Sallie Mae 2011 Annual Report Download - page 120

SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Significant Accounting Policies (Continued)
Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between
willing and able market participants. In general, our policy in estimating fair values is to first look at observable
market prices for identical assets and liabilities in active markets, where available. When these are not available,
other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities,
prepayment speeds, default rates and credit spreads (including for our liabilities), relying first on observable data
from active markets. Depending on current market conditions, additional adjustments to fair value may be based
on factors such as liquidity, credit, and bid/offer spreads. Transaction costs are not included in the determination
of fair value. When possible, we seek to validate the model’s output to market transactions. Depending on the
availability of observable inputs and prices, different valuation models could produce materially different fair
value estimates. The values presented may not represent future fair values and may not be realizable.
We categorize our fair value estimates based on a hierarchical framework associated with three levels of
price transparency utilized in measuring financial instruments at fair value. Classification is based on the lowest
level of input that is significant to the fair value of the instrument. The three levels are as follows:
• Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that we have
the ability to access at the measurement date. The types of financial instruments included in level 1 are
highly liquid instruments with quoted prices.
• Level 2 — Inputs from active markets, other than quoted prices for identical instruments, are used to
determine fair value. Significant inputs are directly observable from active markets for substantially the
full term of the asset or liability being valued.
• Level 3 — Pricing inputs significant to the valuation are unobservable. Inputs are developed based on
the best information available. However, significant judgment is required by us in developing the
inputs.
Loans
Loans, consisting primarily of federally insured student loans and Private Education Loans, that we have the
ability and intent to hold for the foreseeable future are classified as held for investment and are carried at
amortized cost. Amortized cost includes the unamortized premiums, discounts, and capitalized origination costs
and fees, all of which are amortized to interest income as further discussed below. Loans which are
held-for-investment also have an allowance for loan loss as needed. Any loans we have not classified as
held-for-investment are classified as held-for-sale, and carried at the lower of cost or fair value. Loans are
classified as held-for-sale when we have the intent and ability to sell such loans. Loans which are held-for-sale
do not have the associated premium, discount, and capitalized origination costs and fees amortized into interest
income. In addition, once a loan is classified as held-for-sale, there is no further adjustment to the loan’s
allowance for loan loss that existed immediately prior to the reclassification to held-for-sale.
As market conditions permit, we may securitize loans as a source of financing for those loans. If we elect to
use a securitization program to finance loans, loans are selected based on the required characteristics to structure
the desired transaction at the most favorable financing terms (e.g., type of loan, mix of interim vs. repayment
status, credit rating and maturity dates). Due to some of the structuring terms, certain transactions may qualify for
sale treatment while others do not qualify for sale treatment and are recorded as financings.
All of our student loans, except for those which were sold under the U.S. Department of Education’s
(“ED’s”) Purchase Program, as defined and discussed below, are initially categorized as held-for-investment
until there is certainty as to each specific loan’s ultimate financing because we do not securitize all loans and
currently all of our securitizations do not qualify for sales treatment. It is only when we have selected the loans to
F-11