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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-02-25 compared with 2020-02-28 · 37 added, 37 removed, 56 unchanged (57% of the section changed)

7 unchanged sentences

The Bank is the primary source of interest rate risk within the Company.

At present, a significant portion of the Bank’s earning assets are priced off of 1-month LIBOR.

At present, a significant portion of the Bank’s earning assets and a large balance of deposits are indexed to 1-month LIBOR.

Therefore, 1-month LIBOR is considered a core rate in our interest rate risk analysis.

4 unchanged sentences

Interest rate ramps represent a linear increase in 1-month LIBOR over the course of 12 months, with the resulting changes in other indices correlated accordingly.

The following tables summarize the potential effect on earnings over the next 24 months and the potential effect on market values of balance sheet assets and liabilities at December 31, 2019 and 2018, based upon a sensitivity analysis performed by management assuming a hypothetical increase or decrease in market interest rates of 100 basis points and a hypothetical increase in market interest rates of 300 basis points while funding spreads remain constant.

The EVE sensitivity is applied only to financial assets and liabilities, including hedging instruments, that existed at the balance sheet date, and does not take into account new assets, liabilities, commitments or hedging instruments that may arise in the future.

At today’s levels of interest rates, a 300 basis point downward rate shock does not provide a meaningful indication of interest rate sensitivity, so results for that scenario have not been presented.

The results below indicate a market risk profile that has changed slightly from the prior year’s results, with the EAR results exhibiting very low levels of variability with rate shocks.

Economic Value of Equity sensitivity has increased somewhat with the recent seasonal increase in fixed-rate loans, but continues to exhibit a relatively low level of interest rate sensitivity.

It is important to note that the EVE measure is very sensitive to relatively low levels of interest rate sensitivity.

A primary objective in our funding is to manage our sensitivity to changing interest rates by generally funding our assets with liabilities of similar interest rate repricing characteristics.

This funding objective is frequently obtained through the use of derivatives.

Uncertainty in loan repayment cash flows and the pricing behavior of our non-maturity retail deposits pose

challenges in achieving our interest rate risk objectives.

In addition to these considerations, we can have a mismatch in the index (including the frequency of reset) of floating-rate debt versus floating-rate assets.

As part of its suite of financial products, the Bank offers fixed-rate Private Education Loans.

As with other Private Education Loans, the term to maturity is lengthy, and the customer has the option to repay the loan faster than the promissory note requires.

Asset securitization and fixed-rate CDs provide intermediate to long-term fixed-rate funding for some of these assets.

Additionally, a portion of the fixed-rate loans have been hedged with derivatives, which have been used to convert a portion of variable-rate funding to fixed-rate to match the anticipated cash flows of these loans.

Any unhedged position arising from the fixed-rate loan portfolio is monitored and modeled to ensure that the interest rate risk does not cause the Company to exceed its policy limits for earnings at risk or for the value of equity at risk.

In the preceding tables, the interest rate sensitivity analysis reflects the balance sheet mix of fully variable LIBOR-based loans, which exceeds the mix of fully variable funding, including brokered CDs that have been converted to LIBOR through derivative transactions.

The analysis does not anticipate that retail MMDAs or retail savings balances, while relatively sensitive to interest rate changes, will reprice to the full extent of interest rate shocks or ramps.

Also considered is (i) the impact of FFELP loans, which receive floor income in low interest rate environments, and will therefore not reprice fully with interest rate shocks and (ii) the impact of fixed-rate loans that have not been fully match-funded through derivative transactions and fixed-rate funding from CDs and asset securitization.

An additional consideration is the implementation of a loan cap of 25 percent on variable-rate loans originated on and after September 25, 2016.

As of December 31, 2019, there were $13.3 billion of loans with 25 percent interest rate caps on the balance sheet.

The overall slightly asset-sensitive position would generally cause net interest income to increase somewhat when interest rates rise and decrease somewhat when interest rates fall.

However, as the position demonstrates very low levels of variability, the sensitivity position will fluctuate somewhat during the year, depending on the funding mix in place at the time of the analysis.

The following tables summarize the potential effect on earnings over the next 24 months and the potential effect on market values of balance sheet assets and liabilities at December 31, 2020 and 2019, based upon a sensitivity analysis performed by management assuming hypothetical increases in market interest rates of 100 and 300 basis points while credit and funding spreads remain constant.

The EVE sensitivity is applied only to financial assets and liabilities, including hedging instruments, that existed at the balance sheet date, and does not reflect any impact of new assets, liabilities, commitments, or hedging instruments that may arise in the future.

With current interest rates so low, a 100 or 300-basis point downward rate shock does not provide a meaningful indication of interest rate sensitivity, so results for those scenarios have not been presented.

At December 31, 2020, the full impact of a 100-basis point downward rate shock cannot be modeled for some instruments on our balance sheet, due to the precipitous fall in many short-term rates since February 2020.

The EAR results for December 31, 2020 indicate a market risk profile that is less sensitive than at December 31, 2019 to rate changes and is now at a nearly rate-neutral position for net interest income, based on static balance sheet assumptions over the next two years.

For the year ended December 31, 2020, the increased sensitivity in the EVE risk metric is the result of an increase in fixed-rate assets on the balance sheet relative to fixed-rate liabilities and a change in the model used to perform the calculation.

A portion of the increased sensitivity is due to portfolio structural changes as we now have a higher percentage of assets invested in fixed-rate loans and highly liquid fixed-rate securities, with underlying funding of fixed-rate liabilities of relatively shorter duration.

In addition, several changes to the EVE calculation methodology have been made in 2020 that have caused the ratios presented below to increase.

Significant changes in methodology have occurred with the recent implementation of a new asset and liability model, which offers capabilities to model the expected cashflows of our Private Education Loan portfolio more precisely.

These changes have lengthened the projected remaining weighted average lives of our education loan assets.

Points +100 Basis

Points -100 Basis

Points +300 Basis

Points +100 Basis

Points -100 Basis

EAR - Shock -0.6 % -0.0 % N/A +4.4 % +1.4 % -1.4 %

EAR - Ramp -0.1 % +0.1 % N/A +3.8 % +1.1 % -0.9 %

EVE -15.8 % -5.3 % N/A -5.0 % -1.9 % +2.0 %

In the preceding tables, the interest rate sensitivity analysis reflects the balance sheet mix of fully variable LIBOR-based loans, and fully variable funding, including brokered CDs that have been converted to LIBOR through derivative transactions.

The analysis assumes that retail MMDAs and retail savings balances, while relatively sensitive to interest rate changes, will not correlate 100 percent to the full interest rate shocks or ramps.

Also considered is the impact of FFELP Loans, which receive floor income in low interest rate environments, and will therefore not reprice fully with interest rate shocks.

Although we believe that these measurements provide an estimate of our interest rate sensitivity, they do not account for potential changes in credit quality, balance sheet mix, and size of our balance sheet.

9 unchanged sentences

(Dollars in millions)

Fed Funds Effective Rate

daily/weekly/monthly

3-month Treasury bill

3-month LIBOR

1-month LIBOR

Resets Assets Funding (1)

Fed Funds Effective Rate daily/weekly/monthly $ — $ 675.1 $ (675.1)

SOFR Rate monthly 50.6 (50.6)

3-month Treasury bill weekly 109.4 — 109.4

Prime monthly 13.5 — 13.5

3-month LIBOR quarterly — 251.1 (251.1)

1-month LIBOR monthly 12,245.9 9,984.9 2,261.0

1-month LIBOR daily 628.2 — 628.2

Non-Discrete reset (2)

daily/weekly 4,626.6 4,044.0 582.6

Fixed-Rate (3)

13,146.8 15,764.7 (2,617.9)

Total $ 30,770.4 $ 30,770.4 $ —

______________________

(1) Funding (by index) includes all derivatives that qualify as effective hedges.

4 unchanged sentences

The “Funding Gap” in the above table shows primarily mismatches in the 1-month LIBOR (monthly), fixed-rate and Non-Discrete reset categories.

Changes in the Fed Funds Effective Rate, 3-month LIBOR and 1-month LIBOR daily categories are generally quite highly correlated, and should offset each other effectively.

Changes in the Fed Funds Effective Rate, 3-month LIBOR, SOFR and 1-month LIBOR daily categories are generally quite highly correlated, and should offset each other effectively.

The funding in the fixed-rate bucket includes $2.3 billion of equity and $0.5 billion of non-interest bearing liabilities.

In addition, the fixed-rate funding category includes $1.3 billion in CDs that will mature within 3 months and will be available to reprice.

We consider our overall risk to be low and our strategies are designed to maintain low levels of market exposure.

We consider our overall risk to be low and our strategies are designed to maintain low to moderate levels of market exposure.

We use interest rate swaps and other derivatives to achieve our risk management objectives.

5 unchanged sentences

The following table reflects the weighted average lives of our earning assets and liabilities at December 31, 2020.

(Averages in Years)

(Averages in Years) Life

Earning assets

Education loans (1)

Personal Loans

Cash and investments 0.49

3 unchanged sentences

Total deposits 0.81

Short-term borrowings (1)

Long-term borrowings 3.98

Total borrowings 3.98

(1) Weighted average life of short-term borrowings assumes full contractual term for repayment through February 19, 2021.

(1) Includes the loans held for sale portfolio, as well as the loans held for investment portfolio.

Financial Statements and Supplementary Data

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk