10-Q 1 d313786d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

(Mark One)

  þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
       OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

or

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
       OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     

Commission File Number: 001-13251

 

 

SLM Corporation

(Exact name of registrant as specified in its charter)

 

Delaware   52-2013874

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

300 Continental Drive, Newark, Delaware   19713
(Address of principal executive offices)   (Zip Code)

(302) 283-8000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ        No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer    þ          Accelerated filer      ¨     

Non-accelerated filer

   ¨   (Do not check if a smaller reporting company)        Smaller reporting company      ¨     

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ        No  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨        No  þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class

  

Outstanding at April 30, 2012

Common stock, $.20 par value

   487,747,222 shares

 

 

 


Table of Contents

SLM CORPORATION

Table of Contents

 

Part I. Financial Information

  

Item 1.

  

Financial Statements

     2   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     37   

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     72   

Item 4.

  

Controls and Procedures

     77   

PART II. Other Information

  

Item 1.

  

Legal Proceedings

     78   

Item 1A.

  

Risk Factors

     78   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     78   

Item 3.

  

Defaults Upon Senior Securities

     78   

Item 4.

  

Mine Safety Disclosures

     78   

Item 5.

  

Other Information

     78   

Item 6.

  

Exhibits

     79   

 

1


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

SLM CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share amounts)

(Unaudited)

 

     March 31,
2012
    December 31,
2011
 

Assets

    

FFELP Loans (net of allowance for losses of $180 and $187, respectively)

   $ 135,934      $ 138,130   

Private Education Loans (net of allowance for losses of $2,190 and $2,171 respectively)

     36,732        36,290   

Investments

    

Available-for-sale

     64        70   

Other

     935        1,052   
  

 

 

   

 

 

 

Total investments

     999        1,122   

Cash and cash equivalents

     3,043        2,794   

Restricted cash and investments

     5,884        5,873   

Goodwill and acquired intangible assets, net

     471        478   

Other assets

     8,629        8,658   
  

 

 

   

 

 

 

Total assets

   $ 191,692      $ 193,345   
  

 

 

   

 

 

 

Liabilities

    

Short-term borrowings

   $ 27,123      $ 29,573   

Long-term borrowings

     155,588        154,393   

Other liabilities

     3,936        4,128   
  

 

 

   

 

 

 

Total liabilities

     186,647        188,094   
  

 

 

   

 

 

 

Commitments and contingencies

    

Equity

    

Preferred stock, par value $.20 per share, 20 million shares authorized

    

Series A: 3.3 million and 3.3 million shares issued, respectively, at stated value of $50 per share

     165        165   

Series B: 4 million and 4 million shares issued, respectively, at stated value of $100 per share

     400        400   

Common stock, par value $.20 per share, 1.125 billion shares authorized: 532 million and 529 million shares issued, respectively

     106        106   

Additional paid-in capital

     4,182        4,136   

Accumulated other comprehensive loss (net of tax benefit of $6 and $8, respectively)

     (9     (14

Retained earnings

     814        770   
  

 

 

   

 

 

 

Total SLM Corporation stockholders’ equity before treasury stock

     5,658        5,563   

Less: Common stock held in treasury at cost: 39 million and 20 million shares, respectively

     (620     (320
  

 

 

   

 

 

 

Total SLM Corporation stockholders’ equity

     5,038        5,243   

Noncontrolling interest

     7        8   
  

 

 

   

 

 

 

Total equity

     5,045        5,251   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 191,692      $ 193,345   
  

 

 

   

 

 

 

Supplemental information — assets and liabilities of consolidated variable interest entities:

 

     March 31,
2012
     December 31,
2011
 

FFELP Loans

   $ 133,092       $ 135,536   

Private Education Loans

     24,884         24,962   

Restricted cash and investments

     5,715         5,609   

Other assets

     2,640         2,638   

Short-term borrowings

     18,539         21,313   

Long-term borrowings

     134,973         134,533   
  

 

 

    

 

 

 

Net assets of consolidated variable interest entities

   $ 12,819       $ 12,899   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

2


Table of Contents

SLM CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share amounts)

(Unaudited)

 

     Three Months Ended
March  31,
 
         2012             2011      

Interest income:

    

FFELP Loans

   $ 842      $ 877   

Private Education Loans

     625        604   

Other loans

     5        6   

Cash and investments

     5        5   
  

 

 

   

 

 

 

Total interest income

     1,477        1,492   

Total interest expense

     666        594   
  

 

 

   

 

 

 

Net interest income

     811        898   

Less: provisions for loan losses

     253        303   
  

 

 

   

 

 

 

Net interest income after provisions for loan losses

     558        595   
  

 

 

   

 

 

 

Other income (loss):

    

Losses on derivative and hedging activities, net

     (372     (242

Servicing revenue

     97        98   

Contingency revenue

     90        78   

Gains on debt repurchases

     37        38   

Other

     40        22   
  

 

 

   

 

 

 

Total other income (loss)

     (108     (6
  

 

 

   

 

 

 

Expenses:

    

Salaries and benefits

     127        135   

Other operating expenses

     135        168   
  

 

 

   

 

 

 

Total operating expenses

     262        303   

Goodwill and acquired intangible assets impairment and amortization expense

     5        6   

Restructuring expenses

     5        4   
  

 

 

   

 

 

 

Total expenses

     272        313   
  

 

 

   

 

 

 

Income from continuing operations, before income tax expense

     178        276   

Income tax expense

     67        99   
  

 

 

   

 

 

 

Net income from continuing operations

     111        177   

Loss from discontinued operations, net of tax benefit

            (2
  

 

 

   

 

 

 

Net income

     111        175   

Less: net loss attributable to noncontrolling interest

     (1       
  

 

 

   

 

 

 

Net income attributable to SLM Corporation

     112        175   

Preferred stock dividends

     5        4   
  

 

 

   

 

 

 

Net income attributable to SLM Corporation common stock

   $ 107      $ 171   
  

 

 

   

 

 

 

Basic earnings per common share attributable to SLM Corporation:

    

Continuing operations

   $ .21      $ .32   

Discontinued operations

              
  

 

 

   

 

 

 

Total

   $ .21      $ .32   
  

 

 

   

 

 

 

Average common shares outstanding

     503        527   
  

 

 

   

 

 

 

Diluted earnings per common share attributable to SLM Corporation:

    

Continuing operations

   $ .21      $ .32   

Discontinued operations

              
  

 

 

   

 

 

 

Total

   $ .21      $ .32   
  

 

 

   

 

 

 

Average common and common equivalent shares outstanding

     510        532   
  

 

 

   

 

 

 

Dividends per common share attributable to SLM Corporation

   $ .125      $   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

SLM CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

 

     Three Months Ended March 31,  
         2012             2011      

Net income

   $ 111      $ 175   

Other comprehensive income (loss):

    

Unrealized gains/(losses) on derivatives:

    

Unrealized hedging gains/(losses) on derivatives

     (2     (3

Reclassification adjustments for derivative losses included in net income

     10        17   

Income tax expense

     (3     (5
  

 

 

   

 

 

 

Other comprehensive income, net of tax

     5        9   
  

 

 

   

 

 

 

Comprehensive income

     116        184   

Less: comprehensive loss attributable to noncontrolling interest

     (1       
  

 

 

   

 

 

 

Total comprehensive income attributable to SLM Corporation

   $ 117      $ 184   
  

 

 

   

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

SLM CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in millions, except share and per share amounts)

(Unaudited)

 

    Preferred
Stock
Shares
    Common Stock Shares     Preferred
Stock
    Common
Stock
    Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Treasury
Stock
    Total
Stockholders’
Equity
    Noncontrolling
Interest
    Total
Equity
 
      Issued     Treasury     Outstanding                    

Balance at December 31, 2010

    7,300,000        595,263,474        (68,319,589     526,943,885      $ 565      $ 119      $ 5,940      $ (45   $ 309      $ (1,876   $ 5,012      $      $ 5,012   

Comprehensive income:

                         

Net income

                    175          175          175   

Other comprehensive income, net of tax

                  9            9          9   
                     

 

 

     

 

 

 

Total comprehensive income

                        184          184   

Cash dividends:

                         

Preferred stock, series A ($.87 per share)

                    (3       (3       (3

Preferred stock, series B ($.32 per share)

                    (1       (1       (1

Issuance of common shares

      2,304,659          2,304,659          1        22              23          23   

Retirement of common stock in treasury

      (70,074,369     70,074,369            (14     (1,890         1,904                   

Tax benefit related to employee stock-based compensation plans

                (5           (5       (5

Stock-based compensation expense

                25              25          25   

Shares repurchased related to employee stock-based compensation plans

        (1,754,780     (1,754,780               (28     (28       (28
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2011

    7,300,000        527,493,764               527,493,764      $ 565      $ 106      $ 4,092      $ (36   $ 480      $      $ 5,207      $      $ 5,207   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

    7,300,000        529,075,322        (20,323,997     508,751,325      $ 565      $ 106      $ 4,136      $ (14   $ 770      $ (320   $ 5,243      $ 8      $ 5,251   

Comprehensive income:

                         

Net income (loss)

                    112          112        (1     111   

Other comprehensive income, net of tax

                  5            5          5   
                     

 

 

   

 

 

   

 

 

 

Total comprehensive income

                        117        (1     116   

Cash dividends:

                         

Common stock ($.125 per share)

                    (63       (63       (63

Preferred stock, series A ($.87 per share)

                    (3       (3       (3

Preferred stock, series B ($.57 per share)

                    (2       (2       (2

Issuance of common shares

      3,171,484          3,171,484            27              27          27   

Tax benefit related to employee stock-based compensation plans

                (3           (3       (3

Stock-based compensation expense

                22              22          22   

Common stock repurchased

        (16,703,182     (16,703,182               (268     (268       (268

Shares repurchased related to employee stock-based compensation plans

        (2,056,977     (2,056,977               (32     (32       (32
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

    7,300,000        532,246,806        (39,084,156     493,162,650      $ 565      $ 106      $ 4,182      $ (9   $ 814      $ (620   $ 5,038      $ 7      $ 5,045   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

SLM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(Unaudited)

 

     Three Months Ended
March  31,
 
         2012             2011      

Operating activities

    

Net income

   $ 111      $ 175   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Gains on debt repurchases

     (37     (38

Goodwill and acquired intangible assets impairment and amortization expense

     5        6   

Stock-based compensation expense

     22        25   

Unrealized losses on derivative and hedging activities

     193        57   

Provisions for loan losses

     253        303   

Decrease in restricted cash — other

     29        54   

Decrease (increase) in accrued interest receivable

     5        (104

Increase in accrued interest payable

     39        146   

Decrease in other assets

     73        214   

Decrease in other liabilities

     (138     (79
  

 

 

   

 

 

 

Total adjustments

     444        584   
  

 

 

   

 

 

 

Total net cash provided by operating activities

     555        759   
  

 

 

   

 

 

 

Investing activities

    

Student loans acquired and originated

     (1,658     (1,279

Reduction of student loans:

    

Installment payments, claims and other

     3,391        3,544   

Proceeds from sales of student loans

     135        189   

Other investing activities, net

     121        69   

Purchases of available-for-sale securities

     (14     (71

Proceeds from maturities of available-for-sale securities

     12        53   

Purchases of held-to-maturity and other securities

     (80     (50

Proceeds from maturities of held-to-maturity and other securities

     78        67   

Increase in restricted cash — variable interest entities

     (8     (92
  

 

 

   

 

 

 

Cash provided by investing activities — continuing operations

     1,977        2,430   
  

 

 

   

 

 

 

Cash provided by investing activities — discontinued operations

            28   
  

 

 

   

 

 

 

Total net cash provided by investing activities

     1,977        2,458   
  

 

 

   

 

 

 

Financing activities

    

Borrowings collateralized by loans in trust — issued

     2,115        818   

Borrowings collateralized by loans in trust — repaid

     (3,817     (2,712

Asset-backed commercial paper conduits, net

     1,728        (1,238

ED Conduit Program facility, net

     (3,198     (912

Other short-term borrowings issued

     23          

Other short-term borrowings repaid

     (23       

Other long-term borrowings issued

     1,584        1,967   

Other long-term borrowings repaid

     (454     (1,815

Other financing activities, net

     (94     77   

Retail and other deposits, net

     188        130   

Other

     1        1   

Common stock repurchased

     (268       

Common stock dividends paid

     (63       

Preferred stock dividends paid

     (5     (4
  

 

 

   

 

 

 

Net cash used in financing activities

     (2,283     (3,688
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     249        (471

Cash and cash equivalents at beginning of period

     2,794        4,343   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 3,043      $ 3,872   
  

 

 

   

 

 

 

Cash disbursements made (refunds received) for:

    

Interest

   $ 632      $ 613   
  

 

 

   

 

 

 

Income taxes paid

   $ 46      $ 165   
  

 

 

   

 

 

 

Income taxes received

   $ (5   $ (18
  

 

 

   

 

 

 

Noncash activity:

    

Investing activity — Student loans and other assets acquired

   $ 402      $   
  

 

 

   

 

 

 

Operating activity — Other assets acquired and other liabilities assumed, net

   $ 23      $   
  

 

 

   

 

 

 

Financing activity — Borrowings assumed in acquisition of student loans and other assets

   $ 425      $   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2012 and for the three months ended

March 31, 2012 and 2011 is unaudited)

 

1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited, consolidated financial statements of SLM Corporation (“we,” “us,” “our,” or the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The consolidated financial statements include the accounts of SLM Corporation and its majority-owned and controlled subsidiaries and those Variable Interest Entities (“VIEs”) for which we are the primary beneficiary, after eliminating the effects of intercompany accounts and transactions. In the opinion of management, all adjustments considered necessary for a fair statement of the results for the interim periods have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results for the year ending December 31, 2012 or for any other period. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”).

Reclassifications

Certain reclassifications have been made to the balances as of and for the three months ended March 31, 2011 to be consistent with classifications adopted for 2012, and had no effect on net income, total assets, or total liabilities.

Recently Adopted Accounting Standards

Presentation of Comprehensive Income

On January 1, 2012, we adopted Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220), “Presentation of Comprehensive Income.” The objective of this new guidance is to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The new guidance requires all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Upon adoption we present comprehensive income and its components in a separate consolidated statement of comprehensive income on a retrospective basis for all periods presented. There was no impact on our results of operations.

Fair Value Measurement and Disclosure Requirements

On January 1, 2012, we adopted ASU No. 2011-04, Fair Value Measurement (Topic 820), “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” These amendments (1) clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements; and (2) change particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. This new guidance did not have a material impact on our fair value measurements in the first quarter of 2012.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Allowance for Loan Losses

Our provisions for loan losses represent the periodic expense of maintaining an allowance sufficient to absorb incurred probable losses, net of expected recoveries, in the held-for-investment loan portfolios. The evaluation of the provisions for loan losses is inherently subjective as it requires material estimates that may be susceptible to significant changes. We believe that the allowance for loan losses is appropriate to cover probable losses incurred in the loan portfolios. We segregate our Private Education Loan portfolio into two classes of loans — traditional and non-traditional. Non-traditional loans are loans to (i) borrowers attending for-profit schools with an original Fair Isaac and Company (“FICO”) score of less than 670 and (ii) borrowers attending not-for-profit schools with an original FICO score of less than 640. The FICO score used in determining whether a loan is non-traditional is the greater of the borrower or cosigner FICO score at origination. Traditional loans are defined as all other Private Education Loans that are not classified as non-traditional.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses (Continued)

 

Allowance for Loan Losses Metrics

 

 

     Allowance for Loan Losses
Three Months Ended March 31, 2012
 

(Dollars in millions)

   FFELP Loans     Private  Education
Loans
    Other
Loans
    Total  

Allowance for Loan Losses

        

Beginning balance

   $ 187      $ 2,171      $ 69      $ 2,427   

Total provision

     18        235               253   

Charge-offs

     (23     (224     (5     (252

Student loan sales

     (2                   (2

Reclassification of interest reserve(1)

            8               8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 180      $ 2,190      $ 64      $ 2,434   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance:

        

Ending balance: individually evaluated for impairment

   $      $ 853      $ 48      $ 901   

Ending balance: collectively evaluated for impairment

   $ 180      $ 1,337      $ 16      $ 1,533   

Ending balance: loans acquired with deteriorated credit quality

   $      $      $      $   

Loans:

        

Ending balance: individually evaluated for impairment

   $      $ 6,030      $ 88      $ 6,118   

Ending balance: collectively evaluated for impairment

   $ 134,490      $ 33,745      $ 160      $ 168,395   

Ending balance: loans acquired with deteriorated credit quality

   $      $      $      $   

Charge-offs as a percentage of average loans in repayment and forbearance (annualized)

     .08     2.84     7.17  

Charge-offs as a percentage of average loans in repayment (annualized)

     .10     2.96     7.17  

Allowance as a percentage of the ending total loan balance

     .13     5.5     26.0  

Allowance as a percentage of the ending loans in repayment

     .20     7.2     26.0  

Allowance coverage of charge-offs (annualized)

     2.0        2.4        3.6     

Ending total loans(2)

   $ 134,490      $ 39,775      $ 248     

Average loans in repayment

   $ 93,150      $ 30,378      $ 252     

Ending loans in repayment

   $ 92,224      $ 30,236      $ 248     

 

  (1) 

Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

 

  (2)

Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses (Continued)

 

     Allowance for Loan Losses
Three Months Ended March 31, 2011
 

(Dollars in millions)

   FFELP Loans     Private  Education
Loans
    Other
Loans
    Total  

Allowance for Loan Losses

        

Beginning balance

   $ 189      $ 2,022      $ 72      $ 2,283   

Total provision

     23        275        5        303   

Charge-offs

     (20     (273     (3     (296

Student loan sales

     (2                   (2

Reclassification of interest reserve(1)

            10               10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 190      $ 2,034      $ 74      $ 2,298   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance:

        

Ending balance: individually evaluated for impairment

   $      $ 123      $ 61      $ 184   

Ending balance: collectively evaluated for impairment

   $ 190      $ 1,911      $ 13      $ 2,114   

Ending balance: loans acquired with deteriorated credit quality

   $      $      $      $   

Loans:

        

Ending balance: individually evaluated for impairment

   $      $ 474      $ 116      $ 590   

Ending balance: collectively evaluated for impairment

   $ 143,916      $ 38,402      $ 207        182,525   

Ending balance: loans acquired with deteriorated credit quality

   $      $      $      $   

Charge-offs as a percentage of average loans in repayment and forbearance (annualized)

     .07     3.75     4.86  

Charge-offs as a percentage of average loans in repayment (annualized)

     .09     3.94     4.86  

Allowance as a percentage of the ending total loan balance

     .13     5.2     22.8  

Allowance as a percentage of the ending loans in repayment

     .20     7.2     22.8  

Allowance coverage of charge-offs (annualized)

     2.3        1.8        4.6     

Ending total loans(2)

   $ 143,916      $ 38,876      $ 323     

Average loans in repayment

   $ 95,504      $ 28,127      $ 330     

Ending loans in repayment

   $ 94,309      $ 28,120      $ 323     

 

  (1) 

Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

 

  (2)

Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses (Continued)

 

Key Credit Quality Indicators

FFELP Loans are substantially insured and guaranteed as to their principal and accrued interest in the event of default; therefore, the key credit quality indicator for this portfolio is loan status. The impact of changes in loan status is incorporated quarterly into the allowance for loan losses calculation. For Private Education Loans, the key credit quality indicators are school type, FICO scores, the existence of a cosigner, the loan status and loan seasoning. The school type/FICO score are assessed at origination and maintained through the traditional/non-traditional loan designation. The other Private Education Loan key quality indicators can change and are incorporated quarterly into the allowance for loan losses calculation. The following table highlights the principal balance (excluding the receivable for partially charged-off loans) of our Private Education Loan portfolio stratified by the key credit quality indicators.

 

 

     Private Education Loans
Credit Quality Indicators
 
     March 31, 2012     December 31, 2011  

(Dollars in millions)

   Balance(3)      % of Balance     Balance(3)      % of Balance  

Credit Quality Indicators

          

School Type/FICO Scores:

          

Traditional

   $ 35,035         91   $ 34,528         91

Non-Traditional(1)

     3,490         9        3,565         9   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 38,525         100   $ 38,093         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Cosigners:

          

With cosigner

   $ 24,154         63   $ 23,507         62

Without cosigner

     14,371         37        14,586         38   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 38,525         100   $ 38,093         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Seasoning(2):

          

1-12 payments

   $ 8,730         23   $ 9,246         24

13-24 payments

     6,666         17        6,837         18   

25-36 payments

     5,737         15        5,677         15   

37-48 payments

     3,894         10        3,778         10   

More than 48 payments

     6,581         17        6,033         16   

Not yet in repayment

     6,917         18        6,522         17   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 38,525         100   $ 38,093         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Defined as loans to borrowers attending for-profit schools (with a FICO score of less than 670 at origination) and borrowers attending not-for-profit schools (with a FICO score of less than 640 at origination).

 

(2) 

Number of months in active repayment for which a scheduled payment was due.

 

(3) 

Balance represents gross Private Education Loans.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses (Continued)

 

The following tables provide information regarding the loan status and aging of past due loans.

 

 

     FFELP Loan Delinquencies  
     March 31,
2012
    December 31,
2011
 

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 22,788        $ 22,887     

Loans in forbearance(2)

     19,478          19,575     

Loans in repayment and percentage of each status:

        

Loans current

     77,099        83.6     77,093        81.9

Loans delinquent 31-60 days(3)

     5,173        5.6        5,419        5.8   

Loans delinquent 61-90 days(3)

     2,666        2.9        3,438        3.7   

Loans delinquent greater than 90 days(3)

     7,286        7.9        8,231        8.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans in repayment

     92,224        100     94,181        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans, gross

     134,490          136,643     

FFELP Loan unamortized premium

     1,624          1,674     
  

 

 

     

 

 

   

Total FFELP Loans

     136,114          138,317     

FFELP Loan allowance for losses

     (180       (187  
  

 

 

     

 

 

   

FFELP Loans, net

   $ 135,934        $ 138,130     
  

 

 

     

 

 

   

Percentage of FFELP Loans in repayment

       68.6       68.9
    

 

 

     

 

 

 

Delinquencies as a percentage of FFELP Loans in repayment

       16.4       18.1
    

 

 

     

 

 

 

FFELP Loans in forbearance as a percentage of loans in repayment and forbearance

       17.4       17.2
    

 

 

     

 

 

 

 

(1) 

Loans for borrowers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for borrowers who have requested and qualify for other permitted program deferments such as military, unemployment, or economic hardships.

 

(2)

Loans for borrowers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors.

 

(3) 

The period of delinquency is based on the number of days scheduled payments are contractually past due.

 

12


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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses (Continued)

 

     Private Education Traditional Loan
Delinquencies
 
     March 31,
2012
    December 31,
2011
 

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 6,268        $ 5,866     

Loans in forbearance(2)

     1,179          1,195     

Loans in repayment and percentage of each status:

        

Loans current

     25,469        92.4     25,110        91.4

Loans delinquent 31-60 days(3)

     691        2.5        868        3.2   

Loans delinquent 61-90 days(3)

     424        1.5        393        1.4   

Loans delinquent greater than 90 days(3)

     1,004        3.6        1,096        4.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total traditional loans in repayment

     27,588        100     27,467        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total traditional loans, gross

     35,035          34,528     

Traditional loans unamortized discount

     (776       (792  
  

 

 

     

 

 

   

Total traditional loans

     34,259          33,736     

Traditional loans receivable for partially charged-off loans

     720          705     

Traditional loans allowance for losses

     (1,587       (1,542  
  

 

 

     

 

 

   

Traditional loans, net

   $ 33,392        $ 32,899     
  

 

 

     

 

 

   

Percentage of traditional loans in repayment

       78.7       80.0
    

 

 

     

 

 

 

Delinquencies as a percentage of traditional loans in repayment

       7.7       8.6
    

 

 

     

 

 

 

Loans in forbearance as a percentage of loans in repayment and forbearance

       4.1       4.2
    

 

 

     

 

 

 

Loans in repayment greater than 12 months as a percentage of loans in repayment

       74.9       73.4
    

 

 

     

 

 

 

 

(1) 

Deferment includes borrowers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

 

(2)

Loans for borrowers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with 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.

 

13


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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses (Continued)

 

     Private Education Non-Traditional
Loan Delinquencies
 
     March 31,
2012
    December 31,
2011
 

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 649        $ 656     

Loans in forbearance(2)

     193          191     

Loans in repayment and percentage of each status:

        

Loans current

     2,030        76.7     2,012        74.0

Loans delinquent 31-60 days(3)

     168        6.3        208        7.7   

Loans delinquent 61-90 days(3)

     120        4.5        127        4.7   

Loans delinquent greater than 90 days(3)

     330        12.5        371        13.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-traditional loans in repayment

     2,648        100     2,718        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-traditional loans, gross

     3,490          3,565     

Non-traditional loans unamortized discount

     (77       (81  
  

 

 

     

 

 

   

Total non-traditional loans

     3,413          3,484     

Non-traditional loans receivable for partially charged-off loans

     530          536     

Non-traditional loans allowance for losses

     (603       (629  
  

 

 

     

 

 

   

Non-traditional loans, net

   $ 3,340        $ 3,391     
  

 

 

     

 

 

   

Percentage of non-traditional loans in repayment

       75.9       76.2
    

 

 

     

 

 

 

Delinquencies as a percentage of non-traditional loans in repayment

       23.3       26.0
    

 

 

     

 

 

 

Loans in forbearance as a percentage of loans in repayment and forbearance

       6.8       6.6
    

 

 

     

 

 

 

Loans in repayment greater than 12 months as a percentage of loans in repayment

       65.5       63.0
    

 

 

     

 

 

 

 

(1) 

Deferment includes borrowers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

 

(2)

Loans for borrowers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with 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.

Receivable for Partially Charged-Off Private Education Loans

At the end of each month, for loans that are 212 days past due, we charge off the estimated loss of a defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as the “receivable for partially charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately charged off through the allowance for loan losses with an offsetting reduction in the receivable for partially charged-off Private Education Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses (Continued)

 

The following table summarizes the activity in the receivable for partially charged-off loans.

 

 

     Three Months Ended March 31,  

(Dollars in millions)

       2012             2011      

Receivable at beginning of period

   $ 1,241      $ 1,040   

Expected future recoveries of current period defaults(1)

     69        97   

Recoveries(2)

     (50     (40

Charge-offs(3)

     (10     (7
  

 

 

   

 

 

 

Receivable at end of period

   $ 1,250      $ 1,090   
  

 

 

   

 

 

 

 

  (1) 

Remaining loan balance expected to be collected from contractual loan balances partially charged-off during the period. This is the difference between the defaulted loan balance and the amount of the defaulted loan balance that was charged off.

 

  (2) 

Current period cash collections.

 

  (3)

Represents the current period recovery shortfall — the difference between what was expected to be collected and what was actually collected.

Troubled Debt Restructurings

We modify the terms of loans for certain borrowers when we believe such modifications may increase the ability and willingness of a borrower to make payments and thus increase the ultimate overall amount collected on a loan. These modifications generally take the form of a forbearance, a temporary interest rate reduction or an extended repayment plan. For borrowers experiencing financial difficulty, certain Private Education Loans for which we have granted a forbearance of greater than three months, an interest rate reduction or an extended repayment plan are classified as troubled debt restructurings. Forbearance provides borrowers the ability to defer payments for a period of time, but does not result in the forgiveness of any principal or interest. While in forbearance status, interest continues to accrue and is capitalized to principal when the loan re-enters repayment status. The recorded investment of loans granted a forbearance that was classified as a troubled debt restructuring was $5.3 billion and $4.5 billion at March 31, 2012 and December 31, 2011, respectively. The recorded investment for troubled debt restructurings from loans granted interest rate reductions or extended repayment plans was $0.7 billion and $0.7 billion at March 31, 2012 and December 31, 2011, respectively.

At March 31, 2012 and December 31, 2011, all of our troubled debt restructuring loans had a related allowance recorded. The following table provides the recorded investment, unpaid principal balance and related allowance for our troubled debt restructuring loans.

 

 

     Troubled Debt Restructuring Loans  

(Dollars in millions)

   Recorded
Investment(1)
     Unpaid
Principal
Balance
     Related
Allowance
 

March 31, 2012

        

Private Education Loans — Traditional

   $ 4,792       $ 4,858       $ 617   

Private Education Loans — Non-Traditional

     1,165         1,172         236   
  

 

 

    

 

 

    

 

 

 

Total

   $ 5,957       $ 6,030       $ 853   
  

 

 

    

 

 

    

 

 

 

December 31, 2011

        

Private Education Loans — Traditional

   $ 4,201       $ 4,259       $ 546   

Private Education Loans — Non-Traditional

     1,048         1,054         216   
  

 

 

    

 

 

    

 

 

 

Total

   $ 5,249       $ 5,313       $ 762   
  

 

 

    

 

 

    

 

 

 

 

  (1)

The recorded investment is equal to the unpaid principal balance and accrued interest receivable net of unamortized deferred fees and costs.

 

15


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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

2. Allowance for Loan Losses (Continued)

 

The following table provides the average recorded investment and interest income recognized for our troubled debt restructuring loans.

 

 

     Three Months Ended March 31,  
     2012      2011  

(Dollars in millions)

   Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Private Education Loans — Traditional

   $ 4,507       $ 73       $ 276       $ 3   

Private Education Loans — Non-Traditional

     1,110         25         178         3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,617       $ 98       $ 454       $ 6   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides the amount of modified loans that resulted in a troubled debt restructuring, as well as charge-offs occurring in the troubled debt restructuring portfolio. The majority of our loans that are considered troubled debt restructurings involve a temporary forbearance of payments and do not change the contractual interest rate of the loan.

 

 

     Three Months Ended March 31,  
     2012      2011  

(Dollars in millions)

   Modified
Loans(1)
     Charge-
offs(2)
     Modified
Loans(1)
     Charge-
offs(2)
 

Private Education Loans — Traditional

   $ 657       $ 65       $ 30       $ 6   

Private Education Loans — Non-Traditional

     140         29         16         8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 797       $ 94       $ 46       $ 14   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Represents period ending balance of loans that have been modified during the period.

 

(2)

Represents loans that charge off during the period that are classified as troubled debt restructurings.

Accrued Interest Receivable

The following table provides information regarding accrued interest receivable on our Private Education Loans. The table also discloses the amount of accrued interest on loans greater than 90 days past due as compared to our allowance for uncollectible interest. The allowance for uncollectible interest exceeds the amount of accrued interest on our 90 days past due portfolio for all periods presented.

 

 

     Accrued Interest Receivable  

(Dollars in millions)

   Total      Greater than
90 days
Past Due
     Allowance for
Uncollectible
Interest
 

March 31, 2012

        

Private Education Loans — Traditional

   $ 870       $ 34       $ 44   

Private Education Loans — Non-Traditional

     137         16         27   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,007       $ 50       $ 71   
  

 

 

    

 

 

    

 

 

 

December 31, 2011

        

Private Education Loans — Traditional

   $ 870       $ 36       $ 44   

Private Education Loans — Non-Traditional

     148         18         28   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,018       $ 54       $ 72   
  

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. Borrowings

The following table summarizes our borrowings.

 

 

     March 31, 2012      December 31, 2011  

(Dollars in millions)

   Short
Term
     Long
Term
     Total      Short
Term
     Long
Term
     Total  

Unsecured borrowings:

                 

Senior unsecured debt

   $ 2,192       $ 16,182       $ 18,374       $ 1,801       $ 15,199       $ 17,000   

Brokered deposits

     1,455         1,957         3,412         1,733         1,956         3,689   

Retail and other deposits

     2,311                 2,311         2,123                 2,123   

Other(1)

     1,284                 1,284         1,329                 1,329   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unsecured borrowings

     7,242         18,139         25,381         6,986         17,155         24,141   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Secured borrowings:

                 

FFELP Loan securitizations

             107,211         107,211                 107,905         107,905   

Private Education Loan securitizations

             18,334         18,334                 19,297         19,297   

ED Conduit Program Facility

     18,539                 18,539         21,313                 21,313   

FFELP ABCP Facility

             5,459         5,459                 4,445         4,445   

Private Education Loan ABCP Facility

             2,666         2,666                 1,992         1,992   

Acquisition financing(2)

             856         856                 916         916   

FHLB-DM Facility

     1,250                 1,250         1,210                 1,210   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total secured borrowings

     19,789         134,526         154,315         22,523         134,555         157,078   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total before hedge accounting adjustments

     27,031         152,665         179,696         29,509         151,710         181,219   

Hedge accounting adjustments

     92         2,923         3,015         64         2,683         2,747   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27,123       $ 155,588       $ 182,711       $ 29,573       $ 154,393       $ 183,966   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

“Other” primarily consists of the obligation to return cash collateral held related to derivative exposures.

 

(2)

Relates to the acquisition of $25 billion of student loans at the end of 2010.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

3. Borrowings (Continued)

 

Secured Borrowings

We currently consolidate all of our financing entities that are VIEs as a result of being the entities’ primary beneficiary. As a result, these financing VIEs are accounted for as secured borrowings. We consolidate the following financing VIEs:

 

 

    March 31, 2012  
    Debt Outstanding     Carrying Amount of Assets Securing
Debt Outstanding
 

(Dollars in millions)

  Short
Term
    Long
Term
    Total     Loans     Cash     Other Assets     Total  

Secured Borrowings — VIEs:

             

ED Conduit Program Facility

  $ 18,539      $      $ 18,539      $ 18,545      $ 712      $ 376      $ 19,633   

FFELP ABCP Facility

           5,459        5,459        5,921        99        101        6,121   

Private Education Loan ABCP Facility

           2,666        2,666        3,522        563        96        4,181   

Securitizations — FFELP Loans

           107,211        107,211        108,626        3,788        483        112,897   

Securitizations — Private Education Loans

           18,334        18,334        21,362        553        459        22,374   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total before hedge accounting adjustments

    18,539        133,670        152,209        157,976        5,715        1,515        165,206   

Hedge accounting adjustments

           1,303        1,303                      1,125        1,125   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 18,539      $ 134,973      $ 153,512      $ 157,976      $ 5,715      $ 2,640      $ 166,331   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    December 31, 2011  
    Debt Outstanding     Carrying Amount of Assets Securing
Debt Outstanding
 

(Dollars in millions)

  Short
Term
    Long
Term
    Total     Loans     Cash     Other Assets     Total  

Secured Borrowings — VIEs:

             

ED Conduit Program Facility

  $ 21,313      $      $ 21,313      $ 21,445      $ 621      $ 442      $ 22,508   

FFELP ABCP Facility

           4,445        4,445        4,834        86        54        4,974   

Private Education Loan ABCP Facility

           1,992        1,992        2,595        401        76        3,072   

Securitizations — FFELP Loans

           107,905        107,905        109,257        3,783        529        113,569   

Securitizations — Private Education Loans

           19,297        19,297        22,367        718        582        23,667   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total before hedge accounting adjustments

    21,313        133,639        154,952        160,498        5,609        1,683        167,790   

Hedge accounting adjustments

           894        894                      955        955   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 21,313      $ 134,533      $ 155,846      $ 160,498      $ 5,609      $ 2,638      $ 168,745   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

3. Borrowings (Continued)

 

Securitizations

The following table summarizes the securitization transactions that occurred during the year ended December 31, 2011 and the three months ended March 31, 2012.

 

 

(Dollars in millions)

              

AAA-rated bonds

 

Issue

  

Date Issued

   Total
Issued
    

Weighted Average

Interest Rate

   Weighted
Average
Life
 

FFELP:

           

2011-1

   March 2011    $ 812       1 month LIBOR plus 0.89%      5.5 years   

2011-2

   May 2011    $ 821       1 month LIBOR plus 0.94%      5.5 years   

2011-3

   November 2011    $ 812       1 month LIBOR plus 1.28%      7.8 years   
     

 

 

       

Total bonds issued in 2011

      $ 2,445         
     

 

 

       

Total loan amount securitized in 2011

      $ 2,344         
     

 

 

       

2012-1

   January 2012    $ 765       1 month LIBOR plus 0.96%      4.6 years   

2012-2

   March 2012      824       1 month LIBOR plus 0.75%      4.7 years   
     

 

 

       

Total bonds issued in first-quarter 2012

      $ 1,589         
     

 

 

       

Total loan amount securitized in first-quarter 2012

      $ 1,587         
     

 

 

       

Private Education:

           

2011-A

   April 2011    $ 562       1 month LIBOR plus 1.99%      3.8 years   

2011-B

   June 2011    $ 825       1 month LIBOR plus 1.89%      4.0 years   

2011-C

   November 2011    $ 721       1 month LIBOR plus 2.99%      3.4 years   
     

 

 

       

Total bonds issued in 2011

      $ 2,108         
     

 

 

       

Total loan amount securitized in 2011

      $ 2,674         
     

 

 

       

2012-A

   February 2012    $ 547       1 month LIBOR plus 2.17%      3.0 years   
     

 

 

       

Total bonds issued in first-quarter 2012

      $ 547         
     

 

 

       

Total loan amount securitized in first-quarter 2012

      $ 748         
     

 

 

       

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

3. Borrowings (Continued)

 

Additional, Recent Borrowing-Related Transactions

FFELP ABCP Facility

On January 13, 2012, we amended the FFELP ABCP Facility increasing the amount available and extending the step-down dates on the amount available for borrowing and the final maturity date of the facility. The facility amount is now $7.5 billion, reflecting an increase of $2.5 billion. The scheduled maturity date of the facility is January 9, 2015. The usage fee for the facility remains unchanged at 0.50 percent over the applicable funding rate. The amended facility features two contractual step-down reductions on the amount available for borrowing. The first reduction is on January 11, 2013, to $6.5 billion. The second reduction is on January 10, 2014, to $5.5 billion.

Senior Unsecured Debt

On January 27, 2012, we issued an aggregate of $1.5 billion bonds, comprised of five-year and 10-year unsecured bonds. The 6.00 percent fixed rate five-year bond was issued for $750 million to yield 6.25 percent. The rate on the bond was swapped from a fixed rate to a floating rate equal to an all-in cost of one-month LIBOR plus 5.2 percent. The 7.25 percent fixed rate 10-year bond was issued for $750 million to yield 7.50 percent. The rate on the bond was swapped from a fixed rate to a floating rate equal to an all-in cost of one-month LIBOR plus 5.4 percent. The proceeds of these bonds were designated for general corporate purposes.

 

4. Derivative Financial Instruments

Our risk management strategy and use of and accounting for derivatives have not materially changed from that discussed in our 2011 Form 10-K. Please refer to “Note 7 — Derivative Financial Instruments” in our 2011 Form 10-K for a full discussion.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

4. Derivative Financial Instruments (Continued)

 

Summary of Derivative Financial Statement Impact

The following tables summarize the fair values and notional amounts of all derivative instruments at March 31, 2012 and December 31, 2011, and their impact on other comprehensive income and earnings for the three months ended March 31, 2012 and 2011.

Impact of Derivatives on Consolidated Balance Sheet

 

 

        Cash Flow     Fair Value     Trading     Total  

(Dollars in millions)

 

Hedged Risk

Exposure

  Mar. 31,
2012
    Dec. 31,
2011
    Mar. 31,
2012
    Dec. 31,
2011
    Mar. 31,
2012
    Dec. 31,
2011
    Mar. 31,
2012
    Dec. 31,
2011
 

Fair Values(1)

                 

Derivative Assets:

                 

Interest rate swaps

  Interest rate   $      $      $ 1,332      $ 1,471      $ 190      $ 262      $ 1,522      $ 1,733   

Cross currency interest rate swaps

  Foreign currency
& interest rate
                  1,384        1,229        97        130        1,481        1,359   

Other(2)

  Interest rate                                        1               1   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets(3)

                    2,716        2,700        287        393        3,003        3,093   

Derivative Liabilities:

                 

Interest rate swaps

  Interest rate     (20     (26     (9            (211     (244     (240     (270

Floor Income Contracts

  Interest rate                                 (2,413     (2,544     (2,413     (2,544

Cross currency interest rate swaps

  Foreign currency
& interest rate
                  (206     (243                   (206     (243

Other(2)

  Interest rate                                 (4            (4       
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative liabilities(3)

      (20     (26     (215     (243     (2,628     (2,788     (2,863     (3,057
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net total derivatives

    $ (20   $ (26   $ 2,501      $ 2,457      $ (2,341   $ (2,395   $ 140      $ 36   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Fair values reported are exclusive of collateral held and pledged and accrued interest. Assets and liabilities are presented without consideration of master netting agreements. Derivatives are carried on the balance sheet based on net position by counterparty under master netting agreements, and classified in other assets or other liabilities depending on whether in a net positive or negative position.

 

(2)

“Other” includes embedded derivatives bifurcated from securitization debt as well as derivatives related to our Total Return Swap Facility.

 

(3)

The following table reconciles gross positions without the impact of master netting agreements to the balance sheet classification:

 

 

     Other Assets      Other Liabilities  

(Dollar in millions)

   March 31,
2012
     December 31,
2011
     March 31,
2012
     December 31,
2011
 

Gross position

   $ 3,003       $ 3,093       $ (2,863    $ (3,057

Impact of master netting agreements

     (792      (891      792         891   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative values with impact of master netting agreements (as carried on balance sheet)

     2,211         2,202         (2,071      (2,166

Cash collateral (held) pledged

     (1,283      (1,326      899         1,018   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net position

   $ 928       $ 876       $ (1,172    $ (1,148
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

4. Derivative Financial Instruments (Continued)

 

The above fair values include adjustments for counterparty credit risk for both when we are exposed to the counterparty, net of collateral postings, and when the counterparty is exposed to us, net of collateral postings. The net adjustments decreased the overall net asset positions at March 31, 2012 and December 31, 2011 by $174 million and $190 million, respectively. In addition, the above fair values reflect adjustments for illiquid derivatives as indicated by a wide bid/ask spread in the interest rate indices to which the derivatives are indexed. These adjustments decreased the overall net asset positions at March 31, 2012 and December 31, 2011 by $111 million and $111 million, respectively.

 

 

     Cash Flow      Fair Value      Trading      Total  

(Dollars in billions)

   Mar. 31,
2012
     Dec. 31,
2011
     Mar. 31,
2012
     Dec. 31,
2011
     Mar. 31,
2012
     Dec. 31,
2011
     Mar. 31,
2012
     Dec. 31,
2011
 

Notional Values:

                       

Interest rate swaps

   $ 1.1       $ 1.1       $ 15.3       $ 14.0       $ 73.3       $ 73.6       $ 89.7       $ 88.7   

Floor Income Contracts

                                     57.8         57.8         57.8         57.8   

Cross currency interest rate swaps

                     15.4         15.5         .3         .3         15.7         15.8   

Other(1)

                                     1.5         1.4         1.5         1.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 1.1       $ 1.1       $ 30.7       $ 29.5       $ 132.9       $ 133.1       $ 164.7       $ 163.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

“Other” includes embedded derivatives bifurcated from securitization debt, as well as derivatives related to our Total Return Swap Facility.

Impact of Derivatives on Consolidated Statements of Income

 

 

     Three Months Ended March 31,  
     Unrealized
Gain

(Loss) on
Derivatives(1)(2)
    Realized
Gain

(Loss)
on
Derivatives(3)
    Unrealized
Gain

(Loss)
on Hedged
Item(1)
    Total Gain
(Loss)
 

(Dollars in millions)

   2012     2011     2012     2011     2012     2011     2012     2011  

Fair Value Hedges:

                

Interest rate swaps

   $ (148   $ (198   $ 113      $ 128      $ 156      $ 205      $ 121      $ 135   

Cross currency interest rate swaps

     192        701        61        76        (453     (878     (200     (101
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fair value derivatives

     44        503        174        204        (297     (673     (79     34   

Cash Flow Hedges:

                

Interest rate swaps

            (2     (7     (14                   (7     (16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash flow derivatives

            (2     (7     (14                   (7     (16

Trading:

                

Interest rate swaps

     (39     (22     35        40                      (4     18   

Floor Income Contracts

     136        151        (215     (226                   (79     (75

Cross currency interest rate swaps

     (33     (17     2        2                      (31     (15

Other

     (4     3        (1     (1                   (5     2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total trading derivatives

     60        115        (179     (185                   (119     (70
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     104        616        (12     5        (297     (673     (205     (52

Less: realized gains (losses) recorded in interest expense

                   167        190                      167        190   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gains (losses) on derivative and hedging activities, net

   $ 104      $ 616      $ (179   $ (185   $ (297   $ (673   $ (372   $ (242
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Recorded in “Gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.

 

(2)

Represents ineffectiveness related to cash flow hedges.

 

(3)

For fair value and cash flow hedges, recorded in interest expense. For trading derivatives, recorded in “Gains (losses) on derivative and hedging activities, net.”

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

4. Derivative Financial Instruments (Continued)

 

Impact of Derivatives on Consolidated Statements of Changes in Stockholders’ Equity (net of tax)

 

 

     Three Months
Ended
March 31,
 

(Dollars in millions)

   2012     2011  

Total gains (losses) on cash flow hedges

   $ (1   $ (2

Realized (gains) losses reclassified to interest expense(1)(2)(3)

     6        10   

Hedge ineffectiveness reclassified to earnings(1)(4)

            1   
  

 

 

   

 

 

 

Total change in stockholders’ equity for unrealized gains (losses) on derivatives

   $ 5      $ 9   
  

 

 

   

 

 

 

 

  (1)

Amounts included in “Realized gain (loss) on derivatives” in the “Impact of Derivatives on Consolidated Statements of Income” table above.

 

  (2)

Includes net settlement income/expense.

 

  (3)

We expect to reclassify $50 thousand of after-tax net losses from accumulated other comprehensive income to earnings during the next 12 months related to amortization of cash flow hedge that were hedging debt instruments that are outstanding as of the reporting date.

 

  (4)

Recorded in “Gains (losses) derivatives and hedging activities, net” in the consolidated statements of income.

Collateral

Collateral held and pledged related to derivative exposures between us and our derivative counterparties are detailed in the following table:

 

 

(Dollars in millions)

   March 31,
2012
     December 31,
2011
 

Collateral held:

     

Cash (obligation to return cash collateral is recorded in short-term borrowings)(1)

   $ 1,283       $ 1,326   

Securities at fair value — on-balance sheet securitization derivatives (not recorded in financial statements)(2)

     823         841   
  

 

 

    

 

 

 

Total collateral held

   $ 2,106       $ 2,167   
  

 

 

    

 

 

 

Derivative asset at fair value, including accrued interest

   $ 2,632       $ 2,607   
  

 

 

    

 

 

 

Collateral pledged to others:

     

Cash (right to receive return of cash collateral is recorded in investments)

   $ 899       $ 1,018   
  

 

 

    

 

 

 

Total collateral pledged

   $ 899       $ 1,018   
  

 

 

    

 

 

 

Derivative liability at fair value including accrued interest and premium receivable

   $ 1,063       $ 1,223   
  

 

 

    

 

 

 

 

(1)

At March 31, 2012 and December 31, 2011, $38 million and $26 million, respectively, were held in restricted cash accounts.

 

(2)

The trusts do not have the ability to sell or re-pledge securities they hold as collateral.

Our corporate derivatives contain credit contingent features. At our current unsecured credit rating, we have fully collateralized our corporate derivative liability position (including accrued interest and net of premiums receivable) of $882 million with our counterparties. Further downgrades would not result in any additional

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

4. Derivative Financial Instruments (Continued)

 

collateral requirements, except to increase the frequency of collateral calls. Two counterparties have the right to terminate the contracts with further downgrades. We currently have a liability position with these derivative counterparties (including accrued interest and net of premiums receivable) of $269 million and have posted $262 million of collateral to these counterparties. If the credit contingent feature was triggered for these two counterparties and the counterparties exercised their right to terminate, we would be required to deliver additional assets totaling $7 million to settle the contracts. Trust related derivatives do not contain credit contingent features related to our or the trusts’ credit ratings.

 

5. Other Assets

The following table provides detail on our other assets.

 

 

     March 31, 2012     December 31, 2011  

(Dollars in millions)

   Ending
Balance
     % of
Balance
    Ending
Balance
     % of
Balance
 

Accrued interest receivable

   $ 2,503         29   $ 2,484         29

Derivatives at fair value

     2,211         26        2,202         25   

Income tax asset, net current and deferred

     1,397         16        1,427         17   

Accounts receivable

     1,402         16        1,392         16   

Benefit and insurance-related investments

     467         5        466         5   

Fixed assets, net

     208         2        214         3   

Other loans, net

     183         2        193         2   

Other

     258         4        280         3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 8,629         100   $ 8,658         100
  

 

 

    

 

 

   

 

 

    

 

 

 

The “Derivatives at fair value” line in the above table represents the fair value of our derivatives in a gain position by counterparty, exclusive of accrued interest and collateral. At March 31, 2012 and December 31, 2011, these balances included $2.5 billion and $2.5 billion, respectively, of cross-currency interest rate swaps and interest rate swaps designated as fair value hedges that were offset by an increase in interest-bearing liabilities related to the hedged debt. As of March 31, 2012 and December 31, 2011, the cumulative mark-to-market adjustment to the hedged debt was $(3.0) billion and $(2.7) billion, respectively.

 

6. Stockholders’ Equity

The following table summarizes our common share repurchases and issuances.

 

 

     Three Months Ended
March 31,
 
     2012      2011  

Common shares repurchased(1)

     16,703,182           

Average purchase price per share(2)

   $ 16.04       $   

Shares repurchased related to employee stock-based compensation plans(3)

     2,056,977         1,754,780   

Average purchase price per share

   $ 15.33       $ 15.62   

Common shares issued(4)

     3,171,484         2,304,659   

 

  (1)

Common shares purchased under our January 2012 $500 million share repurchase program, of which $232 million remains available as of March 31, 2012.

 

  (2)

Average purchase price per share includes purchase commission costs.

 

  (3)

Comprises shares withheld from stock option exercises and vesting of restricted stock for employees’ tax withholding obligations and shares tendered by employees to satisfy option exercise costs.

 

  (4) 

Common shares issued under our various compensation and benefit plans.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

6. Stockholders’ Equity (Continued)

 

The closing price of our common stock on March 30, 2012 was $15.76.

Dividend and Share Repurchase Program

On January 26, 2012, we increased our regular quarterly common stock dividend to $.125 per share, up from $.10 per share in the prior quarter. We paid our quarterly dividend on March 16, 2012. During the first quarter of 2012, we repurchased 16.7 million shares of common stock at an aggregate price of $268 million. The shares were repurchased on the open market under our January 2012 share repurchase program that authorizes up to $500 million of share repurchases.

 

7. Earnings per Common Share

Basic earnings per common share (“EPS”) are calculated using the weighted average number of shares of common stock outstanding during each period. A reconciliation of the numerators and denominators of the basic and diluted EPS calculations follows.

 

 

     Three Months Ended
March  31,
 

(In millions, except per share data)

     2012          2011    

Numerator:

     

Net income attributable to SLM Corporation

   $ 112       $ 175   

Preferred stock dividends

     5         4   
  

 

 

    

 

 

 

Net income attributable to SLM Corporation common stock

   $ 107       $ 171   
  

 

 

    

 

 

 

Denominator:

     

Weighted average shares used to compute basic EPS

     503         527   

Effect of dilutive securities:

     

Dilutive effect of stock options, non-vested deferred compensation and restricted stock, restricted stock units and Employee Stock Purchase Plan (“ESPP”)(1)

     7         5   
  

 

 

    

 

 

 

Dilutive potential common shares(2)

     7         5   
  

 

 

    

 

 

 

Weighted average shares used to compute diluted EPS

     510         532   
  

 

 

    

 

 

 

Basic earnings per common share attributable to SLM Corporation:

     

Continuing operations

   $ .21       $ .32   

Discontinued operations

     —           —     
  

 

 

    

 

 

 

Total

   $ .21       $ .32   
  

 

 

    

 

 

 

Diluted earnings per common share attributable to SLM Corporation:

     

Continuing operations

   $ .21       $ .32   

Discontinued operations

     —           —     
  

 

 

    

 

 

 

Total

   $ .21       $ .32   
  

 

 

    

 

 

 

 

(1) 

Includes the potential dilutive effect of additional common shares that are issuable upon exercise of outstanding stock options, non-vested deferred compensation and restricted stock, restricted stock units, and the outstanding commitment to issue shares under the ESPP, determined by the treasury stock method.

 

(2) 

For the three months ended March 31, 2012 and 2011, stock options covering approximately 12 million and 16 million shares, respectively, and restricted stock/restricted stock units of 3 million and 2 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.

 

25


Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8. Restructuring Activities

The following table summarizes the restructuring expenses incurred during the three months ended March 31, 2012 and 2011 and cumulative restructuring expenses incurred through March 31, 2012 associated with our restructuring plans.

 

 

     Three Months Ended
March  31,
     Cumulative
Expense(1) as of
March 31,
2012
 

(Dollars in millions)

   2012      2011     

Severance costs

   $ 5       $ 2       $ 174   

Lease and other contract termination costs

                     11   

Exit and other costs

             2         19   
  

 

 

    

 

 

    

 

 

 

Total restructuring costs from continuing operations(1)

     5         4         204   

Total restructuring costs from discontinued operations

                     29   
  

 

 

    

 

 

    

 

 

 

Total

   $ 5       $ 4       $ 233   
  

 

 

    

 

 

    

 

 

 

 

(1) 

Aggregate restructuring expenses from continuing operations incurred across our reportable segments are disclosed in “Note 11 — Segment Reporting.”

Since the fourth quarter of 2007 through March 31, 2012, cumulative severance costs were incurred in conjunction with aggregate completed and planned position eliminations of approximately 5,500 positions. Position eliminations were across all of our reportable segments, ranging from senior executives to servicing center personnel. Lease and other contract termination costs and exit and other costs incurred during 2011 related primarily to terminated or abandoned facility leases and consulting costs incurred in conjunction with various cost reduction and exit strategies.

The following table summarizes changes in the restructuring liability balance, which is included in other liabilities in the accompanying consolidated balance sheet.

 

 

(Dollars in millions)

   Severance
Costs
    Lease and
Other
Contract
Termination
Costs
    Exit and
Other  Costs
    Total  

Balance at December 31, 2010

   $ 48      $ 4      $ 1      $ 53   

Net accruals from continuing operations

     6               3        9   

Net accruals from discontinued operations

                            

Cash paid

     (44     (3     (4     (51
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     10        1               11   

Net accruals from continuing operations

     5                      5   

Net accruals from discontinued operations

                            

Cash paid

     (7                   (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 8      $ 1      $      $ 9   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

9. Fair Value Measurements

We use estimates of fair value in applying various accounting standards in our financial statements. We categorize our fair value estimates based on a hierarchical framework associated with three levels of price transparency utilized in measuring financial instruments at fair value. During the three months ended March 31, 2012, there were no significant transfers of financial instruments between levels, or changes in our methodology or assumptions used to value our financial instruments. Please refer to “Note 13 — Fair Value Measurements” in our 2011 Form 10-K for a full discussion.

 

26


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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

9. Fair Value Measurements (Continued)

 

The following tables summarize the valuation of our financial instruments that are marked-to-market on a recurring basis.

 

 

    Fair Value Measurements on a Recurring
Basis as of March 31, 2012
    Fair Value Measurements on a Recurring
Basis as of December 31, 2011
 

(Dollars in millions)

  Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  

Assets

               

Available-for-sale investments:

               

Agency residential mortgage backed securities

  $      $ 53      $      $ 53      $      $ 59      $      $ 59   

Guaranteed investment contracts

           27               27               20               20   

Other

           12               12               11               11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale investments

           92               92               90               90   

Derivative instruments:(1)

               

Interest rate swaps

           1,398        124        1,522               1,550        183        1,733   

Cross currency interest rate swaps

           160        1,321        1,481               139        1,220        1,359   

Other

                                              1        1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets(3)

           1,558        1,445        3,003               1,689        1,404        3,093   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $      $ 1,650      $ 1,445      $ 3,095      $      $ 1,779      $ 1,404      $ 3,183   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities(2)

               

Derivative instruments:(1)

               

Interest rate swaps

  $      $ (60   $ (180   $ (240   $      $ (47   $ (223   $ (270

Floor Income Contracts

           (2,413            (2,413            (2,544            (2,544

Cross currency interest rate swaps

           (30     (176     (206            (44     (199     (243

Other

                  (4     (4                            
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative liabilities(3)

           (2,503     (360     (2,863            (2,635     (422     (3,057
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $      $ (2,503   $ (360   $ (2,863   $      $ (2,635   $ (422   $ (3,057
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Fair value of derivative instruments excludes accrued interest and the value of collateral.

 

(2) 

Borrowings which are the hedged items in a fair value hedge relationship and which are adjusted for changes in value due to benchmark interest rates only are not carried at full fair value and are not reflected in this table.

 

(3) 

The following reconciles gross positions without the impact of master netting agreements to the balance sheet classification:

 

 

     Other Assets      Other Liabilities  

(Dollar in millions)

   March 31,
2012
     December 31,
2011
     March 31,
2012
     December 31,
2011
 

Gross position

   $ 3,003       $ 3,093       $ (2,863    $ (3,057

Impact of master netting agreements

     (792      (891      792         891   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative values with impact of master netting agreements (as carried on balance sheet)

     2,211         2,202         (2,071      (2,166

Cash collateral (held) pledged

     (1,283      (1,326      899         1,018   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net position

   $ 928       $ 876       $ (1,172    $ (1,148
  

 

 

    

 

 

    

 

 

    

 

 

 

 

27


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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

9. Fair Value Measurements (Continued)

 

The following tables summarize the change in balance sheet carrying value associated with level 3 financial instruments carried at fair value on a recurring basis.

 

 

     Three Months Ended March 31, 2012  
     Derivative instruments  

(Dollars in millions)

   Interest
Rate Swaps
    Cross
Currency
Interest
Rate Swaps
    Other     Total
Derivative
Instruments
 

Balance, beginning of period

   $ (40   $ 1,021      $ 1      $ 982   

Total gains/(losses) (realized and unrealized):

        

Included in earnings(1)

     (29     170        (5     136   

Included in other comprehensive income

                            

Settlements

     13        (46            (33

Transfers in and/or out of Level 3

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ (56   $ 1,145      $ (4   $ 1,085   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in unrealized gains/(losses) relating to instruments still held at the reporting date(2)

   $ (16   $ 124      $ (4   $ 104   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended March 31, 2011  
     Derivative instruments  

(Dollars in millions)

   Interest
Rate Swaps
    Cross
Currency
Interest
Rate Swaps
    Other     Total
Derivative
Instruments
 

Balance, beginning of period

   $ (90   $ 1,427      $ 26      $ 1,363   

Total gains/(losses) (realized and unrealized):

        

Included in earnings(1)

     27        633        2        662   

Included in other comprehensive income

                            

Settlements

     (22     (49     (2     (73

Transfers in and/or out of Level 3

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ (85   $ 2,011      $ 26      $ 1,952   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in unrealized gains/(losses) relating to instruments still held at the reporting date(2)

   $ 5      $ 582      $ 3      $ 590   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1)

“Included in earnings” is comprised of the following amounts recorded in the specified line item in the consolidated statements of income:

 

 

     Three Months Ended
March  31,
 

(Dollars in millions)

       2012              2011      

Gains (losses) on derivative and hedging activities, net

   $ 91       $ 613   

Interest expense

     45         49   
  

 

 

    

 

 

 

Total

   $ 136       $ 662   
  

 

 

    

 

 

 

 

  (2)

Recorded in “gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

9. Fair Value Measurements (Continued)

 

The following table presents the significant inputs that are unobservable or from inactive markets used in the recurring valuations of the level 3 financial instruments detailed above.

 

 

(Dollars in millions)

  Fair Value at
March  31, 2012
    Valuation
Technique
  Input   Range
(Weighted Average)

Derivatives

       

Consumer Price Index/LIBOR basis swaps

  $ 118      Discounted cash flow   Bid/ask adjustment
to discount rate
 

0.03% — 0.14%
(0.06%)

Prime/LIBOR basis swaps

    (174   Discounted cash flow   Constant prepayment rate   4.4%
      Bid/ask adjustment
to discount rate
  0.08% — 0.08%
(0.08%)

Cross-currency interest rate swaps

    1,145      Discounted cash flow   Constant prepayment rate   2.6%

Other

    (4      
 

 

 

       

Total

  $ 1,085         
 

 

 

       

The significant inputs that are unobservable or from inactive markets related to our level 3 derivatives detailed in the table above, would be expected to have the following impacts to the valuations:

 

   

Consumer Price Index/LIBOR basis swaps — these swaps do not actively trade in the markets as indicated by a wide bid/ask spread. A wider bid/ask spread will result in a decrease in the overall valuation.

 

   

Prime/LIBOR basis swaps — these swaps do not actively trade in the markets as indicated by a wide bid/ask spread. A wider bid/ask spread will result in a decrease in the overall valuation. In addition, the unobservable inputs include constant prepayment rates of the underlying securitization trust the swap references. A decrease in this input will result in a longer weighted average life of the swap which will increase the value for swaps in a gain position and decrease the value for swaps in a loss position, everything else equal. The opposite is true for an increase in the input.

 

   

Cross-currency interest rate swaps — the unobservable input used in these valuations are constant prepayment rates of the underlying securitization trust the swap references. A decrease in this input will result in a longer weighted average life of the swap. All else equal in a typical currency market, this will result in a decrease to the valuation due to the delay in the cash flows of the currency exchanges as well as diminished liquidity in the forward exchange markets as you increase the term. The opposite is true for an increase in the input.

 

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Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

9. Fair Value Measurements (Continued)

 

The following table summarizes the fair values of our financial assets and liabilities, including derivative financial instruments.

 

 

    March 31, 2012     December 31, 2011  

(Dollars in millions)

  Fair
Value
    Carrying
Value
    Difference     Fair
Value
    Carrying
Value
    Difference  

Earning assets

           

FFELP loans

  $ 133,541      $ 135,934      $ (2,393   $ 134,196      $ 138,130      $ (3,934

Private Education Loans

    35,172        36,732        (1,560     33,968        36,290        (2,322

Cash and investments(1)

    9,926        9,926               9,789        9,789          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

    178,639        182,592        (3,953     177,953        184,209        (6,256
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities

           

Short-term borrowings

    27,110        27,123        13        29,547        29,573        26   

Long-term borrowings

    145,268        155,588        10,320        141,605        154,393        12,788   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

    172,378        182,711        10,333        171,152        183,966        12,814   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivative financial instruments

           

Floor Income/Cap contracts

    (2,413     (2,413            (2,544     (2,544       

Interest rate swaps

    1,282        1,282               1,463        1,463          

Cross currency interest rate swaps

    1,275        1,275               1,116        1,116          

Other

    (4     (4            1        1          
     

 

 

       

 

 

 

Excess of net asset fair value over carrying value

      $ 6,380          $ 6,558   
     

 

 

       

 

 

 

 

(1)

“Cash and investments” includes available-for-sale investments that consist of investments that are primarily U.S. agency securities whose cost basis is $87 million and $85 million at March 31, 2012 and December 31, 2011, respectively, versus a fair value of $92 million and $90 million at March 30, 2011 and December 31, 2011, respectively.

The following includes a discussion of financial instruments whose fair value is included for disclosure purposes only in the table above along with their level in the fair value hierarchy.

Student Loans

FFELP Loans

Fair values for FFELP Loans were determined by modeling loan cash flows using stated terms of the loans and internally-developed assumptions. The significant assumptions used to determine fair value are prepayment speeds, default rates, cost of funds, capital levels, and expected Repayment Borrower Benefits to be earned. In addition, the Floor Income component of our FFELP Loan portfolio is valued with option models using both observable market inputs and internally developed inputs. A number of significant inputs into the models are internally derived and not observable to market participants. While the resulting fair value can be validated against market transactions where we are a participant, these markets are not considered active. As such, these are level 3 valuations.

Private Education Loans

Fair values for Private Education Loans were determined by modeling loan cash flows using stated terms of the loans and internally-developed assumptions. The significant assumptions used to determine fair value are prepayment speeds, default rates, recovery rates, cost of funds and capital levels. A number of significant inputs into the models are internally derived and not observable to market participants nor can the resulting fair values be validated against market transactions. As such, these are level 3 valuations.

 

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Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

9. Fair Value Measurements (Continued)

 

Cash and Investments (Including “Restricted Cash and Investments”)

Cash and cash equivalents are carried at cost. Carrying value approximated fair value. These are level 2 valuations.

Borrowings

The full fair value of all borrowings is disclosed. Fair value was determined through standard bond pricing models and option models (when applicable) using the stated terms of the borrowings, observable yield curves, foreign currency exchange rates, volatilities from active markets or from quotes from broker-dealers. Fair value adjustments for unsecured corporate debt are made based on indicative quotes from observable trades and spreads on credit default swaps specific to the Company. Fair value adjustments for secured borrowings are based on indicative quotes from broker-dealers. These fair value adjustments are based on inputs from inactive markets. As such, these are level 3 valuations.

 

10. Commitments and Contingencies

In the ordinary course of business, we and our subsidiaries are defendants in or parties to pending and threatened legal actions and proceedings including actions brought on behalf of various classes of claimants. These actions and proceedings may be based on alleged violations of consumer protection, securities, employment and other laws. In certain of these actions and proceedings, claims for substantial monetary damage are asserted against us and our subsidiaries.

In the ordinary course of business, we and our subsidiaries are subject to regulatory examinations, information gathering requests, inquiries and investigations. In connection with formal and informal inquiries in these cases, we and our subsidiaries receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of our regulated activities.

In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, we cannot predict what the eventual outcome of the pending matters will be, what the timing or the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.

We are required to establish reserves for litigation and regulatory matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves.

Based on current knowledge, reserves have been established for certain litigation or regulatory matters where the loss is both probable and estimable. Based on current knowledge, management does not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our consolidated financial position, liquidity, results of operations or cash flows.

 

11. Segment Reporting

Consumer Lending Segment

We originate, acquire, finance and service Private Education Loans. The portfolio totaled $36.7 billion at March 31, 2012. We also provide savings products, primarily in the form of retail deposits, to help customers save for a college education.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

The following table includes asset information for our Consumer Lending segment.

 

 

(Dollars in millions)

   March 31,
2012
     December 31,
2011
 

Private Education Loans, net

   $ 36,732       $ 36,290   

Cash and investments(1)

     2,185         3,113   

Other

     3,312         3,595   
  

 

 

    

 

 

 

Total assets

   $ 42,229       $ 42,998   
  

 

 

    

 

 

 

 

  (1)

Includes restricted cash and investments.

Business Services Segment

This segment generates the vast majority of its revenue from servicing our FFELP Loan portfolio and from performing servicing, default aversion and contingency collections work on behalf of ED, Guarantors of FFELP Loans and other institutions. Through our Campus Solutions business we provide comprehensive financing and transaction processing solutions to college financial aid offices and students to streamline the financial aid process. Through Sallie Mae Insurance Services we offer directly to college students and higher education institutions tuition, renters and student health insurance. We also provide 529 college savings plan account asset servicing and other transaction processing activities.

At March 31, 2012 and December 31, 2011, the Business Services segment had total assets of $866 million and $912 million, respectively.

FFELP Loans Segment

Our FFELP Loans segment consists of our $135.9 billion FFELP Loan portfolio as of March 31, 2012 and the underlying debt and capital funding the loans. We no longer originate FFELP Loans; however, we are actively seeking to acquire FFELP Loan portfolios.

The following table includes asset information for our FFELP Loans segment.

 

 

(Dollars in millions)

   March 31,
2012
     December 31,
2011
 

FFELP Loans, net

   $ 135,934       $ 138,130   

Cash and investments(1)

     5,984         6,067   

Other

     4,510         4,415   
  

 

 

    

 

 

 

Total assets

   $ 146,428       $ 148,612   
  

 

 

    

 

 

 

 

  (1) 

Includes restricted cash and investments.

Other Segment

The Other segment consists primarily of the financial results related to activities of our holding company, including the repurchase of debt, the corporate liquidity portfolio and all overhead. We also include results from smaller wind-down and discontinued operations within this segment. Overhead expenses include costs related to executive management, the board of directors, accounting, finance, legal, human resources, stock-based compensation expense and information technology costs related to infrastructure and operations.

At March 31, 2012 and December 31, 2011, the Other segment had total assets of $2.2 billion and $823 million, respectively.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

11. Segment Reporting (Continued)

 

Measure of Profitability

The tables below include the condensed operating results for each of our reportable segments. Management, including the chief operating decision makers, evaluates the Company on certain performance measures that we refer to as “Core Earnings” performance measures for each operating segment. We use “Core Earnings” to manage each business segment because “Core Earnings” reflect adjustments to GAAP financial results for two items, discussed below, that create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that “Core Earnings” provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information as we believe it provides investors with additional information regarding the operational and performance indicators that are most closely assessed by management. The two items adjusted for in our “Core Earnings” presentations are (1) our use of derivatives instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness and (2) the accounting for goodwill and acquired intangible assets. The tables presented below reflect “Core Earnings” operating measures reviewed and utilized by management to manage the business. Reconciliation of the “Core Earnings” segment totals to our consolidated operating results in accordance with GAAP is also included in the tables below.

Our “Core Earnings” performance measures are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting. The management reporting process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. Our operating segments are defined by the products and services they offer or the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management. Intersegment revenues and expenses are netted within the appropriate financial statement line items consistent with the income statement presentation provided to management. Changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial information.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

11. Segment Reporting (Continued)

 

Segment Results and Reconciliations to GAAP

 

 

    Three Months Ended March 31, 2012  

(Dollars in millions)

  Consumer
Lending
    Business
Services
    FFELP
Loans
    Other     Eliminations(1)     Total  “Core
Earnings”
    Adjustments(2)     Total
GAAP
 

Interest income:

               

Student loans

  $ 625      $      $ 725      $      $      $ 1,350      $ 117      $ 1,467   

Other loans

                         5               5          5   

Cash and investments

    2        3        3               (3     5               5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    627        3        728        5        (3     1,360        117        1,477   

Total interest expense

    202               424        5        (3     628        38        666   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    425        3        304                      732        79        811   

Less: provisions for loan losses

    235               18                      253               253   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provisions for loan losses

    190        3        286                      479        79        558   

Servicing revenue

    12        236        25               (176     97               97   

Contingency revenue

           90                             90               90   

Gains on debt repurchases

                         37               37               37   

Other income (loss)

           8               3               11        (343     (332
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    12        334        25        40        (176     235        (343     (108

Expenses:

               

Direct operating expenses

    73        119        181        1        (176     198               198   

Overhead expenses

                         64               64               64   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    73        119        181        65        (176     262               262   

Goodwill and acquired intangible assets impairment and amortization

                                              5        5   

Restructuring expenses

    1        1               3               5               5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    74        120        181        68        (176     267        5        272   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations, before income tax expense (benefit)

    128        217        130        (28            447        (269     178   

Income tax expense (benefit)(3)

    47        79        48        (10            164        (97     67   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    81        138        82        (18            283        (172     111   

Income from discontinued operations, net of taxes

                                                       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    81        138        82        (18            283        (172     111   

Less: loss attributable to noncontrolling interest

           (1                          (1            (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SLM Corporation

  $ 81      $ 139      $ 82      $ (18   $      $ 284      $ (172   $ 112   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

 

(2)

“Core Earnings” adjustments to GAAP:

 

     Three Months Ended March 31, 2012  

(Dollars in millions)

   Net Impact  of
Derivative
Accounting
     Net Impact of
Goodwill and
Acquired
Intangibles
     Total  

Net interest income after provisions for loan losses

   $ 79       $       $ 79   

Total other loss

     (343              (343

Goodwill and acquired intangible assets impairment and amortization

             5         5   
  

 

 

    

 

 

    

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ (264    $ (5      (269
  

 

 

    

 

 

    

Income tax benefit

           (97
        

 

 

 

Net loss

         $ (172
        

 

 

 

 

(3)

Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

11. Segment Reporting (Continued)

 

    Three Months Ended March 31, 2011  

(Dollars in millions)

  Consumer
Lending
    Business
Services
    FFELP
Loans
    Other     Eliminations(1)     Total
“Core

Earnings”
    Adjustments(2)     Total
GAAP
 

Interest income:

               

Student loans

  $ 604      $      $ 736      $      $      $ 1,340      $ 141      $ 1,481   

Other loans

                         6               6               6   

Cash and investments

    3        3        1        1        (3     5               5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    607        3        737        7        (3     1,351        141        1,492   

Total interest expense

    197               370        15        (3     579        15        594   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    410        3        367        (8            772        126        898   

Less: provisions for loan losses

    275               23        5               303               303   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    135        3        344        (13            469        126        595   

Servicing revenue

    17        245        25               (189     98               98   

Contingency revenue

           78                             78               78   

Gains on debt repurchases

                         64               64        (26     38   

Other income (loss)

           11               2               13        (233     (220
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    17        334        25        66        (189     253        (259     (6

Expenses:

               

Direct operating expenses

    82        128        195        8        (189     224               224   

Overhead expenses

                         79               79               79   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    82        128        195        87        (189     303               303   

Goodwill and acquired intangible assets impairment and amortization

                                              6        6   

Restructuring expenses

    1        1        1        1               4               4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    83        129        196        88        (189     307        6        313   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations, before income tax expense (benefit)

    69        208        173        (35            415        (139     276   

Income tax expense (benefit)(3)

    25        76        64        (12            153        (54     99   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    44        132        109        (23            262        (85     177   

Loss from discontinued operations, net of taxes

                         (2            (2            (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 44      $ 132      $ 109      $ (25   $      $ 260      $ (85   $ 175   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

 

(2)

“Core Earnings” adjustments to GAAP:

 

     Three Months Ended March 31, 2011  

(Dollars in millions)

   Net Impact  of
Derivative
Accounting
     Net Impact of
Goodwill and

Acquired
Intangibles
     Total  

Net interest income after provisions for loan losses

   $ 126       $       $ 126   

Total other loss

     (259              (259

Goodwill and acquired intangible assets impairment and amortization

             6         6   
  

 

 

    

 

 

    

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ (133    $ (6      (139
  

 

 

    

 

 

    

Income tax benefit

           (54
        

 

 

 

Net loss

         $ (85
        

 

 

 

 

(3)

Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

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Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

 

11. Segment Reporting (Continued)

 

Summary of “Core Earnings” Adjustments to GAAP

The adjustments required to reconcile from our “Core Earnings” results to our GAAP results of operations relate to differing treatments for securitization transactions, derivatives, Floor Income, and certain other items that management does not consider in evaluating our operating results. The following table reflects aggregate adjustments associated with these areas.

 

 

     Three months ended
March  31,
 

(Dollars in millions)

       2012             2011      

“Core Earnings” adjustments to GAAP:

    

Net impact of derivative accounting(1)

   $ (264   $ (133

Net impact of acquired intangibles(2)

     (5     (6

Net tax effect(3)

     97        54   
  

 

 

   

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ (172   $ (85
  

 

 

   

 

 

 

 

  (1)

Derivative accounting: “Core Earnings” exclude periodic unrealized gains and losses that are caused primarily by the mark-to-market valuations on derivatives that do not qualify for hedge accounting treatment under GAAP. To a lesser extent, these periodic unrealized gains and losses are also a result of ineffectiveness recognized related to effective hedges. These unrealized gains and losses occur in our Consumer Lending, FFELP Loans and Other business segments. Under GAAP, for our derivatives that are held to maturity, the cumulative net unrealized gain or loss over the life of the contract will equal $0 except for Floor Income Contracts where the cumulative unrealized gain will equal the amount for which we sold the contract. In our “Core Earnings” presentation, we recognize the economic effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest expense or revenue over the hedged item’s life.

 

  (2)

Goodwill and Acquired Intangibles: We exclude goodwill and intangible impairment and amortization of acquired intangibles.

 

  (3)

Net Tax Effect: Such tax effect is based upon our “Core Earnings” effective tax rate for the year.

 

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q.

This report contains “forward-looking statements” and information based on management’s current expectations as of the date of this document. Statements that are not historical facts, including statements about the company’s beliefs or expectations and statements that assume or are dependent upon future events, are forward-looking statements. Forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in Item 1A “Risk Factors” and elsewhere in the company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”) and subsequent filings with the SEC; increases in financing costs; limits on liquidity; increases in costs associated with compliance with laws and regulations; changes in accounting standards and the impact of related changes in significant accounting estimates; any adverse outcomes in any significant litigation to which the company is a party; credit risk associated with the company’s exposure to third parties, including counterparties to the company’s derivative transactions; and changes in the terms of student loans and the educational credit marketplace (including changes resulting from new laws and the implementation of existing laws). The company could also be affected by, among other things: changes in its funding costs and availability; reductions to its credit ratings or the credit ratings of the United States of America; failures of its operating systems or infrastructure, including those of third-party vendors; damage to its reputation; failures to successfully implement cost-cutting and restructuring initiatives and adverse effects of such initiatives on its business; changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; changes in law and regulations with respect to the student lending business and financial institutions generally; increased competition from banks and other consumer lenders; the creditworthiness of its customers; changes in the general interest rate environment, including the rate relationships among relevant money-market instruments and those of its earning assets vs. its funding arrangements; changes in general economic conditions; and changes in the demand for debt management services. The preparation of the company’s consolidated financial statements also requires management to make certain estimates and assumptions including estimates and assumptions about future events. These estimates or assumptions may prove to be incorrect. All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document. 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 its expectations.

Definitions for certain capitalized terms used in this document can be found in the 2011 Form 10-K.

Certain reclassifications have been made to the balances as of and for the three months ended March 31, 2011 to be consistent with classifications adopted for 2012, and had no effect on net income, total assets, or total liabilities.

Through this discussion and analysis, we intend to provide the reader with some narrative context for how our management views our consolidated financial statements, additional context within which to assess our operating results, and information on the quality and variability of our earnings, liquidity and cash flows.

 

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Table of Contents

Selected Financial Information and Ratios

 

     Three Months Ended
March 31,
 

(Dollars and shares in millions, except per share data)

   2012     2011  

GAAP Basis

    

Net income attributable to SLM Corporation

   $ 112      $ 175   

Diluted earnings per common share attributable to SLM Corporation

   $ .21      $ .32   

Weighted average shares used to compute diluted earnings per share

     510        532   

Return on assets

     .24     .36

“Core Earnings” Basis(1)

    

“Core Earnings” attributable to SLM Corporation

   $ 284      $ 260   

“Core Earnings” diluted earnings per common share attributable to SLM Corporation

   $ .55      $ .48   

Weighted average shares used to compute diluted earnings per share

     510        532   

“Core Earnings” return on assets

     .62     .54

Other Operating Statistics

    

Ending FFELP Loans, net

   $ 135,934      $ 145,558   

Ending Private Education Loans, net

     36,732        35,966   
  

 

 

   

 

 

 

Ending total student loans, net

   $ 172,666      $ 181,524   
  

 

 

   

 

 

 

Average student loans

   $ 174,942      $ 184,387   

 

  (1) 

“Core Earnings” are non-GAAP financial measures and do not represent a comprehensive basis of accounting. For a greater explanation of “Core Earnings,” see the section titled “‘Core Earnings’ — Definition and Limitations” and subsequent sections.

Overview

Our primary business is to originate, service and collect loans we make to students and/or their parents to finance the cost of their education. The core of our marketing strategy is to generate student loan originations by promoting our products on campus through the financial aid office and through direct marketing to students and their families. We also provide servicing, loan default aversion and defaulted loan collection services for loans owned by other institutions, including ED. We also provide processing capabilities to educational institutions, 529 college savings plan program management services and a consumer savings network. In addition we are the largest holder, servicer and collector of loans made under FFELP, a program that was discontinued in 2010.

We monitor and assess our ongoing operations and results based on the following four reportable segments:

 

   

Consumer Lending Segment — In this segment, we originate, acquire, finance and service Private Education Loans. The Private Education Loans we make are largely to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans or borrowers’ resources. In this segment, we earn net interest income on the Private Education Loan portfolio (after provision for loan losses) as well as servicing fees, primarily late fees. As of March 31, 2012 and December 31, 2011, we had $36.7 billion and $36.3 billion, respectively, of Private Education Loans outstanding.

 

   

Business Services Segment — In our Business Services segment, we provide loan servicing for our FFELP Loans, ED and other third parties. We provide default aversion and contingency collections work on behalf of ED, Guarantors of FFELP Loans, and other institutions. Our Campus Solutions business provides comprehensive transaction processing solutions and associated technology to college financial aid offices and students to streamline the financial aid process. We provide 529 college savings plan account asset servicing and other transaction processing activities. We offer tuition, renters and student health insurance to college students and higher education institutions.

 

   

FFELP Loans Segment — Our FFELP Loans segment consists of our $135.9 billion FFELP Loan portfolio at March 31, 2012 and the underlying debt and capital funding these loans. Because we no longer originate FFELP Loans, the portfolio is in runoff and is expected to amortize over approximately the next 20 years with a weighted average remaining life of 7.6 years.

 

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Table of Contents

We actively seek to acquire FFELP Loan portfolios to leverage our servicing scale and expertise to generate incremental earnings and cash flow. Of our total FFELP Loan portfolio at March 31, 2012, 95 percent was funded with non-recourse, long-term debt; 77 percent of our FFELP Loan portfolio being funded to term by securitization trusts, 13 percent funded through the ED Conduit Program which terminates on January 19, 2014, and 5 percent funded in our multi-year ABCP facility. This segment is expected to generate a stable net interest margin and significant amounts of cash as the FFELP portfolio amortizes.

 

   

Other — Our Other segment primarily consists of the financial results related to activities of our holding company, including the repurchase of debt, the corporate liquidity portfolio and all overhead. We also include results from smaller wind-down and discontinued operations within this segment.

Many aspects of our businesses are subject to federal and state regulation and administrative oversight. This year, as the Consumer Financial Protection Bureau (the “CFPB”) becomes fully operationalized and various other regulatory agencies continue developing new rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the probability of new or additional regulatory requirements or oversight being applied to our various businesses (most notably, private student lending, default aversion and debt collection) or, generally, to large non-bank financial services companies will likely increase.

The CFPB and the Department of Education appear to be on track to release their report on the private education loan industry by July 2012. We provided requested information to them for this report in the first quarter of this year. Also, the CFPB’s Private Student Loan Ombudsman’s office is now operational and began accepting inquiries and complaints about private education loans through its online portal in March. Our own Office of the Consumer Advocate personnel are now actively involved in establishing working relationships with the CFPB’s staff and quickly responding to all inquiries and complaints that have been forwarded to us from the CFPB. For additional information about these and other legislation and regulations to which we are or may become subject, see “Recent Legislation,” “Other Significant Sources of Regulation” and “Risk Factors” in our 2011 Form 10-K.

Key Financial Measures

Our operating results are primarily driven by net interest income from our student loan portfolios (which include financing costs), provision for loan losses, the revenues and expenses generated by our service businesses, and gains and losses on loan sales and debt repurchases. We manage and assess the performance of each business segment separately as each is focused on different customers and each derives its revenue from different activities and services. A brief summary of our key financial measures (net interest income; provisions for loan losses; charge-offs and delinquencies; servicing and contingency revenues; other income (loss); operating expenses; and “Core Earnings”) can be found in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2011 Form 10-K.

First-Quarter 2012 Summary of Results

We continue to operate in a challenging macroeconomic environment marked by high unemployment and financial uncertainty which contributes added uncertainty to Private Education Loan repayment and default patterns. Our business has changed significantly over the past two years as we no longer originate FFELP Loans. A detailed discussion of these changes can be found in Item 1 “Business” and in Item 1A “Risk Factors” in our 2011 Form 10-K.

Nonetheless, we were able to achieve significant accomplishments during the first quarter of 2012 as discussed below.

We report financial results on a GAAP basis and also present certain “Core Earnings” performance measures. Our management, equity investors, credit rating agencies and debt capital providers use these “Core Earnings” measures to monitor our business performance. See “‘Core Earnings’ — Definition and Limitations” for a further discussion and a complete reconciliation between GAAP net income and “Core Earnings.”

 

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Table of Contents

First-quarter 2012 GAAP net income was $112 million ($.21 diluted earnings per share), versus net income of $175 million ($.32 diluted earnings per share) in the first-quarter 2011. The changes in GAAP net income are driven by the same types of “Core Earnings” items discussed below as well as changes in “mark-to-market” unrealized gains and losses on derivative contracts and amortization and impairment of goodwill and intangible assets that are recognized in GAAP but not in “Core Earnings” results. First-quarter 2012 results had a $131 million increase in unrealized, mark-to-market losses on derivative contracts compared with the year-ago period.

“Core Earnings” for the quarter were $284 million ($.55 diluted earnings per share), compared with $260 million ($.48 diluted earnings per share) in the year-ago period. The improvement in “Core Earnings” was primarily the result of a $50 million decline in loan loss provision and a $40 million decrease in expenses offset by a $40 million net interest income reduction and a $27 million decline in debt repurchase gains.

During the first quarter of 2012, we:

 

   

issued $1.6 billion of FFELP asset-backed securities (“ABS”), $547 million of Private Education Loan ABS and $1.5 billion of unsecured bonds;

 

   

repurchased $204 million of debt and realized “Core Earnings” gains of $37 million, compared with $825 million of debt repurchased and $64 million of gains in the first quarter of 2011;

 

   

amended our FFELP asset-backed commercial paper facility to increase the current amount available to $7.5 billion and extend the final maturity date by one year to January 9, 2015;

 

   

repurchased 16.7 million common shares for $268 million on the open market as part of our previously announced share repurchase program authorization of up to $500 million; and

 

   

increased our regular quarterly common stock dividend to $.125 per share, up from $.10 per share in the prior quarter. We paid our quarterly dividend on March 16, 2012.

2012 Management Objectives

In 2012 we have set out five major goals to create shareholder value. They are: (1) prudently grow Consumer Lending segment assets and revenue; (2) sustain Business Services segment revenue; (3) maximize cash flows from FFELP Loans; (4) reduce our operating expenses; and (5) improve our financial strength. Here is how we plan to achieve these objectives and the progress we have made to date:

Prudently Grow Consumer Lending Segment Assets and Revenues

We will continue to pursue managed growth in our Private Education Loan portfolio in 2012, currently targeting $3.2 billion in new originations for the year compared to $2.7 billion in 2011. We will also be increasing our efforts to improve our return on these assets projecting even lower charge-off rates and provision for loan losses, continuing to build on the improvements we have been demonstrating in these measures since 2009. Originations were 23 percent higher in the first quarter of 2012 compared with the year-ago quarter. Charge-offs decreased to 2.96 percent of loans in repayment from 3.94 percent in the year-ago quarter. This is the lowest charge-off rate on these loans since third-quarter 2008. Provisions for loans losses decreased to $235 million in the first quarter 2012 compared to $275 million in the first quarter 2011.

Sustain Business Services Segment Revenue

Our Business Services segment generates the vast majority of its revenue from servicing and collecting on our FFELP Loan portfolio and FFELP Loans for others. As a result of the elimination of FFELP in 2010, servicing and collection revenues derived from FFELP-related sources are in decline. In 2012 we will work to offset these declines through two primary means — pursuing additional growth and expansion of our non-FFELP- related servicing and collection businesses and seeking to increase the FFELP-related loan servicing and collection work we do for third parties. In 2012 we are targeting significant growth in the number of customers we service for ED under our ED servicing and collection contracts, as well as in the total assets under management in our 529 college savings plans. We will explore both complementary and diversified strategies to

 

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expand demand for our services in and beyond the student loan market. We will also more aggressively seek to leverage our existing FFELP servicing platforms to be able to provide lower cost FFELP servicing to others while increasing segment revenues from these sources.

 

   

Based on our performance in the most recently ended contract year, our allocation of new customer loans awarded for servicing under our ED Servicing Contract increased from 22 percent to 26 percent for the current contract year ending August 15, 2012. The increase was driven primarily by our top ranking for default prevention performance results. We are servicing approximately 3.7 million accounts under the ED Servicing Contract as of March 31, 2012 compared to 3.2 million accounts as of March 31, 2011.

 

   

Campus Solutions added 7 new refund disbursement clients in the first quarter of 2012.

 

   

Assets under management in 529 college savings plans totaled $41.3 billion at March 31, 2012 and grew 13 percent over the year-ago quarter.

Maximize Cash Flows from FFELP Loans

In 2012 we will continue to focus on opportunistically purchasing additional FFELP Loan portfolios from other lenders. As cash flows from our existing FFELP Loans decline over coming years, it also becomes increasingly important that we actively manage and continue to reduce operating and overhead costs attributable to the maintenance and management of this segment. Continuing to reduce these operating and overhead costs will also increase net income for our Business Services segment. During the first quarter of 2012, we purchased over $900 million of FFELP Loans. We expect to make additional purchases during 2012. Total estimated FFELP Loan portfolio acquisitions in the first half of the year are expected to be approximately $2 billion. We will continue to actively and aggressively seek to acquire additional portfolios.

Reduce Operating Expenses

We achieved our 2011 management objective of having a quarterly operating expense of $250 million or less in the fourth quarter of 2011. We will remain focused on reducing operating expenses in 2012 and expect to improve on the $1.1 billion of operating expenses incurred in 2011. First-quarter 2012 operating expenses were $262 million, down from $303 million in the year-ago quarter primarily due to the Company’s ongoing cost-cutting initiatives and lower servicing costs.

Improve Our Financial Strength

It is management’s objective for 2012 to provide increased shareholder distributions while at the same time ending 2012 with a balance sheet and capital position as strong as or stronger than those with which we ended in 2011. In January 2012 we increased our regular quarterly common stock dividend to $0.125 per share, up from $0.10 in the prior quarter. In addition, during the first quarter of 2012, we repurchased 16.7 million shares of common stock at an aggregate purchase price of $268 million. The shares were repurchased under the company’s January 2012 $500 million share repurchase program.

RESULTS OF OPERATIONS

We present the results of operations below first on a consolidated basis in accordance with GAAP. Following our discussion of consolidated earnings results on a GAAP basis, we present our results on a segment basis. We have four business segments: FFELP Loans, Consumer Lending, Business Services and Other. Since these segments operate in distinct business environments and we manage and evaluate the financial performance of these segments using non-GAAP financial measures, these segments are presented on a “Core Earnings” basis (see “‘Core Earnings’ — Definition and Limitations”).

 

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GAAP Statements of Income (Unaudited)

 

     Three Months
Ended
March 31,
    Increase
(Decrease)
 

(Dollars in millions, except per share data)

   2012     2011     $     %  

Interest income:

        

FFELP Loans

   $ 842      $ 877      $ (35     (4 )% 

Private Education Loans

     625        604        21        3   

Other loans

     5        6        (1     (17

Cash and investments

     5        5                 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     1,477        1,492        (15     (1

Total interest expense

     666        594        72        12   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     811        898        (87     (10

Less: provisions for loan losses

     253        303        (50     (17
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provisions for loan losses

     558        595        (37     (6

Other income (loss):

        

Gains (losses) on derivative and hedging activities, net

     (372     (242     (130     (54

Servicing revenue

     97        98        (1     (1

Contingency revenue

     90        78        12        15   

Gains on debt repurchases

     37        38        (1     (3

Other income

     40        22        18        82   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

     (108     (6     (102     (1,700

Expenses:

        

Operating expenses

     262        303        (41     (14

Goodwill and acquired intangible assets impairment and amortization expense

     5        6        (1     (17

Restructuring expenses

     5        4        1        25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     272        313        (41     (13

Income from continuing operations before income tax expense

     178        276        (98     (36

Income tax expense

     67        99        (32     (32
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     111        177        (66     (37

Loss from discontinued operations, net of tax benefit

            (2     2        (100
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     111        175        (64     (37

Less: net loss attributable to noncontrolling interest

     (1            (1     (100
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to SLM Corporation

     112        175        (63     (36

Preferred stock dividends

     5        4        1        25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to SLM Corporation common stock

   $ 107      $ 171      $ (64     (37 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share attributable to SLM Corporation:

        

Continuing operations

   $ .21      $ .32      $ (.11     (34 )% 

Discontinued operations

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ .21      $ .32      $ (.11     (34 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share attributable to SLM Corporation:

        

Continuing operations

   $ .21      $ .32      $ (.11     (34 )% 

Discontinued operations

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ .21      $ .32      $ (.11     (34 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per common share attributable to SLM Corporation

   $ .125      $      $ .125        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Earnings Summary — GAAP-basis

Three Months Ended March 31, 2012 Compared with Three Months Ended March 31, 2011

For the three months ended March 31, 2012 and 2011, net income was $112 million, or $.21 diluted earnings per common share, and $175 million, or $.32 diluted earnings per common share, respectively. The decrease in net income was primarily due to a $130 million increase in net losses on derivative and hedging activities and an $87 million decline in net interest income, which was partially offset by a $50 million decrease in provisions for loan losses and $41 million of lower expenses.

 

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The primary contributors to each of the identified drivers of changes in net income for the current quarter compared with the year-ago quarter are as follows:

 

   

Net interest income declined by $87 million primarily due to the declining outstanding principal balance of our FFELP Loan portfolio and an increase in funding costs.

 

   

Provisions for loan losses decreased by $50 million as a result of overall improvements in credit quality and delinquency and charge-off trends.

 

   

Net losses on derivatives and hedging activities increased by $130 million. The primary factors affecting the change were interest rate and foreign currency fluctuations, which primarily affected the valuations of our Floor Income Contracts, basis swaps and foreign currency hedges during the period. Valuations of derivative instruments vary based upon many factors including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, net gains and losses on derivatives and hedging activities may vary significantly in future periods.

 

   

Contingency revenue increased $12 million primarily as a result of an increase in collections on defaulted FFELP Loans.

 

   

Other income increased primarily as a result of a $19 million increase in foreign currency translation gains. The foreign currency translation gains relate to a portion of our foreign currency denominated debt that does not receive hedge accounting treatment. These gains were partially offset by losses on derivative and hedging activities related to the derivatives used to economically hedge these debt instruments.

 

   

Operating expenses decreased $41 million primarily due to our ongoing cost-cutting initiatives and lower servicing costs. In addition, first-quarter 2012 operating expenses were positively affected by an $8 million gain related to the final termination of our defined benefit pension plan. First-quarter 2011 operating expenses included $10 million in litigation contingency expense.

 

   

The effective tax rates for the first quarters of 2012 and 2011 were 38 percent and 36 percent, respectively.

“Core Earnings” — Definition and Limitations

We prepare financial statements in accordance with GAAP. However, we also evaluate our business segments on a basis that differs from GAAP. We refer to this different basis of presentation as “Core Earnings.” We provide this “Core Earnings” basis of presentation on a consolidated basis for each business segment because this is what we internally review when making management decisions regarding our performance and how we allocate resources. We also refer to this information in our presentations with credit rating agencies, lenders and investors. Because our “Core Earnings” basis of presentation corresponds to our segment financial presentations, we are required by GAAP to provide “Core Earnings” disclosure in the notes to our consolidated financial statements for our business segments.

“Core Earnings” are not a substitute for reported results under GAAP. We use “Core Earnings” to manage each business segment because “Core Earnings” reflect adjustments to GAAP financial results for two items, discussed below, that create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that “Core Earnings” provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information as we believe it provides investors with additional information regarding the operational and performance indicators that are most closely assessed by management. The two items adjusted for in our “Core Earnings” presentations are (1) our use of derivatives instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness and (2) the accounting for goodwill and acquired intangible assets.

While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, our “Core Earnings” basis of presentation does not. “Core Earnings” are subject to certain general and specific limitations that investors should carefully consider. For example, there is no comprehensive, authoritative guidance for management reporting. Our “Core Earnings” are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Accordingly, our “Core Earnings” presentation does not represent a comprehensive basis of accounting. Investors, therefore, may not be able to

 

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compare our performance with that of other financial services companies based upon “Core Earnings.” “Core Earnings” results are only meant to supplement GAAP results by providing additional information regarding the operational and performance indicators that are most closely used by management, our board of directors, rating agencies, lenders and investors to assess performance.

Specific adjustments that management makes to GAAP results to derive our “Core Earnings” basis of presentation are described in detail in the section titled “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP” below.

The following tables show “Core Earnings” for each business segment and our business as a whole along with the adjustments made to the income/expense items to reconcile the amounts to our reported GAAP results as required by GAAP.

 

    Three Months Ended March 31, 2012  

(Dollars in millions)

  Consumer
Lending
    Business
Services
    FFELP
Loans
    Other     Eliminations(1)     Total  “Core
Earnings”
    Adjustments(2)     Total
GAAP
 

Interest income:

               

Student loans

  $ 625      $      $ 725      $      $      $ 1,350      $ 117      $ 1,467   

Other loans

                         5               5          5   

Cash and investments

    2        3        3               (3     5               5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    627        3        728        5        (3     1,360        117        1,477   

Total interest expense

    202               424        5        (3     628        38        666   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    425        3        304                      732        79        811   

Less: provisions for loan losses

    235               18                      253               253   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provisions for loan losses

    190        3        286                      479        79        558   

Servicing revenue

    12        236        25               (176     97               97   

Contingency revenue

           90                             90               90   

Gains on debt repurchases

                         37               37               37   

Other income (loss)

           8               3               11        (343     (332
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    12        334        25        40        (176     235        (343     (108

Expenses:

               

Direct operating expenses

    73        119        181        1        (176     198               198   

Overhead expenses

                         64               64               64   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    73        119        181        65        (176     262               262   

Goodwill and acquired intangible assets impairment and amortization

                                              5        5   

Restructuring expenses

    1        1               3               5               5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    74        120        181        68        (176     267        5        272   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations, before income tax expense (benefit)

    128        217        130        (28            447        (269     178   

Income tax expense (benefit)(3)

    47        79        48        (10            164        (97     67   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    81        138        82        (18            283        (172     111   

Income from discontinued operations, net of taxes

                                                       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    81        138        82        (18            283        (172     111   

Less: net loss attributable to noncontrolling interest

           (1                          (1            (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SLM Corporation

  $ 81      $ 139      $ 82      $ (18   $      $ 284      $ (172   $ 112   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

 

(2) 

“Core Earnings” adjustments to GAAP:

 

     Three Months Ended March 31, 2012  

(Dollars in millions)

   Net Impact  of
Derivative
Accounting
     Net Impact of
Goodwill and
Acquired
Intangibles
     Total  

Net interest income after provisions for loan losses

   $ 79       $       $ 79   

Total other loss

     (343              (343

Goodwill and acquired intangible assets impairment and amortization

             5         5   
  

 

 

    

 

 

    

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ (264    $ (5      (269
  

 

 

    

 

 

    

Income tax benefit

           (97
        

 

 

 

Net loss

         $ (172
        

 

 

 

 

(3) 

Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

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Table of Contents
    Three Months Ended March 31, 2011  

(Dollars in millions)

  Consumer
Lending
    Business
Services
    FFELP
Loans
    Other     Eliminations(1)     Total  “Core
Earnings”
    Adjustments(2)     Total
GAAP
 

Interest income:

               

Student loans

  $ 604      $      $ 736      $      $      $ 1,340      $ 141      $ 1,481   

Other loans

                         6               6               6   

Cash and investments

    3        3        1        1        (3     5               5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    607        3        737        7        (3     1,351        141        1,492   

Total interest expense

    197               370        15        (3     579        15        594   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    410        3        367        (8            772        126        898   

Less: provisions for loan losses

    275               23        5               303               303   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    135        3        344        (13            469        126        595   

Servicing revenue

    17        245        25               (189     98               98   

Contingency revenue

           78                             78               78   

Gains on debt repurchases

                         64               64        (26     38   

Other income (loss)

           11               2               13        (233     (220
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    17        334        25        66        (189     253        (259     (6

Expenses:

               

Direct operating expenses

    82        128        195        8        (189     224               224   

Overhead expenses

                         79               79               79   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    82        128        195        87        (189     303               303   

Goodwill and acquired intangible assets impairment and amortization

                                              6        6   

Restructuring expenses

    1        1        1        1               4               4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    83        129        196        88        (189     307        6        313   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations, before income tax expense (benefit)

    69        208        173        (35            415        (139     276   

Income tax expense (benefit)(3)

    25        76        64        (12            153        (54     99   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    44        132        109        (23            262        (85     177   

Loss from discontinued operations, net of taxes

                         (2            (2            (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 44      $ 132      $ 109      $ (25   $      $ 260      $ (85   $ 175   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

 

(2) 

“Core Earnings” adjustments to GAAP:

 

       Three Months Ended March 31, 2011    

(Dollars in millions)

   Net Impact  of
Derivative
Accounting
     Net Impact of
Goodwill and

Acquired
Intangibles
     Total  

Net interest income after provisions for loan losses

   $ 126       $       $ 126   

Total other loss

     (259              (259

Goodwill and acquired intangible assets impairment and amortization

             6         6   
  

 

 

    

 

 

    

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ (133    $ (6      (139
  

 

 

    

 

 

    

Income tax benefit

           (54
        

 

 

 

Net loss

         $ (85
        

 

 

 

 

(3) 

Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

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Differences between “Core Earnings” and GAAP

The two adjustments required to reconcile from our “Core Earnings” results to our GAAP results of operations relate to differing treatments for: (1) our use of derivatives instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness and (2) the accounting for goodwill and acquired intangible assets. The following table reflects aggregate adjustments associated with these areas.

 

     Three Months
Ended
March 31,
 

(Dollars in millions)

   2012     2011  

“Core Earnings” adjustments to GAAP:

    

Net impact of derivative accounting

   $ (264   $ (133

Net impact of goodwill and acquired intangibles

     (5     (6

Net income tax effect

     97        54   
  

 

 

   

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ (172   $ (85
  

 

 

   

 

 

 

1) Derivative Accounting: “Core Earnings” exclude periodic unrealized gains and losses that are caused primarily by the mark-to-market valuations on derivatives that do not qualify for hedge accounting treatment under GAAP. To a lesser extent, these periodic unrealized gains and losses are also a result of ineffectiveness recognized related to effective hedges. These unrealized gains and losses occur in our Consumer Lending, FFELP Loans and Other business segments. Under GAAP, for our derivatives that are held to maturity, the cumulative net unrealized gain or loss over the life of the contract will equal $0 except for Floor Income Contracts where the cumulative unrealized gain will equal the amount for which we sold the contract. In our “Core Earnings” presentation, we recognize the economic effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest expense or revenue over the hedged item’s life.

The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria are met. We believe that our derivatives are effective economic hedges, and as such, are a critical element of our interest rate and foreign currency risk management strategy. However, some of our derivatives, primarily Floor Income Contracts and certain basis swaps, do not qualify for hedge accounting treatment and the stand-alone derivative must be marked-to-market in the income statement with no consideration for the corresponding change in fair value of the hedged item. These gains and losses recorded in “Gains (losses) on derivative and hedging activities, net” are primarily caused by interest rate and foreign currency exchange rate volatility and changing credit spreads during the period as well as the volume and term of derivatives not receiving hedge accounting treatment.

 

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Our Floor Income Contracts are written options that must meet more stringent requirements than other hedging relationships to achieve hedge effectiveness. Specifically, our Floor Income Contracts do not qualify for hedge accounting treatment because the pay down of principal of the student loans underlying the Floor Income embedded in those student loans does not exactly match the change in the notional amount of our written Floor Income Contracts. Additionally, the term and the interest rate index of the Floor Income Contract are different than that of the student loans. Under derivatives accounting treatment, the upfront payment is deemed a liability and changes in fair value are recorded through income throughout the life of the contract. The change in the value of Floor Income Contracts is primarily caused by changing interest rates that cause the amount of Floor Income earned on the underlying student loans and paid to the counterparties to vary. This is economically offset by the change in value of the student loan portfolio earning Floor Income but that offsetting change in value is not recognized. We believe the Floor Income Contracts are economic hedges because they effectively fix the amount of Floor Income earned over the contract period, thus eliminating the timing and uncertainty that changes in interest rates can have on Floor Income for that period. Therefore, for purposes of “Core Earnings”, we have removed the unrealized gains and losses related to these contracts and added back the amortization of the net premiums received on the Floor Income Contracts. The amortization of the net premiums received on the Floor Income Contracts for “Core Earnings” is reflected in student loan interest income. Under GAAP accounting, the premium received on the Floor Income Contracts is recorded as revenue in the “gains (losses) on derivatives and hedging activities, net” line item by the end of the contracts’ life.

Basis swaps are used to convert floating rate debt from one floating interest rate index to another to better match the interest rate characteristics of the assets financed by that debt. We primarily use basis swaps to hedge our student loan assets that are primarily indexed to a commercial paper, Prime or Treasury bill index. In addition, we use basis swaps to convert debt indexed to the Consumer Price Index to three-month LIBOR debt. The accounting for derivatives requires that when using basis swaps, the change in the cash flows of the hedge effectively offset both the change in the cash flows of the asset and the change in the cash flows of the liability. Our basis swaps hedge variable interest rate risk; however, they generally do not meet this effectiveness test because the index of the swap does not exactly match the index of the hedged assets as required for hedge accounting treatment. Additionally, some of our FFELP Loans can earn at either a variable or a fixed interest rate depending on market interest rates and therefore swaps economically hedging these FFELP Loans do not meet the criteria for hedge accounting treatment. As a result, under GAAP, these swaps are recorded at fair value with changes in fair value reflected currently in the income statement.

The table below quantifies the adjustments for derivative accounting on our net income.

 

     Three Months
Ended

March 31,
 

(Dollars in millions)

   2012     2011  

“Core Earnings” derivative adjustments:

    

Gains (losses) on derivative and hedging activities, net, included in other income(1)

   $ (372   $ (242

Plus: Realized losses on derivative and hedging activities, net(1)

     179        186   
  

 

 

   

 

 

 

Unrealized gains (losses) on derivative and hedging activities, net

     (193     (56

Amortization of net premiums on Floor Income Contracts in net interest income for “Core Earnings”

     (97     (85

Other pre-change in derivatives accounting adjustments

     26        8   
  

 

 

   

 

 

 

Total net impact derivative accounting(2)

   $ (264   $ (133
  

 

 

   

 

 

 

 

  (1) 

See “Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” below for a detailed breakdown of the components of realized losses on derivative and hedging activities.

 

  (2) 

Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income and positive amounts are added to “Core Earnings” net income to arrive at GAAP net income.

 

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Table of Contents

Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities

Derivative accounting requires net settlement income/expense on derivatives and realized gains/losses related to derivative dispositions (collectively referred to as “realized gains (losses) on derivative and hedging activities”) that do not qualify as hedges to be recorded in a separate income statement line item below net interest income. Under our “Core Earnings” presentation, these gains and losses are reclassified to the income statement line item of the economically hedged item. For our “Core Earnings” net interest margin, this would primarily include: (a) reclassifying the net settlement amounts related to our Floor Income Contracts to student loan interest income and (b) reclassifying the net settlement amounts related to certain of our basis swaps to debt interest expense. The table below summarizes the realized losses on derivative and hedging activities and the associated reclassification on a “Core Earnings” basis.

 

    Three Months
Ended
March 31,
 

(Dollars in millions)

      2012             2011      

Reclassification of realized gains (losses) on derivative and hedging activities:

   

Net settlement expense on Floor Income Contracts reclassified to net interest income

  $ (215   $ (226

Net settlement income on interest rate swaps reclassified to net interest income

    36        16   

Foreign exchange derivatives losses reclassified to other income

           (1

Net realized gains (losses) on terminated derivative contracts reclassified to other income

           25   
 

 

 

   

 

 

 

Total reclassifications of realized losses on derivative and hedging activities

    (179     (186

Add: Unrealized gains (losses) on derivative and hedging activities, net(1)

    (193     (56
 

 

 

   

 

 

 

Losses on derivative and hedging activities, net

  $ (372   $ (242
 

 

 

   

 

 

 

 

  (1) 

“Unrealized gains (losses) on derivative and hedging activities, net” comprises the following unrealized mark-to-market gains (losses):

 

     Three Months
Ended

March 31,
 

(Dollars in millions)

       2012              2011      

Floor Income Contracts

   $ 136       $ 151   

Basis swaps

     (22      (6

Foreign currency hedges

     (294      (194

Other

     (13      (7
  

 

 

    

 

 

 

Total unrealized gains (losses) on derivative and hedging activities, net

   $ (193    $ (56
  

 

 

    

 

 

 

Cumulative Impact of Derivative Accounting under GAAP compared to “Core Earnings”

As of March 31, 2012, derivative accounting has reduced GAAP equity by approximately $1.1 billion as a result of approximately $1.1 billion (after-tax) of cumulative net unrealized net losses recognized for GAAP, but not in “Core Earnings.” The following table rolls forward the cumulative impact to GAAP equity due to these unrealized net losses related to derivative accounting.

 

     Three Months Ended
March 31,
 

(Dollars in millions)

       2012             2011      

Beginning impact of derivative accounting of GAAP equity

   $ (977   $ (676

Net impact of net unrealized gains (losses) under derivative accounting

     (172     (76
  

 

 

   

 

 

 

Ending impact of derivative accounting of GAAP equity

   $ (1,149   $ (752
  

 

 

   

 

 

 

 

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In addition, net Floor premiums received on Floor Income Contracts that have not been amortized into “Core Earnings” as of the respective year-ends are presented in the table below. These net premiums will be recognized in “Core Earnings” in future periods and are presented below net of tax. As of March 31, 2012, the remaining amortization term of the net floor premiums was approximately 4.25 years.

 

(Dollars in millions)

   March 31,
  2012  
    March 31,
  2011  
 

Unamortized net Floor premiums (net of tax)

   $ (711   $ (945
  

 

 

   

 

 

 

2) Goodwill and Acquired Intangibles: Our “Core Earnings” exclude goodwill and intangible impairment and the amortization of acquired intangibles. The following table summarizes the goodwill and acquired intangible adjustments.

 

     Three Months
Ended

March  31,
 

(Dollars in millions)

   2012     2011  

“Core Earnings” goodwill and acquired intangibles adjustments(1):

    

Amortization of acquired intangibles from continuing operations

   $ (5   $ (6
  

 

 

   

 

 

 

Total “Core Earnings” goodwill and acquired intangibles adjustments(1)

   $ (5   $ (6
  

 

 

   

 

 

 

 

  (1) 

Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income.

Business Segment Earnings Summary — “Core Earnings” Basis

Consumer Lending Segment

The following table shows “Core Earnings” results for our Consumer Lending segment.

 

     Three Months  Ended
March 31,
     % Increase
(Decrease)
 

(Dollars in millions)

       2012              2011          March 31, 2012
vs. March 31, 2011
 

“Core Earnings” interest income:

        

Private Education Loans

   $ 625       $ 604         3

Cash and investments

     2         3         (33
  

 

 

    

 

 

    

 

 

 

Total “Core Earnings” interest income

     627         607         3   

Total “Core Earnings” interest expense

     202         197         3   
  

 

 

    

 

 

    

 

 

 

Net “Core Earnings” interest income

     425         410         4   

Less: provisions for loan losses

     235         275         (15
  

 

 

    

 

 

    

 

 

 

Net “Core Earnings” interest income after provisions for loan losses

     190         135         41   

Servicing revenue

     12         17         (29

Other income (loss)

                       
  

 

 

    

 

 

    

 

 

 

Total other income

     12         17         (29

Direct operating expenses

     73         82         (11

Restructuring expenses

     1         1           
  

 

 

    

 

 

    

 

 

 

Total expenses

     74         83         (11
  

 

 

    

 

 

    

 

 

 

Income before income tax expense

     128         69         86   

Income tax expense

     47         25         88   
  

 

 

    

 

 

    

 

 

 

“Core Earnings”

   $ 81       $ 44         84
  

 

 

    

 

 

    

 

 

 

“Core Earnings” were $81 million for the three months ended March 31, 2012, compared with $44 million in the year-ago period. This improvement was primarily the result of reduced loan loss provision.

 

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Highlights compared to first-quarter 2011 included:

 

   

Loan originations increased to $1.2 billion, up 23 percent from $940 million.

 

   

The portfolio, net of loan loss allowance, totaled $36.7 billion at March 30, 2012, compared with $36.0 billion at March 31, 2011.

 

   

Net interest margin, before loan loss provision, improved to 4.26 percent, up from 4.11 percent.

 

   

Delinquencies of 90 days or more (as a percentage of loans in repayment) improved to 4.4 percent, compared with 5.1 percent.

 

   

The annual charge-off rate (as a percentage of loans in repayment) improved to 2.96 percent, compared with 3.94 percent.

Consumer Lending Net Interest Margin

The following table shows the Consumer Lending “Core Earnings” net interest margin along with reconciliation to the GAAP-basis Consumer Lending net interest margin before provision for loan losses.

 

     Three Months
Ended
March 31,
 
         2012             2011      

“Core Earnings” basis Private Education Student Loan yield

     6.42     6.36

Discount amortization

     .24        .26   
  

 

 

   

 

 

 

“Core Earnings” basis Private Education Loan net yield

     6.66        6.62   

“Core Earnings” basis Private Education Loan cost of funds

     (2.01     (1.97
  

 

 

   

 

 

 

“Core Earnings” basis Private Education Loan spread

     4.65        4.65   

“Core Earnings” basis other asset spread impact

     (.39     (.54
  

 

 

   

 

 

 

“Core Earnings” basis Consumer Lending net interest margin(1)

     4.26     4.11
  

 

 

   

 

 

 
                  

“Core Earnings” basis Consumer Lending net interest margin(1)

     4.26     4.11

Adjustment for GAAP accounting treatment

     (.13     (.04
  

 

 

   

 

 

 

GAAP-basis Consumer Lending net interest margin(1)

     4.13     4.07
  

 

 

   

 

 

 

 

  (1) 

The average balances of our Consumer Lending interest-earning assets for the respective periods are:

 

(Dollars in millions)

             

Private Education Loans

   $ 37,749       $ 37,006   

Other interest-earning assets

     2,327         3,360   
  

 

 

    

 

 

 

Total Consumer Lending “Core Earnings” basis interest-earning assets

   $ 40,076       $ 40,366   
  

 

 

    

 

 

 

The increase in the “Core Earnings” basis Consumer Lending net interest margin over the year-ago quarter was primarily the result of a benefit from the decline in the average balance of our other asset portfolio. The size of the other asset portfolio, which is primarily securitization trust restricted cash and cash held at Sallie Mae Bank (the “Bank”), has decreased significantly. This other asset portfolio earns a negative yield and as a result, when its relative weighting decreases compared to the Private Education Loan portfolio, the overall net interest margin increases.

Private Education Loan Provision for Loan Losses and Charge-Offs

The following table summarizes the total Private Education Loan provision for loan losses and charge-offs.

 

     Three Months
Ended
March 31,
 

(Dollars in millions)

       2012              2011      

Private Education Loan provision for loan losses

   $ 235       $ 275   

Private Education Loan charge-offs

   $ 224       $ 273   

 

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In establishing the allowance for Private Education Loan losses as of March 31, 2012, we considered several factors with respect to our Private Education Loan portfolio. In particular, we continue to see improving credit quality and continuing positive delinquency and charge-off trends in connection with this portfolio. Improving credit quality is seen in higher FICO scores and cosigner rates as well as a more seasoned portfolio compared with the year-ago quarter. The overall delinquency rate has declined to 9.1 percent from 10.4 percent and the charge-off rate has declined to 2.96 percent from 3.94 percent compared with the year-ago quarter. Apart from these overall improvements, Private Education Loans that have defaulted between 2008 and 2011 for which we have previously charged off estimated losses have, to varying degrees, not met our post-default recovery expectations to date and may continue not to do so. Our allowance for loan losses takes into account these potential recovery uncertainties.

For a more detailed discussion of our policy for determining the collectability of Private Education Loan and maintaining our allowance for Private Education Loan losses, see “Critical Accounting Policies and Estimates — Allowance for Loan Losses” in our 2011 Form 10-K.

Operating Expenses — Consumer Lending Segment

Operating expenses for our Consumer Lending segment include costs incurred to originate Private Education Loans and to service and collect on our Private Education Loan portfolio. The decreases in operating expenses in the quarter ended March 31, 2012 compared with the quarter ended March 31, 2011 were primarily the result of our cost cutting initiatives. Operating expenses were 77 basis points and 90 basis points of average Private Education Loans in the quarters ended March 31, 2012 and 2011, respectively.

Business Services Segment

The following table shows “Core Earnings” results for our Business Services segment.

 

     Three Months Ended
March 31,
     %  Increase
(Decrease)
 

(Dollars in millions)

       2012             2011          2012 vs. 2011  

Net interest income after provision

   $ 3      $ 3        

Servicing revenue:

       

Intercompany loan servicing

     176        189         (7

Third-party loan servicing

     22        22           

Guarantor servicing

     11        9         22   

Other servicing

     27        25         8   
  

 

 

   

 

 

    

 

 

 

Total servicing revenue

     236        245         (4

Contingency revenue

     90        78         15   

Other Business Services revenue

     8        11         (27
  

 

 

   

 

 

    

 

 

 

Total other income

     334        334           

Direct operating expenses

     119        128         (7

Restructuring expenses

     1        1           
  

 

 

   

 

 

    

 

 

 

Total expenses

     120        129         (7
  

 

 

   

 

 

    

 

 

 

Income from continuing operations, before income tax expense

     217        208         4   

Income tax expense

     79        76         4   
  

 

 

   

 

 

    

 

 

 

“Core Earnings”

     138        132         5   

Less: net loss attributable to noncontrolling interest

     (1             (100
  

 

 

   

 

 

    

 

 

 

“Core Earnings” attributable to SLM Corporation

   $ 139      $ 132         5
  

 

 

   

 

 

    

 

 

 

“Core Earnings” were $139 million in the first quarter of 2012, compared to $132 million in the year-ago quarter. The improvement was primarily driven by the reduction in operating expenses.

 

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Table of Contents

Our Business Services segment earns intercompany loan servicing fees from servicing the FFELP Loans in our FFELP Loans segment. The average balance of this portfolio was $135 billion and $144 billion for the quarters ended March 31, 2012 and 2011. The decline in intercompany loan servicing revenue from the year-ago period is primarily the result of a lower balance in the underlying portfolio.

We are servicing approximately 3.7 million accounts under the ED Servicing Contract as of March 31, 2012. Third-party loan servicing fees in the first quarter of 2012 and the first quarter of 2011 included $17 million and $15 million, respectively, of servicing revenue related to the ED Servicing Contract. Our allocation of loans awarded for servicing under the ED contract increased from 22 percent to 26 percent for the contract year ending August 2012. The increase was driven primarily by our top ranking for default prevention performance results.

The increase in contingency revenue was primarily the result of an increase in collections on defaulted FFELP Loans.

The following table presents the outstanding inventory of contingent collections receivables that our Business Services segment will collect on behalf of others. We expect the inventory of contingent collections receivables to decline over time as a result of the elimination of FFELP.

 

(Dollars in millions)

   March 31,
2012
     December 31,
2011
     March 31,
2011
 

Student loans

   $ 11,004       $ 11,553       $ 10,393   

Other

     1,752         2,017         1,883   
  

 

 

    

 

 

    

 

 

 

Total

   $ 12,756       $ 13,570       $ 12,276   
  

 

 

    

 

 

    

 

 

 

Other servicing revenue includes account asset servicing revenue and Campus Solutions revenue. Account asset servicing revenue represents fees earned on program management, transfer and servicing agent services and administration services for our various 529 college savings plans. Assets under administration in our 529 college savings plans totaled $41.3 billion as of March 31, 2012, a 13 percent increase from the year-ago quarter. Campus Solutions revenue is earned from our Campus Solutions business whose services include comprehensive financing and transaction processing solutions that we provide to college financial aid offices and students to streamline the financial aid process.

Other Business Services revenue is primarily transaction fees that are earned in conjunction with our rewards program from participating companies based on member purchase activity, either online or in stores, depending on the contractual arrangement with the participating company. Typically, a percentage of the purchase price of the consumer members’ eligible purchases with participating companies is set aside in an account maintained by us on behalf of our members.

Revenues related to services performed on FFELP Loans accounted for 76 percent and 77 percent of total segment revenues for the quarters ended March 31, 2012 and 2011, respectively.

Operating Expenses — Business Services Segment

Operating expenses for the quarter ended March 31, 2012 decreased from the quarter ended March 31, 2011, primarily as a result of our cost cutting initiatives.

 

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Table of Contents

FFELP Loans Segment

The following table shows “Core Earnings” results for our FFELP Loans segment.

 

     Three Months Ended
March 31,
     % Increase
(Decrease)
 

(Dollars in millions)

       2012              2011          2012 vs. 2011  

“Core Earnings” interest income:

        

FFELP Loans

   $ 725       $ 736         (1 )% 

Cash and investments

     3         1         200   
  

 

 

    

 

 

    

 

 

 

Total “Core Earnings” interest income

     728         737         (1

Total “Core Earnings” interest expense

     424         370         15   
  

 

 

    

 

 

    

 

 

 

Net “Core Earnings” interest income

     304         367         (17

Less: provisions for loan losses

     18         23         (22
  

 

 

    

 

 

    

 

 

 

Net “Core Earnings” interest income after provisions for loan losses

     286         344         (17

Servicing revenue

     25         25           

Other income

                       
  

 

 

    

 

 

    

 

 

 

Total other income

     25         25           

Direct operating expenses

     181         195         (7

Restructuring expenses

             1         (100
  

 

 

    

 

 

    

 

 

 

Total expenses

     181         196         (8
  

 

 

    

 

 

    

 

 

 

Income from continuing operations, before income tax expense

     130         173         (25

Income tax expense

     48         64         (25
  

 

 

    

 

 

    

 

 

 

“Core Earnings”

   $ 82       $ 109         (25 )% 
  

 

 

    

 

 

    

 

 

 

“Core Earnings” from the FFELP Loans segment were $82 million in the first quarter of 2012, compared with $109 million in the year-ago quarter. The decrease was primarily due to lower net interest income resulting from the declining balance of the FFELP loan portfolio and an increase in funding costs. Key financial measures include:

 

   

Net interest margin of .85 percent in the first quarter of 2012 compared with .98 percent in the year-ago quarter (see “FFELP Loans Net Interest Margin” for a further discussion of this decrease).

 

   

The provision for loan losses of $18 million in the first quarter of 2012 decreased from $23 million in the year-ago quarter.

 

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FFELP Loans Net Interest Margin

The following table shows the FFELP Loans “Core Earnings” net interest margin along with reconciliation to the GAAP-basis FFELP Loans net interest margin.

 

     Three Months
Ended
March 31,
 
         2012             2011      

“Core Earnings” basis FFELP student loan yield

     2.67     2.63

Hedged Floor Income

     .28        .23   

Unhedged Floor Income

     .11        .08   

Consolidation Loan Rebate Fees

     (.66     (.66

Repayment Borrower Benefits

     (.13     (.10

Premium amortization

     (.14     (.15
  

 

 

   

 

 

 

“Core Earnings” basis FFELP student loan net yield

     2.13        2.03   

“Core Earnings” basis FFELP student loan cost of funds

     (1.17     (.96
  

 

 

   

 

 

 

“Core Earnings” basis FFELP student loan spread

     .96        1.07   

“Core Earnings” basis FFELP other asset spread impact

     (.11     (.09
  

 

 

   

 

 

 

“Core Earnings” basis FFELP Loans net interest margin(1)

     .85     .98
  

 

 

   

 

 

 
                  

“Core Earnings” basis FFELP Loans net interest margin(1)

     .85     .98

Adjustment for GAAP accounting treatment

     .27        .35   
  

 

 

   

 

 

 

GAAP-basis FFELP Loans net interest margin(1)

     1.12     1.33
  

 

 

   

 

 

 

 

  (1) 

The average balances of our FFELP interest-earning assets for the respective periods are:

 

(Dollars in millions)

             

FFELP Loans

   $ 137,193       $ 147,381   

Other interest-earning assets

     6,427         5,016   
  

 

 

    

 

 

 

Total FFELP “Core Earnings” basis interest-earning assets

   $ 143,620       $ 152,397   
  

 

 

    

 

 

 

The decrease in the “Core Earnings” basis FFELP Loans net interest margin of 13 basis points for the quarter ended March 31, 2012 compared with the year-ago quarter was primarily the result of a widening of the CP/LIBOR spread resulting in a 6 basis point decline in net interest margin as well as a general increase in our funding costs related to unsecured and ABS debt issuances over the last year.

As of March 31, 2012, our FFELP Loan portfolio totaled approximately $135.9 billion, comprised of $49.5 billion of FFELP Stafford and $86.4 billion of FFELP Consolidation Loans. The weighted-average life of these portfolios is 5.0 years and 9.1 years, respectively, assuming a Constant Prepayment Rate (“CPR”) of 5 percent and 3 percent, respectively.

On December 23, 2011, the President signed the Consolidated Appropriations Act of 2012 into law. This law includes changes that permit FFELP lenders or beneficial holders to change the index on which the Special Allowance Payments (“SAP”) are calculated for FFELP Loans first disbursed on or after January 1, 2000. We elected to use the one-month LIBOR rate rather than the CP rate commencing on April 1, 2012 in connection with our entire $128 billion of CP indexed loans. This change will help us to better match lender payments with our financing costs.

During the fourth-quarter 2011, the Administration announced a Special Direct Consolidation Loan Initiative. The initiative provides an incentive to borrowers who have at least one student loan owned by the Department of Education and at least one held by a FFELP lender to consolidate the FFELP lender’s loans into the Direct Loan program by providing a 0.25 percentage point interest rate reduction on the FFELP loans that are eligible for consolidation. The program is available from January 17, 2012 through June 30, 2012. We currently do not foresee the initiative having a significant impact on our FFELP Loans segment.

 

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Floor Income

The following table analyzes the ability of the FFELP Loans in our portfolio to earn Floor Income after March 31, 2012 and 2011, based on interest rates as of those dates.

 

     March 31, 2012     March 31, 2011  

(Dollars in billions)

   Fixed
Borrower
Rate
    Variable
Borrower
Rate
    Total     Fixed
Borrower
Rate
    Variable
Borrower
Rate
    Total  

Student loans eligible to earn Floor Income

   $ 116.7      $ 17.1      $ 133.8      $ 123.7      $ 19.5      $ 143.2   

Less: post-March 31, 2006 disbursed loans required to rebate Floor Income

     (62.0     (1.2     (63.2     (65.6     (1.3     (66.9

Less: economically hedged Floor Income Contracts

     (41.5            (41.5     (35.0            (35.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Student loans eligible to earn Floor Income

   $ 13.2      $ 15.9      $ 29.1      $ 23.1      $ 18.2      $ 41.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Student loans earning Floor Income

   $ 13.2      $ 1.0      $ 14.2      $ 23.0      $ 2.7      $ 25.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 balance of FFELP Consolidation Loans for which Fixed Rate Floor Income has been economically hedged through Floor Income Contracts for the period April 1, 2012 to June 30, 2016. The hedges related to these loans do not qualify as effective hedges.

 

(Dollars in billions)

   April 1, 2012 to
December 31, 2012
     2013      2014      2015      2016  

Average balance of FFELP Consolidation Loans whose Floor Income is economically hedged

   $ 37.3       $ 32.6       $ 28.3       $ 27.2       $ 10.4   

FFELP Loans Provision for Loan Losses and Charge-Offs

The following table summarizes the total FFELP Loan provision for loan losses and charge-offs for the three months March 31, 2012 and 2011.

 

     Three Months
Ended
March 31,
 

(Dollars in millions)

       2012              2011      

FFELP Loan provision for loan losses

   $ 18       $ 23   

FFELP Loan charge-offs

     23         20   

Operating Expenses — FFELP Loans Segment

Operating expenses for our FFELP Loans segment primarily include the contractual rates we pay to service loans in term asset-backed securitization trusts or a similar rate if a loan is not in a term financing facility (which is presented as an intercompany charge from the Business Services segment who services the loans), the fees we pay for third-party loan servicing and costs incurred to acquire loans. The intercompany revenue charged from the Business Services segment and included in those amounts was $176 million and $189 million for the quarters ended March 31, 2012 and 2011, respectively. These amounts exceed the actual cost of servicing the loans. Operating expenses were 53 basis points and 54 basis points of average FFELP Loans in the quarters ended March 31, 2012 and 2011, respectively. The decline in operating expenses from the prior year quarter was primarily the result of the $10.2 billion reduction in the average outstanding balance of our FFELP Loan portfolio.

 

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Other Segment

The following table shows “Core Earnings” results of our Other segment

 

     Three Months Ended
March  31,
    %  Increase
(Decrease)
 

(Dollars in millions)

   2012     2011     2012 vs. 2011  

Net interest loss after provision

   $      $ (13     (100 )% 

Gains on debt repurchases

     37        64        (42

Other

     3        2        50   
  

 

 

   

 

 

   

 

 

 

Total other income

     40        66        (39

Direct operating expenses

     1        8        (88

Overhead expenses:

      

Corporate overhead

     36        49        (27

Unallocated information technology costs

     28        30        (7
  

 

 

   

 

 

   

 

 

 

Total overhead expenses

     64        79        (19
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     65        87        (25

Restructuring expenses

     3        1        200   
  

 

 

   

 

 

   

 

 

 

Total expenses

     68        88        (23
  

 

 

   

 

 

   

 

 

 

Loss from continuing operations, before income tax benefit

     (28     (35     (20

Income tax benefit

     (10     (12     (17
  

 

 

   

 

 

   

 

 

 

Net loss from continuing operations

     (18     (23     (22

Loss from discontinued operations, net of taxes

            (2     (100
  

 

 

   

 

 

   

 

 

 

“Core Earnings” (loss)

   $ (18   $ (25     (28 )% 
  

 

 

   

 

 

   

 

 

 

Net Interest Income (Loss) after Provision for Loan Losses

Net interest income (loss) after provision for loan losses includes net interest income related to our corporate liquidity portfolio as well as net interest income and provision expense related to our mortgage and consumer loan portfolios. The $13 million improvement in the current quarter compared with the prior year quarter was primarily the result of our not recording any provision for loan losses related to our mortgage and consumer loan portfolios in the first quarter of 2012. Each quarter we perform an analysis regarding the adequacy of the loan loss allowance for these portfolios and we determined that at March 31, 2012 no additional allowance for loan losses was required related to this $168 million portfolio.

Gains on Debt Repurchases

We began repurchasing our outstanding debt in 2008. We repurchased $204 million and $825 million face amount of our debt for the quarters ended March 31, 2012 and 2011, respectively.

Overhead

Corporate overhead is comprised of costs related to executive management, the board of directors, accounting, finance, legal, human resources and stock-based compensation expense. Unallocated information technology costs are related to infrastructure and operations.

The decrease in overhead for the quarter ended March 31, 2012 compared with the quarter ended March 31, 2011 was primarily the result of our cost-cutting initiatives as well as an $8 million gain related to the final termination of our defined benefit pension plan.

 

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Table of Contents

Financial Condition

This section provides additional information regarding the changes related to our loan portfolio assets and related liabilities as well as credit quality and performance indicators related to our loan portfolio.

Average Balance Sheets — GAAP

The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities and reflects our net interest margin on a consolidated basis.

 

     Three Months Ended March 31,  
     2012     2011  

(Dollars in millions)

   Balance      Rate     Balance      Rate  

Average Assets

          

FFELP Loans

   $ 137,193         2.47   $ 147,381         2.41

Private Education Loans

     37,749         6.66        37,006         6.62   

Other loans

     187         9.67        262         9.17   

Cash and investments

     9,198         .22        11,177         .19   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     184,327         3.22     195,826         3.09
     

 

 

      

 

 

 

Non-interest-earning assets

     4,768           5,186      
  

 

 

      

 

 

    

Total assets

   $ 189,095         $ 201,012      
  

 

 

      

 

 

    

Average Liabilities and Equity

          

Short-term borrowings

   $ 29,037         .93   $ 33,076         .90

Long-term borrowings

     151,081         1.59        159,569         1.32   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     180,118         1.49        192,645         1.25
     

 

 

      

 

 

 

Non-interest-bearing liabilities

     3,904           3,269      

Equity

     5,073           5,098      
  

 

 

      

 

 

    

Total liabilities and equity

   $ 189,095         $ 201,012      
  

 

 

      

 

 

    

Net interest margin

        1.77        1.86
     

 

 

      

 

 

 

Rate/Volume Analysis — GAAP

The following rate/volume analysis shows the relative contribution of changes in interest rates and asset volumes.

 

(Dollars in millions)

   Increase
(Decrease)
    Change Due To(1)  
     Rate     Volume  

Three Months Ended March 31, 2012 vs. 2011

      

Interest income

   $ (15   $ 63      $ (78

Interest expense

     72        107        (35
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ (87   $ (43   $ (44
  

 

 

   

 

 

   

 

 

 

 

  (1)

Changes in income and expense due to both rate and volume have been allocated in proportion to the relationship of the absolute dollar amounts of the change in each. The changes in income and expense are calculated independently for each line in the table. The totals for the rate and volume columns are not the sum of the individual lines.

 

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Table of Contents

Summary of our Student Loan Portfolio

Ending Student Loan Balances, net

 

     March 31, 2012  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Private
Education
Loans
    Total  

Total student loan portfolio:

          

In-school(1)

   $ 2,850      $      $ 2,850      $ 2,421      $ 5,271   

Grace, repayment and other(2)

     45,966        85,674        131,640        36,104        167,744   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total, gross

     48,816        85,674        134,490        38,525        173,015   

Unamortized premium/(discount)

     803        821        1,624        (853     771   

Receivable for partially charged-off loans

                          1,250        1,250   

Allowance for loan losses

     (111     (69     (180     (2,190     (2,370
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total student loan portfolio

   $ 49,508      $ 86,426      $ 135,934      $ 36,732      $ 172,666   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total FFELP

     36     64     100    

% of total

     29     50     79     21     100

 

     December 31, 2011  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Private
Education
Loans
    Total  

Total student loan portfolio:

          

In-school(1)

   $ 3,100      $      $ 3,100      $ 2,263      $ 5,363   

Grace, repayment and other(2)

     46,618        86,925        133,543        35,830        169,373   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total, gross

     49,718        86,925        136,643        38,093        174,736   

Unamortized premium/(discount)

     839        835        1,674        (873     801   

Receivable for partially charged-off loans

                          1,241        1,241   

Allowance for loan losses

     (117     (70     (187     (2,171     (2,358
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total student loan portfolio

   $ 50,440      $ 87,690      $ 138,130      $ 36,290      $ 174,420   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total FFELP

     37     63     100    

% of total

     29     50     79     21     100

 

(1) 

Loans for borrowers still attending school and are not yet required to make payments on the loan.

 

(2) 

Includes loans in deferment or forbearance.

Average Student Loan Balances (net of unamortized premium/discount)

 

     Three Months Ended March 31, 2012  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
    Private
Education
Loans
    Total  

Total

   $ 50,149      $ 87,044      $ 137,193      $ 37,749      $ 174,942   

% of FFELP

     37     63     100    

% of total

     28     50     78     22     100

 

     Three Months Ended March 31, 2011  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
    Private
Education
Loans
    Total  

Total

   $ 55,535      $ 91,846      $ 147,381      $ 37,006      $ 184,387   

% of FFELP

     38     62     100    

% of total

     30     50     80     20     100

 

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Table of Contents

Student Loan Activity

 

     Three Months Ended March 31, 2012  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
    Total  Private
Education
Loans
    Total
Portfolio
 

Beginning balance

   $ 50,440      $ 87,690      $ 138,130      $ 36,290      $ 174,420   

Acquisitions and originations

     819        78        897        1,151        2,048   

Capitalized interest and premium/discount amortization

     335        398        733        245        978   

Consolidations to third parties

     (719     (225     (944     (23     (967

Sales

     (135            (135            (135

Repayments/defaults/other

     (1,232     (1,515     (2,747     (931     (3,678
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 49,508      $ 86,426      $ 135,934      $ 36,732      $ 172,666   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended March 31, 2011  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
    Total  Private
Education
Loans
    Total
Portfolio
 

Beginning balance

   $ 56,252      $ 92,397      $ 148,649      $ 35,656      $ 184,305   

Acquisitions and originations

     103        247        350        929        1,279   

Capitalized interest and premium/discount amortization

     322        371        693        294        987   

Consolidations to third parties

     (851     (278     (1,129     (17     (1,146

Sales

     (189            (189            (189

Repayments/defaults/other

     (1,271     (1,545     (2,816     (896     (3,712
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 54,366      $ 91,192      $ 145,558      $ 35,966      $ 181,524   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Private Education Loan Originations

Private Education Loan originations increased 23 percent from the year-ago quarter to $1.2 billion in the quarter ended March 31, 2012.

The following table summarizes our Private Education Loan originations.

 

     Three Months Ended March 31,  

(Dollars in millions)

       2012              2011      

Private Education Loan originations

   $ 1,160       $ 940   

 

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Table of Contents

Consumer Lending Portfolio Performance

Private Education Loan Delinquencies and Forbearance

The table below presents our Private Education Loan delinquency trends.

 

     Private Education Loan Delinquencies  
     March 31,
2012
    March 31,
2011
 

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 6,917        $ 8,323     

Loans in forbearance(2)

     1,372          1,343     

Loans in repayment and percentage of each status:

        

Loans current

     27,499        90.9     25,195        89.6

Loans delinquent 31-60 days(3)

     859        2.8        930        3.3   

Loans delinquent 61-90 days(3)

     544        1.9        564        2.0   

Loans delinquent greater than 90 days(3)

     1,334        4.4        1,431        5.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Private Education Loans in repayment

     30,236        100     28,120        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Private Education Loans, gross

     38,525          37,786     

Private Education Loan unamortized discount

     (853       (876  
  

 

 

     

 

 

   

Total Private Education Loans

     37,672          36,910     

Private Education Loan receivable for partially charged-off loans

     1,250          1,090     

Private Education Loan allowance for losses

     (2,190       (2,034  
  

 

 

     

 

 

   

Private Education Loans, net

   $ 36,732        $ 35,966     
  

 

 

     

 

 

   

Percentage of Private Education Loans in repayment

       78.5       74.4
    

 

 

     

 

 

 

Delinquencies as a percentage of Private Education Loans in repayment

       9.1       10.4
    

 

 

     

 

 

 

Loans in forbearance as a percentage of loans in repayment and forbearance

       4.3       4.6
    

 

 

     

 

 

 

Loans in repayment greater than 12 months as a percentage of loans in repayment(4)

       74.1       66.2
    

 

 

     

 

 

 

 

(1) 

Deferment includes borrowers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

 

(2) 

Loans for borrowers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with established loan program servicing policies and procedures.

 

(3) 

The period of delinquency is based on the number of days scheduled payments are contractually past due.

 

(4) 

Based on number of months in an active repayment status for which a scheduled monthly payment was due.

 

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Table of Contents

Allowance for Private Education Loan Losses

The following table summarizes changes in the allowance for Private Education Loan losses.

 

     Three Months Ended
March 31,
 

(Dollars in millions)

   2012     2011  

Allowance at beginning of period

   $ 2,171      $ 2,021   

Provision for Private Education Loan losses

     235        275   

Charge-offs

     (224     (273

Reclassification of interest reserve(1)

     8        11   
  

 

 

   

 

 

 

Allowance at end of period

   $ 2,190      $ 2,034   
  

 

 

   

 

 

 

Charge-offs as a percentage of average loans in repayment (annualized)

     2.96     3.94

Charge-offs as a percentage of average loans in repayment and forbearance (annualized)

     2.84     3.75

Allowance as a percentage of the ending total loan balance

     5.5     5.2

Allowance as a percentage of ending loans in repayment

     7.2     7.2

Average coverage of charge-offs (annualized)

     2.4        1.8   

Ending total loans(2)

   $ 39,775      $ 38,876   

Average loans in repayment

   $ 30,378      $ 28,127   

Ending loans in repayment

   $ 30,236      $ 28,120   

 

  (1) 

Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

 

  (2) 

Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans.

 

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Table of Contents

The following table provides the detail for our traditional and non-traditional Private Education Loans.

 

     March 31, 2012     March 31, 2011  

(Dollars in millions)

   Traditional     Non-
Traditional
    Total     Traditional     Non-
Traditional
    Total  

Ending total loans(1)

   $ 35,755      $ 4,020      $ 39,775      $ 34,563      $ 4,313      $ 38,876   

Ending loans in repayment

     27,588        2,648        30,236        25,401        2,719        28,120   

Private Education Loan allowance for losses

     1,587        603        2,190        1,298        736        2,034   

Charge-offs as a percentage of average loans in repayment (annualized)

     2.26     10.30     2.96     2.92     13.42     3.94

Allowance as a percentage of ending total loan balance

     4.4     15.0     5.5     3.8     17.1     5.2

Allowance as a percentage of ending loans in repayment

     5.8     22.8     7.2     5.1     27.1     7.2

Average coverage of charge-offs (annualized)

     2.5        2.2        2.4        1.8        2.0        1.8   

Delinquencies as a percentage of Private Education Loans in repayment

     7.7     23.3     9.1     8.7     26.4     10.4

Delinquencies greater than 90 days as a percentage of Private Education Loans in repayment

     3.6     12.5     4.4     4.1     14.4     5.1

Loans in forbearance as a percentage of loans in repayment and forbearance

     4.1     6.8     4.3     4.4     6.5     4.6

Loans that entered repayment during the period(2)

   $ 729      $ 54      $ 783      $ 1,519      $ 86      $ 1,605   

Percentage of Private Education Loans with a cosigner

     66     29     63     64     29     60

Average FICO at origination

     727        624        718        725        623        716   

 

(1) 

Ending total loans represent gross Private Education Loans, plus the receivable for partially charged-off loans.

 

(2)

Includes loans that are required to make a payment for the first time.

As part of concluding on the adequacy of the allowance for loan losses, we review key allowance and loan metrics. The most significant of these metrics considered are the allowance coverage of charge-offs ratio; the allowance as a percentage of total loans and of loans in repayment; and delinquency and forbearance percentages.

Receivable for Partially Charged-Off Private Education Loans

At the end of each month, for loans that are 212 days past due, we charge off the estimated loss of a defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as the “receivable for partially charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately charged off through the allowance for loan losses with an offsetting reduction in the receivable for partially charged-off Private Education Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered.

 

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The following table summarizes the activity in the receivable for partially charged-off Private Education Loans.

 

     Three Months Ended
March 31,
 

(Dollars in millions)

   2012     2011  

Receivable at beginning of period

   $ 1,241      $ 1,040   

Expected future recoveries of current period defaults(1)

     69        97   

Recoveries(2)

     (50     (40

Charge-offs(3)

     (10     (7
  

 

 

   

 

 

 

Receivable at end of period

   $ 1,250      $ 1,090   
  

 

 

   

 

 

 

 

  (1) 

Remaining loan balance expected to be collected from contractual loan balances partially charged off during the period. This is the difference between the defaulted loan balance and the amount of the defaulted loan balance that was charged off.

 

  (2) 

Current period cash collections

 

  (3) 

Represents the current period recovery shortfall — the difference between what was expected to be collected and what was actually collected.

Use of Forbearance as a Private Education Loan Collection Tool

Forbearance involves granting the borrower a temporary cessation of payments (or temporary acceptance of smaller than scheduled payments) for a specified period of time. Using forbearance extends the original term of the loan. Forbearance does not grant any reduction in the total repayment obligation (principal or interest). While in forbearance status, interest continues to accrue and is capitalized to principal when the loan re-enters repayment status. Our forbearance policies include limits on the number of forbearance months granted consecutively and the total number of forbearance months granted over the life of the loan. In some instances, we require good-faith payments before granting forbearance. Exceptions to forbearance policies are permitted when such exceptions are judged to increase the likelihood of collection of the loan. Forbearance as a collection tool is used most effectively when applied based on a borrower’s unique situation, including historical information and judgments. We leverage updated borrower information and other decision support tools to best determine who will be granted forbearance based on our expectations as to a borrower’s ability and willingness to repay their obligation. This strategy is aimed at mitigating the overall risk of the portfolio as well as encouraging cash resolution of delinquent loans.

Forbearance may be granted to borrowers who are exiting their grace period to provide additional time to obtain employment and income to support their obligations, or to current borrowers who are faced with a hardship and request forbearance time to provide temporary payment relief. In these circumstances, a borrower’s loan is placed into a forbearance status in limited monthly increments and is reflected in the forbearance status at month-end during this time. At the end of their granted forbearance period, the borrower will enter repayment status as current and is expected to begin making their scheduled monthly payments on a go-forward basis.

Forbearance may also be granted to borrowers who are delinquent in their payments. In these circumstances, the forbearance cures the delinquency and the borrower is returned to a current repayment status. In more limited instances, delinquent borrowers will also be granted additional forbearance time.

 

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The table below reflects the historical effectiveness of using forbearance. Our experience has shown that three years after being granted forbearance for the first time, 66 percent of the loans are current, paid in full, or receiving an in-school grace or deferment, and 20 percent have defaulted. The default experience associated with loans which utilize forbearance is considered in our allowance for loan losses. The monthly average number of loans granted forbearance as a percentage of loans in repayment and forbearance decreased to 5.2 percent in the first quarter of 2012 compared to the year-ago quarter of 5.4 percent. As of March 31, 2012, 2.5 percent of loans in current status were delinquent as of the end of the prior month, but were granted a forbearance that made them current as of March 31, 2012 (borrowers made payments on approximately 24 percent of these loans immediately prior to being granted forbearance).

 

Tracking by First Time in Forbearance Compared to All Loans Entering Repayment

 
     Status distribution
36 months after
being granted
forbearance
for the first time
    Status distribution
36 months after
entering repayment
(all loans)
    Status distribution
36 months after
entering repayment for
loans never entering
forbearance
 

In-school/grace/deferment

     9.7     9.0     5.2

Current

     49.7        58.1        65.9   

Delinquent 31-60 days

     3.2        2.0        .4   

Delinquent 61-90 days

     1.9        1.1        .2   

Delinquent greater than 90 days

     4.8        2.8        .3   

Forbearance

     4.2        3.3          

Defaulted

     19.9        11.0        6.4   

Paid

     6.6        12.7        21.6   
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 

The tables below show the composition and status of the Private Education Loan portfolio aged by number of months in active repayment status (months for which a scheduled monthly payment was due). As indicated in the tables, the percentage of loans in forbearance status decreases the longer the loans have been in active repayment status. At March 31, 2012, loans in forbearance status as a percentage of loans in repayment and forbearance were 7.1 percent for loans that have been in active repayment status for less than 25 months. The percentage drops to 1.3 percent for loans that have been in active repayment status for more than 48 months. Approximately 79 percent of our Private Education Loans in forbearance status has been in active repayment status less than 25 months.

 

     Monthly Scheduled Payments Due     Not Yet in
Repayment
    Total  

(Dollars in millions)

   0 to 12     13 to 24     25 to 36     37 to 48     More
than 48
     

March 31, 2012

              

Loans in-school/grace/deferment

   $      $      $      $      $      $ 6,917      $ 6,917   

Loans in forbearance

     892        198        132        64        86               1,372   

Loans in repayment — current

     6,529        5,920        5,204        3,626        6,220               27,499   

Loans in repayment — delinquent 31-60 days

     381        171        136        72        99               859   

Loans in repayment — delinquent 61-90 days

     265        107        79        39        54               544   

Loans in repayment — delinquent greater than 90 days

     663        270        186        93        122               1,334   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 8,730      $ 6,666      $ 5,737      $ 3,894      $ 6,581      $ 6,917        38,525   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Unamortized discount

                 (853

Receivable for partially charged-off loans

                 1,250   

Allowance for loan losses

                 (2,190
              

 

 

 

Total Private Education Loans, net

               $ 36,732   
              

 

 

 

Loans in forbearance as a percentage of loans in repayment and forbearance

     10.2     3.0     2.3     1.7     1.3         4.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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      Monthly Scheduled Payments Due     Not Yet in
Repayment
    Total  

(Dollars in millions)

   0 to 12     13 to 24     25 to 36     37 to 48     More
than 48
     

March 31, 2011

              

Loans in-school/grace/deferment

   $      $      $      $      $      $ 8,323      $ 8,323   

Loans in forbearance

     967        172        99        48        57               1,343   

Loans in repayment — current

     7,912        5,883        4,136        2,864        4,400               25,195   

Loans in repayment — delinquent 31-60 days

     460        201        122        62        85               930   

Loans in repayment — delinquent 61-90 days

     336        104        57        28        39               564   

Loans in repayment — delinquent greater than 90 days

     803        304        150        73        101               1,431   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 10,478      $ 6,664      $ 4,564      $ 3,075      $ 4,682      $ 8,323        37,786   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Unamortized discount

                 (876

Receivable for partially charged-off loans

                 1,090   

Allowance for loan losses

                 (2,034
              

 

 

 

Total Private Education Loans, net

               $ 35,966   
              

 

 

 

Loans in forbearance as a percentage of loans in repayment and forbearance

     9.2     2.6     2.2     1.6     1.2         4.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The table below stratifies the portfolio of Private Education Loans in forbearance by the cumulative number of months the borrower has used forbearance as of the dates indicated. As detailed in the table below, 4 percent of loans currently in forbearance have cumulative forbearance of more than 24 months.

 

     March 31, 2012     March 31, 2011  

(Dollars in millions)

   Forbearance
Balance
     % of
Total
    Forbearance
Balance
     % of
Total
 

Cumulative number of months borrower has used forbearance

          

Up to 12 months

   $ 839         61   $ 912         68

13 to 24 months

     477         35        390         29   

More than 24 months

     56         4        41         3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,372         100   $ 1,343         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Private Education Loan Repayment Options

Certain loan programs allow borrowers to select from a variety of repayment options depending on their loan type and their enrollment/loan status, which include the ability to extend their repayment term or change their monthly payment. The chart below provides the optional repayment offerings in addition to the standard level principal and interest payments as of March 31, 2012.

 

     Loan Program  

(Dollars in millions)

   Signature and
Other
     Smart Option      Career
Training
     Total  

$ in Repayment

     $23,793         $ 4,750         $ 1,693         $30,236   

$ in Total

     31,030         5,738         1,757         38,525   

Payment method by enrollment status:

           

In-school/Grace

     Deferred(1)        

 

 

Deferred(1)

interest-only or

fixed $25/month

  

  

  

    
 
Interest-only or
fixed $25/month
  
  
  

Repayment

    
 
Level principal and interest
or graduated
  
  
    
 
Level principal and
interest
  
  
    
 
Level principal and
interest
  
  
  

 

(1) 

“Deferred” includes loans for which no payments are required and interest charges are capitalized into the loan balance.

 

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The graduated repayment program that is part of Signature and Other Loans includes an interest-only payment feature that may be selected at the option of the borrower. Borrowers elect to participate in this program at the time they enter repayment following their grace period. This program is available to borrowers in repayment, after their grace period, who would like a temporary lower payment from the required principal and interest payment amount. Borrowers participating in this program pay monthly interest with no amortization of their principal balance for up to 48 payments after entering repayment (dependent on the loan product type). The maturity date of the loan is not extended when a borrower participates in this program. As of March 31, 2012 and 2011, borrowers in repayment owing approximately $7.0 billion (23 percent of loans in repayment) and $7.3 billion (26 percent of loans in repayment), respectively, were enrolled in the interest-only program. Of these amounts, 11 percent and 12 percent were non-traditional loans as of March 31, 2012 and 2011, respectively.

FFELP Loan Portfolio Performance

FFELP Loan Delinquencies and Forbearance

The table below presents our FFELP Loan delinquency trends.

 

     FFELP Loan Delinquencies  
     March 31,  
     2012     2011  

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 22,788        $ 27,773     

Loans in forbearance(2)

     19,478          21,834     

Loans in repayment and percentage of each status:

        

Loans current

     77,099        83.6     78,756        83.5

Loans delinquent 31-60 days(3)

     5,173        5.6        5,050        5.4   

Loans delinquent 61-90 days(3)

     2,666        2.9        3,069        3.2   

Loans delinquent greater than 90 days(3)

     7,286        7.9        7,434        7.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans in repayment

     92,224        100     94,309        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans, gross

     134,490          143,916     

FFELP Loan unamortized premium

     1,624          1,832     
  

 

 

     

 

 

   

Total FFELP Loans

     136,114          145,748     

FFELP Loan allowance for losses

     (180       (190  
  

 

 

     

 

 

   

FFELP Loans, net

   $ 135,934        $ 145,558     
  

 

 

     

 

 

   

Percentage of FFELP Loans in repayment

       68.6       65.5
    

 

 

     

 

 

 

Delinquencies as a percentage of FFELP Loans in repayment

       16.4       16.5
    

 

 

     

 

 

 

FFELP Loans in forbearance as a percentage of loans in repayment and forbearance

       17.4       18.8
    

 

 

     

 

 

 

 

(1) 

Loans for borrowers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for borrowers who have requested extension of grace period during employment transition or who have temporarily ceased making payments due to hardship or other factors.

 

(2) 

Loans for borrowers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making payments due to hardship or other factors.

 

(3) 

The period of delinquency is based on the number of days scheduled payments are contractually past due.

 

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Allowance for FFELP Loan Losses

The following table summarizes changes in the allowance for FFELP Loan losses.

 

     Three Months Ended
March 31,
 

(Dollars in millions)

   2012     2011  

Allowance at beginning of period

   $ 187      $ 189   

Provision for FFELP Loan losses

     18        23   

Charge-offs

     (23     (20

Student loan sales

     (2     (2
  

 

 

   

 

 

 

Allowance at end of period

   $ 180      $ 190   
  

 

 

   

 

 

 

Charge-offs as a percentage of average loans in repayment (annualized)

     .10     .09

Charge-offs as a percentage of average loans in repayment and forbearance (annualized)

     .08     .07

Allowance as a percentage of the ending total loans, gross

     .13     .13

Allowance as a percentage of ending loans in repayment

     .20     .20

Allowance coverage of charge-offs (annualized)

     2.0        2.3   

Ending total loans, gross

   $ 134,490      $ 143,916   

Average loans in repayment

   $ 93,150      $ 95,504   

Ending loans in repayment

   $ 92,224      $ 94,309   

Liquidity and Capital Resources

We expect to fund our ongoing liquidity needs, including the origination of new Private Education Loans and the repayment of $2.2 billion of senior unsecured notes that mature in the next twelve months, primarily through our current cash and investment portfolio and the collection of additional bank deposits, the predictable operating cash flows provided by earnings and repayment of principal on unencumbered student loan assets, and distributions from our securitization trusts (including servicing fees which are priority payments within the trusts). We may also draw down on our FFELP ABCP Facilities and the facility with the Federal Home Loan Bank in Des Moines (the “FHLB-DM Facility”); and we may also issue term ABS and unsecured debt.

Currently, new Private Education Loan originations are initially funded through deposits and subsequently securitized to term on a programmatic basis. We have $670 million of cash at the Bank as of March 31, 2012 available to fund future originations. We no longer originate FFELP Loans and therefore no longer have liquidity requirements for new FFELP Loan originations.

The acquisition of loan portfolios may require incremental funding. Additionally, it is our intent to refinance, primarily through securitizations, the FFELP Loans that are currently in the ED Conduit Program by its January 2014 maturity date. We currently have $18.5 billion of collateral in the ED Conduit Program. While the assets in this facility can be put to ED at the conclusion of the program thus eliminating a call on our liquidity, we intend to refinance these assets. In addition, capacity is maintained in our FFELP ABCP Facility and our FHLB-DM Facility to finance a portion of this collateral should term financing not be achieved or available.

 

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Sources of Liquidity and Available Capacity

Ending Balances

 

     As of  

(Dollars in millions)

   March 31, 2012      December 31, 2011  

Sources of primary liquidity:

     

Unrestricted cash and liquid investments:

     

Holding Company and other non-bank subsidiaries

   $ 2,439       $ 1,403   

SLM Bank(1)

     670         1,462   
  

 

 

    

 

 

 

Total unrestricted cash and liquid investments

   $ 3,109       $ 2,865   
  

 

 

    

 

 

 

Unencumbered FFELP Loans

   $ 1,080       $ 994   

Average Balances

 

     Three Months Ended  

(Dollars in millions)

     March 31, 2012          March 31, 2011    

Sources of primary liquidity:

     

Unrestricted cash and liquid investments:

     

Holding Company and other non-bank subsidiaries

   $ 1,656       $ 2,926   

SLM Bank(1)

     880         1,383   
  

 

 

    

 

 

 

Total unrestricted cash and liquid investments

   $ 2,536       $ 4,309   
  

 

 

    

 

 

 

Unencumbered FFELP Loans

   $ 1,080       $ 2,180   

 

(1)

This cash will be used primarily to originate or acquire student loans at the Bank. Our ability to pay dividends from the Bank is subject to capital and liquidity requirements applicable to the Bank.

We may also have liquidity available under secured credit facilities to the extent we have eligible collateral and capacity available. Current borrowing capacity under the FFELP ABCP Facility and FHLB-DM Facility is determined based on each facility’s size, current usage and qualifying collateral from the unencumbered FFELP Loans reported as primary liquidity in the tables above. Additional borrowing capacity could be used to fund FFELP Loan portfolio acquisitions and to refinance FFELP Loans used as collateral in the ED Conduit Program Facility. As of March 31, 2012 and December 31, 2011, the maximum amount we could borrow under these facilities was $10.5 billion and $11.3 billion, respectively. For the three months ended March 31, 2012 and 2011, the average maximum amount we could borrow under these facilities was $12.1 billion and $12.0 billion, respectively. These maximum total amounts we can borrow are contingent upon obtaining eligible FFELP Loan collateral. If we use our unencumbered FFELP Loans as collateral to borrow against these facilities, the available capacity is reduced accordingly.

We also hold a number of other unencumbered assets, consisting primarily of Private Education Loans and other assets. At March 31, 2012, we had a total of $20.9 billion of unencumbered assets (which includes the assets that comprise our primary liquidity listed in the table above and are available to serve as collateral for our secured credit facilities discussed in the preceding paragraph), excluding goodwill and acquired intangibles. Total unencumbered student loans, net, comprised $12.5 billion of our unencumbered assets of which $11.4 billion and $1.1 billion related to Private Education Loans, net and FFELP Loans, net, respectively.

 

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The following table reconciles encumbered and unencumbered assets and their net impact on total tangible equity.

 

(Dollars in billions)

   March 31,
2012
    December 31,
2011
 

Net assets of consolidated variable interest entities (encumbered assets)

   $ 12.8      $ 12.9   

Tangible unencumbered assets(1)

     20.9        20.2   

Unsecured debt

     (25.4 )     (24.1 )

Mark-to-market on unsecured hedged debt(2)

     (1.7 )     (1.9 )

Other liabilities, net

     (2.0 )     (2.3 )
  

 

 

   

 

 

 

Total tangible equity

   $ 4.6      $ 4.8   
  

 

 

   

 

 

 

 

  (1)

Excludes goodwill and acquired intangible assets.

 

  (2)

At March 31, 2012 and December 31, 2011, there were $1.5 billion and $1.6 billion, respectively, of net gains on derivatives hedging this debt in unencumbered assets, which partially offset these losses.

Transactions during the First-Quarter 2012

The following financing transactions have taken place in the first quarter of 2012:

 

   

On January 13, 2012, the FFELP ABCP Facility was amended to increase the amount available to $7.5 billion, reflecting an increase of $2.5 billion over the previously scheduled facility reduction. In addition, the amendment extends the final maturity date by one year to January 9, 2015 and increases the amount available at future step-down dates.

 

   

On January 19, 2012, we issued $765 million of FFELP ABS.

 

   

On January 27, 2012, we issued a $1.5 billion senior unsecured bond, consisting of a $750 million five-year term bond and a $750 million ten-year term bond.

 

   

On February 9, 2012, we issued $547 million of Private Education Loan ABS.

 

   

On March 15, 2012, we issued $824 million of FFELP ABS.

In addition, on January 26, 2012, we increased our regular quarterly common stock dividend to $0.125 per share, up from $0.10 per share in the prior quarter. We paid our quarterly dividend on March 16, 2012. During the first quarter of 2012, we repurchased 16.7 million shares of common stock at an aggregate purchase price of $268 million. The shares were repurchased on the open market under our January 2012 share repurchase program that authorizes up to $500 million of share repurchases.

Recent Second-Quarter 2012 Transactions

The following transactions have taken place in the second quarter of 2012:

 

   

On April 12, we issued $891 million of Private Education Loan ABS.

 

   

On April 24, we priced a $1.25 billion FFELP ABS.

Counterparty Exposure

Counterparty exposure related to financial instruments arises from the risk that a lending, investment or derivative counterparty will not be able to meet its obligations to us. Risks associated with our lending portfolio are discussed in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Consumer Lending Portfolio Performance” and “— FFELP Loan Portfolio Performance.”

Our investment portfolio is composed of very short-term securities issued by a diversified group of highly rated issuers, limiting our counterparty exposure. Additionally, our investing activity is governed by Board approved limits on the amount that is allowed to be invested with any one issuer based on the credit rating of the issuer, further minimizing our counterparty exposure. Counterparty credit risk is considered when valuing investments and considering impairment.

 

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Related to derivative transactions, protection against counterparty risk is generally provided by International Swaps and Derivatives Association, Inc. (“ISDA”) Credit Support Annexes (“CSAs”). CSAs require a counterparty to post collateral if a potential default would expose the other party to a loss. All derivative contracts entered into by SLM Corporation and the Bank are covered under such agreements and require collateral to be exchanged based on the net fair value of derivatives with each counterparty. Our securitization trusts require collateral in all cases if the counterparty’s credit rating is withdrawn or downgraded below a certain level. Additionally, securitizations involving foreign currency notes issued after November 2005 also require the counterparty to post collateral to the trust based on the fair value of the derivative, regardless of credit rating. The trusts are not required to post collateral to the counterparties. In all cases, our exposure is limited to the value of the derivative contracts in a gain position net of any collateral we are holding. We consider counterparties’ credit risk when determining the fair value of derivative positions on our exposure net of collateral.

We have liquidity exposure related to collateral movements between us and our derivative counterparties. Movements in the value of the derivatives, which are primarily affected by changes in interest rate and foreign exchange rates, may require us to return cash collateral held or may require us to access primary liquidity to post collateral to counterparties. If our credit ratings are downgraded from current levels, we may be required to segregate additional unrestricted cash collateral into restricted accounts.

The table below highlights exposure related to our derivative counterparties at March 31, 2012.

 

(Dollars in millions)

   SLM Corporation
and Sallie Mae Bank
Contracts
    Securitization  Trust
Contracts(1)
 

Exposure, net of collateral

   $ 97      $ 900   

Percent of exposure to counterparties with credit ratings below S&P AA- or Moody’s Aa3

     87     32

Percent of exposure to counterparties with credit ratings below S&P A- or Moody’s A3

     0     0

 

  (1)

Current turmoil in the European markets has led to increased disclosure of exposure to those markets. Of the total net exposure, $796 million is related to financial institutions located in France; of this amount, $563 million carries a guarantee from the French government. All of the $796 million exposure relates to derivatives held at our securitization trusts. Counterparties to these derivatives are required to post collateral when their credit rating is withdrawn or downgraded below a certain level. As of March 31, 2012, no collateral was required to be posted. Adjustments are made to our derivative valuations for counterparty credit risk. The adjustments made at March 31, 2012 related to derivatives with French financial institutions (including those that carry a guarantee from the French government) decreased the derivative asset value by $163 million. Credit risks for all derivative counterparties are assessed internally on a continual basis.

“Core Earnings” Basis Borrowings

The following tables present the ending balances of our “Core Earnings” basis borrowings at March 31, 2012 and December 31, 2011, and average balances and average interest rates of our “Core Earnings” basis borrowings for the three months ended March 31, 2012 and 2011. The average interest rates include derivatives that are economically hedging the underlying debt but do not qualify for hedge accounting treatment. (See “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP — Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” of this Item 2.)

 

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Ending Balances

 

     March 31, 2012      December 31, 2011  

(Dollars in millions)

   Short
Term
     Long
Term
     Total      Short
Term
     Long
Term
     Total  

Unsecured borrowings:

                 

Senior unsecured debt

   $ 2,192       $ 16,182       $ 18,374       $ 1,801       $ 15,199       $ 17,000   

Brokered deposits

     1,455         1,957         3,412         1,733         1,956         3,689   

Retail and other deposits

     2,311                 2,311         2,123                 2,123   

Other(1)

     1,284                 1,284         1,329                 1,329   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unsecured borrowings

     7,242         18,139         25,381         6,986         17,155         24,141   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Secured borrowings:

                 

FFELP Loan securitizations

             107,211         107,211                 107,905         107,905   

Private Education Loan securitizations

             18,334         18,334                 19,297         19,297   

ED Conduit Program Facility

     18,539                 18,539         21,313                 21,313   

FFELP ABCP Facility

             5,459         5,459                 4,445         4,445   

Private Education Loan ABCP Facility

             2,666         2,666                 1,992         1,992   

Acquisition financing(2)

             856         856                 916         916   

FHLB-DM Facility

     1,250                 1,250         1,210                 1,210   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total secured borrowings

     19,789         134,526         154,315         22,523         134,555         157,078   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total before hedge accounting adjustments

     27,031         152,665         179,696         29,509         151,710         181,219   

Hedge accounting adjustments

     92         2,923         3,015         64         2,683         2,747   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27,123       $ 155,588       $ 182,711       $ 29,573       $ 154,393       $ 183,966   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

“Other” primarily consists of the obligation to return cash collateral held related to derivative exposure.

 

(2) 

Relates to the acquisition of $25 billion of student loans at the end of 2010.

Secured borrowings comprised 86 percent and 87 percent of our “Core Earnings” basis debt outstanding at March 31, 2012 and December 31, 2011, respectively.

Average Balances

 

     Three Months Ended March 31,  
     2012     2011  

(Dollars in millions)

   Average
Balance
     Average
Rate
    Average
Balance
     Average
Rate
 

Unsecured borrowings:

          

Senior unsecured debt

   $ 18,004         2.88   $ 21,421         2.15

Brokered deposits

     3,515         2.08        4,354         2.40   

Retail and other deposits

     2,283         .95        1,478         1.24   

Other(1)

     1,400         .11        1,019         .33   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total unsecured borrowings

     25,202         2.44        28,272         2.08   
  

 

 

    

 

 

   

 

 

    

 

 

 

Secured borrowings:

          

FFELP Loan securitizations

     107,230         1.14        112,614         .90   

Private Education Loan securitizations

     18,577         2.09        21,017         2.17   

ED Conduit Program Facility

     20,515         .81        24,114         .76   

FFELP ABCP Facility

     4,018         1.19        4,936         1.12   

Private Education Loan ABCP Facility

     2,633         1.69                  

Acquisition financing(2)

     872         4.85        1,064         4.86   

FHLB-DM Facility

     1,071         .29        628         .33   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total secured borrowings

     154,916         1.23        164,373         1.07   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 180,118         1.40   $ 192,645         1.22
  

 

 

    

 

 

   

 

 

    

 

 

 
   

“Core Earnings” average balance and rate

   $ 180,118         1.40   $ 192,645         1.22

Adjustment for GAAP accounting treatment

             .09                .03   
  

 

 

    

 

 

   

 

 

    

 

 

 

GAAP-basis average balance and rate

   $ 180,118         1.49   $ 192,645         1.25
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

“Other” primarily consists of the obligation to return cash collateral held related to derivative exposure.

 

(2) 

Relates to the acquisition of $25 billion of student loans at the end of 2010.

 

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Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. A discussion of our critical accounting policies, which include allowance for loan losses, premium and discount amortization related to our loan portfolio, fair value measurement, transfers of financial assets and the VIE consolidation model, derivative accounting and goodwill and intangible assets can be found in our 2011 Form 10-K. There were no significant changes to these critical accounting policies during the first quarter of 2012.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity Analysis

Our interest rate risk management seeks to limit the impact of short-term movements in interest rates on our results of operations and financial position. The following tables summarize the potential effect on earnings over the next 12 months and the potential effect on fair values of balance sheet assets and liabilities at March 31, 2012 and December 31, 2011, based upon a sensitivity analysis performed by management assuming a hypothetical increase in market interest rates of 100 basis points and 300 basis points while funding spreads remain constant. Additionally, as it relates to the effect on earnings, a sensitivity analysis was performed assuming the funding index increases 25 basis points while holding the asset index constant, if the funding index is different than the asset index. The earnings sensitivity is applied only to financial assets and liabilities, including hedging instruments, that existed at the balance sheet date and does not take into account new assets, liabilities or hedging instruments that may arise in 2012.

 

    As of March 31, 2012
Impact on Annual Earnings If:
    As of March 31, 2011
Impact on Annual Earnings If:
 
    Interest Rates:     Funding Spreads     Interest Rates:     Funding Spreads  

(Dollars in millions, except per share amounts)

  Increase
100 Basis
Points
    Increase
300 Basis
Points
    Increase
25 Basis
Points(1)
    Increase
100 Basis
Points
    Increase
300 Basis
Points
    Increase
25 Basis
Points(1)
 

Effect on Earnings

           

Change in pre-tax net income before unrealized gains (losses) on derivative and hedging activities

  $ (19   $ 8      $ (343   $ (32   $ (50   $ (425

Unrealized gains (losses) on derivative and hedging activities

    503        857        (12     472        818        (25
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase in net income before taxes

  $ 484      $ 865      $ (355   $ 440      $ 768      $ (450
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase in diluted earnings per common share

  $ .949      $ 1.697      $ (.696   $ .826      $ 1.444      $ (.845
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

If an asset is not funded with the same index/frequency reset of the asset then it is assumed the funding index increases 25 basis points while holding the asset index constant.

 

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    At March 31, 2012  
          Interest Rates:  
          Change from
Increase of
100 Basis
Points
    Change from
Increase of
300 Basis
Points
 

(Dollars in millions)

  Fair Value     $     %     $     %  

Effect on Fair Values

         

Assets

         

Total FFELP Loans

  $ 133,541      $ (737     (1 )%    $ (1,481     (1 )% 

Private Education Loans

    35,172                               

Other earning assets

    10,109                      (1       

Other assets

    8,917        (552     (6     (1,172     (13 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets gain/(loss)

  $ 187,739      $ (1,289     (1 )%    $ (2,654     (1 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

         

Interest bearing liabilities

  $ 172,378      $ (802       $ (2,209     (1 )% 

Other liabilities

    3,936        (469     (12     (394     (10
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities (gain)/loss

  $ 176,314      $ (1,271     (1 )%    $ (2,603     (1 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    At December 31, 2011  
          Interest Rates:  
          Change from
Increase of
100 Basis
Points
    Change from
Increase of
300 Basis
Points
 

(Dollars in millions)

  Fair Value     $     %     $     %  

Effect on Fair Values

         

Assets

         

Total FFELP Loans

  $ 134,196      $ (665       $ (1,335     (1 )% 

Private Education Loans

    33,968                               

Other earning assets

    9,871                      (1       

Other assets

    8,943        (639     (7     (1,420     (16 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets gain/(loss)

  $ 186,978      $ (1,304     (1 )%    $ (2,756     (1 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

         

Interest bearing liabilities

  $ 171,152      $ (730       $ (2,002     (1 )% 

Other liabilities

    4,128        (617     (15     (801     (19
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities (gain)/loss

  $ 175,280      $ (1,347     (1 )%    $ (2,803     (2 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

A primary objective in our funding is to minimize our sensitivity to changing interest rates by generally funding our floating rate student loan portfolio with floating rate debt. However, due to the ability of some FFELP loans to earn Floor Income, we can have a fixed versus floating mismatch in funding if the student loan earns at the fixed borrower rate and the funding remains floating. In addition, we can have a mismatch in the index (including the frequency of reset) of floating rate debt versus floating rate assets.

During the three months ended March 31, 2012 and 2011, certain FFELP Loans were earning Floor Income and we locked in a portion of that Floor Income through the use of Floor Income Contracts. The result of these hedging transactions was to convert a portion of the fixed rate nature of student loans to variable rate, and to fix the relative spread between the student loan asset rate and the variable rate liability.

In the preceding tables, under the scenario where interest rates increase 100 and 300 basis points, the change in pre-tax net income before the unrealized gains (losses) on derivative and hedging activities is primarily due to the impact of (i) our unhedged loans being in a fixed-rate mode due to Floor Income, while being funded with variable debt in low interest rate environments; and (ii) a portion of our variable assets being funded with fixed

 

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rate liabilities and equity. Item (i) will generally cause income to decrease when interest rates increase from a low interest rate environment, whereas item (ii) will generally offset this decrease. The variance in the change in pre-tax income before unrealized gains (losses) on derivatives when comparing the 2012 analysis versus the 2011 analysis related to a higher balance of variable assets being funded with fixed rate liabilities at March 31, 2012 than at March 31, 2011. This resulted in a greater offset to the loss of floor income in the 2012 analysis. This factor also resulted in the positive impact to the net interest margin in the 300 basis point increase scenario for March 31, 2012.

Under the scenario in the tables above labeled “Asset and Funding Index Mismatches,” the main driver of the decrease in pre-tax income before unrealized gains (losses) on derivative and hedging activities in the March 31, 2012 analysis is the result of one-month LIBOR indexed FFELP student loans (loans formerly indexed to commercial paper) being funded with three-month LIBOR and other non discrete indexed liabilities. In the March 31, 2011 analysis, it is the result of LIBOR-based debt funding commercial paper-indexed assets. See “Asset and Liability Funding Gap” of this Item 2 for a further discussion. Increasing the spread between indices will also impact the unrealized gains (losses) on derivatives and hedging activities as it relates to basis swaps that hedge the mismatch between the asset and funding indices.

In addition to interest rate risk addressed in the preceding tables, we are also exposed to risks related to foreign currency exchange rates. Foreign currency exchange risk is primarily the result of foreign currency denominated debt issued by us. When we issue foreign denominated corporate unsecured and securitization debt, our policy is to use cross currency interest rate swaps to swap all foreign currency denominated debt payments (fixed and floating) to U.S. dollar LIBOR using a fixed exchange rate. In the tables above, there would be an immaterial impact on earnings if exchange rates were to decrease or increase, due to the terms of the hedging instrument and hedged items matching. The balance sheet interest bearing liabilities would be affected by a change in exchange rates; however, the change would be materially offset by the cross currency interest rate swaps in other assets or other liabilities. In the current economic environment, volatility in the spread between spot and forward foreign exchange rates has resulted in material mark-to-market impacts to current-period earnings which have not been factored into the above analysis. The earnings impact is noncash, and at maturity of the instruments the cumulative mark-to-market impact will be zero.

Asset and Liability Funding Gap

The tables below present our assets and liabilities (funding) arranged by underlying indices as of March 31, 2012. In the following GAAP presentation, the funding gap only includes derivatives that qualify as effective hedges (those derivatives which are reflected in net interest margin, as opposed to those reflected in the “gains (losses) on derivatives and hedging activities, net” line on the consolidated statements of income). The difference between the asset and the funding is the funding gap for the specified index. This represents our exposure to interest rate risk in the form of basis risk and repricing risk, which is the risk that the different indices may reset at different frequencies or may not move in the same direction or at the same magnitude.

Management analyzes interest rate risk and in doing so includes all derivatives that are economically hedging our debt whether they qualify as effective hedges or not (“Core Earnings” basis). Accordingly, we are also presenting the asset and liability funding gap on a “Core Earnings” basis in the table that follows the GAAP presentation.

 

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GAAP-Basis

 

Index

(Dollars in billions)

   Frequency of
Variable
Resets
   Assets      Funding(2)      Funding
Gap
 

3-month commercial paper(1)

   daily    $ 127.6       $       $ 127.6   

3-month Treasury bill

   weekly      7.5                 7.5   

Prime

   annual      .7                 .7   

Prime

   quarterly      4.8                 4.8   

Prime

   monthly      21.3                 21.3   

Prime

   daily              1.7         (1.7

PLUS Index

   annual      .5                 .5   

3-month LIBOR

   daily                        

3-month LIBOR

   quarterly              117.9         (117.9

1-month LIBOR

   monthly      10.7         19.8         (9.1

CMT/CPI Index

   monthly/quarterly              1.6         (1.6

Non discrete reset(3)

   monthly              31.7         (31.7

Non discrete reset(4)

   daily/weekly      9.9         3.6         6.3   

Fixed rate(5)

        8.7         15.4         (6.7
     

 

 

    

 

 

    

 

 

 

Total

      $ 191.7       $ 191.7       $   
     

 

 

    

 

 

    

 

 

 

 

  (1)

See Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Segment Earnings Summary — ‘Core Earnings’ Basis — FFELP Loans Segment — FFELP Loans Net Interest Margin” for discussion regarding Consolidated Appropriations Act of 2012 and the effect it will have on the FFELP student lender payment index in the second quarter of 2012.

 

  (2) 

Funding includes all derivatives that management considers economic hedges of interest rate risk and reflects how we internally manage our interest rate exposure.

 

  (3) 

Funding consists of auction rate securities, the ABCP Facilities, the ED Conduit Program facility and the FHLB-DM facility.

 

  (4) 

Assets include restricted and unrestricted cash equivalents and other overnight-type instruments. Funding includes retail and other deposits and the obligation to return cash collateral held related to derivatives exposures.

 

  (5) 

Assets include receivables and other assets (including goodwill and acquired intangibles). Funding includes other liabilities and stockholders’ equity (excluding series B Preferred Stock).

The “Funding Gaps” in the above table are primarily interest rate mismatches in short-term indices between our assets and liabilities. We address this issue typically through the use of basis swaps that typically convert quarterly reset three-month LIBOR to other indices that are more correlated to our asset indices. These basis swaps do not qualify as effective hedges and as a result the effect on the funding index is not included in our interest margin and is therefore excluded from the GAAP presentation.

 

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“Core Earnings” Basis

 

Index

(Dollars in billions)

   Frequency of
Variable
Resets
   Assets      Funding(2)      Funding
Gap
 

3-month commercial paper(1)

   daily    $ 127.6       $       $ 127.6   

3-month Treasury bill

   weekly      7.5         1.8         5.7   

Prime

   annual      .7                 .7   

Prime

   quarterly      4.8                 4.8   

Prime

   monthly      21.3         4.5         16.8   

Prime

   daily              1.7         (1.7

PLUS Index

   annual      .5                 .5   

3-month LIBOR

   daily              20.2         (20.2

3-month LIBOR

   quarterly              77.1         (77.1

1-month LIBOR

   monthly      10.7         29.1         (18.4

1-month LIBOR

   daily              8.0         (8.0

Non discrete reset(3)

   monthly              31.7         (31.7

Non discrete reset(4)

   daily/weekly      9.9         3.6         6.3   

Fixed rate(5)

        5.8         11.1         (5.3
     

 

 

    

 

 

    

 

 

 

Total

      $ 188.8       $ 188.8       $   
     

 

 

    

 

 

    

 

 

 

 

  (1)

See Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Segment Earnings Summary — ‘Core Earnings’ Basis — FFELP Loans Segment — FFELP Loans Net Interest Margin” for discussion regarding Consolidated Appropriations Act of 2012 and the effect it will have on the FFELP student lender payment index in the second quarter of 2012.

 

  (2) 

Funding includes all derivatives that management considers economic hedges of interest rate risk and reflects how we internally manage our interest rate exposure.

 

  (3) 

Funding consists of auction rate securities, the ABCP Facilities, the ED Conduit Program facility and the FHLB-DM facility.

 

  (4) 

Assets include restricted and unrestricted cash equivalents and other overnight-type instruments. Funding includes retail and other deposits and the obligation to return cash collateral held related to derivatives exposures.

 

  (5) 

Assets include receivables and other assets (including goodwill and acquired intangibles). Funding includes other liabilities and stockholders’ equity (excluding series B Preferred Stock).

We use interest rate swaps and other derivatives to achieve our risk management objectives. Our asset liability management strategy is to match assets with debt (in combination with derivatives) that have the same underlying index and reset frequency or, when economical, have interest rate characteristics that we believe are highly correlated. For example, a large portion of our daily reset 3-month commercial paper indexed assets are funded with liabilities indexed to LIBOR. The use of funding with index types and reset frequencies that are different from our assets exposes us to interest rate risk in the form of basis and repricing risk. This could result in our cost of funds not moving in the same direction or with the same magnitude as the yield on our assets. While we believe 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 resulting in a negative impact to our earnings.

 

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Weighted Average Life

The following table reflects the weighted average life for our earning assets and liabilities at March 31, 2012.

 

(Averages in Years)

   Weighted  Average
Life
 

Earning assets

  

Student loans

     7.6   

Other loans

     6.3   

Cash and investments

     .1   
  

 

 

 

Total earning assets

     7.2   
  

 

 

 

Borrowings

  

Short-term borrowings

     .3   

Long-term borrowings

     6.9   
  

 

 

 

Total borrowings

     5.9   
  

 

 

 

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2012. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2012, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

We and our subsidiaries and affiliates also are subject to various claims, lawsuits and other actions that arise in the normal course of business. Most of these matters are claims by borrowers disputing the manner in which their loans have been processed or the accuracy of our reports to credit bureaus. In addition, our collections subsidiaries are routinely named in individual plaintiff or class action lawsuits in which the plaintiffs allege that those subsidiaries have violated a federal or state law in the process of collecting their accounts. We believe that these claims, lawsuits and other actions will not have a material adverse effect on our business, financial condition or results of operations. Finally, from time to time, we and our subsidiaries and affiliates receive information and document requests from state attorneys general, legislative committees and administrative agencies concerning certain business practices. Our practice has been and continues to be to cooperate with these bodies and to be responsive to any such requests.

For a description of these items and other litigation to which we are a party, see our 2011 Form 10-K and subsequent filings with the SEC.

 

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Share Repurchases

The following table provides information relating to our purchase of shares of our common stock in the three months ended March 31, 2012.

 

(In millions, except per share data)

   Total Number
of Shares
Purchased(1)
     Average Price
Paid per
Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(2)
     Approximate Dollar
Value of
Shares That
May Yet Be
Purchased Under
Publicly Announced
Plans or
Programs(2)
 

Period:

           

January 1 — January 31, 2012

     1.4       $ 14.72         .4       $ 494.0   

February 1 — February 29, 2012

     8.4         15.99         7.6         372.7   

March 1 — March 31, 2012

     9.0         16.13         8.7         232.4   
  

 

 

    

 

 

    

 

 

    

Total first-quarter 2012

     18.8       $ 15.96         16.7      
  

 

 

    

 

 

    

 

 

    

 

(1) 

The total number of shares purchased includes: (i) shares purchased under the stock repurchase program discussed below, and (ii) shares of our common stock tendered to us to satisfy the exercise price in connection with cashless exercise of stock options, and tax withholding obligations in connection with exercise of stock options and vesting of restricted stock and restricted stock units.

 

(2) 

On January 26, 2012, our board of directors authorized us to purchase up to $500 million of shares of our common stock.

The closing price of our common stock on the NASDAQ Global Select Market on March 30, 2012 was $15.76.

 

Item 3. Defaults upon Senior Securities

Nothing to report.

 

Item 4. Mine Safety Disclosures.

Nothing to report.

 

Item 5. Other Information

Nothing to report.

 

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Item 6. Exhibits

The following exhibits are furnished or filed, as applicable:

 

  10.1   Form of SLM Corporation 2009-2012 Incentive Plan, Performance Stock Unit Term Sheet — 2012†
  10.2   Form of SLM Corporation 2009-2012 Incentive Plan, Bonus Restricted Stock Unit Term Sheet — 2012†
  10.3   Form of SLM Corporation 2009-2012 Incentive Plan, Stock Option Agreement, Net Settled Options - 2012†
  12.1   Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
  31.1   Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2   Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS   XBRL Instance Document.
101.SCH   XBRL Taxonomy Extension Schema Document.
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB   XBRL Taxonomy Extension Label Linkbase Document.
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.

 

Management Contract or Compensatory Plan or Arrangement

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

SLM CORPORATION

(Registrant)

By:  

/s/    JONATHAN C. CLARK        

 

Jonathan C. Clark

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

Date: May 4, 2012

 

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