Sallie Mae 2010 Annual Report Download - page 26

income as “Floor Income”. This Floor Income can be volatile as rates on underlying debt move up and
down. We will generally hedge this risk by selling Floor Income Contracts which lock in the value of the
Floor Income over the term of the contract.
Additional cash flow should be generated within this segment as many of our secured financing vehicles
are over-collateralized, creating the potential for additional cash flow to be distributed to us over time as the
loans amortize.
Consumer Lending Segment
We expect to grow our Private Education Loan portfolio primarily through our school and direct-to-consumer
channels. Net interest income in this segment is determined by the Private Education Loan asset yields, which are
determined by interest rates established by us based upon the credit of the borrower and any co-borrower, the level
of price competition in the Private Education Loan market and our cost of funds. Our cost of funds can be
influenced by a number of factors including the quality of the loans in our portfolio, our corporate credit rating,
general economic conditions, investor demand for ABS and corporate unsecured debt and competition in the
deposit market. Loans are priced to anticipate our cost of funds and expected charge-off rate over the life of the
loans. Our Private Education Loans earn variable rate interest and are funded primarily with variable rate liabilities.
The Consumer Lending segment’s net interest margin was 3.85 percent in 2010 and 2009.
Provision For Loan Losses
Management estimates and maintains an allowance for loan losses equal to charge-offs expected over the
next two years. The provision is an income statement item that reduces segment revenues. Generally the
allowance rises when charge-offs are expected to increase and falls when charge-offs are expected to decline.
Our loss exposure and resulting provision for losses is smaller for FFELP Loans than for Private Education
Loans because we bear a maximum of 3 percent loss exposure on FFELP Loans. Our provision for losses in our
FFELP Loans segment was $98 million in 2010 compared with $119 million in 2009. Our loss exposure and
resulting provision in our Consumer Lending segment is much greater than our FFELP Loans segment. Losses in
our Consumer Lending segment are primarily driven by risk characteristics such as loan program type, school
type, loan status (in-school, grace, forbearance, repayment and delinquency), seasoning (number of months in
active repayment for which a scheduled payment was due), underwriting criteria (e.g., credit scores), existence or
absence of a cosigner and the current economic environment. Our provision for loan losses in our Consumer
Lending segment was $1.298 billion in 2010 compared with $1.399 billion in 2009.
Charge-Offs and Delinquencies
When we conclude a loan is uncollectable (from the borrower or Guarantor), the unrecoverable portion of
the loan is charged against the allowance for loan losses in the relevant lending segment. Information
regarding charge-offs provides relevant information over time with respect to the actual performance of our
loan portfolios as compared against the provisions for loan losses on those portfolios. The Consumer Lending
segment’s charge off-rate was 5 percent of loans in 2010 compared with 6 percent in 2009. Delinquencies are
a very important indicator of the potential future credit performance. Management focuses on the overall level
of delinquencies as well as the progression of loans from early to late stage delinquency. “Core Earnings”
basis Private Education Loan delinquencies as a percentage of Private Education Loans in repayment decreased
from 12.1 percent at December 31, 2009 to 10.6 percent at December 31, 2010.
Servicing and Contingency Revenues
We earn servicing revenues from servicing student loans, Campus Payment Solutions, and from account
asset servicing related to 529 college-savings plans. We earn contingency revenue related to default aversion
and contingency collections work we do primarily on federal loans. The fees we recognize are primarily
driven by our success in collecting or rehabilitating defaulted loans, the number of transactions processed and
the underlying volume of loans we are servicing on behalf of others.
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