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Fair Value Measurements

12 Months Ended

Dec. 31, 2023

We use estimates of fair value in applying various accounting standards for the consolidated financial statements.

We categorize our fair value estimates based on a hierarchical framework associated with three levels of price transparency utilized in measuring financial instruments at fair value. For additional information regarding our policies for determining fair value and the hierarchical framework, see Note 2, “Significant Accounting Policies — Fair Value Measurement” in this Form 10-K.

The following table summarizes the valuation of our financial instruments that are marked-to-fair value on a recurring basis.


	Fair Value Measurements on a Recurring Basis
	2023								2022
As of December 31, (dollars in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:

Trading investments	$	—	$	—	$	54,481	$	54,481	$	—	$	—	$	55,903	$	55,903
Available-for-sale investments	—		2,411,622		—		2,411,622		—		2,342,089		—		2,342,089
Derivative instruments	—		—		—		—		—		972		—		972
Total	$	—	$	2,411,622	$	54,481	$	2,466,103	$	—	$	2,343,061	$	55,903	$	2,398,964

Liabilities:
Derivative instruments	$	—	$	(370)	$	—	$	(370)	$	—	$	(567)	$	—	$	(567)
Total	$	—	$	(370)	$	—	$	(370)	$	—	$	(567)	$	—	$	(567)

The following table summarizes the fair values of our financial assets and liabilities, including derivative financial instruments.


As of December 31, (dollars in thousands)	2023						2022
	Fair Value		Carrying Value		Difference		Fair Value		Carrying Value		Difference
Earning assets:
Loans held for investment, net:
Private Education Loans	$	22,229,045	$	19,772,293	$	2,456,752	$	21,062,548	$	19,019,713	$	2,042,835
FFELP Loans	542,775		534,064		8,711		618,186		607,155		11,031

Loans held for sale	—		—		—		29,448		29,448		—
Cash and cash equivalents	4,149,838		4,149,838		—		4,616,117		4,616,117		—
Trading investments	54,481		54,481		—		55,903		55,903		—
Available-for-sale investments	2,411,622		2,411,622		—		2,342,089		2,342,089		—
Accrued interest receivable	1,448,766		1,379,904		68,862		1,237,074		1,202,059		35,015
Tax indemnification receivable	—		—		—		2,816		2,816		—
Derivative instruments	—		—		—		972		972		—
Total earning assets	$	30,836,527	$	28,302,202	$	2,534,325	$	29,965,153	$	27,876,272	$	2,088,881
Interest-bearing liabilities:
Money-market and savings accounts	$	11,134,883	$	11,203,292	$	68,409	$	11,854,849	$	11,959,828	$	104,979
Certificates of deposit	10,380,684		10,448,365		67,681		9,175,339		9,486,819		311,480

Long-term borrowings	4,873,690		5,227,512		353,822		4,813,233		5,235,114		421,881
Accrued interest payable	105,066		105,066		—		71,586		71,586		—
Derivative instruments	370		370		—		567		567		—
Total interest-bearing liabilities	$	26,494,693	$	26,984,605	$	489,912	$	25,915,574	$	26,753,914	$	838,340

Excess of net asset fair value over carrying value					$	3,024,237					$	2,927,221

The methods and assumptions used to estimate the fair value of each class of financial instruments are as follows:

Cash and Cash Equivalents

Cash and cash equivalents are carried at cost. Carrying value approximated fair value for disclosure purposes. These are level 1 valuations.

Investments

Trading

Investments classified as trading are carried at fair value in the consolidated financial statements. Investments in residual class interests are valued using observable inputs in its cash flow modeling where available but many significant inputs are unobservable. Residual interests are not exchange traded nor do they have quoted market prices as they are unique and do not actively trade. As such, these are level 3 valuations.

At December 31, 2023 and December 31, 2022, we had $54 million and $56 million, respectively, classified as level 3 financial instruments carried at fair value on a recurring basis through earnings. At December 31, 2023 and December 31, 2022, $54 million and $51 million, respectively, represent the five percent vertical risk retentions in the residual classes of Private Education Loans sold through securitizations. Total gains/(losses), net included in earnings were $3 million in net gains in the year ended December 2023, compared to less than $1 million in net losses in the year-ago period. Settlements in the year ended December 31, 2023 were $1 million, compared to $13 million in the year-ago period. There

were no transfers into or out of level 3 related to these residual interest investments during the years ended December 31, 2023 and 2022. The change in mark to market gains/(losses) on investments held as of the reporting date were $4 million in the year ended December 31, 2023, compared to $13 million in the year-ago period.

At December 31, 2022, $5 million of the total trading investment balance included a debt security investment which was converted to an equity investment (classified in other investments) in the first quarter of 2023. Total interest income included in earnings was less than $1 million for both of the years ended December 31, 2023 and 2022. There were no transfers into or out of level 3 related to this investment. There were no market value adjustments recorded related to this investment in the years ended December 31, 2023 and 2022.

The fair value at December 31, 2023 of the residual interests classified as level 3 valuations was $54 million. The residual interest investments are the projected future cash flows representing the difference between the securitized trust’s asset cash flows and the related outflows to the bondholders and for other fees. The residual investments are valued using an internal discounted cash flow model to arrive at the net present value of expected trust residual distributions. These instruments are not actively traded, nor do they have quoted market prices. As a result, unobservable model input assumptions are made regarding the expected CPR and the probability of defaults of the loans in the securitization trusts. At December 31, 2023, the range (average by volume) of the CPR input was 8.1 percent to 12.2 percent (average of 9.49 percent) and the range of the defaults input was 5.1 percent to 20.7 percent (average of 11.03 percent).

The significant inputs considered unobservable detailed above would be expected to have the following impacts to the valuations:

•A decrease in CPR would result in a longer weighted average life of the trust, resulting in a decrease to the valuation due to the delay in residual cash flows with the increased term. The opposite is true for an increase in the CPR.

•A decrease in the probability of defaults means increased principal receipts, resulting in an increase to the valuation due to the increase in residual cash flow.

•Conversely, an increase in the probability of defaults means decreased principal receipts, resulting in a decrease to the valuation due to the decrease in residual cash flow.

Available-for-Sale

Investments classified as available-for-sale are carried at fair value in the consolidated financial statements. Investments in mortgage-backed securities, U.S. government-sponsored enterprises and Treasury securities, and Utah Housing Corporation bonds are valued using observable market prices of similar assets. As such, these are level 2 valuations. The fair value of our non-residual vertical risk retention investments is estimated using pricing indications obtained from the investment bankers who participate in the asset-backed securities market. As such, these are level 2 valuations.

Loans Held For Investment and Accrued Interest Receivable

Private Education Loans

For Private Education Loans, fair value was determined by using observable quoted prices for similar assets in our most recent market transactions. Adjustments were then made to account for the value of loans in our portfolio that have materially different characteristics than those included in the most recent market transaction. These are considered level 2 valuations. A portion of the fair value that has been modeled is attributable to accrued interest receivable that has not yet been capitalized, and has been allocated to the accrued interest receivable line item. The remaining accrued interest receivable that will not be capitalized into the principal balance of the loan is carried at cost.

FFELP Loans

For FFELP Loans, the fair value was determined by modeling expected loan level cash flows using stated terms of the assets and internally developed assumptions to determine aggregate portfolio yield, net present value, and average life. The significant assumptions used to determine fair value are prepayment speeds, default rates, cost of funds, and required return on equity. Significant inputs into the model are not observable. However, we do calibrate the model based on market transactions when appropriate. As such, these are level 3 valuations.

Loans Held For Sale

Our loans held for sale are accounted for at the lower of cost or market. The fair value was determined by using observable quoted prices for similar assets in our most recent market transactions. These are considered level 2 valuations.

Tax Indemnification Receivable

Tax indemnification receivable is carried at cost. The carrying value approximates fair value. This is a level 2 valuation.

Money Market and Savings Accounts

Some of our MMDAs are fixed-rate deposits that are subject to minimum balances for a specified period of time. The fair values of these deposits are estimated using discounted cash flows based on rates currently offered for deposits of similar maturities. These are level 2 valuations. The fair values of our remaining money market and savings accounts equal the amounts payable on demand at the balance sheet date and are reported at their carrying value. These are level 1 valuations.

Certificates of Deposit

The fair values of CDs are estimated using discounted cash flows based on rates currently offered for deposits of similar remaining maturities. These are level 2 valuations.

Accrued Interest Payable

Accrued interest payable is carried at cost. The carrying value approximates fair value due to its short-term nature. This is a level 1 valuation.

Borrowings

Borrowings are accounted for at cost in the consolidated financial statements. The carrying value of short-term borrowings approximated fair value for disclosure purposes, due to the short-term nature of those borrowings. This is a level 1 valuation. The fair value of long-term borrowings is estimated using pricing indications obtained from the investment bankers who participate in the asset-backed securities market. This is a level 2 valuation.

Derivatives

All derivatives are accounted for at fair value in the consolidated financial statements. The fair value of derivative financial instruments was determined by a standard derivative pricing and option model using the stated terms of the contracts and observable market inputs. It is our policy to compare the derivative fair values to those received from our counterparties in order to evaluate the model’s outputs.

When determining the fair value of derivatives, we take into account counterparty credit risk for positions where we are exposed to the counterparty on a net basis by assessing exposure net of collateral held. When the counterparty has exposure to us under derivative contracts with the Company, we fully collateralize the exposure (subject to certain thresholds).

Interest rate swaps are valued using a standard derivative cash flow model with a SOFR swap yield curve, which is an observable input from an active market. These derivatives are level 2 fair value estimates in the hierarchy.

The carrying value of borrowings designated as the hedged item in a fair value hedge is adjusted for changes in fair value due to changes in the benchmark interest rate (SOFR). These valuations are determined through standard pricing models using the stated terms of the borrowings and observable yield curves.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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