SLM Corp 10-K

Item 7A. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Sensitivity Analysis Our interest rate risk management program seeks to manage and control interest rate risk, thereby reducing our exposure to fluctuations in interest rates and achieving consistent and acceptable levels of profit in any rate environment, and sustainable growth in net interest income over the long term. We evaluate and monitor interest rate risk through two primary methods: • Earnings at Risk (“EAR”), which measures the impact of hypothetical changes in interest rates on net interest income; and • Economic Value of Equity (“EVE”), which measures the sensitivity or change in the economic value of equity to changes in interest rates. A number of potential interest rate scenarios are simulated using our asset liability management system. The Bank is the primary source of interest rate risk within the Company. 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. Other interest rate changes are correlated to changes in 1-month LIBOR for analytic purposes, with higher or lower correlations based on historical relationships. In addition, key rates are modeled with a floor, which indicates how low each specific rate is likely to move in practice. Rates are adjusted up or down via a set of scenarios that includes both rate shocks and ramps. Rate shocks represent an immediate and sustained change in 1-month LIBOR, with the resulting changes in other indices correlated accordingly. 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, 2021 and 2020, 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 very 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, 2021, the full impact of a 100-basis point downward rate shock cannot be modeled for some instruments on our balance sheet, due to the current low-rate environment. The EAR results for December 31, 2021 indicate a market risk profile of low sensitivity to rate changes, based on static balance sheet assumptions over the next two years. This position has increased from one year ago but is still well within our risk tolerances. The EVE metrics have decreased from one year ago, mainly due to a higher level of fixed-rate liabilities relative to fixed-rate assets. As of December 31, 2021 2020 +300 Basis Points +100 Basis Points -100 Basis Points +300 Basis Points +100 Basis Points -100 Basis Points EAR - Shock 5.3 % 1.9 % N/A -0.6 % -0.0 % N/A EAR - Ramp 3.5 % 1.2 % N/A -0.1 % +0.1 % N/A EVE -5.9 % -1.9 % N/A -15.8 % -5.3 % N/A 2021 Form 10-K — SLM CORPORATION 103 Table of Contents In the preceding tables, the interest rate sensitivity analysis reflects the balance sheet mix of fully variable LIBOR, SOFR, and Prime-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. They also do not account for other business developments that could affect net income, or for management actions that could affect net income or could be taken to change our risk profile. Accordingly, we can give no assurance that actual results would not differ materially from the estimated outcomes of our simulations. Further, such simulations do not represent our current view of expected future interest rate movements. 104 SLM CORPORATION — 2021 Form 10-K Table of Contents Asset and Liability Funding Gap The table below presents our assets and liabilities (funding) arranged by underlying indices as of December 31, 2021. In the following GAAP presentation, the funding gap only includes derivatives that qualify as effective hedges (those derivatives which are reflected in net interest income, as opposed to those reflected in the “gains (losses) on derivatives and hedging activities, net” line on the consolidated statements of income). The difference between the asset and the funding is the funding gap for the specified index. This represents at a high level our exposure to interest rate risk in the form of basis risk and repricing risk, which is the risk that the different indices may reset at different frequencies or may not move in the same direction or at the same magnitude. (Note that all fixed-rate assets and liabilities are aggregated into one line item, which does not capture the differences in time due to maturity.) As of December 31, 2021 (dollars in millions) Index Frequency of Variable Resets Assets Funding (1) Funding Gap Fed Funds Effective Rate daily/weekly/monthly $ — $ 492.1 $ (492.1) SOFR Rate monthly 1,115.1 703.4 411.7 3-month Treasury bill weekly 104.6 — 104.6 Prime monthly 26.0 — 26.0 3-month LIBOR quarterly — 251.1 (251.1) 1-month LIBOR monthly 9,750.4 7,729.4 2,021.0 1-month LIBOR daily 590.7 — 590.7 Non-Discrete reset (2) daily/weekly 4,582.8 4,226.4 356.4 Fixed-Rate (3) 13,052.3 15,819.5 (2,767.2) Total $ 29,221.9 $ 29,221.9 $ — (1) Funding (by index) includes all derivatives that qualify as effective hedges. (2) Assets include restricted and unrestricted cash equivalents and other overnight type instruments. Funding includes liquid retail deposits and the obligation to return cash collateral held related to derivatives exposures. (3) Assets include receivables and other assets (including premiums and reserves). Funding includes unswapped time deposits, liquid MMDAs swapped to fixed rates, and stockholders’ equity. 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, SOFR and 1-month LIBOR daily categories are generally quite highly correlated, and should offset each other effectively. The funding in 3-month LIBOR bucket includes $0.3 billion of equity and the funding in the fixed-rate bucket includes $1.9 billion of equity and $0.4 billion of non-interest bearing liabilities. 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. Our asset liability management strategy is to match assets with debt (in combination with derivatives) that have the same underlying index and reset frequency or have interest rate characteristics that we believe are highly correlated. The use of funding with index types and reset frequencies that are different from our assets exposes us to interest rate risk in the form of basis and repricing risk. This could result in our cost of funds not moving in the same direction or with the same magnitude as the yield on our assets. While we believe this risk is low, as all of these indices are short-term with rate movements that are highly correlated over a long period of time, market disruptions (which have occurred in recent years) can lead to a temporary divergence between indices, resulting in a negative impact to our earnings. 2021 Form 10-K — SLM CORPORATION 105 Table of Contents Weighted Average Life The following table reflects the weighted average lives of our earning assets and liabilities at December 31, 2021. As of December 31, 2021 (averages in years) Weighted Average Life Earning assets Education loans 4.65 Cash and investments 1.06 Total earning assets 3.75 Deposits Short-term deposits 0.93 Long-term deposits 2.62 Total deposits 1.30 Borrowings Long-term borrowings 3.64 Total borrowings 3.64 106 SLM CORPORATION — 2021 Form 10-K Table of Contents Item 8. Financial Statements and Supplementary Data Reference is made to the financial statements listed under the heading “(a) 1.A. Financial Statements” of Item 15 hereof, which financial statements are incorporated by reference in response to this Item 8. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Nothing to report.