e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30, 2007 or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number:
001-13251
SLM Corporation
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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52-2013874
(I.R.S. Employer
Identification No.)
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12061 Bluemont Way, Reston, Virginia
(Address of principal
executive offices)
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20190
(Zip
Code)
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(703) 810-3000
(Registrants telephone
number, including area code)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date:
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Class
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Outstanding at October 31, 2007
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Voting common stock, $.20 par value
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413,998,316 shares
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GLOSSARY
Listed below are definitions of key terms that are used
throughout this document.
Borrower Benefits Borrower Benefits are
financial incentives offered to borrowers who qualify based on
pre-determined qualifying factors, which are generally tied
directly to making on-time monthly payments. The impact of
Borrower Benefits is dependent on the estimate of the number of
borrowers who will eventually qualify for these benefits and the
amount of the financial benefit offered to the borrower. We
occasionally change Borrower Benefits programs in both amount
and qualification factors. These programmatic changes must be
reflected in the estimate of the Borrower Benefits discount.
Consolidation Loan Rebate Fee All holders of
FFELP Consolidation Loans are required to pay to the
U.S. Department of Education (ED) an annual
105 basis point Consolidation Loan Rebate Fee on all
outstanding principal and accrued interest balances of FFELP
Consolidation Loans purchased or originated after
October 1, 1993, except for loans for which consolidation
applications were received between October 1, 1998 and
January 31, 1999, where the Consolidation Loan Rebate Fee
is 62 basis points.
Constant Prepayment Rate (CPR) A
variable in life of loan estimates that measures the rate at
which loans in the portfolio pay before their stated maturity.
The CPR is directly correlated to the average life of the
portfolio. CPR equals the percentage of loans that prepay
annually as a percentage of the beginning of period balance.
Core Earnings In accordance with
the Rules and Regulations of the Securities and Exchange
Commission (SEC), we prepare financial statements in
accordance with generally accepted accounting principles in the
United States of America (GAAP). In addition to
evaluating the Companys GAAP-based financial information,
management evaluates the Companys business segments on a
basis that, as allowed under the Financial Accounting Standards
Boards (FASB) Statement of Financial
Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related
Information, differs from GAAP. We refer to
managements basis of evaluating our segment results as
Core Earnings presentations for each business
segment and we refer to these performance measures in our
presentations with credit rating agencies and lenders. While
Core Earnings results are not a substitute for
reported results under GAAP, we rely on Core
Earnings performance measures in operating each business
segment because we believe these measures provide additional
information regarding the operational and performance indicators
that are most closely assessed by management.
Our Core Earnings performance measures are the
primary financial performance measures used by management to
evaluate performance and to allocate resources. Accordingly,
financial information is reported to management on a Core
Earnings basis by reportable segment, as these are the
measures used regularly by our chief operating decision maker.
Our Core Earnings performance measures are used in
developing our financial plans and tracking results, and also in
establishing corporate performance targets and determining
incentive compensation. Management believes this information
provides additional insight into the financial performance of
the Companys core business activities. Our Core
Earnings performance measures are not defined terms within
GAAP and may not be comparable to similarly titled measures
reported by other companies. Core Earnings net
income reflects only current period adjustments to GAAP net
income. Accordingly, the Companys Core
Earnings presentation does not represent another
comprehensive basis of accounting.
See NOTE 11 TO THE CONSOLIDATED FINANCIAL
STATEMENTS Segment Reporting and
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS BUSINESS
SEGMENTS Limitations of Core
Earnings for further discussion of the
differences between Core Earnings and GAAP, as well
as reconciliations between Core Earnings and GAAP.
In prior filings with the SEC of SLM Corporations Annual
Report on
Form 10-K
and quarterly report on
Form 10-Q,
Core Earnings has been labeled as
Core net income or Managed net
income in certain instances.
1
Direct Loans Student loans originated
directly by ED under the 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 us.
At the time of the securitization, the value of Embedded Fixed
Rate Floor Income is included in the initial valuation of the
Residual Interest (see definition below) and the gain or loss on
sale of the student loans. Embedded Floor Income is also
included in the quarterly fair value adjustments of the Residual
Interest.
Exceptional Performer (EP)
Designation The EP designation is determined by
ED in recognition of a servicer meeting certain performance
standards set by ED in servicing FFELP Loans. Upon receiving the
EP designation, the EP servicer receives 99 percent
reimbursement on default claims on federally guaranteed student
loans for all loans serviced for a period of at least
270 days before the date of default and will no longer be
subject to the 3 percent Risk Sharing (see definition
below) on these loans. The EP servicer is entitled to receive
this benefit as long as it remains in compliance with the
required servicing standards, which are assessed on an annual
and quarterly basis through compliance audits and other
criteria. The annual assessment is in part based upon subjective
factors which alone may form the basis for an ED determination
to withdraw the designation. If the designation is withdrawn,
the 3 percent Risk Sharing may be applied
retroactively to the date of the occurrence that resulted in
noncompliance. The College Cost Reduction Act of 2007 eliminated
the EP designation effective October 1, 2007. See
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS RECENT
DEVELOPMENTS Other Developments
Exceptional Performer.
FDLP The William D. Ford Federal Direct
Student Loan Program.
FFELP The Federal Family Education Loan
Program, formerly the Guaranteed Student Loan Program.
FFELP Consolidation Loans Under the Federal
Family Education Loan Program (FFELP) borrowers with
multiple eligible student loans may consolidate them into a
single student loan with one lender at a fixed rate for the life
of the loan. The new note is considered a FFELP Consolidation
Loan. Typically a borrower may consolidate his student loans
only once unless the borrower has another eligible loan to
consolidate with the existing FFELP Consolidation Loan. The
borrower rate on a FFELP Consolidation Loan is fixed for the
term of the loan and is set by the weighted average interest
rate of the loans being consolidated, rounded up to the nearest
1/8th of a percent, not to exceed 8.25 percent. In low
interest rate environments, FFELP Consolidation Loans provide an
attractive refinancing opportunity to certain borrowers because
they allow borrowers to consolidate variable rate loans into a
long-term fixed rate loan. Holders of FFELP Consolidation Loans
are eligible to earn interest under the Special Allowance
Payment (SAP) formula (see definition below).
FFELP Stafford and Other Student Loans
Education loans to students or parents of students that are
guaranteed or reinsured under the FFELP. The loans are primarily
Stafford loans but also include PLUS and HEAL loans.
Fixed Rate Floor Income We refer to Floor
Income (see definition below) associated with student loans
whose borrower rate is fixed to term (primarily FFELP
Consolidation Loans and Stafford Loans originated on or after
July 1, 2006) as Fixed Rate Floor Income.
Floor Income FFELP student loans generally
earn interest at the higher of a floating rate based on the
Special Allowance Payment or SAP formula (see definition below)
set by ED and the borrower rate, which is fixed over a period of
time. We generally finance our student loan portfolio with
floating rate debt over all interest rate levels. In low
and/or
declining interest rate environments, when the fixed borrower
rate is higher than the rate produced by the SAP formula, our
student loans earn at a fixed rate while the interest on our
floating rate debt continues to decline. In these interest rate
environments, we earn additional spread income that we refer to
as Floor Income. Depending on the type of the student loan and
when it was originated, the borrower rate is either fixed to
term or is reset to a market rate each July 1. As a result,
for loans where the
2
borrower rate is fixed to term, we may earn Floor Income for an
extended period of time, and for those loans where the borrower
interest rate is reset annually on July 1, we may earn
Floor Income to the next reset date. In accordance with new
legislation enacted in 2006, lenders are required to rebate
Floor Income to ED for all new FFELP loans disbursed on or after
April 1, 2006.
The following example shows the mechanics of Floor Income for a
typical fixed rate FFELP Consolidation Loan (with a commercial
paper-based SAP spread of 2.64 percent):
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Fixed Borrower Rate
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7.25
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%
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SAP Spread over Commercial Paper Rate
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(2.64
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)%
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Floor Strike
Rate(1)
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4.61
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%
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(1) |
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The interest rate at which the
underlying index (Treasury bill or commercial paper) plus the
fixed SAP spread equals the fixed borrower rate. Floor Income is
earned anytime the interest rate of the underlying index
declines below this rate.
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Based on this example, if the quarterly average commercial paper
rate is over 4.61 percent, the holder of the student loan
will earn at a floating rate based on the SAP formula, which in
this example is a fixed spread to commercial paper of
2.64 percent. On the other hand, if the quarterly average
commercial paper rate is below 4.61 percent, the SAP
formula will produce a rate below the fixed borrower rate of
7.25 percent and the loan holder earns at the borrower rate
of 7.25 percent. The difference between the fixed borrower
rate and the lenders expected yield based on the SAP
formula is referred to as Floor Income. Our student loan assets
are generally funded with floating rate debt, so when student
loans are earning at the fixed borrower rate, decreases in
interest rates may increase Floor Income.
Graphic
Depiction of Floor Income:
Floor Income Contracts We enter into
contracts with counterparties under which, in exchange for an
upfront fee representing the present value of the Floor Income
that we expect to earn on a notional amount of underlying
student loans being economically hedged, we will pay the
counterparties the Floor Income earned on that notional amount
over the life of the Floor Income Contract. Specifically, we
agree to pay the counterparty the difference, if positive,
between the fixed borrower rate less the SAP (see definition
below) spread and the average of the applicable interest rate
index on that notional amount, regardless of the actual balance
of underlying student loans, over the life of the contract. The
contracts generally do not extend over the life of the
underlying student loans. This contract effectively locks in the
amount of Floor Income we will earn over the period of the
contract. Floor Income Contracts are not considered effective
hedges under
3
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and each quarter we
must record the change in fair value of these contracts through
income.
GSE The Student Loan Marketing Association
was a federally chartered government-sponsored enterprise and
wholly owned subsidiary of SLM Corporation that was dissolved
under the terms of the Privatization Act (see definition below)
on December 29, 2004.
HEA The Higher Education Act of 1965, as
amended.
Lender Partners Lender Partners are lenders
who originate loans under forward purchase commitments to Sallie
Mae where we own the loans from inception or acquire the loans
soon after origination.
Managed Basis We generally analyze the
performance of our student loan portfolio on a Managed Basis,
under which we view both on-balance sheet student loans and
off-balance sheet student loans owned by the securitization
trusts as a single portfolio, and the related on-balance sheet
financings are combined with off-balance sheet debt. When the
term Managed is capitalized in this document, it is referring to
Managed Basis.
Merger On April 16, 2007, the Company
announced that a buyer group (Buyer Group) led by
J.C. Flowers & Co. (J.C. Flowers) signed a
definitive agreement (Merger Agreement) to acquire
the Company for approximately $25.3 billion or $60.00 per
share of common stock. Under the terms of the Merger Agreement,
J.C. Flowers and certain other private equity investors,
including Friedman Fleischer & Lowe, would, upon
consummation, invest approximately $4.4 billion and own
50.2 percent, and Bank of America (NYSE: BAC) and JPMorgan
Chase (NYSE: JPM) each would, upon consummation, invest
approximately $2.2 billion and each would own
24.9 percent of the surviving entity. The remainder of the
purchase price is expected to be funded by debt. The
Companys independent board members unanimously approved
the agreement and recommended that its shareholders approve the
agreement. The Companys shareholders approved the Merger
Agreement during a special meeting of shareholders held on
August 15, 2007. (See also Merger Agreement
filed with the SEC on the Companys Current Report on
Form 8-K,
dated April 18, 2007.) Pursuant to the Merger Agreement,
the Company was not permitted to pay dividends on its common
stock prior to the consummation of the proposed transaction.
This restriction has been terminated. The Buyer Group has since
repudiated the Merger Agreement and the Company has filed a
lawsuit in Delaware Court of Chancery against the Buyer Group.
Under guidance from the Delaware Court of Chancery at a
scheduling hearing on November 5, 2007, the Company has
elected to pursue an expedited decision on its October 19,
2007 motion for partial judgment on the pleadings. Specifically,
the Company is seeking an expedited ruling that its
interpretation of the Merger Agreement as it pertains to a
Material Adverse Effect (as defined in the Merger
Agreement) is the correct interpretation. The effect of this
election will be that trial is expected to commence on an
undetermined date after Thanksgiving 2008, rather than in
mid-July 2008. See MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS RECENT DEVELOPMENTS
Merger-Related Developments.
Preferred Lender List Most higher education
institutions select a small number of lenders to recommend to
their students and parents. This recommended list is referred to
as the Preferred Lender List.
Preferred Channel Originations Preferred
Channel Originations are comprised of: 1) student loans
that are originated by lenders with forward purchase commitment
agreements with Sallie Mae and are committed for sale to Sallie
Mae, such that we either own them from inception or, in most
cases, acquire them soon after origination, and 2) loans
that are originated by internally marketed Sallie Mae brands.
Private Education Consolidation Loans
Borrowers with multiple Private Education Loans (defined below)
may consolidate them into a single loan with Sallie Mae. The
interest rate on the new loan is variable rate with the spread
set at the lower of the average weighted spread of the
underlying loans (available only to Sallie Mae customers) or a
new spread as a result of favorable underwriting criteria.
Private Education Loans Education loans to
students or parents of students that are not guaranteed or
reinsured under the FFELP or any other federal or private
student loan program. Private Education Loans include loans for
traditional higher education, undergraduate and graduate
degrees, and for alternative
4
education, such as career training, private kindergarten through
secondary education schools and tutorial schools. Traditional
higher education loans have repayment terms similar to FFELP
loans, whereby repayments begin after the borrower leaves
school. Repayment for alternative education or career training
loans generally begins immediately.
Privatization Act The Student Loan Marketing
Association Reorganization Act of 1996.
Reconciliation Legislation The Higher
Education Reconciliation Act of 2005, which reauthorized the
student loan programs of the HEA and generally became effective
as of July 1, 2006.
Residual Interest When we securitize student
loans, we retain the right to receive cash flows from the
student loans sold to trusts we sponsor in excess of amounts
needed to pay servicing, derivative costs (if any), other fees,
and the principal and interest on the bonds backed by the
student loans. The Residual Interest, which may also include
reserve and other cash accounts, is the present value of these
future expected cash flows, which includes the present value of
Embedded Fixed Rate Floor Income described above. We value the
Residual Interest at the time of sale of the student loans to
the trust and at the end of each subsequent quarter.
Retained Interest The Retained Interest
includes the Residual Interest (defined above) and servicing
rights (as the Company retains the servicing responsibilities).
Risk Sharing When a FFELP loan defaults, the
federal government guarantees 97 percent of the principal
balance plus accrued interest (98 percent on loans
disbursed before July 1, 2006) and the holder of the
loan generally must absorb the remaining three percent not
guaranteed as a Risk Sharing loss on the loan. FFELP student
loans originated after October 1, 1993 are subject to Risk
Sharing on loan default claim payments unless the default
results from the borrowers death, disability or
bankruptcy. FFELP loans serviced by a servicer that has EP
designation (see definition above) from ED are subject to
one-percent Risk Sharing for claims filed on or after
July 1, 2006 and before October 1, 2007.
Special Allowance Payment (SAP)
FFELP student loans originated prior to April 1, 2006
generally earn interest at the greater of the borrower rate or a
floating rate determined by reference to the average of the
applicable floating rates
(91-day
Treasury bill rate or commercial paper) in a calendar quarter,
plus a fixed spread that is dependent upon when the loan was
originated and the loans repayment status. If the
resulting floating rate exceeds the borrower rate, ED pays the
difference directly to us. This payment is referred to as the
Special Allowance Payment or SAP and the formula used to
determine the floating rate is the SAP formula. We refer to the
fixed spread to the underlying index as the SAP spread. For
loans disbursed after April 1, 2006, FFELP loans
effectively only earn at the SAP rate, as the excess interest
earned when the borrower rate exceeds the SAP rate (Floor
Income) must be refunded to ED.
Variable rate PLUS Loans and SLS Loans earn SAP only if the
variable rate, which is reset annually, exceeds the applicable
maximum borrower rate. For PLUS loans disbursed on or after
January 1, 2000, this limitation on SAP was repealed
effective April 1, 2006.
Title IV Programs and Title IV
Loans Student loan programs created under
Title IV of the HEA, including the FFELP and the FDLP, and
student loans originated under those programs, respectively.
Variable Rate Floor Income For FFELP Stafford
student loans whose borrower interest rate resets annually on
July 1, we may earn Floor Income or Embedded Floor Income
(see definitions above) based on a calculation of the difference
between the borrower rate and the then current interest rate. We
refer to this as Variable Rate Floor Income because Floor Income
is earned only through the next reset date.
Wholesale Consolidation Loans During 2006, we
implemented a loan acquisition strategy under which we began
purchasing a significant amount of FFELP Consolidation Loans,
primarily via the spot market, which augments our traditional
FFELP Consolidation Loan origination process. Wholesale
Consolidation Loans are considered incremental volume to our
core acquisition channels, which are focused on the retail
marketplace with an emphasis on our brand strategy.
5
SLM
CORPORATION
FORM 10-Q
INDEX
September 30, 2007
6
PART I. FINANCIAL
INFORMATION
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Item 1.
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Financial
Statements
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SLM
CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars and shares in thousands, except per share
amounts)
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September 30,
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December 31,
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2007
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2006
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(Unaudited)
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Assets
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FFELP Stafford and Other Student Loans (net of allowance for
losses of $30,655 and $8,701, respectively)
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$
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34,108,560
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$
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24,840,464
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FFELP Consolidation Loans (net of allowance for losses of
$26,809 and $11,614, respectively)
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71,370,681
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61,324,008
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Private Education Loans (net of allowance for losses of $454,100
and $308,346, respectively)
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13,675,571
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9,755,289
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Other loans (net of allowance for losses of $21,738 and $20,394,
respectively)
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1,193,405
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1,308,832
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Investments
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Available-for-sale
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4,152,071
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2,464,121
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Other
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92,976
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99,330
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Total investments
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4,245,047
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2,563,451
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Cash and cash equivalents
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7,794,954
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2,621,222
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Restricted cash and investments
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4,999,369
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3,423,326
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Retained Interest in off-balance sheet securitized loans
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3,238,637
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3,341,591
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Goodwill and acquired intangible assets, net
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1,354,141
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1,371,606
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Other assets
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8,835,025
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5,585,943
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Total assets
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$
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150,815,390
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$
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116,135,732
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Liabilities
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Short-term borrowings
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$
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33,008,374
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$
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3,528,263
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Long-term borrowings
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108,860,988
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104,558,531
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Other liabilities
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3,934,267
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3,679,781
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Total liabilities
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145,803,629
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111,766,575
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Commitments and contingencies
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Minority interest in subsidiaries
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10,054
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9,115
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Stockholders equity
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Preferred stock, par value $.20 per share, 20,000 shares
authorized; Series A: 3,300 and 3,300 shares issued,
respectively, at stated value of $50 per share; Series B:
4,000 and 4,000 shares issued, respectively, at stated
value of $100 per share
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565,000
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565,000
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Common stock, par value $.20 per share, 1,125,000 shares
authorized; 439,660 and 433,113 shares issued, respectively
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87,932
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86,623
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Additional paid-in capital
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2,847,748
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2,565,211
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Accumulated other comprehensive income (net of tax of $128,716
and $183,684, respectively)
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245,352
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349,111
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Retained earnings
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2,437,639
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1,834,718
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Stockholders equity before treasury stock
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6,183,671
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5,400,663
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Common stock held in treasury: 25,544 and 22,496 shares,
respectively
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1,181,964
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1,040,621
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Total stockholders equity
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5,001,707
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4,360,042
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Total liabilities and stockholders equity
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$
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150,815,390
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$
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116,135,732
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See accompanying notes to consolidated financial statements.
7
SLM
CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands, except per share
amounts)
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Three Months Ended
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Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
545,618
|
|
|
$
|
364,621
|
|
|
$
|
1,507,680
|
|
|
$
|
1,000,211
|
|
FFELP Consolidation Loans
|
|
|
1,145,473
|
|
|
|
916,091
|
|
|
|
3,247,573
|
|
|
|
2,579,017
|
|
Private Education Loans
|
|
|
392,737
|
|
|
|
254,747
|
|
|
|
1,060,509
|
|
|
|
729,796
|
|
Other loans
|
|
|
25,990
|
|
|
|
24,550
|
|
|
|
80,416
|
|
|
|
71,398
|
|
Cash and investments
|
|
|
211,303
|
|
|
|
141,083
|
|
|
|
466,731
|
|
|
|
361,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
2,321,121
|
|
|
|
1,701,092
|
|
|
|
6,362,909
|
|
|
|
4,742,269
|
|
Total interest expense
|
|
|
1,879,811
|
|
|
|
1,363,271
|
|
|
|
5,109,130
|
|
|
|
3,660,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
441,310
|
|
|
|
337,821
|
|
|
|
1,253,779
|
|
|
|
1,082,147
|
|
Less: provisions for loan losses
|
|
|
142,600
|
|
|
|
67,242
|
|
|
|
441,130
|
|
|
|
194,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provisions for loan losses
|
|
|
298,710
|
|
|
|
270,579
|
|
|
|
812,649
|
|
|
|
887,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on student loan securitizations
|
|
|
|
|
|
|
201,132
|
|
|
|
367,300
|
|
|
|
902,417
|
|
Servicing and securitization revenue
|
|
|
28,883
|
|
|
|
187,082
|
|
|
|
413,808
|
|
|
|
368,855
|
|
Losses on loans and securities, net
|
|
|
(25,163
|
)
|
|
|
(13,427
|
)
|
|
|
(67,051
|
)
|
|
|
(24,899
|
)
|
Gains (losses) on derivative and hedging activities, net
|
|
|
(487,478
|
)
|
|
|
(130,855
|
)
|
|
|
(22,881
|
)
|
|
|
(94,875
|
)
|
Guarantor servicing fees
|
|
|
45,935
|
|
|
|
38,848
|
|
|
|
115,449
|
|
|
|
99,011
|
|
Debt management fees
|
|
|
76,306
|
|
|
|
122,556
|
|
|
|
243,865
|
|
|
|
304,329
|
|
Collections revenue
|
|
|
52,788
|
|
|
|
57,913
|
|
|
|
195,442
|
|
|
|
181,951
|
|
Other
|
|
|
106,684
|
|
|
|
87,923
|
|
|
|
292,121
|
|
|
|
234,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss)
|
|
|
(202,045
|
)
|
|
|
551,172
|
|
|
|
1,538,053
|
|
|
|
1,971,169
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
185,741
|
|
|
|
179,910
|
|
|
|
563,723
|
|
|
|
523,977
|
|
Other
|
|
|
170,158
|
|
|
|
173,584
|
|
|
|
547,150
|
|
|
|
469,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
355,899
|
|
|
|
353,494
|
|
|
|
1,110,873
|
|
|
|
993,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest in net
earnings of subsidiaries
|
|
|
(259,234
|
)
|
|
|
468,257
|
|
|
|
1,239,829
|
|
|
|
1,864,954
|
|
Income taxes
|
|
|
84,449
|
|
|
|
203,686
|
|
|
|
499,187
|
|
|
|
722,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest in net earnings of
subsidiaries
|
|
|
(343,683
|
)
|
|
|
264,571
|
|
|
|
740,642
|
|
|
|
1,142,395
|
|
Minority interest in net earnings of subsidiaries
|
|
|
77
|
|
|
|
1,099
|
|
|
|
1,778
|
|
|
|
3,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(343,760
|
)
|
|
|
263,472
|
|
|
|
738,864
|
|
|
|
1,138,851
|
|
Preferred stock dividends
|
|
|
9,274
|
|
|
|
9,221
|
|
|
|
27,523
|
|
|
|
26,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stock
|
|
$
|
(353,034
|
)
|
|
$
|
254,251
|
|
|
$
|
711,341
|
|
|
$
|
1,112,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
(.85
|
)
|
|
$
|
.62
|
|
|
$
|
1.73
|
|
|
$
|
2.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding
|
|
|
412,944
|
|
|
|
410,034
|
|
|
|
411,958
|
|
|
|
411,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
(.85
|
)
|
|
$
|
.60
|
|
|
$
|
1.69
|
|
|
$
|
2.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common and common equivalent shares outstanding
|
|
|
412,944
|
|
|
|
449,841
|
|
|
|
420,305
|
|
|
|
452,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share
|
|
$
|
|
|
|
$
|
.25
|
|
|
$
|
.25
|
|
|
$
|
.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
8
SLM
CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY
(Dollars in thousands, except share and per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Stock
|
|
|
Common Stock Shares
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Treasury
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Issued
|
|
|
Treasury
|
|
|
Outstanding
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Stock
|
|
|
Equity
|
|
|
Balance at June 30, 2006
|
|
|
7,300,000
|
|
|
|
430,753,515
|
|
|
|
(19,078,488
|
)
|
|
|
411,675,027
|
|
|
$
|
565,000
|
|
|
$
|
86,151
|
|
|
$
|
2,440,565
|
|
|
$
|
370,204
|
|
|
$
|
1,775,948
|
|
|
$
|
(878,100
|
)
|
|
$
|
4,359,768
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
263,472
|
|
|
|
|
|
|
|
263,472
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,168
|
|
|
|
|
|
|
|
|
|
|
|
98,168
|
|
Change in unrealized gains (losses) on derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,845
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353,795
|
|
Cash dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock ($.25 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101,995
|
)
|
|
|
|
|
|
|
(101,995
|
)
|
Preferred stock, series A ($.87 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,875
|
)
|
|
|
|
|
|
|
(2,875
|
)
|
Preferred stock, series B ($1.54 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,183
|
)
|
|
|
|
|
|
|
(6,183
|
)
|
Issuance of common shares
|
|
|
|
|
|
|
836,344
|
|
|
|
4,996
|
|
|
|
841,340
|
|
|
|
|
|
|
|
167
|
|
|
|
25,380
|
|
|
|
|
|
|
|
|
|
|
|
259
|
|
|
|
25,806
|
|
Preferred stock issuance costs and related amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163
|
|
|
|
|
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
Tax benefit related to employee stock option and purchase plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,695
|
|
Stock-based compensation cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,048
|
|
Repurchase of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open market repurchases
|
|
|
|
|
|
|
|
|
|
|
(2,159,827
|
)
|
|
|
(2,159,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100,000
|
)
|
|
|
(100,000
|
)
|
Equity forwards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise cost, cash
|
|
|
|
|
|
|
|
|
|
|
(861,576
|
)
|
|
|
(861,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,163
|
)
|
|
|
(47,163
|
)
|
(Gain) loss on settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,826
|
|
|
|
3,826
|
|
Benefit plans
|
|
|
|
|
|
|
|
|
|
|
(134,033
|
)
|
|
|
(134,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,699
|
)
|
|
|
(6,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
7,300,000
|
|
|
|
431,589,859
|
|
|
|
(22,228,928
|
)
|
|
|
409,360,931
|
|
|
$
|
565,000
|
|
|
$
|
86,318
|
|
|
$
|
2,490,851
|
|
|
$
|
460,527
|
|
|
$
|
1,928,204
|
|
|
$
|
(1,027,877
|
)
|
|
$
|
4,503,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2007
|
|
|
7,300,000
|
|
|
|
436,095,303
|
|
|
|
(23,477,044
|
)
|
|
|
412,618,259
|
|
|
$
|
565,000
|
|
|
$
|
87,219
|
|
|
$
|
2,721,554
|
|
|
$
|
265,388
|
|
|
$
|
2,790,674
|
|
|
$
|
(1,081,774
|
)
|
|
$
|
5,348,061
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(343,760
|
)
|
|
|
|
|
|
|
(343,760
|
)
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,914
|
)
|
|
|
|
|
|
|
|
|
|
|
(12,914
|
)
|
Change in unrealized gains (losses) on derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,208
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,208
|
)
|
Defined benefit pension plans adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(363,796
|
)
|
Cash dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, series A ($.87 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,875
|
)
|
|
|
|
|
|
|
(2,875
|
)
|
Preferred stock, series B ($1.58 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,236
|
)
|
|
|
|
|
|
|
(6,236
|
)
|
Restricted stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
Issuance of common shares
|
|
|
|
|
|
|
3,565,038
|
|
|
|
|
|
|
|
3,565,038
|
|
|
|
|
|
|
|
713
|
|
|
|
86,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,895
|
|
Preferred stock issuance costs and related amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163
|
|
|
|
|
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
Tax benefit related to employee stock option and purchase plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,105
|
|
Stock-based compensation cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,744
|
|
Repurchase of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit plans
|
|
|
|
|
|
|
|
|
|
|
(2,067,201
|
)
|
|
|
(2,067,201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100,190
|
)
|
|
|
(100,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
7,300,000
|
|
|
|
439,660,341
|
|
|
|
(25,544,245
|
)
|
|
|
414,116,096
|
|
|
$
|
565,000
|
|
|
$
|
87,932
|
|
|
$
|
2,847,748
|
|
|
$
|
245,352
|
|
|
$
|
2,437,639
|
|
|
$
|
(1,181,964
|
)
|
|
$
|
5,001,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
9
SLM
CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY
(Dollars in thousands, except share and per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Stock
|
|
|
Common Stock Shares
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Treasury
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Issued
|
|
|
Treasury
|
|
|
Outstanding
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Stock
|
|
|
Equity
|
|
|
Balance at December 31, 2005
|
|
|
7,300,000
|
|
|
|
426,483,527
|
|
|
|
(13,346,717
|
)
|
|
|
413,136,810
|
|
|
$
|
565,000
|
|
|
$
|
85,297
|
|
|
$
|
2,233,647
|
|
|
$
|
367,910
|
|
|
$
|
1,111,743
|
|
|
$
|
(572,172
|
)
|
|
$
|
3,791,425
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,138,851
|
|
|
|
|
|
|
|
1,138,851
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,356
|
|
|
|
|
|
|
|
|
|
|
|
91,356
|
|
Change in unrealized gains (losses) on derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,256
|
|
|
|
|
|
|
|
|
|
|
|
1,256
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,231,468
|
|
Cash dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock ($.72 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(296,081
|
)
|
|
|
|
|
|
|
(296,081
|
)
|
Preferred stock, series A ($2.61 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,625
|
)
|
|
|
|
|
|
|
(8,625
|
)
|
Preferred stock, series B ($4.28 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,200
|
)
|
|
|
|
|
|
|
(17,200
|
)
|
Issuance of common shares
|
|
|
|
|
|
|
5,106,332
|
|
|
|
58,745
|
|
|
|
5,165,077
|
|
|
|
|
|
|
|
1,021
|
|
|
|
157,331
|
|
|
|
|
|
|
|
|
|
|
|
3,234
|
|
|
|
161,586
|
|
Preferred stock issuance costs and related amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
484
|
|
|
|
|
|
|
|
(484
|
)
|
|
|
|
|
|
|
|
|
Tax benefit related to employee stock option and purchase plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,654
|
|
Stock-based compensation cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,735
|
|
Repurchase of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open market repurchases
|
|
|
|
|
|
|
|
|
|
|
(2,159,827
|
)
|
|
|
(2,159,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100,000
|
)
|
|
|
(100,000
|
)
|
Equity forwards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise cost, cash
|
|
|
|
|
|
|
|
|
|
|
(5,395,979
|
)
|
|
|
(5,395,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(295,376
|
)
|
|
|
(295,376
|
)
|
(Gain) loss on settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,907
|
|
|
|
10,907
|
|
Benefit plans
|
|
|
|
|
|
|
|
|
|
|
(1,385,150
|
)
|
|
|
(1,385,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74,470
|
)
|
|
|
(74,470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
7,300,000
|
|
|
|
431,589,859
|
|
|
|
(22,228,928
|
)
|
|
|
409,360,931
|
|
|
$
|
565,000
|
|
|
$
|
86,318
|
|
|
$
|
2,490,851
|
|
|
$
|
460,527
|
|
|
$
|
1,928,204
|
|
|
$
|
(1,027,877
|
)
|
|
$
|
4,503,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
7,300,000
|
|
|
|
433,112,982
|
|
|
|
(22,496,170
|
)
|
|
|
410,616,812
|
|
|
$
|
565,000
|
|
|
$
|
86,623
|
|
|
$
|
2,565,211
|
|
|
$
|
349,111
|
|
|
$
|
1,834,718
|
|
|
$
|
(1,040,621
|
)
|
|
$
|
4,360,042
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
738,864
|
|
|
|
|
|
|
|
738,864
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103,014
|
)
|
|
|
|
|
|
|
|
|
|
|
(103,014
|
)
|
Change in unrealized gains (losses) on derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(309
|
)
|
|
|
|
|
|
|
|
|
|
|
(309
|
)
|
Defined benefit pension plans adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(436
|
)
|
|
|
|
|
|
|
|
|
|
|
(436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
635,105
|
|
Cash dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock ($.25 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(102,658
|
)
|
|
|
|
|
|
|
(102,658
|
)
|
Preferred stock, series A ($2.61 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,625
|
)
|
|
|
|
|
|
|
(8,625
|
)
|
Preferred stock, series B ($4.64 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,414
|
)
|
|
|
|
|
|
|
(18,414
|
)
|
Restricted stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
Issuance of common shares
|
|
|
|
|
|
|
6,547,359
|
|
|
|
35,364
|
|
|
|
6,582,723
|
|
|
|
|
|
|
|
1,309
|
|
|
|
180,376
|
|
|
|
|
|
|
|
|
|
|
|
1,584
|
|
|
|
183,269
|
|
Preferred stock issuance costs and related amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
484
|
|
|
|
|
|
|
|
(484
|
)
|
|
|
|
|
|
|
|
|
Tax benefit related to employee stock option and purchase plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,579
|
|
Stock-based compensation cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,098
|
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,761
|
)
|
|
|
|
|
|
|
(5,761
|
)
|
Repurchase of common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit plans
|
|
|
|
|
|
|
|
|
|
|
(3,083,439
|
)
|
|
|
(3,083,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(142,927
|
)
|
|
|
(142,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
7,300,000
|
|
|
|
439,660,341
|
|
|
|
(25,544,245
|
)
|
|
|
414,116,096
|
|
|
$
|
565,000
|
|
|
$
|
87,932
|
|
|
$
|
2,847,748
|
|
|
$
|
245,352
|
|
|
$
|
2,437,639
|
|
|
$
|
(1,181,964
|
)
|
|
$
|
5,001,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
10
SLM
CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
|
|
|
Restated
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
738,864
|
|
|
$
|
1,138,851
|
|
Adjustments to reconcile net income to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
Gains on student loan securitizations
|
|
|
(367,300
|
)
|
|
|
(902,417
|
)
|
Losses on sales of loans and securities, net
|
|
|
67,051
|
|
|
|
24,899
|
|
Stock-based compensation cost
|
|
|
65,193
|
|
|
|
62,081
|
|
Unrealized (gains)/losses on derivative and hedging activities,
excluding equity forwards
|
|
|
(129,078
|
)
|
|
|
(193,972
|
)
|
Unrealized (gains)/losses on derivative and hedging
activities equity forwards
|
|
|
73,467
|
|
|
|
181,616
|
|
Provisions for loan losses
|
|
|
441,130
|
|
|
|
194,957
|
|
Minority interest, net
|
|
|
(1,239
|
)
|
|
|
(5,639
|
)
|
Mortgage loans originated
|
|
|
(528,241
|
)
|
|
|
(1,030,296
|
)
|
Proceeds from sales of mortgage loans
|
|
|
585,853
|
|
|
|
1,052,750
|
|
Decrease (increase) in restricted cash-other
|
|
|
127
|
|
|
|
(148,312
|
)
|
(Increase) in accrued interest receivable
|
|
|
(1,018,465
|
)
|
|
|
(722,659
|
)
|
Increase in accrued interest payable
|
|
|
157,082
|
|
|
|
167,418
|
|
Adjustment for non-cash (income)/loss related to Retained
Interest
|
|
|
142,225
|
|
|
|
147,839
|
|
(Increase) decrease in other assets, goodwill and acquired
intangible assets, net
|
|
|
(269,818
|
)
|
|
|
390,679
|
|
Increase in other liabilities
|
|
|
649,274
|
|
|
|
394,756
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
(132,739
|
)
|
|
|
(386,300
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
606,125
|
|
|
|
752,551
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Student loans acquired
|
|
|
(31,057,701
|
)
|
|
|
(27,121,113
|
)
|
Loans purchased from securitized trusts (primarily loan
consolidations)
|
|
|
(3,944,000
|
)
|
|
|
(5,903,077
|
)
|
Reduction of student loans:
|
|
|
|
|
|
|
|
|
Installment payments
|
|
|
8,532,193
|
|
|
|
7,846,175
|
|
Proceeds from securitization of student loans treated as sales
|
|
|
1,976,599
|
|
|
|
19,521,365
|
|
Proceeds from sales of student loans
|
|
|
777,982
|
|
|
|
94,578
|
|
Other loans originated
|
|
|
(2,967,425
|
)
|
|
|
(1,302,201
|
)
|
Other loans repaid
|
|
|
3,007,256
|
|
|
|
1,159,201
|
|
Other investing activities, net
|
|
|
(204,634
|
)
|
|
|
(110,866
|
)
|
Purchases of available-for-sale securities
|
|
|
(65,822,245
|
)
|
|
|
(58,882,238
|
)
|
Proceeds from sales of available-for-sale securities
|
|
|
73,199
|
|
|
|
2,866
|
|
Proceeds from maturities of available-for-sale securities
|
|
|
64,214,984
|
|
|
|
59,393,499
|
|
Purchases of held-to-maturity and other securities
|
|
|
(330,050
|
)
|
|
|
(559,098
|
)
|
Proceeds from maturities of held-to-maturity securities and
other securities
|
|
|
434,771
|
|
|
|
635,268
|
|
(Increase) in restricted cash on-balance sheet trusts
|
|
|
(1,696,092
|
)
|
|
|
(424,200
|
)
|
Return of investment from Retained Interest
|
|
|
199,345
|
|
|
|
66,781
|
|
Purchase of subsidiaries, net of cash acquired
|
|
|
|
|
|
|
(289,162
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities
|
|
|
(26,805,818
|
)
|
|
|
(5,872,222
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Short-term borrowings issued
|
|
|
5,027,546
|
|
|
|
15,854,385
|
|
Short-term borrowings repaid
|
|
|
(6,870,392
|
)
|
|
|
(15,860,749
|
)
|
Long-term borrowings issued
|
|
|
1,567,602
|
|
|
|
7,682,583
|
|
Long-term borrowings repaid
|
|
|
(3,078,229
|
)
|
|
|
(4,284,140
|
)
|
Borrowings collateralized by loans in trust issued
|
|
|
18,953,651
|
|
|
|
6,203,019
|
|
Borrowings collateralized by loans in trust repaid
|
|
|
(4,295,630
|
)
|
|
|
(3,860,982
|
)
|
Asset-backed commercial paper conduits net activity
|
|
|
20,391,717
|
|
|
|
7,303
|
|
Other financing activities, net
|
|
|
(54,790
|
)
|
|
|
(64,886
|
)
|
Excess tax benefit from the exercise of stock-based awards
|
|
|
29,535
|
|
|
|
27,445
|
|
Common stock issued
|
|
|
159,832
|
|
|
|
144,448
|
|
Net settlements on equity forward contracts
|
|
|
(184,793
|
)
|
|
|
(45,906
|
)
|
Common stock repurchased
|
|
|
(142,927
|
)
|
|
|
(469,846
|
)
|
Common dividends paid
|
|
|
(102,658
|
)
|
|
|
(296,081
|
)
|
Preferred dividends paid
|
|
|
(27,039
|
)
|
|
|
(25,825
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
31,373,425
|
|
|
|
5,010,768
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
5,173,732
|
|
|
|
(108,903
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
2,621,222
|
|
|
|
2,498,655
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
7,794,954
|
|
|
$
|
2,389,752
|
|
|
|
|
|
|
|
|
|
|
Cash disbursements made for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
4,966,249
|
|
|
$
|
3,117,085
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
704,206
|
|
|
$
|
574,220
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
11
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
1.
|
Significant
Accounting Policies
|
Basis
of Presentation
The accompanying unaudited, consolidated financial statements of
SLM Corporation (the Company) have been prepared in
accordance with generally accepted accounting principles in the
United States of America (GAAP) for interim
financial information. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete
consolidated financial statements. In the opinion of management,
all adjustments considered necessary for a fair statement of the
results for the interim periods have been included. The
preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates. Operating results for the three and nine
months ended September 30, 2007 are not necessarily
indicative of the results for the year ending December 31,
2007. The consolidated balance sheet at December 31, 2006,
as presented, was derived from the audited financial statements
included in the Companys Annual Report on
Form 10-K
for the period ended December 31, 2006. These unaudited
financial statements should be read in conjunction with the
audited financial statements and related notes included in the
Companys 2006 Annual Report on
Form 10-K.
Reclassifications
Certain reclassifications have been made to the balances as of
and for the three and nine months ended September 30, 2006
to be consistent with classifications adopted for 2007.
Restatement
of Quarterly Consolidated Statements of Cash Flows
(unaudited)
The Company restated its 2006 quarterly consolidated statements
of cash flows as more fully described within the Companys
2006 Annual Report on
Form 10-K
at Note 2, Significant Accounting
Policies Statement of Cash Flows
Restatement of the Consolidated Statements of Cash Flows
and Note 21, Restatement of Quarterly Consolidated
Statements of Cash Flows (unaudited). The restatements
solely affected the classification of items in operating,
investing and financing activities, and had no impact on the net
increase (decrease) in cash and cash equivalents set forth in
the consolidated statements of cash flows for any of the
previously reported periods. The restatements did not affect the
Companys consolidated balance sheets, consolidated
statements of income or consolidated statements of changes in
stockholders equity. Accordingly, the Companys
historical revenues, net income, earnings per share, total
assets and total stockholders equity remain unchanged.
Recently
Issued Accounting Pronouncements
The Fair
Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115
In February 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 159, The Fair Value
Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115. This statement permits entities an
irrevocable election to measure many financial instruments and
certain other items at fair value, on an
instrument-by-instrument
basis. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility
in reported earnings caused by measuring derivative instruments
and the hedged assets and liabilities differently, without
having to apply complex hedge accounting provisions. Most
recognized financial assets and liabilities are eligible items
for the measurement option established by the
12
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
1.
|
Significant
Accounting Policies (Continued)
|
statement. There are a few exceptions, including an investment
in a subsidiary or an interest in a variable interest entity
that is required to be consolidated, certain obligations related
to post-employment benefits, assets or liabilities recognized
under leases, various deposits and financial instruments
classified as shareholders equity. An entity shall report
unrealized gains and losses on items for which the fair value
option has been elected in earnings at each reporting date. The
Company is currently evaluating the impact of this standard on
its financial statements. The statement will be effective
beginning January 1, 2008.
Fair
Value Measurements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This statement is effective
for financial statements issued for fiscal years beginning after
November 15, 2007. This statement defines fair value,
establishes a framework for measuring fair value within GAAP,
and expands disclosures about fair value measurements. This
statement applies to other accounting pronouncements that
require or permit fair value measurements. Accordingly, this
statement does not change which types of instruments are carried
at fair value, but rather establishes the framework for
measuring fair value. The Company is currently evaluating the
potential impact of SFAS No. 157 on its financial
statements.
Accounting
for Servicing of Financial Assets
In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets, which
amends SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities. This statement was effective for the Company
beginning January 1, 2007.
This statement:
|
|
|
|
|
Requires an entity to recognize a servicing asset or liability
each time it undertakes an obligation to service a financial
asset as the result of (i) a transfer of the
servicers financial assets that meet the requirement for
sale accounting; (ii) a transfer of the servicers
financial assets to a qualifying special-purpose entity in a
guaranteed mortgage securitization in which the transferor
retains all of the resulting securities and classifies them as
either available-for-sale or trading securities in accordance
with SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities; or
(iii) an acquisition or assumption of an obligation to
service a financial asset that does not relate to financial
assets of the servicer or its consolidated affiliates.
|
|
|
|
Requires all separately recognized servicing assets or
liabilities to be initially measured at fair value, if
practicable.
|
|
|
|
Permits an entity to either (i) amortize servicing assets
or liabilities in proportion to and over the period of estimated
net servicing income or loss and assess servicing assets or
liabilities for impairment or increased obligation based on fair
value at each reporting date (amortization method); or
(ii) measure servicing assets or liabilities at fair value
at each reporting date and report changes in fair value in
earnings in the period in which the changes occur (fair value
measurement method). The method must be chosen for each
separately recognized class of servicing asset or liability.
|
|
|
|
At its initial adoption, permits a one-time reclassification of
available-for-sale securities to trading securities by entities
with recognized servicing rights, without calling into question
the treatment of other available-for-sale securities under
SFAS No. 115, provided that the available-for-sale
securities are identified in some manner as offsetting the
entitys exposure to changes in fair value of servicing
assets or liabilities that a servicer elects to subsequently
measure at fair value.
|
13
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
1.
|
Significant
Accounting Policies (Continued)
|
|
|
|
|
|
Requires separate presentation of servicing assets and
liabilities subsequently measured at fair value in the statement
of financial position and additional disclosures for all
separately recognized servicing assets and liabilities.
|
The adoption of SFAS No. 156 did not have a material
impact on the Companys financial statements as the Company
did not elect to carry its servicing rights at fair value
through earnings.
Accounting
for Certain Hybrid Financial Instruments
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments
which amends SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and
SFAS No. 140. This statement was effective for the
Company beginning January 1, 2007.
This statement:
|
|
|
|
|
Requires that all interests in securitized financial assets be
evaluated to determine if the interests are free standing
derivatives or if the interests contain an embedded derivative;
|
|
|
|
Clarifies which interest-only strips and principal-only strips
are exempt from the requirements of SFAS No. 133;
|
|
|
|
Clarifies that the concentrations of credit risk in the form of
subordination are not an embedded derivative;
|
|
|
|
Allows a hybrid financial instrument containing an embedded
derivative that would have required bifurcation under
SFAS No. 133 to be measured at fair value as one
instrument on a case by case basis; and
|
|
|
|
Amends SFAS Statement No. 140 to eliminate the
prohibition of a qualifying special purpose entity from holding
a derivative financial instrument that pertains to beneficial
interests other than another derivative financial instrument.
|
In January 2007, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, Implementation Issues No. B39,
Embedded Derivatives: Application of Paragraph 13(b)
to Call Options That Are Exercisable Only by the Debtor
(Amended), and No. B40, Embedded Derivatives:
Application of Paragraph 13(b) to Securitized Interests in
Prepayable Financial Assets. The guidance clarifies
various aspects of SFAS No. 155 and will require the
Company to either (1) separately record embedded
derivatives that may reside in the Companys Residual
Interest and on-balance sheet securitization debt, or
(2) if embedded derivatives exist that require bifurcation,
record the entire Residual Interest at fair value with changes
in the fair value of the Companys Residual Interest and
on-balance sheet securitization debt in their entirety. This
standard is prospectively applied in 2007 for new
securitizations and does not apply to the Companys
existing Residual Interest or on-balance sheet securitization
debt that settled prior to 2007.
If material embedded derivatives exist within the Residual
Interest that require bifurcation, the Company will most likely
elect to carry the entire Residual Interest at fair value with
subsequent changes in fair value recorded in earnings. This
election could have a material impact on earnings, as prior to
the adoption of SFAS No. 155, changes in the fair
value of these Residual Interests would have been recorded
through other comprehensive income (except for impairment which
is recorded through income). In the first quarter of 2007, the
Company elected this option related to the Private Education
Loan securitization which settled in the first quarter of 2007
and as a result, has recorded related unrealized gains/losses
through earnings that, prior to the
14
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
1.
|
Significant
Accounting Policies (Continued)
|
adoption of SFAS No. 155, would have been recorded
through other comprehensive income (except for any impairment
required to be recognized).
The Company has concluded, based on its current securitization
deal structures, that its on-balance sheet securitization debt
will not be materially impacted upon the adoption of
SFAS No. 155 as embedded derivatives will not have a
material value. Accordingly, there was no impact for the nine
months ended September 30, 2007, as it relates to
on-balance sheet securitization debt.
|
|
2.
|
Allowance
for Student Loan Losses
|
The Companys provisions for student loan losses represent
the periodic expense of maintaining an allowance sufficient to
absorb losses, net of recoveries, inherent in the student loan
portfolios. The evaluation of the provisions for student loan
losses is inherently subjective as it requires material
estimates that may be susceptible to significant changes. The
Company believes that the allowance for student loan losses is
appropriate to cover probable losses inherent in the student
loan portfolios.
The following table summarizes changes in the allowance for
student loan losses for both the Private Education Loan and
federally insured student loan portfolios for the three and nine
months ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Balance at beginning of period
|
|
$
|
451,987
|
|
|
$
|
268,562
|
|
|
$
|
328,661
|
|
|
$
|
219,062
|
|
Provisions for student loan losses
|
|
|
137,220
|
|
|
|
61,864
|
|
|
|
429,386
|
|
|
|
184,480
|
|
Charge-offs
|
|
|
(86,440
|
)
|
|
|
(37,954
|
)
|
|
|
(264,745
|
)
|
|
|
(108,107
|
)
|
Recoveries
|
|
|
8,685
|
|
|
|
5,652
|
|
|
|
23,301
|
|
|
|
18,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(77,755
|
)
|
|
|
(32,302
|
)
|
|
|
(241,444
|
)
|
|
|
(90,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance before reductions for student loan sales and
securitizations
|
|
|
511,452
|
|
|
|
298,124
|
|
|
|
516,603
|
|
|
|
313,516
|
|
Adjustments for student loan sales and securitizations
|
|
|
112
|
|
|
|
(4,781
|
)
|
|
|
(5,039
|
)
|
|
|
(20,173
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
511,564
|
|
|
$
|
293,343
|
|
|
$
|
511,564
|
|
|
$
|
293,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the total provisions for loan
losses for the three and nine months ended September 30,
2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Private Education Loans
|
|
$
|
99,687
|
|
|
$
|
58,549
|
|
|
$
|
380,093
|
|
|
$
|
175,133
|
|
FFELP Stafford and Other Student Loans
|
|
|
37,533
|
|
|
|
3,315
|
|
|
|
49,293
|
|
|
|
9,347
|
|
Mortgage and consumer loans
|
|
|
5,380
|
|
|
|
5,378
|
|
|
|
11,744
|
|
|
|
10,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provisions for loan losses
|
|
$
|
142,600
|
|
|
$
|
67,242
|
|
|
$
|
441,130
|
|
|
$
|
194,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
2.
|
Allowance
for Student Loan Losses (Continued)
|
The third quarter 2007 FFELP provision included a cumulative
$30 million adjustment of non-recurring provision expense
for student loans related to the repeal of the Exceptional
Performer program (and the resulting increase in the
Companys Risk Sharing allowance) due to the passage of the
College Cost Reduction and Access Act of 2007 on
September 27, 2007.
The following table summarizes changes in the allowance for
student loan losses for Private Education Loans for the three
and nine months ended September 30, 2007 and 2006. The
provision for the nine months ended September 30, 2007,
included an update to the Companys projected default rates
reflecting an increased gross charge-off expectation which was
somewhat offset by an increase in expected life-of-loan
recoveries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Balance at beginning of period
|
|
$
|
427,904
|
|
|
$
|
251,582
|
|
|
$
|
308,346
|
|
|
$
|
204,112
|
|
Provision for Private Education Loan losses
|
|
|
99,687
|
|
|
|
58,549
|
|
|
|
380,093
|
|
|
|
175,133
|
|
Charge-offs
|
|
|
(82,176
|
)
|
|
|
(36,845
|
)
|
|
|
(251,860
|
)
|
|
|
(105,564
|
)
|
Recoveries
|
|
|
8,685
|
|
|
|
5,652
|
|
|
|
23,301
|
|
|
|
18,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(73,491
|
)
|
|
|
(31,193
|
)
|
|
|
(228,559
|
)
|
|
|
(87,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance before securitization of Private Education Loans
|
|
|
454,100
|
|
|
|
278,938
|
|
|
|
459,880
|
|
|
|
291,762
|
|
Reduction for securitization of Private Education Loans
|
|
|
|
|
|
|
(3,964
|
)
|
|
|
(5,780
|
)
|
|
|
(16,788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
454,100
|
|
|
$
|
274,974
|
|
|
$
|
454,100
|
|
|
$
|
274,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs as a percentage of average loans in repayment
(annualized)
|
|
|
5.12
|
%
|
|
|
3.19
|
%
|
|
|
5.69
|
%
|
|
|
3.06
|
%
|
Net charge-offs as a percentage of average loans in repayment
and forbearance (annualized)
|
|
|
4.61
|
%
|
|
|
2.95
|
%
|
|
|
5.18
|
%
|
|
|
2.82
|
%
|
Allowance as a percentage of the ending total loan balance
|
|
|
3.21
|
%
|
|
|
3.24
|
%
|
|
|
3.21
|
%
|
|
|
3.24
|
%
|
Allowance as a percentage of ending loans in repayment
|
|
|
7.70
|
%
|
|
|
6.91
|
%
|
|
|
7.70
|
%
|
|
|
6.91
|
%
|
Allowance coverage of net charge-offs (annualized)
|
|
|
1.56
|
|
|
|
2.22
|
|
|
|
1.49
|
|
|
|
2.35
|
|
Average total loans
|
|
$
|
12,705,773
|
|
|
$
|
8,078,690
|
|
|
$
|
11,663,982
|
|
|
$
|
8,348,271
|
|
Ending total loans
|
|
$
|
14,129,671
|
|
|
$
|
8,497,374
|
|
|
$
|
14,129,671
|
|
|
$
|
8,497,374
|
|
Average loans in repayment
|
|
$
|
5,696,049
|
|
|
$
|
3,878,857
|
|
|
$
|
5,373,462
|
|
|
$
|
3,821,361
|
|
Ending loans in repayment
|
|
$
|
5,895,619
|
|
|
$
|
3,980,466
|
|
|
$
|
5,895,619
|
|
|
$
|
3,980,466
|
|
16
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
2.
|
Allowance
for Student Loan Losses (Continued)
|
Delinquencies
The table below presents the Companys Private Education
Loan delinquency trends as of September 30, 2007,
December 31, 2006, and September 30, 2006.
Delinquencies have the potential to adversely impact earnings if
the account charges off and results in increased servicing and
collection costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
(Dollars in millions)
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
7,966
|
|
|
|
|
|
|
$
|
5,218
|
|
|
|
|
|
|
$
|
4,497
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
701
|
|
|
|
|
|
|
|
359
|
|
|
|
|
|
|
|
341
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
5,186
|
|
|
|
88.0
|
%
|
|
|
4,214
|
|
|
|
86.9
|
%
|
|
|
3,462
|
|
|
|
87.0
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
275
|
|
|
|
4.7
|
|
|
|
250
|
|
|
|
5.1
|
|
|
|
209
|
|
|
|
5.3
|
|
Loans delinquent
61-90 days(3)
|
|
|
156
|
|
|
|
2.6
|
|
|
|
132
|
|
|
|
2.7
|
|
|
|
121
|
|
|
|
3.0
|
|
Loans delinquent greater than
90 days(3)
|
|
|
279
|
|
|
|
4.7
|
|
|
|
255
|
|
|
|
5.3
|
|
|
|
188
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans in repayment
|
|
|
5,896
|
|
|
|
100
|
%
|
|
|
4,851
|
|
|
|
100
|
%
|
|
|
3,980
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans, gross
|
|
|
14,563
|
|
|
|
|
|
|
|
10,428
|
|
|
|
|
|
|
|
8,818
|
|
|
|
|
|
Private Education Loan unamortized discount
|
|
|
(433
|
)
|
|
|
|
|
|
|
(365
|
)
|
|
|
|
|
|
|
(321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans
|
|
|
14,130
|
|
|
|
|
|
|
|
10,063
|
|
|
|
|
|
|
|
8,497
|
|
|
|
|
|
Private Education Loan allowance for losses
|
|
|
(454
|
)
|
|
|
|
|
|
|
(308
|
)
|
|
|
|
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Education Loans, net
|
|
$
|
13,676
|
|
|
|
|
|
|
$
|
9,755
|
|
|
|
|
|
|
$
|
8,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Private Education Loans in repayment
|
|
|
40.5
|
%
|
|
|
|
|
|
|
46.5
|
%
|
|
|
|
|
|
|
45.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
|
|
12.0
|
%
|
|
|
|
|
|
|
13.1
|
%
|
|
|
|
|
|
|
13.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
10.6
|
%
|
|
|
|
|
|
|
6.9
|
%
|
|
|
|
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loans for borrowers who still may
be attending school or engaging in other permitted educational
activities and are not yet required to make payments on their
loans, e.g., residency periods for medical students or a grace
period for bar exam preparation.
|
|
(2) |
|
Loans for borrowers who have
requested extension of grace period generally during employment
transition or who have temporarily ceased making full payments
due to hardship or other factors consistent with the established
loan program servicing procedures and policies.
|
|
(3) |
|
The period of delinquency is based
on the number of days scheduled payments are contractually past
due.
|
17
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
3.
|
Goodwill
and Acquired Intangible Assets
|
Intangible assets include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
As of September 30, 2007
|
|
|
|
Amortization
|
|
|
|
|
|
Accumulated
|
|
|
|
|
(Dollars in millions)
|
|
Period
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer, services, and lending relationships
|
|
|
12 years
|
|
|
$
|
379
|
|
|
$
|
(147
|
)
|
|
$
|
232
|
|
Tax exempt bond funding
|
|
|
10 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software and technology
|
|
|
7 years
|
|
|
|
95
|
|
|
|
(74
|
)
|
|
|
21
|
|
Non-compete agreements
|
|
|
2 years
|
|
|
|
12
|
|
|
|
(10
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
486
|
|
|
|
(231
|
)
|
|
|
255
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name and trademark
|
|
|
Indefinite
|
|
|
|
115
|
|
|
|
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquired intangible assets
|
|
|
|
|
|
$
|
601
|
|
|
$
|
(231
|
)
|
|
$
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
As of December 31, 2006
|
|
|
|
Amortization
|
|
|
|
|
|
Accumulated
|
|
|
|
|
(Dollars in millions)
|
|
Period
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer, services, and lending relationships
|
|
|
12 years
|
|
|
$
|
367
|
|
|
$
|
(115
|
)
|
|
$
|
252
|
|
Tax exempt bond funding
|
|
|
10 years
|
|
|
|
46
|
|
|
|
(37
|
)
|
|
|
9
|
|
Software and technology
|
|
|
7 years
|
|
|
|
94
|
|
|
|
(62
|
)
|
|
|
32
|
|
Non-compete agreements
|
|
|
2 years
|
|
|
|
12
|
|
|
|
(9
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
519
|
|
|
|
(223
|
)
|
|
|
296
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name and trademark
|
|
|
Indefinite
|
|
|
|
106
|
|
|
|
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquired intangible assets
|
|
|
|
|
|
$
|
625
|
|
|
$
|
(223
|
)
|
|
$
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded intangible impairment and amortization of
acquired intangibles totaling $19 million and
$37 million for the three months ended September 30,
2007 and 2006, respectively, and $59 million and
$68 million for the nine months ended September 30,
2007 and 2006, respectively. 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 Companys goodwill by
reportable segment (see Note 11, Segment
Reporting) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2006
|
|
|
Adjustments
|
|
|
2007
|
|
|
Lending
|
|
$
|
406
|
|
|
$
|
1
|
|
|
$
|
407
|
|
Asset Performance Group
|
|
|
349
|
|
|
|
28
|
|
|
|
377
|
|
Corporate and Other
|
|
|
215
|
|
|
|
(15
|
)
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
970
|
|
|
$
|
14
|
|
|
$
|
984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
3.
|
Goodwill
and Acquired Intangible Assets (Continued)
|
Acquisitions are accounted for under the purchase method of
accounting as defined in SFAS No. 141, Business
Combinations. The Company allocates the purchase price to
the fair value of the acquired tangible assets, liabilities and
identifiable intangible assets as of the acquisition date as
determined by an independent appraiser. Goodwill associated with
the Companys acquisitions is reviewed for impairment in
accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, and is addressed further in
Note 2, Significant Accounting Policies, within
the Companys 2006 Annual Report on
Form 10-K.
|
|
4.
|
Student
Loan Securitization
|
Securitization
Activity
The Company securitizes its student loan assets and for
transactions qualifying as sales, retains a Residual Interest
and servicing rights (as the Company retains the servicing
responsibilities), all of which are referred to as the
Companys Retained Interest in off-balance sheet
securitized loans. The Residual Interest is the right to receive
cash flows from the student loans and reserve accounts in excess
of the amounts needed to pay servicing, derivative costs (if
any), other fees, and the principal and interest on the bonds
backed by the student loans. The investors of the securitization
trusts have no recourse to the Companys other assets
should there be a failure of the trusts to pay when due.
19
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
4.
|
Student
Loan Securitization (Continued)
|
The following table summarizes the Companys securitization
activity for the three and nine months ended September 30,
2007 and 2006. Those securitizations listed as sales are
off-balance sheet transactions and those listed as financings
remain on-balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Loan
|
|
|
Pre-
|
|
|
|
|
|
|
|
|
Loan
|
|
|
Pre-
|
|
|
|
|
|
|
No. of
|
|
|
Amount
|
|
|
Tax
|
|
|
|
|
|
No. of
|
|
|
Amount
|
|
|
Tax
|
|
|
|
|
(Dollars in millions)
|
|
Transactions
|
|
|
Securitized
|
|
|
Gain
|
|
|
Gain%
|
|
|
Transactions
|
|
|
Securitized
|
|
|
Gain
|
|
|
Gain%
|
|
|
Securitizations sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford/PLUS loans
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
FFELP Consolidation Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
4,001
|
|
|
|
19
|
|
|
|
.5
|
|
Private Education Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1,088
|
|
|
|
182
|
|
|
|
16.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations sales
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
%
|
|
|
3
|
|
|
|
5,089
|
|
|
$
|
201
|
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization financings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford/PLUS
Loans(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Consolidation
Loans(1)
|
|
|
1
|
|
|
|
2,493
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
3,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations financings
|
|
|
1
|
|
|
|
2,493
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
3,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations
|
|
|
1
|
|
|
$
|
2,493
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
$
|
8,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Loan
|
|
|
Pre-
|
|
|
|
|
|
|
|
|
Loan
|
|
|
Pre-
|
|
|
|
|
|
|
No. of
|
|
|
Amount
|
|
|
Tax
|
|
|
|
|
|
No. of
|
|
|
Amount
|
|
|
Tax
|
|
|
|
|
(Dollars in millions)
|
|
Transactions
|
|
|
Securitized
|
|
|
Gain
|
|
|
Gain%
|
|
|
Transactions
|
|
|
Securitized
|
|
|
Gain
|
|
|
Gain%
|
|
|
Securitizations sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford/PLUS loans
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
|
|
2
|
|
|
$
|
5,004
|
|
|
$
|
17
|
|
|
|
.3
|
%
|
FFELP Consolidation Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
9,503
|
|
|
|
55
|
|
|
|
.6
|
|
Private Education Loans
|
|
|
1
|
|
|
|
2,000
|
|
|
|
367
|
|
|
|
18.4
|
|
|
|
3
|
|
|
|
5,088
|
|
|
|
830
|
|
|
|
16.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations sales
|
|
|
1
|
|
|
|
2,000
|
|
|
$
|
367
|
|
|
|
18.4
|
%
|
|
|
9
|
|
|
|
19,595
|
|
|
$
|
902
|
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization financings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford/PLUS
Loans(1)
|
|
|
2
|
|
|
|
7,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Consolidation
Loans(1)
|
|
|
3
|
|
|
|
11,480
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
6,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations financings
|
|
|
5
|
|
|
|
18,484
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
6,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations
|
|
|
6
|
|
|
$
|
20,484
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
$
|
25,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In certain securitizations there
are terms within the deal structure that result in such
securitizations not qualifying for sale treatment and
accordingly, they are accounted for on-balance sheet as variable
interest entities (VIEs). Terms that prevent sale
treatment include: (1) allowing the Company to hold certain
rights that can affect the remarketing of certain bonds,
(2) allowing the trust to enter into interest rate cap
agreements after the initial settlement of the securitization,
which do not relate to the reissuance of third party beneficial
interests or (3) allowing the Company to hold an
unconditional call option related to a certain percentage of the
securitized assets.
|
20
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
4.
|
Student
Loan Securitization (Continued)
|
Key economic assumptions used in estimating the fair value of
Residual Interests at the date of securitization resulting from
the student loan securitization sale transactions completed
during the three and nine months ended September 30, 2007
and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
FFELP
|
|
|
Private
|
|
|
|
|
|
FFELP
|
|
|
Private
|
|
|
|
FFELP
|
|
|
Consolidation
|
|
|
Education
|
|
|
FFELP
|
|
|
Consolidation
|
|
|
Education
|
|
|
|
Stafford(1)
|
|
|
Loans(1)
|
|
|
Loans(1)
|
|
|
Stafford(1)
|
|
|
Loans
|
|
|
Loans
|
|
|
Prepayment speed (annual
rate)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
%
|
|
|
4
|
%
|
Interim status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life of loan repayment status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.9 yrs.
|
|
|
|
9.2 yrs.
|
|
Expected credit losses (% of principal securitized)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.09
|
%
|
|
|
4.75
|
%
|
Residual cash flows discounted at (weighted average)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.0
|
%
|
|
|
12.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
FFELP
|
|
|
Private
|
|
|
|
|
|
FFELP
|
|
|
Private
|
|
|
|
FFELP
|
|
|
Consolidation
|
|
|
Education
|
|
|
FFELP
|
|
|
Consolidation
|
|
|
Education
|
|
|
|
Stafford(1)
|
|
|
Loans(1)
|
|
|
Loans
|
|
|
Stafford
|
|
|
Loans
|
|
|
Loans
|
|
|
Prepayment speed (annual
rate)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
6
|
%
|
|
|
4
|
%
|
Interim status
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment status
|
|
|
|
|
|
|
|
|
|
|
4-7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Life of loan repayment status
|
|
|
|
|
|
|
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average life
|
|
|
|
|
|
|
|
|
|
|
9.4 yrs.
|
|
|
|
3.7 yrs.
|
|
|
|
8.2 yrs.
|
|
|
|
9.4 yrs.
|
|
Expected credit losses (% of principal securitized)
|
|
|
|
|
|
|
|
|
|
|
4.69
|
%
|
|
|
.15
|
%
|
|
|
.19
|
%
|
|
|
4.79
|
%
|
Residual cash flows discounted at (weighted average)
|
|
|
|
|
|
|
|
|
|
|
12.5
|
%
|
|
|
12.4
|
%
|
|
|
10.8
|
%
|
|
|
12.9
|
%
|
|
|
|
|
(1)
|
No securitizations qualified for sale treatment in the period.
|
|
|
(2)
|
Effective December 31, 2006, the Company implemented
Constant Prepayment Rates (CPR) curves for Residual
Interest valuations that are based on the number of months since
entering repayment that better reflect the CPR as the loan
seasons. Under this methodology, a different CPR is applied to
each year of a loans seasoning. Previously, the Company
applied a CPR that was based on a static life of loan
assumption, irrespective of seasoning, or, in the case of FFELP
Stafford and PLUS loans, the Company used a vector approach in
applying the CPR. The repayment status CPR depends on the number
of months since first entering repayment or as the loans seasons
through the portfolio. Life of loan CPR is related to repayment
status only and does not include the impact of the loan while in
interim status. The CPR assumption used for all periods includes
the impact of projected defaults.
|
|
|
|
|
*
|
CPR of 20 percent for 2006, 15 percent for 2007 and
10 percent thereafter.
|
21
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
4.
|
Student
Loan Securitization (Continued)
|
Retained
Interest in Securitized Receivables
The following tables summarize the fair value of the
Companys Residual Interests, included in the
Companys Retained Interest (and the assumptions used to
value such Residual Interests), along with the underlying
off-balance sheet student loans that relate to those
securitizations in transactions that were treated as sales as of
September 30, 2007 and December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007
|
|
|
|
FFELP
|
|
|
Consolidation
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Loan
|
|
|
Education
|
|
|
|
|
(Dollars in millions)
|
|
PLUS
|
|
|
Trusts(1)
|
|
|
Loan
Trusts(5)
|
|
|
Total
|
|
|
Fair value of Residual
Interests(2)
|
|
$
|
472
|
|
|
$
|
688
|
|
|
$
|
2,079
|
|
|
$
|
3,239
|
|
Underlying securitized loan
balance(3)
|
|
|
10,010
|
|
|
|
16,216
|
|
|
|
14,281
|
|
|
|
40,507
|
|
Weighted average life
|
|
|
2.9 yrs.
|
|
|
|
7.4 yrs.
|
|
|
|
7.1 yrs.
|
|
|
|
|
|
Prepayment speed (annual
rate)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim status
|
|
|
0
|
%
|
|
|
N/A
|
|
|
|
0
|
%
|
|
|
|
|
Repayment status
|
|
|
3-38
|
%
|
|
|
3-8
|
%
|
|
|
1-30
|
%
|
|
|
|
|
Life of loan repayment status
|
|
|
21
|
%
|
|
|
6
|
%
|
|
|
9
|
%
|
|
|
|
|
Expected credit losses (% of student loan principal)
|
|
|
.11
|
%
|
|
|
.15
|
%
|
|
|
4.46
|
%
|
|
|
|
|
Residual cash flows discount rate
|
|
|
12.1
|
%
|
|
|
10.4
|
%
|
|
|
12.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
FFELP
|
|
|
Consolidation
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Loan
|
|
|
Education
|
|
|
|
|
(Dollars in millions)
|
|
PLUS
|
|
|
Trusts(1)
|
|
|
Loan Trusts
|
|
|
Total
|
|
|
Fair value of Residual
Interests(2)
|
|
$
|
701
|
|
|
$
|
676
|
|
|
$
|
1,965
|
|
|
$
|
3,342
|
|
Underlying securitized loan
balance(3)
|
|
|
14,794
|
|
|
|
17,817
|
|
|
|
13,222
|
|
|
|
45,833
|
|
Weighted average life
|
|
|
2.9 yrs.
|
|
|
|
7.3 yrs.
|
|
|
|
7.2 yrs.
|
|
|
|
|
|
Prepayment speed (annual rate)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim status
|
|
|
0
|
%
|
|
|
N/A
|
|
|
|
0
|
%
|
|
|
|
|
Repayment status
|
|
|
0-43
|
%
|
|
|
3-9
|
%
|
|
|
4-7
|
%
|
|
|
|
|
Life of loan repayment status
|
|
|
24
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
|
|
Expected credit losses (% of student loan principal)
|
|
|
.06
|
%
|
|
|
.07
|
%
|
|
|
4.36
|
%
|
|
|
|
|
Residual cash flows discount rate
|
|
|
12.6
|
%
|
|
|
10.5
|
%
|
|
|
12.6
|
%
|
|
|
|
|
|
|
|
(1) |
|
Includes $167 million and
$151 million related to the fair value of the Embedded
Floor Income as of September 30, 2007 and December 31,
2006, respectively. Changes in the fair value of the Embedded
Floor Income are primarily due to changes in the interest rates
and the paydown of the underlying loans.
|
|
(2) |
|
At September 30, 2007 and
December 31, 2006, the Company had unrealized gains
(pre-tax) in accumulated other comprehensive income of
$281 million and $389 million, respectively, that
related to the Retained Interests.
|
|
(3) |
|
In addition to student loans in
off-balance sheet trusts, the Company had $61.9 billion and
$48.6 billion of securitized student loans outstanding
(face amount) as of September 30, 2007 and
December 31, 2006, respectively, in on-balance sheet
securitization trusts.
|
|
(4) |
|
Effective December 31, 2006,
the Company implemented CPR curves for Residual Interest
valuations that are based on seasoning (the number of months
since entering repayment). Under this methodology, a different
CPR is applied to each year of a loans seasoning.
Previously, the Company applied a CPR that was based on a static
life of loan assumption, and, in the case of FFELP Stafford and
PLUS loans, the Company applied a vector approach, irrespective
of seasoning. Repayment status CPR used is based on the number
of months since first entering repayment (seasoning). Life of
loan CPR is related to repayment status only and does not
include the impact of the loan while in interim status. The CPR
assumption used for all periods includes the impact of projected
defaults.
|
|
(5) |
|
As discussed in Note 1,
Significant Accounting Policies Accounting for
Certain Hybrid Financial Instruments the Company adopted
SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments effective January 1, 2007. As a result,
the Company elected to carry the Residual Interest on the
Private Education Loan securitization which settled in the first
quarter of 2007 at fair value with subsequent changes in fair
value recorded in earnings. The fair value of this Residual
Interest at September 30, 2007 was $382 million
inclusive of a net $5 million fair value gain adjustment
recorded since settlement.
|
22
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
4.
|
Student
Loan Securitization (Continued)
|
The Company recorded impairments to the Retained Interests of
$90 million and $4 million, respectively, for the
three months ended September 30, 2007 and 2006, and
$137 million and $148 million, respectively, for the
nine months ended September 30, 2007 and 2006. The
impairment charges were the result of FFELP loans prepaying
faster than projected through loan consolidations
($31 million and $4 million for the three months ended
September 30, 2007 and 2006, respectively, and
$54 million and $97 million for the nine months ended
September 30, 2007 and 2006, respectively), impairment to
the Floor Income component of the Companys Retained
Interest due to increases in interest rates during the period
($0 million for both the three months ended
September 30, 2007 and 2006, respectively, and
$24 million and $51 million for the nine months ended
September 30, 2007 and 2006, respectively), and an increase
in prepayments and acceleration of defaults related to Private
Education Loans ($59 million for the three and nine months
ended September 30, 2007).
As of September 30, 2007 the Company updated the following
assumptions used to calculate the fair value of the Residual
Interests: (1) the prepayment assumption related to Private
Education Loans was increased from 6 percent to
9 percent to account for the Companys continued
expectation of increased consolidation activity, (2) the
expected credit losses assumed for the FFELP loans have been
increased to account for the Companys higher percentage of
Risk Sharing resulting from the new legislation; and
(3) the timing of expected defaults of Private Education
Loans was accelerated based on the most current information the
Company has observed. The overall expectation of Private
Education Loan defaults did not materially change; however,
acceleration of the timing has the effect of decreasing the
value of the Companys Residual Interests. The changes in
these assumptions related to the Companys Private
Education Loan Residual Interests and FFELP Residual Interests
resulted in a $196 million and $11 million reduction
in fair value, respectively. The Company also assessed the
appropriateness of the current risk premium which is added to
the risk free rate for the purpose of arriving at a discount
rate in light of the current economic and credit uncertainty
that exists in the market. This discount rate is applied to the
projected cash flows to arrive at a fair value representative of
the current economic conditions. The Company concluded that the
current risk premium is appropriate as it takes into account the
current level of cash flow uncertainty and lack of liquidity
that may exist with the Residual Interests.
23
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
4.
|
Student
Loan Securitization (Continued)
|
The table below shows the Companys off-balance sheet
Private Education Loan delinquency trends as of
September 30, 2007, December 31, 2006 and
September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
(Dollars in millions)
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
6,126
|
|
|
|
|
|
|
$
|
5,608
|
|
|
|
|
|
|
$
|
6,861
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
1,251
|
|
|
|
|
|
|
|
822
|
|
|
|
|
|
|
|
901
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
6,524
|
|
|
|
94.5
|
%
|
|
|
6,419
|
|
|
|
94.5
|
%
|
|
|
5,281
|
|
|
|
94.3
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
192
|
|
|
|
2.8
|
|
|
|
222
|
|
|
|
3.3
|
|
|
|
164
|
|
|
|
2.9
|
|
Loans delinquent
61-90 days(3)
|
|
|
71
|
|
|
|
1.0
|
|
|
|
60
|
|
|
|
.9
|
|
|
|
68
|
|
|
|
1.2
|
|
Loans delinquent greater than
90 days(3)
|
|
|
116
|
|
|
|
1.7
|
|
|
|
91
|
|
|
|
1.3
|
|
|
|
90
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet Private Education Loans in repayment
|
|
|
6,903
|
|
|
|
100
|
%
|
|
|
6,792
|
|
|
|
100
|
%
|
|
|
5,603
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet Private Education Loans, gross
|
|
$
|
14,280
|
|
|
|
|
|
|
$
|
13,222
|
|
|
|
|
|
|
$
|
13,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Loans for borrowers who still may be attending school or
engaging in other permitted educational activities and are not
yet required to make payments on their loans, e.g., residency
periods for medical students or a grace period for bar exam
preparation.
|
|
|
(2)
|
Loans for borrowers who have requested extension of grace period
generally during employment transition or who have temporarily
ceased making full payments due to hardship or other factors
consistent with the established loan program servicing
procedures and programs.
|
|
|
(3)
|
The period of delinquency is based on the number of days
scheduled payments are contractually past due.
|
24
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
5.
|
Derivative
Financial Instruments
|
Summary
of Derivative Financial Statement Impact
The following tables summarize the fair values and notional
amounts or number of contracts of all derivative instruments at
September 30, 2007 and December 31, 2006 and their
impact on other comprehensive income and earnings for the three
and nine months ended September 30, 2007 and 2006. At
September 30, 2007 and December 31, 2006,
$11 million (none of which is in restricted cash and
investments on the balance sheet) and $418 million (of
which $53 million is in restricted cash and investments on
the balance sheet) fair value, respectively, of
available-for-sale investment securities and $445 million
and $28 million, respectively, of cash were pledged as
collateral against these derivative instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow
|
|
|
Fair Value
|
|
|
Trading
|
|
|
Total
|
|
|
|
Sept. 30,
|
|
|
December 31,
|
|
|
Sept. 30,
|
|
|
December 31,
|
|
|
Sept. 30,
|
|
|
December 31,
|
|
|
Sept. 30,
|
|
|
December 31,
|
|
(Dollars in millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Fair
Values(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(11
|
)
|
|
$
|
(9
|
)
|
|
$
|
(235
|
)
|
|
$
|
(355
|
)
|
|
$
|
40
|
|
|
$
|
(111
|
)
|
|
$
|
(206
|
)
|
|
$
|
(475
|
)
|
Floor/Cap contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(296
|
)
|
|
|
(200
|
)
|
|
|
(296
|
)
|
|
|
(200
|
)
|
Futures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity forwards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101
|
)
|
|
|
(213
|
)
|
|
|
(101
|
)
|
|
|
(213
|
)
|
Cross currency interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
3,273
|
|
|
|
1,440
|
|
|
|
|
|
|
|
|
|
|
|
3,273
|
|
|
|
1,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(11
|
)
|
|
$
|
(9
|
)
|
|
$
|
3,038
|
|
|
$
|
1,085
|
|
|
$
|
(357
|
)
|
|
$
|
(524
|
)
|
|
$
|
2,670
|
|
|
$
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in
billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
1.9
|
|
|
$
|
2.1
|
|
|
$
|
15.6
|
|
|
$
|
15.6
|
|
|
$
|
193.4
|
|
|
$
|
162.0
|
|
|
$
|
210.9
|
|
|
$
|
179.7
|
|
Floor/Cap contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39.9
|
|
|
|
21.5
|
|
|
|
39.9
|
|
|
|
21.5
|
|
Futures
|
|
|
|
|
|
|
.1
|
|
|
|
|
|
|
|
|
|
|
|
.6
|
|
|
|
.6
|
|
|
|
.6
|
|
|
|
.7
|
|
Cross currency interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
23.8
|
|
|
|
23.0
|
|
|
|
.1
|
|
|
|
|
|
|
|
23.9
|
|
|
|
23.0
|
|
Other(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.5
|
|
|
|
2.0
|
|
|
|
.5
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.9
|
|
|
$
|
2.2
|
|
|
$
|
39.4
|
|
|
$
|
38.6
|
|
|
$
|
234.5
|
|
|
$
|
186.1
|
|
|
$
|
275.8
|
|
|
$
|
226.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity forwards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48.2
|
|
|
|
48.2
|
|
|
|
48.2
|
|
|
|
48.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Fair values reported are exclusive of collateral held and/or
pledged.
|
|
|
(2)
|
Other includes embedded derivatives bifurcated from
newly issued on-balance sheet securitization debt, as a result
of adopting SFAS No. 155 (see Note 1,
Significant Accounting Policies Accounting for
Certain Hybrid Financial Instruments). In addition, for
December 31, 2006, other consisted of an
embedded derivative ($2 billion notional) bifurcated from
the convertible debenture issuance that relates primarily to
certain contingent interest and conversion features of the debt.
All of the embedded derivatives have had a de minimis fair value
since bifurcation.
|
25
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
5.
|
Derivative
Financial Instruments (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Cash Flow
|
|
|
Fair Value
|
|
|
Trading
|
|
|
Total
|
|
(Dollars in millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Changes to accumulated other comprehensive income, net of
tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value to cash flow hedges
|
|
$
|
(7
|
)
|
|
$
|
(11
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(7
|
)
|
|
$
|
(11
|
)
|
Amortization of effective
hedges(1)
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in accumulated other comprehensive income, net
|
|
$
|
(7
|
)
|
|
$
|
(7
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(7
|
)
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of closed futures contracts gains/losses in
interest
expense(2)
|
|
$
|
|
|
|
$
|
(6
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(6
|
)
|
Gains (losses) on derivative and hedging activities
Realized(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33
|
)
|
|
|
(18
|
)
|
|
|
(33
|
)
|
|
|
(18
|
)
|
Gains (losses) on derivative and hedging activities
Unrealized(4)
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
(20
|
)
|
|
|
(476
|
)
|
|
|
(93
|
)
|
|
|
(454
|
)
|
|
|
(113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings impact
|
|
$
|
|
|
|
$
|
(6
|
)
|
|
$
|
22
|
|
|
$
|
(20
|
)
|
|
$
|
(509
|
)
|
|
$
|
(111
|
)
|
|
$
|
(487
|
)
|
|
$
|
(137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
Cash Flow
|
|
|
Fair Value
|
|
|
Trading
|
|
|
Total
|
|
(Dollars in millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Changes to accumulated other comprehensive income, net of
tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value to cash flow hedges
|
|
$
|
(1
|
)
|
|
$
|
(9
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
(9
|
)
|
Amortization of effective
hedges(1)
|
|
|
1
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in accumulated other comprehensive income, net
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of closed futures contracts gains/losses in
interest
expense(2)
|
|
$
|
(2
|
)
|
|
$
|
(17
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(2
|
)
|
|
$
|
(17
|
)
|
Gains (losses) on derivative and hedging activities
Realized(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79
|
)
|
|
|
(107
|
)
|
|
|
(79
|
)
|
|
|
(107
|
)
|
Gains (losses) on derivative and hedging activities
Unrealized(4)
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
23
|
|
|
|
18
|
|
|
|
(11
|
)
|
|
|
56
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings impact
|
|
$
|
(2
|
)
|
|
$
|
(17
|
)
|
|
$
|
38
|
|
|
$
|
23
|
|
|
$
|
(61
|
)
|
|
$
|
(118
|
)
|
|
$
|
(25
|
)
|
|
$
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The Company expects to amortize $.1 million of after-tax
net losses from accumulated other comprehensive income to
earnings during the next 12 months related to closed
futures contracts that were hedging the forecasted issuance of
debt instruments that were outstanding as of September 30,
2007.
|
|
(2)
|
For futures contracts that qualify as SFAS No. 133
hedges where the hedged transaction occurs.
|
|
(3)
|
Includes net settlement income/expense related to trading
derivatives and realized gains and losses related to derivative
dispositions.
|
|
(4)
|
The change in the fair value of cash flow and fair value hedges
represents amounts related to ineffectiveness.
|
26
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
5.
|
Derivative
Financial Instruments (Continued)
|
Previously, the Company hedged the full fair value of certain
fixed rate U.S. dollar denominated unsecured debt for
SFAS No. 133 hedge accounting purposes. The widening
of the Companys credit spreads due to the Merger
announcement (see Note 12, Merger Related
Developments) resulted in certain hedge relationships no
longer qualifying for hedge accounting as full fair value
hedges. Those relationships, which no longer qualified for hedge
accounting as full fair value hedges, were terminated and
re-designated as hedges of changes in fair value due to changes
in benchmark interest rates only, in the second quarter of 2007.
The basis adjustment related to the hedged items as of the
termination date is being amortized over the remaining life of
the hedged items.
The following table summarizes the Companys common share
repurchases, issuances and equity forward activity for the three
and nine months ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(Shares in millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Common shares repurchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open market
|
|
|
|
|
|
|
2.2
|
|
|
|
|
|
|
|
2.2
|
|
Equity forwards
|
|
|
|
|
|
|
.9
|
|
|
|
|
|
|
|
5.4
|
|
Benefit
plans(1)
|
|
|
2.1
|
|
|
|
.1
|
|
|
|
3.1
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares repurchased
|
|
|
2.1
|
|
|
|
3.2
|
|
|
|
3.1
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average purchase price per share
|
|
$
|
48.47
|
|
|
$
|
48.76
|
|
|
$
|
46.35
|
|
|
$
|
52.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued
|
|
|
3.6
|
|
|
|
.8
|
|
|
|
6.6
|
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period
|
|
|
48.2
|
|
|
|
45.9
|
|
|
|
48.2
|
|
|
|
42.7
|
|
New contracts
|
|
|
|
|
|
|
3.2
|
|
|
|
|
|
|
|
10.9
|
|
Exercises
|
|
|
|
|
|
|
(.9
|
)
|
|
|
|
|
|
|
(5.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
48.2
|
|
|
|
48.2
|
|
|
|
48.2
|
|
|
|
48.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authority remaining at end of period to repurchase or enter into
equity forwards
|
|
|
15.7
|
|
|
|
5.7
|
|
|
|
15.7
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes shares withheld from stock option exercises and vesting
of performance stock for employees tax withholding
obligations and shares tendered by employees to satisfy option
exercise costs.
|
27
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
6.
|
Stockholders
Equity (Continued)
|
As of September 30, 2007, the expiration dates and purchase
prices for outstanding equity forward contracts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Outstanding
|
|
|
Range of
|
|
Average
|
|
Year of Maturity
|
|
Contracts
|
|
|
Purchase Prices
|
|
Purchase Price
|
|
|
|
(in millions of shares)
|
|
|
|
|
|
|
|
2008
|
|
|
7.3
|
|
|
$43.50 - $44.00
|
|
$
|
43.80
|
|
2009
|
|
|
14.7
|
|
|
46.00 - 54.74
|
|
|
53.66
|
|
2010
|
|
|
15.0
|
|
|
54.74
|
|
|
54.74
|
|
2011
|
|
|
9.1
|
|
|
49.75 - 53.76
|
|
|
51.91
|
|
2012
|
|
|
2.1
|
|
|
46.30 - 46.70
|
|
|
46.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48.2
|
|
|
|
|
$
|
51.86
|
|
|
|
|
|
|
|
|
|
|
|
|
The closing price of the Companys common stock on
September 30, 2007 was $49.67. Should the market value of
the Companys stock fall below certain initial trigger
prices, the counterparty to the contract has a right to
terminate the contract and settle all or a portion at the
original contract price. For equity forward contracts
outstanding at September 30, 2007, these initial trigger
prices range from $23.93 per share to $30.11 per share.
Depending on market conditions and the economic terms negotiated
with counterparties, the Company may enter into agreements to
terminate certain of its equity forward purchase contracts. The
Company anticipates that, if it were to enter into any such
terminations, these contracts would likely be settled using the
net cash settlement method. At any time, the Company may also
repurchase shares in the open market, enter into new equity
forward positions or utilize other programs that have similar
economic results in connection with its share repurchase program.
28
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
6.
|
Stockholders
Equity (Continued)
|
Accumulated
Other Comprehensive Income
Accumulated other comprehensive income includes the after-tax
change in unrealized gains and losses on available-for-sale
investments, unrealized gains and losses on derivatives
qualifying as cash flow hedges, and the defined benefit pension
plans adjustment. The following table presents the cumulative
balances of the components of other comprehensive income as of
September 30, 2007, December 31, 2006 and
September 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
Net unrealized gains (losses) on
investments(1)
|
|
$
|
237,349
|
|
|
$
|
340,363
|
|
|
$
|
473,671
|
|
Net unrealized gains (losses) on
derivatives(2)
|
|
|
(7,879
|
)
|
|
|
(7,570
|
)
|
|
|
(11,304
|
)
|
Defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net prior service cost
|
|
|
(23
|
)
|
|
|
(24
|
)
|
|
|
|
|
Net gain
|
|
|
15,905
|
|
|
|
16,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total defined benefit pension
plans(3)
|
|
|
15,882
|
|
|
|
16,318
|
|
|
|
|
|
Minimum pension liability
adjustment(4)
|
|
|
|
|
|
|
|
|
|
|
(1,840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income
|
|
$
|
245,352
|
|
|
$
|
349,111
|
|
|
$
|
460,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net of tax expense of $123,928, $179,244 and $251,941 as of
September 30, 2007, December 31, 2006 and
September 30, 2006, respectively.
|
|
|
(2)
|
Net of tax benefit of $4,436, $4,347 and $6,512 as of
September 30, 2007, December 31, 2006 and
September 30, 2006, respectively.
|
|
|
(3)
|
Net of tax expense of $9,224 and $8,787 as of September 30,
2007 and December 31, 2006, respectively.
|
|
|
(4)
|
Net of tax benefit of $991 as of September 30, 2006.
|
29
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
7.
|
Earnings
(Loss) per Common Share
|
Basic earnings (loss) per common share (EPS) are
calculated using the weighted average number of shares of common
stock outstanding during each period. A reconciliation of the
numerators and denominators of the basic and diluted EPS
calculations follows for the three and nine months ended
September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stock
|
|
$
|
(353,034
|
)
|
|
$
|
254,251
|
|
|
$
|
711,341
|
|
|
$
|
1,112,542
|
|
Adjusted for debt expense of convertible debentures
(Co-Cos), net of
taxes(1)
|
|
|
|
|
|
|
17,962
|
|
|
|
|
|
|
|
49,239
|
|
Adjusted for non-taxable unrealized gains on equity
forwards(2)
|
|
|
|
|
|
|
(707
|
)
|
|
|
|
|
|
|
(3,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stock, adjusted
|
|
$
|
(353,034
|
)
|
|
$
|
271,506
|
|
|
$
|
711,341
|
|
|
$
|
1,158,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute basic EPS
|
|
|
412,944
|
|
|
|
410,034
|
|
|
|
411,958
|
|
|
|
411,212
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of Co-Cos
|
|
|
|
|
|
|
30,312
|
|
|
|
|
|
|
|
30,312
|
|
Dilutive effect of stock options, nonvested deferred
compensation, nonvested restricted stock, restricted stock
units, Employee Stock Purchase Plan (ESPP) and
equity
forwards(3)(4)
|
|
|
|
|
|
|
9,495
|
|
|
|
8,347
|
|
|
|
10,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common
shares(5)
|
|
|
|
|
|
|
39,807
|
|
|
|
8,347
|
|
|
|
40,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute diluted EPS
|
|
|
412,944
|
|
|
|
449,841
|
|
|
|
420,305
|
|
|
|
452,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
(.85
|
)
|
|
$
|
.62
|
|
|
$
|
1.73
|
|
|
$
|
2.71
|
|
Dilutive effect of
Co-Cos(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.07
|
)
|
Dilutive effect of equity
forwards(2)(4)
|
|
|
|
|
|
|
(.01
|
)
|
|
|
|
|
|
|
(.01
|
)
|
Dilutive effect of stock options, nonvested deferred
compensation, nonvested restricted stock, restricted stock
units, and
ESPP(3)
|
|
|
|
|
|
|
(.01
|
)
|
|
|
(.04
|
)
|
|
|
(.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
(.85
|
)
|
|
$
|
.60
|
|
|
$
|
1.69
|
|
|
$
|
2.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Emerging Issues Task Force (EITF) Issue
No. 04-8,
The Effect of Contingently Convertible Debt on Diluted
Earnings per Share, requires the shares underlying Co-Cos
to be included in diluted EPS computations regardless of whether
the market price trigger or the conversion price has been met,
using the if-converted method. On July 25,
2007, the Co-Cos were called at par.
|
|
(2)
|
SFAS No. 128, Earnings per Share, and the
additional guidance provided by EITF Topic
No. D-72,
Effect of Contracts That May Be Settled in Stock or Cash
on the Computation of Diluted Earnings per Share, require
both the denominator and the numerator to be adjusted in
calculating the potential impact of the Companys equity
forward contracts on diluted EPS. Under this guidance, the
impact can be dilutive when: (1) the average share price
during the period is lower than the respective strike prices on
the Companys equity forward contracts, and (2) the
Company recorded an unrealized gain or loss on derivative and
hedging activities related to its equity forward contracts.
|
|
(3)
|
Reflects the potential dilutive effect of additional common
shares that are issuable upon exercise of outstanding stock
options, nonvested deferred compensation, nonvested restricted
stock, restricted stock units, and the outstanding commitment to
issue shares under the ESPP, determined by the treasury stock
method.
|
|
(4)
|
Reflects the potential dilutive effect of equity forward
contracts, determined by the reverse treasury stock method.
|
|
(5)
|
For the three months ended September 30, 2007 and 2006,
stock options and equity forwards of approximately
59 million shares and 60 million shares, respectively,
and for the nine months ended September 30, 2007 and 2006,
stock options and equity forwards of approximately
60 million shares and 54 million shares, respectively,
were outstanding but not included in the computation of diluted
earnings per share because they were antidilutive.
|
30
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
Components
of Net Periodic Pension Cost
Net periodic pension cost included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Service cost benefits earned during the period
|
|
$
|
1,775
|
|
|
$
|
2,072
|
|
|
$
|
5,325
|
|
|
$
|
6,218
|
|
Interest cost on projected benefit obligations
|
|
|
3,083
|
|
|
|
2,862
|
|
|
|
9,251
|
|
|
|
8,586
|
|
Expected return on plan assets
|
|
|
(4,493
|
)
|
|
|
(4,070
|
)
|
|
|
(13,481
|
)
|
|
|
(12,208
|
)
|
Net amortization and deferral
|
|
|
(180
|
)
|
|
|
123
|
|
|
|
(539
|
)
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic pension cost
|
|
$
|
185
|
|
|
$
|
987
|
|
|
$
|
556
|
|
|
$
|
2,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer
Contributions
The Company previously disclosed in its financial statements for
the year ended December 31, 2006 that it did not expect to
contribute to its qualified pension plan (the Qualified
Plan) in 2007. As of September 30, 2007, the Company
had made no contributions to its Qualified Plan.
The following table summarizes the Companys unrecognized
tax benefits:
|
|
|
|
|
|
|
As of January 1, 2007
|
|
|
Gross amount of unrecognized tax benefits
|
|
$
|
113,334
|
|
Total amount of unrecognized tax benefits that, if recognized,
would affect the effective tax rate
|
|
|
38,325
|
|
Total amount of interest and penalties recognized in the
statement of operations and the statement of financial position
|
|
|
16,418
|
|
The Company adopted the provisions of the FASBs Financial
Interpretation (FIN) No. 48, Accounting
for Uncertainty in Income Taxes, on January 1, 2007.
As a result of the implementation of FIN No. 48, the
Company recognized a $6 million increase in its liability
for unrecognized tax benefits, which was accounted for as a
reduction to the January 1, 2007 balance of retained
earnings. In addition, unrecognized tax benefits of
$3 million are currently treated as a pending refund claim,
reducing the above balance of total unrecognized tax benefits
that if recognized would affect the effective tax rate.
In the first and second quarters of 2007, the Company adjusted
its federal unrecognized tax benefits to reflect the outcome of
several issues that were addressed with the IRS as a part of the
2003-2004
exam cycle, primarily regarding the timing of recognition of
certain income and deduction items. Several other less
significant amounts of uncertain tax benefits were also added
during these quarters and the third quarter of 2007. In total,
as of September 30, 2007, the Company has gross
unrecognized tax benefits of $189 million, unrecognized tax
benefits that, if recognized, would impact the effective tax
rate of $43 million, as well as total interest and
penalties recognized in the statements of operations and
financial position of $19 million.
31
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
9.
|
Income
Taxes (Continued)
|
Reasonably
Possible Significant Increases/Decreases within Twelve
Months
U.S.
Federal Tax Uncertainties
The IRS issued a Revenue Agents Report (RAR)
during the second quarter of 2007 concluding the primary exam of
the Companys 2003 and 2004 U.S. federal tax returns.
However, the exam of these years remains open pending the
conclusion of the separate IRS audit of an entity in which the
Company is an investor (any results of which are not expected to
have a material impact on the Companys unrecognized tax
benefit amounts). In addition, during the third quarter of 2007,
the Company filed an administrative-level appeal related to one
unagreed item originating from the Companys 2004
U.S. federal tax return. An estimate of the range of the
possible change to the balance of the Companys
unrecognized tax benefits that may result from resolution of the
remaining unagreed item cannot at this time be made, pending
further development of the appeals process.
In addition, the IRS is beginning the examination of the
Companys 2005 and 2006 federal income tax returns. It is
reasonably possible that issues that arise during the exam may
create the need for an increase in unrecognized tax benefits.
Until the exam proceeds further, an estimate of any such amounts
cannot currently be made.
Other
Tax Uncertainties
In the event that the Company is not contacted for exam by
additional tax authorities by the end of 2007, it is reasonably
possible that there will be a decrease in the Companys
unrecognized tax position liability, due to the tolling of
various statute of limitations periods. When considering both
tax and interest amounts, such change could be approximately
$5 million to $7 million.
Tax Years
Remaining Subject to Exam
The Company or one of its subsidiaries files income tax returns
at the U.S. federal level, in most U.S. states, and
various foreign jurisdictions. U.S. federal income tax
returns filed for years prior to 2003 have been audited and are
now resolved. As shown in the table below, the Companys
primary operating subsidiary has been audited by the listed
states through the year shown, again with all issues resolved.
Other combinations of subsidiaries, tax years, and jurisdictions
remain open for review, subject to statute of limitations
periods (typically 3 to 4 prior years).
|
|
|
|
|
State
|
|
Year audited through
|
|
|
Florida
|
|
|
2000
|
|
Indiana
|
|
|
2000
|
|
Pennsylvania
|
|
|
2000
|
|
California
|
|
|
2002
|
|
Missouri
|
|
|
2003
|
|
New York
|
|
|
2003
|
|
Texas
|
|
|
2004
|
|
The Company recognizes interest accrued related to unrecognized
tax benefits in income tax expense and penalties in operating
expenses.
32
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
On October 8, 2007, the Company filed a lawsuit in the
Delaware Court of Chancery against the Buyer Group seeking a
declaration that the Buyer Group repudiated the Merger
Agreement, that no Material Adverse Effect (as
defined in the Merger Agreement) has occurred and that the
Company may terminate the agreement and collect the
$900 million termination fee (see Note 12,
Merger-Related Developments).
On April 6, 2007, the Company was served with a putative
class action suit by several borrowers in federal court in
California. The complaint, which was amended on April 12,
2007, alleges violations of California Business &
Professions Code 17200, breach of contract, breach of covenant
of good faith and fair dealing, violation of consumer legal
remedies act and unjust enrichment. The complaint challenges the
Companys FFELP billing practices as they relate to use of
the simple daily interest method for calculating interest. On
June 19, 2007, the Company filed a Motion to Dismiss the
amended complaint. On September 14, 2007, the court entered
an order denying Sallie Maes Motion to Dismiss. The court
did not comment on the merits of the allegations or the
plaintiffs case but instead merely determined that the
allegations stated a claim sufficient under the Federal Rules of
Civil Procedure. On September 17, 2007, the court entered a
scheduling order that set July 8, 2008, as the start date
for the trial. Discovery has commenced and is scheduled to
continue through May 30, 2008. The Company believes these
allegations lack merit and will continue to vigorously defend
itself in this case. The Company filed an answer on
September 28, 2007, denying any liability.
On January 25, 2007, the Attorney General of Illinois filed
a lawsuit against one of the Companys subsidiaries, Arrow
Financial Services, LLC (AFS), in the Circuit Court
of Cook County, Illinois alleging that AFS violated the Illinois
Consumer Fraud and Deceptive Practices Act and the federal Fair
Debt Collections Practices Act. The lawsuit seeks to enjoin AFS
from violating the Illinois Consumer Fraud and Deceptive
Practices Act and from engaging in debt management and
collection services in or from the State of Illinois. The
lawsuit also seeks to rescind certain agreements to pay back
debt between AFS and Illinois consumers, to pay restitution to
all consumers who have been harmed by AFSs alleged
unlawful practices, to impose a statutory civil penalty of
$50,000 and to impose a civil penalty of $50,000 per violation
($60,000 per violation if the consumer is 65 years of age
or older). The lawsuit alleges that as of January 25, 2007,
660 complaints against AFS have been filed with the Office of
the Illinois Attorney General since 1999 and over 800 complaints
have been filed with the Better Business Bureau. As of
September 30, 2007, the Company owned 88 percent of
the membership interests in AFS Holdings, LLC, the parent
company of AFS. Management cannot predict the outcome of this
lawsuit or its effect on the Companys financial position
or results of operations.
The Company is also subject to various claims, lawsuits and
other actions that arise in the normal course of business. Most
of these matters are claims by borrowers disputing the manner in
which their loans have been processed or the accuracy of the
Companys reports to credit bureaus. In addition, the
collections subsidiaries in the Companys asset performance
group are routinely named in individual plaintiff or class
action lawsuits in which the plaintiffs allege that the Company
has violated a federal or state law in the process of collecting
their accounts. Management believes that these claims, lawsuits
and other actions will not have a material adverse effect on its
business, financial condition or results of operations. Finally,
from time to time, the Company receives information and document
requests from state attorneys general and Congressional
committees concerning certain of its business practices. The
Companys practice has been and continues to be to
cooperate with the state attorneys general and Congressional
committees and to be responsive to any such requests.
33
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
The Company has two primary operating segments as defined in
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information the Lending
operating segment and the Asset Performance Group
(APG), formerly known as Debt Management Operations
(DMO), operating segment. The Lending and APG
operating segments meet the quantitative thresholds for
reportable segments identified in SFAS No. 131.
Accordingly, the results of operations of the Companys
Lending and APG business segments are presented below. The
Company has smaller operating segments including the Guarantor
Servicing, Student Loan Servicing, and Upromise operating
segments as well as certain other products and services provided
to colleges and universities that do not meet the quantitative
thresholds identified in SFAS No. 131. Therefore, the
results of operations for these smaller operating segments and
the revenues and expenses associated with these other products
and services are combined with corporate overhead and other
corporate activities within the Corporate and Other reportable
segment.
The management reporting process measures the performance of the
Companys operating segments based on the management
structure of the Company as well as the methodology used by
management to evaluate performance and allocate resources.
Management, including the Companys chief operating
decision maker, evaluates the performance of the Companys
operating segments based on their profitability. As discussed
further below, management measures the profitability of the
Companys operating segments based on Core
Earnings net income. Accordingly, information regarding
the Companys reportable segments is provided on a
Core Earnings basis. The Companys Core
Earnings performance measures are not defined terms within
GAAP and may not be comparable to similarly titled measures
reported by other companies. Core Earnings net
income reflects only current period adjustments to GAAP net
income as described below. Unlike financial accounting, there is
no comprehensive, authoritative guidance for management
reporting. The management reporting process measures the
performance of the operating segments based on the management
structure of the Company and is not necessarily comparable with
similar information for any other financial institution. The
Companys operating segments are defined by the products
and services they offer or the types of customers they serve,
and they reflect the manner in which financial information is
currently evaluated by management. Intersegment revenues and
expenses are netted within the appropriate financial statement
line items consistent with the income statement presentation
provided to management. Changes in management structure or
allocation methodologies and procedures may result in changes in
reported segment financial information.
The Companys principal operations are located in the
United States, and its results of operations and long-lived
assets in geographic regions outside of the United States are
not significant. In the Lending segment, no individual customer
accounted for more than 10 percent of its total revenue
during the three months ended September 30, 2007 and 2006.
United Student Aid Funds, Inc. (USA Funds) is the
Companys largest customer in both the APG and Corporate
and Other segments. During the nine months ended
September 30, 2007 and 2006, it accounted for
24 percent and 32 percent, respectively, of the
aggregate revenues generated by the Companys APG and
Corporate and Other segments. No other customers accounted for
more than 10 percent of total revenues in those segments
for these reporting periods.
Lending
In the Companys Lending operating segment, the Company
originates and acquires both federally guaranteed student loans,
which are administered by the U.S. Department of Education
(ED), and Private Education Loans, which are not
federally guaranteed. Private Education Loans are primarily used
by borrowers to supplement FFELP loans to meet the rising cost
of education. The Company manages student loans for
34
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
11.
|
Segment
Reporting (Continued)
|
nearly 10 million student and parent customers; its Managed
student loan portfolio totaled $160 billion at
September 30, 2007, of which $132 billion or
83 percent are federally insured. In addition to education
lending, the Company also originates mortgage and consumer loans
with the intent of selling the majority of such loans. During
the nine months ended September 30, 2007, the Company
originated $769 million in mortgage and consumer loans of
which $528 million were mortgages held for sale. The
Companys mortgage and consumer loan portfolio totaled
$578 million at September 30, 2007.
In addition to its federally insured FFELP products, the Company
originates and acquires Private Education Loans which consist of
two general types: (1) those that are designed to bridge
the gap between the cost of higher education and the amount
financed through either capped federally insured loans or the
borrowers resources, and (2) those that are used to
meet the needs of students who attend non-Title IV eligible
institutions where FFELP loans are not available (such as career
training, distance learning and lifelong learning programs).
Most higher education Private Education Loans are made in
conjunction with a FFELP Stafford loan and as such are marketed
through the same channel as FFELP loans by the same sales force.
Unlike FFELP loans, Private Education Loans are subject to the
full credit risk of the borrower. The Company manages this
additional risk through loan underwriting standards and a
combination of higher interest rates and loan origination fees
that compensate the Company for the higher risk.
Asset
Performance Group (APG)
The Companys APG operating segment provides a wide range
of accounts receivable and collections services including
student loan default aversion services, defaulted student loan
portfolio management services, contingency collections services
for student loans and other asset classes, and accounts
receivable management and collection for purchased portfolios of
receivables that are delinquent or have been charged off by
their original creditors, as well as sub-performing and
non-performing mortgage loans. The Companys APG segment
serves the student loan marketplace through a broad array of
default management services on a contingency fee or other
pay-for-performance basis to 14 FFELP guarantors and for
campus-based programs.
In addition to collecting on its own purchased consumer loan
receivables and mortgage loans, the APG segment provides
receivable management and collection services for large federal
agencies, credit card clients and other holders of consumer debt.
Corporate
and Other
The Companys Corporate and Other reportable segment
includes the aggregate activity of its smaller operating
segments, primarily its Guarantor Servicing, Student Loan
Servicing, and Upromise operating segments. The Corporate and
Other reportable segment also includes several smaller products
and services, as well as corporate overhead.
In the Guarantor Servicing operating segment, the Company
provides a full complement of administrative services to FFELP
guarantors including guarantee issuance, account maintenance,
and guarantee fulfillment. In the Student Loan Servicing
operating segment, the Company provides a full complement of
activities required to service student loans on behalf of
lenders who are unrelated to the Company. Such servicing
activities generally commence once a loan has been fully
disbursed and include sending out payment coupons to borrowers,
processing borrower payments, originating and disbursing FFELP
Consolidation Loans on behalf of the lender, and other
administrative activities required by ED. In the Upromise
operating segment, the
35
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
11.
|
Segment
Reporting (Continued)
|
Company markets and administers saving-for-college plans and
also provides administration services for college savings plans.
Corporate overhead includes all of the typical headquarter
functions such as executive management, accounting and finance,
human resources and marketing.
Measure
of Profitability
The tables below include the condensed operating results for
each of the Companys reportable segments. Management,
including the chief operating decision maker, evaluates the
Company on certain performance measures that the Company refers
to as Core Earnings performance measures for each
operating segment. While Core Earnings results are
not a substitute for reported results under GAAP, the Company
relies on Core Earnings performance measures to
manage each operating segment because it believes these measures
provide additional information regarding the operational and
performance indicators that are most closely assessed by
management.
Core Earnings performance measures are the primary
financial performance measures used by management to develop the
Companys financial plans, track results, and establish
corporate performance targets and incentive compensation.
Management believes this information provides additional insight
into the financial performance of the core business activities
of its operating segments. Accordingly, the tables presented
below reflect Core Earnings operating measures
reviewed and utilized by management to manage the business.
Reconciliation of the Core Earnings segment totals
to the Companys consolidated operating results in
accordance with GAAP is also included in the tables below.
36
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
11.
|
Segment
Reporting (Continued)
|
Segment
Results and Reconciliations to GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Total Core
|
|
|
|
|
|
Total
|
|
(Dollars in millions)
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Earnings
|
|
|
Adjustments(3)
|
|
|
GAAP
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
729
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
729
|
|
|
$
|
(183
|
)
|
|
$
|
546
|
|
FFELP Consolidation Loans
|
|
|
1,445
|
|
|
|
|
|
|
|
|
|
|
|
1,445
|
|
|
|
(300
|
)
|
|
|
1,145
|
|
Private Education Loans
|
|
|
753
|
|
|
|
|
|
|
|
|
|
|
|
753
|
|
|
|
(360
|
)
|
|
|
393
|
|
Other loans
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
26
|
|
Cash and investments
|
|
|
251
|
|
|
|
|
|
|
|
6
|
|
|
|
257
|
|
|
|
(46
|
)
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
3,204
|
|
|
|
|
|
|
|
6
|
|
|
|
3,210
|
|
|
|
(889
|
)
|
|
|
2,321
|
|
Total interest expense
|
|
|
2,534
|
|
|
|
7
|
|
|
|
5
|
|
|
|
2,546
|
|
|
|
(667
|
)
|
|
|
1,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
670
|
|
|
|
(7
|
)
|
|
|
1
|
|
|
|
664
|
|
|
|
(222
|
)
|
|
|
442
|
|
Less: provisions for loan losses
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
(57
|
)
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
470
|
|
|
|
(7
|
)
|
|
|
1
|
|
|
|
464
|
|
|
|
(165
|
)
|
|
|
299
|
|
Fee income
|
|
|
|
|
|
|
76
|
|
|
|
46
|
|
|
|
122
|
|
|
|
|
|
|
|
122
|
|
Collections revenue
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
53
|
|
Other income
|
|
|
46
|
|
|
|
|
|
|
|
63
|
|
|
|
109
|
|
|
|
(486
|
)
|
|
|
(377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
46
|
|
|
|
129
|
|
|
|
109
|
|
|
|
284
|
|
|
|
(486
|
)
|
|
|
(202
|
)
|
Operating
expenses(1)
|
|
|
164
|
|
|
|
94
|
|
|
|
79
|
|
|
|
337
|
|
|
|
19
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest in net
earnings of subsidiaries
|
|
|
352
|
|
|
|
28
|
|
|
|
31
|
|
|
|
411
|
|
|
|
(670
|
)
|
|
|
(259
|
)
|
Income tax expense
(benefit)(2)
|
|
|
130
|
|
|
|
11
|
|
|
|
11
|
|
|
|
152
|
|
|
|
(67
|
)
|
|
|
85
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
222
|
|
|
$
|
17
|
|
|
$
|
20
|
|
|
$
|
259
|
|
|
$
|
(603
|
)
|
|
$
|
(344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating expenses for the Lending,
APG, and Corporate and Other reportable segments include
$4 million, $2 million, and $2 million,
respectively, of stock option compensation expense.
|
|
(2) |
|
Income taxes are based on a
percentage of net income before tax for each individual
reportable segment.
|
|
(3) |
|
Core Earnings
adjustments to GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007
|
|
|
|
Net Impact of
|
|
|
Net Impact of
|
|
|
|
|
|
Net Impact
|
|
|
|
|
|
|
Securitization
|
|
|
Derivative
|
|
|
Net Impact of
|
|
|
of Acquired
|
|
|
|
|
(Dollars in millions)
|
|
Accounting
|
|
|
Accounting
|
|
|
Floor Income
|
|
|
Intangibles
|
|
|
Total
|
|
|
Net interest income (loss)
|
|
$
|
(215
|
)
|
|
$
|
33
|
|
|
$
|
(40
|
)
|
|
$
|
|
|
|
$
|
(222
|
)
|
Less: provisions for loan losses
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
(158
|
)
|
|
|
33
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
(165
|
)
|
Fee income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collections revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss)
|
|
|
1
|
|
|
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
|
(486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss)
|
|
|
1
|
|
|
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
|
(486
|
)
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax Core Earnings adjustments to GAAP
|
|
$
|
(157
|
)
|
|
$
|
(454
|
)
|
|
$
|
(40
|
)
|
|
$
|
(19
|
)
|
|
|
(670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67
|
)
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings adjustments to GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
11.
|
Segment
Reporting (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Total Core
|
|
|
|
|
|
Total
|
|
(Dollars in millions)
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Earnings
|
|
|
Adjustments(3)
|
|
|
GAAP
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
702
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
702
|
|
|
$
|
(337
|
)
|
|
$
|
365
|
|
FFELP Consolidation Loans
|
|
|
1,242
|
|
|
|
|
|
|
|
|
|
|
|
1,242
|
|
|
|
(326
|
)
|
|
|
916
|
|
Private Education Loans
|
|
|
558
|
|
|
|
|
|
|
|
|
|
|
|
558
|
|
|
|
(303
|
)
|
|
|
255
|
|
Other loans
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
24
|
|
Cash and investments
|
|
|
207
|
|
|
|
|
|
|
|
3
|
|
|
|
210
|
|
|
|
(69
|
)
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
2,733
|
|
|
|
|
|
|
|
3
|
|
|
|
2,736
|
|
|
|
(1,035
|
)
|
|
|
1,701
|
|
Total interest expense
|
|
|
2,124
|
|
|
|
6
|
|
|
|
4
|
|
|
|
2,134
|
|
|
|
(771
|
)
|
|
|
1,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
609
|
|
|
|
(6
|
)
|
|
|
(1
|
)
|
|
|
602
|
|
|
|
(264
|
)
|
|
|
338
|
|
Less: provisions for loan losses
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
(13
|
)
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
529
|
|
|
|
(6
|
)
|
|
|
(1
|
)
|
|
|
522
|
|
|
|
(251
|
)
|
|
|
271
|
|
Fee income
|
|
|
|
|
|
|
122
|
|
|
|
39
|
|
|
|
161
|
|
|
|
|
|
|
|
161
|
|
Collections revenue
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
58
|
|
Other income
|
|
|
46
|
|
|
|
|
|
|
|
41
|
|
|
|
87
|
|
|
|
245
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
46
|
|
|
|
180
|
|
|
|
80
|
|
|
|
306
|
|
|
|
245
|
|
|
|
551
|
|
Operating
expenses(1)
|
|
|
156
|
|
|
|
91
|
|
|
|
70
|
|
|
|
317
|
|
|
|
37
|
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest in net
earnings of subsidiaries
|
|
|
419
|
|
|
|
83
|
|
|
|
9
|
|
|
|
511
|
|
|
|
(43
|
)
|
|
|
468
|
|
Income tax
expense(2)
|
|
|
155
|
|
|
|
31
|
|
|
|
3
|
|
|
|
189
|
|
|
|
15
|
|
|
|
204
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
264
|
|
|
$
|
51
|
|
|
$
|
6
|
|
|
$
|
321
|
|
|
$
|
(58
|
)
|
|
$
|
263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating expenses for the Lending,
APG, and Corporate and Other reportable segments include
$8 million, $4 million, and $4 million,
respectively, of stock option compensation expense.
|
|
(2) |
|
Income taxes are based on a
percentage of net income before tax for each individual
reportable segment.
|
|
(3) |
|
Core Earnings
adjustments to GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006
|
|
|
|
Net Impact of
|
|
|
Net Impact of
|
|
|
|
|
|
Net Impact
|
|
|
|
|
|
|
Securitization
|
|
|
Derivative
|
|
|
Net Impact of
|
|
|
of Acquired
|
|
|
|
|
(Dollars in millions)
|
|
Accounting
|
|
|
Accounting
|
|
|
Floor Income
|
|
|
Intangibles
|
|
|
Total
|
|
|
Net interest income (loss)
|
|
$
|
(229
|
)
|
|
$
|
18
|
|
|
$
|
(53
|
)
|
|
$
|
|
|
|
$
|
(264
|
)
|
Less: provisions for loan losses
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
(216
|
)
|
|
|
18
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
(251
|
)
|
Fee income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collections revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
376
|
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss)
|
|
|
376
|
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
245
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax Core Earnings adjustments to GAAP
|
|
$
|
160
|
|
|
$
|
(113
|
)
|
|
$
|
(53
|
)
|
|
$
|
(37
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings adjustments to GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
11.
|
Segment
Reporting (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Total Core
|
|
|
|
|
|
Total
|
|
(Dollars in millions)
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Earnings
|
|
|
Adjustments(3)
|
|
|
GAAP
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
2,143
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,143
|
|
|
$
|
(635
|
)
|
|
$
|
1,508
|
|
FFELP Consolidation Loans
|
|
|
4,167
|
|
|
|
|
|
|
|
|
|
|
|
4,167
|
|
|
|
(920
|
)
|
|
|
3,247
|
|
Private Education Loans
|
|
|
2,104
|
|
|
|
|
|
|
|
|
|
|
|
2,104
|
|
|
|
(1,043
|
)
|
|
|
1,061
|
|
Other loans
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
80
|
|
Cash and investments
|
|
|
595
|
|
|
|
|
|
|
|
15
|
|
|
|
610
|
|
|
|
(143
|
)
|
|
|
467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
9,089
|
|
|
|
|
|
|
|
15
|
|
|
|
9,104
|
|
|
|
(2,741
|
)
|
|
|
6,363
|
|
Total interest expense
|
|
|
7,125
|
|
|
|
20
|
|
|
|
16
|
|
|
|
7,161
|
|
|
|
(2,052
|
)
|
|
|
5,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
1,964
|
|
|
|
(20
|
)
|
|
|
(1
|
)
|
|
|
1,943
|
|
|
|
(689
|
)
|
|
|
1,254
|
|
Less: provisions for loan losses
|
|
|
644
|
|
|
|
|
|
|
|
1
|
|
|
|
645
|
|
|
|
(204
|
)
|
|
|
441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
1,320
|
|
|
|
(20
|
)
|
|
|
(2
|
)
|
|
|
1,298
|
|
|
|
(485
|
)
|
|
|
813
|
|
Fee income
|
|
|
|
|
|
|
244
|
|
|
|
115
|
|
|
|
359
|
|
|
|
|
|
|
|
359
|
|
Collections revenue
|
|
|
|
|
|
|
196
|
|
|
|
|
|
|
|
196
|
|
|
|
|
|
|
|
196
|
|
Other income
|
|
|
150
|
|
|
|
|
|
|
|
162
|
|
|
|
312
|
|
|
|
671
|
|
|
|
983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
150
|
|
|
|
440
|
|
|
|
277
|
|
|
|
867
|
|
|
|
671
|
|
|
|
1,538
|
|
Operating
expenses(1)
|
|
|
517
|
|
|
|
284
|
|
|
|
251
|
|
|
|
1,052
|
|
|
|
59
|
|
|
|
1,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
953
|
|
|
|
136
|
|
|
|
24
|
|
|
|
1,113
|
|
|
|
127
|
|
|
|
1,240
|
|
Income tax
expense(2)
|
|
|
352
|
|
|
|
51
|
|
|
|
9
|
|
|
|
412
|
|
|
|
87
|
|
|
|
499
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
601
|
|
|
$
|
83
|
|
|
$
|
15
|
|
|
$
|
699
|
|
|
$
|
40
|
|
|
$
|
739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating expenses for the Lending,
APG, and Corporate and Other reportable segments include
$26 million, $9 million, and $12 million,
respectively, of stock option compensation expense.
|
|
(2) |
|
Income taxes are based on a
percentage of net income before tax for each individual
reportable segment.
|
|
(3) |
|
Core Earnings
adjustments to GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
Net Impact of
|
|
|
Net Impact of
|
|
|
|
|
|
Net Impact
|
|
|
|
|
|
|
Securitization
|
|
|
Derivative
|
|
|
Net Impact of
|
|
|
of Acquired
|
|
|
|
|
(Dollars in millions)
|
|
Accounting
|
|
|
Accounting
|
|
|
Floor Income
|
|
|
Intangibles
|
|
|
Total
|
|
|
Net interest income (loss)
|
|
$
|
(649
|
)
|
|
$
|
79
|
|
|
$
|
(119
|
)
|
|
$
|
|
|
|
$
|
(689
|
)
|
Less: provisions for loan losses
|
|
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
(445
|
)
|
|
|
79
|
|
|
|
(119
|
)
|
|
|
|
|
|
|
(485
|
)
|
Fee income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collections revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
694
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss)
|
|
|
694
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
671
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax Core Earnings adjustments to GAAP
|
|
$
|
249
|
|
|
$
|
56
|
|
|
$
|
(119
|
)
|
|
$
|
(59
|
)
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings adjustments to GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
11.
|
Segment
Reporting (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Total Core
|
|
|
|
|
|
Total
|
|
(Dollars in millions)
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Earnings
|
|
|
Adjustments(3)
|
|
|
GAAP
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
2,070
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,070
|
|
|
$
|
(1,070
|
)
|
|
$
|
1,000
|
|
FFELP Consolidation Loans
|
|
|
3,385
|
|
|
|
|
|
|
|
|
|
|
|
3,385
|
|
|
|
(806
|
)
|
|
|
2,579
|
|
Private Education Loans
|
|
|
1,472
|
|
|
|
|
|
|
|
|
|
|
|
1,472
|
|
|
|
(742
|
)
|
|
|
730
|
|
Other loans
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
71
|
|
Cash and investments
|
|
|
507
|
|
|
|
|
|
|
|
5
|
|
|
|
512
|
|
|
|
(150
|
)
|
|
|
362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
7,505
|
|
|
|
|
|
|
|
5
|
|
|
|
7,510
|
|
|
|
(2,768
|
)
|
|
|
4,742
|
|
Total interest expense
|
|
|
5,687
|
|
|
|
17
|
|
|
|
6
|
|
|
|
5,710
|
|
|
|
(2,050
|
)
|
|
|
3,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
1,818
|
|
|
|
(17
|
)
|
|
|
(1
|
)
|
|
|
1,800
|
|
|
|
(718
|
)
|
|
|
1,082
|
|
Less: provisions for loan losses
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
215
|
|
|
|
(20
|
)
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
1,603
|
|
|
|
(17
|
)
|
|
|
(1
|
)
|
|
|
1,585
|
|
|
|
(698
|
)
|
|
|
887
|
|
Fee income
|
|
|
|
|
|
|
304
|
|
|
|
99
|
|
|
|
403
|
|
|
|
|
|
|
|
403
|
|
Collections revenue
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
182
|
|
Other income
|
|
|
138
|
|
|
|
|
|
|
|
95
|
|
|
|
233
|
|
|
|
1,153
|
|
|
|
1,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
138
|
|
|
|
486
|
|
|
|
194
|
|
|
|
818
|
|
|
|
1,153
|
|
|
|
1,971
|
|
Operating
expenses(1)
|
|
|
481
|
|
|
|
266
|
|
|
|
178
|
|
|
|
925
|
|
|
|
68
|
|
|
|
993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
1,260
|
|
|
|
203
|
|
|
|
15
|
|
|
|
1,478
|
|
|
|
387
|
|
|
|
1,865
|
|
Income tax
expense(2)
|
|
|
466
|
|
|
|
75
|
|
|
|
6
|
|
|
|
547
|
|
|
|
175
|
|
|
|
722
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
794
|
|
|
$
|
124
|
|
|
$
|
9
|
|
|
$
|
927
|
|
|
$
|
212
|
|
|
$
|
1,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating expenses for the Lending,
APG, and Corporate and Other reportable segments include
$26 million, $9 million, and $13 million,
respectively, of stock option compensation expense.
|
|
(2) |
|
Income taxes are based on a
percentage of net income before tax for each individual
reportable segment.
|
|
(3) |
|
Core Earnings
adjustments to GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006
|
|
|
|
Net Impact of
|
|
|
Net Impact of
|
|
|
|
|
|
Net Impact
|
|
|
|
|
|
|
Securitization
|
|
|
Derivative
|
|
|
Net Impact of
|
|
|
of Acquired
|
|
|
|
|
(Dollars in millions)
|
|
Accounting
|
|
|
Accounting
|
|
|
Floor Income
|
|
|
Intangibles
|
|
|
Total
|
|
|
Net interest income (loss)
|
|
$
|
(668
|
)
|
|
$
|
108
|
|
|
$
|
(158
|
)
|
|
$
|
|
|
|
$
|
(718
|
)
|
Less: provisions for loan losses
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
(648
|
)
|
|
|
108
|
|
|
|
(158
|
)
|
|
|
|
|
|
|
(698
|
)
|
Fee income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collections revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
1,248
|
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
1,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss)
|
|
|
1,248
|
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
1,153
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax Core Earnings adjustments to GAAP
|
|
$
|
600
|
|
|
$
|
13
|
|
|
$
|
(158
|
)
|
|
$
|
(68
|
)
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings adjustments to GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
11.
|
Segment
Reporting (Continued)
|
Summary
of Core Earnings Adjustments to GAAP
The adjustments required to reconcile from the Companys
Core Earnings results to its GAAP results of
operations relate to differing treatments for securitization
transactions, derivatives, Floor Income related to the
Companys student loans, and certain other items that
management does not consider in evaluating the Companys
operating results. The following table reflects aggregate
adjustments associated with these areas for the three and nine
months ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(Dollars in millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Core Earnings adjustments to GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact of securitization
accounting(1)
|
|
$
|
(157
|
)
|
|
$
|
160
|
|
|
$
|
249
|
|
|
$
|
600
|
|
Net impact of derivative
accounting(2)
|
|
|
(454
|
)
|
|
|
(113
|
)
|
|
|
56
|
|
|
|
13
|
|
Net impact of Floor
Income(3)
|
|
|
(40
|
)
|
|
|
(53
|
)
|
|
|
(119
|
)
|
|
|
(158
|
)
|
Net impact of acquired
intangibles(4)
|
|
|
(19
|
)
|
|
|
(37
|
)
|
|
|
(59
|
)
|
|
|
(68
|
)
|
Net tax
effect(5)
|
|
|
67
|
|
|
|
(15
|
)
|
|
|
(87
|
)
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings adjustments to GAAP
|
|
$
|
(603
|
)
|
|
$
|
(58
|
)
|
|
$
|
40
|
|
|
$
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Securitization: Under
GAAP, certain securitization transactions in the Companys
Lending operating segment are accounted for as sales of assets.
Under the Companys Core Earnings presentation
for the Lending operating segment, the Company presents all
securitization transactions on a Core Earnings basis
as long-term non-recourse financings. The upfront
gains on sale from securitization transactions as
well as ongoing servicing and securitization revenue
presented in accordance with GAAP are excluded from Core
Earnings net income and replaced by the interest income,
provisions for loan losses, and interest expense as they are
earned or incurred on the securitization loans. The Company also
excludes transactions with its off-balance sheet trusts from
Core Earnings net income as they are considered
intercompany transactions on a Core Earnings basis.
|
|
(2) |
|
Derivative
accounting: Core
Earnings net income excludes periodic unrealized gains and
losses arising primarily in the Companys Lending operating
segment, and to a lesser degree in the Companys Corporate
and Other reportable segment, that are caused primarily by the
one-sided mark-to-market derivative valuations prescribed by
SFAS No. 133 on derivatives that do not qualify for
hedge treatment under GAAP. Under the Companys
Core Earnings presentation, the Company recognizes
the economic effect of these hedges, which generally results in
any cash paid or received being recognized ratably as an expense
or revenue over the hedged items life. Core
Earnings net income also excludes the gain or loss on
equity forward contracts that under SFAS No. 133, are
required to be accounted for as derivatives and are
marked-to-market through GAAP net income.
|
|
(3) |
|
Floor
Income: The
timing and amount (if any) of Floor Income earned in the
Companys Lending operating segment is uncertain and in
excess of expected spreads. Therefore, the Company excludes such
income from Core Earnings net income when it is not
economically hedged. The Company employs derivatives, primarily
Floor Income Contracts and futures, to economically hedge Floor
Income. As discussed above in Derivative Accounting,
these derivatives do not qualify as effective accounting hedges
and therefore, under GAAP, are marked-to-market through the
gains (losses) on derivative and hedging activities,
net line on the income statement with no offsetting gain
or loss recorded for the economically hedged items. For
Core Earnings net income, the Company reverses the
fair value adjustments on the Floor Income Contracts and futures
economically hedging Floor Income and includes the amortization
of net premiums received (net of Eurodollar futures
contracts realized gains or losses) in income.
|
|
(4) |
|
Acquired
Intangibles: The
Company excludes goodwill and intangible impairment and
amortization of acquired intangibles.
|
|
(5) |
|
Net Tax
Effect: Such
tax effect is based upon the Companys Core
Earnings effective tax rate for the year. The net tax
effect results primarily from the exclusion of the permanent
income tax impact of the equity forward contracts.
|
41
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
12.
|
Merger-Related
Developments
|
On April 16, 2007, the Company announced that the Buyer
Group signed the Merger Agreement to acquire the Company for
approximately $25.3 billion or $60.00 per share of common
stock. Under the terms of the Merger Agreement, J.C.
Flowers & Co. and certain other private equity
investors, including Friedman Fleischer & Lowe, would,
upon consummation, invest approximately $4.4 billion and
own 50.2 percent, and Bank of America (NYSE: BAC) and
JPMorgan Chase (NYSE: JPM) each would, upon consummation, invest
approximately $2.2 billion and each would own
24.9 percent of the surviving entity. The remainder of the
purchase price is expected to be funded by debt. The
Companys independent board members unanimously approved
the agreement and recommended that its shareholders approve the
agreement. The Companys shareholders approved the Merger
Agreement at a special meeting of shareholders held on
August 15, 2007. (See also Merger Agreement
filed with the SEC on the Companys Current Report on
Form 8-K,
dated April 18, 2007.) Pursuant to the Merger Agreement,
the Company was not permitted to pay dividends on its common
stock prior to the consummation of the proposed transaction.
This restriction has been terminated. See below.
The termination of the waiting period under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, was granted on
June 18, 2007. On June 1, 2007, the Buyer Group filed
with the Federal Deposit Insurance Corporation
(FDIC) its Interagency Notice of Change in Control
with respect to the Sallie Mae Bank. As of the date of this
Report, the FDIC has not acted on that notice.
On July 11, 2007, the Company announced that the Buyer
Group informed the Company that it believed that legislative
proposals then pending before the U.S. House of Representatives
and U.S. Senate could result in a failure of the conditions
to the closing of the Merger to be satisfied.
On September 26, 2007, J.C. Flowers & Co., on
behalf of itself and the Buyer Group, asserted that the Buyer
Group believed that the conditions to closing under the Merger
Agreement, if the closing were to occur on that day, would not
be satisfied as a result of changes in the legislative and
economic environment. On October 2, 2007, the Buyer Group
again asserted that it believed that, if the conditions to the
closing of the Merger were required to be measured on that day,
the conditions to the Buyer Groups obligation to close
would not be satisfied, asserted that a Material Adverse
Effect (as defined in the Merger Agreement) had occurred
and made a proposal to acquire the Company at a significantly
lower price and upon substantially different terms instead of
honoring its obligations under the Merger Agreement. On
October 3, 2007, the Company notified the Buyer Group that
all conditions to closing of the Merger had been satisfied, and
set November 5, 2007 as the closing date of the Merger. In
response, the Buyer Group sent a letter to the Company on
October 8, 2007 asserting that the conditions to closing of
the Merger had not been satisfied because of, among other
things, the alleged occurrence of a Material Adverse Effect
under the terms of the Merger Agreement.
On October 8, 2007, the Company filed a lawsuit in the
Delaware Court of Chancery against the Buyer Group, which
includes J.C. Flowers & Co., JPMorgan Chase, and Bank
of America. The lawsuit seeks a declaration that the Buyer Group
repudiated the Merger Agreement, that no Material Adverse Effect
has occurred and that the Company may terminate the agreement
and collect the $900 million termination fee. On
October 12, 2007, the Company requested an expedited trial.
On October 15, 2007, the Buyer Group filed an answer and
counterclaims and filed a response opposing the Companys
request for an expedited trial. On October 22, 2007, the
Court held a scheduling conference to set a schedule for trial.
Pursuant to the Courts directions at the scheduling
conference, effective October 23, 2007, the Buyer Group
waived the Companys obligation under the Merger Agreement
to comply with, among other things, the covenants that limited
the conduct of the Companys business. The Company and
Buyer Group have since served discovery requests on
42
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
12.
|
Merger-Related
Developments (Continued)
|
each other. Under guidance from the Delaware Court of Chancery
at a scheduling hearing on November 5, 2007, the Company
has elected to pursue an expedited decision on its
October 19, 2007 motion for partial judgment on the
pleadings. Specifically, the Company is seeking an expedited
ruling that its interpretation of the Merger Agreement as it
pertains to a Material Adverse Effect is the correct
interpretation. The effect of this election will be that trial
is expected to commence on an undetermined date after
Thanksgiving 2008, rather than in mid-July 2008.
Financing
Considerations if the Merger Closes
Under the terms of the Merger Agreement, the Company would
continue to have publicly traded debt securities and as a result
would continue comprehensive financial reporting about its
business, financial condition and results of operations. Bank of
America and JPMorgan Chase have committed to provide debt
financing for the transaction and to provide additional
liquidity to the Company prior to and after the closing date,
subject to customary terms and conditions.
The Companys existing unsecured debt will remain
outstanding if the Merger is consummated, and such outstanding
debt will not be equally and ratably secured with the new
acquisition-related debt. The acquisition financing is expected
to be structured with the intent to accommodate the repayment of
any outstanding unsecured debt as it matures. If the Merger
closes, the Company expects it to have no material impact on the
Companys outstanding asset-backed debt and expects to
remain an active participant in the asset-backed securities
market.
Financing
Considerations if the Merger does not Close
On April 16, 2007, after the Company announced the
transaction, Moodys Investor Services,
Standard & Poors and Fitch Ratings placed the
long-term and short-term ratings on the Companys senior
unsecured debt under review for possible downgrade, and
secondary market credit spreads on the Companys
outstanding senior unsecured bonds widened significantly. These
factors limited the Companys access to new sources of
senior unsecured funds at borrowing costs comparable to those
available before the announcement. On June 1, 2007,
Standard & Poors downgraded the Companys
senior unsecured debt rating to BBB+ from
A. On July 2, 2007, Fitch Ratings downgraded
the Companys long-term issuer default rating
(IDR) and senior unsecured debt rating to
BBB from A+. On August 14, 2007,
Moodys downgraded the Companys corporate credit
rating to Baa1 from
A2. In the near term, the Company does
not expect to rely on the unsecured debt market as a source of
liquidity due to the high cost and restrictive covenants likely
to be associated with such financing. As a result, student loan
asset-backed securities financings are expected to be its
primary source of cost-effective financing for the immediate
future.
On April 30, 2007, Bank of America and JPMorgan Chase
provided the Company with new aggregate $30 billion
asset-backed commercial paper conduit facilities (collectively,
the Interim ABCP Facility). Generally, the Interim
ABCP Facility effectively terminates on the earliest of
(1) the Merger closing (2) 90 calendar days after
the date of termination of the Merger Agreement or
(3) 90 calendar days after February 15, 2008. If
the Merger Agreement is terminated or the Merger does not close,
the Companys liquidity could be materially adversely
affected as a result of the prospective termination of the
Companys Interim ABCP Facility. The Company is in
substantive discussions with various financing sources
concerning the replacement of the Interim ABCP Facility, should
it be necessary, and believes that this source of liquidity can
be replaced in a timely manner. In addition, any new issuance of
unsecured debt will likely be subject to much wider spreads and
more restrictive terms than the Company has historically
experienced. The Company
43
SLM
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Information at September 30, 2007 and for the three and
nine months ended
September 30, 2007 and 2006 is unaudited)
(Dollars in thousands, except per share amounts, unless
otherwise noted)
|
|
12.
|
Merger-Related
Developments (Continued)
|
expects to remain an active participant in the asset-backed
securities market if the Merger Agreement is terminated or the
Merger does not close.
Accounting
Considerations Related to the Transaction
If the Merger is consummated, the transaction would be accounted
for in accordance with SFAS No. 141, Business
Combinations. The fair values of the tangible assets and
liabilities and the intangible assets acquired by the Buyer
Group, as well as the related goodwill associated with the
transaction would be pushed down to the Company. Thus, all of
the Companys assets and liabilities would have a new basis
of accounting and therefore previous unamortized premiums,
discounts and reserves related to those assets and liabilities
would be written-off upon closing. The excess of the purchase
price over the estimated fair value of the identifiable assets
and liabilities would be recognized as goodwill. Since the
Company would be the acquired enterprise, expenses incurred in
connection with the transaction would be expensed as incurred.
Transaction fees that are contingent upon the closing would be
recognized if the transaction closes. Transaction fees that are
not contingent on the closing would be expensed as incurred, and
included in operating expense. These expenses totaled
$42 million for the nine months ended September 30,
2007. If the transaction closes, vesting would accelerate on all
stock-based compensation awards, and as a result, all deferred
compensation related to those awards would be expensed.
44
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three and nine months ended September 30, 2007 and 2006
(Dollars in millions, except per share amounts, unless otherwise
noted)
FORWARD-LOOKING
AND CAUTIONARY STATEMENTS
This quarterly report contains forward-looking statements and
information that are based on managements current
expectations as of the date of this document. When used in this
report, the words anticipate, believe,
estimate, intend and expect
and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are subject to
risks, uncertainties, assumptions and other factors that may
cause the actual results to be materially different from those
reflected in such forward-looking statements. These factors
include, among others, the occurrence of any event, change or
other circumstances that could give rise to the termination of
the merger agreement (the Merger Agreement) for the
buyer group (the Buyer Group) led by J.C.
Flowers & Co. (J.C. Flowers), Bank of
America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM) to acquire (the
Merger) SLM Corporation, more commonly known as
Sallie Mae, and its subsidiaries (collectively, the
Company); the outcome of any legal proceedings that may be
instituted by us or against us and others relating to the Merger
Agreement; the inability to complete the Merger due to the
failure to obtain shareholder approval or the failure to satisfy
other conditions to completion of the Merger; the failure to
obtain the necessary debt financing arrangements set forth in
commitment letters received in connection with the Merger; the
effect of the announcement of the Merger on our customer
relationships, operating results and business generally; the
amount of the costs, fees, expenses and charges related to the
Merger and the actual terms of certain financings that will be
obtained for the Merger; the impact of the substantial
indebtedness incurred to finance the consummation of the Merger;
increased costs, fees, expenses or other charges related to the
interim asset-backed commercial paper facilities extended by
Bank of America and JPMorgan Chase for use during the period
between executing the Merger Agreement and the closing of the
Merger, including any potential foreclosure on the student loans
under those facilities following their termination; if the
Merger Agreement is terminated, increased financing costs and
more limited liquidity; changes in the terms of student loans
and the educational credit marketplace arising from the
implementation of applicable laws and regulations and from
changes in these laws and regulations, which may reduce the
volume, average term and yields on student loans under the
Federal Family Education Loan Program (FFELP) or
result in loans being originated or refinanced under non-FFELP
programs or may affect the terms upon which banks and others
agree to sell FFELP loans to the Company. In addition, a larger
than expected increase in third party consolidations of our
FFELP loans could materially adversely affect our results of
operations. The Company could also be affected by changes in the
demand for educational financing or in financing preferences of
lenders, educational institutions, students and their families;
incorrect estimates or assumptions by management in connection
with the preparation of our consolidated financial statements;
changes in the composition of our Managed FFELP and Private
Education Loan portfolios; a significant decrease in our common
stock price, which may result in counterparties terminating
equity forward positions with us, which, in turn, could have a
materially dilutive effect on our common stock; changes in the
general interest rate environment and in the securitization
markets for education loans, which may increase the costs or
limit the availability of financings necessary to initiate,
purchase or carry education loans; changes in projections of
losses from loan defaults; changes in prepayment rates and
credit spreads; and changes in the demand for debt management
services and new laws or changes in existing laws that govern
debt management services. The Company does not undertake any
obligation to update or revise these forward-looking statements
to conform the statement to actual results or changes in the
Companys expectations.
OVERVIEW
We are the largest source of funding, delivery and servicing
support for education loans in the United States. Our primary
business is to originate, acquire and hold both federally
guaranteed student loans and Private Education Loans, which are
not federally guaranteed or privately insured. The primary
source of our
45
earnings is from net interest income earned on those student
loans as well as gains on the sales of such loans in off-balance
sheet securitization transactions. We also earn fees for
pre-default and post-default receivables management services on
student loans, such that we are engaged in every phase of the
student loan life cycle from originating and
servicing student loans to default prevention and ultimately the
collection on defaulted student loans. Through recent
acquisitions, we have expanded our receivables management
services to a number of different asset classes outside of
student loans. SLM Corporation, more commonly known as Sallie
Mae, is a holding company that operates through a number of
subsidiaries. References in this report to the
Company refer to SLM Corporation and its
subsidiaries.
We have used both internal growth and strategic acquisitions to
attain our leadership position in the education finance
marketplace. Our sales force, which delivers our products on
campuses across the country, is the largest in the student loan
industry. The core of our marketing strategy is to promote our
on-campus brands, which generate student loan originations
through our Preferred Channel. Loans generated through our
Preferred Channel are more profitable than loans acquired
through other acquisition channels because we own them earlier
in the student loans life and generally incur lower costs
to acquire such loans. We have built brand leadership through
the Sallie Mae name, the brands of our subsidiaries and those of
our lender partners. These sales and marketing efforts are
supported by the largest and most diversified servicing
capabilities in the industry, providing an unmatched array of
services to borrowers. In recent years, borrowers have been
consolidating their FFELP Stafford loans into FFELP
Consolidation Loans in much greater numbers such that FFELP
Consolidation Loans now constitute 55 percent of our
Managed loan portfolio. FFELP Consolidation Loans are marketed
directly to consumers and we believe they will continue to be an
important loan acquisition channel. We continue to expand our
offerings in the Private Education Loan marketplace that we
market both on campus and direct-to-consumers.
We have expanded into a number of fee-based businesses, most
notably, our Asset Performance Group (APG), formerly
known as Debt Management Operations (DMO), business.
Our APG business provides a wide range of accounts receivable
and collections services including student loan default aversion
services, defaulted student loan portfolio management services,
contingency collections services for student loans and other
asset classes, and accounts receivable management and collection
for purchased portfolios of receivables that are delinquent or
have been charged off by their original creditors as well as
sub-performing and non-performing mortgage loans. In the
purchased receivables business, we focus on a variety of
consumer debt types with emphasis on charged off credit card
receivables and distressed mortgage receivables. We purchase
these portfolios at a discount to their face value, and then use
both our internal collection operations coupled with third party
collection agencies to maximize the recovery on these
receivables.
We manage our business through two primary operating segments:
the Lending operating segment and the APG operating segment.
Accordingly, the results of operations of the Companys
Lending and APG segments are presented separately below under
BUSINESS SEGMENTS. These operating segments are
considered reportable segments under the Financial Accounting
Standards Boards (FASB) Statement of Financial
Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related
Information, based on quantitative thresholds applied to
the Companys financial statements.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
A discussion of the Companys critical accounting policies,
which include premiums, discounts and Borrower Benefits,
securitization accounting and Retained Interests, provisions for
loan losses, derivative accounting and the effects of
Consolidation Loan activity on estimates, can be found in the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2006. There have been no
material changes to these policies during the third quarter of
2007.
46
SELECTED
FINANCIAL DATA
Condensed
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
Increase
|
|
|
Ended
|
|
|
Increase
|
|
|
|
September 30,
|
|
|
(Decrease)
|
|
|
September 30,
|
|
|
(Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
Net interest income
|
|
$
|
442
|
|
|
$
|
338
|
|
|
$
|
104
|
|
|
|
31
|
%
|
|
$
|
1,254
|
|
|
$
|
1,082
|
|
|
$
|
172
|
|
|
|
16
|
%
|
Less: provisions for loan losses
|
|
|
143
|
|
|
|
67
|
|
|
|
76
|
|
|
|
113
|
|
|
|
441
|
|
|
|
195
|
|
|
|
246
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provisions for loan losses
|
|
|
299
|
|
|
|
271
|
|
|
|
28
|
|
|
|
10
|
|
|
|
813
|
|
|
|
887
|
|
|
|
(74
|
)
|
|
|
(8
|
)
|
Gains on student loan securitizations
|
|
|
|
|
|
|
201
|
|
|
|
(201
|
)
|
|
|
(100
|
)
|
|
|
367
|
|
|
|
902
|
|
|
|
(535
|
)
|
|
|
(59
|
)
|
Servicing and securitization revenue
|
|
|
29
|
|
|
|
187
|
|
|
|
(158
|
)
|
|
|
(84
|
)
|
|
|
414
|
|
|
|
369
|
|
|
|
45
|
|
|
|
12
|
|
Losses on loans and securities, net
|
|
|
(25
|
)
|
|
|
(13
|
)
|
|
|
(12
|
)
|
|
|
(92
|
)
|
|
|
(67
|
)
|
|
|
(25
|
)
|
|
|
(42
|
)
|
|
|
(168
|
)
|
Gains (losses) on derivative and hedging activities, net
|
|
|
(487
|
)
|
|
|
(131
|
)
|
|
|
(356
|
)
|
|
|
(272
|
)
|
|
|
(23
|
)
|
|
|
(95
|
)
|
|
|
72
|
|
|
|
76
|
|
Guarantor servicing fees
|
|
|
46
|
|
|
|
39
|
|
|
|
7
|
|
|
|
18
|
|
|
|
115
|
|
|
|
99
|
|
|
|
16
|
|
|
|
16
|
|
Debt management fees
|
|
|
76
|
|
|
|
122
|
|
|
|
(46
|
)
|
|
|
(38
|
)
|
|
|
244
|
|
|
|
304
|
|
|
|
(60
|
)
|
|
|
(20
|
)
|
Collections revenue
|
|
|
53
|
|
|
|
58
|
|
|
|
(5
|
)
|
|
|
(9
|
)
|
|
|
196
|
|
|
|
182
|
|
|
|
14
|
|
|
|
8
|
|
Other income
|
|
|
106
|
|
|
|
88
|
|
|
|
18
|
|
|
|
20
|
|
|
|
292
|
|
|
|
235
|
|
|
|
57
|
|
|
|
24
|
|
Operating expenses
|
|
|
356
|
|
|
|
354
|
|
|
|
2
|
|
|
|
1
|
|
|
|
1,111
|
|
|
|
993
|
|
|
|
118
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income (loss)
|
|
|
(259
|
)
|
|
|
468
|
|
|
|
(727
|
)
|
|
|
(155
|
)
|
|
|
1,240
|
|
|
|
1,865
|
|
|
|
(625
|
)
|
|
|
(34
|
)
|
Income taxes
|
|
|
85
|
|
|
|
204
|
|
|
|
(119
|
)
|
|
|
(58
|
)
|
|
|
499
|
|
|
|
722
|
|
|
|
(223
|
)
|
|
|
(31
|
)
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
(100
|
)
|
|
|
2
|
|
|
|
4
|
|
|
|
(2
|
)
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(344
|
)
|
|
|
263
|
|
|
|
(607
|
)
|
|
|
(231
|
)
|
|
|
739
|
|
|
|
1,139
|
|
|
|
(400
|
)
|
|
|
(35
|
)
|
Preferred stock dividends
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
26
|
|
|
|
2
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stock
|
|
$
|
(353
|
)
|
|
$
|
254
|
|
|
$
|
(607
|
)
|
|
|
(231
|
)%
|
|
$
|
711
|
|
|
$
|
1,113
|
|
|
$
|
(402
|
)
|
|
|
(36
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
(.85
|
)
|
|
$
|
.62
|
|
|
$
|
(1.47
|
)
|
|
|
(237
|
)%
|
|
$
|
1.73
|
|
|
$
|
2.71
|
|
|
$
|
(.98
|
)
|
|
|
(36
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
(.85
|
)
|
|
$
|
.60
|
|
|
$
|
(1.45
|
)
|
|
|
(242
|
)%
|
|
$
|
1.69
|
|
|
$
|
2.56
|
|
|
$
|
(.87
|
)
|
|
|
(34
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share
|
|
$
|
|
|
|
$
|
.25
|
|
|
$
|
(.25
|
)
|
|
|
(100
|
)%
|
|
$
|
.25
|
|
|
$
|
.72
|
|
|
$
|
(.47
|
)
|
|
|
(65
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
Condensed
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
(Decrease)
|
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans, net
|
|
$
|
34,108
|
|
|
$
|
24,841
|
|
|
$
|
9,267
|
|
|
|
37
|
%
|
FFELP Consolidation Loans, net
|
|
|
71,371
|
|
|
|
61,324
|
|
|
|
10,047
|
|
|
|
16
|
|
Private Education Loans, net
|
|
|
13,676
|
|
|
|
9,755
|
|
|
|
3,921
|
|
|
|
40
|
|
Other loans, net
|
|
|
1,193
|
|
|
|
1,309
|
|
|
|
(116
|
)
|
|
|
(9
|
)
|
Cash and investments
|
|
|
12,040
|
|
|
|
5,185
|
|
|
|
6,855
|
|
|
|
132
|
|
Restricted cash and investments
|
|
|
4,999
|
|
|
|
3,423
|
|
|
|
1,576
|
|
|
|
46
|
|
Retained Interest in off-balance sheet securitized loans
|
|
|
3,239
|
|
|
|
3,341
|
|
|
|
(102
|
)
|
|
|
(3
|
)
|
Goodwill and acquired intangible assets, net
|
|
|
1,354
|
|
|
|
1,372
|
|
|
|
(18
|
)
|
|
|
(1
|
)
|
Other assets
|
|
|
8,835
|
|
|
|
5,586
|
|
|
|
3,249
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
150,815
|
|
|
$
|
116,136
|
|
|
$
|
34,679
|
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
33,008
|
|
|
$
|
3,528
|
|
|
$
|
29,480
|
|
|
|
836
|
%
|
Long-term borrowings
|
|
|
108,861
|
|
|
|
104,559
|
|
|
|
4,302
|
|
|
|
4
|
|
Other liabilities
|
|
|
3,934
|
|
|
|
3,680
|
|
|
|
254
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
145,803
|
|
|
|
111,767
|
|
|
|
34,036
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in subsidiaries
|
|
|
10
|
|
|
|
9
|
|
|
|
1
|
|
|
|
11
|
|
Stockholders equity before treasury stock
|
|
|
6,184
|
|
|
|
5,401
|
|
|
|
783
|
|
|
|
14
|
|
Common stock held in treasury
|
|
|
1,182
|
|
|
|
1,041
|
|
|
|
141
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
5,002
|
|
|
|
4,360
|
|
|
|
642
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
150,815
|
|
|
$
|
116,136
|
|
|
$
|
34,679
|
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESULTS
OF OPERATIONS
Consolidated
Earnings Summary
Three
Months Ended September 30, 2007 Compared to Three Months
Ended September 30, 2006
For the three months ended September 30, 2007, our net loss
was $344 million, or $.85 diluted loss per share, compared
to net income of $263 million, or $.60 diluted earnings per
share, for the three months ended September 30, 2006. The
effective tax rate in those periods was (33) percent and
43 percent, respectively. The movement in the effective tax
rate was primarily driven by the permanent tax impact of
excluding non-taxable gains and losses on our equity forward
contracts which are marked to market through earnings under the
FASBs SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. Pre-tax income
decreased by $727 million versus the year-ago quarter,
primarily due to a $356 million increase in net losses on
derivative and hedging activities, which was comprised primarily
of unrealized losses on our equity forward contracts. Gains
(losses) on derivative and hedging activities were
($487) million in the third quarter of 2007 compared to
($131) million in the year-ago quarter.
In the third quarter of 2007, we did not complete an off-balance
sheet securitization and as a result we did not recognize any
securitization gains compared to a $201 million pre-tax
securitization gain recognized in the year-ago quarter. In the
third quarter of 2007, servicing and securitization income was
$29 million, a $158 million decrease over the year-ago
quarter. This decrease was primarily due to an $86 million
increase in impairment losses and to a $62 million increase
in the unrealized fair value loss adjustment related to a
portion of our Retained Interests, as discussed above. Both of
these changes were primarily a result of FFELP Stafford
consolidation activity, Private Education Loan consolidation
activity and the timing of expected default activity.
48
Net interest income after provisions for loan losses increased
by $28 million versus the third quarter of 2006. The
increase was due to the $103 million increase in net
interest income, offset by a $76 million increase in the
provisions for loan losses. The increase in net interest income
was primarily due to an increase of $35 billion in the
average balance of on-balance sheet interest earning assets,
offset by a decrease in the student loan spread, including the
impact of Wholesale Consolidation Loans (see NET INTEREST
INCOME Student Loan Spread Analysis
On-Balance Sheet). The provisions for Private
Education Loan losses and FFELP loan losses increased by
$42 million and $34 million, respectively, versus the
year-ago quarter. The increase in the provision for Private
Education Loan losses was primarily due to a further seasoning
and mix of the portfolio and an increase in delinquencies and
charge-offs related in part to operational challenges
encountered from a call center move (see LENDING
SEGMENT Allowance for Private Education Loan
Losses). The increase in the provision for FFELP loan
losses was primarily due to the repeal of the Exceptional
Performer program due to the passage of the College Cost
Reduction and Access Act of 2007 on September 27, 2007,
which resulted in a higher Risk Sharing percentage for the
Company (see RECENT DEVELOPMENTS Other
Developments Exceptional Performer).
Fee and other income and collections revenue decreased
$26 million from $307 million in the third quarter of
2006 to $281 million in the third quarter of 2007. This
decrease was primarily due to legislative changes in the federal
regulations governing the rehabilitated FFELP loan policy in the
third quarter of 2006 that resulted in a one-time acceleration
of revenue recognized in the third quarter of 2006. Operating
expenses of $356 million for the third quarter of 2007
remained relatively consistent compared to $354 million for
the third quarter of 2006.
Nine
Months Ended September 30, 2007 Compared to Nine Months
Ended September 30, 2006
For the nine months ended September 30, 2007, our net
income decreased by 35 percent to $739 million ($1.69
diluted earnings per share) from net income of $1.1 billion
($2.56 diluted earnings per share) in the year-ago period. The
effective tax rate in those periods was 40 percent and
39 percent, respectively. Pre-tax income decreased by
$625 million versus the nine months ended
September 30, 2006, primarily due to a $535 million
decrease in gains on student loan securitizations. The
securitization gains in the first nine months of 2007 were the
result of one Private Education Loan securitization that had a
pre-tax gain of $367 million or 18.4 percent of the
amount securitized. In the year-ago period, there were three
Private Education Loan securitizations that had total pre-tax
gains of $830 million or 16.3 percent of the amount
securitized.
In the first nine months of 2007, servicing and securitization
income was $414 million, a $45 million increase over
the nine months ended September 30, 2006. This increase can
primarily be attributed to the increase of higher yielding
Private Education Loan Residual Interests as a percentage of the
total Residual Interest.
For the nine months ended September 30, 2007, net losses on
derivative and hedging activities were $23 million, a
decrease of $72 million from the net losses of
$95 million in the year-ago period. The change in net
losses was not caused by any significant changes of specific
derivative and hedging relationships, but was generally due to
changes in the fair value of derivatives that were
non-qualifying hedges.
Net interest income after provisions for loan losses decreased
by $74 million versus the nine months ended
September 30, 2006. The decrease was due to the
year-over-year increase in the provision for loan losses of
$246 million, which offset the year-over-year
$172 million increase in net interest income. The increase
in net interest income was primarily due to an increase of
$28 billion in the average balance of on-balance sheet
interest earning assets offset by a decrease in the student loan
spread, including the impact of Wholesale Consolidation Loans
(see NET INTEREST INCOME Student Loan Spread
Analysis On-Balance Sheet). The
provisions for Private Education Loan losses and FFELP loan
losses increased by $205 million and $40 million,
respectively. The increase in the provision for Private
Education Loan losses was primarily due to a further seasoning
and mix of the portfolio and an increase in delinquencies and
charge-offs related in part to operational challenges
encountered from a call center move (see LENDING
SEGMENT Allowance for Private Education Loan
Losses). The increase in the provision for FFELP loan
49
losses was primarily due to the repeal of the Exceptional
Performer program as discussed above (see RECENT
DEVELOPMENTS Other Developments
Exceptional Performer).
Fee and other income and collections revenue increased
$27 million from $820 million for the nine months
ended September 30, 2006 to $847 million for the nine
months ended September 30, 2007. Operating expenses
increased by $117 million year-over-year. This increase in
operating expenses was primarily due to $42 million in
Merger-related expenses incurred in 2007 and Upromise costs of
$65 million in 2007 versus $8 million in 2006 due to
the Upromise acquisition occurring in August 2006.
NET
INTEREST INCOME
Average
Balance Sheets
The following table reflects the rates earned on interest
earning assets and paid on interest bearing liabilities for the
three and nine months ended September 30, 2007 and 2006.
This table reflects the net interest margin for the entire
Company on a consolidated basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Average Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
32,576
|
|
|
|
6.64
|
%
|
|
$
|
21,194
|
|
|
|
6.83
|
%
|
|
$
|
30,106
|
|
|
|
6.70
|
%
|
|
$
|
20,433
|
|
|
|
6.54
|
%
|
FFELP Consolidation Loans
|
|
|
69,289
|
|
|
|
6.56
|
|
|
|
54,968
|
|
|
|
6.61
|
|
|
|
66,590
|
|
|
|
6.52
|
|
|
|
53,829
|
|
|
|
6.41
|
|
Private Education Loans
|
|
|
12,706
|
|
|
|
12.26
|
|
|
|
8,079
|
|
|
|
12.51
|
|
|
|
11,664
|
|
|
|
12.16
|
|
|
|
8,348
|
|
|
|
11.69
|
|
Other loans
|
|
|
1,192
|
|
|
|
8.65
|
|
|
|
1,133
|
|
|
|
8.59
|
|
|
|
1,272
|
|
|
|
8.46
|
|
|
|
1,132
|
|
|
|
8.44
|
|
Cash and investments
|
|
|
14,625
|
|
|
|
5.73
|
|
|
|
9,915
|
|
|
|
5.65
|
|
|
|
10,861
|
|
|
|
5.75
|
|
|
|
8,618
|
|
|
|
5.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
130,388
|
|
|
|
7.06
|
%
|
|
|
95,289
|
|
|
|
7.08
|
%
|
|
|
120,493
|
|
|
|
7.06
|
%
|
|
|
92,360
|
|
|
|
6.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest earning assets
|
|
|
9,928
|
|
|
|
|
|
|
|
8,707
|
|
|
|
|
|
|
|
9,612
|
|
|
|
|
|
|
|
8,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
140,316
|
|
|
|
|
|
|
$
|
103,996
|
|
|
|
|
|
|
$
|
130,105
|
|
|
|
|
|
|
$
|
100,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
21,052
|
|
|
|
6.06
|
%
|
|
$
|
3,994
|
|
|
|
5.70
|
%
|
|
$
|
9,894
|
|
|
|
6.16
|
%
|
|
$
|
4,186
|
|
|
|
5.18
|
%
|
Long-term borrowings
|
|
|
109,887
|
|
|
|
5.63
|
|
|
|
91,668
|
|
|
|
5.65
|
|
|
|
111,082
|
|
|
|
5.60
|
|
|
|
88,803
|
|
|
|
5.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
130,939
|
|
|
|
5.70
|
%
|
|
|
95,662
|
|
|
|
5.65
|
%
|
|
|
120,976
|
|
|
|
5.65
|
%
|
|
|
92,989
|
|
|
|
5.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities
|
|
|
4,315
|
|
|
|
|
|
|
|
4,110
|
|
|
|
|
|
|
|
4,301
|
|
|
|
|
|
|
|
3,772
|
|
|
|
|
|
Stockholders equity
|
|
|
5,062
|
|
|
|
|
|
|
|
4,224
|
|
|
|
|
|
|
|
4,828
|
|
|
|
|
|
|
|
4,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
140,316
|
|
|
|
|
|
|
$
|
103,996
|
|
|
|
|
|
|
$
|
130,105
|
|
|
|
|
|
|
$
|
100,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
1.34
|
%
|
|
|
|
|
|
|
1.41
|
%
|
|
|
|
|
|
|
1.39
|
%
|
|
|
|
|
|
|
1.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
Rate/Volume
Analysis
The following rate/volume analysis illustrates the relative
contribution of changes in interest rates and asset volumes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
(Decrease)
|
|
|
|
Increase
|
|
|
Attributable to Change in
|
|
|
|
(Decrease)
|
|
|
Rate
|
|
|
Volume
|
|
|
Three months ended September 30, 2007 vs. three months
ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
620
|
|
|
$
|
(29
|
)
|
|
$
|
649
|
|
Interest expense
|
|
|
517
|
|
|
|
12
|
|
|
|
505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
103
|
|
|
$
|
(41
|
)
|
|
$
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2007 vs. nine months
ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
1,621
|
|
|
$
|
142
|
|
|
$
|
1,479
|
|
Interest expense
|
|
|
1,449
|
|
|
|
350
|
|
|
|
1,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
172
|
|
|
$
|
(208
|
)
|
|
$
|
380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in net interest income are primarily due to
fluctuations in the student loan spread discussed below, as well
as the growth of our student loan portfolio and the level of
cash and investments we may hold on our balance sheet for
liquidity purposes. In connection with the Merger Agreement, we
increased our liquidity portfolio to higher than historical
levels. The liquidity portfolio has a negative net interest
margin, so the increase in this portfolio reduced net interest
income by approximately $8 million for the third quarter of
2007. See also Student Loans Student Loan
Spread Student Loan Spread Analysis
On-Balance Sheet.
Student
Loans
For both federally insured student loans and Private Education
Loans, we account for premiums paid, discounts received and
certain origination costs incurred on the origination and
acquisition of student loans in accordance with
SFAS No. 91, Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases. The unamortized and
unaccreted portion of the premiums and discounts, respectively,
is included in the carrying value of the student loan on the
consolidated balance sheet. We recognize income on our student
loan portfolio based on the expected yield of the student loan
after giving effect to the amortization of purchase premiums and
the accretion of student loan discounts, as well as interest
rate reductions and rebates expected to be earned through
Borrower Benefits programs. Discounts on Private Education Loans
are deferred and accreted to income over the lives of the
student loans. In the table below, this accretion of discounts
is netted with the amortization of the premiums.
Student
Loan Spread
An important performance measure closely monitored by management
is the student loan spread. The student loan spread is the
difference between the income earned on the student loan assets
and the interest paid on the debt funding those assets. A number
of factors can affect the overall student loan spread such as:
|
|
|
|
|
the mix of student loans in the portfolio, with FFELP
Consolidation Loans having the lowest spread and Private
Education Loans having the highest spread;
|
|
|
|
the premiums paid, borrower fees charged and capitalized costs
incurred to acquire student loans which impact the spread
through subsequent amortization;
|
|
|
|
the type and level of Borrower Benefits programs for which the
student loans are eligible;
|
51
|
|
|
|
|
the level of Floor Income and, when considering the Core
Earnings spread, the amount of Floor Income-eligible loans
that have been hedged through Floor Income Contracts; and
|
|
|
|
funding and hedging costs.
|
The student loan spread is highly susceptible to liquidity,
funding and interest rate risk. These risks are discussed
separately in our 2006 Annual Report on
Form 10-K
at LIQUIDITY AND CAPITAL RESOURCES and in the
RISK FACTORS discussion.
Student
Loan Spread Analysis On-Balance Sheet
The following table analyzes the reported earnings from student
loans on-balance sheet, before provision and before the effect
of Wholesale Consolidation Loans. For an analysis of our student
loan spread for the entire portfolio of Managed student loans on
a similar basis to the on-balance sheet analysis, see
LENDING BUSINESS SEGMENT Student Loan Spread
Analysis Core Earnings Basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
On-Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loan yield, before Floor Income
|
|
|
8.13
|
%
|
|
|
8.17
|
%
|
|
|
8.12
|
%
|
|
|
7.86
|
%
|
Gross Floor Income
|
|
|
.04
|
|
|
|
.02
|
|
|
|
.03
|
|
|
|
.04
|
|
Consolidation Loan Rebate Fees
|
|
|
(.60
|
)
|
|
|
(.67
|
)
|
|
|
(.61
|
)
|
|
|
(.67
|
)
|
Borrower Benefits
|
|
|
(.11
|
)
|
|
|
(.13
|
)
|
|
|
(.12
|
)
|
|
|
(.12
|
)
|
Premium and discount amortization
|
|
|
(.15
|
)
|
|
|
(.15
|
)
|
|
|
(.16
|
)
|
|
|
(.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loan net yield
|
|
|
7.31
|
|
|
|
7.24
|
|
|
|
7.26
|
|
|
|
6.97
|
|
Student loan cost of funds
|
|
|
(5.62
|
)
|
|
|
(5.64
|
)
|
|
|
(5.59
|
)
|
|
|
(5.25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loan spread, before Interim ABCP Facility
fees(1)(2)
|
|
|
1.69
|
|
|
|
1.60
|
|
|
|
1.67
|
|
|
|
1.72
|
|
Interim ABCP Facility
fees(2)
|
|
|
(.06
|
)
|
|
|
|
|
|
|
(.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loan
spread(1)(3)
|
|
|
1.63
|
%
|
|
|
1.60
|
%
|
|
|
1.63
|
%
|
|
|
1.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet student
loans(1)
|
|
$
|
106,825
|
|
|
$
|
83,909
|
|
|
$
|
101,891
|
|
|
$
|
82,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Excludes
the effect of the Wholesale Consolidation Loan portfolio on the
student loan spread and average balances.
|
(2) The
Interim ABCP Facility fees are the commitment and liquidity fees
that related to a new financing facility in connection with the
Merger. See Note 12, Merger-Related
Developments to the consolidated financial statements.
|
(3) Student
loan spread including the effect of
Wholesale Consolidation Loans
|
|
|
1.53
|
%
|
|
|
1.59
|
%
|
|
|
1.54
|
%
|
|
|
1.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above shows the various items that impact our student
loan spread. Gross Floor Income is impacted by the level of
interest rates, and the percentage of the FFELP portfolio
eligible to earn Floor Income. The spread impact from
Consolidation Loan Rebate Fees fluctuates as a function of the
percentage of FFELP Consolidation Loans on our balance sheet.
Borrower Benefits are generally impacted by the amount of
Borrower Benefits being offered as well as the payment behavior
of the underlying loans. Premium and discount amortization is
generally impacted by the prices we pay for loans and amounts
capitalized related to such purchases or originations. Premium
and discount amortization is also impacted by prepayment
behavior of the underlying loans.
In the second half of 2006, we implemented a new loan
acquisition strategy under which we began purchasing FFELP
Consolidation Loans outside of our normal origination channels,
primarily via the spot market. We refer to this volume as our
Wholesale Consolidation Channel. FFELP Consolidation Loans
acquired through this channel are considered incremental volume
to our core acquisition channels, which are
52
focused on the retail marketplace with an emphasis on our
internal brand strategy. Wholesale Consolidation Loans generally
command significantly higher premiums than our originated FFELP
Consolidation Loans, and as a result, Wholesale Consolidation
Loans have lower spreads. Since Wholesale Consolidation Loans
are acquired outside of our core loan acquisition channels and
have different yields and return expectations than the rest of
our FFELP Consolidation Loan portfolio, we have excluded the
impact of the Wholesale Consolidation Loan volume from the
student loan spread analysis to provide more meaningful
period-over-period comparisons on the performance of our student
loan portfolio.
FEDERAL
AND STATE TAXES
The Company is subject to federal and state income taxes. Our
effective tax rate for the three months ended September 30,
2007 was (33) percent versus 43 percent for the three
months ended September 30, 2006 and for the nine months
ended September 30, 2007 was 40 percent versus
39 percent for the nine months ended September 30,
2006. The effective tax rate reflects the permanent impact of
the exclusion of the gains or losses on equity forward contracts
recognized under SFAS No. 150.
BUSINESS
SEGMENTS
The results of operations of the Companys Lending and
Asset Performance Group (APG) operating segments are
presented below. These defined business segments operate in
distinct business environments and are considered reportable
segments under SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, based
on quantitative thresholds applied to the Companys
consolidated financial statements. In addition, we provide other
complementary products and services, including guarantor and
student loan servicing, through smaller operating segments that
do not meet such thresholds and are aggregated in the Corporate
and Other reportable segment for financial reporting purposes.
The management reporting process measures the performance of the
Companys operating segments based on the management
structure of the Company as well as the methodology used by
management to evaluate performance and allocate resources. In
accordance with the Rules and Regulations of the Securities and
Exchange Commission (SEC), we prepare financial
statements in accordance with generally accepted accounting
principles in the United States of America (GAAP).
In addition to evaluating the Companys GAAP-based
financial information, management, including the Companys
chief operation decision maker, evaluates the performance of the
Companys operating segments based on their profitability
on a basis that, as allowed under SFAS No. 131,
differs from GAAP. We refer to managements basis of
evaluating our segment results as Core Earnings
presentations for each business segment and we refer to these
performance measures in our presentations with credit rating
agencies and lenders. Accordingly, information regarding the
Companys reportable segments is provided herein based on
Core Earnings, which are discussed in detail below.
Our Core Earnings are not defined terms within GAAP
and may not be comparable to similarly titled measures reported
by other companies. Core Earnings net income
reflects only current period adjustments to GAAP net income as
described below. Unlike financial accounting, there is no
comprehensive, authoritative guidance for management reporting
and as a result, our management reporting is not necessarily
comparable with similar information for any other financial
institution. The Companys operating segments are defined
by the products and services they offer or the types of
customers they serve, and they reflect the manner in which
financial information is currently evaluated by management.
Intersegment revenues and expenses are netted within the
appropriate financial statement line items consistent with the
income statement presentation provided to management. Changes in
management structure or allocation methodologies and procedures
may result in changes in reported segment financial information.
Core Earnings are the primary financial performance
measures used by management to develop the Companys
financial plans, track results, and establish corporate
performance targets and incentive compensation. While Core
Earnings are not a substitute for reported results under
GAAP, the Company relies on Core Earnings in
operating its business because Core Earnings permit
management to make meaningful period-to-period comparisons of
the operational and performance indicators that are most closely
assessed by
53
management. Management believes this information provides
additional insight into the financial performance of the core
business activities of our operating segments. Accordingly, the
tables presented below reflect Core Earnings which
is reviewed and utilized by management to manage the business
for each of the Companys reportable segments. A further
discussion regarding Core Earnings is included under
Limitations of Core Earnings and
Pre-tax Differences between Core Earnings and
GAAP by Business Segment.
The LENDING BUSINESS SEGMENT section includes all
discussion of income and related expenses associated with the
net interest margin, the student loan spread and its components,
the provisions for loan losses, and other fees earned on our
Managed portfolio of student loans. The ASSET PERFORMANCE
GROUP (APG) BUSINESS SEGMENT section reflects
the fees earned and expenses incurred in providing accounts
receivable management and collection services. Our
CORPORATE AND OTHER BUSINESS SEGMENT section
includes our remaining fee businesses and other corporate
expenses that do not pertain directly to the primary operating
segments identified above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
729
|
|
|
$
|
|
|
|
$
|
|
|
FFELP Consolidation Loans
|
|
|
1,445
|
|
|
|
|
|
|
|
|
|
Private Education Loans
|
|
|
753
|
|
|
|
|
|
|
|
|
|
Other loans
|
|
|
26
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
|
251
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
3,204
|
|
|
|
|
|
|
|
6
|
|
Total interest expense
|
|
|
2,534
|
|
|
|
7
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
670
|
|
|
|
(7
|
)
|
|
|
1
|
|
Less: provisions for loan losses
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
470
|
|
|
|
(7
|
)
|
|
|
1
|
|
Fee income
|
|
|
|
|
|
|
76
|
|
|
|
46
|
|
Collections revenue
|
|
|
|
|
|
|
53
|
|
|
|
|
|
Other income
|
|
|
46
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
46
|
|
|
|
129
|
|
|
|
109
|
|
Operating
expenses(1)
|
|
|
164
|
|
|
|
94
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
352
|
|
|
|
28
|
|
|
|
31
|
|
Income tax
expense(2)
|
|
|
130
|
|
|
|
11
|
|
|
|
11
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income
|
|
$
|
222
|
|
|
$
|
17
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating expenses for the Lending,
APG, and Corporate and Other reportable segments include
$4 million, $2 million, and $2 million,
respectively, of stock option compensation expense.
|
|
(2) |
|
Income taxes are based on a
percentage of net income before tax for each individual
reportable segment.
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
702
|
|
|
$
|
|
|
|
$
|
|
|
FFELP Consolidation Loans
|
|
|
1,242
|
|
|
|
|
|
|
|
|
|
Private Education Loans
|
|
|
558
|
|
|
|
|
|
|
|
|
|
Other loans
|
|
|
24
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
|
207
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
2,733
|
|
|
|
|
|
|
|
3
|
|
Total interest expense
|
|
|
2,124
|
|
|
|
6
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
609
|
|
|
|
(6
|
)
|
|
|
(1
|
)
|
Less: provisions for loan losses
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
529
|
|
|
|
(6
|
)
|
|
|
(1
|
)
|
Fee income
|
|
|
|
|
|
|
122
|
|
|
|
39
|
|
Collections revenue
|
|
|
|
|
|
|
58
|
|
|
|
|
|
Other income
|
|
|
46
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
46
|
|
|
|
180
|
|
|
|
80
|
|
Operating
expenses(1)
|
|
|
156
|
|
|
|
91
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
419
|
|
|
|
83
|
|
|
|
9
|
|
Income tax
expense(2)
|
|
|
155
|
|
|
|
31
|
|
|
|
3
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income
|
|
$
|
264
|
|
|
$
|
51
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating expenses for the Lending,
APG, and Corporate and Other reportable segments include
$8 million, $4 million, and $4 million,
respectively, of stock option compensation expense.
|
|
(2) |
|
Income taxes are based on a
percentage of net income before tax for each individual
reportable segment.
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
2,143
|
|
|
$
|
|
|
|
$
|
|
|
FFELP Consolidation Loans
|
|
|
4,167
|
|
|
|
|
|
|
|
|
|
Private Education Loans
|
|
|
2,104
|
|
|
|
|
|
|
|
|
|
Other loans
|
|
|
80
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
|
595
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
9,089
|
|
|
|
|
|
|
|
15
|
|
Total interest expense
|
|
|
7,125
|
|
|
|
20
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
1,964
|
|
|
|
(20
|
)
|
|
|
(1
|
)
|
Less: provisions for loan losses
|
|
|
644
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
1,320
|
|
|
|
(20
|
)
|
|
|
(2
|
)
|
Fee income
|
|
|
|
|
|
|
244
|
|
|
|
115
|
|
Collections revenue
|
|
|
|
|
|
|
196
|
|
|
|
|
|
Other income
|
|
|
150
|
|
|
|
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
150
|
|
|
|
440
|
|
|
|
277
|
|
Operating
expenses(1)
|
|
|
517
|
|
|
|
284
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
953
|
|
|
|
136
|
|
|
|
24
|
|
Income tax
expense(2)
|
|
|
352
|
|
|
|
51
|
|
|
|
9
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income
|
|
$
|
601
|
|
|
$
|
83
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating expenses for the Lending,
APG, and Corporate and Other reportable segments include
$26 million, $9 million, and $12 million,
respectively, of stock option compensation expense.
|
|
(2) |
|
Income taxes are based on a
percentage of net income before tax for each individual
reportable segment.
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
2,070
|
|
|
$
|
|
|
|
$
|
|
|
FFELP Consolidation Loans
|
|
|
3,385
|
|
|
|
|
|
|
|
|
|
Private Education Loans
|
|
|
1,472
|
|
|
|
|
|
|
|
|
|
Other loans
|
|
|
71
|
|
|
|
|
|
|
|
|
|
Cash and investments
|
|
|
507
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
7,505
|
|
|
|
|
|
|
|
5
|
|
Total interest expense
|
|
|
5,687
|
|
|
|
17
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss)
|
|
|
1,818
|
|
|
|
(17
|
)
|
|
|
(1
|
)
|
Less: provisions for loan losses
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
|
1,603
|
|
|
|
(17
|
)
|
|
|
(1
|
)
|
Fee income
|
|
|
|
|
|
|
304
|
|
|
|
99
|
|
Collections revenue
|
|
|
|
|
|
|
182
|
|
|
|
|
|
Other income
|
|
|
138
|
|
|
|
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
138
|
|
|
|
486
|
|
|
|
194
|
|
Operating
expenses(1)
|
|
|
481
|
|
|
|
266
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
1,260
|
|
|
|
203
|
|
|
|
15
|
|
Income tax
expense(2)
|
|
|
466
|
|
|
|
75
|
|
|
|
6
|
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income
|
|
$
|
794
|
|
|
$
|
124
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating expenses for the Lending,
APG, and Corporate and Other reportable segments include
$26 million, $9 million, and $13 million,
respectively, of stock option compensation expense.
|
|
(2) |
|
Income taxes are based on a
percentage of net income before tax for each individual
reportable segment.
|
Limitations
of Core Earnings
While GAAP provides a uniform, comprehensive basis of
accounting, for the reasons described above, management believes
that Core Earnings are an important additional tool
for providing a more complete understanding of the
Companys results of operations. Nevertheless, Core
Earnings are subject to certain general and specific
limitations that investors should carefully consider. For
example, as stated above, unlike financial accounting, there is
no comprehensive, authoritative guidance for management
reporting. Our Core Earnings are not defined terms
within GAAP and may not be comparable to similarly titled
measures reported by other companies. Unlike GAAP, Core
Earnings reflect only current period adjustments to GAAP.
Accordingly, the Companys Core Earnings
presentation does not represent a comprehensive basis of
accounting. Investors, therefore, may not compare our
Companys performance with that of other financial services
companies based upon Core Earnings. Core
Earnings results are only meant to supplement GAAP results
by providing additional information regarding the operational
and performance indicators that are most closely used by
management, the Companys board of directors, rating
agencies and lenders to assess performance.
Other limitations arise from the specific adjustments that
management makes to GAAP results to derive Core
Earnings results. For example, in reversing the unrealized
gains and losses that result from SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, on derivatives that do not
57
qualify for hedge treatment, as well as on
derivatives that do qualify but are in part ineffective because
they are not perfect hedges, we focus on the long-term economic
effectiveness of those instruments relative to the underlying
hedged item and isolate the effects of interest rate volatility,
changing credit spreads and changes in our stock price on the
fair value of such instruments during the period. Under GAAP,
the effects of these factors on the fair value of the derivative
instruments (but not on the underlying hedged item) tend to show
more volatility in the short term. While our presentation of our
results on a Core Earnings basis provides important
information regarding the performance of our Managed portfolio,
a limitation of this presentation is that we are presenting the
ongoing spread income on loans that have been sold to a trust
managed by us. While we believe that our Core
Earnings presentation presents the economic substance of
our Managed loan portfolio, it understates earnings volatility
from securitization gains. Our Core Earnings results
exclude certain Floor Income, which is real cash income, from
our reported results and therefore may understate earnings in
certain periods. Managements financial planning and
valuation of operating results, however, does not take into
account Floor Income because of its inherent uncertainty, except
when it is economically hedged through Floor Income Contracts.
Pre-tax
differences between Core Earnings and GAAP by
Business Segment
Our Core Earnings are the primary financial
performance measures used by management to evaluate performance
and to allocate resources. Accordingly, financial information is
reported to management on a Core Earnings basis by
reportable segment, as these are the measures used regularly by
our chief operating decision maker. Our Core
Earnings are used in developing our financial plans and
tracking results, and also in establishing corporate performance
targets and determining incentive compensation. Management
believes this information provides additional insight into the
financial performance of the Companys core business
activities. Core Earnings net income reflects only
current period adjustments to GAAP net income, as described in
the more detailed discussion of the differences between
Core Earnings and GAAP that follows, which includes
further detail on each specific adjustment required to reconcile
our Core Earnings segment presentation to our GAAP
earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Core Earnings adjustments to GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact of securitization accounting
|
|
$
|
(157
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
160
|
|
|
$
|
|
|
|
$
|
|
|
Net impact of derivative accounting
|
|
|
4
|
|
|
|
|
|
|
|
(458
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
(99
|
)
|
Net impact of Floor Income
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
Amortization of acquired intangibles
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(9
|
)
|
|
|
(30
|
)
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings adjustments to GAAP
|
|
$
|
(198
|
)
|
|
$
|
(5
|
)
|
|
$
|
(467
|
)
|
|
$
|
63
|
|
|
$
|
(5
|
)
|
|
$
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Lending
|
|
|
APG
|
|
|
and Other
|
|
|
Core Earnings adjustments to GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impact of securitization accounting
|
|
$
|
249
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
600
|
|
|
$
|
|
|
|
$
|
|
|
Net impact of derivative accounting
|
|
|
130
|
|
|
|
|
|
|
|
(74
|
)
|
|
|
195
|
|
|
|
|
|
|
|
(182
|
)
|
Net impact of Floor Income
|
|
|
(119
|
)
|
|
|
|
|
|
|
|
|
|
|
(158
|
)
|
|
|
|
|
|
|
|
|
Amortization of acquired intangibles
|
|
|
(23
|
)
|
|
|
(14
|
)
|
|
|
(22
|
)
|
|
|
(51
|
)
|
|
|
(13
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings adjustments to GAAP
|
|
$
|
237
|
|
|
$
|
(14
|
)
|
|
$
|
(96
|
)
|
|
$
|
586
|
|
|
$
|
(13
|
)
|
|
$
|
(186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1) Securitization: Under GAAP, certain
securitization transactions in our Lending operating segment are
accounted for as sales of assets. Under the Companys
Core Earnings presentation for the Lending
58
operating segment, we present all securitization transactions on
a Core Earnings basis as long-term non- recourse
financings. The upfront gains on sale from
securitization transactions as well as ongoing servicing
and securitization revenue presented in accordance with
GAAP are excluded from Core Earnings net income and
replaced by the interest income, provisions for loan losses, and
interest expense as they are earned or incurred on the
securitization loans. We also exclude transactions with our
off-balance sheet trusts from Core Earnings net
income as they are considered intercompany transactions on a
Core Earnings basis.
The following table summarizes the securitization adjustments in
our Lending operating segment for the three and nine months
ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Core Earnings securitization adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on securitized loans, after provisions for
loan losses
|
|
$
|
(158
|
)
|
|
$
|
(216
|
)
|
|
$
|
(445
|
)
|
|
$
|
(647
|
)
|
Gains on student loan securitizations
|
|
|
|
|
|
|
201
|
|
|
|
367
|
|
|
|
902
|
|
Servicing and securitization revenue
|
|
|
29
|
|
|
|
187
|
|
|
|
414
|
|
|
|
369
|
|
Intercompany transactions with off-balance sheet trusts
|
|
|
(28
|
)
|
|
|
(12
|
)
|
|
|
(87
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings securitization adjustments
|
|
$
|
(157
|
)
|
|
$
|
160
|
|
|
$
|
249
|
|
|
$
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2) Derivative Accounting: Core
Earnings net income excludes periodic unrealized gains and
losses arising primarily in our Lending operating segment, and
to a lesser degree in our Corporate and Other reportable
segment, that are caused primarily by the one-sided
mark-to-market derivative valuations prescribed by
SFAS No. 133 on derivatives that do not qualify for
hedge treatment under GAAP. Under the Companys
Core Earnings presentation, we recognize the
economic effect of these hedges, which generally results in any
cash paid or received being recognized ratably as an expense or
revenue over the hedged items life. Core
Earnings also excludes the gain or loss on equity forward
contracts that under SFAS No. 133, are required to be
accounted for as derivatives and are marked-to-market through
earnings.
SFAS No. 133 requires that changes in the fair value
of derivative instruments be recognized currently in earnings
unless specific hedge accounting criteria, as specified by
SFAS No. 133, are met. We believe that our derivatives
are effective economic hedges, and as such, are a critical
element of our interest rate risk management strategy. However,
some of our derivatives, primarily Floor Income Contracts,
certain basis swaps and equity forward contracts (discussed in
detail below), do not qualify for hedge treatment as
defined by SFAS No. 133, and the stand-alone
derivative must be marked-to-market in the income statement with
no consideration for the corresponding change in fair value of
the hedged item. The gains and losses described in gains
(losses) on derivative and hedging activities, net are
primarily caused by interest rate and foreign currency exchange
rate volatility, changing credit spreads and changes in our
stock price during the period as well as the volume and term of
derivatives not receiving hedge treatment.
Our Floor Income Contracts are written options that must meet
more stringent requirements than other hedging relationships to
achieve hedge effectiveness under SFAS No. 133.
Specifically, our Floor Income Contracts do not qualify for
hedge accounting treatment because the paydown of principal of
the student loans underlying the Floor Income embedded in those
student loans does not exactly match the change in the notional
amount of our written Floor Income Contracts. Under
SFAS No. 133, the upfront payment is deemed a
liability and changes in fair value are recorded through income
throughout the life of the contract. The change in the value of
Floor Income Contracts is primarily caused by changing interest
rates that cause the amount of Floor Income earned on the
underlying student loans and paid to the counterparties to vary.
This is economically offset by the change in value of the
student loan portfolio, including our Retained Interests,
earning Floor Income but that offsetting change in value is not
recognized under SFAS No. 133. We believe the Floor
Income Contracts are economic hedges because they effectively
fix the amount of Floor Income earned over the contract period,
thus eliminating the timing and uncertainty that changes in
interest rates can
59
have on Floor Income for that period. Prior to
SFAS No. 133, we accounted for Floor Income Contracts
as hedges and amortized the upfront cash compensation ratably
over the lives of the contracts.
Basis swaps are used to convert floating rate debt from one
interest rate index to another to better match the interest rate
characteristics of the assets financed by that debt. We
primarily use basis swaps to change the index of our floating
rate debt to better match the cash flows of our student loan
assets that are primarily indexed to a commercial paper, Prime
or Treasury bill index. In addition, we use basis swaps to
convert debt indexed to the Consumer Price Index
(CPI) to
3-month
LIBOR debt. SFAS No. 133 requires that when using
basis swaps, the change in the cash flows of the hedge
effectively offset both the change in the cash flows of the
asset and the change in the cash flows of the liability. Our
basis swaps hedge variable interest rate risk, however they do
not meet this effectiveness test because our FFELP student loans
can earn at either a variable or a fixed interest rate depending
on market interest rates. We also have basis swaps that do not
meet the SFAS No. 133 effectiveness test that
economically hedge off-balance sheet instruments. As a result,
under GAAP these swaps are recorded at fair value with changes
in fair value reflected in the income statement.
Under SFAS No. 150, equity forward contracts that
allow a net settlement option either in cash or the
Companys stock are required to be accounted for as
derivatives in accordance with SFAS No. 133. As a
result, we account for our equity forward contracts as
derivatives in accordance with SFAS No. 133 and mark
them to market through earnings. They do not qualify as
effective SFAS No. 133 hedges, as a requirement to
achieve hedge accounting is the hedged item must impact net
income and the settlement of these contracts through the
purchase of our own stock does not impact net income.
The table below quantifies the adjustments for derivative
accounting under SFAS No. 133 on our net income for
the three and nine months ended September 30, 2007 and 2006
when compared with the accounting principles employed in all
years prior to the SFAS No. 133 implementation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Core Earnings derivative adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on derivative and hedging activities, net,
included in other
income(1)
|
|
$
|
(487
|
)
|
|
$
|
(131
|
)
|
|
$
|
(23
|
)
|
|
$
|
(95
|
)
|
Less: Realized losses on derivative and hedging activities,
net(1)
|
|
|
33
|
|
|
|
18
|
|
|
|
79
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on derivative and hedging activities,
net(1)
|
|
|
(454
|
)
|
|
|
(113
|
)
|
|
|
56
|
|
|
|
12
|
|
Other pre-SFAS No. 133 accounting adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net impact of SFAS No. 133 derivative accounting
|
|
$
|
(454
|
)
|
|
$
|
(113
|
)
|
|
$
|
56
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Reclassification of
Realized Gains (Losses) on Derivative and Hedging
Activities below for a detailed breakdown of the
components of both the realized and unrealized losses on
derivative and hedging activities.
|
60
Reclassification
of Realized Gains (Losses) on Derivative and Hedging
Activities
SFAS No. 133 requires net settlement income/expense on
derivatives and realized gains/losses related to derivative
dispositions (collectively referred to as realized gains
(losses) on derivative and hedging activities) that do not
qualify as hedges under SFAS No. 133 to be recorded in
a separate income statement line item below net interest income.
The table below summarizes the realized losses on derivative and
hedging activities, and where they are reclassified to on a
Core Earnings basis for the three and nine months
ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Reclassification of realized losses on derivative and hedging
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net settlement expense on Floor Income Contracts reclassified to
net interest income
|
|
$
|
(14
|
)
|
|
$
|
(8
|
)
|
|
$
|
(31
|
)
|
|
$
|
(41
|
)
|
Net settlement expense on interest rate swaps reclassified to
net interest income
|
|
|
(19
|
)
|
|
|
(10
|
)
|
|
|
(48
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications of realized losses on derivative and
hedging activities
|
|
|
(33
|
)
|
|
|
(18
|
)
|
|
|
(79
|
)
|
|
|
(107
|
)
|
Add: Unrealized gains (losses) on derivative and hedging
activities,
net(1)
|
|
|
(454
|
)
|
|
|
(113
|
)
|
|
|
56
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on derivative and hedging activities, net
|
|
$
|
(487
|
)
|
|
$
|
(131
|
)
|
|
$
|
(23
|
)
|
|
$
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unrealized gains (losses) on
derivative and hedging activities, net is comprised of the
following unrealized mark-to-market gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Nine Months
|
|
|
Ended
|
|
Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floor Income Contracts
|
|
$
|
(149
|
)
|
|
$
|
(90
|
)
|
|
$
|
(63
|
)
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity forward contracts
|
|
|
(458
|
)
|
|
|
(99
|
)
|
|
|
(74
|
)
|
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis swaps
|
|
|
132
|
|
|
|
98
|
|
|
|
154
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
21
|
|
|
|
(22
|
)
|
|
|
39
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrealized gains (losses) on derivative and hedging
activities, net
|
|
$
|
(454
|
)
|
|
$
|
(113
|
)
|
|
$
|
56
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains and losses on Floor Income Contracts are
primarily caused by changes in interest rates. In general, an
increase in interest rates results in an unrealized gain and
vice versa. Unrealized gains and losses on equity forward
contracts fluctuate with changes in the Companys stock
price. Unrealized gains and losses on basis swaps result from
changes in the spread between indices, and differences in the
repricing frequency of the pay and receive legs of the basis
swaps.
3) Floor Income: The timing and amount
(if any) of Floor Income earned in our Lending operating segment
is uncertain and in excess of expected spreads. Therefore, we
exclude such income from Core Earnings net income
when it is not economically hedged. We employ derivatives,
primarily Floor Income Contracts and futures, to economically
hedge Floor Income. As discussed above in Derivative
Accounting, these derivatives do not qualify as effective
accounting hedges and therefore, under GAAP, they are
marked-to-market through the gains (losses) on derivative
and hedging activities, net line on the income statement
with no offsetting gain or loss recorded for the economically
hedged items. For Core Earnings net income, we
reverse the fair value adjustments on the Floor Income Contracts
and futures economically hedging Floor Income and include the
amortization of net premiums received (net of Eurodollar futures
contracts realized gains or losses) in income.
61
The following table summarizes the Floor Income adjustments in
our Lending operating segment for the three and nine months
ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Core Earnings Floor Income adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floor Income earned on Managed loans, net of payments on Floor
Income Contracts
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Amortization of net premiums on Floor Income Contracts and
futures in net interest income
|
|
|
(40
|
)
|
|
|
(53
|
)
|
|
|
(119
|
)
|
|
|
(158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings Floor Income adjustments
|
|
$
|
(40
|
)
|
|
$
|
(53
|
)
|
|
$
|
(119
|
)
|
|
$
|
(158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4) Acquired Intangibles: We exclude
goodwill and intangible impairment and amortization of acquired
intangibles. These amounts totaled $19 million and
$37 million, respectively, for the three months ended
September 30, 2007 and 2006, and $59 million and
$68 million, respectively, for the nine months ended
September 30, 2007 and 2006, respectively.
62
LENDING
BUSINESS SEGMENT
In our Lending business segment, we originate and acquire
federally guaranteed student loans, which are administered by
ED, and Private Education Loans, which are not federally
guaranteed. Most of our Private Education Loans are made in
conjunction with a FFELP Stafford loan and as a result are
marketed through the same marketing channels as FFELP Stafford
loans. While FFELP student loans and Private Education Loans
have different overall risk profiles due to the federal
guarantee of the FFELP student loans, they share many of the
same characteristics such as similar repayment terms, the same
marketing channel and sales force, and are originated and
serviced on the same servicing platform. Finally, where
possible, the borrower receives a single bill for both the
federally guaranteed and privately underwritten loans.
The following table summarizes the Core Earnings
results of operations for our Lending business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
% Increase
|
|
|
Ended
|
|
|
% Increase
|
|
|
|
September 30,
|
|
|
(Decrease)
|
|
|
September 30,
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
2007 vs.
|
|
|
|
|
|
|
|
|
2007 vs.
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
Core Earnings interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford and Other Student Loans
|
|
$
|
729
|
|
|
$
|
702
|
|
|
|
4
|
%
|
|
$
|
2,143
|
|
|
$
|
2,070
|
|
|
|
4
|
%
|
FFELP Consolidation Loans
|
|
|
1,445
|
|
|
|
1,242
|
|
|
|
16
|
|
|
|
4,167
|
|
|
|
3,385
|
|
|
|
23
|
|
Private Education Loans
|
|
|
753
|
|
|
|
558
|
|
|
|
35
|
|
|
|
2,104
|
|
|
|
1,472
|
|
|
|
43
|
|
Other loans
|
|
|
26
|
|
|
|
24
|
|
|
|
8
|
|
|
|
80
|
|
|
|
71
|
|
|
|
13
|
|
Cash and investments
|
|
|
251
|
|
|
|
207
|
|
|
|
21
|
|
|
|
595
|
|
|
|
507
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Core Earnings interest income
|
|
|
3,204
|
|
|
|
2,733
|
|
|
|
17
|
|
|
|
9,089
|
|
|
|
7,505
|
|
|
|
21
|
|
Total Core Earnings interest expense
|
|
|
2,534
|
|
|
|
2,124
|
|
|
|
19
|
|
|
|
7,125
|
|
|
|
5,687
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Core Earnings interest income
|
|
|
670
|
|
|
|
609
|
|
|
|
10
|
|
|
|
1,964
|
|
|
|
1,818
|
|
|
|
8
|
|
Less: provisions for loan losses
|
|
|
200
|
|
|
|
80
|
|
|
|
150
|
|
|
|
644
|
|
|
|
215
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Core Earnings interest income after provisions
for loan losses
|
|
|
470
|
|
|
|
529
|
|
|
|
(11
|
)
|
|
|
1,320
|
|
|
|
1,603
|
|
|
|
(18
|
)
|
Other income
|
|
|
46
|
|
|
|
46
|
|
|
|
|
|
|
|
150
|
|
|
|
138
|
|
|
|
9
|
|
Operating expenses
|
|
|
164
|
|
|
|
156
|
|
|
|
5
|
|
|
|
517
|
|
|
|
481
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
352
|
|
|
|
419
|
|
|
|
(16
|
)
|
|
|
953
|
|
|
|
1,260
|
|
|
|
(24
|
)
|
Income tax expense
|
|
|
130
|
|
|
|
155
|
|
|
|
(16
|
)
|
|
|
352
|
|
|
|
466
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income
|
|
$
|
222
|
|
|
$
|
264
|
|
|
|
(16
|
)%
|
|
$
|
601
|
|
|
$
|
794
|
|
|
|
(24
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
Summary
of our Managed Student Loan Portfolio
The following tables summarize the components of our Managed
student loan portfolio and show the changing composition of our
portfolio.
Ending
Balances, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
|
|
|
Education
|
|
|
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
Total FFELP
|
|
|
Loans
|
|
|
Total
|
|
|
On-balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-school
|
|
$
|
14,114
|
|
|
$
|
|
|
|
$
|
14,114
|
|
|
$
|
6,219
|
|
|
$
|
20,333
|
|
Grace and repayment
|
|
|
19,154
|
|
|
|
70,082
|
|
|
|
89,236
|
|
|
|
8,344
|
|
|
|
97,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet, gross
|
|
|
33,268
|
|
|
|
70,082
|
|
|
|
103,350
|
|
|
|
14,563
|
|
|
|
117,913
|
|
On-balance sheet unamortized premium/(discount)
|
|
|
871
|
|
|
|
1,316
|
|
|
|
2,187
|
|
|
|
(433
|
)
|
|
|
1,754
|
|
On-balance sheet allowance for losses
|
|
|
(31
|
)
|
|
|
(27
|
)
|
|
|
(58
|
)
|
|
|
(454
|
)
|
|
|
(512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet, net
|
|
|
34,108
|
|
|
|
71,371
|
|
|
|
105,479
|
|
|
|
13,676
|
|
|
|
119,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-school
|
|
|
1,197
|
|
|
|
|
|
|
|
1,197
|
|
|
|
3,446
|
|
|
|
4,643
|
|
Grace and repayment
|
|
|
8,814
|
|
|
|
16,216
|
|
|
|
25,030
|
|
|
|
10,834
|
|
|
|
35,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet, gross
|
|
|
10,011
|
|
|
|
16,216
|
|
|
|
26,227
|
|
|
|
14,280
|
|
|
|
40,507
|
|
Off-balance sheet unamortized premium/(discount)
|
|
|
167
|
|
|
|
488
|
|
|
|
655
|
|
|
|
(338
|
)
|
|
|
317
|
|
Off-balance sheet allowance for losses
|
|
|
(16
|
)
|
|
|
(5
|
)
|
|
|
(21
|
)
|
|
|
(199
|
)
|
|
|
(220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet, net
|
|
|
10,162
|
|
|
|
16,699
|
|
|
|
26,861
|
|
|
|
13,743
|
|
|
|
40,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
|
|
$
|
44,270
|
|
|
$
|
88,070
|
|
|
$
|
132,340
|
|
|
$
|
27,419
|
|
|
$
|
159,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of on-balance sheet FFELP
|
|
|
32
|
%
|
|
|
68
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Managed FFELP
|
|
|
33
|
%
|
|
|
67
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of total
|
|
|
28
|
%
|
|
|
55
|
%
|
|
|
83
|
%
|
|
|
17
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
|
|
|
Education
|
|
|
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
Total FFELP
|
|
|
Loans
|
|
|
Total
|
|
|
On-balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-school
|
|
$
|
9,745
|
|
|
$
|
|
|
|
$
|
9,745
|
|
|
$
|
4,353
|
|
|
$
|
14,098
|
|
Grace and repayment
|
|
|
14,530
|
|
|
|
60,348
|
|
|
|
74,878
|
|
|
|
6,075
|
|
|
|
80,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet, gross
|
|
|
24,275
|
|
|
|
60,348
|
|
|
|
84,623
|
|
|
|
10,428
|
|
|
|
95,051
|
|
On-balance sheet unamortized premium/(discount)
|
|
|
575
|
|
|
|
988
|
|
|
|
1,563
|
|
|
|
(365
|
)
|
|
|
1,198
|
|
On-balance sheet allowance for losses
|
|
|
(9
|
)
|
|
|
(12
|
)
|
|
|
(21
|
)
|
|
|
(308
|
)
|
|
|
(329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet, net
|
|
|
24,841
|
|
|
|
61,324
|
|
|
|
86,165
|
|
|
|
9,755
|
|
|
|
95,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-school
|
|
|
2,047
|
|
|
|
|
|
|
|
2,047
|
|
|
|
3,892
|
|
|
|
5,939
|
|
Grace and repayment
|
|
|
12,747
|
|
|
|
17,817
|
|
|
|
30,564
|
|
|
|
9,330
|
|
|
|
39,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet, gross
|
|
|
14,794
|
|
|
|
17,817
|
|
|
|
32,611
|
|
|
|
13,222
|
|
|
|
45,833
|
|
Off-balance sheet unamortized premium/(discount)
|
|
|
244
|
|
|
|
497
|
|
|
|
741
|
|
|
|
(303
|
)
|
|
|
438
|
|
Off-balance sheet allowance for losses
|
|
|
(10
|
)
|
|
|
(3
|
)
|
|
|
(13
|
)
|
|
|
(86
|
)
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet, net
|
|
|
15,028
|
|
|
|
18,311
|
|
|
|
33,339
|
|
|
|
12,833
|
|
|
|
46,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
|
|
$
|
39,869
|
|
|
$
|
79,635
|
|
|
$
|
119,504
|
|
|
$
|
22,588
|
|
|
$
|
142,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of on-balance sheet FFELP
|
|
|
29
|
%
|
|
|
71
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Managed FFELP
|
|
|
33
|
%
|
|
|
67
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of total
|
|
|
28
|
%
|
|
|
56
|
%
|
|
|
84
|
%
|
|
|
16
|
%
|
|
|
100
|
%
|
|
|
|
(1) |
|
FFELP category is primarily
Stafford loans, but also includes federally insured PLUS and
HEAL loans.
|
64
Average
Balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
|
|
|
Education
|
|
|
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
Total FFELP
|
|
|
Loans
|
|
|
Total
|
|
|
On-balance sheet
|
|
$
|
32,576
|
|
|
$
|
69,289
|
|
|
$
|
101,865
|
|
|
$
|
12,706
|
|
|
$
|
114,571
|
|
Off-balance sheet
|
|
|
10,667
|
|
|
|
16,881
|
|
|
|
27,548
|
|
|
|
13,978
|
|
|
|
41,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
|
|
$
|
43,243
|
|
|
$
|
86,170
|
|
|
$
|
129,413
|
|
|
$
|
26,684
|
|
|
$
|
156,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of on-balance sheet FFELP
|
|
|
32
|
%
|
|
|
68
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Managed FFELP
|
|
|
33
|
%
|
|
|
67
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
28
|
%
|
|
|
55
|
%
|
|
|
83
|
%
|
|
|
17
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
|
|
|
Education
|
|
|
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
Total FFELP
|
|
|
Loans
|
|
|
Total
|
|
|
On-balance sheet
|
|
$
|
21,194
|
|
|
$
|
54,968
|
|
|
$
|
76,162
|
|
|
$
|
8,079
|
|
|
$
|
84,241
|
|
Off-balance sheet
|
|
|
18,558
|
|
|
|
17,538
|
|
|
|
36,096
|
|
|
|
12,130
|
|
|
|
48,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
|
|
$
|
39,752
|
|
|
$
|
72,506
|
|
|
$
|
112,258
|
|
|
$
|
20,209
|
|
|
$
|
132,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of on-balance sheet FFELP
|
|
|
28
|
%
|
|
|
72
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Managed FFELP
|
|
|
35
|
%
|
|
|
65
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
30
|
%
|
|
|
55
|
%
|
|
|
85
|
%
|
|
|
15
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
|
|
|
Education
|
|
|
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
Total FFELP
|
|
|
Loans
|
|
|
Total
|
|
|
On-balance sheet
|
|
$
|
30,106
|
|
|
$
|
66,590
|
|
|
$
|
96,696
|
|
|
$
|
11,664
|
|
|
$
|
108,360
|
|
Off-balance sheet
|
|
|
12,134
|
|
|
|
17,415
|
|
|
|
29,549
|
|
|
|
13,646
|
|
|
|
43,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
|
|
$
|
42,240
|
|
|
$
|
84,005
|
|
|
$
|
126,245
|
|
|
$
|
25,310
|
|
|
$
|
151,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of on-balance sheet FFELP
|
|
|
31
|
%
|
|
|
69
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Managed FFELP
|
|
|
33
|
%
|
|
|
67
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
28
|
%
|
|
|
55
|
%
|
|
|
83
|
%
|
|
|
17
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
|
|
|
Education
|
|
|
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
Total FFELP
|
|
|
Loans
|
|
|
Total
|
|
|
On-balance sheet
|
|
$
|
20,432
|
|
|
$
|
53,830
|
|
|
$
|
74,262
|
|
|
$
|
8,348
|
|
|
$
|
82,610
|
|
Off-balance sheet
|
|
|
20,791
|
|
|
|
14,706
|
|
|
|
35,497
|
|
|
|
10,530
|
|
|
|
46,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
|
|
$
|
41,223
|
|
|
$
|
68,536
|
|
|
$
|
109,759
|
|
|
$
|
18,878
|
|
|
$
|
128,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of on-balance sheet FFELP
|
|
|
28
|
%
|
|
|
72
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Managed FFELP
|
|
|
38
|
%
|
|
|
62
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
32
|
%
|
|
|
53
|
%
|
|
|
85
|
%
|
|
|
15
|
%
|
|
|
100
|
%
|
|
|
|
(1) |
|
FFELP category is primarily
Stafford loans, but also includes federally insured PLUS and
HEAL loans.
|
65
Net
Interest Income
The changes in net interest income are primarily due to
fluctuations in the student loan spread discussed below, as well
as the growth of our student loan portfolio and the level of
cash and investments we may hold on our balance sheet for
liquidity purposes. In connection with the Merger Agreement, we
increased our liquidity portfolio to higher than historical
levels. The liquidity portfolio has a negative net interest
margin, so the increase in this portfolio reduced net interest
income by $8 million for the third quarter of 2007.
Student
Loan Spread Analysis Core Earnings
Basis
The following table analyzes the earnings from our portfolio of
Managed student loans on a Core Earnings basis (see
BUSINESS SEGMENTS Pre-tax Differences between
Core Earnings and GAAP). The Core
Earnings Basis student loan spread analysis presentation
and certain components used in the calculation differ from the
on-balance sheet student loan spread analysis presentation. The
Core Earnings basis presentation, when compared to
our on-balance sheet presentation, is different in that it:
|
|
|
|
|
includes the net interest margin related to our off-balance
sheet student loan securitization trusts. This includes any
related fees or costs such as the Consolidation Loan Rebate
Fees, premium/discount amortization and Borrower Benefits yield
adjustments;
|
|
|
|
includes the reclassification of certain derivative net
settlement amounts. The net settlements on certain derivatives
that do not qualify as SFAS No. 133 hedges are
recorded as part of the gain (loss) on derivative and
hedging activities, net line item on the income statement
and are therefore not recognized in the student loan spread.
Under this presentation, these gains and losses are reclassified
to the income statement line item of the economically hedged
item. For our Core Earnings basis student loan
spread, this would primarily include: (a) reclassifying the
net settlement amounts related to our written Floor Income
Contracts to student loan interest income and
(b) reclassifying the net settlement amounts related to
certain of our basis swaps to debt interest expense;
|
|
|
|
excludes unhedged Floor Income earned on the Managed student
loan portfolio; and
|
|
|
|
includes the amortization of upfront payments on Floor Income
Contracts in student loan income that we believe are
economically hedging the Floor Income.
|
As discussed above, these differences result in the Core
Earnings basis student loan spread not being a GAAP-basis
presentation. Management relies on this measure to manage our
Lending business segment. Specifically, management uses the
Core Earnings basis student loan spread to evaluate
the overall economic effect that certain factors have on our
student loans either on-balance sheet or off-balance sheet.
These factors include the overall mix of student loans in our
portfolio, acquisition costs, Borrower Benefits program costs,
Floor Income and funding and hedging costs. Management believes
that it is important to evaluate all of these factors on a
Managed Basis to gain additional information about the economic
effect of these factors on our student loans under management.
Management believes that this additional information assists us
in making strategic decisions about the Companys business
model for the Lending business segment, including among other
factors, how we acquire or originate student loans, how we fund
acquisitions and originations, what Borrower Benefits we offer
and what type of loans we purchase or originate. While
management believes that the Core Earnings basis
student loan spread is an important tool for evaluating the
Companys performance for the reasons described above, it
is subject to certain general and specific limitations that
investors should carefully consider. See BUSINESS
SEGMENTS Limitations of Core Earnings.
One specific limitation is that the Core
Earnings basis student loan spread includes the spread on
loans that we have sold to securitization trusts.
66
The following table reflects the Core Earnings basis
student loan spreads before provision and before the effect of
Wholesale Consolidation Loans (except as otherwise noted).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Core Earnings basis student loan yield
|
|
|
8.31
|
%
|
|
|
8.33
|
%
|
|
|
8.31
|
%
|
|
|
7.99
|
%
|
Consolidation Loan Rebate Fees
|
|
|
(.54
|
)
|
|
|
(.56
|
)
|
|
|
(.55
|
)
|
|
|
(.55
|
)
|
Borrower Benefits
|
|
|
(.10
|
)
|
|
|
(.11
|
)
|
|
|
(.11
|
)
|
|
|
(.08
|
)
|
Premium and discount amortization
|
|
|
(.15
|
)
|
|
|
(.16
|
)
|
|
|
(.16
|
)
|
|
|
(.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings basis student loan net yield
|
|
|
7.52
|
|
|
|
7.50
|
|
|
|
7.49
|
|
|
|
7.20
|
|
Core Earnings basis student loan cost of funds
|
|
|
(5.71
|
)
|
|
|
(5.70
|
)
|
|
|
(5.68
|
)
|
|
|
(5.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings basis student loan spread, before
Interim ABCP Facility
fees(1)(2)
|
|
|
1.81
|
|
|
|
1.80
|
|
|
|
1.81
|
|
|
|
1.84
|
|
Interim ABCP Facility
fees(2)
|
|
|
(.04
|
)
|
|
|
|
|
|
|
(.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings basis student loan
spread(1)(3)
|
|
|
1.77
|
%
|
|
|
1.80
|
%
|
|
|
1.78
|
%
|
|
|
1.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings basis student loan spreads by
product:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Loan Spread, before Interim ABCP Facility
fees(1)(2)
|
|
|
1.02
|
%
|
|
|
1.17
|
%
|
|
|
1.06
|
%
|
|
|
1.28
|
%
|
Private Education Loan Spread, before Interim ABCP Facility
fees(2)
|
|
|
5.43
|
|
|
|
5.25
|
|
|
|
5.33
|
|
|
|
5.08
|
|
Private Education Loan Spread, after provision and before
Interim ABCP Facility
fees(2)
|
|
|
3.29
|
|
|
|
3.83
|
|
|
|
2.33
|
|
|
|
3.70
|
|
Average Balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet student
loans(1)
|
|
$
|
106,825
|
|
|
$
|
83,909
|
|
|
$
|
101,891
|
|
|
$
|
82,498
|
|
Off-balance sheet student loans
|
|
|
41,526
|
|
|
|
48,226
|
|
|
|
43,195
|
|
|
|
46,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed student loans
|
|
$
|
148,351
|
|
|
$
|
132,135
|
|
|
$
|
145,086
|
|
|
$
|
128,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Excludes the effect of the Wholesale Consolidation Loan
portfolio on the student loan spread and average balances.
|
(2)
|
|
The Interim ABCP Facility fees are the commitment and liquidity
fees that related to a new financing facility in connection with
the Merger. See Note 12, Merger-Related
Developments to the consolidated financial statements.
|
(3)
|
|
Core Earnings basis student loan spread including
the effect of Wholesale Consolidation Loans
|
|
|
1.69
|
%
|
|
|
1.79
|
%
|
|
|
1.71
|
%
|
|
|
1.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys Core Earnings basis student loan
spread before Interim ABCP Facility fees and the impact of
Wholesale Consolidation Loans remained relatively consistent
over all periods presented above. The primary drivers of changes
in the spread are changes in portfolio composition, Borrower
Benefits, premium amortization, and cost of funds. The FFELP
loan spread declined over all periods presented above as the mix
of the FFELP portfolio shifted toward the lower yielding
Consolidation Loan product. The Private Education Loan spreads
before provision continued to increase due primarily to a change
in the mix of the portfolio to more direct-to-consumer loans
(Tuition
AnswerSM
loans). The changes in the Private Education Loan spreads after
provision for all periods was primarily due to the timing and
amount of provision associated with our allowance for Private
Education Loan Losses as discussed below in Private
Education Loans Allowance for Private Education Loan
Losses.
67
The following table presents a projection of the average Managed
balance of FFELP Consolidation Loans for which its Fixed Rate
Floor Income has already been economically hedged through Floor
Income Contracts for the period October 1, 2007 to
June 30, 2010. These loans are both on-balance sheet and
off-balance sheet and the related hedges do not qualify under
SFAS No. 133 accounting as effective hedges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2007 to
|
|
|
|
|
|
|
(Dollars in billions)
|
|
December 31, 2007
|
|
2008
|
|
2009
|
|
2010
|
|
Average balance of FFELP Consolidation Loans whose Floor Income
is economically hedged (Managed Basis)
|
|
$
|
16
|
|
|
$
|
15
|
|
|
$
|
10
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Education Loans
All Private Education Loans are initially acquired on-balance
sheet. In securitizations of Private Education Loans that are
treated as sales, the loans are no longer owned by us, and they
are accounted for off-balance sheet. For our Managed Basis
presentation in the table below, when Private Education Loans
are sold to securitization trusts, we reduce the on-balance
sheet allowance for loan losses for amounts previously provided
and then re-establish the allowance for these loans in the
off-balance sheet section. The total allowance of both
on-balance sheet and off-balance sheet loan losses results in
the Managed Basis allowance for loan losses. The off- balance
sheet allowance is lower than the on-balance sheet allowance
when measured as a percentage of ending loans in repayment
because of the different mix of loans on-balance sheet and
off-balance sheet.
When Private Education Loans in our securitized trusts that
settled before September 30, 2005, become 180 days
delinquent, we typically exercise our contingent call option to
repurchase these loans at par value out of the trust and record
a loss (which is reflected in losses on loans and securities,
net in the income statement) for the difference in the par value
paid and the fair market value of the loan at the time of
purchase. If these loans reach the
212-day
delinquency, a charge-off for the remaining balance of the loan
is triggered. On a Managed Basis, the losses recorded under GAAP
for loans repurchased at day 180 are reversed and the full
amount is charged off in the month in which the loan is
212 days delinquent. We do not hold the contingent call
option for all trusts settled after September 30, 2005 and
as such, the loans are charged off in these trusts.
68
Activity
in the Allowance for Private Education Loan Losses
The provision for student loan losses represents the periodic
expense of maintaining an allowance sufficient to absorb losses,
net of recoveries, inherent in the portfolio of Private
Education Loans.
The following table summarizes changes in the allowance for
Private Education Loan losses for the three and nine months
ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity in Allowance for Private Education Loan Losses
|
|
|
|
On-Balance Sheet
|
|
|
Off-Balance Sheet
|
|
|
Managed Basis
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Allowance at beginning of period
|
|
$
|
428
|
|
|
$
|
252
|
|
|
$
|
183
|
|
|
$
|
92
|
|
|
$
|
611
|
|
|
$
|
344
|
|
Provision for Private Education Loan losses
|
|
|
100
|
|
|
|
58
|
|
|
|
44
|
|
|
|
14
|
|
|
|
144
|
|
|
|
72
|
|
Charge-offs
|
|
|
(82
|
)
|
|
|
(37
|
)
|
|
|
(28
|
)
|
|
|
(10
|
)
|
|
|
(110
|
)
|
|
|
(47
|
)
|
Recoveries
|
|
|
8
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(74
|
)
|
|
|
(31
|
)
|
|
|
(28
|
)
|
|
|
(10
|
)
|
|
|
(102
|
)
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance before securitization of Private Education Loans
|
|
|
454
|
|
|
|
279
|
|
|
|
199
|
|
|
|
96
|
|
|
|
653
|
|
|
|
375
|
|
Reduction for securitization of Private Education Loans
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period
|
|
$
|
454
|
|
|
$
|
275
|
|
|
$
|
199
|
|
|
$
|
100
|
|
|
$
|
653
|
|
|
$
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs as a percentage of average loans in repayment
(annualized)
|
|
|
5.12
|
%
|
|
|
3.19
|
%
|
|
|
1.60
|
%
|
|
|
.68
|
%
|
|
|
3.16
|
%
|
|
|
1.70
|
%
|
Net charge-offs as a percentage of average loans in repayment
and forbearance (annualized)
|
|
|
4.61
|
%
|
|
|
2.95
|
%
|
|
|
1.38
|
%
|
|
|
.59
|
%
|
|
|
2.78
|
%
|
|
|
1.52
|
%
|
Allowance as a percentage of the ending total loan balance
|
|
|
3.21
|
%
|
|
|
3.24
|
%
|
|
|
1.43
|
%
|
|
|
.77
|
%
|
|
|
2.33
|
%
|
|
|
1.74
|
%
|
Allowance as a percentage of ending loans in repayment
|
|
|
7.70
|
%
|
|
|
6.91
|
%
|
|
|
2.88
|
%
|
|
|
1.79
|
%
|
|
|
5.10
|
%
|
|
|
3.92
|
%
|
Average coverage of net charge-offs (annualized)
|
|
|
1.56
|
|
|
|
2.22
|
|
|
|
1.74
|
|
|
|
2.62
|
|
|
|
1.61
|
|
|
|
2.32
|
|
Average total loans
|
|
$
|
12,706
|
|
|
$
|
8,079
|
|
|
$
|
13,978
|
|
|
$
|
12,130
|
|
|
$
|
26,684
|
|
|
$
|
20,209
|
|
Ending total loans
|
|
$
|
14,130
|
|
|
$
|
8,497
|
|
|
$
|
13,942
|
|
|
$
|
13,079
|
|
|
$
|
28,072
|
|
|
$
|
21,576
|
|
Average loans in repayment
|
|
$
|
5,696
|
|
|
$
|
3,879
|
|
|
$
|
7,124
|
|
|
$
|
5,667
|
|
|
$
|
12,820
|
|
|
$
|
9,546
|
|
Ending loans in repayment
|
|
$
|
5,896
|
|
|
$
|
3,980
|
|
|
$
|
6,903
|
|
|
$
|
5,603
|
|
|
$
|
12,799
|
|
|
$
|
9,583
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity in Allowance for Private Education Loan Losses
|
|
|
|
On-Balance Sheet
|
|
|
Off-Balance Sheet
|
|
|
Managed Basis
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Allowance at beginning of period
|
|
$
|
308
|
|
|
$
|
204
|
|
|
$
|
86
|
|
|
$
|
78
|
|
|
$
|
394
|
|
|
$
|
282
|
|
Provision for Private Education Loan losses
|
|
|
380
|
|
|
|
175
|
|
|
|
186
|
|
|
|
19
|
|
|
|
566
|
|
|
|
194
|
|
Charge-offs
|
|
|
(251
|
)
|
|
|
(105
|
)
|
|
|
(79
|
)
|
|
|
(14
|
)
|
|
|
(330
|
)
|
|
|
(119
|
)
|
Recoveries
|
|
|
23
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(228
|
)
|
|
|
(87
|
)
|
|
|
(79
|
)
|
|
|
(14
|
)
|
|
|
(307
|
)
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance before securitization of Private Education Loans
|
|
|
460
|
|
|
|
292
|
|
|
|
193
|
|
|
|
83
|
|
|
|
653
|
|
|
|
375
|
|
Reduction for securitization of Private Education Loans
|
|
|
(6
|
)
|
|
|
(17
|
)
|
|
|
6
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance at end of period
|
|
$
|
454
|
|
|
$
|
275
|
|
|
$
|
199
|
|
|
$
|
100
|
|
|
$
|
653
|
|
|
$
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs as a percentage of average loans in repayment
(annualized)
|
|
|
5.69
|
%
|
|
|
3.06
|
%
|
|
|
1.53
|
%
|
|
|
.36
|
%
|
|
|
3.36
|
%
|
|
|
1.51
|
%
|
Net charge-offs as a percentage of average loans in repayment
and forbearance (annualized)
|
|
|
5.18
|
%
|
|
|
2.82
|
%
|
|
|
1.33
|
%
|
|
|
.31
|
%
|
|
|
2.98
|
%
|
|
|
1.35
|
%
|
Allowance as a percentage of the ending total loan balance
|
|
|
3.21
|
%
|
|
|
3.24
|
%
|
|
|
1.43
|
%
|
|
|
.77
|
%
|
|
|
2.33
|
%
|
|
|
1.74
|
%
|
Allowance as a percentage of ending loans in repayment
|
|
|
7.70
|
%
|
|
|
6.91
|
%
|
|
|
2.88
|
%
|
|
|
1.79
|
%
|
|
|
5.10
|
%
|
|
|
3.92
|
%
|
Average coverage of net charge-offs (annualized)
|
|
|
1.49
|
|
|
|
2.35
|
|
|
|
1.89
|
|
|
|
5.44
|
|
|
|
1.59
|
|
|
|
2.77
|
|
Average total loans
|
|
$
|
11,664
|
|
|
$
|
8,348
|
|
|
$
|
13,646
|
|
|
$
|
10,530
|
|
|
$
|
25,310
|
|
|
$
|
18,878
|
|
Ending total loans
|
|
$
|
14,130
|
|
|
$
|
8,497
|
|
|
$
|
13,942
|
|
|
$
|
13,079
|
|
|
$
|
28,072
|
|
|
$
|
21,576
|
|
Average loans in repayment
|
|
$
|
5,373
|
|
|
$
|
3,821
|
|
|
$
|
6,848
|
|
|
$
|
5,127
|
|
|
$
|
12,221
|
|
|
$
|
8,948
|
|
Ending loans in repayment
|
|
$
|
5,896
|
|
|
$
|
3,980
|
|
|
$
|
6,903
|
|
|
$
|
5,603
|
|
|
$
|
12,799
|
|
|
$
|
9,583
|
|
Toward the end of 2006 and through mid-2007, we experienced
lower pre-default collections, resulting in increased levels of
charge-off activity in our Private Education Loan portfolio. As
this portfolio seasons and due to shifts in its mix and certain
economic factors, we expected and have seen charge-off rates
increase from the historically low levels experienced in prior
years. Additionally, the increase was significantly impacted by
other factors. In the second half of 2006, we relocated
responsibility for certain Private Education Loan collections
from our Nevada call center to a new call center in Indiana.
This transfer presented us with unexpected operational
challenges that resulted in lower collections that have
negatively impacted the Private Education Loan portfolio. In
addition, in late 2006, APG also revised certain procedures,
including its use of forbearance, to better optimize our
long-term collection strategies. These developments have
resulted in increased later stage delinquency levels and
associated higher charge-offs.
We have been aggressively remediating these issues, including
transferring experienced collection personnel to the new call
center and conducting extensive training and monitoring.
Beginning in mid-2007, APG also instituted more precise analytic
collection strategies and new systematic enhancements to better
manage the challenges posed by the volume, seasoning and shift
in the portfolio mix. Due to the remedial actions in place, we
anticipate the negative trends caused by the operational
difficulties will improve over the remainder of 2007 and 2008.
70
The anticipated level of delinquency and net charge-offs into
2008 is reflected in higher loss provision for the nine months
ended September 30, 2007. The higher provisioning occurred
predominantly in the first and second quarters of 2007 using
increased projected default rates which stabilized in the third
quarter of 2007. Through our status-based allowance methodology,
the provision is correlated to both the current level of
delinquency in the portfolio and the expected rate of charge-off
associated with each repayment status category. The gross
charge-off rates are reduced by the expected life-of-loan
recoveries anticipated on the charged-off portfolio to arrive at
a net charge-off expectation.
Delinquencies
The tables below present our Private Education Loan delinquency
trends as of September 30, 2007 and 2006. Delinquencies
have the potential to adversely impact earnings through
increased servicing and collection costs in the event the
delinquent accounts charge off.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Balance Sheet Private Education
|
|
|
|
Loan Delinquencies
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
7,966
|
|
|
|
|
|
|
$
|
4,497
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
701
|
|
|
|
|
|
|
|
341
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
5,186
|
|
|
|
88.0
|
%
|
|
|
3,462
|
|
|
|
87.0
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
275
|
|
|
|
4.7
|
|
|
|
209
|
|
|
|
5.3
|
|
Loans delinquent
61-90 days(3)
|
|
|
156
|
|
|
|
2.6
|
|
|
|
121
|
|
|
|
3.0
|
|
Loans delinquent greater than
90 days(3)
|
|
|
279
|
|
|
|
4.7
|
|
|
|
188
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans in repayment
|
|
|
5,896
|
|
|
|
100
|
%
|
|
|
3,980
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans, gross
|
|
|
14,563
|
|
|
|
|
|
|
|
8,818
|
|
|
|
|
|
Private Education Loan unamortized discount
|
|
|
(433
|
)
|
|
|
|
|
|
|
(321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans
|
|
|
14,130
|
|
|
|
|
|
|
|
8,497
|
|
|
|
|
|
Private Education Loan allowance for losses
|
|
|
(454
|
)
|
|
|
|
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Education Loans, net
|
|
$
|
13,676
|
|
|
|
|
|
|
$
|
8,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Private Education Loans in repayment
|
|
|
|
|
|
|
40.5
|
%
|
|
|
|
|
|
|
45.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
|
|
|
|
|
|
12.0
|
%
|
|
|
|
|
|
|
13.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
|
|
|
|
10.6
|
%
|
|
|
|
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loans for borrowers who still may
be attending school or engaging in other permitted educational
activities and are not yet required to make payments on the
loans, e.g., residency periods for medical students or a grace
period for bar exam preparation.
|
|
(2) |
|
Loans for borrowers who have
requested extension of grace period generally during employment
transition or who have temporarily ceased making full payments
due to hardship or other factors, consistent with the
established loan program servicing policies and procedures.
|
|
(3) |
|
The period of delinquency is based
on the number of days scheduled payments are contractually past
due.
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Private Education
|
|
|
|
Loan Delinquencies
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
6,126
|
|
|
|
|
|
|
$
|
6,861
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
1,251
|
|
|
|
|
|
|
|
901
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
6,524
|
|
|
|
94.5
|
%
|
|
|
5,281
|
|
|
|
94.3
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
192
|
|
|
|
2.8
|
|
|
|
164
|
|
|
|
2.9
|
|
Loans delinquent
61-90 days(3)
|
|
|
71
|
|
|
|
1.0
|
|
|
|
68
|
|
|
|
1.2
|
|
Loans delinquent greater than
90 days(3)
|
|
|
116
|
|
|
|
1.7
|
|
|
|
90
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans in repayment
|
|
|
6,903
|
|
|
|
100
|
%
|
|
|
5,603
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans, gross
|
|
|
14,280
|
|
|
|
|
|
|
|
13,365
|
|
|
|
|
|
Private Education Loan unamortized discount
|
|
|
(338
|
)
|
|
|
|
|
|
|
(286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans
|
|
|
13,942
|
|
|
|
|
|
|
|
13,079
|
|
|
|
|
|
Private Education Loan allowance for losses
|
|
|
(199
|
)
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Education Loans, net
|
|
$
|
13,743
|
|
|
|
|
|
|
$
|
12,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Private Education Loans in repayment
|
|
|
|
|
|
|
48.3
|
%
|
|
|
|
|
|
|
41.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
|
|
|
|
|
|
5.5
|
%
|
|
|
|
|
|
|
5.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
|
|
|
|
15.3
|
%
|
|
|
|
|
|
|
13.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Basis Private Education
|
|
|
|
Loan Delinquencies
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Balance
|
|
|
%
|
|
|
Balance
|
|
|
%
|
|
|
Loans
in-school/grace/deferment(1)
|
|
$
|
14,092
|
|
|
|
|
|
|
$
|
11,358
|
|
|
|
|
|
Loans in
forbearance(2)
|
|
|
1,952
|
|
|
|
|
|
|
|
1,242
|
|
|
|
|
|
Loans in repayment and percentage of each status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans current
|
|
|
11,710
|
|
|
|
91.5
|
%
|
|
|
8,743
|
|
|
|
91.2
|
%
|
Loans delinquent
31-60 days(3)
|
|
|
467
|
|
|
|
3.6
|
|
|
|
373
|
|
|
|
3.9
|
|
Loans delinquent
61-90 days(3)
|
|
|
227
|
|
|
|
1.8
|
|
|
|
189
|
|
|
|
2.0
|
|
Loans delinquent greater than
90 days(3)
|
|
|
395
|
|
|
|
3.1
|
|
|
|
278
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans in repayment
|
|
|
12,799
|
|
|
|
100
|
%
|
|
|
9,583
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans, gross
|
|
|
28,843
|
|
|
|
|
|
|
|
22,183
|
|
|
|
|
|
Private Education Loan unamortized discount
|
|
|
(771
|
)
|
|
|
|
|
|
|
(607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Private Education Loans
|
|
|
28,072
|
|
|
|
|
|
|
|
21,576
|
|
|
|
|
|
Private Education Loan allowance for losses
|
|
|
(653
|
)
|
|
|
|
|
|
|
(375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Education Loans, net
|
|
$
|
27,419
|
|
|
|
|
|
|
$
|
21,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Private Education Loans in repayment
|
|
|
|
|
|
|
44.4
|
%
|
|
|
|
|
|
|
43.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquencies as a percentage of Private Education Loans in
repayment
|
|
|
|
|
|
|
8.5
|
%
|
|
|
|
|
|
|
8.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
|
|
|
|
13.2
|
%
|
|
|
|
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Loans for borrowers who still may
be attending school or engaging in other permitted educational
activities and are not yet required to make payments on the
loans, e.g., residency periods for medical students or a grace
period for bar exam preparation.
|
|
(2) |
|
Loans for borrowers who have
requested extension of grace period generally during employment
transition or who have temporarily ceased making full payments
due to hardship or other factors, consistent with the
established loan program servicing policies and procedures.
|
|
(3) |
|
The period of delinquency is based
on the number of days scheduled payments are contractually past
due.
|
72
Forbearance
Managed Basis Private Education Loans
Private Education Loans are made to parent and student borrowers
in accordance with our underwriting policies. These loans
generally supplement federally guaranteed student loans, which
are subject to federal lending caps. Private Education Loans are
not federally guaranteed nor insured against any loss of
principal or interest. Traditional student borrowers use the
proceeds of these loans to obtain higher education, which
increases the likelihood of obtaining employment at higher
income levels than would be available without the additional
education. As a result, the borrowers repayment capability
improves between the time the loan is made and the time they
enter the post-education work force. We generally allow the loan
repayment period on traditional higher education Private
Education Loans to begin six months after the borrower leaves
school (consistent with our federally regulated FFELP loans).
This provides the borrower time after graduation to obtain a job
to service the debt. For borrowers that need more time or
experience other hardships, we permit additional delays in
payment or partial payments (both referred to as forbearances)
when we believe additional time will improve the borrowers
ability to repay the loan. Forbearance is also granted to
borrowers who may experience temporary hardship after entering
repayment, when we believe that it will increase the likelihood
of ultimate collection of the loan. Such forbearance is granted
within established policies that include limits on the number of
forbearance months granted consecutively and limits on the total
number of forbearance months granted over the life of the loan.
In some instances of forbearance, we require good-faith payments
or continuing partial payments. Exceptions to forbearance
policies are permitted in limited circumstances and only when
such exceptions are judged to increase the likelihood of
ultimate collection of the loan.
Forbearance does not grant any reduction in the total repayment
obligation (principal or interest) but does allow for the
temporary cessation of borrower payments (on a prospective
and/or
retroactive basis) or a reduction in monthly payments for an
agreed period of time. The forbearance period extends the
original term of the loan. While the loan is in forbearance,
interest continues to accrue and is capitalized as principal
upon the loan re-entering repayment status. Loans exiting
forbearance into repayment status are considered current
regardless of their previous delinquency status.
Forbearance is used most heavily immediately after the loan
enters repayment. As a result, forbearance levels are impacted
by the timing of loans entering repayment and are generally at
higher levels in the first quarter. As indicated in the tables
below that show the composition and status of the Managed
Private Education Loan portfolio by number of months aged from
the first date of repayment, the percentage of loans in
forbearance decreases the longer the loans have been in
repayment. At September 30, 2007, loans in forbearance as a
percentage of loans in repayment and forbearance are
16.9 percent for loans that have been in repayment one to
twenty-four months. The percentage drops to 5.0 percent for
loans that have been in repayment more than 48 months.
Approximately 77 percent of our Managed Private Education
Loans in forbearance have been in repayment less than
24 months. These borrowers are essentially extending their
grace period as they transition to the workforce. Forbearance
continues to be a positive collection tool for the Private
Education Loans as we believe it can provide the borrower with
sufficient time to obtain employment and income to support his
or her obligation. Forbearance policies were tightened in late
2006 and no additional policy changes have taken place to date.
The increase in use of forbearance is attributed to improved
borrower contact procedures and current economic conditions.
Loans in forbearance are reserved commensurate with the default
expectation of this specific loan status.
73
The tables below show the composition and status of the Private
Education Loan portfolio by number of months aged from the first
date of repayment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months Since Entering Repayment
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
|
|
1 to 24
|
|
|
25 to 48
|
|
|
More than
|
|
|
Sept. 30,
|
|
|
|
|
September 30, 2007
|
|
Months
|
|
|
Months
|
|
|
48 Months
|
|
|
2007(1)
|
|
|
Total
|
|
|
Loans in-school/grace/deferment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14,092
|
|
|
$
|
14,092
|
|
Loans in forbearance
|
|
|
1,496
|
|
|
|
339
|
|
|
|
117
|
|
|
|
|
|
|
|
1,952
|
|
Loans in repayment current
|
|
|
6,733
|
|
|
|
2,916
|
|
|
|
2,061
|
|
|
|
|
|
|
|
11,710
|
|
Loans in repayment delinquent
31-60 days
|
|
|
269
|
|
|
|
126
|
|
|
|
72
|
|
|
|
|
|
|
|
467
|
|
Loans in repayment delinquent
61-90 days
|
|
|
145
|
|
|
|
53
|
|
|
|
29
|
|
|
|
|
|
|
|
227
|
|
Loans in repayment delinquent greater than
90 days
|
|
|
215
|
|
|
|
115
|
|
|
|
65
|
|
|
|
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,858
|
|
|
$
|
3,549
|
|
|
$
|
2,344
|
|
|
$
|
14,092
|
|
|
$
|
28,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(771
|
)
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed Private Education Loans, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
16.9
|
%
|
|
|
9.6
|
%
|
|
|
5.0
|
%
|
|
|
|
%
|
|
|
13.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes all loans
in-school/grace/deferment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months Since Entering Repayment
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
|
|
|
1 to 24
|
|
|
25 to 48
|
|
|
More than
|
|
|
Sept. 30,
|
|
|
|
|
September 30, 2006
|
|
Months
|
|
|
Months
|
|
|
48 Months
|
|
|
2006(1)
|
|
|
Total
|
|
|
Loans in-school/grace/deferment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,358
|
|
|
$
|
11,358
|
|
Loans in forbearance
|
|
|
956
|
|
|
|
203
|
|
|
|
83
|
|
|
|
|
|
|
|
1,242
|
|
Loans in repayment current
|
|
|
5,055
|
|
|
|
2,050
|
|
|
|
1,638
|
|
|
|
|
|
|
|
8,743
|
|
Loans in repayment delinquent
31-60 days
|
|
|
208
|
|
|
|
94
|
|
|
|
71
|
|
|
|
|
|
|
|
373
|
|
Loans in repayment delinquent
61-90 days
|
|
|
120
|
|
|
|
41
|
|
|
|
28
|
|
|
|
|
|
|
|
189
|
|
Loans in repayment delinquent greater than
90 days
|
|
|
156
|
|
|
|
77
|
|
|
|
45
|
|
|
|
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,495
|
|
|
$
|
2,465
|
|
|
$
|
1,865
|
|
|
$
|
11,358
|
|
|
$
|
22,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(607
|
)
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed Private Education Loans, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans in forbearance as a percentage of loans in repayment and
forbearance
|
|
|
14.7
|
%
|
|
|
8.2
|
%
|
|
|
4.5
|
%
|
|
|
|
%
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes all loans
in-school/grace/deferment.
|
The table below stratifies the portfolio of loans in forbearance
by the cumulative number of months the borrower has used
forbearance as of the dates indicated. As detailed in the table
below, 6 percent of loans currently in forbearance have
deferred their loan repayment more than 24 months, which is
1 percent lower versus the year-ago quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Forbearance
|
|
|
% of
|
|
|
Forbearance
|
|
|
% of
|
|
Cumulative number of months borrower has used forbearance
|
|
Balance
|
|
|
Total
|
|
|
Balance
|
|
|
Total
|
|
|
Up to 12 months
|
|
$
|
1,373
|
|
|
|
70
|
%
|
|
$
|
902
|
|
|
|
72
|
%
|
13 to 24 months
|
|
|
473
|
|
|
|
24
|
|
|
|
259
|
|
|
|
21
|
|
More than 24 months
|
|
|
106
|
|
|
|
6
|
|
|
|
81
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,952
|
|
|
|
100
|
%
|
|
$
|
1,242
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
Total
Provisions for Loan Losses
The following tables summarize the total loan provisions on both
an on-balance sheet basis and a Managed Basis for the three and
nine months ended September 30, 2007 and 2006.
Total
on-balance sheet loan provisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Private Education Loans
|
|
$
|
100
|
|
|
$
|
58
|
|
|
$
|
380
|
|
|
$
|
175
|
|
FFELP Stafford and Other Student Loans
|
|
|
38
|
|
|
|
3
|
|
|
|
49
|
|
|
|
9
|
|
Mortgage and consumer loans
|
|
|
5
|
|
|
|
6
|
|
|
|
12
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet provisions for loan losses
|
|
$
|
143
|
|
|
$
|
67
|
|
|
$
|
441
|
|
|
$
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Managed Basis loan provisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Private Education Loans
|
|
$
|
144
|
|
|
$
|
72
|
|
|
$
|
566
|
|
|
$
|
194
|
|
FFELP Stafford and Other Student Loans
|
|
|
51
|
|
|
|
2
|
|
|
|
69
|
|
|
|
12
|
|
Mortgage and consumer loans
|
|
|
5
|
|
|
|
6
|
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed Basis provisions for loan losses
|
|
$
|
200
|
|
|
$
|
80
|
|
|
$
|
644
|
|
|
$
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The third quarter 2007 FFELP provision included cumulative
adjustments of non-recurring provision expense of
$30 million and $44 million for on-balance sheet and
Managed student loans, respectively, related to the repeal of
the Exceptional Performer program (and the resulting increase in
our Risk Sharing allowance) due to the passage of the College
Cost Reduction and Access Act of 2007 on September 27, 2007
(see RECENT DEVELOPMENTS Other
Developments Exceptional Performer).
Total
Loan Net Charge-offs
The following tables summarize the net charge-offs for all loan
types on both an on-balance sheet basis and a Managed Basis for
the three and nine months ended September 30, 2007 and
2006. The majority of Private Education Loan charge-offs occur
on-balance sheet due to the contingent call feature in
off-balance sheet securitization trusts that settled before
September 30, 2005, which is discussed in more detail at
LENDING BUSINESS SEGMENT Private Education
Loans.
Total
on-balance sheet loan net charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Private Education Loans
|
|
$
|
74
|
|
|
$
|
31
|
|
|
$
|
228
|
|
|
$
|
87
|
|
FFELP Stafford and Other Student Loans
|
|
|
4
|
|
|
|
1
|
|
|
|
13
|
|
|
|
3
|
|
Mortgage and consumer loans
|
|
|
3
|
|
|
|
1
|
|
|
|
7
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet loan net charge-offs
|
|
$
|
81
|
|
|
$
|
33
|
|
|
$
|
248
|
|
|
$
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
Total
Managed loan net charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Private Education Loans
|
|
$
|
102
|
|
|
$
|
41
|
|
|
$
|
307
|
|
|
$
|
101
|
|
FFELP Stafford and Other Student Loans
|
|
|
7
|
|
|
|
1
|
|
|
|
24
|
|
|
|
3
|
|
Mortgage and consumer loans
|
|
|
3
|
|
|
|
1
|
|
|
|
7
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed loan net charge-offs
|
|
$
|
112
|
|
|
$
|
43
|
|
|
$
|
338
|
|
|
$
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in net charge-offs on FFELP Stafford and Other
student loans for the nine months ended September 30, 2007
versus the year-ago period was the result of a legislative
change in 2006 which lowered the federal guaranty on claims
filed to 99 percent from 100 percent. See
LENDING BUSINESS SEGMENT Allowance for Private
Education Loan Losses for a discussion of net charge-offs
related to our Private Education Loans.
Student
Loan Premiums as a Percentage of Principal
The following table presents student loan premiums paid as a
percentage of the principal balance of student loans acquired
for the three and nine months ended September 30, 2007 and
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Volume
|
|
|
Rate
|
|
|
Volume
|
|
|
Rate
|
|
|
Volume
|
|
|
Rate
|
|
|
Student loan premiums paid:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sallie Mae brands
|
|
$
|
5,468
|
|
|
|
1.38
|
%
|
|
$
|
4,393
|
|
|
|
1.05
|
%
|
|
$
|
12,364
|
|
|
|
1.41
|
%
|
|
$
|
9,368
|
|
|
|
.81
|
%
|
Lender partners
|
|
|
2,373
|
|
|
|
2.69
|
|
|
|
2,361
|
|
|
|
1.83
|
|
|
|
8,132
|
|
|
|
2.86
|
|
|
|
10,178
|
|
|
|
1.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Preferred Channel
|
|
|
7,841
|
|
|
|
1.78
|
|
|
|
6,754
|
|
|
|
1.32
|
|
|
|
20,496
|
|
|
|
1.98
|
|
|
|
19,546
|
|
|
|
1.33
|
|
Other
purchases(1)
|
|
|
1,062
|
|
|
|
4.77
|
|
|
|
2,183
|
|
|
|
4.05
|
|
|
|
6,252
|
|
|
|
5.24
|
|
|
|
2,851
|
|
|
|
3.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total base purchases
|
|
|
8,903
|
|
|
|
2.13
|
|
|
|
8,937
|
|
|
|
1.99
|
|
|
|
26,748
|
|
|
|
2.75
|
|
|
|
22,397
|
|
|
|
1.66
|
|
Consolidation originations
|
|
|
821
|
|
|
|
2.54
|
|
|
|
1,682
|
|
|
|
2.22
|
|
|
|
2,008
|
|
|
|
2.58
|
|
|
|
3,432
|
|
|
|
2.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,724
|
|
|
|
2.17
|
%
|
|
$
|
10,619
|
|
|
|
2.03
|
%
|
|
$
|
28,756
|
|
|
|
2.73
|
%
|
|
$
|
25,829
|
|
|
|
1.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Primarily includes spot purchases (including Wholesale
Consolidation Loans), other commitment clients, and subsidiary
acquisitions.
|
The increase in premiums paid as a percentage of principal
balance for Sallie Mae brands over the prior year is
primarily due to the increase in loans where we pay the
origination fee
and/or
federal guaranty fee on behalf of borrowers, a practice we call
zero-fee lending. Premiums paid on Lender partners
volume were similarly impacted by zero-fee lending. The borrower
origination fee will be gradually phased out by the
Reconciliation Legislation from 2007 to 2010.
The Other purchases category includes the
acquisition of Wholesale Consolidation Loans which totaled
$950 million at a rate of 4.77 percent for the three
months ended September 30, 2007. At September 30,
2007, Wholesale Consolidation Loans totaled $8.2 billion.
We include in Consolidation originations the
50 basis point Consolidation Loan origination fee paid on
each FFELP Stafford loan that we consolidate, including loans
that are already in our portfolio. The consolidation
originations premium paid percentage is calculated on only
consolidation volume that is incremental to our portfolio. This
percentage is largely driven by the mix of FFELP Stafford loans
consolidated in this quarter.
76
Student
Loan Acquisitions
The following tables summarize the components of our student
loan acquisition activity for the three and nine months ended
September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30, 2007
|
|
|
|
FFELP
|
|
|
Private
|
|
|
Total
|
|
|
Preferred Channel
|
|
$
|
5,080
|
|
|
$
|
2,761
|
|
|
$
|
7,841
|
|
Wholesale Consolidations
|
|
|
950
|
|
|
|
|
|
|
|
950
|
|
Other commitment clients
|
|
|
29
|
|
|
|
53
|
|
|
|
82
|
|
Spot purchases
|
|
|
30
|
|
|
|
|
|
|
|
30
|
|
Consolidations from third parties
|
|
|
755
|
|
|
|
66
|
|
|
|
821
|
|
Acquisitions from off-balance sheet securitized trusts,
primarily consolidations
|
|
|
796
|
|
|
|
140
|
|
|
|
936
|
|
Capitalized interest, premiums and discounts
|
|
|
536
|
|
|
|
76
|
|
|
|
612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet student loan acquisitions
|
|
|
8,176
|
|
|
|
3,096
|
|
|
|
11,272
|
|
Consolidations to SLM Corporation from off-balance sheet
securitized trusts
|
|
|
(796
|
)
|
|
|
(140
|
)
|
|
|
(936
|
)
|
Capitalized interest, premiums and discounts
off-balance sheet securitized trusts
|
|
|
115
|
|
|
|
118
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed student loan acquisitions
|
|
$
|
7,495
|
|
|
$
|
3,074
|
|
|
$
|
10,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30, 2006
|
|
|
|
FFELP
|
|
|
Private
|
|
|
Total
|
|
|
Preferred Channel
|
|
$
|
4,146
|
|
|
$
|
2,608
|
|
|
$
|
6,754
|
|
Other commitment clients
|
|
|
195
|
|
|
|
61
|
|
|
|
256
|
|
Spot purchases
|
|
|
1,927
|
|
|
|
|
|
|
|
1,927
|
|
Consolidations from third parties
|
|
|
1,648
|
|
|
|
34
|
|
|
|
1,682
|
|
Acquisitions from off-balance sheet securitized trusts,
primarily consolidations
|
|
|
2,377
|
|
|
|
74
|
|
|
|
2,451
|
|
Capitalized interest, premiums and discounts
|
|
|
448
|
|
|
|
22
|
|
|
|
470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet student loan acquisitions
|
|
|
10,741
|
|
|
|
2,799
|
|
|
|
13,540
|
|
Consolidations to SLM Corporation from off-balance sheet
securitized trusts
|
|
|
(2,377
|
)
|
|
|
(74
|
)
|
|
|
(2,451
|
)
|
Capitalized interest, premiums and discounts
off-balance sheet securitized trusts
|
|
|
151
|
|
|
|
79
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed student loan acquisitions
|
|
$
|
8,515
|
|
|
$
|
2,804
|
|
|
$
|
11,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2007
|
|
|
|
FFELP
|
|
|
Private
|
|
|
Total
|
|
|
Preferred Channel
|
|
$
|
14,193
|
|
|
$
|
6,303
|
|
|
$
|
20,496
|
|
Wholesale Consolidations
|
|
|
4,937
|
|
|
|
|
|
|
|
4,937
|
|
Other commitment clients
|
|
|
223
|
|
|
|
57
|
|
|
|
280
|
|
Spot purchases
|
|
|
1,035
|
|
|
|
|
|
|
|
1,035
|
|
Consolidations from third parties
|
|
|
1,834
|
|
|
|
174
|
|
|
|
2,008
|
|
Acquisitions from off-balance sheet securitized trusts,
primarily consolidations
|
|
|
3,541
|
|
|
|
441
|
|
|
|
3,982
|
|
Capitalized interest, premiums and discounts
|
|
|
1,692
|
|
|
|
227
|
|
|
|
1,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet student loan acquisitions
|
|
|
27,455
|
|
|
|
7,202
|
|
|
|
34,657
|
|
Consolidations to SLM Corporation from off-balance sheet
securitized trusts
|
|
|
(3,541
|
)
|
|
|
(441
|
)
|
|
|
(3,982
|
)
|
Capitalized interest, premiums and discounts
off-balance sheet securitized trusts
|
|
|
396
|
|
|
|
416
|
|
|
|
812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed student loan acquisitions
|
|
$
|
24,310
|
|
|
$
|
7,177
|
|
|
$
|
31,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2006
|
|
|
|
FFELP
|
|
|
Private
|
|
|
Total
|
|
|
Preferred Channel
|
|
$
|
13,557
|
|
|
$
|
5,989
|
|
|
$
|
19,546
|
|
Other commitment clients
|
|
|
397
|
|
|
|
64
|
|
|
|
461
|
|
Spot purchases
|
|
|
2,390
|
|
|
|
|
|
|
|
2,390
|
|
Consolidations from third parties
|
|
|
3,389
|
|
|
|
43
|
|
|
|
3,432
|
|
Acquisitions from off-balance sheet securitized trusts,
primarily consolidations
|
|
|
5,813
|
|
|
|
90
|
|
|
|
5,903
|
|
Capitalized interest, premiums and discounts
|
|
|
1,170
|
|
|
|
74
|
|
|
|
1,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total on-balance sheet student loan acquisitions
|
|
|
26,716
|
|
|
|
6,260
|
|
|
|
32,976
|
|
Consolidations to SLM Corporation from off-balance sheet
securitized trusts
|
|
|
(5,813
|
)
|
|
|
(90
|
)
|
|
|
(5,903
|
)
|
Capitalized interest, premiums and discounts
off-balance sheet securitized trusts
|
|
|
475
|
|
|
|
256
|
|
|
|
731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed student loan acquisitions
|
|
$
|
21,378
|
|
|
$
|
6,426
|
|
|
$
|
27,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As shown in the above tables, off-balance sheet FFELP Stafford
loans that consolidate with us become an on-balance sheet
interest earning asset. This activity results in impairments of
our Retained Interests in securitizations, but this is offset by
an increase in on-balance sheet interest earning assets, for
which we do not record an offsetting gain.
The following table includes on-balance sheet asset information
for our Lending business segment.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
FFELP Stafford and Other Student Loans, net
|
|
$
|
34,108
|
|
|
$
|
24,841
|
|
FFELP Consolidation Loans, net
|
|
|
71,371
|
|
|
|
61,324
|
|
Private Education Loans, net
|
|
|
13,676
|
|
|
|
9,755
|
|
Other loans, net
|
|
|
1,193
|
|
|
|
1,309
|
|
Investments(1)
|
|
|
16,801
|
|
|
|
8,175
|
|
Retained Interest in off-balance sheet securitized loans
|
|
|
3,239
|
|
|
|
3,341
|
|
Other(2)
|
|
|
7,460
|
|
|
|
4,859
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
147,848
|
|
|
$
|
113,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Investments include cash and cash
equivalents, investments, restricted cash and investments,
leveraged leases, and municipal bonds.
|
|
(2) |
|
Other assets include accrued
interest receivable, goodwill and acquired intangible assets,
and other non-interest earning assets.
|
Preferred
Channel Originations
We originated $8.9 billion in student loan volume through
our Preferred Channel in the quarter ended September 30,
2007 versus $7.8 billion in the quarter ended
September 30, 2006.
For the quarter ended September 30, 2007, our internal
lending brands grew 25 percent over the year-ago quarter,
and comprised 65 percent of our Preferred Channel
Originations, up from 59 percent in the year-ago quarter.
Our internal lending brands combined with our other lender
partners comprised 93 percent of our Preferred Channel
Originations for the current quarter, versus 87 percent for
the year-ago quarter; together these two segments of our
Preferred Channel grew 20 percent over the year-ago quarter.
78
The following tables further itemize our Preferred Channel
Originations by type of loan and source.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Three Months Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Preferred Channel Originations Type of Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stafford
|
|
$
|
4,977
|
|
|
$
|
4,257
|
|
|
$
|
11,703
|
|
|
$
|
10,559
|
|
PLUS
|
|
|
820
|
|
|
|
856
|
|
|
|
1,944
|
|
|
|
2,087
|
|
GradPLUS
|
|
|
262
|
|
|
|
144
|
|
|
|
479
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP
|
|
|
6,059
|
|
|
|
5,257
|
|
|
|
14,126
|
|
|
|
12,790
|
|
Private Education Loans
|
|
|
2,793
|
|
|
|
2,574
|
|
|
|
6,331
|
|
|
|
5,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,852
|
|
|
$
|
7,831
|
|
|
$
|
20,457
|
|
|
$
|
18,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
2007
|
|
|
2006
|
|
|
Increase (Decrease)
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
$
|
|
|
%
|
|
|
FFELP
|
|
|
FFELP
|
|
|
$
|
|
|
%
|
|
|
FFELP Preferred Channel Originations Source
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal lending brands
|
|
$
|
3,201
|
|
|
$
|
2,402
|
|
|
$
|
799
|
|
|
|
33
|
%
|
|
$
|
7,236
|
|
|
$
|
5,257
|
|
|
$
|
1,979
|
|
|
|
38
|
%
|
Other lender partners
|
|
|
2,255
|
|
|
|
1,962
|
|
|
|
293
|
|
|
|
15
|
|
|
|
5,146
|
|
|
|
4,685
|
|
|
|
461
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before JPMorgan Chase
|
|
|
5,456
|
|
|
|
4,364
|
|
|
|
1,092
|
|
|
|
25
|
|
|
|
12,382
|
|
|
|
9,942
|
|
|
|
2,440
|
|
|
|
25
|
|
JPMorgan Chase
|
|
|
603
|
|
|
|
893
|
|
|
|
(290
|
)
|
|
|
(32
|
)
|
|
|
1,744
|
|
|
|
2,848
|
|
|
|
(1,104
|
)
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,059
|
|
|
$
|
5,257
|
|
|
$
|
802
|
|
|
|
15
|
%
|
|
$
|
14,126
|
|
|
$
|
12,790
|
|
|
$
|
1,336
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
2007
|
|
|
2006
|
|
|
Increase (Decrease)
|
|
|
|
Private
|
|
|
Private
|
|
|
$
|
|
|
%
|
|
|
Private
|
|
|
Private
|
|
|
$
|
|
|
%
|
|
|
Private Preferred Channel Originations Source
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal lending brands
|
|
$
|
2,560
|
|
|
$
|
2,223
|
|
|
$
|
337
|
|
|
|
15
|
%
|
|
$
|
5,769
|
|
|
$
|
4,680
|
|
|
$
|
1,089
|
|
|
|
23
|
%
|
Other lender partners
|
|
|
190
|
|
|
|
262
|
|
|
|
(72
|
)
|
|
|
(27
|
)
|
|
|
433
|
|
|
|
763
|
|
|
|
(330
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before JPMorgan Chase
|
|
|
2,750
|
|
|
|
2,485
|
|
|
|
265
|
|
|
|
11
|
|
|
|
6,202
|
|
|
|
5,443
|
|
|
|
759
|
|
|
|
14
|
|
JPMorgan Chase
|
|
|
43
|
|
|
|
89
|
|
|
|
(46
|
)
|
|
|
(52
|
)
|
|
|
129
|
|
|
|
386
|
|
|
|
(257
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,793
|
|
|
$
|
2,574
|
|
|
$
|
219
|
|
|
|
9
|
%
|
|
$
|
6,331
|
|
|
$
|
5,829
|
|
|
$
|
502
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
|
Total
|
|
|
Total
|
|
|
$
|
|
|
%
|
|
|
Total
|
|
|
Total
|
|
|
$
|
|
|
%
|
|
|
Total Preferred Channel Originations Source
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal lending brands
|
|
$
|
5,761
|
|
|
$
|
4,625
|
|
|
$
|
1,136
|
|
|
|
25
|
%
|
|
$
|
13,005
|
|
|
$
|
9,937
|
|
|
$
|
3,068
|
|
|
|
31
|
%
|
Other lender partners
|
|
|
2,445
|
|
|
|
2,224
|
|
|
|
221
|
|
|
|
10
|
|
|
|
5,579
|
|
|
|
5,448
|
|
|
|
131
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before JPMorgan Chase
|
|
|
8,206
|
|
|
|
6,849
|
|
|
|
1,357
|
|
|
|
20
|
|
|
|
18,584
|
|
|
|
15,385
|
|
|
|
3,199
|
|
|
|
21
|
|
JPMorgan Chase
|
|
|
646
|
|
|
|
982
|
|
|
|
(336
|
)
|
|
|
(34
|
)
|
|
|
1,873
|
|
|
|
3,234
|
|
|
|
(1,361
|
)
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,852
|
|
|
$
|
7,831
|
|
|
$
|
1,021
|
|
|
|
13
|
%
|
|
$
|
20,457
|
|
|
$
|
18,619
|
|
|
$
|
1,838
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
Student
Loan Activity
The following tables summarize the activity in our on-balance
sheet, off-balance sheet and Managed portfolios of FFELP student
loans and Private Education Loans and highlight the effects of
Consolidation Loan activity on our FFELP portfolios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Balance Sheet
|
|
|
|
Three Months Ended September 30, 2007
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Total Private
|
|
|
Total On-
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Balance Sheet
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
31,503
|
|
|
$
|
68,109
|
|
|
$
|
99,612
|
|
|
$
|
11,014
|
|
|
$
|
110,626
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
755
|
|
|
|
755
|
|
|
|
66
|
|
|
|
821
|
|
Consolidations to third parties
|
|
|
(663
|
)
|
|
|
(228
|
)
|
|
|
(891
|
)
|
|
|
(12
|
)
|
|
|
(903
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(663
|
)
|
|
|
527
|
|
|
|
(136
|
)
|
|
|
54
|
|
|
|
(82
|
)
|
Acquisitions
|
|
|
5,344
|
|
|
|
1,281
|
|
|
|
6,625
|
|
|
|
2,889
|
|
|
|
9,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
4,681
|
|
|
|
1,808
|
|
|
|
6,489
|
|
|
|
2,943
|
|
|
|
9,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(1,647
|
)
|
|
|
2,293
|
|
|
|
646
|
|
|
|
130
|
|
|
|
776
|
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments/claims/resales/other
|
|
|
(429
|
)
|
|
|
(839
|
)
|
|
|
(1,268
|
)
|
|
|
(411
|
)
|
|
|
(1,679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
34,108
|
|
|
$
|
71,371
|
|
|
$
|
105,479
|
|
|
$
|
13,676
|
|
|
$
|
119,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet
|
|
|
|
Three Months Ended September 30, 2007
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Total Private
|
|
|
Total Off-
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Balance Sheet
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
11,362
|
|
|
$
|
17,167
|
|
|
$
|
28,529
|
|
|
$
|
14,048
|
|
|
$
|
42,577
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidations to third parties
|
|
|
(211
|
)
|
|
|
(54
|
)
|
|
|
(265
|
)
|
|
|
(29
|
)
|
|
|
(294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(211
|
)
|
|
|
(54
|
)
|
|
|
(265
|
)
|
|
|
(29
|
)
|
|
|
(294
|
)
|
Acquisitions
|
|
|
63
|
|
|
|
52
|
|
|
|
115
|
|
|
|
119
|
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
(148
|
)
|
|
|
(2
|
)
|
|
|
(150
|
)
|
|
|
90
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(461
|
)
|
|
|
(185
|
)
|
|
|
(646
|
)
|
|
|
(130
|
)
|
|
|
(776
|
)
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments/claims/resales/other
|
|
|
(591
|
)
|
|
|
(281
|
)
|
|
|
(872
|
)
|
|
|
(265
|
)
|
|
|
(1,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
10,162
|
|
|
$
|
16,699
|
|
|
$
|
26,861
|
|
|
$
|
13,743
|
|
|
$
|
40,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Portfolio
|
|
|
|
Three Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Total Private
|
|
|
Managed
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Basis
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
42,865
|
|
|
$
|
85,276
|
|
|
$
|
128,141
|
|
|
$
|
25,062
|
|
|
$
|
153,203
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
755
|
|
|
|
755
|
|
|
|
66
|
|
|
|
821
|
|
Consolidations to third parties
|
|
|
(874
|
)
|
|
|
(282
|
)
|
|
|
(1,156
|
)
|
|
|
(41
|
)
|
|
|
(1,197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(874
|
)
|
|
|
473
|
|
|
|
(401
|
)
|
|
|
25
|
|
|
|
(376
|
)
|
Acquisitions
|
|
|
5,407
|
|
|
|
1,333
|
|
|
|
6,740
|
|
|
|
3,008
|
|
|
|
9,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
4,533
|
|
|
|
1,806
|
|
|
|
6,339
|
|
|
|
3,033
|
|
|
|
9,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(2,108
|
)
|
|
|
2,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments/claims/resales/other
|
|
|
(1,020
|
)
|
|
|
(1,120
|
)
|
|
|
(2,140
|
)
|
|
|
(676
|
)
|
|
|
(2,816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
44,270
|
|
|
$
|
88,070
|
|
|
$
|
132,340
|
|
|
$
|
27,419
|
|
|
$
|
159,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
Acquisitions(3)
|
|
$
|
5,407
|
|
|
$
|
2,088
|
|
|
$
|
7,495
|
|
|
$
|
3,074
|
|
|
$
|
10,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
FFELP category is primarily
Stafford loans and also includes PLUS and HEAL loans.
|
|
(2) |
|
Represents loans that we either own
on-balance sheet or loans that we consolidated from our
off-balance sheet securitization trusts.
|
|
(3) |
|
The Total Managed Acquisitions line
includes incremental consolidations from third parties and
acquisitions.
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Balance Sheet
|
|
|
|
Three Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
FFELP
|
|
|
|
|
|
|
|
|
Private
|
|
|
Total On-
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Balance Sheet
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
21,391
|
|
|
$
|
54,055
|
|
|
$
|
75,446
|
|
|
$
|
6,833
|
|
|
$
|
82,279
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
1,648
|
|
|
|
1,648
|
|
|
|
34
|
|
|
|
1,682
|
|
Consolidations to third parties
|
|
|
(729
|
)
|
|
|
(367
|
)
|
|
|
(1,096
|
)
|
|
|
(4
|
)
|
|
|
(1,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(729
|
)
|
|
|
1,281
|
|
|
|
552
|
|
|
|
30
|
|
|
|
582
|
|
Acquisitions
|
|
|
5,014
|
|
|
|
1,702
|
|
|
|
6,716
|
|
|
|
2,691
|
|
|
|
9,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
4,285
|
|
|
|
2,983
|
|
|
|
7,268
|
|
|
|
2,721
|
|
|
|
9,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(2,397
|
)
|
|
|
4,813
|
|
|
|
2,416
|
|
|
|
83
|
|
|
|
2,499
|
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
(4,066
|
)
|
|
|
(4,066
|
)
|
|
|
(1,008
|
)
|
|
|
(5,074
|
)
|
Repayments/claims/resales/other
|
|
|
(665
|
)
|
|
|
(583
|
)
|
|
|
(1,248
|
)
|
|
|
(407
|
)
|
|
|
(1,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
22,614
|
|
|
$
|
57,202
|
|
|
$
|
79,816
|
|
|
$
|
8,222
|
|
|
$
|
88,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet
|
|
|
|
Three Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
FFELP
|
|
|
|
|
|
|
|
|
Private
|
|
|
Total Off-
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Balance Sheet
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
20,535
|
|
|
$
|
15,140
|
|
|
$
|
35,675
|
|
|
$
|
12,190
|
|
|
$
|
47,865
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidations to third parties
|
|
|
(726
|
)
|
|
|
(119
|
)
|
|
|
(845
|
)
|
|
|
(11
|
)
|
|
|
(856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(726
|
)
|
|
|
(119
|
)
|
|
|
(845
|
)
|
|
|
(11
|
)
|
|
|
(856
|
)
|
Acquisitions
|
|
|
96
|
|
|
|
55
|
|
|
|
151
|
|
|
|
79
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
(630
|
)
|
|
|
(64
|
)
|
|
|
(694
|
)
|
|
|
68
|
|
|
|
(626
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(2,185
|
)
|
|
|
(231
|
)
|
|
|
(2,416
|
)
|
|
|
(83
|
)
|
|
|
(2,499
|
)
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
4,066
|
|
|
|
4,066
|
|
|
|
1,008
|
|
|
|
5,074
|
|
Repayments/claims/resales/other
|
|
|
(547
|
)
|
|
|
(166
|
)
|
|
|
(713
|
)
|
|
|
(204
|
)
|
|
|
(917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
17,173
|
|
|
$
|
18,745
|
|
|
$
|
35,918
|
|
|
$
|
12,979
|
|
|
$
|
48,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Portfolio
|
|
|
|
Three Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
|
FFELP
|
|
|
|
|
|
|
|
|
Private
|
|
|
Managed
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Basis
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
41,926
|
|
|
$
|
69,195
|
|
|
$
|
111,121
|
|
|
$
|
19,023
|
|
|
$
|
130,144
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
1,648
|
|
|
|
1,648
|
|
|
|
34
|
|
|
|
1,682
|
|
Consolidations to third parties
|
|
|
(1,455
|
)
|
|
|
(486
|
)
|
|
|
(1,941
|
)
|
|
|
(15
|
)
|
|
|
(1,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(1,455
|
)
|
|
|
1,162
|
|
|
|
(293
|
)
|
|
|
19
|
|
|
|
(274
|
)
|
Acquisitions
|
|
|
5,110
|
|
|
|
1,757
|
|
|
|
6,867
|
|
|
|
2,770
|
|
|
|
9,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
3,655
|
|
|
|
2,919
|
|
|
|
6,574
|
|
|
|
2,789
|
|
|
|
9,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(4,582
|
)
|
|
|
4,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments/claims/resales/other
|
|
|
(1,212
|
)
|
|
|
(749
|
)
|
|
|
(1,961
|
)
|
|
|
(611
|
)
|
|
|
(2,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
39,787
|
|
|
$
|
75,947
|
|
|
$
|
115,734
|
|
|
$
|
21,201
|
|
|
$
|
136,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
Acquisitions(3)
|
|
$
|
5,110
|
|
|
$
|
3,405
|
|
|
$
|
8,515
|
|
|
$
|
2,804
|
|
|
$
|
11,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
FFELP category is primarily
Stafford loans and also includes PLUS and HEAL loans.
|
|
(2) |
|
Represents loans that we either own
on-balance sheet or loans that we consolidated from our
off-balance sheet securitization trusts.
|
|
(3) |
|
The Total Managed Acquisitions line
includes incremental consolidations from third parties and
acquisitions.
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Balance Sheet
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Total Private
|
|
|
Total On-
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Balance Sheet
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
24,841
|
|
|
$
|
61,324
|
|
|
$
|
86,165
|
|
|
$
|
9,755
|
|
|
$
|
95,920
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
1,834
|
|
|
|
1,834
|
|
|
|
174
|
|
|
|
2,008
|
|
Consolidations to third parties
|
|
|
(1,943
|
)
|
|
|
(673
|
)
|
|
|
(2,616
|
)
|
|
|
(29
|
)
|
|
|
(2,645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(1,943
|
)
|
|
|
1,161
|
|
|
|
(782
|
)
|
|
|
145
|
|
|
|
(637
|
)
|
Acquisitions
|
|
|
16,103
|
|
|
|
5,977
|
|
|
|
22,080
|
|
|
|
6,586
|
|
|
|
28,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
14,160
|
|
|
|
7,138
|
|
|
|
21,298
|
|
|
|
6,731
|
|
|
|
28,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(3,788
|
)
|
|
|
5,803
|
|
|
|
2,015
|
|
|
|
399
|
|
|
|
2,414
|
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,871
|
)
|
|
|
(1,871
|
)
|
Repayments/claims/resales/other
|
|
|
(1,105
|
)
|
|
|
(2,894
|
)
|
|
|
(3,999
|
)
|
|
|
(1,338
|
)
|
|
|
(5,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
34,108
|
|
|
$
|
71,371
|
|
|
$
|
105,479
|
|
|
$
|
13,676
|
|
|
$
|
119,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Total Private
|
|
|
Total Off-
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Balance Sheet
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
15,028
|
|
|
$
|
18,311
|
|
|
$
|
33,339
|
|
|
$
|
12,833
|
|
|
$
|
46,172
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidations to third parties
|
|
|
(831
|
)
|
|
|
(181
|
)
|
|
|
(1,012
|
)
|
|
|
(65
|
)
|
|
|
(1,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(831
|
)
|
|
|
(181
|
)
|
|
|
(1,012
|
)
|
|
|
(65
|
)
|
|
|
(1,077
|
)
|
Acquisitions
|
|
|
237
|
|
|
|
159
|
|
|
|
396
|
|
|
|
417
|
|
|
|
813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
(594
|
)
|
|
|
(22
|
)
|
|
|
(616
|
)
|
|
|
352
|
|
|
|
(264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(1,332
|
)
|
|
|
(683
|
)
|
|
|
(2,015
|
)
|
|
|
(399
|
)
|
|
|
(2,414
|
)
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,871
|
|
|
|
1,871
|
|
Repayments/claims/resales/other
|
|
|
(2,940
|
)
|
|
|
(907
|
)
|
|
|
(3,847
|
)
|
|
|
(914
|
)
|
|
|
(4,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
10,162
|
|
|
$
|
16,699
|
|
|
$
|
26,861
|
|
|
$
|
13,743
|
|
|
$
|
40,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Portfolio
|
|
|
|
Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
FFELP
|
|
|
FFELP
|
|
|
|
|
|
Total Private
|
|
|
Managed
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Basis
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
39,869
|
|
|
$
|
79,635
|
|
|
$
|
119,504
|
|
|
$
|
22,588
|
|
|
$
|
142,092
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
1,834
|
|
|
|
1,834
|
|
|
|
174
|
|
|
|
2,008
|
|
Consolidations to third parties
|
|
|
(2,774
|
)
|
|
|
(854
|
)
|
|
|
(3,628
|
)
|
|
|
(94
|
)
|
|
|
(3,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(2,774
|
)
|
|
|
980
|
|
|
|
(1,794
|
)
|
|
|
80
|
|
|
|
(1,714
|
)
|
Acquisitions
|
|
|
16,340
|
|
|
|
6,136
|
|
|
|
22,476
|
|
|
|
7,003
|
|
|
|
29,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
13,566
|
|
|
|
7,116
|
|
|
|
20,682
|
|
|
|
7,083
|
|
|
|
27,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(5,120
|
)
|
|
|
5,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments/claims/resales/other
|
|
|
(4,045
|
)
|
|
|
(3,801
|
)
|
|
|
(7,846
|
)
|
|
|
(2,252
|
)
|
|
|
(10,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
44,270
|
|
|
$
|
88,070
|
|
|
$
|
132,340
|
|
|
$
|
27,419
|
|
|
$
|
159,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
Acquisitions(3)
|
|
$
|
16,340
|
|
|
$
|
7,970
|
|
|
$
|
24,310
|
|
|
$
|
7,177
|
|
|
$
|
31,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
FFELP category is primarily
Stafford loans and also includes PLUS and HEAL loans.
|
|
(2) |
|
Represents loans that we either own
on-balance sheet or loans that we consolidated from our
off-balance sheet securitization trusts.
|
|
(3) |
|
The Total Managed Acquisitions line
includes incremental consolidations from third parties and
acquisitions.
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Balance Sheet
|
|
|
|
Nine Months Ended September 30, 2006
|
|
|
|
FFELP
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Stafford
|
|
|
|
|
|
|
|
|
Private
|
|
|
Total On-
|
|
|
|
and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Balance Sheet
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio-
|
|
|
Beginning balance
|
|
$
|
19,988
|
|
|
$
|
54,859
|
|
|
$
|
74,847
|
|
|
$
|
7,757
|
|
|
$
|
82,604
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
3,389
|
|
|
|
3,389
|
|
|
|
43
|
|
|
|
3,432
|
|
Consolidations to third parties
|
|
|
(1,422
|
)
|
|
|
(1,775
|
)
|
|
|
(3,197
|
)
|
|
|
(11
|
)
|
|
|
(3,208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(1,422
|
)
|
|
|
1,614
|
|
|
|
192
|
|
|
|
32
|
|
|
|
224
|
|
Acquisitions
|
|
|
15,114
|
|
|
|
2,401
|
|
|
|
17,515
|
|
|
|
6,127
|
|
|
|
23,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
13,692
|
|
|
|
4,015
|
|
|
|
17,707
|
|
|
|
6,159
|
|
|
|
23,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(4,772
|
)
|
|
|
9,914
|
|
|
|
5,142
|
|
|
|
203
|
|
|
|
5,345
|
|
Off-balance sheet securitizations
|
|
|
(5,034
|
)
|
|
|
(9,638
|
)
|
|
|
(14,672
|
)
|
|
|
(4,737
|
)
|
|
|
(19,409
|
)
|
Repayments/claims/resales/other
|
|
|
(1,260
|
)
|
|
|
(1,948
|
)
|
|
|
(3,208
|
)
|
|
|
(1,160
|
)
|
|
|
(4,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
22,614
|
|
|
$
|
57,202
|
|
|
$
|
79,816
|
|
|
$
|
8,222
|
|
|
$
|
88,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet
|
|
|
|
Nine Months Ended September 30, 2006
|
|
|
|
FFELP
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Stafford
|
|
|
|
|
|
|
|
|
Private
|
|
|
Total Off-
|
|
|
|
and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Balance Sheet
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
20,670
|
|
|
$
|
10,575
|
|
|
$
|
31,245
|
|
|
$
|
8,680
|
|
|
$
|
39,925
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidations to third parties
|
|
|
(1,591
|
)
|
|
|
(574
|
)
|
|
|
(2,165
|
)
|
|
|
(21
|
)
|
|
|
(2,186
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(1,591
|
)
|
|
|
(574
|
)
|
|
|
(2,165
|
)
|
|
|
(21
|
)
|
|
|
(2,186
|
)
|
Acquisitions
|
|
|
302
|
|
|
|
172
|
|
|
|
474
|
|
|
|
256
|
|
|
|
730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
(1,289
|
)
|
|
|
(402
|
)
|
|
|
(1,691
|
)
|
|
|
235
|
|
|
|
(1,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(4,634
|
)
|
|
|
(508
|
)
|
|
|
(5,142
|
)
|
|
|
(203
|
)
|
|
|
(5,345
|
)
|
Off-balance sheet securitizations
|
|
|
5,034
|
|
|
|
9,638
|
|
|
|
14,672
|
|
|
|
4,737
|
|
|
|
19,409
|
|
Repayments/claims/resales/other
|
|
|
(2,608
|
)
|
|
|
(558
|
)
|
|
|
(3,166
|
)
|
|
|
(470
|
)
|
|
|
(3,636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
17,173
|
|
|
$
|
18,745
|
|
|
$
|
35,918
|
|
|
$
|
12,979
|
|
|
$
|
48,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Portfolio
|
|
|
|
Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Total
|
|
|
|
FFELP
|
|
|
|
|
|
|
|
|
Private
|
|
|
Managed
|
|
|
|
Stafford and
|
|
|
Consolidation
|
|
|
Total
|
|
|
Education
|
|
|
Basis
|
|
|
|
Other(1)
|
|
|
Loans
|
|
|
FFELP
|
|
|
Loans
|
|
|
Portfolio
|
|
|
Beginning balance
|
|
$
|
40,658
|
|
|
$
|
65,434
|
|
|
$
|
106,092
|
|
|
$
|
16,437
|
|
|
$
|
122,529
|
|
Net consolidations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental consolidations from third parties
|
|
|
|
|
|
|
3,389
|
|
|
|
3,389
|
|
|
|
43
|
|
|
|
3,432
|
|
Consolidations to third parties
|
|
|
(3,013
|
)
|
|
|
(2,349
|
)
|
|
|
(5,362
|
)
|
|
|
(32
|
)
|
|
|
(5,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consolidations
|
|
|
(3,013
|
)
|
|
|
1,040
|
|
|
|
(1,973
|
)
|
|
|
11
|
|
|
|
(1,962
|
)
|
Acquisitions
|
|
|
15,416
|
|
|
|
2,573
|
|
|
|
17,989
|
|
|
|
6,383
|
|
|
|
24,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquisitions
|
|
|
12,403
|
|
|
|
3,613
|
|
|
|
16,016
|
|
|
|
6,394
|
|
|
|
22,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal
consolidations(2)
|
|
|
(9,406
|
)
|
|
|
9,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet securitizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments/claims/resales/other
|
|
|
(3,868
|
)
|
|
|
(2,506
|
)
|
|
|
(6,374
|
)
|
|
|
(1,630
|
)
|
|
|
(8,004
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
39,787
|
|
|
$
|
75,947
|
|
|
$
|
115,734
|
|
|
$
|
21,201
|
|
|
$
|
136,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Managed
Acquisitions(3)
|
|
$
|
15,416
|
|
|
$
|
5,962
|
|
|
$
|
21,378
|
|
|
$
|
6,426
|
|
|
$
|
27,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
FFELP category is primarily
Stafford loans and also includes PLUS and HEAL loans.
|
|
|
(2) |
|
Represents loans that we either own
on-balance sheet or loans that we consolidated from our
off-balance sheet securitization trusts.
|
|
|
(3) |
|
The Total Managed Acquisitions line
includes incremental consolidations from third parties and
acquisitions.
|
83
The increase in consolidations to third parties in 2006 reflects
FFELP lenders reconsolidating FFELP Consolidation Loans using
the Direct Loan program as a pass-through entity, a practice
which was restricted by The Higher Education Reconciliation Act
of 2005, as of July 1, 2006.
During 2006, we introduced Private Education Consolidation Loans
as a separate product line and for the nine months ended
September 30, 2007, we added $80 million of net
incremental volume of Private Education Consolidation Loans.
This incremental volume is of higher credit quality than the
volume that consolidated away from us. We expect this product
line to continue to grow in the future and we will aggressively
employ this and other tools to protect our portfolio against
third-party consolidation of our Private Education Loans.
Other
Income Lending Business Segment
The following table summarizes the components of other income,
net, for our Lending business segment for the three and nine
months ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Late fees
|
|
$
|
34
|
|
|
$
|
29
|
|
|
$
|
101
|
|
|
$
|
86
|
|
Gains on sales of mortgages and other loan fees
|
|
|
2
|
|
|
|
5
|
|
|
|
10
|
|
|
|
12
|
|
Gains on sales of student loans
|
|
|
2
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
Other
|
|
|
8
|
|
|
|
12
|
|
|
|
18
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
$
|
46
|
|
|
$
|
46
|
|
|
$
|
150
|
|
|
$
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company periodically sells student loans. The timing and
amount of loan sales impacts the amount of recognized gains on
sales of student loans. In the second quarter of 2007, we sold
$770 million of FFELP Stafford and Consolidation student
loans, the majority of which were serviced by third parties. The
decrease in the Other category versus the prior year
is due to the shift of origination volume to Sallie Mae Bank.
Prior to this shift, we earned servicing fees for originated
Private Education Loans on behalf of third party lenders prior
to our acquisition of those loans. This revenue stream has been
more than offset by capturing the net interest income earned by
acquiring these loans earlier.
Operating
Expense Lending Business Segment
The following table summarizes the components of operating
expenses for our Lending business segment for the three and nine
months ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Sales and originations
|
|
$
|
84
|
|
|
$
|
81
|
|
|
$
|
264
|
|
|
$
|
244
|
|
Servicing and information technology
|
|
|
56
|
|
|
|
49
|
|
|
|
167
|
|
|
|
151
|
|
Corporate overhead
|
|
|
24
|
|
|
|
26
|
|
|
|
86
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
164
|
|
|
$
|
156
|
|
|
$
|
517
|
|
|
$
|
481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses for our Lending business segment include
costs incurred to service our Managed student loan portfolio and
acquire student loans, as well as other general and
administrative expenses. Operating expenses for the Lending
business segment also include stock option compensation expense
of $4 million and $8 million, respectively, for the
three months ended September 30, 2007 and 2006, and
$26 million, for each of the nine months ended
September 30, 2007 and 2006.
84
ASSET
PERFORMANCE GROUP (APG) BUSINESS SEGMENT
The following table includes the Core Earnings
results of operations for our APG business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
% Increase
|
|
|
Nine Months
|
|
|
% Increase
|
|
|
|
Ended September 30,
|
|
|
(Decrease)
|
|
|
Ended September 30,
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
2007 vs.
|
|
|
|
|
|
|
|
|
2007 vs.
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
Contingency fee income
|
|
$
|
65
|
|
|
$
|
103
|
|
|
|
(37
|
)%
|
|
$
|
207
|
|
|
$
|
261
|
|
|
|
(21
|
)%
|
Other fee income
|
|
|
11
|
|
|
|
19
|
|
|
|
(42
|
)
|
|
|
37
|
|
|
|
43
|
|
|
|
(14
|
)
|
Collections revenue
|
|
|
53
|
|
|
|
58
|
|
|
|
(9
|
)
|
|
|
196
|
|
|
|
182
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
129
|
|
|
|
180
|
|
|
|
(28
|
)
|
|
|
440
|
|
|
|
486
|
|
|
|
(9
|
)
|
Operating expenses
|
|
|
94
|
|
|
|
91
|
|
|
|
3
|
|
|
|
284
|
|
|
|
266
|
|
|
|
7
|
|
Net interest expense
|
|
|
7
|
|
|
|
6
|
|
|
|
17
|
|
|
|
20
|
|
|
|
17
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest in net earnings
of subsidiaries
|
|
|
28
|
|
|
|
83
|
|
|
|
(66
|
)
|
|
|
136
|
|
|
|
203
|
|
|
|
(33
|
)
|
Income tax expense
|
|
|
11
|
|
|
|
31
|
|
|
|
(65
|
)
|
|
|
51
|
|
|
|
75
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest in net earnings of subsidiaries
|
|
|
17
|
|
|
|
52
|
|
|
|
(67
|
)
|
|
|
85
|
|
|
|
128
|
|
|
|
(34
|
)
|
Minority interest in net earnings of subsidiaries
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
2
|
|
|
|
4
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income
|
|
$
|
17
|
|
|
$
|
51
|
|
|
|
(67
|
)%
|
|
$
|
83
|
|
|
$
|
124
|
|
|
|
(33
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in contingency fee income for the third quarter of
2007 versus the year-ago quarter was primarily due to a
legislative change in July 2006 governing the rehabilitated loan
policy which reduced the number of consecutive payments to
qualify for a loan rehabilitation from twelve months to nine
months. This accelerated process added approximately
$30 million of incremental revenue in the third quarter of
2006. To a lesser extent, the third quarter of 2007 was
negatively impacted by a lower rate earned on consolidating
defaulted loans due to legislative changes in 2006 as well as
lower performance in default prevention.
The decrease in collections revenue for the third quarter of
2007 versus the year-ago quarter was primarily due to the
write-downs of certain purchased paper portfolios. Declines in
real estate values, general economic uncertainty as well as
lengthening the assumed lifetime collection period have resulted
in write-downs related to the mortgage purchased paper
portfolio. Specifically, the mortgage purchased paper portfolio
had impairments of $11 million (which equals approximately
1 percent of the carry value of these portfolios) in the
third quarter of 2007 compared to impairments of $5 million
in the third quarter of 2006. General economic uncertainty has
also resulted in lengthening the assumed lifetime collection
period related to the non-mortgage portfolio.
Revenues from United Student Aid Funds, Inc. (USA
Funds) represented 29 percent and 36 percent,
respectively, of total APG revenue for the three months ended
September 30, 2007 and 2006, and 27 percent and
32 percent, respectively, for the nine months ended
September 30, 2007 and 2006.
85
Purchased
Paper Non-Mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Face value of purchases for the period
|
|
$
|
1,741
|
|
|
$
|
865
|
|
|
$
|
3,881
|
|
|
$
|
1,857
|
|
Purchase price for the period
|
|
|
134
|
|
|
|
79
|
|
|
|
358
|
|
|
|
154
|
|
% of face value purchased
|
|
|
7.7
|
%
|
|
|
9.2
|
%
|
|
|
9.2
|
%
|
|
|
8.3
|
%
|
Gross cash collections (GCC)
|
|
$
|
118
|
|
|
$
|
81
|
|
|
$
|
357
|
|
|
$
|
263
|
|
Collections revenue
|
|
|
43
|
|
|
|
49
|
|
|
|
158
|
|
|
|
152
|
|
Collections revenue as a% of GCC
|
|
|
36
|
%
|
|
|
61
|
%
|
|
|
44
|
%
|
|
|
58
|
%
|
Carrying value of purchases
|
|
$
|
448
|
|
|
$
|
193
|
|
|
$
|
448
|
|
|
$
|
193
|
|
The amount of face value of purchases in any quarter is a
function of a combination of factors including the amount of
receivables available for purchase in the marketplace, average
age of each portfolio, the asset class of the receivables, and
competition in the marketplace. As a result, the percentage of
face value purchased will vary from quarter to quarter. The
decrease in collections revenue as a percentage of gross cash
collections (GCC) versus the prior year can
primarily be attributed to the increase in new portfolio
purchases in the third quarter of 2007. Typically, revenue
recognition based on a portfolios effective interest rate
is a lower percentage of cash collections in the early stages of
servicing a portfolio.
Purchased
Paper Mortgage/Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Face value of purchases for the period
|
|
$
|
102
|
|
|
$
|
140
|
|
|
$
|
827
|
|
|
$
|
463
|
|
Collections revenue
|
|
|
10
|
|
|
|
9
|
|
|
|
38
|
|
|
|
30
|
|
Collateral value of purchases
|
|
|
85
|
|
|
|
147
|
|
|
|
775
|
|
|
|
510
|
|
Purchase price for the period
|
|
|
57
|
|
|
|
114
|
|
|
|
581
|
|
|
|
388
|
|
Purchase price as a % of collateral value
|
|
|
67
|
%
|
|
|
78
|
%
|
|
|
75
|
%
|
|
|
76
|
%
|
Carrying value of purchases
|
|
$
|
937
|
|
|
$
|
503
|
|
|
$
|
937
|
|
|
$
|
503
|
|
The purchase price for sub-performing and non-performing
mortgage loans is generally determined as a percentage of the
underlying collateral, but we also consider a number of
additional factors when pricing mortgage loan portfolios to
attain a targeted yield. Therefore, the purchase price as a
percentage of collateral value can fluctuate depending on the
mix of sub-performing versus non-performing mortgages in the
portfolio, the projected timeline to resolution of loans in the
portfolio and the level of private mortgage insurance associated
with particular assets.
Contingency
Inventory
The following table presents the outstanding inventory of
receivables that are currently being serviced through our APG
business.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Contingency:
|
|
|
|
|
|
|
|
|
Student loans
|
|
$
|
8,353
|
|
|
$
|
6,971
|
|
Other
|
|
|
1,550
|
|
|
|
1,667
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,903
|
|
|
$
|
8,638
|
|
|
|
|
|
|
|
|
|
|
86
The $1.3 billion increase in the contingency inventory from
December 31, 2006 is primarily due to higher placements of
defaulted loans.
Operating
Expenses APG Business Segment
For the three months ended September 30, 2007 and 2006,
operating expenses for the APG business segment totaled
$94 million and $91 million, respectively, and
included $2 million and $4 million, respectively, of
stock option compensation expense. For the nine months ended
September 30, 2007 and September 30, 2006, operating
expenses for this segment totaled $284 million and
$266 million, respectively, and included $9 million of
stock option compensation expense for both periods.
At September 30, 2007 and December 31, 2006, the APG
business segment had total assets of $2.2 billion and
$1.5 billion, respectively.
CORPORATE
AND OTHER BUSINESS SEGMENT
The following table includes Core Earnings results
of operations for our Corporate and Other business segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
% Increase
|
|
|
Ended
|
|
|
% Increase
|
|
|
|
September 30,
|
|
|
(Decrease)
|
|
|
September 30,
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
2007 vs.
|
|
|
|
|
|
|
|
|
2007 vs.
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
Net interest income (loss) after provisions for loan losses
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
|
200
|
%
|
|
$
|
(2
|
)
|
|
$
|
(1
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor servicing fees
|
|
|
46
|
|
|
|
39
|
|
|
|
18
|
|
|
|
115
|
|
|
|
99
|
|
|
|
16
|
|
Loan servicing fees
|
|
|
6
|
|
|
|
8
|
|
|
|
(25
|
)
|
|
|
17
|
|
|
|
23
|
|
|
|
(26
|
)
|
Upromise
|
|
|
28
|
|
|
|
8
|
|
|
|
250
|
|
|
|
78
|
|
|
|
8
|
|
|
|
875
|
|
Other
|
|
|
29
|
|
|
|
25
|
|
|
|
16
|
|
|
|
67
|
|
|
|
64
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee and other income
|
|
|
109
|
|
|
|
80
|
|
|
|
36
|
|
|
|
277
|
|
|
|
194
|
|
|
|
43
|
|
Operating expenses
|
|
|
79
|
|
|
|
70
|
|
|
|
13
|
|
|
|
251
|
|
|
|
178
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
31
|
|
|
|
9
|
|
|
|
244
|
|
|
|
24
|
|
|
|
15
|
|
|
|
60
|
|
Income tax expense
|
|
|
11
|
|
|
|
3
|
|
|
|
267
|
|
|
|
9
|
|
|
|
6
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings net income
|
|
$
|
20
|
|
|
$
|
6
|
|
|
|
233
|
%
|
|
$
|
15
|
|
|
$
|
9
|
|
|
|
67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in income from Upromise for the three and nine
months ended September 30, 2007 from the year ago periods
is the result of a full three and nine months of income, as
Upromise was acquired in August 2006.
USA Funds, the nations largest guarantee agency, accounted
for 83 percent and 81 percent, respectively, of
guarantor servicing fees and 16 percent and
24 percent, respectively, of revenues associated with other
products and services for the quarters ended September 30,
2007 and 2006.
87
Operating
Expenses Corporate and Other Business
Segment
The following table summarizes the components of operating
expenses for our Corporate and Other business segment for the
three and nine months ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Operating expenses
|
|
$
|
27
|
|
|
$
|
48
|
|
|
$
|
84
|
|
|
$
|
115
|
|
Upromise
|
|
|
24
|
|
|
|
8
|
|
|
|
66
|
|
|
|
8
|
|
Corporate overhead
|
|
|
28
|
|
|
|
14
|
|
|
|
101
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
79
|
|
|
$
|
70
|
|
|
$
|
251
|
|
|
$
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses for our Corporate and Other business segment
include direct costs incurred to service loans for unrelated
third parties and to perform guarantor servicing on behalf of
guarantor agencies, as well as information technology expenses
related to these functions. The $73 million increase in
operating expenses during the nine months ended
September 30, 2007 versus the year-ago period was primarily
due to a $58 million increase in Upromise expenses and
$42 million in Merger-related fees. Stock option
compensation expense included in operating expenses for this
segment totaled $2 million and $4 million,
respectively, for the three months ended September 30, 2007
and 2006, and totaled $12 million and $13 million,
respectively, for the nine months ended September 30, 2007
and 2006.
At September 30, 2007 and December 31, 2006, the
Corporate and Other business segment had total assets of
$777 million and $999 million, respectively.
LIQUIDITY
AND CAPITAL RESOURCES
Except in the case of acquisitions, which are discussed
separately, our APG and Corporate and Other business segments
are not capital intensive businesses, and as such, a minimal
amount of debt and equity capital is allocated to these
segments. Therefore, the following LIQUIDITY AND CAPITAL
RESOURCES discussion is concentrated on our Lending
business segment.
Our primary funding objective is to maintain cost-effective
liquidity to fund the growth in our Managed portfolio of student
loans. Upon the announcement of the Merger on April 16,
2007, credit spreads on our unsecured debt widened considerably,
significantly increasing our cost of accessing the unsecured
debt markets (see RECENT DEVELOPMENTS-Merger Related
Developments). In the near term, we do not expect to rely
on the unsecured debt market as a source of liquidity, due to
the high cost and restrictive covenants likely to be associated
with such financing. As a result, student loan asset-backed
securities financings, including asset-backed commercial paper
(ABCP) facilities and term asset-backed securities
(ABS) are expected to be our primary source of
cost-effective financing for the immediate future.
We have built a highly liquid and deep market for our student
loan asset-backed securities. We securitized $20.5 billion
in student loans in six transactions in the nine months ended
September 30, 2007, compared to $25.6 billion in
eleven transactions in the year-ago period. Asset-backed
securities financings, including term ABS, ABCP borrowings and
other secured financings, comprised 75 percent of our
Managed debt outstanding at September 30, 2007, versus
70 percent at September 30, 2006. On April 30,
2007, in connection with the Merger, we entered into new
aggregate interim $30 billion asset-backed commercial paper
conduit facilities (collectively, the Interim ABCP
Facility), which provided us with significant additional
liquidity. Generally, the Interim ABCP Facility effectively
terminates on the earliest of (1) the Merger closing,
(2) 90 calendar days after the date of termination of the
Merger Agreement or (3) 90 calendar days after
February 15, 2008. We are in substantive discussions with
various financing sources concerning the replacement of the
Interim ABCP Facility, should it be necessary, and believe that
this source of liquidity can be replaced in a timely manner.
In the third quarter, as with similarly sized financial services
companies, adverse conditions in the financial markets increased
the Companys cost of issuance in the term ABS market, and
increased spreads on our existing ABCP financings. Because of
this increase in the cost of issuance, the Company chose not to
88
issue in the term ABS market in August and September of 2007.
The Company resumed the issuance of term ABS in October 2007,
and expects to continue to access the term ABS market on a
regular basis throughout the remainder of 2007 and in 2008. To
the extent the current increased cost of borrowing in the term
ABS market persists, it will have a negative impact on the
companys overall future cost of funds.
As noted above, since the announcement of the Merger (see
RECENT DEVELOPMENTS Merger-Related
Developments), the asset-backed securities markets have
been the Companys only source of cost-effective financing.
As a result we have significant long-term funding, credit spread
and liquidity exposure to those markets. A long-term disruption
in the asset-backed securities markets that limits our ability
to raise funds or significantly increases the cost of those
funds could have an adverse impact on our results of operations.
Additionally, the Companys liquidity may be impacted if
the Merger Agreement is terminated or the Merger transaction
does not close, primarily as a result of the prospective
termination of the Companys Interim ABCP Facility. The
Company is in substantive discussions with various financing
sources concerning the replacement of the Interim ABCP Facility,
should it be necessary, and believes that this source of
liquidity can be replaced in a timely manner. As a result, we
believe we will have sufficient sources of liquidity to meet the
cash needs of the Company. We would also expect to continue to
have ready access to our $6.5 billion revolving credit
facilities, our existing $6.0 billion ABCP facility, our
cash and investment portfolio and the term ABS markets as
sources of liquidity. See Note 12, Merger-Related
Developments Financing Considerations if the
Merger does not Close to the consolidated financial
statements. Whether the Merger is consummated or not, as stated
above, we do not expect to rely on the unsecured debt markets as
a significant source of liquidity in the near term, due to the
high cost and restrictive covenants likely to be associated with
such financing.
The following table details our primary sources of liquidity and
the available capacity at September 30, 2007, and
December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
Available Capacity
|
|
|
Available Capacity
|
|
|
Sources of primary liquidity:
|
|
|
|
|
|
|
|
|
Unrestricted cash and liquid
investments(1)(2)
|
|
$
|
11,936
|
|
|
$
|
4,720
|
|
Unused commercial paper and bank lines of credit
|
|
|
6,500
|
|
|
|
6,500
|
|
ABCP borrowing capacity
|
|
|
5,758
|
|
|
|
1,047
|
|
Interim ABCP Facility borrowing capacity
|
|
|
4,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sources of primary liquidity
|
|
|
29,091
|
|
|
|
12,267
|
|
|
|
|
|
|
|
|
|
|
Sources of stand-by liquidity:
|
|
|
|
|
|
|
|
|
Unencumbered FFELP student
loans(2)
|
|
|
16,340
|
|
|
|
28,070
|
|
|
|
|
|
|
|
|
|
|
Total sources of primary and stand-by liquidity
|
|
$
|
45,431
|
|
|
$
|
40,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes $11 million and $365 million of investments
pledged as collateral related to certain derivative positions
and $93 million and $99 million of other non-liquid
investments classified at September 30, 2007 and
December 31, 2006, respectively, as cash and investments on
our balance sheet in accordance with GAAP.
|
|
|
(2)
|
Pursuant to the Merger Agreement, certain asset sales required
the approval of the Buyer Group prior to the Merger. On
October 23, 2007, the Buyer Group waived the Companys
obligation to obtain such approvals. See RECENT
DEVELOPMENTS Merger-Related Developments.
|
We believe our currently unencumbered FFELP student loan
portfolio provides an excellent source of potential or stand-by
liquidity because of the well-developed market for
securitizations and whole loan sales of government guaranteed
student loans. In addition to the assets listed in the table
above, we hold on-balance sheet a number of other unencumbered
assets, consisting primarily of Private Education Loans,
Retained Interests and other assets. At September 30, 2007,
we had a total of $48.3 billion of unencumbered assets,
including goodwill and acquired intangibles. On October 2,
2007, the Company received approximately $3.0 billion of
cash in exchange for a similar amount of FFELP student loans
encumbered on September 30,
89
2007. Upon receipt of this cash, total unencumbered assets were
$51.3 billion with no change in overall liquidity in the
table above.
In addition to liquidity, a major objective when financing our
business is to minimize interest rate risk by aligning the
interest rate and reset characteristics of our Managed assets
and liabilities, generally on a pooled basis, to the extent
practicable. In this process we use derivative financial
instruments extensively to reduce our interest rate and foreign
currency exposure. This interest rate risk management helps us
to stabilize our student loan spread in various and changing
interest rate environments.
Managed
Borrowings
The following tables present the ending balances of our Managed
borrowings at September 30, 2007 and 2006 and average
balances and average interest rates of our Managed borrowings
for the three and nine months ended September 30, 2007 and
2006. The average interest rates include derivatives that are
economically hedging the underlying debt, but do not qualify for
hedge accounting treatment under SFAS No. 133. (See
BUSINESS SEGMENTS Pre-tax differences Between
Core Earnings and GAAP by Business
Segment Reclassification of Realized Gains
(Losses) on Derivative and Hedging Activities.)
Ending
Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Ending Balance
|
|
|
Ending Balance
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Short
|
|
|
Long
|
|
|
Managed
|
|
|
Short
|
|
|
Long
|
|
|
Managed
|
|
|
|
Term
|
|
|
Term
|
|
|
Basis
|
|
|
Term
|
|
|
Term
|
|
|
Basis
|
|
|
Unsecured borrowings
|
|
$
|
7,410
|
|
|
$
|
37,973
|
|
|
$
|
45,383
|
|
|
$
|
3,595
|
|
|
$
|
41,549
|
|
|
$
|
45,144
|
|
Indentured trusts (on-balance sheet)
|
|
|
149
|
|
|
|
2,513
|
|
|
|
2,662
|
|
|
|
75
|
|
|
|
3,109
|
|
|
|
3,184
|
|
ABCP borrowings (on-balance sheet)
|
|
|
25,103
|
|
|
|
242
|
|
|
|
25,345
|
|
|
|
|
|
|
|
4,966
|
|
|
|
4,966
|
|
Securitizations (on-balance sheet)
|
|
|
|
|
|
|
65,105
|
|
|
|
65,105
|
|
|
|
|
|
|
|
44,840
|
|
|
|
44,840
|
|
Securitizations (off-balance sheet)
|
|
|
|
|
|
|
43,887
|
|
|
|
43,887
|
|
|
|
|
|
|
|
54,153
|
|
|
|
54,153
|
|
Other
|
|
|
359
|
|
|
|
|
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,021
|
|
|
$
|
149,720
|
|
|
$
|
182,741
|
|
|
$
|
3,670
|
|
|
$
|
148,617
|
|
|
$
|
152,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Unsecured borrowings
|
|
$
|
45,117
|
|
|
|
5.69
|
%
|
|
$
|
44,615
|
|
|
|
5.75
|
%
|
|
$
|
46,915
|
|
|
|
5.66
|
%
|
|
$
|
42,813
|
|
|
|
5.42
|
%
|
Indentured trusts (on-balance sheet)
|
|
|
2,715
|
|
|
|
4.91
|
|
|
|
3,224
|
|
|
|
4.74
|
|
|
|
2,813
|
|
|
|
4.80
|
|
|
|
3,309
|
|
|
|
4.49
|
|
ABCP borrowings (on-balance sheet)
|
|
|
17,733
|
|
|
|
6.17
|
|
|
|
4,864
|
|
|
|
5.67
|
|
|
|
9,328
|
|
|
|
6.18
|
|
|
|
4,854
|
|
|
|
5.26
|
|
Securitizations (on-balance sheet)
|
|
|
65,160
|
|
|
|
5.68
|
|
|
|
42,831
|
|
|
|
5.68
|
|
|
|
61,539
|
|
|
|
5.67
|
|
|
|
41,871
|
|
|
|
5.30
|
|
Securitizations (off-balance sheet)
|
|
|
44,773
|
|
|
|
5.79
|
|
|
|
52,986
|
|
|
|
5.73
|
|
|
|
46,694
|
|
|
|
5.78
|
|
|
|
49,702
|
|
|
|
5.40
|
|
Other
|
|
|
215
|
|
|
|
5.14
|
|
|
|
128
|
|
|
|
5.25
|
|
|
|
382
|
|
|
|
5.28
|
|
|
|
142
|
|
|
|
4.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
175,713
|
|
|
|
5.75
|
%
|
|
$
|
148,648
|
|
|
|
5.70
|
%
|
|
$
|
167,671
|
|
|
|
5.71
|
%
|
|
$
|
142,691
|
|
|
|
5.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
Unsecured
On-Balance Sheet Financing Activities
The following table presents the senior unsecured credit ratings
assigned by major rating agencies as of September 30, 2007.
Each of the Companys debt ratings are under review with
negative implications due to the pending Merger.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P
|
|
Moodys
|
|
Fitch
|
|
Short-term unsecured debt
|
|
|
A-2
|
|
|
|
P-2
|
|
|
|
F3
|
|
Long-term senior unsecured debt
|
|
|
BBB+
|
|
|
|
Baa1
|
|
|
|
BBB
|
|
The table below presents our unsecured on-balance sheet term
funding by funding source for the three and nine months ended
September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Issued For
|
|
|
Debt Issued For
|
|
|
|
|
|
|
the Three Months
|
|
|
the Nine Months
|
|
|
Outstanding at
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Convertible debentures
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,996
|
|
Retail notes
|
|
|
|
|
|
|
148
|
|
|
|
59
|
|
|
|
415
|
|
|
|
4,192
|
|
|
|
4,018
|
|
Foreign currency denominated
notes(1)
|
|
|
|
|
|
|
794
|
|
|
|
161
|
|
|
|
2,269
|
|
|
|
12,803
|
|
|
|
11,039
|
|
Extendible notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
999
|
|
|
|
5,748
|
|
|
|
5,246
|
|
Global notes (Institutional)
|
|
|
|
|
|
|
2,054
|
|
|
|
1,348
|
|
|
|
3,999
|
|
|
|
21,857
|
|
|
|
21,044
|
|
Medium-term notes (Institutional)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
596
|
|
|
|
1,799
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
187
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
2,996
|
|
|
$
|
1,568
|
|
|
$
|
7,682
|
|
|
$
|
45,383
|
|
|
$
|
45,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
All foreign currency denominated notes are hedged using
derivatives that exchange the foreign denomination for U.S.
dollars.
|
In addition to the term issuances reflected in the table above,
we also use our commercial paper program for short-term
liquidity purposes. The average balance of commercial paper
outstanding was $109 million for the nine months ended
September 30, 2006. There was no average balance
outstanding for the three months ended September 30, 2007
and 2006 and for the nine months ended September 30, 2007.
The maximum daily amount outstanding was $2.2 billion for
the nine months ended September 30, 2006. There was no
amount outstanding for the three months ended September 30,
2007 and 2006 or for the nine months ended September 30,
2007.
91
Securitization
Activities
Securitization
Program
The following table summarizes our securitization activity for
the three and nine months ended September 30, 2007 and
2006. Those securitizations listed as sales are off-balance
sheet transactions and those listed as financings remain
on-balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Loan
|
|
|
|
|
|
|
|
|
|
|
|
Loan
|
|
|
|
|
|
|
|
|
|
No. of
|
|
|
Amount
|
|
|
Pre-Tax
|
|
|
|
|
|
No. of
|
|
|
Amount
|
|
|
Pre-Tax
|
|
|
|
|
(Dollars in millions)
|
|
Transactions
|
|
|
Securitized
|
|
|
Gain
|
|
|
Gain%
|
|
|
Transactions
|
|
|
Securitized
|
|
|
Gain
|
|
|
Gain%
|
|
|
Securitizations sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford/PLUS loans
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
FFELP Consolidation Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
4,001
|
|
|
|
19
|
|
|
|
.5
|
|
Private Education Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1,088
|
|
|
|
182
|
|
|
|
16.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations sales
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
%
|
|
|
3
|
|
|
|
5,089
|
|
|
$
|
201
|
|
|
|
4.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization financings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford/PLUS
Loans(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Consolidation
Loans(1)
|
|
|
1
|
|
|
|
2,493
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
3,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations financings
|
|
|
1
|
|
|
|
2,493
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
3,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations
|
|
|
1
|
|
|
$
|
2,493
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
$
|
8,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Loan
|
|
|
|
|
|
|
|
|
|
|
|
Loan
|
|
|
|
|
|
|
|
|
|
No. of
|
|
|
Amount
|
|
|
Pre-Tax
|
|
|
|
|
|
No. of
|
|
|
Amount
|
|
|
Pre-Tax
|
|
|
|
|
(Dollars in millions)
|
|
Transactions
|
|
|
Securitized
|
|
|
Gain
|
|
|
Gain%
|
|
|
Transactions
|
|
|
Securitized
|
|
|
Gain
|
|
|
Gain%
|
|
|
Securitizations sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford/PLUS loans
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
%
|
|
|
2
|
|
|
$
|
5,004
|
|
|
$
|
17
|
|
|
|
.3
|
%
|
FFELP Consolidation Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
9,503
|
|
|
|
55
|
|
|
|
.6
|
|
Private Education Loans
|
|
|
1
|
|
|
|
2,000
|
|
|
|
367
|
|
|
|
18.4
|
|
|
|
3
|
|
|
|
5,088
|
|
|
|
830
|
|
|
|
16.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations sales
|
|
|
1
|
|
|
|
2,000
|
|
|
$
|
367
|
|
|
|
18.4
|
%
|
|
|
9
|
|
|
|
19,595
|
|
|
$
|
902
|
|
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization financings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Stafford/PLUS
Loans(1)
|
|
|
2
|
|
|
|
7,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Consolidation
Loans(1)
|
|
|
3
|
|
|
|
11,480
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
6,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations financings
|
|
|
5
|
|
|
|
18,484
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
6,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securitizations
|
|
|
6
|
|
|
$
|
20,484
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
$
|
25,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In certain securitizations there
are terms within the deal structure that result in such
securitizations not qualifying for sale treatment and
accordingly, they are accounted for on-balance sheet as variable
interest entities (VIEs). Terms that prevent sale
treatment include: (1) allowing us to hold certain rights
that can affect the remarketing of certain bonds,
(2) allowing the trust to enter into interest rate cap
agreements after the initial settlement of the securitization,
which do not relate to the reissuance of third party beneficial
interests or (3) allowing us to hold an unconditional call
option related to a certain percentage of the securitized assets.
|
Our Private Education Loan gain on sale percentages are
significantly higher than our FFELP gain on sale percentages
primarily for two reasons: (1) the significantly higher
excess spread earned by the Residual Interest holder which is
primarily due to the higher spreads to index the Company earns
on the underlying Private Education Loans compared to FFELP
loans (see LENDING BUSINESS SEGMENT Core
Earnings Basis Student Loan Spreads by Loan Type for
further discussion regarding average student loan spreads by
loan type) and (2) the weighted average life of the Private
Education Loan securitizations are longer. The weighted average
life for the first quarter of 2007 Private Education Loan
securitization was 9.4 years. The Constant Prepayment Rate
(CPR) assumption we use to determine the fair value
of the Residual Interest impacts the weighted average life of
the securitization. See the Companys 2006
Form 10-K,
Note 9 to the consolidated financial statements,
Student Loan Securitization, for a sensitivity
analysis of the significant assumptions used to determine the
fair value of the Residual Interest.
92
Retained
Interest in Securitized Receivables
The following tables summarize the fair value of the
Companys Residual Interests, included in the
Companys Retained Interest (and the assumptions used to
value such Residual Interests), along with the underlying
off-balance sheet student loans that relate to those
securitizations in transactions that were treated as sales as of
September 30, 2007 and December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007
|
|
|
|
FFELP
|
|
|
Consolidation
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Loan
|
|
|
Education
|
|
|
|
|
|
|
PLUS
|
|
|
Trusts(1)
|
|
|
Loan
Trusts(5)
|
|
|
Total
|
|
|
Fair value of Residual
Interests(2)
|
|
$
|
472
|
|
|
$
|
688
|
|
|
$
|
2,079
|
|
|
$
|
3,239
|
|
Underlying securitized loan
balance(3)
|
|
|
10,010
|
|
|
|
16,216
|
|
|
|
14,281
|
|
|
|
40,507
|
|
Weighted average life
|
|
|
2.9 yrs.
|
|
|
|
7.4 yrs.
|
|
|
|
7.1 yrs.
|
|
|
|
|
|
Prepayment speed (annual
rate)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim status
|
|
|
0
|
%
|
|
|
N/A
|
|
|
|
0
|
%
|
|
|
|
|
Repayment status
|
|
|
3-38
|
%
|
|
|
3-8
|
%
|
|
|
1-30
|
%
|
|
|
|
|
Life of loan repayment status
|
|
|
21
|
%
|
|
|
6
|
%
|
|
|
9
|
%
|
|
|
|
|
Expected credit losses (% of student loan principal)
|
|
|
.11
|
%
|
|
|
.15
|
%
|
|
|
4.46
|
%
|
|
|
|
|
Residual cash flows discount rate
|
|
|
12.1
|
%
|
|
|
10.4
|
%
|
|
|
12.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
FFELP
|
|
|
Consolidation
|
|
|
Private
|
|
|
|
|
|
|
Stafford and
|
|
|
Loan
|
|
|
Education
|
|
|
|
|
|
|
PLUS
|
|
|
Trusts(1)
|
|
|
Loan Trusts
|
|
|
Total
|
|
|
Fair value of Residual
Interests(2)
|
|
$
|
701
|
|
|
$
|
676
|
|
|
$
|
1,965
|
|
|
$
|
3,342
|
|
Underlying securitized loan
balance(3)
|
|
|
14,794
|
|
|
|
17,817
|
|
|
|
13,222
|
|
|
|
45,833
|
|
Weighted average life
|
|
|
2.9 yrs.
|
|
|
|
7.3 yrs.
|
|
|
|
7.2 yrs.
|
|
|
|
|
|
Prepayment speed (annual rate)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interim status
|
|
|
0
|
%
|
|
|
N/A
|
|
|
|
0
|
%
|
|
|
|
|
Repayment status
|
|
|
0-43
|
%
|
|
|
3-9
|
%
|
|
|
4-7
|
%
|
|
|
|
|
Life of loan repayment status
|
|
|
24
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
|
|
Expected credit losses (% of student loan principal)
|
|
|
.06
|
%
|
|
|
.07
|
%
|
|
|
4.36
|
%
|
|
|
|
|
Residual cash flows discount rate
|
|
|
12.6
|
%
|
|
|
10.5
|
%
|
|
|
12.6
|
%
|
|
|
|
|
|
|
|
(1) |
|
Includes $167 million and
$151 million related to the fair value of the Embedded
Floor Income as of September 30, 2007 and December 31,
2006, respectively. Changes in the fair value of the Embedded
Floor Income are primarily due to changes in the interest rates
and the paydown of the underlying loans.
|
|
(2) |
|
At September 30, 2007 and
December 31, 2006, we had unrealized gains (pre-tax) in
accumulated other comprehensive income of $281 million and
$389 million, respectively, that related to the Retained
Interests.
|
|
(3) |
|
In addition to student loans in
off-balance sheet trusts, we had $61.9 billion and
$48.6 billion of securitized student loans outstanding
(face amount) as of September 30, 2007 and
December 31, 2006, respectively, in on-balance sheet
securitization trusts.
|
|
(4) |
|
Effective December 31, 2006,
the Company implemented CPR curves for Residual Interest
valuations that are based on seasoning (the number of months
since entering repayment). Under this methodology, a different
CPR is applied to each year of a loans seasoning.
Previously, we applied a CPR that was based on a static life of
loan assumption, and, in the case of FFELP Stafford and PLUS
loans, we applied a vector approach, irrespective of seasoning.
Repayment status CPR used is based on the number of months since
first entering repayment (seasoning). Life of loan CPR is
related to repayment status only and does not include the impact
of the loan while in interim status. The CPR assumption used for
all periods includes the impact of projected defaults.
|
|
(5) |
|
As discussed in Note 1,
Significant Accounting Policies Accounting for
Certain Hybrid Financial Instruments the Company adopted
SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments effective January 1, 2007. As a
result, the Company elected to carry the Residual Interest on
the Private Education Loan securitization which settled in the
first quarter of 2007 at fair value with subsequent changes in
fair value recorded in earnings. The fair value of this Residual
Interest at September 30, 2007 was $382 million
inclusive of a net $5 million fair value gain adjustment
recorded since settlement.
|
93
Securitizations are, and will continue to be, the primary source
of long-term financing and liquidity. Our securitizations are
structured such that we are not obligated to provide any
material level of financial, credit or liquidity support to any
of the trusts, thus limiting our exposure to the recovery of the
Retained Interest asset on the balance sheet for off-balance
sheet securitizations or to the loss of the earnings spread for
loans securitized on-balance sheet. While all of our Retained
Interests are subject to some prepayment risk, Retained
Interests from our FFELP Stafford securitizations have
significant prepayment risk primarily arising from borrowers
opting to consolidate their Stafford/PLUS loans. When
consolidation activity is higher than projected, the increase in
prepayments could materially impair the value of our Retained
Interest. However, this negative effect on our Retained Interest
is somewhat offset by the loans that consolidate back onto our
balance sheet, which we view as trading one interest bearing
asset for another, whereas loans that consolidate with third
parties represent a complete loss of future economics to the
Company. We discuss our short-term liquidity risk, including a
table of our sources of liquidity at the beginning of this
LIQUIDITY AND CAPITAL RESOURCES section.
Off-Balance
Sheet Net Assets
The following table summarizes our off-balance sheet net assets
at September 30, 2007 and December 31, 2006 on a basis
equivalent to our GAAP on-balance sheet trusts, which presents
the assets and liabilities in the off-balance sheet trusts as if
they were being accounted for on-balance sheet rather than
off-balance sheet. This presentation, therefore, includes a
theoretical calculation of the premiums on student loans, the
allowance for loan losses, and the discounts and deferred
financing costs on the debt. This presentation is not, nor is it
intended to be, a liquidation basis of accounting. (See also
LENDING BUSINESS SEGMENT Summary of our
Managed Student Loan Portfolio Ending Balances,
net and LIQUIDITY AND CAPITAL
RESOURCES Managed Borrowings Ending
Balances, earlier in this section.)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Off-Balance Sheet Assets:
|
|
|
|
|
|
|
|
|
Total student loans, net
|
|
$
|
40,604
|
|
|
$
|
46,172
|
|
Restricted cash and investments
|
|
|
3,352
|
|
|
|
4,269
|
|
Accrued interest receivable
|
|
|
1,610
|
|
|
|
1,467
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet assets
|
|
|
45,566
|
|
|
|
51,908
|
|
Off-Balance Sheet Liabilities:
|
|
|
|
|
|
|
|
|
Debt, par value
|
|
|
43,997
|
|
|
|
50,058
|
|
Debt, unamortized discount and deferred issuance costs
|
|
|
(110
|
)
|
|
|
(193
|
)
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
43,887
|
|
|
|
49,865
|
|
Accrued interest payable
|
|
|
334
|
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
Total off-balance sheet liabilities
|
|
|
44,221
|
|
|
|
50,270
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Net Assets
|
|
$
|
1,345
|
|
|
$
|
1,638
|
|
|
|
|
|
|
|
|
|
|
Servicing
and Securitization Revenue
Servicing and securitization revenue, the ongoing revenue from
securitized loan pools accounted for off-balance sheet as QSPEs,
includes the interest earned on the Residual Interest asset and
the revenue we receive for servicing the loans in the
securitization trusts. Interest income recognized on the
Residual Interest is based on our anticipated yield determined
by estimating future cash flows each quarter.
94
The following table summarizes the components of servicing and
securitization revenue for the three and nine months ended
September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Servicing revenue
|
|
$
|
69
|
|
|
$
|
87
|
|
|
$
|
221
|
|
|
$
|
254
|
|
Securitization revenue, before Net Embedded Floor Income,
impairment and unrealized fair value adjustment
|
|
|
110
|
|
|
|
103
|
|
|
|
331
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing and securitization revenue, before Net Embedded Floor
Income, impairment and unrealized fair value adjustment
|
|
|
179
|
|
|
|
190
|
|
|
|
552
|
|
|
|
511
|
|
Embedded Floor Income
|
|
|
4
|
|
|
|
2
|
|
|
|
8
|
|
|
|
12
|
|
Less: Floor Income previously recognized in gain calculation
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Embedded Floor Income
|
|
|
2
|
|
|
|
1
|
|
|
|
4
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing and securitization revenue, before impairment and
unrealized fair value adjustment
|
|
|
181
|
|
|
|
191
|
|
|
|
556
|
|
|
|
517
|
|
Unrealized fair value
adjustment(1)
|
|
|
(62
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
Retained Interest impairment
|
|
|
(90
|
)
|
|
|
(4
|
)
|
|
|
(137
|
)
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total servicing and securitization revenue
|
|
$
|
29
|
|
|
$
|
187
|
|
|
$
|
414
|
|
|
$
|
369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average off-balance sheet student loans
|
|
$
|
41,526
|
|
|
$
|
48,226
|
|
|
$
|
43,195
|
|
|
$
|
46,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balance of Retained Interest
|
|
$
|
3,378
|
|
|
$
|
3,381
|
|
|
$
|
3,457
|
|
|
$
|
2,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing and securitization revenue as a percentage of the
average balance of off-balance sheet student loans (annualized)
|
|
|
.28
|
%
|
|
|
1.54
|
%
|
|
|
1.28
|
%
|
|
|
1.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company adopted
SFAS No. 155 on January 1, 2007.
SFAS No. 155 requires the Company to identify and
bifurcate embedded derivatives from the Residual Interest.
However, SFAS No. 155 does allow the Company to elect
to carry the entire Residual Interest at fair value through
earnings rather than bifurcate such embedded derivatives. For
the off-balance sheet securitizations that settled in the nine
months ended September 30, 2007, the Company elected to
carry the entire Residual Interest recorded at fair value
through earnings. As a result of this election, all changes in
the fair value of the Residual Interests for those
securitizations are recorded through earnings. Management
anticipates electing to carry future Residual Interests at fair
value through earnings. For securitizations settling prior to
January 1, 2007, changes in the fair value of Residual
Interests will continue to be recorded in other comprehensive
income.
|
Servicing and securitization revenue is primarily driven by the
average balance of off-balance sheet student loans, the amount
of and the difference in the timing of Embedded Floor Income
recognition on off-balance sheet student loans, Retained
Interest impairments, and the fair value adjustment related to
those Residual Interests where the Company has elected to carry
such Residual Interests at fair value through earnings under
SFAS No. 155 as discussed in the above table. The
increase in securitization revenue, before net Embedded
Floor Income and impairment and unrealized gain, from 2006 to
2007, is primarily due to the continued increase in the amount
of Private Education Loan Residual Interests as a percentage of
the total Residual Interests.
95
Servicing and securitization revenue can be negatively impacted
by impairments of the value of our Retained Interest, caused
primarily by the effect of higher than expected consolidation
activity on FFELP Stafford/PLUS student loan securitizations and
the effect of market interest rates on the Embedded Floor Income
included in the Retained Interest. The majority of the
consolidations bring the loans back on-balance sheet, so for
those loans, we retain the value of the asset on-balance sheet
versus in the trust.
The Company recorded impairments to the Retained Interests of
$90 million and $4 million, respectively, for the
three months ended September 30, 2007 and 2006, and
$137 million and $148 million, respectively, for the
nine months ended September 30, 2007 and 2006. The
impairment charges were the result of FFELP loans prepaying
faster than projected through loan consolidations
($31 million and $4 million for the three months ended
September 30, 2007 and 2006, respectively, and
$54 million and $97 million for the nine months ended
September 30, 2007 and 2006, respectively), impairment to
the Floor Income component of the Companys Retained
Interest due to increases in interest rates during the period
($0 million for both the three months ended
September 30, 2007 and 2006, respectively, and
$24 million and $51 million for the nine months ended
September 30, 2007 and 2006, respectively), and an increase
in prepayments and acceleration of defaults related to Private
Education Loans ($59 million for the three and nine months
ended September 30, 2007).
As of September 30, 2007, the Company updated the following
assumptions used to calculate the fair value of the Residual
Interests: (1) The prepayment assumption related to Private
Education Loans was increased from 6 percent to
9 percent to account for the Companys continued
expectation of increased consolidation activity (2) the
expected credit losses assumed for the FFELP loans have been
increased to account for our higher percentage of Risk Sharing
resulting from the new legislation (see RECENT
DEVELOPMENTS Legislative Developments); and
(3) the timing of expected defaults of Private Education
Loans was accelerated based on the most current information the
Company has observed. The overall expectation of Private
Education Loan defaults did not materially change; however,
acceleration of the timing has the effect of decreasing the
value of our Residual Interests. The changes in these
assumptions related to the Companys Private Education Loan
Residual Interests and FFELP Residual Interests resulted in a
$196 million and $11 million reduction in fair value,
respectively. The Company also assessed the appropriateness of
the current risk premium which is added to the risk free rate
for the purpose of arriving at a discount rate in light of the
current economic and credit uncertainty that exists in the
market. This discount rate is applied to the projected cash
flows to arrive at a fair value representative of the current
economic conditions. The Company concluded that the current risk
premium is appropriate as it takes into account the current
level of cash flow uncertainty and lack of liquidity that may
exist with the Residual Interests.
96
Interest
Rate Risk Management
Asset
and Liability Funding Gap
The tables below present our assets and liabilities (funding)
arranged by underlying indices as of September 30, 2007. In
the following GAAP presentation, the funding gap only includes
derivatives that qualify as effective SFAS No. 133
hedges (those derivatives which are reflected in net interest
margin, as opposed to those reflected in the
gains/(losses) on derivatives and hedging activities,
net line on the income statement). The difference between
the asset and the funding is the funding gap for the specified
index. This represents our exposure to interest rate risk in the
form of basis risk and repricing risk, which is the risk that
the different indices may reset at different frequencies or may
not move in the same direction or at the same magnitude.
Management analyzes interest rate risk on a Managed basis, which
consists of both on-balance sheet and off-balance sheet assets
and liabilities and includes all derivatives that are
economically hedging our debt whether they qualify as effective
hedges under SFAS No. 133 or not. Accordingly, we are
also presenting the asset and liability funding gap on a Managed
basis in the table that follows the GAAP presentation.
GAAP Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index
|
|
Frequency of
|
|
|
|
|
|
|
|
Funding
|
|
(Dollars in billions)
|
|
Variable Resets
|
|
Assets
|
|
|
Funding(1)
|
|
|
Gap
|
|
|
3 month Commercial paper
|
|
daily
|
|
$
|
94.4
|
|
|
$
|
|
|
|
$
|
94.4
|
|
3 month Treasury bill
|
|
weekly
|
|
|
8.1
|
|
|
|
.2
|
|
|
|
7.9
|
|
Prime
|
|
annual
|
|
|
.6
|
|
|
|
|
|
|
|
.6
|
|
Prime
|
|
quarterly
|
|
|
1.4
|
|
|
|
|
|
|
|
1.4
|
|
Prime
|
|
monthly
|
|
|
12.1
|
|
|
|
|
|
|
|
12.1
|
|
PLUS Index
|
|
annual
|
|
|
1.7
|
|
|
|
|
|
|
|
1.7
|
|
3-month LIBOR
|
|
daily
|
|
|
|
|
|
|
|
|
|
|
|
|
3-month LIBOR
|
|
quarterly
|
|
|
1.5
|
|
|
|
101.1
|
|
|
|
(99.6
|
)
|
1-month
LIBOR(2)
|
|
monthly
|
|
|
|
|
|
|
13.2
|
|
|
|
(13.2
|
)
|
CMT/CPI index
|
|
monthly/quarterly
|
|
|
|
|
|
|
4.3
|
|
|
|
(4.3
|
)
|
Non Discrete
reset(3)
|
|
monthly
|
|
|
|
|
|
|
2.8
|
|
|
|
(2.8
|
)
|
Non Discrete
reset(4)
|
|
daily/weekly
|
|
|
15.3
|
|
|
|
15.5
|
|
|
|
(.2
|
)
|
Fixed
Rate(5)
|
|
|
|
|
15.7
|
|
|
|
13.7
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
150.8
|
|
|
$
|
150.8
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Funding includes all derivatives
that qualify as hedges under SFAS No. 133.
|
|
(2) |
|
Funding includes a portion of
Interim ABCP Facility.
|
|
(3) |
|
Funding consists of auction rate
securities.
|
|
(4) |
|
Assets include restricted and
non-restricted cash equivalents and other overnight type
instruments. Funding includes a portion of Interim ABCP Facility.
|
|
(5) |
|
Assets include receivables and
other assets (including Retained Interests, goodwill and
acquired intangibles). Funding includes other liabilities and
stockholders equity (excluding Series B Preferred
Stock).
|
The funding gaps in the above table are primarily interest rate
mismatches in short-term indices between our assets and
liabilities. We address this issue typically through the use of
basis swaps that primarily convert quarterly
3-month
LIBOR to other indices that are more correlated to our asset
indices. These basis swaps do not qualify as effective hedges
under SFAS No. 133 and as a result the effect on the
funding index is not included in our interest margin and is
therefore excluded from the GAAP presentation.
97
Managed
Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index
|
|
Frequency of
|
|
|
|
|
|
|
|
Funding
|
|
(Dollars in billions)
|
|
Variable Resets
|
|
Assets
|
|
|
Funding(1)
|
|
|
Gap
|
|
|
3 month Commercial paper
|
|
daily
|
|
$
|
116.7
|
|
|
$
|
12.1
|
|
|
$
|
104.6
|
|
3 month Treasury bill
|
|
weekly
|
|
|
11.7
|
|
|
|
10.6
|
|
|
|
1.1
|
|
Prime
|
|
annual
|
|
|
1.0
|
|
|
|
.2
|
|
|
|
.8
|
|
Prime
|
|
quarterly
|
|
|
7.0
|
|
|
|
6.0
|
|
|
|
1.0
|
|
Prime
|
|
monthly
|
|
|
19.6
|
|
|
|
16.3
|
|
|
|
3.3
|
|
PLUS Index
|
|
annual
|
|
|
2.7
|
|
|
|
4.6
|
|
|
|
(1.9
|
)
|
3-month LIBOR
|
|
daily
|
|
|
|
|
|
|
99.4
|
|
|
|
(99.4
|
)
|
3-month LIBOR
|
|
quarterly
|
|
|
1.5
|
|
|
|
1.5
|
|
|
|
|
|
1-month
LIBOR(2)
|
|
monthly
|
|
|
|
|
|
|
12.2
|
|
|
|
(12.2
|
)
|
Non Discrete
reset(3)
|
|
monthly
|
|
|
|
|
|
|
2.5
|
|
|
|
(2.5
|
)
|
Non Discrete
reset(4)
|
|
daily/weekly
|
|
|
18.7
|
|
|
|
15.5
|
|
|
|
3.2
|
|
Fixed
Rate(5)
|
|
|
|
|
11.6
|
|
|
|
9.6
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
190.5
|
|
|
$
|
190.5
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Funding includes all derivatives
that management considers economic hedges of interest rate risk
and reflects how we internally manage our interest rate exposure.
|
|
(2) |
|
Funding includes a portion of
Interim ABCP Facility.
|
|
(3) |
|
Funding consists of auction rate
securities.
|
|
(4) |
|
Assets include restricted and
non-restricted cash equivalents and other overnight type
instruments. Funding includes a portion of Interim ABCP Facility.
|
|
(5) |
|
Assets include receivables and
other assets (including Retained Interests, goodwill and
acquired intangibles). Funding includes other liabilities and
stockholders equity (excluding Series B Preferred
Stock).
|
To the extent possible, we generally fund our assets with debt
(in combination with derivatives) that has the same underlying
index (index type and index reset frequency). When it is more
economical, we also fund our assets with debt that has a
different index
and/or reset
frequency than the asset, but only in instances where we believe
there is a high degree of correlation between the interest rate
movement of the two indices. For example, we use daily reset
3-month
LIBOR to fund a large portion of our daily reset
3-month
commercial paper indexed assets. In addition, we use quarterly
reset
3-month
LIBOR to fund a portion of our quarterly reset Prime rate
indexed Private Education Loans. We also use our Non Discrete
reset and
1-month
LIBOR funding (asset-backed commercial paper program and auction
rate securities) to fund various asset types. In using different
index types and different index reset frequencies to fund our
assets, we are exposed to interest rate risk in the form of
basis risk and repricing risk, which is the risk that the
different indices that may reset at different frequencies will
not move in the same direction or at the same magnitude. We
believe that this risk is low as all of these indices are
short-term with rate movements that are highly correlated over a
long period of time. We use interest rate swaps and other
derivatives to achieve our risk management objectives.
When compared with the GAAP presentation, the Managed Basis
presentation includes all of our off-balance sheet assets and
funding, and also includes basis swaps that primarily convert
quarterly
3-month
LIBOR to other indices that are more correlated to our asset
indices.
98
Weighted
Average Life
The following table reflects the weighted average life of our
Managed earning assets and liabilities at September 30,
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-Balance
|
|
|
Off-Balance
|
|
|
|
|
(Averages in Years)
|
|
Sheet
|
|
|
Sheet
|
|
|
Managed
|
|
|
Earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loans
|
|
|
9.3
|
|
|
|
6.1
|
|
|
|
9.2
|
|
Other loans
|
|
|
5.3
|
|
|
|
|
|
|
|
5.3
|
|
Cash and investments
|
|
|
.2
|
|
|
|
.1
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
8.1
|
|
|
|
5.6
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
.3
|
|
|
|
|
|
|
|
.3
|
|
Long-term borrowings
|
|
|
6.7
|
|
|
|
6.1
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
5.2
|
|
|
|
6.1
|
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt issuances likely to be called by us or putable by
the investor have been categorized according to their call or
put dates rather than their maturity dates.
COMMON
STOCK
The following table summarizes the Companys common share
repurchases, issuances and equity forward activity for the three
and nine months ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(Shares in millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Common shares repurchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open market
|
|
|
|
|
|
|
2.2
|
|
|
|
|
|
|
|
2.2
|
|
Equity forwards
|
|
|
|
|
|
|
.9
|
|
|
|
|
|
|
|
5.4
|
|
Benefit
plans(1)
|
|
|
2.1
|
|
|
|
.1
|
|
|
|
3.1
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares repurchased
|
|
|
2.1
|
|
|
|
3.2
|
|
|
|
3.1
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average purchase price per share
|
|
$
|
48.47
|
|
|
$
|
48.76
|
|
|
$
|
46.35
|
|
|
$
|
52.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued
|
|
|
3.6
|
|
|
|
.8
|
|
|
|
6.6
|
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period
|
|
|
48.2
|
|
|
|
45.9
|
|
|
|
48.2
|
|
|
|
42.7
|
|
New contracts
|
|
|
|
|
|
|
3.2
|
|
|
|
|
|
|
|
10.9
|
|
Exercises
|
|
|
|
|
|
|
(.9
|
)
|
|
|
|
|
|
|
(5.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
48.2
|
|
|
|
48.2
|
|
|
|
48.2
|
|
|
|
48.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authority remaining at end of period to repurchase or enter into
equity forwards
|
|
|
15.7
|
|
|
|
5.7
|
|
|
|
15.7
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes shares withheld from stock
option exercises and vesting of performance stock for
employees tax withholding obligations and shares tendered
by employees to satisfy option exercise costs.
|
99
As of September 30, 2007, the expiration dates and purchase
prices for outstanding equity forward contracts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Outstanding
|
|
|
Range of
|
|
Average
|
|
Year of Maturity
|
|
Contracts
|
|
|
Purchase Prices
|
|
Purchase Price
|
|
|
|
(in millions of shares)
|
|
|
|
|
|
|
|
2008
|
|
|
7.3
|
|
|
$43.50 - $44.00
|
|
$
|
43.80
|
|
2009
|
|
|
14.7
|
|
|
46.00 - 54.74
|
|
|
53.66
|
|
2010
|
|
|
15.0
|
|
|
54.74
|
|
|
54.74
|
|
2011
|
|
|
9.1
|
|
|
49.75 - 53.76
|
|
|
51.91
|
|
2012
|
|
|
2.1
|
|
|
46.30 - 46.70
|
|
|
46.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48.2
|
|
|
|
|
$
|
51.86
|
|
|
|
|
|
|
|
|
|
|
|
|
The closing price of the Companys common stock on
September 30, 2007 was $49.67. Should the market value of
our stock fall below certain initial trigger prices, the
counterparty to the contract has a right to terminate the
contract and settle all or a portion at the original contract
price. For equity forward contracts outstanding at
September 30, 2007, these initial trigger prices range from
$23.93 per share to $30.11 per share.
Depending on market conditions and the economic terms negotiated
with counterparties, the Company may enter into agreements to
terminate certain of its equity forward purchase contracts. The
Company anticipates that, if it were to enter into any such
terminations, these contracts would likely be settled using the
net cash settlement method. At any time, the Company may also
repurchase shares in the open market, enter into new equity
forward positions or utilize other programs that have similar
economic results in connection with its share repurchase program.
RECENT
DEVELOPMENTS
Legislative
Developments
On September 27, 2007, the President signed into law the
College Cost Reduction and Access Act of 2007 (the
Act or the CCRAA of 2007), legislation that
cuts funding for the FFELP program by $20 billion over the
next five years as estimated by the Congressional Budget Office
and will impact our business. The Act:
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Reduces special allowance payments to for-profit lenders and
not-for-profit lenders for both Stafford and Consolidation Loans
disbursed after October 2, 2007 by 0.55 percentage
points and .40 percentage points, respectively;
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|
Reduces special allowance payments to for-profit lenders and
not-for-profit lenders for PLUS loans by 0.85 percentage
points and 0.70 percentage points, respectively;
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|
Doubles lender origination fees on all loan types, from
0.5 percent to 1.0 percent;
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For loans first disbursed after October 1, 2012, reduces
default insurance to 95 percent of the unpaid principal of
such loans;
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Eliminates Exceptional Performer designation (and the monetary
benefit associated with it) effective October 1, 2007;
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Reduces default collections retention by guaranty agencies from
23 percent to 16 percent;
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Reduces the guaranty agency account maintenance fee from
0.10 percent to 0.06 percent,
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Requires ED to develop and then implement a pilot auction for
participation in the FFELP Parent PLUS loan program, by state,
effective July 1, 2009; and
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100
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Effective October 1, 2007, provides loan forgiveness for
all FDLP borrowers, including consolidation borrowers, in
certain public service jobs who make 120 monthly payments.
|
Although the direct effect of the provisions of the Act will be
to reduce our margins on FFELP loans (which generate less than
half of our Core Earnings net interest income), the
net effect of the Act could be significantly mitigated by the
market share and other opportunities it creates and the steps
the Company might take to capitalize on those opportunities.
On October 10, 2007, The House of Representatives passed HR
3056, the Tax Collection Responsibility Act of 2007, by vote of
232 to 173. If enacted, this legislation would repeal the
authority of the Internal Revenue Service (the IRS)
to contract with private collection agencies for certain federal
tax collections. The Companys subsidiary, Pioneer Credit
Recovery, is one of two agencies participating in the IRS pilot,
testing the use of private collectors in improving federal tax
collections. The Senate is not expected to act on corresponding
repeal legislation this year. However, the Senate Appropriations
Committee has reported a limitation on the funds that could be
spent on administering this program next year. Fee income
currently generated from federal tax collections activity is
currently de minimis to our APG business segment results of
operations.
On October 30, 2007, the House and Senate passed S. 2258,
The Third Higher Education Extension Act of 2007,
which extends the authorization of the Higher Education Act for
through March 31, 2008. The reauthorization of the Higher
Education Act remains one of the outstanding issues for this
Congress. The Senate passed its version of reauthorization, S.
1642, on July 24, 2007. It is expected that the House
Education and Workforce Committee could
mark-up its
version of the reauthorization bill within the next month and
could include previously-passed legislation, such as the
House-passed Sunshine Act, H.R. 890.
Merger-Related
Developments
On April 16, 2007, the Company announced that the Buyer
Group signed the Merger Agreement to acquire the Company for
approximately $25.3 billion or $60.00 per share of common
stock. Under the terms of the Merger Agreement, J.C.
Flowers & Co. and certain other private equity
investors, including Friedman Fleischer & Lowe, would,
upon consummation, invest approximately $4.4 billion and
own 50.2 percent, and Bank of America (NYSE: BAC) and
JPMorgan Chase (NYSE: JPM) each would, upon consummation, invest
approximately $2.2 billion and each would own
24.9 percent of the surviving entity. The remainder of the
purchase price is expected to be funded by debt. The
Companys independent board members unanimously approved
the agreement and recommended that its shareholders approve the
agreement. The Companys shareholders approved the Merger
Agreement at a special meeting of shareholders held on
August 15, 2007. (See also Merger Agreement
filed with the SEC on the Companys Current Report on
Form 8-K,
dated April 18, 2007.) Pursuant to the Merger Agreement,
the Company was not permitted to pay dividends on its common
stock prior to the consummation of the proposed transaction.
This restriction has been terminated. See below.
The termination of the waiting period under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, was granted on
June 18, 2007. On June 1, 2007, the Buyer Group filed
with the Federal Deposit Insurance Corporation
(FDIC) its Interagency Notice of Change in Control
with respect to the Sallie Mae Bank. As of the date of this
Report, the FDIC has not acted on that notice.
On July 11, 2007, the Company announced that the Buyer
Group informed the Company that it believed that legislative
proposals then pending before the U.S. House of
Representatives and U.S. Senate could result in a failure
of the conditions to the closing of the Merger to be satisfied.
On September 26, 2007, J.C. Flowers & Co., on
behalf of itself and the Buyer Group, asserted that the Buyer
Group believed that the conditions to closing under the Merger
Agreement, if the closing were to occur on that day, would not
be satisfied as a result of changes in the legislative and
economic environment. On October 2, 2007, the Buyer Group
again asserted that it believed that, if the conditions to the
closing of the Merger were required to be measured on that day,
the conditions to the Buyer Groups obligation to close
would not be satisfied, asserted that a Material Adverse
Effect (as defined in the Merger Agreement) had
101
occurred and made a proposal to acquire the Company at a
significantly lower price and upon substantially different terms
instead of honoring its obligations under the Merger Agreement.
On October 3, 2007, the Company notified the Buyer Group
that all conditions to closing of the Merger had been satisfied,
and set November 5, 2007 as the closing date of the Merger.
In response, the Buyer Group sent a letter to the Company on
October 8, 2007 asserting that the conditions to closing of
the Merger had not been satisfied because of, among other
things, the alleged occurrence of a Material Adverse Effect
under the terms of the Merger Agreement.
On October 8, 2007, the Company filed a lawsuit in the
Delaware Court of Chancery against the Buyer Group, which
includes J.C. Flowers & Co., JPMorgan Chase, and Bank
of America. The lawsuit seeks a declaration that the Buyer Group
repudiated the Merger Agreement, that no Material Adverse Effect
has occurred and that the Company may terminate the agreement
and collect the $900 million termination fee. On
October 12, 2007, the Company requested an expedited trial.
On October 15, 2007, the Buyer Group filed an answer and
counterclaims and filed a response opposing the Companys
request for an expedited trial. On October 22, 2007, the
Court held a scheduling conference to set a schedule for trial.
Pursuant to the Courts directions at the scheduling
conference, effective October 23, 2007, the Buyer Group
waived the Companys obligation under the Merger Agreement
to comply with, among other things, the covenants that limited
the conduct of the Companys business. The Company and
Buyer Group have since served discovery requests on each other.
Under guidance from the Delaware Court of Chancery at a
scheduling hearing on November 5, 2007, the Company has
elected to pursue an expedited decision on its October 19,
2007 motion for partial judgment on the pleadings. Specifically,
the Company is seeking an expedited ruling that its
interpretation of the Merger Agreement as it pertains to a
Material Adverse Effect is the correct interpretation. The
effect of this election will be that trial is expected to
commence on an undetermined date after Thanksgiving 2008, rather
than in mid-July 2008.
Other
Developments
Exceptional
Performer
By a letter dated September 28, 2007, ED informed us that
Sallie Mae, Inc. is designated as an Exceptional Performer for
the period beginning October 19, 2006. As stated above, the
Act eliminates EP designation effective October 1, 2007.
Department
of Education Negotiated Rulemaking
On June 12, 2007, ED published in the Federal Register a
Notice of Proposed Rulemaking. The Company submitted comments on
August 10, 2007 to EDs proposed FFELP regulations. ED
published final regulations on November 1, 2007, which will
be effective on July 1, 2008. The final regulations codify
changes regarding 16 topics affecting FFELP loans, including
deferment simplification, disability and death discharge,
interest capitalization, record retention and reporting, as well
as changes regarding prohibited inducements and permissible
activities, and requirements schools must meet in providing
recommended or preferred lenders to students and their parents.
State
Attorney General Investigations
On April 11, 2007, the Company entered into a settlement
agreement with the Office of the Attorney General of the State
of New York under which we agreed to adopt the New York
Attorney Generals Code of Conduct governing student
lending and donate $2 million to a national fund devoted to
educating college bound students about their loan options. Under
the agreement, the Company did not admit, and expressly denied,
that our conduct constituted any violation of law. The Code of
Conduct, among other things, precludes the Company from
providing anything more than nominal value to any employees of
an institution of higher education and requires additional
disclosures to borrowers and schools under certain
circumstances. We cannot predict the effect that adopting the
Code of Conduct will have on our future business prospects.
Under the settlement agreement, we certified implementation of
its terms on August 15, 2007.
102
Separate from the settlement agreement with the Office of the
Attorney General of the State of New York, the attorneys
general of the States of Arizona, California, Connecticut,
Delaware, Illinois, Indiana, Louisiana, Missouri,
New Jersey, Ohio, Tennessee and the Commonwealth of
Massachusetts have served civil investigative demands or
requests for documents on the Company seeking information
concerning our relationships with schools. The Company has
responded to these requests by providing responsive documents.
SEC,
House and Senate
The SEC is conducting an investigation into trading of SLM stock
prior to the public release of the Presidents budget on
February 5, 2007. We are cooperating with the SEC and have
provided the requested information and documents. Before the SEC
investigation commenced, U.S. Senator Edward Kennedy,
chairman of the Senate Committee on Health, Education, Labor and
Pensions, and U.S. Representatives George Miller and Barney
Frank, chairmen of the House of Representatives Committee on
Education and Labor and Committee on Financial Services,
respectively, separately submitted requests for information
regarding certain SLM stock sales by SLMs Chairman of the
Board of Directors Albert L. Lord. We have cooperated with
the Senate and House Committee counsel to provide the requested
information.
The U.S. House of Representatives Committee on
Education and Labor submitted requests to the Company seeking
information regarding our marketing practices in the student
loan business. We have cooperated with committee counsel in
order to provide the requested information.
The U.S. Senate Committee on Health, Education, Labor and
Pensions submitted requests to the Company seeking information
regarding our marketing practices in the student loan business
and our collections practices on delinquent and defaulted FFELP
student loans. We have cooperated with committee counsel in
order to provide the requested information.
On June 7, 2007, the U.S. House of Representatives
Committee on Education and Labor requested information from the
Company about the qualifying factors and criteria borrowers and
schools must meet to obtain the best loan rates and other
borrower benefits. In addition, in a letter to the Company dated
June 13, 2007, Senator Christopher J. Dodd, Chairman of the
United States Senate Committee on Banking, Housing, and Urban
Affairs, requested documents that reflect the Companys
recent private education loan underwriting criteria, including
the factors and relative weights assigned to those factors that
the Company considers in its underwriting. The Company has
responded to these requests.
103
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Item 3.
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Quantitative
and Qualitative Disclosures about Market Risk
|
Interest
Rate Sensitivity Analysis
The effect of short-term movements in interest rates on our
results of operations and financial position has been limited
through our interest rate risk management. The following tables
summarize the effect on earnings for the three months ended
September 30, 2007 and 2006 and the effect on fair values
at September 30, 2007 and December 31, 2006, based
upon a sensitivity analysis performed by management assuming a
hypothetical increase in market interest rates of 100 basis
points and 300 basis points while funding spreads remain
constant. The Effect on earnings tables below apply
the increase in market interest rates to all variable-rate
financial instruments. The Effect on fair values
tables below apply the increase in market interest rates to all
fixed-rate financial instruments, including derivatives. An
increase in market interest rates would have minimal impact to
the fair value of variable-rate financial instruments due to the
frequency of interest rate resets. Changes in spreads between
indices (basis risk) would have an additional impact to that
presented in the following tables. For a discussion of basis
risk and a presentation of the asset and liability funding gap
by index, see MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES Interest Rate Risk
Management Asset and Liability Funding
Gap. This analysis does not consider any potential
impairment to our Residual Interests that may result from a
higher discount rate that would be used to compute the present
value of the cash flows if long-term interest rates increased.
See the Companys 2006
Form 10-K,
Note 9 to the consolidated financial statements,
Student Loan Securitization, which details the
potential decrease to fair value that could occur.
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Three Months Ended September 30,
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2007
|
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2006
|
|
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|
Interest Rates:
|
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|
Interest Rates:
|
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|
Change from
|
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|
Change from
|
|
|
Change from
|
|
|
Change from
|
|
|
|
Increase of
|
|
|
Increase of
|
|
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Increase of
|
|
|
Increase of
|
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100 Basis
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|
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300 Basis
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100 Basis
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300 Basis
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Points
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Points
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Points
|
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Points
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(Dollars in millions, except per share amounts)
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$
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%
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|
|
$
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|
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%
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|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Effect on Earnings
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|
|
|
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|
|
|
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|
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|
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|
|
|
|
|
|
|
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|
Increase/(decrease) in pre-tax net income before unrealized
gains (losses) on derivative and hedging activities
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$
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(2
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)
|
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(1
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)%
|
|
$
|
(6
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)
|
|
|
(3
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)%
|
|
$
|
1
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|
|
|
|
%
|
|
$
|
3
|
|
|
|
|
%
|
Unrealized gains (losses) on derivative and hedging activities
|
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|
169
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|
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37
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|
261
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|
57
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|
144
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|
|
|
127
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|
|
|
236
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|
|
|
209
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|
|
|
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|
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|
|
|
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|
Increase in net income before taxes
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$
|
167
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|
|
|
64
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%
|
|
$
|
255
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|
|
|
99
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%
|
|
$
|
145
|
|
|
|
31
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%
|
|
$
|
239
|
|
|
|
51
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%
|
|
|
|
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|
Increase in diluted earnings per common share
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$
|
.259
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|
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|
31
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%
|
|
$
|
.399
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|
|
|
47
|
%
|
|
$
|
.210
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|
|
|
35
|
%
|
|
$
|
.360
|
|
|
|
60
|
%
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
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|
|
104
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
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|
|
2007
|
|
|
2006
|
|
|
|
Interest Rates:
|
|
|
Interest Rates:
|
|
|
|
Change from
|
|
|
Change from
|
|
|
Change from
|
|
|
Change from
|
|
|
|
Increase of
|
|
|
Increase of
|
|
|
Increase of
|
|
|
Increase of
|
|
|
|
100 Basis
|
|
|
300 Basis
|
|
|
100 Basis
|
|
|
300 Basis
|
|
|
|
Points
|
|
|
Points
|
|
|
Points
|
|
|
Points
|
|
(Dollars in millions, except per share amounts)
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|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Effect on Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in pre-tax net income before unrealized
gains (losses) on derivative and hedging activities
|
|
$
|
17
|
|
|
|
1
|
%
|
|
$
|
44
|
|
|
|
4
|
%
|
|
$
|
(6
|
)
|
|
|
|
%
|
|
$
|
(24
|
)
|
|
|
(1
|
)%
|
Unrealized gains (losses) on derivative and hedging activities
|
|
|
169
|
|
|
|
304
|
|
|
|
261
|
|
|
|
469
|
|
|
|
144
|
|
|
|
1,163
|
|
|
|
236
|
|
|
|
1,913
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in net income before taxes
|
|
$
|
186
|
|
|
|
15
|
%
|
|
$
|
305
|
|
|
|
25
|
%
|
|
$
|
138
|
|
|
|
7
|
%
|
|
$
|
212
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in diluted earnings per common share
|
|
$
|
.297
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|
|
|
18
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%
|
|
$
|
.508
|
|
|
|
30
|
%
|
|
$
|
.210
|
|
|
|
8
|
%
|
|
$
|
.360
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2007
|
|
|
|
|
|
|
Interest Rates:
|
|
|
|
|
|
|
Change from
|
|
|
Change from
|
|
|
|
|
|
|
Increase of
|
|
|
Increase of
|
|
|
|
|
|
|
100 Basis
|
|
|
300 Basis
|
|
|
|
|
|
|
Points
|
|
|
Points
|
|
(Dollars in millions)
|
|
Fair Value
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Effect on Fair Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP student loans
|
|
$
|
108,015
|
|
|
$
|
(209
|
)
|
|
|
|
%
|
|
$
|
(382
|
)
|
|
|
|
%
|
Private Education Loans
|
|
|
16,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other earning assets
|
|
|
18,266
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
(69
|
)
|
|
|
|
|
Other assets
|
|
|
13,436
|
|
|
|
(725
|
)
|
|
|
(5
|
)
|
|
|
(1,312
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
155,727
|
|
|
$
|
(958
|
)
|
|
|
(1
|
)%
|
|
$
|
(1,763
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
$
|
137,709
|
|
|
$
|
(1,495
|
)
|
|
|
(1
|
)%
|
|
$
|
(3,451
|
)
|
|
|
(3
|
)%
|
Other liabilities
|
|
|
3,934
|
|
|
|
652
|
|
|
|
17
|
|
|
|
1,936
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
141,643
|
|
|
$
|
(843
|
)
|
|
|
(1
|
)%
|
|
$
|
(1,515
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006
|
|
|
|
|
|
|
Interest Rates:
|
|
|
|
|
|
|
Change from
|
|
|
Change from
|
|
|
|
|
|
|
Increase of
|
|
|
Increase of
|
|
|
|
|
|
|
100 Basis
|
|
|
300 Basis
|
|
|
|
|
|
|
Points
|
|
|
Points
|
|
(Dollars in millions)
|
|
Fair Value
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Effect on Fair Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFELP student loans
|
|
$
|
87,797
|
|
|
$
|
(182
|
)
|
|
|
|
%
|
|
$
|
(313
|
)
|
|
|
|
%
|
Private Education Loans
|
|
|
12,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other earning assets
|
|
|
9,950
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
(109
|
)
|
|
|
(1
|
)
|
Other assets
|
|
|
10,299
|
|
|
|
(436
|
)
|
|
|
(4
|
)
|
|
|
(750
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
120,109
|
|
|
$
|
(656
|
)
|
|
|
(1
|
)%
|
|
$
|
(1,172
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
$
|
108,142
|
|
|
$
|
(1,427
|
)
|
|
|
(1
|
)%
|
|
$
|
(3,610
|
)
|
|
|
(3
|
)%
|
Other liabilities
|
|
|
3,680
|
|
|
|
877
|
|
|
|
24
|
|
|
|
2,613
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
111,822
|
|
|
$
|
(550
|
)
|
|
|
|
%
|
|
$
|
(997
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A primary objective in our funding is to minimize our
sensitivity to changing interest rates by generally funding our
floating rate student loan portfolio with floating rate debt.
However, we can have a fixed versus floating mismatch in funding
if the student loan earns Floor Income at the fixed borrower
rate and the funding remains floating.
During the three months ended September 30, 2007 and 2006,
certain FFELP student loans were earning Floor Income and we
locked in a portion of that Floor Income through the use of
futures and Floor Income Contracts. The result of these hedging
transactions was to convert a portion of the fixed rate nature
of student loans to variable rate, and to fix the relative
spread between the student loan asset rate and the variable rate
liability.
In the above table, under the scenario where interest rates
increase 100 and 300 basis points, the changes in pre-tax
net income before the unrealized gains (losses) on derivative
and hedging activities is primarily due to the impact of
(i) our off-balance sheet hedged FFELP Consolidation Loan
securitizations and the related Embedded Floor Income recognized
as part of the gain on sale, which results in a decrease in
payments on the written Floor contracts that more than offset
impairment losses on the Embedded Floor Income in the Residual
Interest; (ii) variable rate assets being funded with fixed
rate debt and (iii) fixed rate assets being funded with
variable debt. The first two items will generally cause income
to increase when interest rates increase, whereas, the third
item will generally offset this increase. In the 100 and
300 basis point scenario for the three months ended
September 30, 2007, item (iii) had a greater impact
than item (i) resulting in a net loss. In the prior year
period, items (i) and (ii) had a greater impact than
item (iii) resulting in a net gain for both the 100 and
300 basis point scenarios.
In the 100 and 300 basis point scenario for the nine months
ended September 30, 2007, item (ii) resulted in a net
gain. In the prior year period, item (iii) resulted in a
net loss for both scenarios.
In addition to interest rate risk addressed in the preceding
tables, the Company is also exposed to risks related to foreign
currency exchange rates and the equity price of its own stock.
Foreign currency exchange risk is primarily the result of
foreign denominated debt issued by the Company. As it relates to
the Companys corporate unsecured and securitization debt
programs used to fund the Companys business, the
Companys policy is to use cross currency interest rate
swaps to swap all foreign denominated debt payments (fixed and
floating) to U.S. dollar LIBOR using a fixed exchange rate.
In the tables above, there would be an immaterial impact on
earnings if exchange rates were to decrease or increase, due to
the terms of the hedging instrument
106
and hedged items matching. The balance sheet interest bearing
liabilities would be affected by a change in exchange rates,
however, the change would be materially offset by the cross
currency interest rate swaps in other assets or other
liabilities. In addition, the Company has foreign exchange risk
as a result of international operations; however, the exposure
is minimal at this time.
Equity price risk of the Companys own stock is due to
equity forward contracts used in the Companys share
repurchase program. A hypothetical decrease in the
Companys stock price per share of $5.00 and $10.00 would
result in a $241 million and $482 million unrealized
loss on derivative and hedging, respectively. In addition to the
net income impact, other liabilities would increase by the
aforementioned amounts. Stock price decreases can also result in
the counterparty exercising its right to demand early settlement
on a portion of or the total contract depending on trigger
prices set in each contract. The initial trigger prices as of
September 30, 2007 range from approximately $23.93 to
$30.11. At September 28, 2007, the closing price of the
Companys stock was $49.67. With the $5.00 and $10.00
decrease in unit stock price above, none of these triggers would
be met and no counterparty would have the right to early
settlement.
|
|
Item 4.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
Our management, with the participation of our Chief Executive
Officer and Principal Accounting 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 September 30, 2007. Based
on this evaluation, our Chief Executive Officer and Principal
Accounting Officer, concluded that, as of September 30,
2007, our disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is
(a) recorded, processed, summarized and reported within the
time periods specified in the SECs rules and forms and
(b) accumulated and communicated to our management,
including our Chief Executive Officer and Principal Accounting
Officer, as appropriate to allow timely decisions regarding
required disclosure.
Changes
in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as
defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934, as amended) occurred
during the fiscal quarter ended September 30, 2007 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
107
PART II.
OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
On October 8, 2007, the Company filed a lawsuit in the
Delaware Court of Chancery against the Buyer Group seeking a
declaration that the Buyer Group repudiated the Merger
Agreement, that no Material Adverse Effect (as
defined in the Merger Agreement) has occurred and that the
Company may terminate the agreement and collect the
$900 million termination fee (see MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS RECENT DEVELOPMENTS
Merger-Related Developments.)
On April 6, 2007, the Company was served with a putative
class action suit by several borrowers in federal court in
California. The complaint, which was amended on April 12,
2007, alleges violations of California Business &
Professions Code 17200, breach of contract, breach of covenant
of good faith and fair dealing, violation of consumer legal
remedies act and unjust enrichment. The complaint challenges the
Companys FFELP billing practices as they relate to use of
the simple daily interest method for calculating interest. On
June 19, 2007, the Company filed a Motion to Dismiss the
amended complaint. On September 14, 2007, the court entered
an order denying Sallie Maes Motion to Dismiss. The court
did not comment on the merits of the allegations or the
plaintiffs case but instead merely determined that the
allegations stated a claim sufficient under the Federal Rules of
Civil Procedure. On September 17, 2007, the court entered a
scheduling order that set July 8, 2008, as the start date
for the trial. Discovery has commenced and is scheduled to
continue through May 30, 2008. The Company believes these
allegations lack merit and will continue to vigorously defend
itself in this case. The Company filed an answer on
September 28, 2007, denying any liability.
On January 25, 2007, the Attorney General of Illinois filed
a lawsuit against one of the Companys subsidiaries, Arrow
Financial Services, LLC (AFS), in the Circuit Court
of Cook County, Illinois alleging that AFS violated the Illinois
Consumer Fraud and Deceptive Practices Act and the federal Fair
Debt Collections Practices Act. The lawsuit seeks to enjoin AFS
from violating the Illinois Consumer Fraud and Deceptive
Practices Act and from engaging in debt management and
collection services in or from the State of Illinois. The
lawsuit also seeks to rescind certain agreements to pay back
debt between AFS and Illinois consumers, to pay restitution to
all consumers who have been harmed by AFSs alleged
unlawful practices, to impose a statutory civil penalty of
$50,000 and to impose a civil penalty of $50,000 per violation
($60,000 per violation if the consumer is 65 years of age
or older). The lawsuit alleges that as of January 25, 2007,
660 complaints against AFS have been filed with the Office of
the Illinois Attorney General since 1999 and over 800 complaints
have been filed with the Better Business Bureau. As of
September 30, 2007, the Company owned 88 percent of
the membership interests in AFS Holdings, LLC, the parent
company of AFS. Management cannot predict the outcome of this
lawsuit or its effect on the Companys financial position
or results of operations.
We are also subject to various claims, lawsuits and other
actions that arise in the normal course of business. Most of
these matters are claims by borrowers disputing the manner in
which their loans have been processed or the accuracy of our
reports to credit bureaus. In addition, the collections
subsidiaries in our asset performance group are routinely named
in individual plaintiff or class action lawsuits in which the
plaintiffs allege that we have violated a federal or state law
in the process of collecting their accounts. Management believes
that these claims, lawsuits and other actions will not have a
material adverse effect on our business, financial condition or
results of operations. Finally, from time to time, we receive
information and document requests from state attorneys general
and Congressional committees concerning certain of our business
practices. Our practice has been and continues to be to
cooperate with the state attorneys general and Congressional
committees and to be responsive to any such requests.
108
If the
Merger Agreement is terminated, our ability to fund our
operations could be materially adversely affected.
On April 16, 2007, the Company announced that a Buyer Group
led by J.C. Flowers & Co. signed a definitive
agreement to acquire the Company for approximately
$25.3 billion or $60.00 per share of common stock. See
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS RECENT
DEVELOPMENTS Merger-Related Developments in
this
Form 10-Q.
As a result of the Companys announcement, Moodys
Investor Services, Standard & Poors and Fitch
Ratings placed the long and short-term ratings on our senior
unsecured debt under review for possible downgrade and secondary
market credit spreads on our outstanding senior unsecured bonds
widened significantly. As a consequence, since the Merger
announcement we have relied primarily on our Interim ABCP
Facility and the term asset-backed securities markets as our
primary sources of liquidity. If the Merger agreement is
terminated or the Merger does not close, our liquidity could be
materially adversely affected as a result of the prospective
termination of the Companys Interim ABCP Facility. We are
in substantive discussions with various financing sources
concerning the replacement of this facility, should it be
necessary, and believe that this source of liquidity can be
replaced in a timely manner. In addition, any new issuance of
unsecured debt will likely be subject to much wider spreads and
more restrictive terms than we have historically experienced.
Moreover, the price of our stock could be materially adversely
affected. In such circumstances, if the stock price were to fall
below $30.11, we may be required to settle our equity forward
contracts in a manner that could have a materially dilutive
effect on our common stock, as more fully described within the
Companys 2006 Annual Report on
Form 10-K
at Item 1A. Risk Factors LIQUIDITY AND
CAPITAL RESOURCES.
On October 8, 2007, the Company filed a lawsuit in the
Delaware Court of Chancery against the Buyer Group seeking a
declaration that the Buyer Group repudiated the Merger
Agreement, that no Material Adverse Effect (as
defined in the Merger Agreement) has occurred and that the
Company may terminate the agreement and collect the
$900 million termination fee (see MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS RECENT DEVELOPMENTS
Merger-Related Developments.)
Our
derivative counterparties may terminate their positions with the
Company if its credit ratings fall to certain levels and the
Company could incur substantial additional costs to replace any
terminated positions.
The majority of our ISDA Master Agreements with our
counterparties relating to non-equity forward transactions
provide that the counterparty may declare a Termination
Event and terminate its positions if a Designated
Event occurs and the unsecured and unsubordinated
long-term debt rating of the Company falls below a
pre-determined level or the Companys unsecured and
unsubordinated long-term debt is not rated. For purposes of
these ISDA Master Agreements, the execution of the Merger
Agreement constituted a Designated Event. Therefore
under the agreements, the counterparties would have a right to
terminate their positions if the Companys unsecured and
unsubordinated long-term debt rating fell below either of the
pre-determined levels which is typically Baa3 for
Moodys and BBB- from S&P. As of
September 30, 2007, our ratings were above those levels. In
addition we have entered into agreements with counterparties
holding substantially all of our non-equity forward derivative
transactions under which the counterparties have agreed to waive
their rights to declare a Termination Event based
upon the execution of the Merger Agreement for a limited period
of time, which, in most cases, is through the closing date of
the Merger. Depending upon interest rates and exchange rates,
the Company could be liable for substantial payments to
terminate the positions. In addition, the Company may not be
able to replace any terminated positions or may incur
substantial additional costs to do so. Our liquidity could be
adversely affected by these additional payments and costs.
We
could experience cash flow delays or shortfalls if a guaranty
agency defaults on its guaranty obligation.
The CCRAA, among other things, reduces default collections
retention by guaranty agencies from 23 percent to
16 percent and the guaranty account maintenance fee from
0.10 percent to 0.06 percent. These reductions could
adversely affect the results of operations of certain guaranty
agencies. A deterioration in the
109
financial status of a guaranty agency and its ability to honor
guaranty claims on defaulted student loans could result in a
failure of that guaranty agency to make its guaranty payments in
a timely manner, if at all. The financial condition of a
guaranty agency can be adversely affected if it submits a large
number of reimbursement claims to ED, which results in a
reduction of the amount of reimbursement that ED is obligated to
pay the guaranty agency. ED may also require a guaranty agency
to return its reserve funds to ED upon a finding that the
reserves are unnecessary for the guaranty agency to pay its
FFELP expenses or to serve the best interests of the FFELP.
If ED has determined that a guaranty agency is unable to meet
its guaranty obligations, the loan holder may submit claims
directly to ED, and ED is required to pay the full guaranty
claim. However, EDs obligation to pay guaranty claims
directly in this fashion is contingent upon ED making the
determination that a guaranty agency is unable to meet its
guaranty obligations. ED may not ever make this determination
with respect to a guaranty agency and, even if ED does make this
determination, payment of the guaranty claims may not be made in
a timely manner, which could result in cash flow delays. If
these delays are extensive or frequent, we may experience cash
flow shortfalls.
As of September 30, 2007, approximately fifty percent of
the Companys Managed FFELP loan portfolio was guaranteed
by USA Funds.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
The following table summarizes the Companys common share
repurchases during the third quarter of 2007 pursuant to the
stock repurchase program (see Note 6,
Stockholders Equity, to the consolidated
financial statements) first authorized in September 1997 by the
Board of Directors. Since the inception of the program, which
has no expiration date, the Board of Directors has authorized
the purchase of up to 317.5 million shares as of
September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
of Shares That
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
May Yet Be
|
|
|
|
Total Number
|
|
|
Average Price
|
|
|
as Part of Publicly
|
|
|
Purchased Under
|
|
|
|
of Shares
|
|
|
Paid per
|
|
|
Announced Plans
|
|
|
the Plans or
|
|
(Common shares in millions)
|
|
Purchased(1)
|
|
|
Share
|
|
|
or Programs
|
|
|
Programs(2)
|
|
|
Period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1 July 31, 2007
|
|
|
.1
|
|
|
$
|
53.95
|
|
|
|
|
|
|
|
15.7
|
|
August 1 August 31, 2007
|
|
|
2.0
|
|
|
|
48.26
|
|
|
|
|
|
|
|
15.7
|
|
September 1 September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total third quarter of 2007
|
|
|
2.1
|
|
|
$
|
48.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The total number of shares
purchased includes: i) shares purchased under the stock
repurchase program discussed above, and ii) shares
purchased in connection with the exercise of stock options and
vesting of performance stock to satisfy minimum statutory tax
withholding obligations and shares tendered by employees to
satisfy option exercise costs (which combined totaled
2.1 million shares for the third quarter of 2007).
|
|
(2) |
|
Reduced by outstanding equity
forward contracts.
|
|
|
Item 3.
|
Defaults
upon Senior Securities
|
Nothing to report.
110
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
At a special meeting of shareholders held on August 15,
2007, the following proposals were approved by the margins
indicated:
1. To approve and adopt the Merger Agreement:
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
279,723,010
|
|
296,475
|
|
2,227,009
|
2. To approve the adjournment of the special meeting, if
necessary or appropriate, to solicit additional proxies if there
were insufficient votes at the time of the meeting:
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
259,703,045
|
|
20,377,657
|
|
2,165,792
|
|
|
Item 5.
|
Other
Information
|
Nothing to report.
The following exhibits are furnished or filed, as applicable:
|
|
|
|
|
|
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
|
111
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)
Sandra L. Masino
Senior Vice President
Accounting, Credit and Loan Portfolio Analysis
(Principal Accounting Officer and
Duly Authorized Officer)
Date: November 8, 2007
112