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. 1-month LIBOR and other rates are shocked in parallel for shock scenarios unless otherwise indicated. In addition, key rates are modeled with a floor, which indicates how low each specific rate is likely to move in practice. On April 1, 2021, we began offering variable-rate Private Education Loans based on the 30-day average SOFR, replacing 1-month LIBOR for new originations. 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 key rates, including both 1-month LIBOR and 30-day average SOFR, with the resulting changes in other indices correlated accordingly. Interest rate ramps represent a linear increase in those key rates over the course of 12 months, with the resulting changes in other indices correlated accordingly. The following table summarizes 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, 2022 and 2021, based upon a sensitivity analysis performed by management assuming hypothetical increases in market interest rates of 100 and 300 basis points and a decrease of 100 and 300 basis points while credit and funding spreads remain constant. EAR analysis assumes a static balance sheet, with maturities of each product replaced with assumed issuance of new products of the same type. 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. The 300-basis point downward rate shock was added to the model run for the first time in several years. The EAR results for December 31, 2022 indicate a market risk profile of low sensitivity to rate changes, based on static balance sheet assumptions over the next two years. The EVE metrics demonstrate higher sensitivity than results from one year ago, but remain well within established trigger and threshold limits. As of December 31, 2022 2021 +300 Basis Points +100 Basis Points -100 Basis Points -300 Basis Points +300 Basis Points +100 Basis Points -100 Basis Points -300 Basis Points EAR - Shock +3.0 % +1.0 % -1.1 % -3.7 % +5.3 % +1.9 % N/A N/A EAR - Ramp +2.5 % +0.9 % -0.9 % -2.9 % +3.5 % +1.2 % N/A N/A EVE -9.5 % -3.2 % +3.1 % +6.2 % -5.9 % -1.9 % N/A N/A 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 or SOFR 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 102 SLM CORPORATION — 2022 Form 10-K 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. Asset and Liability Funding Gap The table below presents our assets and liabilities (funding) arranged by underlying indices as of December 31, 2022. 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, 2022 (dollars in millions) Index Frequency of Variable Resets Assets Funding (1) Funding Gap Fed Funds Effective Rate daily/weekly/monthly $ — $ 1,494.9 $ (1,494.9) SOFR Rate daily/weekly/monthly 2,753.3 2,830.1 (76.8) 3-month Treasury bill weekly 95.2 — 95.2 Prime monthly 30.0 — 30.0 3-month LIBOR quarterly — 251.1 (251.1) 1-month LIBOR monthly 6,550.3 2,802.7 3,747.6 1-month LIBOR daily 513.8 — 513.8 Non-Discrete reset (2) daily/weekly 4,823.6 4,177.5 646.1 Fixed-Rate (3) 14,044.8 17,254.7 (3,209.9) Total $ 28,811.0 $ 28,811.0 $ — (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 Fed Funds Effective Rate categories. Changes in the Non-Discrete reset, 1-month LIBOR, 3-month LIBOR, and SOFR Rate 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 $1.5 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 2022 Form 10-K — SLM CORPORATION 103 occurred in recent years) can lead to a temporary divergence between indices, resulting in a negative impact to our earnings. Weighted Average Life The following table reflects the weighted average lives of our earning assets and liabilities at December 31, 2022. As of December 31, 2022 (averages in years) Weighted Average Life Earning assets Education loans 4.95 Cash and investments 1.32 Total earning assets 4.00 Deposits Short-term deposits 0.92 Long-term deposits 2.43 Total deposits 1.29 Borrowings Long-term borrowings 3.38 Total borrowings 3.38 104 SLM CORPORATION — 2022 Form 10-K 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.