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EX-3.1 - EXHIBIT - SLM Corpslm20140930ex31.htm
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EX-32.1 - EXHIBIT - SLM Corpslm20140930ex321.htm
EX-32.2 - EXHIBIT - SLM Corpslm20140930ex322.htm



 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
or
c
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-13251
 
SLM Corporation
(Exact name of registrant as specified in its charter)
 
Delaware
52-2013874
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
300 Continental Drive, Newark, Delaware
19713
(Address of principal executive offices)
(Zip Code)
(302) 451-0200
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  c
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
x
 
Accelerated filer
c
 
 
 
 
 
Non-accelerated filer
c
(Do not check if a smaller reporting company)
Smaller reporting company
c
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   c
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  c    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
Class
 
Outstanding at September 30, 2014
Common Stock, $0.20 par value
423,164,643 shares
 






SLM CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS
INDEX
 

Part I. Financial Information
 
 

Item 1.
Financial Statements
 
2

Item 1.
Notes to the Financial Statements
 
11

Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
42

Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
71

Item 4.
Controls and Procedures
 
74

PART II. Other Information
 
 
Item 1.
Legal Proceedings
 
75

Item 1A.
Risk Factors
 
76

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
76

Item 3.
Defaults Upon Senior Securities
 
76

Item 4.
Mine Safety Disclosures
 
76

Item 5.
Other Information
 
76

Item 6.
Exhibits
 
77




1



SLM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
 
 
September 30,
 
December 31,
 
 
2014
 
2013
Assets
 
 
 
 
Cash and cash equivalents
 
$
1,570,378

 
$
2,182,865

Available-for-sale investments at fair value (cost of $155,136 and $106,977, respectively)
 
153,893

 
102,105

Loans held for investment (net of allowance for losses of $65,715 and $68,081, respectively)
 
9,095,373

 
7,931,377

Other interest-earning assets
 
52,191

 
4,355

Accrued interest receivable
 
453,522

 
356,283

Premises and equipment, net
 
78,806

 
74,188

Acquired intangible assets, net
 
3,733

 
6,515

Tax indemnification receivable
 
253,681

 

Other assets
 
53,375

 
48,976

Total assets
 
$
11,714,952

 
$
10,706,664

 
 
 
 
 
Liabilities
 
 
 
 
Deposits
 
$
9,173,022

 
$
9,001,550

Income taxes payable, net
 
283,118

 
162,205

Upromise related liabilities
 
296,594

 
307,518

Other liabilities
 
143,790

 
69,248

Total liabilities
 
9,896,524

 
9,540,521

 
 
 
 
 
Commitments and contingencies
 

 

 
 
 
 
 
Equity
 
 
 
 
Preferred stock, par value $0.20 per share, 20 million shares authorized
 
 
 
 
Series A: 3.3 million and 0 shares issued, respectively, at stated value of $50 per share
 
165,000

 

Series B: 4 million and 0 shares issued, respectively, at stated value of $100 per share
 
400,000

 

Common stock, par value $0.20 per share, 1.125 billion shares authorized: 424 million and 0 shares issued, respectively
 
84,777

 

Additional paid-in capital
 
1,078,501

 

Navient's subsidiary investment
 

 
1,164,495

Accumulated other comprehensive (loss) income (net of tax (benefit) expense of ($1,275) and ($1,849), respectively)
 
(1,852
)
 
(3,024
)
Retained earnings
 
98,210

 

Total SLM Corporation stockholders' equity before treasury stock
 
1,824,636

 
1,161,471

Less: Common stock held in treasury at cost: 1 million and 0 shares, respectively
 
(6,208
)
 

Noncontrolling interest
 

 
4,672

Total equity
 
1,818,428

 
1,166,143

Total liabilities and equity
 
$
11,714,952

 
$
10,706,664


See accompanying notes to consolidated financial statements.

2



SLM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
Interest income:
 
 
 
 
 
 
 
 
Loans
 
$
164,106

 
$
131,030

 
$
486,379

 
$
384,811

Investments
 
2,917

 
5,826

 
6,121

 
17,450

Cash and cash equivalents
 
1,180

 
837

 
3,145

 
2,608

Total interest income
 
168,203

 
137,693

 
495,645

 
404,869

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
24,177

 
20,849

 
67,801

 
64,857

Other interest expense
 

 
61

 
41

 
110

Total interest expense
 
24,177

 
20,910

 
67,842

 
64,967

Net interest income
 
144,026

 
116,783

 
427,803

 
339,902

Less: provisions for loan losses
 
14,898

 
20,404

 
55,071

 
40,081

Net interest income after provisions for loan losses
 
129,128

 
96,379

 
372,732

 
299,821

Non interest income:
 
 
 
 
 
 
 
 
Gains on sales of loans, net
 
85,147

 
43,434

 
120,963

 
192,097

Gains (losses) on derivatives and hedging activities, net
 
5,401

 
297

 
(4,821
)
 
855

Other
 
5,461

 
9,416

 
28,826

 
25,880

Total noninterest income
 
96,009

 
53,147

 
144,968

 
218,832

Expenses:
 
 
 
 
 
 
 
 
Compensation and benefits
 
31,597

 
26,031

 
92,931

 
82,616

Other operating expenses
 
40,482

 
42,509

 
103,226

 
113,111

Total operating expenses
 
72,079

 
68,540

 
196,157

 
195,727

Acquired intangible asset impairment and amortization expense
 
1,150

 
1,657

 
4,145

 
3,085

Restructuring and other reorganization expenses
 
14,079

 

 
27,828

 
107

Total expenses
 
87,308

 
70,197

 
228,130

 
198,919

Income before income tax expense
 
137,829

 
79,329

 
289,570

 
319,734

Income tax expense
 
54,903

 
30,272

 
115,502

 
122,011

Net income
 
82,926

 
49,057

 
174,068

 
197,723

Less: net loss attributable to noncontrolling interest
 

 
(333
)
 
(434
)
 
(1,020
)
Net income attributable to SLM Corporation
 
82,926

 
49,390

 
174,502

 
198,743

Preferred stock dividends
 
4,850

 

 
8,078

 

Net income attributable to SLM Corporation common stock
 
$
78,076

 
$
49,390

 
$
166,424

 
$
198,743

 
 
 
 
 
 
 
 
 
Basic earnings per common share attributable to SLM Corporation
 
$
0.18

 
$
0.11

 
$
0.39

 
$
0.45

Average common shares outstanding
 
423,079

 
436,109

 
424,187

 
442,208

Diluted earnings per common share attributable to SLM Corporation
 
$
0.18

 
$
0.11

 
$
0.38

 
$
0.44

Average common and common equivalent shares outstanding
 
431,604

 
444,939

 
432,324

 
450,437



See accompanying notes to consolidated financial statements.

3



SLM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,  
 
September 30,  
 
 
2014
 
2013
 
2014
 
2013
Net income
 
$
82,926

 
$
49,057

 
$
174,068

 
$
197,723

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Unrealized gains (losses) on investments
 
(525
)
 
3,613

 
3,629

 
41,382

Unrealized losses on cash flow hedges
 
(1,883
)
 

 
(1,883
)
 

Total unrealized gains (losses)
 
(2,408
)
 
3,613

 
1,746

 
41,382

Income tax (expense) benefit
 
921

 
(1,368
)
 
(574
)
 
(15,695
)
Other comprehensive income (loss), net of tax benefit (expense)
 
(1,487
)
 
2,245

 
1,172

 
25,687

Comprehensive income
 
81,439

 
51,302

 
175,240

 
223,410

Less: comprehensive loss attributable to noncontrolling interest
 

 
(333
)
 
(434
)
 
(1,020
)
Total comprehensive income attributable to SLM Corporation
 
$
81,439

 
$
51,635

 
$
175,674

 
$
224,430


















See accompanying notes to consolidated financial statements.

4



SLM CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except share and per share amounts)
(Unaudited)
 



 
 
 
 
 
 
 
 
 
 
 
 
 
 
Navient's Subsidiary Investment
 
Accumulated
Other
Comprehensive
Income
 
 
Total SLM Corporation Equity
 
Non-controlling interest
 
Total Equity
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2013
 
$
1,162,822

 
$
37,790

 
 
$
1,200,612

 
$
5,338

 
$
1,205,950

Net income (loss)
 
49,390

 

 
 
49,390

 
(333
)
 
49,057

Other comprehensive income, net of tax
 

 
2,245

 
 
2,245

 

 
2,245

Total comprehensive income (loss)
 

 

 
 
51,635

 
(333
)
 
51,302

Net transfers to affiliate
 
(84,080
)
 

 
 
(84,080
)
 

 
(84,080
)
Balance at September 30, 2013
 
$
1,128,132

 
$
40,035

 
 
$
1,168,167

 
$
5,005

 
$
1,173,172

 
 
 
 
 
 
 
 
 
 
 
 















See accompanying notes to consolidated financial statements.



5




SLM CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except share and per share amounts)(Unaudited) 
 
 
 
 
Common Stock Shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock Shares
 
Issued
 
Treasury
 
Outstanding
 
Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Navient's Subsidiary Investment
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings
 
Treasury Stock
 
Total SLM Corporation Equity
 
Non-controlling interest
 
Total Equity
Balance at June 30, 2014
 
7,300,000

 
423,295,249

 
(358,771
)
 
422,936,478

 
$
565,000

 
$
84,659

 
$
1,071,916

 
$

 
$
(365
)
 
$
20,167

 
$
(3,113
)
 
$
1,738,264

 
$

 
$
1,738,264

Net income
 

 

 

 

 

 

 

 

 

 
82,926

 

 
82,926

 

 
82,926

Other comprehen-sive loss, net of tax
 

 

 

 

 

 

 

 

 
(1,487
)
 

 

 
(1,487
)
 

 
(1,487
)
Total comprehensive income
 

 

 

 

 

 

 

 

 

 

 

 
81,439

 

 
81,439

Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock, series A ($.87 per share)
 

 

 

 

 

 

 

 

 

 
(2,875
)
 

 
(2,875
)
 

 
(2,875
)
Preferred Stock, series B ($.49 per share)
 

 

 

 

 

 

 

 

 

 
(1,975
)
 

 
(1,975
)
 

 
(1,975
)
Dividend equivalent units related to employee stock-based compensation plans
 

 

 

 

 

 

 
33

 

 

 
(33
)
 

 

 

 

Issuance of common shares
 

 
584,787

 

 
584,787

 

 
118

 
2,047

 

 

 

 

 
2,165

 

 
2,165

Stock-based compensation expense
 

 

 

 

 

 

 
4,505

 

 

 

 

 
4,505

 

 
4,505

Shares repurchased related to employee stock-based compensation plans
 

 

 
(356,622
)
 
(356,622
)
 

 

 

 

 

 

 
(3,095
)
 
(3,095
)
 

 
(3,095
)
Balance at September 30, 2014
 
7,300,000

 
423,880,036

 
(715,393
)
 
423,164,643

 
$
565,000

 
$
84,777

 
$
1,078,501

 
$

 
$
(1,852
)
 
$
98,210

 
$
(6,208
)
 
$
1,818,428

 
$

 
$
1,818,428

See accompanying notes to consolidated financial statements.

6



SLM CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except share and per share amounts)
(Unaudited)
 



 
 
 
 
 
 
 
 
 
 
 
 
 
Navient's Subsidiary Investment
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total SLM Corporation Equity
 
Non-controlling interest
 
Total Equity
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
$
1,068,928

 
$
14,348

 
$
1,083,276

 
$
6,025

 
$
1,089,301

Net income (loss)
 
198,743

 
 
 
198,743

 
(1,020
)
 
197,723

Other comprehensive income, net of tax
 

 
25,687

 
25,687

 

 
25,687

Total comprehensive (loss)
 

 

 
224,430

 
(1,020
)
 
223,410

Net transfers to affiliate
 
(139,539
)
 

 
(139,539
)
 

 
(139,539
)
Balance at September 30, 2013
 
$
1,128,132

 
$
40,035

 
$
1,168,167

 
$
5,005

 
$
1,173,172















See accompanying notes to consolidated financial statements.

7




SLM CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except share and per share amounts)(Unaudited) 
 
 
 
 
Common Stock Shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock Shares
 
Issued
 
Treasury
 
Outstanding
 
Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Navient's Subsidiary Investment
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings
 
Treasury Stock
 
Total SLM Corporation Equity
 
Non-controlling interest
 
Total Equity
Balance at December 31, 2013
 

 

 

 

 
$

 
$

 
$

 
$
1,164,495

 
$
(3,024
)
 
$

 
$

 
$
1,161,471

 
$
4,672

 
$
1,166,143

Net income (loss)
 

 

 

 

 

 

 

 
68,173

 

 
106,329

 

 
174,502

 
(434
)
 
174,068

Other comprehensive income, net of tax
 

 

 

 

 

 

 

 

 
1,172

 

 

 
1,172

 

 
1,172

Total comprehensive income (loss)
 

 

 

 

 

 

 

 

 

 

 

 
175,674

 
(434
)
 
175,240

Net transfers from affiliate
 

 

 

 

 

 

 

 
479,409

 

 

 

 
479,409

 

 
479,409

Separation adjustments related to Spin-Off of Navient Corporation
 
7,300,000

 
422,790,320

 

 
422,790,320

 
565,000

 
84,558

 
1,062,519

 
(1,712,077
)
 

 

 

 

 

 

Sale of non-controlling interest
 

 

 

 

 

 

 

 

 

 

 

 

 
(4,238
)
 
(4,238
)
Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock, series A ($.87 per share)
 

 

 

 

 

 

 

 

 

 
(4,792
)
 

 
(4,792
)
 

 
(4,792
)
Preferred Stock, series B ($.49 per share)
 

 

 

 

 

 

 

 

 

 
(3,286
)
 

 
(3,286
)
 

 
(3,286
)
Dividend equivalent units related to employee stock-based compensation plans
 

 

 

 

 

 

 
41

 

 

 
(41
)
 
 
 

 

 

Issuance of common shares
 

 
1,089,716

 

 
1,089,716

 

 
219

 
4,391

 

 

 

 

 
4,610

 

 
4,610

Stock-based compensation expense
 

 

 

 

 

 

 
11,550

 

 

 

 

 
11,550

 

 
11,550

Shares repurchased related to employee stock-based compensation plans
 

 

 
(715,393
)
 
(715,393
)
 

 

 

 

 

 

 
(6,208
)
 
(6,208
)
 

 
(6,208
)
Balance at September 30, 2014
 
7,300,000

 
423,880,036

 
(715,393
)
 
423,164,643

 
$
565,000

 
$
84,777

 
$
1,078,501

 
$

 
$
(1,852
)
 
$
98,210

 
$
(6,208
)
 
$
1,818,428

 
$

 
$
1,818,428

See accompanying notes to consolidated financial statements.

8



SLM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Nine Months Ended
 
 
September 30,
 
 
2014
 
2013
Operating activities
 
 
 
 
Net income
 
$
174,068

 
$
197,723

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
Provision for loan losses
 
55,071

 
40,081

Tax provision
 
115,502

 
122,011

Amortization of FDIC fees
 

 
1,046

Amortization of brokered deposit placement fee
 
7,548

 
7,128

Amortization of deferred loan origination costs and fees, net
 
1,446

 
753

Net amortization (accretion) of discount on investments
 
433

 
(6,442
)
Depreciation of premises and equipment
 
2,326

 
2,977

Amortization and impairment of acquired intangibles
 
4,145

 
3,085

Stock-based compensation expense
 
20,127

 
12,420

Interest rate swap
 
1,307

 
(641
)
Gains on sale of loans, net
 
(120,963
)
 
(192,097
)
Changes in operating assets and liabilities:
 
 
 
 
Net decrease in loans held for sale
 
6,448

 
2,674

Origination of loans held for sale
 
(6,448
)
 
(2,674
)
Increase in accrued interest receivable
 
(220,273
)
 
(184,590
)
(Increase) decrease in other interest-earning assets
 
(47,836
)
 
87

(Increase) decrease in other assets
 
11,499

 
8,148

Decrease in income tax payable
 
(294,116
)
 
(209,362
)
Increase (decrease) in accrued interest payable
 
2,639

 
(130
)
Increase in payable due to Navient
 
18,114

 
228,243

Increase (decrease) in other liabilities
 
30,741

 
(23,584
)
Total adjustments
 
(412,290
)
 
(190,867
)
Total net cash (used in) provided by operating activities
 
(238,222
)
 
6,856

Investing activities
 
 
 
 
Loans acquired and originated
 
(38,165
)
 
(274,975
)
Net proceeds from sales of loans held for investment
 
1,994,017

 
2,428,404

Net increase in loans held for investment
 
(2,932,369
)
 
(2,809,567
)
Purchases of available-for-sale securities
 
(55,928
)
 
(33,037
)
Proceeds from sales and maturities of available-for-sale securities
 
7,337

 
14,313

Total net cash used in investing activities
 
(1,025,108
)
 
(674,862
)
Financing activities
 
 
 
 
Brokered deposit placement fee
 
(5,533
)
 

Net decrease in brokered certificates of deposit
 
(601,685
)
 
(552,908
)
Net (decrease) increase in NOW account deposits
 
(18,214
)
 
6,558

Net (decrease) increase in High Yield Savings Deposits
 
(39,359
)
 
22,083

Net (decrease) increase in Retail Certificates of Deposit
 
(13,268
)
 
27,759

Net increase in MMDA deposits
 
862,447

 
927,997

Net decrease in deposits with entity that is a subsidiary of Navient
 
(5,633
)
 
(122,870
)
Special cash contribution from Navient
 
472,718

 

Net capital contributions from entity that is a subsidiary of Navient
 
7,448

 
28,164

Preferred stock dividends paid
 
(8,078
)
 

Dividend paid to entity that is a subsidiary of Navient
 

 
(120,000
)
Net cash provided by financing activities
 
650,843

 
216,783

Net decrease in cash and cash equivalents
 
(612,487
)
 
(451,223
)

9



Cash and cash equivalents at beginning of period
 
2,182,865

 
1,599,082

Cash and cash equivalents at end of period
 
$
1,570,378

 
$
1,147,859

Cash disbursements made for:
 
 
 
 
Interest
 
$
64,987

 
$
58,573

Income taxes paid
 
$
294,116

 
$
209,362
























See accompanying notes to consolidated financial statements.

10


SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise noted)
 
 
 


1. Significant Accounting Policies

Basis of Presentation
The financial reporting and accounting policies of SLM Corporation (“Sallie Mae,” “SLM,” the “Company,” “we” or “us”) conform to generally accepted accounting principles in the United States of America (“GAAP”). In conjunction with the Spin-Off (as herein after defined), our consolidated financial statements are comprised of financial information relating to Sallie Mae Bank (the “Bank”), Upromise, Inc. ("Upromise") and the Private Education Loan origination functions. We use “Private Education Loans” to mean education loans to students or their families that are non-federal loans and loans not insured or guaranteed under the previously existing Federal Family Education Loan Program (“FFELP”). Also included in our financial statements, for periods before the Spin-Off, are certain general corporate overhead expenses allocated to the Company.
On April 30, 2014, we completed our plan to legally separate into two distinct publicly traded entities - an education loan management, servicing and asset recovery business, Navient Corporation (“Navient”), and a consumer banking business, SLM Corporation. The separation of Navient from SLM Corporation (the “Spin-Off”) was preceded by an internal corporate reorganization, which was the first step to separate the education loan management, servicing and asset recovery business from the consumer banking business.  As a result of a holding company merger under Section 251(g) of the Delaware General Corporation Law (“DGCL”), which is referred to herein as the “SLM Merger,” all of the shares of then existing SLM Corporation’s common stock were converted, on a 1-to-1 basis, into shares of common stock of New BLC Corporation, a newly formed company that was a subsidiary of pre-Spin-Off SLM Corporation (“pre-Spin-Off SLM”), and, pursuant to the SLM Merger, New BLC Corporation replaced then existing SLM Corporation as the publicly-traded registrant and changed its name to SLM Corporation. As part of the internal corporate reorganization, the assets and liabilities associated with the education loan management, servicing and asset recovery business were transferred to Navient, and those assets and liabilities associated with the consumer banking business remained with or were transferred to the newly constituted SLM Corporation. The separation and distribution were accounted for on a substantially tax-free basis.
The timing and steps necessary to complete the Spin-Off and comply with the Securities and Exchange Commission ("SEC") reporting requirements, including the replacement of pre-Spin-Off SLM Corporation with our current publicly-traded registrant, have resulted in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on February 19, 2014, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, filed with the SEC on May 12, 2014, providing business results and financial information for the periods reported therein on the basis of the consolidated businesses of pre-Spin-Off SLM. While information contained in those prior reports may provide meaningful historical context for the Company’s business, the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 was our first periodic report made on the basis of the post-Spin-Off business of the Company.
At the time of the Spin-Off transaction, we had a targeted starting equity balance of $1,710 million. To achieve the targeted equity balance we retained $565 million of preferred stock and approximately $473 million of cash to offset the obligation attributable to the principal of Series A Preferred Stock and the Series B Preferred Stock, substantially similar to pre-Spin-Off SLM's respective series of preferred stock.
For periods before the Spin-Off, these financial statements are presented on a basis of accounting that reflects a change in reporting entity and have been adjusted for the effects of the Spin-Off. These carve-out financial statements and selected financial information represent only those operations, assets, liabilities and equity that form Sallie Mae on a stand-alone basis. Because the Spin-Off occurred on April 30, 2014, these financial statements include the carved out financial results for the first four months of 2014. All prior period amounts represent carved-out amounts.
Consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned and controlled subsidiaries after eliminating the effects of intercompany accounts and transactions.

11


SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)
1.
Significant Accounting Policies (Continued)
 


Allowance for Private Education Loan Losses
We maintain an allowance for loan losses at an amount sufficient to absorb probable losses incurred in our portfolios at the reporting date based on a projection of estimated probable credit losses incurred in the portfolio.
We analyze our portfolio to determine the effects various stages of delinquency have on borrower default behavior and ultimate charge-off activity. We estimate the allowance for loan losses for our loan portfolio using a migration analysis of delinquent and current accounts. A migration analysis is a technique used to estimate the likelihood a loan receivable may progress through the various delinquency stages and ultimately charge off. We may also take into account the current and future economic environment and other qualitative factors when calculating the allowance for loan losses.
The evaluation of the allowance for loan losses is inherently subjective, as it requires material estimates that may be susceptible to significant changes. Our default estimates are based on a loss confirmation period (loss confirmation period represents the expected period between a loss event and when management considers the debt to be uncollectible), taking into consideration account management practices that affect the timing of a loss, such as the usage of forbearance.
Prior to the Spin-Off, the Bank exercised its right and sold substantially all of the Private Education Loans it originated that became delinquent or were granted forbearance to one or more of its then affiliates at its fair value. Because of this arrangement, the Bank did not hold many loans in forbearance. As a result, the Bank had very little historical forbearance activity and very few delinquencies.
In connection with the Spin-Off, the agreement under which the Bank previously made these sales was amended so that the Bank now only has the right to require Navient to purchase (at fair value) loans only where (a) the borrower has a lending relationship with both the Bank and Navient (“Split Loans”) and (b) the Split Loans either (1) are more than 90 days past due; (2) have been restructured; (3) have been granted a hardship forbearance or more than six months of administrative forbearance; or (4) have a borrower or cosigner who has filed for bankruptcy. At September 30, 2014, we held approximately $126 million of Split Loans.
Pre-Spin-Off SLM charged off loans when they were 212 days delinquent. As such, default aversion strategies were focused on the final stages of delinquency, from 150 days to 212 days. In connection with the Spin-Off, we changed our charge-off policy for Private Education Loans to charging off loans when they reach 120 days delinquent. As a result of changing our corporate charge-off policy and greatly reducing the number of potentially delinquent loans we sell to Navient, our default aversion strategies must now focus on loans 30 to 120 days delinquent. This change has the effect of accelerating the recognition of losses due to the shorter charge-off period (120 days). In addition, at the time of the Spin-Off, we changed our loss confirmation period from two years to one year to reflect the shorter charge-off policy and our revised servicing practices. These two changes resulted in recognizing a $14 million net reduction in our allowance for loan losses in second quarter 2014 because we are now only reserving for one year of losses as compared with two years under the prior policy, which more than offset the impact of the shorter charge-off period.
The one-year estimate underlying the allowance for loan losses is subject to a number of assumptions. If actual future performance in delinquency, charge-offs and recoveries are significantly different than estimated, or account management assumptions or practices were to change, this could materially affect the estimate of the allowance for loan losses, the timing of when losses are recognized, and the related provision for loan losses on our consolidated statements of income.

Separately, for our troubled debt restructurings ("TDR") portfolio, we estimate an allowance amount sufficient to cover life-of-loan expected losses through an impairment calculation based on the difference between the loan’s basis and the present value of expected future cash flows (which would include life-of-loan default and recovery assumptions) discounted at the loan’s original effective interest rate. Our TDR portfolio is comprised mostly of loans with interest rate reductions and forbearance usage greater than three months.

12


SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)
1.
Significant Accounting Policies (Continued)
 



Securitization Accounting

In the third quarter 2014, we entered into our first securitization transaction. We accounted for this as a sale of loans and we do not consolidate the securitization trust. This securitization used a two-step structure with a special purpose entity that legally isolated the transferred assets from us, even in the event of bankruptcy. The transaction was also structured to ensure the holders of the beneficial interests issued are not constrained from pledging or exchanging their interests, and we do not maintain effective control over the transferred assets. If these criteria had not been met, then the transaction would be accounted for as an on-balance sheet secured borrowing. Our securitization transaction was legally structured to be a sale of assets that isolated the transferred assets from us. If a securitization qualifies as a sale, we then assess whether we are the primary beneficiary of the securitization trust and are required to consolidate such trust. If we are the primary beneficiary then no gain or loss is recognized.

The investors in the securitization trust have no recourse to our assets should there be a failure of the trust to pay when due. Generally, the only recourse the trust has to us is in the event we breach a seller representation or warranty or our duties as master servicer, in which event we agree to repurchase the related loans from the trust. As master servicer, our primary responsibility will be to monitor the performance of the subservicer and find a substitute subservicer in the event the subservicer of the trust defaults. 

We did not record a servicing asset or servicing liability related to the securitization transaction we entered into in third quarter 2014 because we determined the master servicing fee we receive is at market rate.
Gains on Sale of Loans, net

We participate and sell loans to third parties and affiliates (including entities that were related parties prior to the Spin-off Transaction). These sales may be through whole loan sales or securitization transactions that qualify for sales treatment. These loans were initially recorded as held for investment, and were transferred to held-for-sale immediately prior to sale or securitization. Beginning in April 2012, loans were sold at fair value. Details of these transactions are further discussed in Note 12, “Arrangements with Navient Corporation.”

In the third quarter 2014, we sold $1.2 billion of loans through loan sales and a securitization transaction with third parties. As a result of these loan sales we recorded net gains of $85 million. In the third quarter 2013, we recorded $43 million in net gains from the sale of $0.6 billion of loan sales.

For the nine months ended September 30, 2014, we sold $1.9 billion of loans through loan sales and a securitization transaction. As a result of these loan sales we recorded net gains of $121 million. In the nine months ended September 30, 2013, we recorded $192 million in net gains from the sale of $2.3 billion of loans.
Income Taxes
In connection with the Spin-Off, the Company has become the taxpayer legally responsible for $283 million of deferred taxes payable (installment payments due quarterly through 2018) in connection with gains recognized by pre-Spin-Off SLM on debt repurchases in prior years. As part of the tax sharing agreement between the Company and Navient, Navient has agreed to fully pay us for these deferred taxes due. An indemnification receivable of $264 million was recorded, which represents the fair value of the future payments under the agreement based on a discounted cash flow model. We will accrue interest income on the indemnification receivable using the interest method.
The Company also recorded a liability related to uncertain tax positions of $27 million for which we are indemnified by Navient. If there is an adjustment to the indemnified uncertain tax liability, an offsetting adjustment to the indemnification receivable will be recorded as pre-tax adjustment to the income statement.

13


SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)
1.
Significant Accounting Policies (Continued)
 



As of the date of the Spin-Off on April 30, 2014, we recorded a liability of $310 million ($283 million related to deferred taxes and $27 million related to uncertain tax positions) and an indemnification receivable of $291 million ($310 million less the $19 million discount). As of September 30, 2014, the liability balance is $299 million ($283 million related to deferred taxes and $16 million related to uncertain tax positions) and the indemnification receivable balance is $254 million ($238 million related to deferred taxes and $16 million related to uncertain tax positions).
Recently Issued Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance when it becomes effective. The new standard is effective on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We have determined that this new guidance will have an immaterial impact on the financial results of the Company.


2. Investments

The amortized cost and fair value of securities available for sale are as follows:

 
 
 
As of September 30, 2014
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Available for sale:
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
155,136

 
$
1,332

 
$
(2,575
)
 
$
153,893

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2013
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Available for sale:
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
106,977

 
$
706

 
$
(5,578
)
 
$
102,105

     
Our investment portfolio is comprised of mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac with amortized costs of $76,274, $67,163 and $11,699, respectively, at September 30, 2014. We own these securities to meet our requirements under the Community Reinvestment Act. As of September 30, 2014, there were 22 of 51 separate mortgage-backed securities with unrealized losses in our investment portfolio. As of December 31, 2013, there were 20 of 33 separate mortgage-backed securities with unrealized losses in our investment portfolio. As of September 30, 2014, 11 of the 22 securities in a net loss position were issued under Ginnie Mae programs that carry a full faith and credit guarantee from the U.S. Government. The remaining securities in a net loss position carry a principal and interest guarantee by Fannie Mae and Freddie Mac. We have the ability and the intent to hold these securities for a period of time sufficient for the market price to recover to at least the adjusted amortized cost of the security.

14


SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)
2.
Investments (Continued)
 


The mortgage-backed securities have been pledged to the Federal Reserve Bank (“FRB”) as collateral against any advances and accrued interest under the Primary Credit program or any other program sponsored by the FRB. We had $149,057 and $103,049 par value of mortgage-backed securities pledged to this borrowing facility at September 30, 2014 and December 31, 2013, respectively, as discussed further in Note 6, “Borrowed Funds.”

As of September 30, 2014, the amortized cost and fair value of securities, by contractual maturities, were as follows:
Year of Maturity
 
Amortized Cost
 
Estimated Fair Value
2038
 
$
611

 
$
662

2039
 
12,079

 
12,888

2042
 
28,317

 
26,719

2043
 
74,701

 
74,307

2044
 
39,428

 
39,317

Total
 
$
155,136

 
$
153,893




15


SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)

3. Loans Held for Investment
Loans Held for Investment consist of Private Education Loans and FFELP Loans.
Our Private Education Loans are made largely to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans or customers’ resources. Private Education Loans bear the full credit risk of the customer. We manage this risk through historical risk-performance underwriting strategies and the addition of qualified cosigners. Private Education Loans generally carry a variable rate indexed to LIBOR; as of September 30, 2014, 83 percent of all Private Education Loans were indexed to LIBOR. We provide incentives for customers to include a cosigner on the loan, and the vast majority of loans in our portfolio are cosigned. We also encourage customers to make payments while in school.
FFELP Loans are insured as to their principal and accrued interest in the event of default subject to a Risk Sharing level based on the date of loan disbursement. When a FFELP Loan first disbursed on and after July 1, 2006 defaults, the federal government guarantees 97 percent of the principal balance plus accrued interest (98 percent on loans disbursed before July 1, 2006) and the holder of the loan is at risk for the remaining amount not guaranteed as a Risk Sharing loss on the loan. FFELP Loans originated after October 1, 1993 are subject to Risk Sharing on loan default claim payments unless the default results from the borrower’s death, disability or bankruptcy, in which case the loan is 100 percent guaranteed.
Loans held for investment are summarized as follows:
 
 
September 30,
 
December 31,
 
 
2014
 
2013
Private Education Loans
 
$
7,829,420

 
$
6,563,342

Deferred origination costs
 
9,975

 
5,063

Allowance for loan losses
 
(59,973
)
 
(61,763
)
Total Private Education Loans, net
 
7,779,422

 
6,506,642

 
 
 
 
 
FFELP Loans
 
1,317,963

 
1,426,972

Unamortized acquisition costs, net
 
3,730

 
4,081

Allowance for loan losses
 
(5,742
)
 
(6,318
)
Total FFELP Loans, net
 
1,315,951

 
1,424,735

 
 
 
 
 
Loans held for investment, net
 
$
9,095,373

 
$
7,931,377


 
The estimated weighted average life of Private Education Loans in our portfolio was approximately 6.7 years and 7.0 years at September 30, 2014 and December 31, 2013, respectively.

16


SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)
3.
Loans Held for Investment (Continued)
 


The average balance and the respective weighted average interest rates are summarized as follows:

 
 
Three Months Ended September 30, 2014
 
Three Months Ended September 30, 2013
 
 
Average Balance
 
Weighted Average Interest Rate
 
Average Balance
 
Weighted Average Interest Rate
Private Education Loans
 
$
7,407,774

 
8.20
%
 
$
5,846,241

 
8.22
%
FFELP Loans
 
1,339,748

 
3.23

 
1,167,174

 
3.38

Total portfolio
 
$
8,747,522

 

 
$
7,013,415

 


 
 
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
 
 
Average Balance
 
Weighted Average Interest Rate
 
Average Balance
 
Weighted Average Interest Rate
Private Education Loans
 
$
7,394,985

 
8.19
%
 
$
5,860,864

 
8.15
%
FFELP Loans
 
1,373,945

 
3.25

 
1,099,436

 
3.33

Total portfolio
 
$
8,768,930

 
 
 
$
6,960,300

 
 



17


SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)

4. Allowance for Loan Losses
Our provision for Private Education Loan losses represent the periodic expense of maintaining an allowance sufficient to absorb incurred probable losses, in the held-for-investment loan portfolios. The evaluation of the allowance for loan losses is inherently subjective, as it requires material estimates that may be susceptible to significant changes. We believe the allowance for loan losses is appropriate to cover probable losses incurred in the loan portfolios. See Note 1, “Significant Accounting Policies - Allowance for Private Education Loan Losses” for a more detailed discussion.

Allowance for Loan Losses Metrics

 
 
Allowance for Loan Losses
 
 
Three Months Ended September 30, 2014
 
 
FFELP Loans
 
Private Education
Loans
 
Total
Allowance for Loan Losses
 
 
 
 
 
 
Beginning balance
 
$
6,212

 
$
54,315

 
$
60,527

Total provision
 
291

 
14,607

 
14,898

Charge-offs(1)
 
(761
)
 
(4,378
)
 
(5,139
)
Student loan sales(2)
 

 
(4,571
)
 
(4,571
)
Ending Balance
 
$
5,742

 
$
59,973

 
$
65,715

Allowance:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
2,966

 
$
2,966

Ending balance: collectively evaluated for impairment
 
$
5,742

 
$
57,007

 
$
62,749

Loans:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
13,115

 
$
13,115

Ending balance: collectively evaluated for impairment
 
$
1,317,963

 
$
7,816,305

 
$
9,134,268

Charge-offs as a percentage of average loans in repayment (annualized)
 
0.32
%
 
0.39
%
 
 
Allowance as a percentage of the ending total loan balance
 
0.44
%
 
0.77
%
 
 
Allowance as a percentage of the ending loans in repayment
 
0.61
%
 
1.31
%
 
 
Allowance coverage of charge-offs (annualized)
 
1.89

 
3.42

 
 
Ending total loans, gross
 
$
1,317,963

 
$
7,829,420

 
 
Average loans in repayment
 
$
953,620

 
$
4,453,775

 
 
Ending loans in repayment
 
$
945,230

 
$
4,575,143

 
 

     (1) Prior to the Spin-Off, Private Education Loans were sold to an entity that is now a subsidiary of Navient prior to being charged-off.
(2) Represents fair value write-downs on loans sold.


18


SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)
4.
Allowance for Loan Losses (Continued)
 

 
 
Allowance for Loan Losses
 
 
Three Months Ended September 30, 2013
 
 
FFELP Loans
 
Private Education
Loans
 
Total
Allowance for Loan Losses
 
 
 
 
 
 
Beginning balance
 
$
4,616

 
$
50,868

 
$
55,484

Total provision
 
1,403

 
19,001

 
20,404

Charge-offs(1)
 
(671
)
 

 
(671
)
Student loan sales(2)
 

 
(15,632
)
 
(15,632
)
Ending Balance
 
$
5,348

 
$
54,237

 
$
59,585

Allowance:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$

 
$

Ending balance: collectively evaluated for impairment
 
$
5,348

 
$
54,237

 
$
59,585

Loans:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$

 
$

Ending balance: collectively evaluated for impairment
 
$
1,217,404

 
$
6,214,840

 
$
7,432,244

Charge-offs as a percentage of average loans in repayment (annualized)
 
0.30
%
 
%
 
 
Allowance as a percentage of the ending total loan balance
 
0.44
%
 
0.87
%
 
 
Allowance as a percentage of the ending loans in repayment
 
0.59
%
 
1.54
%
 
 
Allowance coverage of charge-offs (annualized)
 
1.99

 

 
 
Ending total loans, gross
 
$
1,217,404

 
$
6,214,840

 
 
Average loans in repayment
 
$
896,801

 
$
3,400,620

 
 
Ending loans in repayment
 
$
902,766

 
$
3,518,997

 
 

(1) Prior to the Spin-Off, Private Education Loans were sold to an entity that is now a subsidiary of Navient prior to being charged-off.
(2) Represents fair value write-downs on delinquent loans sold prior to the Spin-Off to an entity that is now a subsidiary of Navient, recorded at the time of sale.

19


SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)
4.
Allowance for Loan Losses (Continued)
 

 
 
Allowance for Loan Losses
 
 
Nine Months Ended September 30, 2014
 
 
FFELP Loans
 
Private Education
Loans
 
Total
Allowance for Loan Losses
 
 
 
 
 
 
Beginning balance
 
$
6,318

 
$
61,763

 
$
68,081

Total provision
 
1,482

 
53,589

 
55,071

Charge-offs(1)
 
(2,058
)
 
(4,378
)
 
(6,436
)
Student loan sales(2)
 

 
(51,001
)
 
(51,001
)
Ending Balance
 
$
5,742

 
$
59,973

 
$
65,715

Allowance:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
2,966

 
$
2,966

Ending balance: collectively evaluated for impairment
 
$
5,742

 
$
57,007

 
$
62,749

Loans:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
13,115

 
$
13,115

Ending balance: collectively evaluated for impairment
 
$
1,317,963

 
$
7,816,305

 
$
9,134,268

Charge-offs as a percentage of average loans in repayment (annualized)
 
0.28
%
 
0.13
%
 
 
Allowance as a percentage of the ending total loan balance
 
0.44
%
 
0.77
%
 
 
Allowance as a percentage of the ending loans in repayment
 
0.61
%
 
1.31
%
 
 
Allowance coverage of charge-offs (annualized)
 
2.09

 
10.27

 
 
Ending total loans, gross
 
$
1,317,963

 
$
7,829,420

 
 
Average loans in repayment
 
$
980,733

 
$
4,408,852

 
 
Ending loans in repayment
 
$
945,230

 
$
4,575,143

 
 

(1) Prior to the Spin-Off, Private Education Loans were sold to an entity that is now a subsidiary of Navient prior to being charged-off.
(2) Post-Spin-Off represents fair value write-downs on loans sold. Pre-Spin-Off represents fair value write-downs on delinquent loans sold to an entity that is now a subsidiary of Navient, recorded at the time of sale.

20


SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)
4.
Allowance for Loan Losses (Continued)
 

 
 
Allowance for Loan Losses
 
 
Nine Months Ended September 30, 2013
 
 
FFELP Loans
 
Private Education
Loans
 
Total
Allowance for Loan Losses
 
 
 
 
 
 
Beginning balance
 
$