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| SLM > SEC Filings for SLM > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This quarterly report contains forward-looking statements and information based on management's current expectations as of the date of this document. Statements that are not historical facts, including statements about our beliefs or expectations and statements that assume or are dependent upon future events, are forward-looking statements. Forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the occurrence of any event, change or other circumstances that could give rise to our ability to cost-effectively refinance asset-backed financing facilities due February 2009, (collectively, the "2008 Asset-Backed Financing Facilities"), including any potential foreclosure on the student loans under those facilities following their termination; increased financing costs; limited liquidity; any adverse outcomes in any significant litigation to which we are a party; our derivative counterparties terminating their positions with the Company if permitted by their contracts and the Company substantially incurring additional costs to replace any terminated positions; changes in the terms of student loans and the educational credit marketplace (including changes resulting from new laws and regulations and from the implementation of applicable laws and regulations) which, among other things, may reduce the volume, average term and yields on student loans under the Federal Family Education Loan Program ("FFELP"), may result in loans being originated or refinanced under non-FFELP programs, or may affect the terms upon which banks and others agree to sell FFELP loans to the Company. The Company could also be affected by: the implementation of the Emergency Economic Stabilization Act of 2008, changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; incorrect estimates or assumptions by management in connection with the preparation of our consolidated financial statements; changes in the composition of our Managed FFELP and Private Education Loan portfolios; changes in the general interest rate environment and in the securitization markets for education loans, which may increase the costs or limit the availability of financings necessary to initiate, purchase or carry education loans; changes in projections of losses from loan defaults; changes in general economic conditions; changes in prepayment rates and credit spreads; and changes in the demand for debt management services and new laws or changes in existing laws that govern debt management services. All forward-looking statements contained in this quarterly report are qualified by these cautionary statements and are made only as of the date this document is filed. The Company does not undertake any obligation to update or revise these forward-looking statements to conform the statement to actual results or changes in the Company's expectations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
A discussion of the Company's critical accounting policies, which include premiums, discounts and borrower benefits, related to our loan portfolio, securitization gain on sale and Retained Interest accounting, provisions for loan losses, derivative accounting and the effects of Consolidation Loan activity on estimates, can be found in the Company's Annual Report on Form 10-K for the year ended December 31, 2007.
In addition, on January 1, 2008, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements." This statement defines fair value, establishes a framework for measuring fair value within generally accepted accounting principles in the United States of America ("GAAP"), and expands disclosures about fair value measurements. Accordingly, this statement does not change which types of instruments are carried at fair value, but rather establishes the framework for measuring fair value.
On February 12, 2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") SFAS No. 157-2, "Effective Date of SFAS No. 157," which defers the effective date of SFAS No. 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. This FSP will delay the implementation of SFAS No. 157 for the
Company's accounting of goodwill, acquired intangibles, and other nonfinancial assets and liabilities that are measured at the lower of cost or market until January 1, 2009.
As such, SFAS No. 157 currently applies to our investment portfolio accounted for under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities;" our derivative portfolio and designated hedged assets or liabilities accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities;" and our Residual Interest in off-balance sheet securitization trusts accounted for under SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115." In general, changes in the fair value of these items will affect the consolidated statement of income and capital. Liquidity is impacted to the extent a decrease in fair value would result in less cash being received upon a sale of an investment. Liquidity is also impacted to the extent that changes in capital and net income affect compliance with principal financial covenants in our unsecured revolving credit facilities. Noncompliance with these covenants also impacts our ability to use our 2008 ABCP Facilities (see "LIQUIDITY AND CAPITAL RESOURCES - Additional Funding for General Corporate Purposes"). Additionally, liquidity is impacted to the extent that changes in the fair value of derivative instruments results in the movement of collateral between the Company and its counterparties. Collateral agreements are bilateral and are based on the derivative fair values used to determine the net exposure between the Company and individual counterparties. For a general description of valuation techniques and models used for the above items, see Note 11, "Fair Value Measurements," to the consolidated financial statements. For a discussion of the sensitivity of fair value estimates, see "Item 3. Quantitative and Qualitative Disclosures about Market Risk."
As it relates to Residual Interests, additional discussion of significant unobservable inputs, how they are determined, how they impact realized and unrealized gains and the nature of and sensitivity to material changes in Residual Interest fair values can be found in Note 9, "Student Loan Securitization," within the Company's 2007 Annual Report on Form 10-K.
In light of the recent economic turmoil occurring in the U.S. the FASB released FSP No. 157-3 "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active" on October 10, 2008. This FSP clarified, among other things, that quotes and other market inputs need not be solely used to determine fair value if they do not relate to an active market. The FSP points out that when relevant observable market information is not available, an approach that incorporates management's judgments about the assumptions that market participants would use in pricing the asset in a current sale transaction would be acceptable (such as a discounted cash flow analysis). Regardless of the valuation technique applied, entities must include appropriate risk adjustments that market participants would make, including adjustments for non performance risk (credit risk) and liquidity risk. In determining the fair value of the instruments that fall under SFAS No. 157 the Company has specifically taken into account both credit risk and liquidity risk as of September 30, 2008 as follows:
1. Investments - The Company's investments primarily consist of overnight/weekly maturity instruments with high credit quality counterparties. As such, the Company has considered credit and liquidity risk involving these instruments. These assumptions have further been validated by the successful maturity of these investments in the period immediately following September 30, 2008. Additionally, the Company has a $500 million investment in the Reserve Primary Fund which was assessed for impairment as of September 30, 2008. See "LIQUIDITY AND CAPITAL RESOURCES - Counterparty Exposure" for further discussion.
2. Derivatives - When determining the fair value of derivatives, the Company takes into account the credit risk by assessing the credit ratings of the counterparties and collateral posted. See "LIQUIDITY AND CAPITAL RESOURCES - Counterparty Exposure" for further discussion of specific positions and conclusions on fair value as a result of credit risk. The Company also takes into account changes in liquidity related to derivative positions and the fair value. The Company adjusted the fair value of certain less liquid positions by approximately $260 million to take into account a significant reduction in liquidity as of September 30, 2008, related primarily to basis swaps and Floor Income Contracts indexed to interest rate indices with inactive markets. A major indicator of market inactivity is the widening of the bid/ask spread in these markets. Additionally, when the counterparty has exposure to the Company related to SLM Corporation derivatives, we fully collateralize the exposure minimizing the adjustment to the derivative valuations for the Company's credit risk. While trusts that contain
derivatives are not required to post collateral to counterparties, the credit quality and securitized nature of the trusts minimizes any adjustments for credit risk.
3. Residual Interests - The Company has never sold its Residual Interests and we are unaware of any sales of student loan residual interests. As a result, these instruments have never been considered liquid. This lack of liquidity has always been taken into account when valuing the Residual Interests. The discount rate assumption related to the Private Education Loan Residual Interests has been increased every quarter since the fourth quarter of 2007 to take into account the changes in credit and liquidity risks. The discount rate assumption related to the FFELP Loan Residual Interests has been examined and deemed to accurately reflect the risks associated with these instruments each quarter since the fourth quarter 2007 through the second quarter of 2008. It was subsequently increased in the quarter ending September 30, 2008. The Company uses non-binding broker quotes and industry analyst reports which show changes in the indicative prices of the asset-backed securities tranches immediately senior to the Residual Interest as an indication of potential changes in the discount rate used to value the Residual Interest. The Company also uses the most current prepayment and default rate assumptions to project the expected cash flows used to value Residual Interests. These assumptions are internally developed and primarily based on analyzing the actual results of loan performance from past periods. See Note 4, "Student Loan Securitization," to the consolidated financial statements for a discussion of all assumption changes made during the quarter to properly determine the fair value of the Residual Interests.
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