Sallie Mae 2011 Annual Report Download - page 51

In establishing the allowance for Private Education Loan losses as of December 31, 2011, we considered
several factors with respect to our Private Education Loan portfolio. In particular, we continue to see improving
credit quality and continuing positive delinquency and charge-off trends in connection with this portfolio.
Improving credit quality is seen in higher FICO scores and cosigner rates, as well as a more seasoned portfolio
compared with the previous year. The delinquency rate has declined to 10.1 percent from 10.6 percent and the
charge-off rate has declined to 3.7 percent from 5.0 percent compared with the previous year.
Apart from these overall improvements in credit quality, delinquency and charge-off trends, Private
Education Loans which defaulted between 2008 and 2011 for which we have previously charged off estimated
losses have, to varying degrees, not met our post-default recovery expectations to date and may continue not to
do so. We have been charging off these periodic shortfalls in expected recoveries against our allowance for
Private Education Loan losses and the related receivable for partially charged-off Private Education Loans and
we will continue to do so. Differences in actual future recoveries on these defaulted loans could affect our
receivable for partially charged-off Private Education Loans. In the third quarter of 2011, we increased our
provision for Private Education Loan losses for the quarter in the amount of $143 million to reflect these
uncertainties. Continuing historically high unemployment rates may negatively affect future Private Education
Loan default and recovery expectations over our estimated two-year loss confirmation period. Consequently, we
have also given consideration to these factors in projecting charge-offs for this period and establishing our
allowance for Private Education Loan losses. We will continue to monitor defaults and recoveries in light of the
continuing weak economy and high unemployment rates. For a more detailed discussion of our policy for
determining the collectability of Private Education Loan and maintaining our allowance for Private Education
Loan losses, see “Critical Accounting Policies and Estimates—Allowance for Loan Losses.”
Servicing Revenue and Other Income — Consumer Lending Segment
Servicing revenue for our Consumer Lending segment primarily includes late fees and forbearance fees. For
the years ended December 31, 2011, 2010 and 2009, servicing revenue for our Consumer Lending segment
totaled $64 million, $72 million and $70 million, respectively. Included in other income for the year ended
December 31, 2011 was a $9 million mark-to-market loss related to classifying our entire $12 million portfolio of
non-U.S. dollar-denominated student loans as held-for-sale.
Operating Expenses — Consumer Lending Segment
Operating expenses for our Consumer Lending segment include costs incurred to originate Private
Education Loans and to service and collect on our Private Education Loan portfolio. For the years ended
December 31, 2011, 2010 and 2009, operating expenses for our Consumer Lending segment totaled
$304 million, $350 million and $265 million, respectively.
2011 versus 2010
The decrease in operating expenses in the year ended December 31, 2011 compared with the year-ago
period was primarily the result of our cost cutting initiatives. Operating expenses, excluding restructuring-related
asset impairments, were 82 basis points and 96 basis points of average Private Education Loans in the years
ended December 31, 2011 and 2010, respectively.
2010 versus 2009
Operating expenses increased $85 million from 2009, primarily as the result of a non-recurring $11 million
benefit in 2009 related to reversing a contingency reserve, an increase in collection and servicing costs from a
higher number of loans in repayment and delinquency status and higher marketing and technology enhancement
costs related to Private Education Loans in 2010. Operating expenses, excluding restructuring-related asset
impairments, were 96 basis points and 74 basis points, respectively, of average “Core Earnings” basis Private
Education Loans in the years ended December 31, 2010 and 2009.
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