Sallie Mae 2005 Annual Report Download - page 64

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The following table summarizes the Floor Income adjustments in our Lending operating segment for
the years ended December 31, 2005, 2004 and 2003.
Years ended December 31,
2005 2004 2003
“Core earnings” Floor Income adjustments:
Floor Income earned on Managed loans, net of payments on
FloorIncomeContracts ............................. $ 19 $ 88 $ 292
Amortization of net premiums on Floor Income Contracts
and futuresin net interest income..................... (223) (194) (161)
Net losses related to closed Eurodollar futures contracts
economically hedging Floor Income ................... — (50 ) (14 )
Losses onsales of derivatives hedging Floor Income....... — — (94)
Total “core earnings”FloorIncome adjustments.......... $(204) $(156) $ 23
4) Other items: We exclude amortization of acquired intangibles.
LENDING BUSINESS SEGMENT
In our Lending operating segment, we originate and acquire federally guaranteed student loans, which
are administered by ED, and Private Education Loans, which are not federally guaranteed. The majority of
our Private Education Loans is made in conjunction with a FFELP Stafford loan and as a result is
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 earnings growth in our Lending operating segment is a product of the growth in our Managed
portfolio of student loans and the earning spread on those loans. In 2005, the Managed portfolio grew by
14 percent to $122.5 billion at December 31, 2005. As a result of receiving EP designation from ED,
approximately 95 percent of our Managed FFELP student loans are 100 percent guaranteed by the federal
government (declining to 99 percent guaranteed after July 1, 2006) and as such, represent high quality
assets with minimal credit risk. At December 31, 2005, our Managed FFELP student loan portfolio was
$106.1 billion or 87 percent of our total Managed student loans.
Trends in the Lending Business Segment
The growth in our Lending operating segment has been largely driven by the steady growth in the
demand for post-secondary education in the United States over the last decade. This growth is evident in
the $30.2 billion of student loans we originated or acquired in 2005 through our “normal” acquisition
channels, a 27 percent increase over the $23.7 billion of student loans acquired in 2004. Our “normal”
acquisition channels exclude loans acquired in conjunction with business combinations. In 2005, we
originated $21.4 billion of student loans through our Preferred Channel, an increase of 19 percent over the
$18.0 billion of student loans originated through our Preferred Channel in 2004.
We expect the growth in the demand for post-secondary education to continue in the future due to a
number of factors. First, the college age population will continue to grow as ED predicts that the college-
age population will increase approximately 12 percent from 2005 to 2014. Second, we project an increase in
non-traditional students (those not attending college directly from high school) and adult education. Third,
tuition costs have risen 54 percent for four-year public institutions and 37 percent for four-year private