|
Asset servicing and other transaction fees
|
|
|
123,568
|
|
|
|
42,951
|
|
|
|
|
|
Loan servicing fees
|
|
|
26,094
|
|
|
|
47,708
|
|
|
|
59,548
|
|
Gains on sales of mortgages and other loan fees
|
|
|
10,737
|
|
|
|
15,325
|
|
|
|
18,257
|
|
Other
|
|
|
89,049
|
|
|
|
111,672
|
|
|
|
97,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
$
|
385,075
|
|
|
$
|
338,307
|
|
|
$
|
273,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 an affinity marketing
program which is designed to increase consumer purchases of
merchant goods and services and to promote saving for college by
consumers who are members of this program. Merchant partners
generally pay Upromise transaction fees based on member purchase
volume, either online or in stores depending on the contractual
arrangement with the merchant partner. A percentage of the
consumer members purchases is set aside in an account
maintained by Upromise on the members behalf. 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, Upromise
Investments, Inc. (UII), a registered
broker-dealer,
and Upromise Investment Advisors, LLC (UIA),
provides transfer and servicing agent services and program
management associated with 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 and the net assets of the
investments within the 529 college-savings plans (transfer and
servicing agent/program management fees), and the number of
accounts for which Upromise provides record-keeping and account
servicing functions (an additional form of transfer and
servicing agent fees).
|
|
16.
|
Fair
Values of Financial Instruments
|
The Company uses estimates of fair value in applying various
accounting standards for its financial statements. Under GAAP,
fair value measurements are used in one of four ways:
|
|
|
|
|
In the consolidated balance sheet with changes in fair value
recorded in the consolidated statement of income;
|
|
|
|
In the consolidated balance sheet with changes in fair value
recorded in the other comprehensive income section of
stockholders equity;
|
F-64
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 lower
of cost or market 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.
|
In general, the Companys policy in estimating fair values
is to first obtain 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 the Companys liabilities) relying first
on observable data from active markets. Additional adjustments
may be made for factors including liquidity, bid/offer spreads,
etc., depending on current market conditions. 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.
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. For both
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/capital,
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. When possible, market
transactions are used to validate the model. In most cases these
are either infrequent or not observable.
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. Valuations were determined with discounted cash flow
models using the stated terms of the loans and observable market
yield curves and credit spreads. In addition, adjustments and
assumptions were made for liquidity, prepayment speeds and
defaults.
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 classified as held-to-maturity
are carried at cost. Fair values of all investments are
disclosed in the notes to 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 (such as U.S. Treasury-backed securities) were
valued through standard bond pricing models using observable
market yield curves adjusted for credit and liquidity spreads.
Fair value of investments in Commercial Paper, Asset Backed
Commercial Paper, or Demand Deposits that have a
F-65
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
16.
|
Fair
Values of Financial Instruments (Continued)
|
remaining term of less than 90 days when purchased, are
estimated at cost. Adjustments for liquidity and credit spreads
are made if determined to have a material impact.
Short-term
Borrowings and Long-term Borrowings
Borrowings are accounted for at cost in the financial statements
except 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. The fair values 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, forward foreign currency exchange
rates, volatilities and credit spreads specific to the Company
from active markets; or from quotes from broker-dealers.
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 matched securitized asset
balances. The fair value of some derivatives is determined using
counterparty valuations.
Residual
Interests
The Residual Interests are carried at fair value in the
financial statements. 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, and discount rates are used in
determining the fair value and require significant judgment. In
addition, market transactions are not available to validate the
models results. (See Note 9, Student Loan
Securitization, for further discussion regarding these
assumptions.)
F-66
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
16.
|
Fair
Values of Financial Instruments (Continued)
|
The following table summarizes the fair values of the
Companys financial assets and liabilities, including
derivative financial instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Fair
|
|
|
Carrying
|
|
|
|
|
|
Fair
|
|
|
Carrying
|
|
|
|
|
(Dollars in millions)
|
|
Value
|
|
|
Value
|
|
|
Difference
|
|
|
Value
|
|
|
Value
|
|
|
Difference
|
|
|
Earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP loans
|
|
$
|
111,552
|
|
|
$
|
109,335
|
|
|
$
|
2,217
|
|
|
$
|
87,797
|
|
|
$
|
86,165
|
|
|
$
|
1,632
|
|
Private Education Loans
|
|
|
17,289
|
|
|
|
14,818
|
|
|
|
2,471
|
|
|
|
12,063
|
|
|
|
9,755
|
|
|
|
2,308
|
|
Other loans
|
|
|
1,175
|
|
|
|
1,173
|
|
|
|
2
|
|
|
|
1,342
|
|
|
|
1,309
|
|
|
|
33
|
|
Cash and investments
|
|
|
15,146
|
|
|
|
15,146
|
|
|
|
|
|
|
|
8,608
|
|
|
|
8,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
145,162
|
|
|
|
140,472
|
|
|
|
4,690
|
|
|
|
109,810
|
|
|
|
105,837
|
|
|
|
3,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
35,828
|
|
|
|
35,947
|
|
|
|
119
|
|
|
|
3,529
|
|
|
|
3,528
|
|
|
|
(1
|
)
|
Long-term borrowings
|
|
|
105,227
|
|
|
|
111,099
|
|
|
|
5,872
|
|
|
|
104,613
|
|
|
|
104,559
|
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
141,055
|
|
|
|
147,046
|
|
|
|
5,991
|
|
|
|
108,142
|
|
|
|
108,087
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floor Income/Cap Contracts
|
|
|
(442
|
)
|
|
|
(442
|
)
|
|
|
|
|
|
|
(200
|
)
|
|
|
(200
|
)
|
|
|
|
|
Interest rate swaps
|
|
|
320
|
|
|
|
320
|
|
|
|
|
|
|
|
(475
|
)
|
|
|
(475
|
)
|
|
|
|
|
Cross currency interest rate swaps
|
|
|
3,643
|
|
|
|
3,643
|
|
|
|
|
|
|
|
1,440
|
|
|
|
1,440
|
|
|
|
|
|
Equity forwards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(213
|
)
|
|
|
(213
|
)
|
|
|
|
|
Futures contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residual interest in securitized assets
|
|
|
3,044
|
|
|
|
3,044
|
|
|
|
|
|
|
|
3,342
|
|
|
|
3,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of net asset fair value over carrying value
|
|
|
|
|
|
|
|
|
|
$
|
10,681
|
|
|
|
|
|
|
|
|
|
|
$
|
3,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant change in the difference between the fair value
and the carrying value of the Companys interest bearing
liabilities was due to increases in the credit spread on its
unsecured debt.
|
|
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 buying or originating student
loans. In the event that a line of credit is drawn upon, the
loan is collateralized by underlying student loans. The
contractual amount of these financial instruments represents the
maximum possible credit risk should the counterparty draw down
the commitment,
F-67
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
17.
|
Commitments,
Contingencies and Guarantees (Continued)
|
and the counterparty subsequently fails to perform according to
the terms of its contract with the Company. The Company also
records unrecognized tax benefits in accordance with the
FASBs FIN No. 48.
Commitments outstanding are summarized below:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Lines of credit
|
|
$
|
2,035,638
|
|
|
$
|
2,145,624
|
|
Unrecognized tax benefits
|
|
|
175,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,211,201
|
|
|
$
|
2,145,624
|
|
|
|
|
|
|
|
|
|
|
The following schedule summarizes expirations of commitments to
the earlier of call date or maturity date outstanding at
December 31, 2007.
|
|
|
|
|
|
|
Lines of
|
|
|
|
Credit
|
|
|
2008
|
|
$
|
485,680
|
|
2009
|
|
|
478,827
|
|
2010
|
|
|
871,130
|
|
2011
|
|
|
200,001
|
|
2012
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,035,638
|
|
|
|
|
|
|
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. As a result of the legislative
changes effective October 1, 2007, the Company is currently
reviewing its forward purchase contracts. At December 31,
2007, there were $5.4 billion originated loans (FFELP and
Private Education Loans) in the pipeline that the Company is
committed to purchase.
Contingencies
On September 11, 2007, the Office of the Inspector General
(OIG) of ED, confirmed that they planned to conduct
an audit to determine if the Company billed for special
allowance payments, under the 9.5 percent floor
calculation, in compliance with the Higher Education Act,
regulations and guidance issued by ED. The audit covers the
period from 2003 through 2006, and is currently confined to the
Companys Nellie Mae subsidiaries. The Company ceased
billing under the 9.5 percent floor calculation at the end
of 2006. The Company believes that its billing practices were
consistent with longstanding ED guidance, but there can be no
assurance that the OIG will not advocate an interpretation that
differs from the EDs previous guidance. The OIG has
audited other industry participants who billed for
9.5 percent SAP and in certain cases ED has disagreed
with the OIGs recommendation.
F-68
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
17.
|
Commitments,
Contingencies and Guarantees (Continued)
|
On January 31, 2008, a putative securities class action
lawsuit was filed against the Company and three senior officers
in federal court in the Southern District of New York
(Burch v. SLM Corporation, Albert L. Lord, C.E. Andrews,
and Robert S. Autor). The case has been assigned to the
Honorable William H. Pauley, III. The case purports to be
brought on behalf of all persons who purchased or otherwise
acquired the Common stock of the Company between
January 18, 2007 and January 3, 2008. The complaint
alleges that the Company and the named officers violated federal
securities laws by issuing a series of materially false and
misleading statements to the market throughout the
Class Period, which statements allegedly had the effect of
artificially inflating the market price of the Companys
securities. The complaint alleges that defendants caused the
Companys results for year-end 2006 and for the first three
quarters of 2007 to be materially misstated because the Company
failed to adequately accrue its loan loss provisions, 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. The complaint alleges violations of the Securities
Exchange Act of 1934 § 10(b) and § 20(a) and
Rule 10b-5.
The Company was served on February 5, 2008 and the case is
pending. A class has not yet been certified in the above action.
The Company is aware of press reports that other similar actions
may be filed, but has not been served with any other complaints.
The Company intends to vigorously assert its defenses.
The Company is also subject to various claims, lawsuits and
other actions that arise in the normal course of business. Most
of these matters are claims by borrowers disputing the manner in
which their loans have been processed or the accuracy of the
Companys reports to credit bureaus. In addition, the
collections subsidiaries in the Companys APG segment are
occasionally named in individual plaintiff or class action
lawsuits in which the plaintiffs allege that the Company has
violated a federal or state law in the process of collecting
their account. Management believes that these claims, lawsuits
and other actions will not have a material adverse effect on its
business, financial condition or results of operations. Finally,
from time to time, the Company receives information and document
requests from state attorney generals concerning certain of its
business practices. The Companys practice has been and
continues to be to cooperate with the state attorney generals
and to be responsive to any such requests.
Pension
Plans
As of December 31, 2007, 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 (grandfathered
participant) will receive the greater of the benefits
calculated under the prior plan, which uses a final average pay
plan method, or the current plan under the cash balance formula.
F-69
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
18.
|
Benefit
Plans (Continued)
|
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.
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, 2007 and
2006, respectively, and a statement of the funded status as of
December 31 of both years based on a December 31
measurement date.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
222,606
|
|
|
$
|
216,138
|
|
Service cost
|
|
|
7,100
|
|
|
|
8,291
|
|
Interest cost
|
|
|
12,337
|
|
|
|
11,445
|
|
Actuarial (gain)/loss
|
|
|
(1,777
|
)
|
|
|
(2,274
|
)
|
Plan settlements
|
|
|
(2,615
|
)
|
|
|
|
|
Special termination benefits
|
|
|
912
|
|
|
|
|
|
Benefits paid
|
|
|
(10,912
|
)
|
|
|
(10,994
|
)
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
$
|
227,651
|
|
|
$
|
222,606
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
218,369
|
|
|
$
|
197,972
|
|
Actual return on plan assets
|
|
|
23,850
|
|
|
|
31,805
|
|
Employer contribution
|
|
|
3,466
|
|
|
|
1,015
|
|
Plan settlements
|
|
|
(2,615
|
)
|
|
|
|
|
Benefits paid
|
|
|
(10,912
|
)
|
|
|
(10,994
|
)
|
Administrative payments
|
|
|
(1,460
|
)
|
|
|
(1,429
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
230,698
|
|
|
$
|
218,369
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
3,047
|
|
|
$
|
(4,237
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the statement of financial position
consist of:
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
$
|
30,322
|
|
|
$
|
22,520
|
|
Current liabilities
|
|
|
(6,227
|
)
|
|
|
(1,006
|
)
|
Noncurrent liabilities
|
|
|
(21,048
|
)
|
|
|
(25,751
|
)
|
|
|
|
|
|
|
|
|
|
Net amount recognized in statement of financial position after
SFAS No. 158
|
|
$
|
3,047
|
|
|
$
|
(4,237
|
)
|
|
|
|
|
|
|
|
|
|
Amounts not yet recognized in net periodic pension cost and
included in accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
|
|
|
|
(37
|
)
|
Accumulated gain
|
|
|
31,843
|
|
|
|
25,142
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
31,843
|
|
|
$
|
25,105
|
|
|
|
|
|
|
|
|
|
|
F-70
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
18.
|
Benefit
Plans (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Amounts expected to be reflected in net periodic pension cost
during the next fiscal year:
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
$
|
|
|
|
|
(37
|
)
|
Accumulated gain
|
|
|
1,450
|
|
|
|
757
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
1,450
|
|
|
$
|
720
|
|
|
|
|
|
|
|
|
|
|
Additional year-end information for plans with accumulated
benefit obligations in excess of plan assets:
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
27,275
|
|
|
$
|
26,757
|
|
Accumulated benefit obligation
|
|
|
26,592
|
|
|
|
24,819
|
|
Fair value of plan assets
|
|
|
|
|
|
|
|
|
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.
The accumulated benefit obligations of the qualified and
nonqualified defined benefit plans were $221 million and
$218 million at December 31, 2007 and 2006,
respectively. There are no plan assets in the 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Service cost benefits earned during the period
|
|
$
|
7,100
|
|
|
$
|
8,291
|
|
|
$
|
9,893
|
|
Interest cost on project benefit obligations
|
|
|
12,337
|
|
|
|
11,445
|
|
|
|
11,208
|
|
Expected return on plan assets
|
|
|
(17,975
|
)
|
|
|
(16,277
|
)
|
|
|
(16,434
|
)
|
Curtailment gain
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement loss
|
|
|
1,265
|
|
|
|
|
|
|
|
|
|
Special termination benefits
|
|
|
912
|
|
|
|
|
|
|
|
|
|
Net amortization and deferral
|
|
|
(719
|
)
|
|
|
494
|
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
2,920
|
|
|
$
|
3,953
|
|
|
$
|
4,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-71
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
18.
|
Benefit
Plans (Continued)
|
Assumptions
The weighted average assumptions used to determine the projected
accumulated benefit obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Discount rate
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
Expected return on plan assets
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
The weighted average assumptions used to determine the net
periodic pension cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Discount rate
|
|
|
5.75
|
%
|
|
|
5.50
|
%
|
Expected return on plan assets
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
To develop the long term rate of return for determining the net
periodic pension cost during the fiscal year ending
December 31, 2008, the Company expects to use an expected
return on assets of 5.25 percent considering the investment
policy changes moving plan assets into all fixed income
investments.
Plan
Assets
The weighted average asset allocations at December 31, 2007
and 2006, by asset category, are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Asset Category
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
%
|
|
|
78
|
%
|
Fixed income securities
|
|
|
62
|
|
|
|
18
|
|
Cash equivalents
|
|
|
38
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Investment
Policy and Strategy
During 2007, the investment strategy was revised with the
principle objective of preserving funding status. Based on the
current funded status of the plan and the ceasing of benefit
accruals effective in 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. As of December 31,
2007, the plan is invested 62 percent in bonds and
38 percent in cash, considering the traditional and cash
balance nature of plan liabilities. During 2008, the Company
will be reviewing alternative implementation strategies.
Cash
Flows
The Company did not contribute to its qualified pension plan in
2007 and does not expect to contribute in 2008. There are no
plan assets in the nonqualified plans due to the nature of the
plans, and benefits are paid
F-72
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
18.
|
Benefit
Plans (Continued)
|
from corporate assets when due to the participant. It is
estimated that approximately $6 million will be paid in
2008 for these benefits. No plan assets are expected to be
returned to the employer during 2008.
Estimated
Future Benefit Payments
The following qualified and nonqualified plan benefit payments,
which reflect future service as appropriate, are expected to be
paid:
|
|
|
|
|
2008
|
|
$
|
21,572
|
|
2009
|
|
|
17,384
|
|
2010
|
|
|
17,681
|
|
2011
|
|
|
17,372
|
|
2012
|
|
|
15,856
|
|
2013-2017
|
|
|
82,710
|
|
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 hired before August 1, 2007,
excluding employees of Asset Performance Group and Upromise.
Participating employees as of July 1, 2005, may
contribute up to 75 percent of eligible compensation;
between January 1, 2005 and June 30, 2005 the maximum
deferral percentage was 25 percent. Up to 6 percent of
these contributions are matched 100 percent by the Company
after one year of service. Effective July 1, 2004, in
conjunction with the defined benefit plan change, certain
eligible employees began receiving a 2 percent core
employer contribution. As additional employees phase out of the
Pension Plans in July 2009, they will begin receiving the
2 percent core employer contribution.
The Sallie Mae 401(k) Retirement Savings Plan (the
Retirement Savings Plan) covers substantially all
employees of the Company hired after August 1, 2007,
excluding employees of Upromise. The Retirement Savings Plan was
formerly the Sallie Mae DMO 401(k) Savings Plan (the DMO
Plan), which covered substantially all employees of Debt
Management Operations, now referred to as Asset Performance
Group. Participating employees as of July 1, 2005, may
contribute up to 75 percent of eligible compensation;
between January 1, 2005 and June 30, 2005, the maximum
deferral percentage was 25 percent. In conjunction with the
August 1, 2007 changes, the Retirement Savings Plan
increased the match formula to up to 100 percent of the
first 5 percent of contributions after one year of service.
Formerly the DMO Plan had a match formula of 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.
In conjunction with the 2006 acquisition of Upromise, the
Company maintained the Upromise, Inc. 401(k) Plan. Eligible
employees can contribute up to 60 percent of eligible
compensation. For the 2007 and 2006 plan years, the Company
provided matching contributions of $1 and $.50 up to a maximum
of $1,000 and $500, respectively, to eligible employees who were
employed on the last day of the plan year. Effective
January 1, 2008, eligible employees of Upromise became
participants of the Sallie Mae 401(k) Retirement Savings Plan.
The Company also maintains a non-qualified plan to ensure that
designated participants receive the full amount of benefits to
which they would have been entitled under the 401(k) Plan except
for limits on compensation imposed by the Internal Revenue Code.
F-73
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
18.
|
Benefit
Plans (Continued)
|
Total expenses related to the 401(k) plans were
$22 million, $21 million and $18 million in 2007,
2006 and 2005, respectively.
Reconciliations of the statutory U.S. federal income tax
rates to the Companys effective tax rate follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Equity forward contracts
|
|
|
(113.2
|
)
|
|
|
6.3
|
|
|
|
(2.0
|
)
|
State tax, net of federal benefit
|
|
|
(3.7
|
)
|
|
|
1.1
|
|
|
|
1.2
|
|
Capitalized transaction costs
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(1.1
|
)
|
|
|
(.6
|
)
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(85.6
|
)%
|
|
|
41.8
|
%
|
|
|
34.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense for the years ended December 31, 2007,
2006, and 2005 consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,027,087
|
|
|
$
|
747,573
|
|
|
$
|
768,865
|
|
State
|
|
|
53,865
|
|
|
|
49,399
|
|
|
|
34,798
|
|
Foreign
|
|
|
1,045
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
1,081,997
|
|
|
|
797,069
|
|
|
|
803,663
|
|
Deferred provision/(benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(642,393
|
)
|
|
|
52,866
|
|
|
|
(80,077
|
)
|
State
|
|
|
(26,840
|
)
|
|
|
(15,617
|
)
|
|
|
5,181
|
|
Foreign
|
|
|
(481
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision/(benefit)
|
|
|
(669,714
|
)
|
|
|
37,242
|
|
|
|
(74,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax expense
|
|
$
|
412,283
|
|
|
$
|
834,311
|
|
|
$
|
728,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-74
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
19.
|
Income
Taxes (Continued)
|
At December 31, 2007 and 2006, the tax effect of temporary
differences that give rise to deferred tax assets and
liabilities include the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Loan reserves
|
|
$
|
867,840
|
|
|
$
|
321,467
|
|
Market value adjustments on investments
|
|
|
322,001
|
|
|
|
279,347
|
|
Deferred revenue
|
|
|
61,780
|
|
|
|
59,825
|
|
Accrued expenses not currently deductible
|
|
|
60,821
|
|
|
|
57,863
|
|
Stock-based compensation plans
|
|
|
54,137
|
|
|
|
34,054
|
|
Operating loss and credit carryovers
|
|
|
43,600
|
|
|
|
57,125
|
|
Warrants issuance
|
|
|
34,105
|
|
|
|
42,132
|
|
Partnership income
|
|
|
15,433
|
|
|
|
21,629
|
|
Loan origination services
|
|
|
9,001
|
|
|
|
12,652
|
|
In-substance defeasance transactions
|
|
|
18,074
|
|
|
|
|
|
Other
|
|
|
28,959
|
|
|
|
29,664
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
1,515,751
|
|
|
|
915,758
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Securitization transactions
|
|
|
370,378
|
|
|
|
387,290
|
|
Unrealized investment gains recorded to other comprehensive
income
|
|
|
124,459
|
|
|
|
183,684
|
|
Leases
|
|
|
83,286
|
|
|
|
92,382
|
|
Depreciation/amortization
|
|
|
23,031
|
|
|
|
57,856
|
|
Contingent payment debt instruments
|
|
|
|
|
|
|
100,632
|
|
In-substance defeasance transactions
|
|
|
|
|
|
|
9,930
|
|
Other
|
|
|
7,247
|
|
|
|
9,085
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
608,401
|
|
|
|
840,859
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
907,350
|
|
|
$
|
74,899
|
|
|
|
|
|
|
|
|
|
|
Included in other deferred tax assets is a valuation allowance
of $7,635 and $3,778 as of December 31, 2007 and 2006,
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, 2007, the Company has federal net
operating loss carryforwards of $89,052 which begin to expire in
2022, apportioned state net operating loss carryforwards of
$129,080 which begin to expire in 2008, and federal and state
credit carryovers of $1,921 which begin to expire in 2021.
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
F-75
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
19.
|
Income
Taxes (Continued)
|
January 1, 2007 balance of retained earnings. In addition,
unrecognized tax benefits of $3 million are currently
treated as a pending refund claim, reducing the balance of total
unrecognized tax benefits that if recognized would affect the
effective tax rate.
A reconciliation of unrecognized tax benefits from
January 1, 2007 to December 31, 2007 is as follows:
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
113.3
|
|
Increases resulting from tax positions taken during a prior
period
|
|
|
86.5
|
|
Decreases resulting from tax positions taken during a prior
period
|
|
|
(30.0
|
)
|
Increases/(decreases) resulting from tax positions taken during
the current period
|
|
|
.3
|
|
Decreases related to settlements with taxing authorities
|
|
|
(30.0
|
)
|
Increases related to settlements with taxing authorities
|
|
|
42.3
|
|
Reductions related to the lapse of statute of limitations
|
|
|
(7.6
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
174.8
|
|
|
|
|
|
|
During 2007, the Company adjusted its federal unrecognized tax
benefits to reflect the outcome of several issues that were
addressed with the IRS as a part of the
2003-2004
exam cycle, primarily regarding the timing of recognition of
certain income and deduction items. Several other less
significant amounts of uncertain tax benefits were also added
during the year. In total, as of December 31, 2007, the
Company has gross unrecognized tax benefits of
$175 million, unrecognized tax benefits that, if
recognized, would impact the effective tax rate of
$35 million, as well as total interest and penalties
recognized, net of tax benefit, in the consolidated statements
of income and consolidated balance sheet of $18 million.
Reasonably
Possible Significant Increases/Decreases within Twelve
Months
U.S.
Federal Tax Uncertainties
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 remains open pending the
conclusion of the separate IRS audit of an entity in which the
Company is an investor (any results of which are not expected to
have a material impact on the Companys unrecognized tax
benefit amounts). 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. An estimate of the range of the
possible change to the balance of the Companys
unrecognized tax benefits that may result from resolution of the
remaining unagreed item cannot at this time be made, pending
further development of the appeals process.
In addition, the IRS began the examination of the Companys
2005 and 2006 federal income tax returns during the third
quarter of 2007. It is reasonably possible that issues that
arise during the exam may create the need for an increase in
unrecognized tax benefits. Until the exam proceeds further, an
estimate of any such amounts cannot currently be made.
Other
Tax Uncertainties
In the event that the Company is not contacted for exam by
additional tax authorities by the end of 2008, it is reasonably
possible that there will be a decrease in the Companys
unrecognized tax position liability, due
F-76
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
19.
|
Income
Taxes (Continued)
|
to the tolling of various statute of limitations periods. When
considering both tax and interest amounts, such change could be
approximately $3 million to $5 million.
Tax Years
Remaining Subject to Exam
The Company or one of its subsidiaries files income tax returns
at the U.S. federal level, in most U.S. states, and
various foreign jurisdictions. U.S. federal income tax
returns filed for years prior to 2003 have been audited and are
now resolved. As shown in the table below, the Companys
primary operating subsidiary has been audited by the listed
states through the year shown, again with all issues resolved.
Other combinations of subsidiaries, tax years, and jurisdictions
remain open for review, subject to statute of limitations
periods (typically 3 to 4 prior years).
|
|
|
|
|
State
|
|
Year audited through
|
|
|
Florida
|
|
|
2000
|
|
Indiana
|
|
|
2000
|
|
Pennsylvania
|
|
|
2000
|
|
California
|
|
|
2002
|
|
Missouri
|
|
|
2003
|
|
New York
|
|
|
2003
|
|
Texas
|
|
|
2004
|
|
The Company recognizes interest accrued related to unrecognized
tax benefits in income tax expense and penalties in operating
expenses.
The Company has two primary operating segments as defined in
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information 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 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
reporting segment.
The management reporting process measures the performance of the
Companys operating segments based on the management
structure of the Company as well as the methodology used by
management to evaluate performance and allocate resources.
Management, including the Companys chief operating
decision 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 on Core
Earnings net income. Accordingly, information regarding
the Companys reportable segments is provided based on
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
F-77
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
20.
|
Segment
Reporting (Continued)
|
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, 2007, 2006 and 2005.
USA Funds is the Companys largest customer in both the APG
and Corporate and Other segments. During the years ended
December 31, 2007, 2006 and 2005, USA Funds accounted for
35 percent, 31 percent and 36 percent,
respectively, of the aggregate revenues generated by the
Companys APG and Corporate and Other reportable segments.
No other customers accounted for more than 10 percent of
total revenues in those segments for the years mentioned.
Lending
In the Companys Lending business segment, the Company
originates and acquires both federally guaranteed student loans,
which are administered by ED, and Private Education Loans, which
are not federally guaranteed. Private Education Loans are
primarily used by borrowers to supplement FFELP loans to meet
the rising cost of education. As of December 31, 2007, the
Company manages $163.6 billion of student loans, of which
$135.2 billion or 83 percent are federally insured,
and serves over 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 2007, the Company originated
$848 million in mortgage and consumer loans and its
mortgage and consumer loan portfolio totaled $545.4 million
at December 31, 2007, of which $19.4 million pertains
to mortgages in the held for sale portfolio.
In addition to its federally insured FFELP products, the Company
originates and acquires Private Education Loans which consist of
two general types: (1) those that are designed to bridge
the gap between the cost of higher education and the amount
financed through either capped federally insured loans or the
borrowers resources, and (2) those that are used to
meet the needs of students 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 Stafford loan and as such are
marketed through the same channel as FFELP loans by the same
sales force. Unlike FFELP loans, Private Education Loans are
subject to the full credit risk of the borrower. The Company
manages this additional risk through industry-tested loan
underwriting standards and a combination of higher interest
rates and loan origination fees that compensate the Company for
the higher risk.
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 as well as sub-performing and
non-performing mortgage loans. The Companys APG operating
segment serves the student loan marketplace through a broad
array of default management services
F-78
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
20.
|
Segment
Reporting (Continued)
|
on a contingency fee or other pay-for-performance basis to 14
FFELP guarantors and for campus based programs.
In addition to collecting on its own purchased receivables and
mortgage loans, the APG operating segment provides receivable
management and collection services for large federal agencies,
credit card clients and other holders of consumer debt.
Corporate
and Other
The Companys Corporate and Other business segment includes
the aggregate activity of its smaller operating segments
primarily its Guarantor Servicing, 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 an affinity marketing program
and also provides 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-79
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
20.
|
Segment
Reporting (Continued)
|
Segment
Results and Reconciliations to GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Total Core
|
|
|
|
|
|
Total
|
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Earnings
|
|
|
Adjustments(3)
|
|
|
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
|
|
Guarantor servicing fees
|
|
|
|
|
|
|
|
|
|
|
156
|
|
|
|
156
|
|
|
|
|
|
|
|
156
|
|
Collections revenue
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
269
|
|
|
|
3
|
|
|
|
272
|
|
Other income
|
|
|
194
|
|
|
|
|
|
|
|
218
|
|
|
|
412
|
|
|
|
(679
|
)
|
|
|
(267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
194
|
|
|
|
605
|
|
|
|
374
|
|
|
|
1,173
|
|
|
|
(676
|
)
|
|
|
497
|
|
Operating
expenses(1)
|
|
|
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(2)
|
|
|
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) |
|
Operating expenses for the Lending,
APG, and Corporate and Other reportable segments include
$31 million, $11 million, and $15 million,
respectively, of stock option compensation expense, and
$19 million, $2 million and $2 million,
respectively, of severance expense.
|
|
(2) |
|
Income taxes are based on a
percentage of net income before tax for the individual
reportable segment.
|
|
(3) |
|
Core Earnings
adjustments to GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Net Impact of
|
|
|
Net Impact of
|
|
|
|
|
|
Net Impact
|
|
|
|
|
|
|
Securitization
|
|
|
Derivative
|
|
|
Net Impact of
|
|
|
of Acquired
|
|
|
|
|
|
|
Accounting
|
|
|
Accounting
|
|
|
Floor Income
|
|
|
Intangibles
|
|
|
Total
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor servicing fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collections revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
683
|
|
|
|
(1,359
|
)
|
|
|
|
|
|
|
|
|
|
|
(676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss)
|
|
|
683
|
|
|
|
(1,359
|
)
|
|
|
|
|
|
|
|
|
|
|
(676
|
)
|
Operating 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-80
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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(3)
|
|
|
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
|
|
Guarantor servicing fees
|
|
|
|
|
|
|
|
|
|
|
132
|
|
|
|
132
|
|
|
|
|
|
|
|
132
|
|
Collections revenue
|
|
|
|
|
|
|
239
|
|
|
|
|
|
|
|
239
|
|
|
|
1
|
|
|
|
240
|
|
Other income
|
|
|
177
|
|
|
|
|
|
|
|
155
|
|
|
|
332
|
|
|
|
1,073
|
|
|
|
1,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
177
|
|
|
|
636
|
|
|
|
287
|
|
|
|
1,100
|
|
|
|
1,074
|
|
|
|
2,174
|
|
Operating
expenses(1)
|
|
|
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(2)
|
|
|
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) |
|
Operating expenses for the Lending,
APG, and Corporate and Other reportable segments include
$34 million, $12 million, and $17 million,
respectively, of stock option compensation expense.
|
|
(2) |
|
Income taxes are based on a
percentage of net income before tax for the individual
reportable segment.
|
|
(3) |
|
Core Earnings
adjustments to GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
Net Impact of
|
|
|
Net Impact of
|
|
|
|
|
|
Net Impact
|
|
|
|
|
|
|
Securitization
|
|
|
Derivative
|
|
|
Net Impact of
|
|
|
of Acquired
|
|
|
|
|
|
|
Accounting
|
|
|
Accounting
|
|
|
Floor Income
|
|
|
Intangibles
|
|
|
Total
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor servicing fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collections revenue
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
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-81
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
20.
|
Segment
Reporting (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Total Core
|
|
|
|
|
|
Total
|
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Earnings
|
|
|
Adjustments(2)
|
|
|
GAAP
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
2,298
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,298
|
|
|
$
|
(1,283
|
)
|
|
$
|
1,015
|
|
FFELP Consolidation Loans
|
|
|
3,014
|
|
|
|
|
|
|
|
|
|
|
|
3,014
|
|
|
|
(514
|
)
|
|
|
2,500
|
|
Private Education Loans
|
|
|
1,160
|
|
|
|
|
|
|
|
|
|
|
|
1,160
|
|
|
|
(526
|
)
|
|
|
634
|
|
Other loans
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
85
|
|
|
|
|
|
|
|
85
|
|
Cash and investments
|
|
|
396
|
|
|
|
|
|
|
|
5
|
|
|
|
401
|
|
|
|
(125
|
)
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
6,953
|
|
|
|
|
|
|
|
5
|
|
|
|
6,958
|
|
|
|
(2,448
|
)
|
|
|
4,510
|
|
Total interest expense
|
|
|
4,798
|
|
|
|
19
|
|
|
|
6
|
|
|
|
4,823
|
|
|
|
(1,764
|
)
|
|
|
3,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
2,155
|
|
|
|
(19
|
)
|
|
|
(1
|
)
|
|
|
2,135
|
|
|
|
(684
|
)
|
|
|
1,451
|
|
Less: provisions for loan losses
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
138
|
|
|
|
65
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
2,017
|
|
|
|
(19
|
)
|
|
|
(1
|
)
|
|
|
1,997
|
|
|
|
(749
|
)
|
|
|
1,248
|
|
Contingency fee revenue
|
|
|
|
|
|
|
360
|
|
|
|
|
|
|
|
360
|
|
|
|
|
|
|
|
360
|
|
Guarantor servicing fees
|
|
|
|
|
|
|
|
|
|
|
115
|
|
|
|
115
|
|
|
|
|
|
|
|
115
|
|
Collections revenue
|
|
|
|
|
|
|
167
|
|
|
|
|
|
|
|
167
|
|
|
|
|
|
|
|
167
|
|
Other income
|
|
|
111
|
|
|
|
|
|
|
|
125
|
|
|
|
236
|
|
|
|
1,129
|
|
|
|
1,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
111
|
|
|
|
527
|
|
|
|
240
|
|
|
|
878
|
|
|
|
1,129
|
|
|
|
2,007
|
|
Operating expenses
|
|
|
547
|
|
|
|
288
|
|
|
|
235
|
|
|
|
1,070
|
|
|
|
68
|
|
|
|
1,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
1,581
|
|
|
|
220
|
|
|
|
4
|
|
|
|
1,805
|
|
|
|
312
|
|
|
|
2,117
|
|
Income tax
expense(1)
|
|
|
586
|
|
|
|
81
|
|
|
|
1
|
|
|
|
668
|
|
|
|
61
|
|
|
|
729
|
|
Minority interest in net earnings of subsidiaries
|
|
|
2
|
|
|
|
4
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
993
|
|
|
$
|
135
|
|
|
$
|
3
|
|
|
$
|
1,131
|
|
|
$
|
251
|
|
|
$
|
1,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2005
|
|
|
|
Net Impact of
|
|
|
Net Impact of
|
|
|
|
|
|
Net Impact
|
|
|
|
|
|
|
Securitization
|
|
|
Derivative
|
|
|
Net Impact of
|
|
|
of Acquired
|
|
|
|
|
|
|
Accounting
|
|
|
Accounting
|
|
|
Floor Income
|
|
|
Intangibles
|
|
|
Total
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
$
|
(867
|
)
|
|
$
|
387
|
|
|
$
|
(204
|
)
|
|
$
|
|
|
|
$
|
(684
|
)
|
Less: provisions for loan losses
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
(932
|
)
|
|
|
387
|
|
|
|
(204
|
)
|
|
|
|
|
|
|
(749
|
)
|
Contingency fee revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor servicing fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collections revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
879
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
1,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
879
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
1,129
|
|
Operating expenses
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax Core Earnings adjustments to GAAP
|
|
$
|
(60
|
)
|
|
$
|
637
|
|
|
$
|
(204
|
)
|
|
$
|
(61
|
)
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings adjustments to GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-82
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 related to the
Companys student loans, and certain other items that
management does not consider in evaluating the Companys
operating results. The following table reflects aggregate
adjustments associated with these areas for the years ended
December 31, 2007, 2006, and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
Core Earnings adjustments to GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact of securitization
accounting(1)
|
|
$
|
247
|
|
|
$
|
532
|
|
|
$
|
(60
|
)
|
Net impact of derivative
accounting(2)
|
|
|
(1,341
|
)
|
|
|
(229
|
)
|
|
|
637
|
|
Net impact of Floor
Income(3)
|
|
|
(169
|
)
|
|
|
(209
|
)
|
|
|
(204
|
)
|
Net impact of acquired
intangibles(4)
|
|
|
(112
|
)
|
|
|
(94
|
)
|
|
|
(61
|
)
|
Net tax
effect(5)
|
|
|
(81
|
)
|
|
|
(96
|
)
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings adjustments to GAAP
|
|
$
|
(1,456
|
)
|
|
$
|
(96
|
)
|
|
$
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 results primarily from the exclusion of the permanent
income tax impact of the equity forward contracts.
|
F-83
SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts, unless
otherwise stated)
|
|
21.
|
Quarterly
Financial Information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Operating expenses
|
|
|
356,174
|
|
|
|
398,800
|
|
|
|
355,899
|
|
|
|
440,974
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Net interest income
|
|
$
|
387,521
|
|
|
$
|
356,805
|
|
|
$
|
337,821
|
|
|
$
|
371,970
|
|
Less: provisions for loan losses
|
|
|
60,319
|
|
|
|
67,396
|
|
|
|
67,242
|
|
|
|
92,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provisions for loan losses
|
|
|
327,202
|
|
|
|
289,409
|
|
|
|
270,579
|
|
|
|
279,965
|
|
Gains (losses) on derivative and hedging activities, net
|
|
|
(86,739
|
)
|
|
|
122,719
|
|
|
|
(130,855
|
)
|
|
|
(244,521
|
)
|
Other income
|
|
|
372,582
|
|
|
|
1,011,435
|
|
|
|
682,027
|
|
|
|
447,623
|
|
Operating expenses
|
|
|
323,309
|
|
|
|
316,602
|
|
|
|
353,494
|
|
|
|
352,747
|
|
Income taxes
|
|
|
137,045
|
|
|
|
381,828
|
|
|
|
203,686
|
|
|
|
111,752
|
|
Minority interest in net earnings of subsidiaries
|
|
|
1,090
|
|
|
|
1,355
|
|
|
|
1,099
|
|
|
|
463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
151,601
|
|
|
|
723,778
|
|
|
|
263,472
|
|
|
|
18,105
|
|
Preferred stock dividends
|
|
|
8,301
|
|
|
|
8,787
|
|
|
|
9,221
|
|
|
|
9,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stock
|
|
$
|
143,300
|
|
|
$
|
714,991
|
|
|
$
|
254,251
|
|
|
$
|
8,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
.35
|
|
|
$
|
1.74
|
|
|
$
|
.62
|
|
|
$
|
.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
.34
|
|
|
$
|
1.52
|
|
|
$
|
.60
|
|
|
$
|
.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-84
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 borrowers school prior to the end of the
academic period;
|
|
|
|
false certification by the borrowers school of his
eligibility for the loan; 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 Reconciliation Act of 2005 (HERA 2005),
which was signed into law February 8, 2006 as part of the
Deficit Reduction Act, Public Law
109-171.
Since HERA 2005 the President signed into law the College Cost
Reduction and Access Act (CCRAA), Public Law
110-84 on
September 27, 2007, and ED amended the FFELP regulations on
November 1, 2007.
A-1
Other recent amendments since the program was previously
reauthorized by the Higher Education Amendments of 1998, include
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 FFELP
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 Federal Direct FFELP
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 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.
|
|
|
|
Repeals limitations on special allowance for PLUS loans made on
and after January 1, 2000.
|
A-2
|
|
|
|
|
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, 2011
|
A-3
|
|
|
|
|
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; and
|
|
|
|
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 parent PLUS which
includes the potential for loan forgiveness after 25 years.
|
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-4
Special
Allowance Payments
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 special allowance payment
for each calendar quarter.
The special allowance payment 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 special allowance payment 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.
A-5
If the result is negative, the special allowance payment is zero.
|
|
|
Date of First Disbursement
|
|
Special Allowance Margin
|
|
From 01/01/00 through 09/30/07
|
|
1.74% for Stafford Loans that are in In-School, Grace or
Deferment
|
|
|
2.34% for Stafford Loans that are in Repayment
|
|
|
2.64% for PLUS and FFELP Consolidation Loans
|
From 10/01/07 and after
|
|
1.19% for Stafford Loans that are in In-School, Grace or
Deferment
|
|
|
1.79% for Stafford Loans that are in Repayment and PLUS
|
|
|
2.09% for FFELP Consolidation Loans
|
|
|
Note: The margins for loans held by an eligible not-for-profit
holder 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-6
|
|
|
|
|
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-7
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 current 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-8
The following chart shows historic loan limits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 for 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-9
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. Only 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.
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
special allowance payment 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 form 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
A-10
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. 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 FFELP 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-11
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 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.
A-12
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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.
A-13
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.
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Collection Retention
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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.
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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.
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