Sallie Mae 2012 Annual Report Download - page 18

The interest rate characteristics of our earning assets do not always match the interest rate characteristics of
our funding arrangements. This mismatch exposes us to risk in the form of basis risk and repricing risk.
Moreover, it may not always be possible to hedge all of our exposure to such basis risks. While the asset and
hedge indices are short-term with rate movements that are typically highly correlated, there can be no assurance
that the historically high correlation will not be disrupted by capital market dislocations or other factors not
within our control. In such circumstances, our earnings could be adversely affected, possibly to a material extent.
Adverse market conditions or an inability to effectively manage our liquidity risk could negatively impact our
ability to meet our liquidity and funding needs, which could materially and adversely impact our business
operations and our overall financial condition.
We must effectively manage the liquidity risk to which we are exposed. We require liquidity to meet cash
requirements such as day-to-day operating expenses, extensions of credit on our Private Education Loans,
required payments of principal and interest on our borrowings, and distributions to our shareholders. Our primary
sources of liquidity and funding are from fees we collect for servicing education loans, payments made on
FFELP and Private Education Loans that we hold, proceeds and distributions from securitization transactions and
trusts that we undertake and offerings of debt and equity securities. We may maintain too much liquidity, which
can be costly, or we may be too illiquid, which could result in financial distress during times of financial stress or
capital market disruptions.
Higher than expected prepayments of education loans could reduce servicing revenues we receive or reduce or
delay payments we receive as the holder of the residual interests of securitization trusts holding education
loans. While some fluctuation in prepayment levels is to be expected, extraordinary or extended increases in
prepayment levels could materially adversely affect our liquidity, income and the value of those residual
interest assets.
Education loans may be voluntarily prepaid by borrowers or, in the case of FFELP Loans, may also be
consolidated with the borrowers’ other education loans through refinancing into the DSLP. FFELP Loans may
also be repaid after default by the guarantors of FFELP Loans. Prepayment rates and levels are subject to many
factors which are beyond our control, including repayment through loan consolidation programs. When education
loans contained within a securitization trust are prepaid the fees we earn as servicer decrease and the value of any
residual interest we own in the securitization trust may decline. If we experience significantly higher than
expected prepayments, our liquidity, income and future value of assets could be materially and adversely affected.
Operations
A failure of our operating systems or infrastructure or a breach or violation of law by one of the many third-
party vendors we rely on to deliver services and information, including confidential customer information, to
our customers could disrupt our business, result in disclosure of confidential customer information, damage
our reputation, cause significant losses and provide our competitors with an opportunity to enhance their
position at our expense. We may also be exposed to litigation and regulatory risk for failure to provide proper
oversight to these third-party vendors.
A failure of operating systems or infrastructure could disrupt our business. Our business is dependent on our
ability to process and monitor large numbers of daily transactions in compliance with legal and regulatory
standards and our product specifications, which change to reflect our business needs and new or revised
regulatory requirements. As processing demands change and our loan portfolios grow in both volume and
differing terms and conditions, developing and maintaining our operating systems and infrastructure becomes
increasingly challenging and there is no assurance that we can adequately or efficiently develop, maintain or
acquire access to such systems.
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