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SLM > SEC Filings for SLM > Form 10-Q on 4-Nov-2011All Recent SEC Filings

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Form 10-Q for SLM CORP


Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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

This report contains "forward-looking statements" and information based on management's current expectations as of the date of this document. Statements that are not historical facts, including statements about the company's beliefs or expectations and statements that assume or are dependent upon future events, are forward-looking statements. Forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in Item 1A "Risk Factors" and elsewhere in the company's Annual Report on Form 10-K for the year ended Dec. 31, 2010, the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, and subsequent filings with the SEC; increases in financing costs; limits on liquidity; increases in costs associated with compliance with laws and regulations; changes in accounting standards and the impact of related changes in significant accounting estimates; any adverse outcomes in any significant litigation to which the company is a party; credit risk associated with the company's exposure to third parties, including counterparties to the company's derivative transactions; and changes in the terms of student loans and the educational credit marketplace (including changes resulting from new laws and the implementation of existing laws). The company could also be affected by, among other things: changes in its funding costs and availability; reductions to its credit ratings or the credit ratings of the United States of America; failures of its operating systems or infrastructure, including those of third-party vendors; damage to its reputation; failures to successfully implement cost-cutting and restructuring initiatives and adverse effects of such initiatives on its business; changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; changes in law and regulations with respect to the student lending business and financial institutions generally; increased competition from banks and other consumer lenders; the creditworthiness of its customers; changes in the general interest rate environment, including the rate relationships among relevant money-market instruments and those of its earning assets vs. its funding arrangements; changes in general economic conditions; and changes in the demand for debt management services. The preparation of the company's consolidated financial statements also requires management to make certain estimates and assumptions including estimates and assumptions about future events. These estimates or assumptions may prove to be incorrect. All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document. The company does not undertake any obligation to update or revise these forward-looking statements to conform the statement to actual results or changes in its expectations.

Definitions for capitalized terms used in this document can be found in the "Glossary" at the end of this document.

Certain reclassifications have been made to the balances as of and for the three and nine months ended September 30, 2010 to be consistent with classifications adopted for 2011, and had no effect on net income, total assets, or total liabilities.

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

Selected Financial Information and Ratios

                                                                    Three Months Ended                      Nine Months Ended
                                                                       September 30,                          September 30,
(Dollars and shares in millions, except per share data)          2011                2010                2011               2010
GAAP Basis
Net income (loss)                                              $     (47 )         $    (495 )         $     122          $      83
Diluted earnings (loss) per common share                       $    (.10 )         $   (1.06 )         $     .21          $     .06
Weighted average shares used to compute diluted
earnings (loss) per share                                            511                 485                 526                486
Return on assets                                                    (.10 )%            (1.00 )%              .09 %              .06 %
"Core Earnings" Basis(1)
"Core Earnings" net income                                     $     188           $     202           $     708          $     627
"Core Earnings" diluted earnings per common share(2)           $     .36           $     .37           $    1.32          $    1.17
Weighted average shares used to compute diluted
earnings per share                                                   517                 528                 526                527
"Core Earnings" return on assets                                     .39 %               .41 %               .49 %              .43 %
Other Operating Statistics
Ending FFELP Loans, net                                        $ 140,659           $ 146,593           $ 140,659          $ 146,593
Ending Private Education Loans, net                               36,157              35,542              36,157             35,542

Ending total student loans, net                                $ 176,816           $ 182,135           $ 176,816          $ 182,135

Average student loans                                          $ 178,620           $ 184,139           $ 181,242          $ 183,424

(1) "Core Earnings" are non-GAAP financial measures and do not represent a comprehensive basis of accounting. For a greater explanation of "Core Earnings," see the section titled "'Core Earnings' - Definition and Limitations" and subsequent sections.

(2) Preferred dividends of $15 million and $44 million, applicable to our convertible Series C Preferred Stock, were added back to the numerator in the three and nine months ended September 30, 2010, respectively, in computing diluted earnings per share, as the Series C Preferred Stock was dilutive on a "Core Earnings" basis. The Series C Preferred Stock was fully converted to common shares on December 15, 2010.


Our primary business is to help students and families save, plan and pay for college. As part of this, we originate, service and collect loans made to students and/or their parents to finance the cost of their education. We provide funding, delivery and servicing support for education loans in the United States, through our non-federally guaranteed Private Education Loan programs and as a servicer and collector of loans for the U.S. Department of Education ("ED"). In addition we are the largest holder, servicer and collector of loans made under the Federal Family Education Loan Program ("FFELP"), a program that was discontinued in 2010.

We have used internal growth and strategic acquisitions to attain our leadership position in the education finance market. The core of our marketing strategy is to generate student loan originations by promoting our products on campus through the financial aid office and through direct marketing to students and their parents. These sales and marketing efforts are supported by the largest and most diversified servicing capabilities in the industry.

We earn fee income by providing student loan-related services including student loan servicing, loan default aversion and defaulted loan collections, transaction processing capabilities and information technology to educational institutions, and 529 college-savings plan program management services and a consumer savings network.

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

FFELP Loans segment - This segment consists of our $140.7 billion and $148.7 billion FFELP Loan portfolio and the underlying debt and capital funding the loans as of September 30, 2011 and December 31, 2010, respectively. We no longer originate FFELP Loans; however, we are actively seeking to acquire, and have acquired, FFELP Loan portfolios. The portfolio has a weighted average remaining life of 7.7 years.

Consumer Lending segment - We originate, acquire, finance and service Private Education Loans. The portfolio totaled $36.2 billion and $35.7 billion at September 30, 2011 and December 31, 2010, respectively. We also provide savings products, primarily in the form of retail deposits, to help customers save for a college education.

Business Services segment - In this segment we provide loan servicing to our FFELP Loans segment, ED and other third parties. We provide default aversion work and contingency collections on behalf of Guarantors, colleges, ED and other third parties. Through our Campus Solutions business we provide comprehensive financing and transaction processing solutions to college financial aid offices and students to streamline the financial aid process. Through Sallie Mae Insurance Services we offer directly to college students and higher education institutions, tuition insurance, renters insurance, and student health insurance. We also provide 529 college-savings plan account asset servicing and other transaction processing activities.

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

Key Financial Measures

Our operating results are primarily driven by interest income from our student loan portfolios, provision for loan losses, financing costs, costs necessary to generate new assets, the revenues and expenses generated by our service businesses, and gains and losses on loan sales, debt repurchases and derivatives. We manage and assess the performance of each business segment separately as each is focused on different customer bases and derives its revenue from different activities and services. A brief summary of our key financial measures (net interest income; provision for loan losses; charge-offs and delinquencies; servicing and contingency revenues; other income (loss); operating expenses; and "Core Earnings") can be found in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2010 Form 10-K.

First Nine Months of 2011 Summary of Results

We continue to operate in a challenging macroeconomic environment marked by high unemployment and uncertainty. On July 1, 2010, the Health Care and Education Reconciliation Act of 2010 ("HCERA"), which included the SAFRA Act, eliminated FFELP Loan originations, a major source of our net income. All federal loans to students are now made through the Direct Student Loan Program ("DSLP") and as discussed above, we no longer originate FFELP Loans. In addition, on July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") that represents a comprehensive change to banking laws, imposing significant new regulation on almost every aspect of the U.S. financial services industry. A discussion of HCERA and the Dodd-Frank Act can be found in Item 1 "Business" and in Item 1A "Risk Factors" in our 2010 Form 10-K.

In this environment, we were able to achieve significant accomplishments during the first nine months of 2011 as discussed below.

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

GAAP third quarter 2011 net loss was $47 million ($.10 diluted loss per share), versus net loss of $495 million ($1.06 diluted loss per share) in the same quarter last year. We manage our business segments on a "Core Earnings" basis. The primary difference between our "Core Earnings" and GAAP results for the third quarter of 2011 is a $371 million unrealized, mark-to-market loss on certain derivative contracts recognized in GAAP but not in "Core Earnings" results. The primary difference between "Core Earnings" and GAAP in the year-ago quarter was a mark-to-market loss on certain derivative contracts of $269 million and a $660 million impairment of goodwill and intangibles in the year-ago quarter.

"Core Earnings" were $188 million ($.36 diluted earnings per share) for the third quarter 2011, compared with $202 million ($.37 diluted earnings per share) for the year-ago period. Improved loan loss provision and operating expenses and the gain on the sale of our Purchased Paper - Non-Mortgage business more than offset lower debt repurchase gains.

Both GAAP and "Core Earnings" third-quarter 2011 results included the following:
an additional $124 million of provision for Private Education Loan losses attributable to the adoption of recent accounting guidance for troubled debt restructurings, and a $35 million gain on the sale of the Company's discontinued Purchased Paper - Non-Mortgage business.

During the first nine months of 2011, we raised $2 billion of unsecured debt and issued $1.6 billion of FFELP asset-backed securities and $1.4 billion of Private Education Loan securities. We also repurchased $894 million of debt and realized "Core Earnings" gains of $64 million for the nine months ended September 30, 2011, compared with $3.6 billion and $199 million in the nine months ended September 30, 2010.

During the second and third quarters of 2011, we paid $300 million to repurchase 19.1 million common shares on the open market as part of our previously announced $300 million share repurchase program authorization. We have fully utilized this authorization. We declared and paid a $.10 per share dividend during the second and third quarters of 2011.

Effective March 31, 2011, we completed the relocation of our headquarters to Newark, Delaware from Reston, Virginia.

2011 Management Objectives

In 2011 we have set out five major goals to create shareholder value. They are:
(1) Reduce our operating expenses; (2) Maximize cash flows from FFELP Loans;
(3) Prudently grow Consumer Lending segment assets and revenue; (4) Increase Business Services segment revenue; and (5) Reinstate dividends and/or share repurchases. Here is how we plan to achieve these objectives and the progress we have made to date.

Reduce Operating Expenses

The elimination of FFELP by HCERA greatly reduced the scope of our historical revenue generating capabilities. In 2010 we originated $14 billion of loans, 84 percent of them FFELP Loans; in 2011 we expect to originate $2.7 billion of new loans, all of them Private Education Loans. Our FFELP related revenues will decline over the coming years. As a result, we must effectively match our cost structure to our ongoing business. We have set a goal of getting to a quarterly operating expense of $250 million in the fourth quarter 2011 and are on track to achieve this goal. Operating expenses were $285 million in the third quarter of 2011. Operating expenses in the third quarter of 2011 included $15 million related to the pending termination of our defined benefit retirement plan and $8 million of servicing costs related to the $25 billion student loan portfolio acquisition at the end of last year. We completed conversion of the acquired portfolio to our loan servicing system in October 2011 and expect these servicing costs to decline as a result. These charges notwithstanding, we expect to achieve our quarterly operating expense target of $250 million in the fourth quarter of 2011.

Maximize Cash Flows from FFELP Loans

We have a $140.7 billion portfolio of FFELP Loans that is expected to generate significant amounts of cash flow and earnings in the coming years. We plan to reduce related costs, minimize income volatility and opportunistically purchase additional FFELP Loan portfolios such as the portfolio we purchased at the end of 2010. During the first nine months of 2011 we acquired $1.5 billion of FFELP loans and expect to purchase additional FFELP loans in the future.

Prudently Grow Consumer Lending Segment Assets and Revenue

Successfully growing Private Education Loan lending, which is designed to supplement federal financial aid, is the key component of our long-term plan to grow shareholder value. We must originate increasing numbers of high quality Private Education Loans, increase net interest margins and further reduce charge-offs and provision for loan losses. Originations were 29 percent higher in the third quarter of 2011 compared with the year-ago quarter. Charge-offs decreased to 3.7 percent of loans in repayment from 5.4 percent in the year-ago quarter.

Increase Business Services Segment Revenue

Our Business Services segment comprises several businesses with customers related to FFELP that will experience revenue declines and several businesses with customers that provide growth opportunities. Our growth businesses are ED servicing, ED collections, other school-based asset type servicing and collections, Campus Solutions, Sallie Mae Insurance Services, transaction processing and 529 college-savings plan account asset servicing.

Our allocation of new customer loans awarded for servicing under our ED Servicing Contract recently increased from 22 percent to 26 percent for the current contract year ending August 15, 2012. The increase was driven primarily by our top ranking for default prevention performance results. We are servicing approximately 3.4 million accounts under the ED Servicing Contract as of September 30, 2011. We can continue to expand our market share on the next contract year under the ED Servicing Contract by having a better performance ranking than the three other servicing companies. We expect that this volume will also grow organically as more loans are originated under DSLP. Our goal is to further expand our market share and broaden the services we provide to ED and other third-party servicing clients.

Campus Solutions is a business line that we expect to grow by expanding our product offerings and leveraging our deep relationships with colleges and universities. In the first quarter, we announced a Sallie Mae Bank No-Fee Student Checking Account with Debit as an enhanced refund disbursement choice for schools and students to help higher education institutions rapidly process financial aid and tuition refunds. This new option complements existing refund disbursement choices that include electronic deposit to the bank account of the student's choice, debit card or a check. We have added 35 new refund disbursement clients in 2011.

Assets under management in 529 college-savings plans total $34.5 billion and have been growing at a rate of 22 percent over the last three years. We recently were selected to continue as the program manager for New York's 529 College Savings Program under a seven-year contract, which is currently being negotiated. New York has the largest direct 529 plan in the country. Our goal is to service additional 529 plans.

We launched Sallie Mae Insurance Services in the prior quarter, which offers directly to college students and higher education institutions tuition insurance, renters insurance and student health insurance.

We completed the acquisition of SC Services & Associates, Inc., a provider of collections services to local governments and courts. This acquisition will enhance and complement our other contingency collection businesses.

Reinstate Dividends and/or Share Repurchases

Our objective was to begin either paying dividends or repurchasing shares, or a combination of both, by the second half of 2011. On June 17, 2011 and September 16, 2011, we paid a quarterly dividend of $.10 per share on our common stock, the first dividends paid since early 2007. In April 2011, we authorized the repurchase of up to $300 million of outstanding common stock in open-market transactions and terminated all previous authorizations. During the second and third quarters of 2011, we paid $300 million to repurchase 19.1 million common shares on the open market. We have now fully utilized the share repurchase program authorization.


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

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