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SLM CORP 10-Q 2008
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Commission File Number:
001-13251
(703) 810-3000
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
(Do
not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest
practicable date:
Listed below are definitions of key terms that are used
throughout this document. See also
“Appendix A — FEDERAL FAMILY EDUCATION LOAN
PROGRAM,” included in SLM Corporation’s (“the
Company’s”) 2007 Annual Report on
Form 10-K,
filed with the Securities and Exchange Commission
(“SEC”) on February 29, 2008, for a further
discussion of FFELP and CCRAA.
2008 Asset-Backed Financing Facilities — New
financing facilities closed in the first quarter of 2008
comprised of: (i) a $26.0 billion FFELP student loan
asset-backed commercial paper (“ABCP”) conduit
facility; (ii) a $5.9 billion Private Education Loan
ABCP conduit facility (collectively, the “2008 ABCP
Facilities”); and (iii) a $2.0 billion secured
FFELP loan facility (the “2008 Asset-Backed Loan
Facility”). The 2008 Asset-Backed Financing Facilities
replaced the $30.0 billion Interim ABCP Facility (defined
below) and $6.0 billion ABCP facility in the first quarter
of 2008.
CCRAA — The College Cost Reduction and Access
Act of 2007.
Consolidation Loan Rebate Fee — All holders of
FFELP Consolidation Loans are required to pay to the
U.S. Department of Education (“ED”) an annual
105 basis point Consolidation Loan Rebate Fee on all
outstanding principal and accrued interest balances of FFELP
Consolidation Loans purchased or originated after
October 1, 1993, except for loans for which consolidation
applications were received between October 1, 1998 and
January 31, 1999, where the Consolidation Loan Rebate Fee
is 62 basis points.
Constant Prepayment Rate (“CPR”) — A
variable in life-of-loan estimates that measures the rate at
which loans in the portfolio prepay before their stated
maturity. The CPR is directly correlated to the average life of
the portfolio. CPR equals the percentage of loans that prepay
annually as a percentage of the beginning of period balance.
“Core Earnings” — In accordance with
the rules and regulations of the SEC, the Company prepares
financial statements in accordance with generally accepted
accounting principles in the United States of America
(“GAAP”). In addition to evaluating the Company’s
GAAP-based financial information, management evaluates the
Company’s business segments on a basis that, as allowed
under the Financial Accounting Standards Board’s
(“FASB”) Statement of Financial Accounting Standards
(“SFAS”) No. 131, “Disclosures about
Segments of an Enterprise and Related Information,” differs
from GAAP. The Company refers to management’s basis of
evaluating its segment results as “Core Earnings”
presentations for each business segment and refers to these
performance measures in its presentations with credit rating
agencies and lenders. While “Core Earnings” results
are not a substitute for reported results under GAAP, the
Company relies on “Core Earnings” performance measures
in operating each business segment because it believes these
measures provide additional information regarding the
operational and performance indicators that are most closely
assessed by management.
“Core Earnings” performance measures are the primary
financial performance measures used by management to evaluate
performance and to allocate resources. Accordingly, financial
information is reported to management on a “Core
Earnings” basis by reportable segment, as these are the
measures used regularly by the Company’s chief operating
decision makers. “Core Earnings” performance measures
are used in developing the Company’s financial plans,
tracking results, and establishing corporate performance targets
and incentive compensation. Management believes this information
provides additional insight into the financial performance of
the Company’s core business activities. “Core
Earnings” performance measures are not defined terms within
GAAP and may not be comparable to similarly titled measures
reported by other companies. “Core Earnings” net
income reflects only current period adjustments to GAAP net
income. Accordingly, the Company’s “Core
Earnings” presentation does not represent another
comprehensive basis of accounting.
See Note 13, “Segment Reporting,” to the
consolidated financial statements and “MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — BUSINESS SEGMENTS — Limitations
of ‘Core Earnings’ ” and
“— Pre-tax Differences between ‘Core
Earnings’ and GAAP by Business Segment“ for further
discussion of the differences between “Core Earnings”
and GAAP, as well as reconciliations between “Core
Earnings” and GAAP.
In prior filings with the SEC of SLM Corporation’s Annual
Report on
Form 10-K
and quarterly reports on
Form 10-Q,
“Core Earnings” has been labeled as “
’Core’ net income” or “Managed net
income” in certain instances.
Direct Loans — Student loans originated
directly by ED under the William D. Ford Federal Direct Student
Loan Program (“FDLP”).
ED — The U.S. Department of Education.
Embedded Fixed-Rate/Variable Rate Floor
Income — Embedded Floor Income is Floor Income
(see definition below) that is earned on off-balance sheet
student loans that are in securitization trusts sponsored by the
Company. At the time of the securitization, the value of
Embedded Fixed-Rate Floor Income is included in the initial
valuation of the Residual Interest (see definition below) and
the gain or loss on sale of the student loans. Embedded Floor
Income is also included in the quarterly fair value adjustments
of the Residual Interest.
FFELP — The Federal Family Education Loan
Program, formerly the Guaranteed Student Loan Program.
FFELP Consolidation Loans — Under the FFELP,
borrowers with multiple eligible student loans may consolidate
them into a single student loan with one lender at a fixed-rate
for the life of the loan. The new loan is considered a FFELP
Consolidation Loan. Typically a borrower may consolidate his
student loans only once unless the borrower has another eligible
loan to consolidate with the existing FFELP Consolidation Loan.
The borrower rate on a FFELP Consolidation Loan is fixed for the
term of the loan and is set by the weighted average interest
rate of the loans being consolidated, rounded up to the nearest
1/8th of a percent, not to exceed 8.25 percent. In low
interest rate environments, FFELP Consolidation Loans provide an
attractive refinancing opportunity to certain borrowers because
they allow borrowers to consolidate variable rate loans into a
long-term fixed-rate loan. Holders of FFELP Consolidation Loans
are eligible to earn interest under the Special Allowance
Payment (“SAP”) formula (see definition below). In
April 2008, the Company suspended its participation in the FFELP
Consolidation Loan program.
FFELP Stafford and Other Student Loans —
Education loans to students or parents of students that are
guaranteed or reinsured under FFELP. The loans are primarily
Stafford loans but also include PLUS and HEAL loans.
Fixed-Rate Floor Income — The Company refers to
Floor Income (see definition below) associated with student
loans with borrower rates that are fixed to term (primarily
FFELP Consolidation Loans and Stafford Loans originated on or
after July 1, 2006) as Fixed-Rate Floor Income.
Floor Income — FFELP loans generally earn
interest at the higher of either the borrower rate, which is
fixed over a period of time, or a floating rate based on the SAP
formula (see definition below). The Company generally finances
its student loan portfolio with floating rate debt whose
interest is matched closely to the floating nature of the
applicable SAP formula. If interest rates decline to a level at
which the borrower rate exceeds the SAP formula rate, the
Company continues to earn interest on the loan at the fixed
borrower rate while the floating rate interest on our debt
continues to decline. In these interest rate environments, the
Company refers to the additional spread it earns between the
fixed borrower rate and the SAP formula rate as Floor Income.
Depending on the type of student loan and when it was
originated, the borrower rate is either fixed to term or is
reset to a market rate each July 1. As a result, for loans
where the borrower rate is fixed to term, the Company may earn
Floor Income for an extended period of time, and for those loans
where the borrower interest rate is reset annually on
July 1, the Company may earn Floor Income to the next reset
date. In accordance with legislation enacted in 2006, lenders
are required to rebate Floor Income to ED for all FFELP loans
disbursed on or after April 1, 2006.
The following example shows the mechanics of Floor Income for a
typical fixed-rate FFELP Consolidation Loan (with a commercial
paper-based SAP spread of 2.64 percent):
Based on this example, if the quarterly average commercial paper
rate is over 4.61 percent, the holder of the student loan
will earn at a floating rate based on the SAP formula, which in
this example is a fixed spread to commercial paper of
2.64 percent. On the other hand, if the quarterly average
commercial paper rate is below 4.61 percent, the SAP
formula will produce a rate below the fixed borrower rate of
7.25 percent and the loan holder earns at the borrower rate
of 7.25 percent.
Floor Income Contracts — The Company enters
into contracts with counterparties under which, in exchange for
an upfront fee representing the present value of the Floor
Income that the Company expects to earn on a notional amount of
underlying student loans being economically hedged, the Company
will pay the counterparties the Floor Income earned on that
notional amount over the life of the Floor Income Contract.
Specifically, the Company agrees to pay the counterparty the
difference, if positive, between the fixed borrower rate less
the SAP (see definition below) spread and the average of the
applicable interest rate index on that notional amount,
regardless of the actual balance of underlying student loans,
over the life of the contract. The contracts generally do not
extend over the life of the underlying student loans. This
contract effectively locks in the amount of Floor Income the
Company will earn over the period of the contract. Floor Income
Contracts are not considered effective hedges under
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” and each quarter the
Company must record the change in fair value of these contracts
through income.
Front-End Borrower Benefits — Financial
incentives offered to borrowers at origination. Front-End
Borrower Benefits primarily represent the Company’s payment
on behalf of borrowers for required FFELP fees, including the
federal origination fee and federal default fee. The Company
accounts for these Front-End Borrower Benefits as loan premiums
amortized over the estimated life of the loans as an adjustment
to the loan’s yield.
Gross Floor Income — Floor Income earned before
payments on Floor Income Contracts.
Guarantors — State agencies or non-profit
companies that guarantee (or insure) FFELP loans made by
eligible lenders under The Higher Education Act of 1965
(“HEA”), as amended.
Interim ABCP Facility — An aggregate of
$30 billion asset-backed commercial paper conduit
facilities that the Company entered into on April 30, 2007
in connection with the Merger (defined below under “Merger
Agreement”).
Lender Partners — Lender Partners are lenders
who originate loans under forward purchase commitments under
which the Company owns the loans from inception or, in most
cases, acquires the loans soon after origination.
Managed Basis — The Company generally analyzes
the performance of its student loan portfolio on a Managed
Basis. The Company views both on-balance sheet student loans and
off-balance sheet student loans owned by the securitization
trusts as a single portfolio, and the related on-balance sheet
financings are combined with off-balance sheet debt. When the
term Managed is capitalized in this document, it is referring to
Managed Basis.
Merger Agreement — On April 16, 2007, the
Company announced that a buyer group (“Buyer Group”)
led by J.C. Flowers & Co. (“J.C. Flowers”),
Bank of America, N.A. and JPMorgan Chase, N.A. (the
“Merger”) signed a definitive agreement (“Merger
Agreement”) to acquire the Company for approximately
$25.3 billion or $60.00 per share of common stock. (See
also “Merger Agreement” filed with the SEC on the
Company’s Current Report on
Form 8-K,
dated April 18, 2007.) On January 25, 2008, the
Company, Mustang Holding Company Inc. (“Mustang
Holding”), Mustang Merger Sub, Inc. (“Mustang
Sub”), J.C. Flowers, Bank of America, N.A. and JPMorgan
Chase Bank, N.A. entered into a Settlement, Termination and
Release Agreement (the “Agreement”). Under the
Agreement, a lawsuit filed by the Company related to the Merger,
as well as all counterclaims, was dismissed.
Private Education Consolidation Loans —
Borrowers with multiple Private Education Loans (defined below)
may consolidate them into a single loan with the Company
(Private Consolidation
Loans®).
The interest rate on the new loan is variable rate with the
spread set at the lower of the average weighted spread of the
underlying loans or a new spread as a result of favorable
underwriting criteria.
Private Education Loans — Education loans to
students or parents of students that are not guaranteed under
the FFELP. Private Education Loans include loans for higher
education (undergraduate and graduate degrees) and for
alternative education, such as career training, private
kindergarten through secondary education schools and tutorial
schools. Higher education loans have repayment terms similar to
FFELP loans, whereby repayments begin after the borrower leaves
school. The Company’s higher education Private Education
Loans are not dischargeable in bankruptcy, except in certain
limited circumstances. Repayment for alternative education
generally begins immediately.
In the context of the Company’s Private Education Loan
business, the Company uses the term “non-traditional
loans” to describe education loans made to certain
borrowers that have or are expected to have a high default rate
as a result of a number of factors, including having a lower
tier credit rating, low program completion and graduation rates
or, where the borrower is expected to graduate, a low expected
income relative to the borrower’s cost of attendance.
Preferred Channel Originations — Preferred
Channel Originations are comprised of: 1) loans that are
originated by internally marketed Sallie Mae brands, and
2) student loans that are originated by Lender Partners
(defined above).
Repayment Borrower Benefits — Financial
incentives offered to borrowers based on pre-determined
qualifying factors, which are generally tied directly to making
on-time monthly payments. The impact of Repayment Borrower
Benefits is dependent on the estimate of the number of borrowers
who will eventually qualify for these benefits and the amount of
the financial benefit offered to the borrower. The Company
occasionally changes Repayment Borrower Benefits programs in
both amount and qualification factors. These programmatic
changes must be reflected in the estimate of the Repayment
Borrower Benefits discount when made.
Residual Interest — When the Company
securitizes student loans, it retains the right to receive cash
flows from the student loans sold to trusts that it sponsors in
excess of amounts needed to pay servicing, derivative costs (if
any), other fees, and the principal and interest on the bonds
backed by the student loans. The Residual Interest, which may
also include reserve and other cash accounts, is the present
value of these future expected cash flows, which includes the
present value of any Embedded Fixed-Rate Floor Income described
above. The Company values the Residual Interest at the time of
sale of the student loans to the trust and as of the end of each
subsequent quarter.
Retained Interest — The Retained Interest
includes the Residual Interest (defined above) and servicing
rights (as the Company retains the servicing responsibilities)
for our securitization transactions accounted for as sales.
Risk Sharing — When a FFELP loan first
disbursed on and after July 1, 2006 defaults, the federal
government guarantees 97 percent of the principal balance
plus accrued interest (98 percent on loans disbursed before
July 1, 2006) and the holder of the loan is at risk
for the remaining amount not guaranteed as a Risk Sharing loss
on the loan. FFELP loans originated after October 1, 1993
are subject to Risk Sharing on loan default claim payments
unless the default results from the borrower’s death,
disability or bankruptcy. FFELP loans serviced by a servicer
that has Exceptional Performer designation from ED were subject
to one-percent Risk Sharing for claims filed on or after
July 1, 2006 and before October 1, 2007. The CCRAA
reduces default insurance to 95 percent of the unpaid
principal and accrued interest for loans first disbursed on or
after October 1, 2012.
Special Allowance Payment (“SAP”) —
FFELP loans disbursed prior to April 1, 2006 (with the
exception of certain PLUS and SLS loans discussed below)
generally earn interest at the greater of the borrower rate or a
floating rate determined by reference to the average of the
applicable floating rates
(91-day
Treasury bill rate or commercial paper) in a calendar quarter,
plus a fixed spread that is dependent upon when the loan was
originated and the loan’s repayment status. If the
resulting floating rate exceeds the borrower rate, ED pays the
difference directly to the Company. This payment is referred to
as the Special Allowance Payment or SAP and the formula used to
determine the floating rate is the SAP formula. The Company
refers to the fixed spread to the underlying index as the SAP
spread. For loans disbursed after April 1, 2006, FFELP
loans effectively only earn at the SAP rate, as the excess
interest earned when the borrower rate exceeds the SAP rate
(Floor Income) must be refunded to ED.
Variable rate PLUS Loans and SLS Loans earn SAP only if the
variable rate, which is reset annually, exceeds the applicable
maximum borrower rate. For PLUS loans disbursed on or after
January 1, 2000, this limitation on SAP was repealed
effective April 1, 2006.
A schedule of SAP rates is set forth on
page A-5
of the Company’s 2007 Annual Report on
Form 10-K.
Title IV Programs and Title IV
Loans — Student loan programs created under
Title IV of the HEA and student loans originated under
those programs, respectively.
Variable Rate Floor Income — For FFELP Stafford
loans whose borrower interest rate resets annually on
July 1, the Company may earn Floor Income or Embedded Floor
Income (see definitions above) based on a calculation of the
difference between the borrower rate and the then current
interest rate. The Company refers to this as Variable Rate Floor
Income because Floor Income is earned only through the next
reset date.
Wholesale Consolidation Loans — During 2006,
the Company implemented a loan acquisition strategy under which
it began purchasing a significant amount of FFELP Consolidation
Loans, primarily via the spot market, which augmented its
in-house FFELP Consolidation Loan origination process. Wholesale
Consolidation Loans are considered incremental volume to the
Company’s core acquisition channels, which are focused on
the retail marketplace with an emphasis on the Company’s
brand strategy. In 2008, the Company ceased acquiring Wholesale
Consolidation Loans.
PART I.
FINANCIAL INFORMATION
SLM
CORPORATION
CONSOLIDATED BALANCE SHEETS (Dollars and shares in thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
SLM
CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Dollars and shares in thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
SLM
CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Dollars in thousands, except share and per share amounts) (Unaudited)
See accompanying notes to consolidated financial statements.
SLM
CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Dollars in thousands, except share and per share amounts) (Unaudited)
See accompanying notes to consolidated financial statements.
SLM
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
The accompanying unaudited, consolidated financial statements of
SLM Corporation (the “Company”) have been prepared in
accordance with generally accepted accounting principles in the
United States of America (“GAAP”) for interim
financial information. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete
consolidated financial statements. In the opinion of management,
all adjustments considered necessary for a fair statement of the
results for the interim periods have been included. The
preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates. Operating results for the three and six
months ended June 30, 2008 are not necessarily indicative
of the results for the year ending December 31, 2008. The
consolidated balance sheet at December 31, 2007, as
presented, was derived from the audited financial statements
included in the Company’s Annual Report on
Form 10-K
for the period ended December 31, 2007. These unaudited
financial statements should be read in conjunction with the
audited financial statements and related notes included in the
Company’s 2007 Annual Report on
Form 10-K.
Certain reclassifications have been made to the balances as of
and for the three and six months ended June 30, 2007 to be
consistent with classifications adopted for 2008.
The Company is currently restructuring its business in response
to the impact of the College Cost Reduction and Access Act of
2007 (“CCRAA”) and current challenges in the capital
markets. One-time, involuntary benefit arrangements, disposal
costs (including contract termination costs and other exit
costs), as well as certain other costs that are incremental and
incurred as a direct result of the Company’s restructuring
plans, are accounted for in accordance with the Financial
Accounting Standards Board’s (“FASB’s”)
Statement of Financial Accounting Standards (“SFAS”)
No. 146, “Accounting for Costs Associated with Exit or
Disposal Activities,” and are classified as restructuring
expenses in the accompanying consolidated statements of income.
In conjunction with its restructuring plans, the Company has
entered into one-time benefit arrangements with employees,
primarily senior executives, who have been involuntarily
terminated. The Company recognizes a liability when all of the
following conditions have been met and the benefit arrangement
has been communicated to the employees:
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Information at June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 is unaudited) (Dollars in thousands, except per share amounts, unless otherwise noted)
Severance costs under such one-time termination benefit
arrangements may include all or some combination of severance
pay, medical and dental benefits, outplacement services, and
certain other costs.
Contract termination costs are expensed at the earlier of
(1) the contract termination date or (2) the cease use
date under the contract. Other exit costs are expensed as
incurred and classified as restructuring expenses if
(1) the cost is incremental to and incurred as a direct
result of planned restructuring activities, and (2) the
cost is not associated with or incurred to generate revenues
subsequent to the Company’s consummation of the related
restructuring activities.
In addition to one-time involuntary benefit arrangements, the
Company sponsors the SLM Corporation Employee Severance Plan,
which provides severance benefits in the event of termination of
the Company’s and its subsidiaries’ full-time
employees (with the exception of certain specified levels of
management and employees of the Company’s Asset Performance
Group (“APG”) subsidiaries) and part-time employees
who work at least 24 hours per week. The Company also
sponsors the DMO Employee Severance Plan, which provides
severance benefits to certain specified levels of full-time
management and full-time employees in the Company’s APG
subsidiaries. The Employee Severance Plan and the DMO Employee
Severance Plan (collectively, the “Severance Plan”)
establishes specified benefits based on base salary, job level
immediately preceding termination and years of service upon
termination of employment due to Involuntary Termination or a
Job Abolishment, as defined in the Severance Plan. The benefits
payable under the Severance Plan relate to past service and they
accumulate and vest. Accordingly, the Company recognizes
severance costs to be paid pursuant to the Severance Plan in
accordance with SFAS No. 112, “Employer’s
Accounting for Post Employment Benefits,” when payment of
such benefits is probable and reasonably estimable. Such
benefits including severance pay calculated based on the
Severance Plan, medical and dental benefits, outplacement
services and continuation pay, have been incurred during the
first half of 2008 and the fourth quarter of 2007 as a direct
result of the Company’s restructuring initiatives.
Accordingly, such costs are classified as restructuring expenses
in the accompanying consolidated statements of income.
Recently
Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements.” This statement is effective
for financial statements issued for fiscal years beginning after
November 15, 2007. This statement defines fair value,
establishes a framework for measuring fair value within GAAP,
and expands disclosures about fair value measurements. This
statement applies to other accounting pronouncements that
require or permit fair value measurements. Accordingly, this
statement does not change which types of instruments are carried
at fair value, but rather establishes the framework for
measuring fair value. The adoption of SFAS No. 157 on
January 1, 2008 did not have a material impact on the
Company’s financial statements.
On February 12, 2008, the FASB issued FASB Staff Position
(“FSP”)
SFAS No. 157-2,
“Effective Date of SFAS No. 157,” which
defers the effective date of SFAS No. 157 for
nonfinancial assets and liabilities, except for items that are
recognized or disclosed at fair value in the financial
statements on a recurring basis. This FSP will delay the
implementation of SFAS No. 157 for the Company’s
accounting of goodwill, acquired intangibles, and other
nonfinancial assets and liabilities that are measured at the
lower of cost or market until January 1, 2009.
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Information at June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 is unaudited) (Dollars in thousands, except per share amounts, unless otherwise noted)
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities — Including an Amendment of FASB Statement
No. 115.” This statement permits entities to choose to
measure many financial instruments and certain other items at
fair value (on an instrument by instrument basis). Most
recognized financial assets and liabilities are eligible items
for the measurement option established by the statement. There
are a few exceptions, including an investment in a subsidiary or
an interest in a variable interest entity that is required to be
consolidated, certain obligations related to post-employment
benefits, assets or liabilities recognized under leases, various
deposits, and financial instruments classified as
shareholder’s equity. A business entity shall report
unrealized gains and losses on items for which the fair value
option has been elected in earnings at each reporting date. The
Company adopted SFAS No. 159 on January 1, 2008,
and elected the fair value option on all of its Residual
Interests effective January 1, 2008. The Company chose this
election in order to simplify the accounting for Residual
Interests by including all Residual Interests under one
accounting model. Prior to this election, Residual Interests
were accounted for either under SFAS No. 115 with
changes in fair value recorded through other comprehensive
income or under SFAS No. 155, “Accounting for
Certain Hybrid Financial Instruments,” with changes in fair
value recorded through income. At transition, the Company
recorded a pre-tax gain to retained earnings as a
cumulative-effect adjustment totaling $301 million
($195 million net of tax). This amount was in accumulated
other comprehensive income as of December 31, 2007, and as
a result equity was not impacted at transition on
January 1, 2008. Changes in fair value of Residual
Interests on and after January 1, 2008 are recorded through
the income statement. The Company has not elected the fair value
option for any other financial instruments at this time.
In December 2007, the FASB issued SFAS No. 141(R),
“Business Combinations.” SFAS No. 141(R)
requires the acquiring entity in a business combination to
recognize the entire acquisition-date fair value of assets
acquired and liabilities assumed in both full and partial
acquisitions; changes the recognition of assets acquired and
liabilities assumed related to contingencies; changes the
recognition and measurement of contingent consideration;
requires expensing of most transaction and restructuring costs;
and requires additional disclosures to enable the users of the
financial statements to evaluate and understand the nature and
financial effect of the business combination.
SFAS No. 141(R) applies to all transactions or other
events in which the Company obtains control of one or more
businesses. SFAS No. 141(R) applies prospectively to
business combinations for which the acquisition date is on or
after the beginning of the reporting period beginning on or
after December 15, 2008, which for the Company is
January 1, 2009. Early adoption is not permitted.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements — an Amendment of Accounting Research
Bulletin No. 51.” SFAS No. 160 requires
reporting entities to present noncontrolling (minority)
interests as equity (as opposed to its current presentation as a
liability or mezzanine equity) and provides guidance on the
accounting for transactions between an entity and noncontrolling
interests. SFAS No. 160 applies prospectively for
reporting periods beginning on or after
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Information at June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 is unaudited) (Dollars in thousands, except per share amounts, unless otherwise noted)
December 15, 2008, which for the Company is January 1,
2009, except for the presentation and disclosure requirements
which will be applied retrospectively for all periods presented.
Adoption of this standard will not be material to the Company.
In March 2008, the FASB issued SFAS No. 161,
“Disclosures about Derivative Investments and Hedging
Activities — an Amendment of FASB Statement
No. 133.” SFAS No. 161 requires enhanced
disclosures about an entity’s derivative and hedging
activities, including (1) how and why an entity uses
derivative instruments, (2) how derivative instruments and
related hedged items are accounted for under
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” and its related
interpretations, and (3) how derivative instruments and
related hedged items affect an entity’s financial position,
financial performance, and cash flows. To meet those objectives,
SFAS No. 161 requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about
credit-risk-related contingent features in derivative
agreements. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning
after November 15, 2008, which for the Company is
January 1, 2009.
In recent meetings, the FASB tentatively decided to amend
SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities — a replacement of FASB Statement
No. 125,” which would impact the accounting for QSPEs
and result in certain changes to the FASB’s Financial
Interpretation (“FIN”) No. 46R,
“Consolidation of Variable Interest Entities — an
interpretation of ARB No. 51.” An exposure draft of
the proposed amendment to SFAS No. 140 is expected in
the third quarter of 2008. Based on the FASB’s preliminary
discussions and tentative decisions, and assuming no changes to
the Company’s current business model, it is likely that
these changes may lead to the consolidation of certain QSPEs and
variable interest entities (“VIEs”). However, the
impact to the Company’s accounting for its QSPEs and VIEs
cannot be determined until the FASB issues the final amendments
to SFAS No. 140 and FIN No. 46R.
In May 2008, the FASB issued an FSP on Accounting Principles
Board Opinion (“APB”)
No. 14-1,
“Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement).” FSP APB
14-1
requires the issuer of certain convertible debt instruments that
may be settled in cash (or other assets) on conversion to
separately account for the liability (debt) and equity
(conversion option) components of the instrument in a manner
that reflects the issuer’s nonconvertible debt borrowing
rate. FSP APB
14-1, which
is applied retrospectively, is effective for the Company
beginning January 1, 2009. The Company is evaluating the
impact of this FSP on its accounting for its contingently
convertible note issued in May 2003 and subsequently called in
July 2007.
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Information at June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 is unaudited) (Dollars in thousands, except per share amounts, unless otherwise noted)
In June 2008, the FASB issued an exposure draft to amend the
accounting for hedging activities in SFAS No. 133.
This proposed Statement is intended to simplify accounting for
hedging activities, improve the financial reporting of hedging
activities, resolve major practice issues related to hedge
accounting that have arisen under SFAS No. 133, and
address differences resulting from recognition and measurement
anomalies between the accounting for derivative instruments and
the accounting for hedged items or transactions. While the
amendment as currently written may simplify the Company’s
accounting model for hedging activities under
SFAS No. 133 by relieving a portion of the burdensome
nature of hedge effectiveness testing and relaxing the threshold
to qualify as a hedge from highly effective to reasonably
effective, the Company does not expect it to significantly
impact its results of operations. The full impact of the
amendment cannot be evaluated until the final statement is
issued later this year. It is expected the amendment will be
effective January 1, 2010.
The Company’s provisions for loan losses represent the
periodic expense of maintaining an allowance sufficient to
absorb incurred losses, net of recoveries, in the 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. The Company believes that
the allowance for loan losses is appropriate to cover probable
losses incurred in the loan portfolios.
The following tables summarize the total loan provisions for the
three and six months ended June 30, 2008 and 2007.
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Information at June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 is unaudited) (Dollars in thousands, except per share amounts, unless otherwise noted)
The following table summarizes changes in the allowance for loan
losses for Private Education Loans for the three and six months
ended June 30, 2008 and 2007.
Due to the seasoning of the Private Education Loan portfolio,
shifts in its mix, certain economic factors and other
operational factors, the Company has expected and has seen
charge-off rates increase from the levels experienced prior to
2007. In the fourth quarter of 2007, the Company recorded
provision expense of $503 million related to the Private
Education Loan portfolio. This significant increase in provision
expense compared to prior and current quarters primarily relates
to the non-traditional portion of the Company’s Private
Education Loan portfolio which the Company had been expanding
over the past few years. The
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Information at June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 is unaudited) (Dollars in thousands, except per share amounts, unless otherwise noted)
Company has recently terminated these non-traditional loan
programs because the performance of these loans turned out to be
materially different from its original expectations and from the
rest of the Company’s Private Education Loan programs. The
non-traditional portfolio is particularly impacted by the
weakening U.S. economy and an underlying borrower’s
ability to repay a non-traditional loan. As a result, the
Company recorded the additional provision in the fourth quarter
of 2007, and this is the primary reason that the allowance as a
percentage of the ending total loan balance and as a percentage
of ending loans in repayment is significantly higher at
June 30, 2008 versus June 30, 2007.
Private
Education Loan Delinquencies
The table below presents the Company’s Private Education
Loan delinquency trends as of June 30, 2008,
December 31, 2007, and June 30, 2007. Delinquencies
have the potential to adversely impact earnings if the loan
charges off and results in increased servicing and collection
costs.
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Information at June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 is unaudited) (Dollars in thousands, except per share amounts, unless otherwise noted)
The following table summarizes changes in the allowance for loan
losses for the FFELP loan portfolio for the three and six months
ended June 30, 2008 and 2007.
The Company maintains an allowance for Risk Sharing loan losses
on its FFELP loan portfolio. The level of Risk Sharing has
varied over the past few years with legislative changes. As of
June 30, 2008, 44 percent of the on-balance sheet
FFELP loan portfolio was subject to three-percent Risk
Sharing, 55 percent was subject to two-percent Risk
Sharing and the remaining one percent was not subject to any
Risk Sharing. At June 30, 2007, the Company’s FFELP
loans were serviced under the Exceptional Performer designation
from ED which limited the portfolio to only one-percent Risk
Sharing. The Exceptional Performer designation was eliminated by
the CCRAA effective October 1, 2007.
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Information at June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 is unaudited) (Dollars in thousands, except per share amounts, unless otherwise noted)
FFELP
Loan Delinquencies
The table below shows the Company’s FFELP loan delinquency
trends as of June 30, 2008, December 31, 2007 and
June 30, 2007. Delinquencies have the potential to
adversely impact earnings if the account charges off and results
in increased servicing and collection costs.
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Information at June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 is unaudited) (Dollars in thousands, except per share amounts, unless otherwise noted)
Intangible assets include the following:
The Company recorded amortization of acquired intangibles
totaling $15 million and $16 million for the three
months ended June 30, 2008 and 2007, respectively, and
$31 million and $31 million for the six months ended
June 30, 2008 and 2007, respectively. In the first quarter
of 2007, the Company recognized intangible impairments of
$9 million in connection with certain tax exempt bonds
previously acquired through the purchase of certain
subsidiaries. The Company will continue to amortize its
intangible assets with definite useful lives over their
remaining estimated useful lives.
A summary of changes in the Company’s goodwill by
reportable segment (see Note 13, “Segment
Reporting”) is as follows:
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Information at June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 is unaudited) (Dollars in thousands, except per share amounts, unless otherwise noted)
On January 3, 2008, the Company acquired an additional
12 percent interest in AFS Holdings, LLC (“AFS”)
for a purchase price of approximately $38 million,
increasing the Company’s total purchase price to
approximately $324 million including cash consideration and
certain acquisition costs for its 100 percent controlling
interest. The acquisition was accounted for under the purchase
method of accounting as defined in SFAS No. 141,
“Business Combinations.” The Company’s purchase
price allocation associated with the January 2008 acquisition
resulted in goodwill of approximately $19 million, which
increased the aggregate goodwill associated with the
Company’s acquisition of AFS to $226 million. The
remaining fair value of AFS’s assets and liabilities at
each respective acquisition date was primarily allocated to
purchased loan portfolios and other identifiable intangible
assets.
Securitization
Activity
The Company securitizes its student loan assets and for
transactions qualifying as sales, retains a Residual Interest
and servicing rights (as the Company retains the servicing
responsibilities), all of which are referred to as the
Company’s Retained Interest in off-balance sheet
securitized loans. The Residual Interest is the right to receive
cash flows from the student loans and reserve accounts in excess
of the amounts needed to pay servicing, derivative costs (if
any), other fees, and the principal and interest on the bonds
backed by the student loans. The investors in the securitization
trusts have no recourse to the Company’s other assets
should there be a failure of the trusts to pay principal or
interest to investors when due.
The following table summarizes the Company’s securitization
activity for the three and six months ended June 30, 2008
and 2007. Those securitizations listed as sales are off-balance
sheet transactions and those listed as financings remain
on-balance sheet.
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Information at June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 is unaudited) (Dollars in thousands, except per share amounts, unless otherwise noted)
23
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Information at June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 is unaudited) (Dollars in thousands, except per share amounts, unless otherwise noted)
Key economic assumptions used in estimating the fair value of
Residual Interests at the date of securitization resulting from
the student loan securitization sale transactions completed
during the three and six months ended June 30, 2008 and
2007 were as follows:
The following tables summarize the fair value of the
Company’s Residual Interests included in the Company’s
Retained Interest (and the assumptions used to value such
Residual Interests), along with the underlying off-balance sheet
student loans that relate to those securitizations in
transactions that were treated as sales as of June 30, 2008
and December 31, 2007.
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Information at June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 is unaudited) (Dollars in thousands, except per share amounts, unless otherwise noted)
As previously discussed, the Company adopted
SFAS No. 159 on January 1, 2008, and has elected
the fair value option on all of the Residual Interests effective
January 1, 2008. The Company chose this election in order
to record all Residual Interests under one accounting model.
Prior to this election, Residual Interests were accounted for
either under SFAS No. 115 with changes in fair value
recorded through other
25
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Information at June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 is unaudited) (Dollars in thousands, except per share amounts, unless otherwise noted)
comprehensive income, except if impaired in which case changes
in fair value were recorded through income, or under
SFAS No. 155 with all changes in fair value recorded
through income. Changes in the fair value of Residual Interests
from January 1, 2008 forward are recorded in the servicing
and securitization revenue line item of the consolidated income
statement.
The Company recorded a net unrealized mark-to-market loss
related to the Residual Interests of $280 million during
the six months ended June 30, 2008. The mark-to-market loss
was primarily related to the increase in the discount rate
assumption related to the Private Education Loan Residual
Interest. This discount rate is applied to the projected cash
flows to arrive at a fair value representative of the current
economic conditions. The Company increased the risk premium by
350 basis points (from December 31, 2007) to take
into account the current level of cash flow uncertainty and lack
of liquidity that exists with the Private Education Loan
Residual Interests in light of the current economic and credit
uncertainty that exists in the market. The increase in the
discount rate accounted for $244 million of the net
unrealized mark-to-market loss for the six months ended
June 30, 2008.
The 2008 mark-to-market loss was also related to increases in
the cost of funds assumptions related to the underlying auction
rate securities bonds within the FFELP ($1.7 billion face
amount of bonds) and Private Education Loan ($0.6 billion
face amount of bonds) trusts, which resulted in a
$98 million decrease in fair value.
The Company recorded impairments to the Retained Interests of
$46 million for the six months ended June 30, 2007.
The impairment charges were primarily the result of FFELP loans
prepaying faster than projected through loan consolidations. In
addition, the Company recorded an unrealized mark-to-market loss
under SFAS No. 155 of $57 million for the six
months ended June 30, 2007.
The table below shows the Company’s off-balance sheet
Private Education Loan delinquency trends as of June 30,
2008, December 31, 2007 and June 30, 2007.
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Information at June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 is unaudited) (Dollars in thousands, except per share amounts, unless otherwise noted)
The following tables summarize the fair values and notional
amounts of all derivative instruments at June 30, 2008 and
December 31, 2007 and their impact on other comprehensive
income and earnings for the three and six months ended
June 30, 2008 and 2007. At June 30, 2008 and
December 31, 2007, available-for-sale securities with fair
values of $208 million and $196 million (none of which
was in restricted cash and investments on the balance sheet),
respectively, and $69 million and $890 million,
respectively, of cash were pledged as collateral against these
derivative instruments. In addition, $2.2 billion
($0.1 billion of which is in restricted cash and
investments on the balance sheet) and $1.3 billion (none of
which was in restricted cash and investments on the balance
sheet) of cash was held as collateral at June 30, 2008 and
December 31, 2007, respectively, for derivative
counterparties where the Company has exposure.
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Information at June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 is unaudited) (Dollars in thousands, except per share amounts, unless otherwise noted)
28
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Information at June 30, 2008 and for the three and six months ended June 30, 2008 and 2007 is unaudited) (Dollars in thousands, except per share amounts, unless otherwise noted)
The following table provides the detail of the Company’s
other assets at June 30, 2008 and December 31, 2007.
The “Derivatives at fair value” line in the above
table represents the fair value of the Company’s
derivatives in a gain position by counterparty. At June 30,
2008 and December 31, 2007, these balances primarily
included cross-currency interest rate swaps designated as fair
value hedges that were offset by an increase in interest-bearing
liabilities related to the hedged foreign currency-denominated
debt. As of June 30, 2008 and December 31, 2007, the
cumulative mark-to-market adjustment to the hedged debt was
$(5.0) billion and $(3.6) billion, respectively.
The following table summarizes the Company’s common share
repurchases and issuances for the three and six months ended
June 30, 2008 and 2007. Equity forward activity for the
three and six months ended June 30, 2007 is also reported.
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