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EX-21.1 - EXHIBIT 21.1 - SLM Corpex211_12312016.htm
EX-32.2 - EXHIBIT 32.2 - SLM Corpex322_12312016.htm
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EX-31.1 - EXHIBIT 31.1 - SLM Corpex311_12312016.htm
EX-23.1 - EXHIBIT 23.1 - SLM Corpex231_12312016.htm
EX-12.1 - EXHIBIT 12.1 - SLM Corpex121_12312016.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from                  to                 
Commission file numbers 001-13251
 
SLM Corporation
(Exact Name of Registrant as Specified in Its Charter)  
Delaware
52-2013874
(State of 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)
Securities registered pursuant to Section 12(b) of the Act
Common Stock, par value $.20 per share.
Name of Exchange on which Listed:
The NASDAQ Global Select Market
6.97% Cumulative Redeemable Preferred Stock, Series A, par value $.20 per share
Name of Exchange on which Listed:
The NASDAQ Global Select Market
Floating Rate Non-Cumulative Preferred Stock, Series B, par value $.20 per share
Name of Exchange on which Listed:
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ        No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨        No  þ 
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  þ        No  ¨
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  þ        No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
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   þ
 
 
Accelerated filer  ¨ 
Non-accelerated filer   ¨ 
 
 
Smaller reporting company  ¨ 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨         No  þ
The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 2016 was $2.6 billion (based on closing sale price of $6.18 per share as reported for the NASDAQ Global Select Market).
As of January 31, 2017, there were 429,101,108 shares of common stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement relating to the Registrant’s 2017 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on
Form 10-K.

 
 






SLM CORPORATION
TABLE OF CONTENTS
 
 
 
Page Number
 
 
 
 
Forward-Looking and Cautionary Statements
1
 
Available Information
2
PART I
 
 
Item 1.
Business
3
Item 1A.
Risk Factors
19
Item 1B.
Unresolved Staff Comments
33
Item 2.
Properties
34
Item 3.
Legal Proceedings
35
Item 4.
Mine Safety Disclosures
36
PART II
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
37
Item 6.
Selected Financial Data
40
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
41
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
82
Item 8.
Financial Statements and Supplementary Data
86
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
86
Item 9A.
Controls and Procedures
86
Item 9B.
Other Information
86
PART III.
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
87
Item 11.
Executive Compensation
87
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
87
Item 13.
Certain Relationships and Related Transactions, and Director Independence
87
Item 14.
Principal Accounting Fees and Services
87
PART IV
 
 
Item 15.
Exhibits, Financial Statement Schedules
88





    
    

FORWARD-LOOKING AND CAUTIONARY STATEMENTS


 
References in this Annual Report on Form 10-K to “we,” “us,” “our,” “Sallie Mae,” “SLM” and the “Company” refer to SLM Corporation and its subsidiaries, except as otherwise indicated or unless the context otherwise requires.

This Annual Report on Form 10-K contains “forward-looking” statements and information based on management’s current expectations as of the date of this report. Statements that are not historical facts, including statements about the Company’s beliefs, opinions or expectations and statements that assume or are dependent upon future events, are forward-looking statements. Forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in Item 1A “Risk Factors” and elsewhere in this Annual Report on Form 10-K and subsequent filings with the Securities and Exchange Commission (“SEC”); increases in financing costs; limits on liquidity; increases in costs associated with compliance with laws and regulations; failure to comply with consumer protection, banking and other laws; changes in accounting standards and the impact of related changes in significant accounting estimates; any adverse outcomes in any significant litigation to which the Company is a party; credit risk associated with the Company’s exposure to third-parties, including counterparties to the Company’s derivative transactions; and changes in the terms of education loans and the educational credit marketplace (including changes resulting from new laws and the implementation of existing laws). The Company could also be affected by, among other things: changes in its funding costs and availability; reductions to its credit ratings; failures or breaches of its operating systems or infrastructure, including those of third-party vendors; damage to its reputation; risks associated with restructuring initiatives, including failures to successfully implement cost-cutting programs and the adverse effects of such initiatives on the Company’s business; changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; changes in law and regulations with respect to the student lending business and financial institutions generally; changes in banking rules and regulations, including increased capital requirements; increased competition from banks and other consumer lenders; the creditworthiness of the Company’s customers; changes in the general interest rate environment, including the rate relationships among relevant money-market instruments and those of the Company’s earning assets versus the Company’s funding arrangements; rates of prepayment on the loans that the Company makes; changes in general economic conditions and the Company’s ability to successfully effectuate any acquisitions; and other strategic initiatives. The preparation of the Company’s consolidated financial statements also requires management to make certain estimates and assumptions, including estimates and assumptions about future events. These estimates or assumptions may prove to be incorrect. All forward-looking statements contained in this Annual Report on Form 10-K are qualified by these cautionary statements and are made only as of the date of this report. The Company does not undertake any obligation to update or revise these forward-looking statements to conform such statements to actual results or changes in its expectations.
    
The financial information contained herein and in the accompanying consolidated balance sheets, statements of income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2016, presents information on our business as configured after the Spin-Off, as hereafter defined. For more information regarding the basis of presentation of these statements, see Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies — Basis of Presentation.”


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AVAILABLE INFORMATION

Our website address is www.salliemae.com. Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments to those reports, and any significant investor presentations, are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. In addition, copies of our Board Governance Guidelines, Code of Business Conduct (which includes the code of ethics applicable to our Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) and the governing charters for each committee of our Board of Directors are available free of charge on our website, as well as in print to any stockholder upon request. We intend to disclose any amendments to or waivers from our Code of Business Conduct (to the extent applicable to our Principal Executive Officer, Principal Financial Officer or Principal Accounting Officer) by posting such information on our website. Information contained or referenced on our website is not incorporated by reference into and does not form a part of this Annual Report on Form 10-K.



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PART I.

Item 1. Business

Company History
SLM Corporation, more commonly known as Sallie Mae, is the nation’s leading saving, planning and paying for college company. For 44 years, we have made a difference in students’ and families’ lives, helping more than 34 million Americans pay for college. We recognize there is no single way to achieve this task, so we provide a range of products to help families, whether college is a long way off or right around the corner. We promote responsible financial habits that help our customers make college happen.
Our primary business is to originate and service Private Education Loans we make to students and their families. We use “Private Education Loans” to mean education loans to students or their families that are not made, insured or guaranteed by any state or federal government. Private Education Loans do not include loans insured or guaranteed under the previously existing Federal Family Education Loan program (“FFELP Loans”). We also offer a range of deposit products insured by the Federal Deposit Insurance Corporation (the “FDIC”) and operate a consumer savings network that provides financial rewards on everyday purchases to help families save for college.
We were formed in 1972 as the Student Loan Marketing Association, a federally chartered government-sponsored enterprise (“GSE”), with the goal of furthering access to higher education by providing a national secondary market and warehousing facilities for FFELP Loans. The GSE’s federal charter prohibited it from originating student loans in the primary market.
In 1996, the United States Congress passed the Student Loan Marketing Association Reorganization Act, which set the stage for the “privatization” of the GSE. As part of the privatization process, we incorporated SLM Corporation in 1997 as a Delaware corporation, the GSE became a subsidiary of SLM Corporation, and by mid-2004 the GSE stopped purchasing FFELP Loans in the secondary market and was dissolved by the end of 2004.
On November 3, 2005, SLM Corporation formed Sallie Mae Bank, a Utah industrial bank subsidiary (the “Bank”), to fund and originate Private Education Loans on behalf of SLM Corporation. While the Bank first originated Private Education Loans in February 2006, SLM Corporation continued to purchase a portion of its Private Education Loans from its third-party lending partners through mid-2009. With some minor exceptions, the Bank became the sole originator of Private Education Loans for SLM Corporation beginning with the 2009-2010 academic year, the first academic year following the launch of the Bank’s Smart Option Student Loan program in mid-2009.
On March 30, 2010, President Obama signed into law the Federal Direct Student Loan Program (the “DSLP”), effective July 1, 2010. At that time, the guaranteed student loan program (under which FFELP Loans were made) was eliminated, although the terms and conditions of existing guaranteed student loans were not altered or affected.
On April 30, 2014, we completed our plan to legally separate (the “Spin-Off”) into two distinct publicly traded entities: an education loan management, servicing and asset recovery business, named Navient Corporation (“Navient”), which retained all assets and liabilities generated prior to the Spin-Off other than those explicitly retained by SLM Corporation; and a consumer banking business, named SLM Corporation. We sometimes refer to the SLM Corporation that existed prior to the Spin-Off as “pre-Spin-Off SLM.”
Our principal executive offices are located at 300 Continental Drive, Newark, Delaware 19713, and our telephone number is (302) 451-0200.

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Our Business
Our primary business is to originate and service high quality Private Education Loans. In 2016, we originated $4.7 billion of Private Education Loans, an increase of 8 percent from the year ended December 31, 2015. As of December 31, 2016, we had $14.1 billion of Private Education Loans outstanding.
Private Education Loans
The Private Education Loans we make to students and families serve primarily to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans and customers’ resources. We also extend Private Education Loans as an alternative to similar federal education loan products where we believe our rates are competitive. We earn interest income on our Private Education Loan portfolio, net of provisions for loan losses.
In 2009, we introduced the Smart Option Student Loan, our Private Education Loan product emphasizing in-school payment features that can produce shorter terms and minimize customers’ total finance charges. Customers elect one of three Smart Option repayment types at the time of loan origination. The first two, Interest Only and Fixed Payment options, require monthly payments while the student is in school and during the six-month grace period thereafter, and accounted for approximately 55 percent of the Private Education Loans Sallie Mae Bank originated during 2016. The third repayment option is the more traditional deferred Private Education Loan product where customers are not required to make payments while the student is in school and for a six-month grace period after separation. Lower interest rates on the Interest Only and Fixed Payment options encourage customers to elect those options. Making payments while in school helps customers reduce their total loan cost compared with the traditional deferred loan, and also helps them become accustomed to making on-time regular loan payments. We offer both variable rate and fixed rate loans.
We regularly review and update the terms of our Private Education Loan products. Our Private Education Loans include important protections for the family, including loan forgiveness in case of death or permanent disability of the student borrower and a free, quarterly FICO Score benefit to students and cosigners with a Smart Option Student Loan.
Private Education Loans bear the full credit risk of the customers. We manage this risk by underwriting and pricing based on customized credit scoring criteria and the addition of qualified cosigners. For the year ended December 31, 2016, our average FICO scores were 748 at the time of original approval and approximately 89 percent of our loans were cosigned. In addition, we voluntarily require school certification of both the need for, and the amount of, every Private Education Loan we originate, and we disburse the loan proceeds directly to the higher education institutions.
The core of our marketing strategy is to promote our products on campuses through financial aid offices as well as through online and direct marketing to students and their families. Our on-campus efforts with 2,400 higher education institutions are led by our sales force, the largest in the industry, which has become a trusted resource for financial aid offices.
Our loans are high credit quality and the overwhelming majority of our customers manage their payments with great success. At December 31, 2016, 2.1 percent of loans in repayment were greater than 30 days delinquent, and loans in forbearance were 3.5 percent of loans in repayment and forbearance. In 2016, net charge-offs as a percentage of average loans in repayment was 0.96 percent. Loans in repayment include loans on which customers are making interest only and fixed payments, as well as loans that have entered full principal and interest repayment status.
Sallie Mae Bank
Since 2006, the Bank, which is regulated by the Utah Department of Financial Institutions (the “UDFI”), the FDIC, and the Consumer Financial Protection Bureau (the “CFPB”), has originated Private Education Loans and accepted deposits. At December 31, 2016, the Bank had total assets of $18.3 billion, including $14.1 billion of Private Education Loans and $1.0 billion of FFELP Loans, and total deposits of $14.0 billion.
Our ability to obtain deposit funding and offer competitive interest rates on deposits will be necessary to sustain the growth of our Private Education Loan originations. Our ability to obtain such funding is dependent, in part, on the capital level of the Bank and its compliance with other applicable regulatory requirements. At the time of this filing, there are no restrictions on our ability to obtain deposit funding or the interest rates we charge other than those restrictions generally applicable to all FDIC-insured banks of similar charter and size. In 2016, we added $1.5 billion in deposits from Educational 529 and Health Savings Accounts as a way to diversify our funding sources. We further diversified our funding base by raising $1.8 billion in

4


term funding collateralized by pools of Private Education Loans in the long-term asset-backed securities (“ABS”) market. We plan to continue to do so, market conditions permitting. This helps us better match-fund our assets and reduce our reliance on deposits to fund our growth.
We expect the Bank or affiliates of the Bank to retain servicing of all Private Education Loans the Bank originates, regardless of whether the loans are held, sold or securitized. When Private Education Loans are sold and servicing is retained, the Bank receives ongoing servicing revenue for those loans in addition to the gain on sale recognized on the sale of those assets. The Bank did not sell loans in 2016 and does not expect to sell loans in 2017.
See the subsection titled “Regulation of Sallie Mae Bank” under “Supervision and Regulation” for additional details about the Bank.
Operational Infrastructure
In April 2014, we began to perform collection activity on our portfolio of Private Education Loans. In October 2014, we launched our stand-alone servicing platform and began servicing our portfolio of Private Education Loans. Since early 2015, all servicing and collections activities have been conducted in the United States.
Our servicing operation includes resources dedicated to assist customers with specialized needs and escalated inquiries. We also have a group of customer service representatives dedicated to assisting military personnel with available military benefits.
In 2015, we completed the build-out of our new loan originations platform to independently originate Private Education Loans.
In 2016, we transitioned all loan servicing call center functions from a third-party to our in-house servicing area in our Newark, Delaware and Indianapolis, Indiana offices.  We also implemented several improvements in our ability to interact with our customers, including:
an integrated platform that allows customers and servicing agents to simultaneously access the same systems in real time interaction;
an on-line chat function for customer service; and
a mobile application accessible through smart phones and the Apple watch. 
These and other enhancements have contributed to streamlined originations and servicing processes, increased customer self-services rates, and improved customer satisfaction in all channels.
Upromise by Sallie Mae
Upromise by Sallie Mae is a save-for-college rewards program helping Americans save for higher education. The program is free to join, and in 2016, approximately 200,000 consumers enrolled. Members can earn money for college by receiving cash back rewards when shopping at participating on-line or brick-and-mortar retailers, booking travel, dining out at participating restaurants, and by using their Upromise MasterCard. Since inception, Upromise members have earned approximately $1 billion through the program, and more than 380,000 members are using their Upromise credit card to save.

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Our Approach to Advising Students and Families How to Pay for College
Our annual research on How America Pays for College1 confirms students and their families cover the cost of college using multiple sources. According to this research, just 40 percent of families have a plan to pay for college. Sallie Mae offers free online financial literacy resources, including interactive tools and content, on SallieMae.com, to help families construct a comprehensive financial strategy to save and pay for college. Our College Planning Calculator helps families set college savings goals, project the full cost of a college degree, and estimate future student loan payments and the annual starting salary level needed to keep payments manageable. In addition, Sallie Mae offers a free mobile application, College Ahead, that engages high school juniors and seniors in a step-by-step journey to college.
To encourage responsible borrowing, Sallie Mae advises students and families to follow a three-step approach to paying for college:
Step 1: Use scholarships, grants, savings and income.
We provide access to an extensive, free, online scholarship database, which includes information about more than 5 million scholarships with an aggregate value in excess of $24 billion.
Through the Bank, we offer traditional savings products, such as high-yield savings accounts, money market accounts, and certificates of deposit (“CDs”).
In addition, our Upromise by Sallie Mae save-for-college rewards program helps families jumpstart their save-for-college plans by providing financial rewards on everyday purchases made at participating merchants.
Step 2: Explore federal government loan options.
We encourage students to explore federal government loan options, including Perkins loans, Direct loans, and PLUS loans. Students apply for federal student aid, including federal student loans, by completing the Free Application for Federal Student Aid.
Step 3: Consider affordable Private Education Loans to fill the gap.
We offer competitively priced Private Education Loan products to bridge the gap between family resources, federal loans, grants, student aid and scholarships, and the cost of a college education.













____________________
1 Sallie Mae’s How America Pays for College 2016, conducted by Ipsos, www.salliemae.com/howamericapays.



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Our Approach to Assisting Students and Families Borrowing and Repaying Private Education Loans
To ensure applicants borrow only what they need to cover their school’s cost of attendance, we actively engage with schools and require school certification before we disburse a Private Education Loan. To help applicants understand their loan and its terms, we provide multiple, customized disclosures explaining the applicant’s starting interest rate, the interest rate during the life of the loan, and the loan’s total cost under the available repayment options. Our Smart Option Student Loan features no origination fees and no prepayment penalties, provides rewards for paying on time, and offers a choice of repayment options and a choice of either variable or fixed interest rates.
The majority of our Smart Option Student Loan customers elect an in-school repayment option. By making in-school payments, customers learn to establish good repayment patterns, reduce their total loan cost, and graduate with less debt. We send monthly communications to customers while they are in school, even if they have no monthly payments scheduled, to keep them informed and encourage them to reduce the amount they will owe when they leave school.
Some customers transitioning from school to the work force may require more time before they are financially capable of making full payments of principal and interest. Sallie Mae created a Graduated Repayment Program to assist new graduates with additional payment flexibility, allowing customers to elect to make interest-only payments instead of full principal and interest payments during the first year after their six-month grace period.
Our experience has taught us the successful transition from school to full principal and interest repayment status involves making and carrying out a financial plan. As customers approach the principal and interest repayment period on their loans, Sallie Mae engages with them and communicates what to expect during the transition. In addition, an informational section of SallieMae.com, Manage Your Student Loans, provides educational content for customers on how to organize loans, set up a monthly budget, and understand repayment obligations. Examples are provided that help explain how payments are applied and allocated, and help site visitors estimate payments and see how the accrued interest on alternative repayment programs could affect the cost of their loans. The site also provides important information on special benefits available to service men and women under the Servicemembers Civil Relief Act (the “SCRA”).
After graduation, a customer may apply for the cosigner to be released from the loan. This option is available once there have been 12 consecutive, on-time principal and interest payments and the student borrower adequately meets our credit requirements. In the event of a cosigner’s death, the student borrower automatically continues as the sole individual on the loan with the same terms.
During repayment, customers may struggle to meet their financial obligations. If a customer’s account becomes delinquent, we will work with the customer and/or the cosigner to understand their ability to make ongoing payments. If the customer is in financial hardship, we work with the customer and/or cosigner to understand their financial circumstances and identify any available alternative arrangements designed to reduce monthly payment obligations. These can include extended repayment schedules, temporary interest rate reductions and, if appropriate, short-term hardship forbearance, suited to their individual circumstances and ability to make payments. We grant forbearance in our servicing centers if a borrower who is current requests it for increments of three months at a time, for up to twelve months.
In some cases, loan modifications and other efforts may be insufficient for those experiencing extreme long-term hardship. Sallie Mae has long supported bankruptcy reform that (i) would permit the discharge of education loans, both private and federal, after a required period of good faith attempts to repay and (ii) is prospective in application, so as not to rewrite existing contracts. Any reform should recognize education loans have unique characteristics and benefits as compared to other consumer loan classes.
Key Drivers of Private Education Loan Market Growth
The size of the Private Education Loan market is based primarily on three factors: college enrollment levels, the costs of attending college, and the availability of funds from the federal government to pay for a college education. The amounts students and their families can contribute toward college costs and the availability of scholarships and institutional grants are also important. If the cost of education increases at a pace exceeding the sum of family income, savings, federal lending, and scholarships, more students and families can be expected to rely on Private Education Loans. If enrollment levels or college costs decline or the availability of federal education loans, grants or subsidies and scholarships significantly increases, Private Education Loan demand could decrease.

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We focus primarily on students attending public and private not-for-profit four-year degree granting institutions. We lend to some students attending two-year and for-profit schools. Due to the low cost of two-year programs, federal grant and loan programs are typically sufficient for the funding needs of these students. The for-profit industry has been the subject of increased scrutiny and regulation over the last several years. Since 2007, we have reduced the number of for-profit institutions included in our lending program. Approximately 9 percent or $419 million of our 2016 Private Education Loan originations were for students attending for-profit schools. The for-profit schools where we continue to do business are focused on career training. We expect students who attend and complete programs at for-profit schools to support the same repayment performance as students who attend and graduate from public and private not-for-profit four-year degree granting institutions.
Our competitors1 in the Private Education Loan market include large banks such as Wells Fargo Bank, N.A., Discover Bank, Citizens Financial Group, Inc. and PNC Bank NA, as well as a number of smaller specialty finance companies. We compete based on our products, originations capability, and customer service.
Enrollment

We expect modest enrollment growth over the next several years.

Enrollments at public and private not-for-profit four-year institutions increased by approximately 9 percent from academic years (“AYs”) 2004-2005 through 2007-2008. Enrollment increased especially during the recession of 2007-2009, which created high unemployment. Enrollment has been stable post-recession.


Enrollment at Four-Year Degree Granting Institutions2 
     (in millions)
a2016form10-_chartx27718.jpg  
    
According to the U.S. Department of Education’s projections released in February 2014, the high school graduate population is projected to remain relatively flat from 2015 to 2022.2  




_________________________
1Source: MeasureOne Q3 2015 Private Student Loan Report, December 2015. www.measureone.com.
2Source: U.S. Department of Education, National Center for Education Statistics, Projections of Education Statistics to 2022 (NCES, February 2014), Enrollment in Postsecondary Institutions (NCES, December 2013), Enrollment in Postsecondary Institutions (NCES, October 2014) and Enrollment and Employees in Postsecondary Institutions (NCES, November 2015). These are the most recent sources available to us for this information.



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Tuition Rates

Average published tuition and fees (exclusive of room and board) at four-year public and private not-for-profit institutions increased at compound annual growth rates of 5.2 percent and 4.1 percent, respectively, from AYs 2006-2007 through 2016-2017. Growth rates have been more modest the last two AYs, with average published tuition and fees at public and private four-year not-for-profit institutions increasing 3.0 percent and 3.3 percent, respectively, between AYs 2014-2015 and 2015-2016 and 2.4 percent and 3.6 percent, respectively, between AYs 2015-2016 and 2016-2017.3 Tuition and fees are likely to continue to grow at the more modest rates of recent years.


Published Tuition and Fees3 
     (Dollars in actuals)
a2016form10-_chartx29693.jpg
______
3 Source: The College Board-Trends in College Pricing 2016. © 2016 The College Board. www.collegeboard.org. The College Board restates its data annually, which may cause previously reported results to vary.

Sources of Funding


Borrowing through federal education loan programs increased at a compound annual growth rate of 10 percent between AYs 2004-2005 and 2011-2012.6 Federal borrowing increased considerably during the recession, with borrowing increasing 26 percent between AYs 2007-2008 and 2008-2009 alone. A major driver of this activity was the Higher Education Reconciliation Act of 2005, which in AY 2007-2008 raised annual Stafford loan limits for the first time since 1992 and expanded federal lending with the introduction of the Graduate PLUS loan. In response to the financial crisis in AY 2008-2009, The Ensuring Continued Access to Student Loans Act of 2008 raised unsubsidized Stafford loan limits for undergraduate students again by $2,000.4 Federal education loan program borrowing peaked in AY 2011-2012. Since then it declined by 4 percent in AY 2012-2013, 1 percent in AY 2013-2014, 4 percent in AY 2014-2015, and another 2 percent in AY 2015-2016. We believe these declines are principally driven by enrollment declines in the for-profit schools sector.4 Between AYs 2005-2006 and 2015-2016, federal grants for college students increased 151 percent to $43.3 billion.5 

_________________________
4 Source: FinAid, History of Student Financial Aid and Historical Loan Limits. © 2014 by FinAid. www.FinAid.org.
5 Source: The College Board-Trends in Student Aid 2016. © 2016 The College Board. www.collegeboard.org.





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These increases in federal lending for higher education had a significant impact on the market for Private Education Loans. Annual originations of Private Education Loans peaked at $21.1 billion in AY 2007-2008 and declined to $6.0 billion in AY 2010-2011. Contributing to the decline in Private Education Loan originations was a significant tightening of underwriting standards by Private Education Loan providers, including Sallie Mae. Private Education Loan originations increased to an estimated $9.9 billion in AY 2015-2016, up 8.0 percent over the previous year.6 


image0a74.jpg

_______ 
6 Source: The College Board-Trends in Student Aid 2016. © 2016 The College Board. www.collegeboard.org. Funding sources in current dollars and includes Federal Grants, Federal Loans, Education Tax Benefits, Work Study, State, Institutional and Private Grants and Non-Federal Loans. Other sources for the size of the Private Education Loan market exist and may cite the size of the market differently. We believe the College Board source includes Private Education Loans made by major financial institutions in the Private Education Loan market, with an unknown adjustment for Private Education Loans made by smaller lenders such as credit unions. The College Board restates its data annually, which may cause previously reported results to vary.
 



                        

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We estimate total spending on higher education was $417 billion in the AY 2015-2016, up from $360 billion in the AY 2010-2011. Private Education Loans represent just 2 percent of total spending on higher education. Modest growth in total spending can lead to meaningful increases in Private Education Loans in the absence of growth in other sources of funding.7 

image1a53.jpg

Over the AY 2009-2016 period, increases in total spending have been absorbed primarily through increased family contributions. If household finances continue to improve, we would expect this trend to continue.











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7 Source: Total post-secondary education spending is estimated by Sallie Mae determining the full-time equivalents for both graduates and undergraduates and multiplying by the estimated total per person cost of attendance for each school type. In doing so, we utilize information from the U.S. Department of Education, National Center for Education Statistics, Projections of Education Statistics to 2022 (NCES 2014, February 2014), The Integrated Postsecondary Education Data System (IPEDS), College Board -Trends in Student Aid 2016. © 2016 The College Board. www.collegeboard.org, College Board -Trends in Student Pricing 2016. © 2016 The College Board. www.collegeboard.org, National Student Clearinghouse - Term Enrollment Estimates, and Company analysis. Other sources for these data points also exist publicly and may vary from our computed estimates. NCES, IPEDS, and College Board restate their data annually, which may cause previously reported results to vary. We have also recalculated figures in our Company analysis to standardize all costs of attendance to dollars not adjusted for inflation. This has a minimal impact on historically-stated numbers.


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Supervision and Regulation

Overview
We are subject to extensive regulation, examination and supervision by various federal, state and local authorities. The more significant aspects of the laws and regulations that apply to us and our subsidiaries are described below. These descriptions are qualified in their entirety by reference to the full text of the applicable statutes, legislation, regulations and policies, as they may be amended, and as interpreted and applied, by federal, state and local agencies.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) was adopted to reform and strengthen regulation and supervision of the U.S. financial services industry. It contains comprehensive provisions to govern the practices and oversight of financial institutions and other participants in the financial markets. It mandates significant regulations, additional requirements and oversight on almost every aspect of the U.S. financial services industry, including increased capital and liquidity requirements, limits on leverage and enhanced supervisory authority. It requires the issuance of many regulations, which will take effect over several years.

Consumer Protection Laws and Regulations
Our origination, servicing, first-party collection and deposit taking activities subject us to federal and state consumer protection, privacy and related laws and regulations. Some of the more significant laws and regulations that are applicable to our business include:
various state and federal laws governing unfair, deceptive or abusive acts or practices;
the federal Truth-In-Lending Act and Regulation Z, which govern disclosures of credit terms to consumer borrowers;
the Fair Credit Reporting Act and Regulation V, which govern the use and provision of information to consumer reporting agencies;
the Equal Credit Opportunity Act and Regulation B, which prohibit creditor practices that discriminate on the basis of race, religion and other prohibited factors in extending credit;
the SCRA, which applies to all debts incurred prior to commencement of active military service (including education loans) and limits the amount of interest, including fees, that may be charged;
the Truth in Savings Act and Regulation DD, which mandate certain disclosures related to consumer deposit accounts;
the Expedited Funds Availability Act, Check Clearing for the 21st Century Act and Regulation CC issued by the Federal Reserve Bank (“FRB”), which relate to the availability of deposit funds to consumers;
the Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with federal government requests for and subpoenas of financial records;
the Electronic Funds Transfer Act and Regulation E, which govern automated transfers of funds and consumers’ rights related thereto;
the Telephone Consumer Protection Act, which governs communication methods that may be used to contact customers; and
the Gramm-Leach-Bliley Act, which governs the ability of financial institutions to disclose nonpublic information about consumers to non-affiliated third-parties.

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Consumer Financial Protection Bureau
The Consumer Financial Protection Act, a part of the Dodd-Frank Act, established the CFPB, which has broad authority to promulgate regulations under federal consumer financial protection laws and to directly or indirectly enforce those laws, including regulatory oversight of the Private Education Loan industry, and to examine financial institutions for compliance. It is authorized to collect fines and order consumer restitution in the event of violations, engage in consumer financial education, track consumer complaints, request data and promote the availability of financial services to underserved consumers and communities. It has authority to prevent unfair, deceptive or abusive acts and practices by issuing regulations that define the same or by using its enforcement authority without first issuing regulations. The CFPB has been active in its supervision, examination and enforcement of financial services companies, notably bringing enforcement actions, imposing fines and mandating large refunds to customers of several large banking institutions. On January 1, 2015, the CFPB became the Bank’s primary consumer compliance supervisor with compliance examination authority and primary consumer protection enforcement authority. The CFPB began its formal examination of us in 2016. The UDFI and FDIC remain the prudential regulatory authorities with respect to the Bank’s financial strength.
The Dodd-Frank Act created the Private Education Loan Ombudsman within the CFPB to receive and attempt to informally resolve inquiries about Private Education Loans. The Private Education Loan Ombudsman reports to Congress annually on the trends and issues identified through this process. The CFPB continues to take an active interest in the student loan industry, undertaking a number of initiatives related to the Private Education Loan market and student loan servicing. On October 20, 2016, the Private Education Loan Ombudsman submitted its fifth report based on Private Education Loan inquiries, federal education loan inquiries, and debt collection inquiries related to both federal education loans and Private Education Loans. The report was based on inquiries received by the CFPB from September 1, 2015 through August 31, 2016. During that period of time, the Bank received 276 complaints related to its Private Education Loan portfolio through the CFPB complaint portal. As it did in the fall 2015 and spring 2016 agendas, the CFPB’s fall 2016 rulemaking agenda lists rules related to student loan servicing as a “long-term action” item with no estimated date for further action.
Regulation of Sallie Mae Bank
The Bank was chartered in 2005 and is a Utah industrial bank regulated by the FDIC, the UDFI and the CFPB. We are not a bank holding company and therefore are not subject to the federal regulations applicable to bank holding companies. However, we and our non-bank subsidiaries are subject to regulation and oversight as institution-affiliated parties. The following discussion sets forth some of the elements of the bank regulatory framework applicable to us, the Bank and our other non-bank subsidiaries.
General
The Bank is currently subject to prudential regulation and examination by the FDIC and the UDFI, and consumer compliance regulation and examination by the CFPB. Numerous other federal and state laws and regulations govern almost all aspects of the operations of the Bank and, to some degree, our operations and those of our non-bank subsidiaries as institution-affiliated parties.
Actions by Federal and State Regulators
Under federal and state laws and regulations pertaining to the safety and soundness of insured depository institutions, the UDFI and the FDIC have the authority to compel or restrict certain actions of the Bank if it is determined to lack sufficient capital or other resources, or is otherwise operating in a manner deemed to be inconsistent with safe and sound banking practices. Under this authority, the Bank’s regulators can require it to enter into informal or formal supervisory agreements, including board resolutions, memoranda of understanding, written agreements and consent or cease and desist orders, pursuant to which the Bank would be required to take identified corrective actions to address cited concerns and refrain from taking certain actions.

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Enforcement Powers
As “institution-affiliated parties” of the Bank, we, our non-bank subsidiaries and our management, employees, agents, independent contractors and consultants are subject to potential civil and criminal penalties for violations of law, regulations or written orders of a government agency. Violations can include failure to timely file required reports, filing false or misleading information or submitting inaccurate reports. Civil penalties may be as high as $1,000,000 a day for such violations and criminal penalties for some financial institution crimes may include imprisonment for 20 years. Regulators have flexibility to commence enforcement actions against institutions and institution-affiliated parties, and the FDIC has the authority to terminate deposit insurance. When issued by a banking agency, cease and desist and similar orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including by compelling restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions determined to be appropriate by the ordering agency. The federal banking regulators also may remove a director or officer from an insured depository institution (or bar them from the industry) if a violation is willful or reckless.
At the time of this filing, the Bank remains subject to a Consent Order, Order to Pay Restitution and Order to Pay Civil Money Penalty dated May 13, 2014 issued by the FDIC (the “FDIC Consent Order”) and a Consent Order (the “DOJ Consent Order”) issued by the Department of Justice (the “DOJ”).  On May 13, 2014, the Bank reached a settlement with the DOJ, and agreed to the DOJ Consent Order, regarding compliance issues with the SCRA. At the same time, the Bank reached a settlement with the FDIC regarding disclosures and assessments of certain late fees, as well as compliance with the SCRA. Under the FDIC Consent Order, the Bank agreed to pay $3.3 million in fines and oversee the refund of up to $30 million in late fees assessed on loans owned or originated by the Bank since its inception in November 2005. The DOJ Consent Order was approved by the U.S. District Court for the District of Delaware on September 29, 2014. Under the terms of the Separation and Distribution Agreement executed in connection with the Spin-Off (the “Separation and Distribution Agreement”), Navient is responsible for funding all liabilities under the regulatory orders and, as of the date hereof, has funded all liabilities other than fines directly levied against the Bank in connection with these matters which the Bank is required to pay.
We believe the Bank has complied with all the requirements of the FDIC Consent Order and the DOJ Consent Order. This includes implementing new SCRA policies, procedures and training, updated billing statement disclosures, steps to ensure its third-party service providers are also fully compliant in these regards, and overseeing Navient’s restitution responsibilities. Notwithstanding the assumption by the CFPB of the role of the Bank’s primary consumer compliance regulator in January 2015, the FDIC will continue to monitor the Bank’s improved compliance management system, policies and procedures until it is satisfied the Bank has demonstrated its ability to sustain the enhancements and additions implemented in response to the FDIC Consent Order. Pursuant to the terms of the DOJ Consent Order, the Bank will remain subject to certain DOJ reporting and record-keeping requirements until September 29, 2018.
In May 2014, the Bank received a Civil Investigative Demand (a “CID”) from the CFPB as part of the CFPB’s separate investigation relating to customer complaints, fees and charges assessed in connection with the servicing of student loans and related collection practices of pre-Spin-Off SLM by entities now subsidiaries of Navient during a time period prior to the Spin-Off. Two state attorneys general provided the Bank identical CIDs and other state attorneys general have become involved in the inquiry over time. To the extent requested, the Bank has been cooperating fully with the CFPB and the attorneys general but is not in a position at this time to predict the duration or outcome of these matters. Given the timeframe covered by the CIDs and the focus on practices and procedures previously conducted by Navient and its servicing subsidiaries prior to the Spin-Off, as contemplated by the Separation and Distribution Agreement relating to, and the structure of, the Spin-Off, Navient is leading the response to these investigations, is legally responsible for, and has accepted responsibility to indemnify the Company against all costs, expenses, losses and remediation that may arise from these matters. Additionally, on January 18, 2017, the Illinois Attorney General filed a separate lawsuit against Navient - its subsidiaries Navient Solutions, Inc., Pioneer Credit Recovery, Inc., and General Revenue Corporation - and the Bank arising out of the aforementioned multi-state investigation of various lending, servicing, and collection practices. As contemplated by the Separation and Distribution Agreement relating to, and the structure of, the Spin-Off, Navient is legally responsible for, and has accepted responsibility to indemnify the Company against, all costs, expenses, losses and remediation that may arise from these matters.
On January 18, 2017, the CFPB filed a complaint in federal court in Pennsylvania against Navient, along with its subsidiaries, Navient Solutions, Inc., and Pioneer Credit Recovery, Inc. The complaint alleges these Navient entities, among other things, engaged in deceptive practices with respect to its historic servicing and debt collection practices. Neither SLM, the

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Bank, nor any of their current subsidiaries are named in, or otherwise a party to, the lawsuit and are not alleged to have engaged in any wrongdoing.
Standards for Safety and Soundness
The Federal Deposit Insurance Act requires the federal bank regulatory agencies such as the FDIC to prescribe, by regulation or guidance, operational and managerial standards for all insured depository institutions, such as the Bank, relating to internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, and asset quality. The agencies also must prescribe standards for asset quality, earnings, and stock valuation, as well as standards for compensation, fees and benefits. The federal banking regulators have implemented these required standards through regulations and interagency guidance designed to identify and address problems at insured depository institutions before capital becomes impaired. Under the regulations, if a regulator determines a bank fails to meet any prescribed standards, the regulator may require the bank to submit an acceptable plan to achieve compliance, consistent with deadlines for the submission and review of such safety and soundness compliance plans.
Dividends
The Bank is chartered under the laws of the State of Utah and its deposits are insured by the FDIC. The Bank’s ability to pay dividends is subject to the laws of Utah and the regulations of the FDIC. Generally, under Utah’s industrial bank laws and regulations as well as FDIC regulations, the Bank may pay dividends to the Company from its net profits without regulatory approval if, following the payment of the dividend, the Bank’s capital and surplus would not be impaired. The Bank paid no dividends on its common stock for the years ended December 31, 2016, 2015 and 2014. For the foreseeable future, we expect the Bank to only pay dividends to the Company as may be necessary to provide for regularly scheduled dividends payable on the Company’s Series A and Series B Preferred Stock.
Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements administered by the FDIC and the UDFI. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material adverse effect on our business, results of operations and financial position. Under the FDIC’s regulations implementing the Basel III capital framework (“U.S. Basel III”) and the regulatory framework for prompt corrective action, the Bank must meet specific capital standards that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and its classification under the prompt corrective action framework are also subject to qualitative judgments by the regulators about components of capital, risk weightings and other factors.
U.S. Basel III, which is aimed at increasing both the quantity and quality of regulatory capital, established Common Equity Tier 1 as a new tier of capital and modified methods for calculating risk-weighted assets, among other things. Certain aspects of U.S. Basel III, including new deductions from and adjustments to regulatory capital and a new capital conservation buffer, are being phased in over several years.
The Bank is subject to the following minimum capital ratios under U.S. Basel III: a Common Equity Tier 1 risk-based capital ratio of 4.5 percent, a Tier 1 risk-based capital ratio of 6.0 percent, a Total risk-based capital ratio of 8.0 percent, and a Tier 1 leverage ratio of 4.0 percent. In addition, the Bank is subject to a Common Equity Tier 1 capital conservation buffer, which is being phased in over three years beginning January 1, 2016: 0.625 percent of risk-weighted assets for 2016, 1.25 percent for 2017, and 1.875 percent for 2018, with the fully phased-in level of greater than 2.5 percent effective as of January 1, 2019. Failure to maintain the buffer will result in restrictions on the Bank’s ability to make capital distributions, including the payment of dividends, and to pay discretionary bonuses to executive officers. Including the buffer, by January 1, 2019, the Bank will be required to maintain the following minimum capital ratios: a Common Equity Tier 1 risk-based capital ratio of greater than 7.0 percent, a Tier 1 risk-based capital ratio of greater than 8.5 percent and a Total risk-based capital ratio of greater than 10.5 percent.
U.S. Basel III also revised the capital thresholds for the prompt corrective action framework for insured depository institutions. To qualify as “well capitalized,” the Bank must maintain a Common Equity Tier 1 risk-based capital ratio of at least

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6.5 percent, a Tier 1 risk-based capital ratio of at least 8.0 percent, a Total risk-based capital ratio of at least 10.0 percent, and a Tier 1 leverage ratio of at least 5.0 percent.
Stress Testing Requirements
The Dodd-Frank Act imposes stress testing requirements on banking organizations with total consolidated assets, averaged over the four most recent consecutive quarters, of more than $10 billion. As of September 30, 2014, the Bank met this asset threshold. Under the FDIC’s implementing regulations, the Bank is required to conduct annual company-run stress tests utilizing scenarios provided by the FDIC and publish a summary of those results. The Bank conducted its first annual stress test under the rules in the January 1, 2016 stress testing cycle, submitted the results of that stress test to the FDIC on July 16, 2016 and published the results on October 31, 2016. In all scenarios, including the severely adverse scenario, the Bank’s capital levels exceed regulatory expectations for “well capitalized”.
Deposit Insurance and Assessments
Deposits at the Bank are insured up to the applicable legal limits by the FDIC - administered Deposit Insurance Fund (the “DIF”), which is funded primarily by quarterly assessments on insured banks. An insured bank’s assessment is calculated by multiplying its assessment rate by its assessment base. A bank’s assessment base and assessment rate are determined each quarter.
The Bank’s insurance assessment base currently is its average consolidated total assets minus its average tangible equity during the assessment period. The Bank’s assessment rate is determined by the FDIC using a number of factors, including the results of supervisory evaluations, the Bank’s capital ratios and its financial condition, as well as the risk posed by the Bank to the DIF. Assessment rates for insured banks also are subject to adjustment depending on a number of factors, including significant holdings of brokered deposits in certain instances and the issuance or holding of certain types of debt.
Deposits
With respect to brokered deposits, an insured depository institution must be well capitalized to accept, renew or roll over such deposits without FDIC clearance. An adequately capitalized insured depository institution must obtain a waiver from the FDIC to accept, renew or roll over brokered deposits. Undercapitalized insured depository institutions generally may not accept, renew or roll over brokered deposits. For more information on the Bank’s deposits, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Financial Measures — Funding Sources.”
Regulatory Examinations
The Bank currently undergoes regular on-site examinations by the Bank’s regulators, who examine for adherence to a range of legal and regulatory compliance responsibilities. A regulator conducting an examination has complete access to the books and records of the examined institution. The results of the examination are confidential. The cost of examinations may be assessed against the examined institution as the agency deems necessary or appropriate. The CFPB conducted its first review of the Bank’s compliance management system in 2016 with no follow up actions required.
Source of Strength
Under the Dodd-Frank Act, we are required to serve as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances when we might not do so absent the statutory requirement. Any loan by us to the Bank would be subordinate in right of payment to depositors and to certain other indebtedness of the Bank.
Community Reinvestment Act
The Community Reinvestment Act (the “CRA”) requires the FDIC to evaluate the record of the Bank in meeting the credit needs of its local community, including low- and moderate-income neighborhoods. These evaluations are considered in evaluating mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could result in additional requirements and limitations on the Bank. The Bank has received a CRA rating of Outstanding.

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Privacy Laws
The federal banking regulators, as required by the Gramm-Leach-Bliley Act, have adopted regulations that limit the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third-parties. Financial institutions are required to disclose to consumers their policies for collecting and protecting confidential customer information. Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third-parties, with some exceptions, such as the processing of transactions requested by the consumer. Financial institutions generally may not disclose certain consumer or account information to any nonaffiliated third-party for use in telemarketing, direct mail marketing or other marketing. The privacy regulations also restrict information sharing among affiliates for marketing purposes and govern the use and provision of information to consumer reporting agencies. Federal and state banking agencies have prescribed standards for maintaining the security and confidentiality of consumer information, and the Bank is subject to such standards, as well as certain federal and state laws or standards for notifying consumers in the event of a security breach.
Other Sources of Regulation
Many other aspects of our businesses are subject to federal and state regulation and administrative oversight. Some of the most significant of these are described below.
Oversight of Derivatives
Title VII of the Dodd-Frank Act requires all standardized derivatives, including most interest rate swaps, to be submitted for clearing to central intermediaries to reduce counterparty risk. As of December 31, 2016, $4.8 billion notional of our derivative contracts were cleared on the Chicago Mercantile Exchange and the London Clearing House. This represents 92.1 percent of our total notional derivative contracts of $5.2 billion. All derivative contracts cleared through an exchange require collateral to be exchanged based on the fair value of the derivative. Our exposure is limited to the value of the derivative contracts in a gain position less any collateral held by us and plus collateral posted with the counterparty.
Credit Risk Retention
In October 2014, the Department of the Treasury, the Federal Reserve, the Office of the Comptroller of the Currency, the FDIC, the SEC, the Federal Housing Finance Agency and the Department of Housing and Urban Development issued final rules to implement the credit risk retention requirements of Section 941 of the Dodd-Frank Act for ABS, including those backed by residential and commercial mortgages and automobile, commercial, credit card, and student loans, except for certain transactions with limited connections to the United States and U.S. investors. The regulations generally require securitizers of assets backing ABS, such as Sallie Mae, to retain an economic interest in an ABS transaction that represents at least five percent of the credit risk of the assets being securitized. The final rules provide reduced risk retention requirements for securitization transactions collateralized solely (excluding servicing assets) by FFELP Loans. The regulations took effect in December 2015 for securitization transactions backed by residential mortgages and took effect in December 2016 for other securitization transactions, including those collateralized by Private Education Loans. Prior to December 2016, the Bank’s on-balance sheet securitizations were subject to the credit risk retention requirements of the FDIC “safe harbor” rule, which generally reduced the risk to securitization investors in the event of an insolvency of the Bank.
Anti-Money Laundering, the USA PATRIOT Act, and U.S. Economic Sanctions
The USA PATRIOT Act of 2001 (the “USA Patriot Act”), which amended the Bank Secrecy Act, substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The U.S. Treasury Department has issued and, in some cases proposed, a number of regulations that apply various requirements of the USA Patriot Act to financial institutions such as the Bank. These regulations impose obligations on financial institutions to maintain appropriate internal policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. In addition, U.S. law generally prohibits or substantially restricts U.S. persons from doing business with countries designated by the U.S. Department of State as state sponsors of terrorism, which currently are Iran, Sudan and Syria. Under U.S. law, there are similar prohibitions or restrictions with countries subject to other U.S. economic sanctions administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control or other

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agencies. We maintain policies and procedures designed to ensure compliance with relevant U.S. laws and regulations applicable to U.S. persons.
Volcker Rule
In December 2013, the U.S. banking agencies, the SEC and U.S. Commodity Futures Trading Commission issued final rules to implement the “Volcker Rule” provisions of the Dodd-Frank Act. The rules prohibit insured depository institutions and their affiliates (collectively, “banking entities”) from engaging in proprietary trading and from investing in, sponsoring or having certain financial relationships with certain private funds.  These prohibitions are subject to a number of important exclusions and exemptions that, for example, permit banking entities to trade for risk mitigating hedging and liquidity management, subject to certain conditions and restrictions. A conformance period ended on July 21, 2015. We do not expect the Volcker Rule to have a meaningful effect on our current operations or those of our subsidiaries, as we do not materially engage in the businesses prohibited by the Volcker Rule.
Employees
At December 31, 2016, we had approximately 1,300 employees, none of whom is covered by collective bargaining agreements.


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Item 1A. Risk Factors
Economic Environment
Economic conditions could have a material adverse effect on our business, results of operations, financial condition and liquidity.
Our business is significantly influenced by economic conditions. Economic growth in the United States remains uneven. Employment levels in the United States are often sensitive not only to domestic economic growth but to the performance of major foreign economies and commodity prices. High unemployment rates and the failure of our in-school borrowers to graduate are two of the most significant macroeconomic factors that could increase loan delinquencies, defaults and forbearance, or otherwise negatively affect performance of our existing education loan portfolios. Since 2009, the unemployment rate of 20-24 year old college graduates has been higher than in the years immediately prior to 2009. It reached a high of 13.3 percent in 2011 and declined to 5.6 percent in December 2016. Likewise, high unemployment and decreased savings rates may impede Private Education Loan originations growth as loan applicants and their cosigners may experience trouble repaying credit obligations or may not meet our credit standards. Additionally, if interest rates rise, borrowers and cosigners of variable-rate loans in our portfolio could experience trouble repaying loans we have made to them. Consequently, for a number of reasons, our borrowers may experience more trouble in repaying loans we have made to them, which could increase our loan delinquencies, defaults and forbearance. In addition, some consumers may find that higher education is an unnecessary investment during uncertain economic times and defer enrollment in educational institutions until the economy grows at a stronger pace, or they may turn to less costly forms of secondary education, thus decreasing our education loan application and funding volumes. Higher credit-related losses and weaker credit quality negatively affect our business, financial condition and results of operations and limit funding options, which could also adversely impact our liquidity position.
Competition
We operate in a competitive environment. Our product offerings are primarily concentrated in loan products for higher education and deposit products for online depositors. Such concentrations and the competitive environment subject us to risks that could adversely affect our financial position.
The principal assets on our balance sheet are Private Education Loans. At December 31, 2016, approximately 76 percent of our assets were comprised of Private Education Loans, and this concentration will likely increase. We compete in the Private Education Loan market with banks and other consumer lending institutions, many with strong consumer brand name recognition and greater financial resources. We compete based on our products, origination capability and customer service. To the extent our competitors compete more aggressively or effectively, we could lose market share to them or subject our existing loans to refinancing risk.
Competition plays a significant role in our online deposit gathering activities. The market for online deposits is highly competitive, based primarily on a combination of reputation and rate. Increased competition for deposits could cause our cost of funds to increase, with negative impacts on our financial returns.
In addition to competition with banks and other consumer lending institutions, the federal government, through the DSLP, poses significant competition to our Private Education Loan products. The availability and terms of loans the government originates or guarantees affect the demand for Private Education Loans because students and their families often rely on Private Education Loans to bridge a gap between available funds, including family savings, scholarships, grants, and federal and state loans, and the costs of post-secondary education. The federal government currently places both annual and aggregate limitations on the amount of federal loans any student can receive and determines the criteria for student eligibility. Parents and graduate students may obtain additional federal education loans through other programs. These federal education lending programs are generally adjusted in connection with funding authorizations from the U.S. Congress for programs under the Higher Education Act of 1965 (the “HEA”). The HEA’s reauthorization is currently pending in the U.S. Congress and a vote may occur in 2017. Increased funding authorizations or federal education loan limits contained in any reauthorization could decrease demand for Private Education Loans.

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Access to alternative means of financing the costs of education and other factors may reduce demand for Private Education Loans, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The demand for Private Education Loans could weaken if families and student borrowers use other vehicles to bridge the gap between available funds and costs of post-secondary education. These vehicles include, among others:
Home equity loans or other borrowings available to families to finance their education costs;
Pre-paid tuition plans, which allow students to pay tuition at today’s rates to cover tuition costs in the future;
Section 529 plans, which include both pre-paid tuition plans and college savings plans that allow a family to save funds on a tax-advantaged basis;
Education IRAs, now known as Coverdell Education Savings Accounts, under which a holder can make annual contributions for education savings;
Government education loan programs such as the DSLP; and
Direct loans from colleges and universities.
In addition, our ability to grow Private Education Loan originations could be negatively affected if
demographic trends in the United States result in a decrease in college-age individuals,
demand for higher education decreases,
the cost of attendance of higher education decreases, or
public resistance to increasing higher education costs strengthens.

Consolidation or refinancing of existing Private Education Loans could have a material adverse effect on our business, financial condition, results of operations and cash flows.
To date, we have experienced no significant increase in consolidation or refinancing of our existing Private Education Loans. We believe the design of our products, with emphasis on rigorous underwriting, credit-worthy cosigners and variable interest rates, creates sustainable, competitive loan products. However, a prolonged introduction of significant amounts of subsidized funding into the Private Education Loan market at below market interest rates - whether from federal or private sources (including financial technology (“FinTech”) companies) - could increase the prepayment rates of our existing Private Education Loans and have a material adverse effect on our business, financial condition, results of operations and cash flows.
Since 2010, both the number of bills introduced in the United States Congress to promote federal financing for consolidation or refinancing of existing student loans, as well as the number of lenders offering similar products, have increased. Also, on December 2, 2016, the Comptroller of the Currency announced that the Office of the Comptroller of the Currency (the “OCC”) would move forward with considering applications from FinTech companies to become special purpose national banks. Concurrent with the announcement, the OCC published a white paper discussing the issues and conditions that agency will consider in granting special purpose national bank charters. We are still evaluating the potential competitive impact if the OCC begins to charter FinTech companies that offer bank products and services, including loans to consolidate or refinance existing student loans.
We are dependent on key personnel and the loss of one or more of those key personnel could harm our business.
Our future success depends significantly on the continued services and performance of our management team. We believe our management team’s depth and breadth of experience in our industry is integral to executing our business plan. We also will need to continue to attract, motivate and retain other key personnel. The loss of the services of members of our management team or other key personnel to our competitors or other companies or the inability to attract additional qualified personnel as needed could have a material adverse effect on our business, financial position, results of operations and cash flows.

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Regulatory
Failure to comply with consumer protection laws could subject us to civil and criminal penalties or litigation, including class actions, and have a material adverse effect on our business.
We are subject to a broad range of federal and state consumer protection laws applicable to our Private Education Loan lending and retail banking activities, including laws governing fair lending, unfair, deceptive and abusive acts and practices, service member protections, interest rates and loan fees, disclosures of loan terms, marketing, servicing and collections.
Violations of, or changes in, federal or state consumer protection laws or related regulations, or in the prevailing interpretations thereof, may expose us to litigation, administrative fines, penalties and restitution, result in greater compliance costs, constrain the marketing of Private Education Loans, adversely affect the collection of balances due on the loan assets held by us or by securitization trusts or otherwise adversely affect our business. We could incur substantial additional expense complying with these requirements and may be required to create new processes and information systems. Moreover, changes in federal or state consumer protection laws and related regulations, or in the prevailing interpretations thereof, could invalidate or call into question the legality of certain of our services and business practices.
For example, the Bank is currently subject to the FDIC Consent Order and the DOJ Consent Order.  Specifically, on May 13, 2014, the Bank reached settlements with the FDIC and the DOJ regarding disclosures and assessments of certain late fees, as well as compliance with the SCRA.
Effective January 1, 2015, the CFPB became the Bank’s primary consumer compliance supervisor, with consumer compliance examination authority and primary consumer compliance enforcement authority. CFPB jurisdiction could result in additional regulation and supervision, which could increase our costs and limit our ability to pursue business opportunities. Consent orders, decrees or settlements entered into with governmental agencies may also increase our compliance costs or restrict certain of our activities.
Finally, we operate in an environment of heightened political and regulatory scrutiny of education loan lending, servicing and originations. The rising cost of higher education, questions regarding the quality of education provided, particularly among for-profit institutions, and the increasing level of student loan debt in the United States have prompted this heightened and ongoing scrutiny. This environment could lead to further laws and regulations applicable to, or limiting, our business. As an example of potential further laws and regulations applicable to our business, in late 2015 the CFPB expressed some concerns with education loan servicers and indicated it may begin to consider possible rulemaking efforts for the industry at some point. As an example of potential further laws and regulations limiting our business, increasing numbers of allegations or findings levied against for-profit institutions could lead us to further curtail the loans we make to students of these institutions or increase the risk of enforceability of our existing loans to graduates of particular institutions found to have fraudulently misrepresented or to have not provided reasonably expected training or educational benefits.
We operate in a highly regulated environment and the laws and regulations that govern our operations, or changes in these laws and regulations, or our failure to comply with them, may adversely affect us.
In addition to consumer protection laws, we are also subject to extensive regulation and supervision that govern almost all aspects of our operations. Intended to protect clients, depositors, the DIF, and the overall financial system, these laws and regulations may, among other matters:
prescribe minimum capital requirements,
limit the rates of growth of our business,
impose limitations on the business activities in which we can engage,
limit the dividends or distributions the Bank can pay to us,
restrict the ability of institutions to guarantee our debt,
limit proprietary trading and investments in certain private funds,
impose certain specific accounting requirements on us that may be more restrictive, and

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result in greater or earlier charges to earnings or reductions in our capital than would result under generally accepted accounting principles.
The FDIC has the authority to limit the Bank’s annual total balance sheet growth, but no such limitations were imposed in 2016. Accordingly, we did not sell any Private Education Loans in 2016, through off-balance sheet securitization transactions or otherwise, to meet previously imposed limitations, although there can be no assurance that limitations will not be imposed in the future.
As our business, capital and balance sheet continue to grow, we expect to be able to achieve our annual Private Education Loan origination targets for 2017 without the need to sell loans to third-parties. We may reconsider loan sales from time to time, however, based on a number of factors, including our risk-based capital levels and input from our regulators.
Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations, as well as increased intensity in supervision, often impose additional compliance costs. We, like the rest of the banking sector, are facing increased regulation and supervision of our industry by bank regulatory agencies and expect there will be additional and changing requirements and conditions imposed on us. Our failure to comply with these laws and regulations, even if the failure is inadvertent or reflects a difference in interpretation, could subject us to fines, other penalties and restrictions on our business activities, any of which could adversely affect our business, financial condition, cash flows, results of operations, capital base and the price of our securities.
Significant increases in our FDIC insurance premiums could have an adverse impact on our financial position, results of operations and cash flows.
Deposits at the Bank are insured up to the applicable legal limits by the DIF, which is funded primarily by quarterly assessments on insured banks. An insured bank’s assessment is calculated by multiplying its assessment rate by its assessment base. A bank’s assessment base and assessment rate are determined each quarter. See Item 1. “Business - Supervision and Regulation - Regulation of Sallie Mae Bank - Deposit Insurance and Assessments.”
On July 1, 2016, the FDIC began imposing a 4.5 basis point premium surcharge on banks, such as ours, with $10 billion or more in assets. The FDIC may further redefine how assessments are calculated, impose special assessments or surcharges on us or increase our deposit insurance premiums.
Regulatory agencies have increased their expectations with respect to how regulated institutions oversee their relationships with third-party vendors and service providers.
The CFPB and the FDIC have issued guidance to supervised banks with respect to increased responsibilities to vet and supervise the activities of service providers to ensure compliance with federal consumer protection laws. In addition, the FDIC Consent Order, among other things, imposes strict requirements on the Bank with respect to oversight of third-party agreements and services. The issuance of regulatory guidance, the FDIC Consent Order, and the enforcement of the enhanced vendor management standards via examination and investigation of us or any third-party with whom we do business, may increase our costs, require increased management attention and adversely impact our operations. In the event we should fail to meet the heightened standards for management of service providers, we could be subject to further supervisory orders to cease and desist, civil monetary penalties or other actions due to claimed noncompliance, which could have an adverse effect on our business, financial condition, operating results and cash flows.

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Capital and Liquidity
Adverse market conditions or an inability to effectively manage our liquidity risk could negatively impact our ability to meet our liquidity and funding needs, which could materially and adversely impact our business operations and our overall financial condition.
We must effectively manage the liquidity risk to which we are exposed. We require liquidity to meet cash requirements for such things as day-to-day operating expenses, extensions of credit on our Private Education Loans, deposit withdrawals and payment of required dividends on our preferred stock. Our primary sources of liquidity and funding are from customer deposits, payments received on Private Education Loans and FFELP Loans that we hold, and proceeds from securitization transactions we undertake. We may maintain too much liquidity, which can be costly, or we may be too illiquid, which could result in financial distress during times of economic stress or capital market disruptions.
For at least the next several years, our ability to grow our business to its fullest potential will be heavily reliant on our ability to obtain deposits and obtain financing through asset-backed securitizations. Should growth opportunities exceed the pace at which we can increase deposits or generate asset-backed financing, business growth could be less than optimal unless we can generate or raise sufficient additional capital to support this growth.
If we are unable to obtain funding sufficient to fund new Private Education Loan originations, our business, financial condition, results of operations and cash flows could be materially adversely affected. We must also maintain appropriate levels of risk-based capital to support increased levels of funding.
We fund Private Education Loan originations through term and liquid brokered and retail deposits, as well as Educational 529 and Health Savings Account deposits, raised by the Bank and financing raised through asset-backed securitizations. Assets funded through deposits result in refinancing risk because the average term of the deposits is shorter than the expected term of the Private Education Loan assets we create. Also, our ability to maintain our current level of deposits or grow our deposit base could be affected by regulatory restrictions, including the possible imposition by our regulators of prior approval requirements or restrictions on deposit growth through brokered deposits. As a supervisory matter, reliance on brokered deposits as a significant source of funding is discouraged. As a result, to grow our deposit base, we will need to continue to expand our non-brokered channels for deposit generation, including through new marketing and advertising efforts, which may require significant time, capital, and effort to implement. Further, the significant competition for deposits from other banking organizations that are also seeking stable deposits to support their funding needs may affect deposit renewal rates, costs or availability. If we are unable to expand existing channels or develop new sources of deposit generation on favorable terms, it could have a material adverse effect on our business, results of operations, financial position and cash flows. In addition, our ability to maintain existing balances or obtain additional deposits may be affected by factors, including those beyond our control, such as perceptions about our financial strength, quality of deposit servicing or online banking generally, which could reduce the number of consumers choosing to make deposits with us.
Our short-term success depends on our ability to structure Private Education Loan securitizations or execute other secured funding transactions. Several factors may have a material adverse effect on both our ability to obtain such funding and the time it takes us to structure and execute these transactions, including the following:
Persistent and prolonged disruption or volatility in the capital markets or in the education loan ABS sector specifically;
Our inability to generate sufficient Private Education Loan volume;
Degradation of the credit quality or performance of the Private Education Loans we sell or finance through securitization trusts, or adverse rating agency assumptions, ratings or conclusions with respect to those trusts or the education loan-backed securitization trusts sponsored by other issuers;
A material breach of our obligations to purchasers of our Private Education Loans, including securitization trusts;
The timing, pricing and size of education loan asset-backed securitizations other parties issue, or the adverse performance of, or other problems with, such securitizations;

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Challenges to the enforceability of Private Education Loans based on violations of, or changes to, federal or state consumer protection or licensing laws and related regulations, or imposition of penalties or liabilities on assignees of Private Education Loans for violation of such laws and regulations; and
Our inability to structure and gain market acceptance for new products or services to meet new demands of ABS investors, rating agencies or credit facility providers.
If rates of growth require funding beyond that which we may be able to obtain through deposits and proceeds from asset-backed securitization transactions, we may need to raise liquidity through other forms of secured and unsecured debt financing which, in turn, could increase our funding costs and reduce our net interest margin. Several factors, some of which may be beyond our control, may have a material adverse effect on our ability to raise this additional funding in the amounts, at the rates, or within the timeframes we desire. If we are unable raise this additional funding in the amounts, at the rates, or within the timeframes we desire, our business, results of operations, financial position and cash flow could be materially and adversely impacted.
We currently maintain sufficient risk-based capital through retention and reinvestment of all earnings from operations. If growth rates require capital above and beyond what we generate through retained earnings, we may need to raise capital for our business by issuing additional equity to investors. Several factors, some of which may be beyond our control, may have a material adverse effect on our ability to issue additional equity in the amounts, at the prices, or within the timeframes we desire. If we are unable to issue equity in the amounts, at the prices, or within the timeframes we desire, our business, results of operations, financial position and cash flow could be materially and adversely impacted.
In structuring and facilitating securitizations of Private Education Loans, administering securitization trusts or providing portfolio management, we may incur liabilities to transaction parties.
Under applicable state and federal securities laws, if investors incur losses as a result of purchasing ABS issued in connection with our securitization transactions, we could be deemed responsible and could be liable to investors for damages. We could also be liable to investors or other parties for certain updated information that we may provide subsequent to the original issuances. If we fail to cause the securitization trusts or other transaction parties to disclose adequately all material information regarding an investment in any securities, if we or the trusts make statements that are misleading in any material respect in information delivered to investors in any securities, if we breach any representations or warranties made in connection with securitization of the loans, or if we breach any other duties as the administrator or servicer of the securitization trusts, it is possible we could be sued and ultimately held liable to an investor or other transaction party. This risk includes failure to properly administer or oversee servicing or collections and may increase if the performance of the securitization trusts’ loan portfolios degrades. In addition, under various agreements, we may be contractually bound to indemnify transaction parties if an investor is successful in seeking to recover any loss from those parties and the securitization trusts are found to have made a materially misleading statement or to have omitted material information.
If we are liable to an investor or other transaction party for a loss incurred in any securitization we facilitate or structured and any insurance that we may have does not cover this liability or proves to be insufficient, our business, financial position, results of operations and cash flows could be materially adversely affected.
The interest rate and maturity characteristics of our earning assets do not always match the interest rate and maturity characteristics of our funding arrangements, which may increase the price of, or decrease our ability to obtain, necessary liquidity. We are also subject to repayment and prepayment risks, which can adversely affect our financial condition.
Net interest income is the primary source of cash flow generated by our portfolios of Private Education Loans and FFELP Loans. Interest earned on Private Education Loans and FFELP Loans is primarily indexed to one-month LIBOR rates, but our cost of funds is primarily related to deposit rates. Certain of our Private Education Loans bear fixed interest rates. These loans are not specifically match funded with fixed-rate deposits or fixed-rate funding obtained through asset-backed securitization. Likewise, the average term of our deposits is shorter than the expected term of our Private Education Loans and FFELP Loans.
The different interest rate and maturity characteristics of our loan portfolio and the liabilities funding that portfolio result in interest rate risk, basis risk and re-pricing risk. In certain interest rate environments, this mismatch may compress our net interest margin (the net interest yield earned on our portfolio less the rate paid on our interest bearing liabilities). It is not possible to hedge all of our exposure to such risks. While the assets, liabilities and related hedging derivative contract repricing

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indices are typically highly correlated, there can be no assurance that the historically high correlation will not be disrupted by capital market dislocations or other factors outside our control. In these circumstances, our earnings could be materially adversely affected.
We are also subject to risks associated with changes in repayment and prepayment rates on Private Education Loans. For example, most of our Smart Option Student Loan products promote accelerated repayment. In addition, increases in employment levels, wages, family income or alternative sources of financing may also contribute to higher than expected prepayment rates, which can adversely affect our financial condition.
Our use of derivatives to manage interest rate sensitivity exposes us to credit and market risk that could have a material adverse effect on our earnings.
We maintain an overall interest rate strategy that uses derivatives to reduce the economic effect of interest rate changes. Developing an effective hedging strategy for dealing with movements in interest rates is complex, and no strategy can completely avoid the risks associated with these fluctuations. For example, our education loan portfolios remain subject to prepayment risk that could cause them to be under- or over-hedged, which could result in material losses. In addition, our interest rate risk management activities expose us to mark-to-market losses if interest rates move in a materially different way than was expected when we entered into the related derivative contracts. As a result, there can be no assurance hedging activities using derivatives will effectively manage our interest rate sensitivity, have the desired beneficial impact on our results of operations or financial condition or not adversely impact our liquidity and earnings.
Our use of derivatives also exposes us to market risk and credit risk. Market risk is the chance of financial loss resulting from changes in interest rates and market liquidity. Some of the swaps we use to economically hedge interest rate risk between our assets and liabilities do not qualify for hedge accounting treatment. Therefore, the change in fair value, called the “mark-to-market,” of the swaps that do not so qualify is included in our statement of income. A decline in the fair value of those derivatives could have an adverse effect on our reported earnings.
We are also subject to the creditworthiness of third-parties, including counterparties to derivative transactions. For example, we have exposure to the financial conditions of various lending, investment and derivative counterparties. If a counterparty fails to perform its obligations, we could, depending on the type of counterparty arrangement, experience a loss of liquidity or an economic loss. In addition, if a derivative counterparty fails to perform, we might not be able to cost effectively replace the derivative position, depending on the type of derivative and the current economic environment, and thus could be exposed to a greater level of interest rate risk, potentially leading to additional losses. Our counterparty exposure is more fully discussed in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Counterparty Exposure.” If our counterparties are unable to perform their obligations, such inability could have a material adverse impact on our business, financial condition, results of operations and cash flows.
Defaults on education loans, particularly Private Education Loans, could adversely affect our business, financial position, results of operations and cash flows.
We bear the full credit exposure on Private Education Loans. Delinquencies are an important indicator of the potential future credit performance for Private Education Loans. Our delinquencies (loans greater than 30 days past due), as a percentage of Private Education Loans in repayment, were 2.1 percent at December 31, 2016.
In connection with the Spin-Off, we conformed our policy with the Bank’s policy to charge off loans after 120 days of delinquency. We also changed our loss emergence period - management’s estimate of the expected period of time between the first occurrence of an event likely to cause a loss on a loan (e.g., a borrower’s loss of job, divorce, death, etc.) and the date the loan is expected to be charged off - from two years to one year to reflect both the shorter charge-off policy and related servicing practices. Prior to the Spin-Off, the Bank sold all loans past 90 days delinquent to an entity that is now a subsidiary of Navient. Post-Spin-Off, sales of delinquent loans to Navient have been significantly curtailed. Similarly, pre-Spin-Off SLM’s Private Education Loan default aversion strategies were focused on the final stages of delinquency, from 150 days to 212 days. As a result of changing our corporate charge-off policy to charging off at 120 days delinquent and greatly reducing the number of potentially delinquent loans we sell to Navient, our default aversion strategies now focus more on loans 30 to 120 days delinquent. We only have two and one half years of experience in executing our default aversion strategies on such compressed collection timeframes.  If we are unable to maintain or improve on our existing default aversion levels during these shortened collection timeframes, default rates on our Private Education Loans could increase.

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Our allowance for loan losses may not be adequate to cover actual losses, and we may be required to materially increase our allowance, which may adversely affect our capital, financial condition, and results of operations.
The evaluation of our allowance for loan losses is inherently subjective, as it requires material estimates that may be subject to significant changes. As of December 31, 2016, our allowance for Private Education Loan losses was approximately $182 million. During the year ended December 31, 2016, we recognized provisions for Private Education Loan losses of $159 million. The provision for loan losses reflects the Private Education Loan performance for the applicable period and establishes the allowance at a level that management believes is appropriate to cover probable losses inherent in the loan portfolio. However, future defaults can be higher than anticipated due to a variety of factors outside of our control, such as downturns in the economy, rising interest rates, regulatory or operational changes and other unforeseen future trends. Losses on Private Education Loans are also determined by risk characteristics such as school type, loan status (in-school, grace, forbearance, repayment and delinquency), loan seasoning (number of months in active repayment), underwriting criteria (e.g., credit scores), presence of a cosigner and the current economic environment. General economic and employment conditions, including employment rates for recent college graduates during the recent recession, led to higher rates of education loan defaults. In addition, our product offerings may prove to be unprofitable and may result in higher than expected losses. If actual loan performance is worse than currently estimated, it could materially increase our estimate of the allowance for loan losses in our balance sheet and the related provision for loan losses in our statements of income and, as a result, adversely affect our capital, financial condition and results of operations.
Changes in accounting standards could adversely affect our capital levels, results of operation and financial condition.
We are subject to the requirements of entities that set and interpret the accounting standards governing the preparation of our financial statements and other financial reports. These entities, which include the Financial Accounting Standards Board (“FASB”), the SEC, banking regulators and our independent registered public accounting firm, may add new requirements or change their interpretations of how those standards should be applied.
For example, the FASB approved a final accounting standard in 2016 related to the calculation of loan loss reserves that will require us to apply a current expected credit loss (“CECL”) model when recording impairment of loans and other financial instruments. The CECL model, which will become effective on January 1, 2020, will require us to record an allowance for estimated life of loan losses at each balance sheet date. Currently, for those Private Education Loans that are not TDRs (as defined below), we apply an inherent loss model and only record an allowance for losses expected to be realized in the 12 months following the balance sheet date. Adoption of the CECL life of loan model will significantly increase our allowance for loan losses and thereby materially affect our financial condition, results of operations and capital levels. See Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies — Recently Issued but Not Yet Adopted Accounting Pronouncements” for further details.
The Bank is subject to various regulatory capital requirements administered by the FDIC and the UDFI. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material adverse effect on our business, results of operations and financial condition.
Under U.S. Basel III and the regulatory framework for prompt corrective action, the Bank must meet specific capital standards that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and its classification under the prompt corrective action framework are also subject to qualitative judgments by the regulators about components of capital, risk weightings and other factors.
The Bank is required to maintain the following minimum regulatory capital ratios under U.S. Basel III: a Common Equity Tier 1 risk-based capital ratio of 4.5 percent, a Tier 1 risk-based capital ratio of 6.0 percent, a Total risk-based capital ratio of 8.0 percent, and a Tier 1 leverage ratio of 4.0 percent. In addition, on a fully phased-in basis by January 1, 2019, banks will be subject to a greater than 2.5 percent Common Equity Tier 1 capital conservation buffer; in 2017, the phase-in amount of the buffer is 50 percent of the fully phased-in requirement. Institutions that do not maintain the buffer will face restrictions on dividend payments, share repurchases and the payment of discretionary bonuses to executive officers.
U.S. Basel III also revised the capital thresholds for the prompt corrective action framework for insured depository institutions. To qualify as “well capitalized,” an insured depository institution must maintain a Common Equity Tier 1 risk-based capital ratio of at least 6.5 percent, a Tier 1 risk-based capital ratio of at least 8.0 percent, a Total risk-based capital ratio

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of at least 10.0 percent, and a Tier 1 leverage ratio of at least 5.0 percent. As of December 31, 2016, the Bank had a Common Equity Tier 1 risk-based capital ratio of 12.6 percent, a Tier 1 risk-based capital ratio of 12.6 percent, a Total risk-based capital ratio of 13.8 percent and a Tier 1 leverage ratio of 11.1 percent.
If the Bank fails to satisfy regulatory risk-based or leverage capital requirements, it may be subject to serious regulatory sanctions that could prevent us from successfully executing our business plan and may have a material adverse effect on our business, results of operations, financial position and cash flows. See Item 1. “Business - Supervision and Regulation - Regulation of Sallie Mae Bank - Regulatory Capital Requirements.”
Unfavorable results from required annual stress tests conducted by us may adversely affect our capital position.
The Dodd-Frank Act imposes stress test requirements on banking organizations with total consolidated assets, averaged over the four most recent consecutive quarters, of more than $10 billion, an asset threshold which the Bank meets. Under the FDIC’s implementing regulations, the Bank is required to conduct annual stress tests utilizing scenarios provided by the FDIC and publish a summary of those results. The Bank conducted its first annual stress test under the rules in the 2016 stress testing cycle and submitted the results of that stress test to the FDIC on July 31, 2016. In October 2016, we published summary stress test results, including certain measures that evaluate the Bank’s ability to absorb losses in severely adverse economic and financial conditions. From time to time, our regulators may require the Bank to raise additional capital or take other actions, or may impose restrictions on our business, based on the results of the stress tests. We may not be able to raise additional capital if required to do so, or may not be able to do so on terms which are advantageous to us or our current shareholders. Any such capital raises, if required, may also be dilutive to our existing stockholders.
Operations
Failure of our operating systems or infrastructure or the inability to adapt to changes could disrupt our business, cause significant losses, result in regulatory action or damage our reputation.
Our business is dependent on our ability to process and monitor large numbers of transactions in compliance with legal and regulatory standards and our product specifications. As processing demands change and our loan portfolios grow in both volume and differing terms and conditions, developing and maintaining our operating systems and infrastructure become increasingly challenging. There is no assurance we can adequately or efficiently develop, maintain or acquire access to such systems and infrastructure.
Our loan originations and the servicing, financial, accounting, data processing or other operating systems and facilities that support them may fail to operate properly, become disabled as a result of events beyond our control or be unable to be rapidly configured to timely address regulatory changes, in each case potentially adversely affecting our ability to process these transactions. Any such failure could adversely affect our ability to service our clients, result in financial loss or liability to our clients, disrupt our business, result in regulatory action or cause reputational damage. Despite the plans and facilities we have in place, our ability to conduct business may be adversely affected by a disruption in the infrastructure that supports our businesses. This may include a disruption involving electrical, communications, Internet, information technology, transportation or other services used by us or third-parties with which we conduct business. Notwithstanding our efforts to maintain business continuity, a disruptive event impacting our processing locations could adversely affect our business, financial condition, results of operations and cash flows.
Our business processes are becoming increasingly dependent upon technological advancement, and we could lose market share if we are not able to keep pace with rapid changes in technology.
Our future success depends, in part, on our ability to underwrite and approve loans, and process loan applications and payments and provide other customer services in a safe, automated manner with high-quality service standards. The volume of loan originations we are able to process is based, in large part, on the systems and processes we have implemented and developed. These systems and processes are becoming increasingly dependent upon technological advancement, such as the ability to process loans and payments over the Internet via personal computers or mobile devices, accept electronic signatures and provide initial decisions instantly. Our future success also depends, in part, on our ability to develop and implement technology solutions that anticipate and keep pace with continuing changes in technology, industry standards and client preferences. We may not be successful in anticipating or responding to these developments on a timely basis. We have made,

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and need to continue to make, investments in our technology platform to provide competitive products and services. If competitors introduce products, services, systems and processes that are better than ours or that gain greater market acceptance, those we offer or use may become obsolete or noncompetitive. Any one of these circumstances could have a material adverse effect on our business reputation and ability to obtain and retain clients.
We may be required to expend significant funds to develop or acquire new technologies. If we cannot offer new technologies as quickly as our competitors, we could lose market share. We also could lose market share if our competitors develop more cost effective technologies than those we offer or develop.
We depend on secure information technology and a breach of those systems or those of third-party vendors could result in significant losses, unauthorized disclosure of confidential customer information and reputational damage, which could materially adversely affect our business, financial condition or results of operations.
Our operations rely on the secure processing, storage and transmission of personal, confidential and other information in a significant number of customer transactions on a continuous basis through our computer systems and networks and those of our third-party service providers. To access our products and services, our customers may use smart phones, tablets and other mobile devices that are beyond our security systems and those of our third-party service providers. Information security risks for financial institutions and third-party service providers have increased in recent years and continue to evolve in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists and other external parties, including foreign state-sponsored actors. These parties also may fraudulently induce employees, customers and other users of our systems to gain access to our and our customers’ data. As a result, we continue to evolve our security controls to effectively prevent, detect and respond to the continually changing threats and we may be required to expend significant additional resources in the future to modify and enhance our security controls in response to new or more sophisticated threats, new regulations related to cybersecurity and other developments.
Despite the measures we and our third-party service providers implement to protect our systems and data, we may not be able to anticipate, prevent or detect cyber-attacks given the unknown and evolving nature of cyber criminals and techniques. As a result, our computer systems, software and networks, as well as those of third-party vendors we utilize, may be vulnerable to unauthorized access, computer viruses, malicious attacks and other events that could have a security impact beyond our control. Our staff, technologies, systems, networks and those of third-parties we utilize also may become the target of cyber-attacks, unauthorized access, malicious code, computer viruses, denial of service attacks and physical attacks that could result in information security breaches, the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our customers’ confidential, proprietary and other information, or otherwise disrupt our or our customers’ or other third-parties’ business operations. We also routinely transmit and receive personal, confidential and proprietary information, some through third-parties, which may be vulnerable to interception, misuse or mishandling.
If one or more of such events occur, personal, confidential and other information processed and stored in, and transmitted through our computer systems and networks, or those of third-party vendors, could be compromised or could cause interruptions or malfunctions in our or our customers’ operations that could result in significant losses, loss of confidence by and business from customers, customer dissatisfaction, significant litigation, regulatory exposures and harm to our reputation and brand.
In the event personal, confidential or other information is threatened, intercepted, misused, mishandled or compromised, we may be required to expend significant additional resources to modify our protective measures, to investigate the circumstances surrounding the event and implement mitigation and remediation measures. We also may be subject to fines, penalties, litigation and regulatory investigation costs and settlements and financial losses that are either not insured against or not fully covered through any insurance maintained by us. If one or more of such events occur, our business, financial condition or results of operations could be significantly and adversely affected.

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We depend significantly on third-parties for a wide array of our operations and customer services and key components of our information technology infrastructure, and a breach of security or service levels, or violation of law by one of these third-parties, could disrupt our business or provide our competitors with an opportunity to enhance their position at our expense.
We depend significantly on third-parties for a wide array of our operations and customer services and key components of our information technology and security infrastructures. Third-party vendors are significantly involved in aspects of our servicing for Private Education Loans and FFELP Loans, Bank deposit-taking activities, software and systems development, data center and operations, including the timely and secure transmission of information across our data communication network, and for other telecommunications, email, processing, storage, remittance and technology-related services in connection with our business. If a service provider fails to provide the services we require or expect, or fails to meet applicable regulatory or contractual requirements, such as service levels, protection of our customers’ personal and confidential information, or compliance with applicable laws, that failure could negatively impact our business by adversely affecting our ability to process customers’ transactions in a timely and accurate manner, otherwise hampering our ability to serve our customers and investors, or subjecting us to litigation and regulatory risk for matters as diverse as poor vendor oversight, improper release or protection of personal information, or release of incorrect information. Such a failure could adversely affect the perception of the reliability of our networks and services, and the quality of our brands, and could materially adversely affect our business, financial condition or results of operations.
We may face risks from our operations related to litigation or regulatory actions that could result in significant legal expenses and settlement or damage awards.
Navient has agreed to be responsible, and indemnify us, for all claims, actions, damages, losses or expenses that may arise from the conduct of all activities of pre-Spin-Off SLM occurring prior to the Spin-Off other than those specifically excluded in the Separation and Distribution Agreement. One such exclusion is that Navient’s obligation to indemnify us for any liabilities, costs or expenses we may incur arising from any action or threatened action related to the servicing, operations and collections activities Navient provided to the Bank pre-Spin-Off extends only to claims or potential claims for which Navient has received notice from us on or before April 30, 2017. Consequently, due to Navient’s indemnification obligations and the smaller, relatively younger vintages of our Private Education Loans, over the near term our dispute-related expenses may be lower than might otherwise be expected. As our business grows, we will likely be subject to additional claims and litigation, which could seriously harm our business and require us to incur significant costs. Defending against litigation may require significant attention and resources of management and, regardless of the outcome, such actions could result in significant expenses. If we are a party to material litigation and if the defenses we assert are ultimately unsuccessful, or if we are unable to achieve a favorable settlement, we could be liable for large damages and that could have a material adverse effect on our business, results of operations and financial condition. Likewise, similar material adverse effects could occur if Navient is unwilling or unable to honor its indemnification or other obligations under the Separation and Distribution Agreement.
New products and services may subject us to additional risks.
In 2017, we intend to continue to focus more attention on expanding the suite of products and services that we provide to our customers. While we do not expect significant financial contributions from these products in the near term, there may be substantial regulatory, operational and credit challenges, risks and uncertainties associated with these efforts and we may invest significant time and resources in developing and launching any new products or services. In addition, our initial timetables for the introduction and development of new products or services may not be met, market acceptance may fall short of our expectations, and price and profitability targets may not prove achievable, which could in turn unnecessarily divert management’s attention and focus and have a material negative effect on our perception in the marketplace and our operating results.
Incorrect estimates and assumptions by management in connection with the preparation of our consolidated financial statements could adversely affect our reported assets, liabilities, income and expenses.
The preparation of our consolidated financial statements requires management to make critical accounting estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses during the reporting periods. Incorrect estimates and assumptions by management in connection with the preparation of our consolidated financial statements could adversely affect the reported amounts of assets, liabilities, income and expenses. A description of our critical accounting estimates and assumptions may be found in Part I, Item 7. “Management’s Discussion and Analysis of Financial Condition and

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Results of Operations - Critical Accounting Policies and Estimates” and Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies” to the consolidated financial statements included in this Form 10-K. If we make incorrect assumptions or estimates, we may under- or overstate reported financial results, which could materially and adversely affect our business, financial condition and results of operations.
Our framework for managing risks may not be effective in mitigating our risk of loss.
Our risk management framework seeks to mitigate risk and appropriately balance risk and return. We have established processes and procedures intended to identify, measure, monitor, control and report the types of risk to which we are subject. We seek to monitor and control our risk exposure through a framework of policies, procedures, limits and reporting requirements. Management of risks in some cases depends upon the use of analytical and/or forecasting models. If the models that we use to mitigate these risks are inadequate, we may incur increased losses. In addition, there may be existing or developing risks that we have not appropriately anticipated, identified or mitigated. If our risk management framework does not effectively identify or mitigate our risks, we could suffer unexpected losses and our financial condition and results of operations could be materially adversely affected.
Our internal controls over financial reporting and disclosure controls may be ineffective.
Our management is responsible for maintaining, regularly assessing and, as necessary, making changes to our internal controls over financial reporting and our disclosure controls. Nevertheless, our internal controls over financial reporting and our disclosure controls can provide only reasonable assurances regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles in the United States (“GAAP”) and may not prevent or detect misstatements. Any failure or circumvention of our internal controls over financial reporting or our disclosure controls, failure to comply with rules and regulations related to such controls or failure to make sound and appropriate application of the criteria established in the framework set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission could have a material adverse effect on our financial condition and results of operations.
We are subject to reputational and other risks related to customer or employee fraud.
Employee and customer misconduct could subject us to financial losses, lawsuits or regulatory sanctions and severely harm our reputation. Misconduct by our customers could include such activities as providing fraudulent credentials, information or authorization on behalf of a family member or other cosigner through identification theft or by other means in order to secure loan approval. Customers also may attempt to fraudulently secure Private Education Loan proceeds. Misconduct by our employees could include, among other things, theft of our or our customers’ confidential information, or making unauthorized payments on behalf of a collection client in order to meet certain incentive thresholds.
If our internal controls fail to prevent or detect an occurrence of customer or employee fraud, or if any resulting loss is not insured, exceeds applicable insurance limits or if insurance is denied, such occurrence could have a material adverse effect on our reputation, financial condition and results of operations.
Risks Related to the Spin-Off
We continue to rely on Navient’s Private Education Loan data and, because of Navient’s indemnification obligations, have significant exposures to risks related to its creditworthiness. If we are unable to rely on these data or to obtain indemnification payments from Navient, we could experience higher than expected costs and operating expenses and our results of operations, cash flows and financial condition could be materially and adversely affected.
Navient regularly provides us with a significant amount of current and historical data on their portfolios of private education loans, including data that supports, among other things, the tracking of loan performance metrics such as default and recovery rates on those loans, including loans classified as troubled debt restructurings, and, in connection with our ABS financing transactions, to provide investors with historical information about Private Education Loan performance. We also use these metrics in the development of certain critical accounting assumptions.

30


Navient is legally responsible for, and has agreed to indemnify us against, all claims, actions, damages, losses or expenses that may arise from the conduct of all activities of pre-Spin-Off SLM occurring prior to the Spin-Off other than those specifically excluded in the Separation and Distribution Agreement. Some significant examples of the types of indemnification obligations Navient has include:

Navient will indemnify the Company and the Bank for any liabilities, costs or expenses they may incur arising from any action or threatened action related to the servicing, operations and collections activities of pre-Spin-Off SLM and its subsidiaries with respect to Private Education Loans and FFELP Loans that were assets of the Bank or Navient at the time of the Spin-Off; provided that written notice is provided to Navient on or prior to April 30, 2017, the third anniversary date of the Spin-Off. Navient will not indemnify for changes in law or changes in prior existing interpretations of law that occur on or after April 30, 2014.

At the time of this filing, the Bank remains subject to the FDIC Consent Order and the DOJ Consent Order. Under the terms of the Separation and Distribution Agreement, Navient is responsible for funding all liabilities under the regulatory orders and, as of the date hereof, has funded all liabilities other than fines directly levied against the Bank in connection with these matters which the Bank is required to pay.

Pursuant to a tax sharing agreement, Navient has agreed to indemnify us for $283 million in deferred taxes that the Company will be legally responsible for but that relate to gains recognized by the Company’s predecessor on debt repurchases made prior to the Spin-Off. The remaining amount of this indemnification at December 31, 2016 was $116 million. In connection with the Spin-Off, we also recorded a liability related to uncertain tax positions of $27 million for which we are indemnified by Navient. As of December 31, 2016, the remaining balance of the indemnification receivable related to those uncertain tax positions was $28 million. In addition, we believe we are indemnified by Navient for uncertain tax positions relating to historical transactions among entities that are now subsidiaries of Navient that should have been recorded at the time of the Spin-Off. The remaining balance of the indemnification receivable related to these uncertain tax positions also was $116 million at December 31, 2016. See Notes to the Consolidated Financial Statements, Note 2, “Significant Accounting Policies — Correction Recorded in the Current Period” and “—Income Taxes,” for additional details.

The Separation and Distribution Agreement provides specific processes and procedures pursuant to which we may submit claims for indemnification to Navient and, to date, Navient has acknowledged and accepted substantially all claims that we have submitted. Nonetheless, if for any reason Navient is unable or unwilling to pay claims made against it, our costs, operating expenses, cash flows and financial condition could be materially and adversely affected over time.
Sallie Mae and Navient are each subject to restrictions under a tax sharing agreement between them, and a violation of the tax sharing agreement may result in tax liability to Sallie Mae and to its stockholders.
In connection with the Spin-Off, we entered into a tax sharing agreement with Navient to preserve the tax-free treatment of the separation and distribution of Navient. Under this tax sharing agreement, both we and Navient are restricted from engaging in certain transactions that could prevent the Spin-Off from being tax-free to us and our stockholders at the time of the Spin-Off for U.S. federal income tax purposes. If Navient fails to comply with the restrictions in the tax sharing agreement and as a result the Spin-Off is determined to have been taxable for U.S. federal income tax purposes, we and our stockholders at the time of the Spin-Off that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities. Although the tax sharing agreement provides that Navient is required to indemnify the Company for taxes incurred that may arise were Navient to fail to comply with its obligations under the tax sharing agreement, there is no assurance that Navient will have the funds to satisfy that liability. Also, Navient will not be required to indemnify our stockholders for any tax liabilities they may incur for Navient’s violation of the tax sharing agreement.
Risks Related to Our Securities
Our common and preferred stock prices may fluctuate significantly.

31


The market price of shares of our common stock may fluctuate significantly due to a number of factors, some of which may be beyond our control, including:
Actual or anticipated fluctuations in our operating results;
Our smaller market capitalization as compared to pre-Spin-Off SLM;
Changes in earnings estimated by securities analysts or our ability to meet those estimates;
Our policy of paying no common stock dividends;
The operating and stock price performance of comparable companies;
News reports relating to trends, concerns and other issues in the student loan industry or other parts of the financial services industry, including regulatory actions against other financial institutions;
Perceptions in the marketplace regarding us and/or our competitors;
New technology used, or services offered, by competitors;
Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors;
Changes to the regulatory and legal environment under which we and our subsidiaries operate;
Our ability to securitize our Private Education Loans; and
Domestic and worldwide economic conditions.
The market price of shares of our preferred stock may fluctuate significantly due to a number of factors, some of which may be beyond our control, including:
Significant sales of our preferred stock, or the expectation of significant sales;
Lack of credit agency ratings;
Movements in interest rates and spreads that negatively affect return; and
Call and redemption features.
In addition, when the market price of a company’s common stock drops significantly, stockholders often institute securities class action lawsuits against the company. A securities class action lawsuit against the Company could cause it to incur substantial costs and could divert the time and attention of its management and other resources, which could materially adversely affect our business, financial condition and results of operations.
An investment in our securities is not an insured deposit.
Our common stock, preferred stock and indebtedness are not bank deposits and, therefore, are not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of securities of any company. As a result, if you acquire our common stock, preferred stock or indebtedness, you may lose some or all of your investment.
The holders of our preferred stock have rights that are senior to those of our common shareholders.
At December 31, 2016, we had issued and outstanding 3.3 million shares of our 6.97 percent Cumulative Redeemable Preferred Stock, Series A and 4.0 million shares of our Floating-Rate Non-Cumulative Preferred Stock, Series B.
Our preferred stock is senior to our shares of common stock in right of payment of dividends and other distributions. We must be current on dividends payable to holders of preferred stock before any dividends can be paid on our common stock. In

32


the event of our bankruptcy, dissolution or liquidation, the holders of our preferred stock must be satisfied before any distributions can be made to our common shareholders.
Our ability to pay dividends on our common stock can be subject to regulatory restrictions.
We have not paid dividends on our common stock since the Spin-Off, and we do not expect to do so for the foreseeable future. However, should we choose to do so, we are dependent on funds obtained from the Bank to fund dividend payments. Regulatory and other legal restrictions may limit our ability to transfer funds freely, either to or from our subsidiaries. In particular, the Bank is subject to laws and regulations that authorize regulatory bodies to block or reduce the flow of funds to us, or that prohibit such transfers altogether in certain circumstances. These laws, regulations and rules may hinder our ability to access funds that we may need to make payments on our obligations. The FDIC has the authority to prohibit or limit the payment of dividends by the banking organizations it supervises, including us and our bank subsidiaries.
Restrictions on Ownership
The ability of a third-party to acquire us is limited under applicable U.S. and state banking laws and regulations.
Under the Change in Bank Control Act of 1978, as amended (“CIBC Act”), the FDIC’s regulations thereunder, and similar Utah banking laws, any person, either individually or acting through or in concert with one or more other persons, must provide notice to, and effectively receive prior approval from, the FDIC and UDFI before acquiring “control” of us.  In practice, the process for obtaining such approval is complicated and time-consuming, often taking longer than six months, and a proposed acquisition may be disapproved for a variety of factors, including, but not limited to, antitrust concerns, financial condition and managerial competence of the applicant, and failure of the applicant to furnish all required information. Under the FDIC’s CIBC Act regulations, control is rebuttably presumed to exist, and notice is required, where a person owns, controls or holds with the power to vote 10 percent or more of any class of our voting shares and no other person owns, controls or holds with the power to vote a greater percentage of that class of voting shares.
Item 1B. Unresolved Staff Comments
None.


33


Item 2. Properties

The following table lists the principal facility owned by us as of December 31, 2016:
 
Location
 
Function
 
Approximate
Square Feet
Newark, DE
 
Headquarters
 
160,000
 
The following table lists the principal facilities leased by us as of December 31, 2016:
 
Location
 
Function
 
Approximate
Square Feet
Indianapolis, IN
 
Loan Servicing Center
 
76,000

Newton, MA
 
Administrative Offices
 
24,000

Reston, VA
 
Administrative Offices
 
20,000

Salt Lake City, UT
 
Sallie Mae Bank
 
11,400

The facility that we own is not encumbered by a mortgage. We believe that our headquarters, loan servicing centers, data center, back-up facility and data management and collection centers are generally adequate to meet our long-term lending and business goals. Our headquarters are currently located in owned space at 300 Continental Drive, Newark, Delaware, 19713.



34


Item 3.
Legal Proceedings
We and our subsidiaries and affiliates are subject to various claims, lawsuits and other actions that arise in the normal course of business. It is common for the Company, our subsidiaries and affiliates to receive information and document requests and investigative demands from state attorneys general, legislative committees and administrative agencies. These requests may be for informational or regulatory purposes and may relate to our business practices, the industries in which we operate, or other companies with whom we conduct business. Our practice has been and continues to be to cooperate with these bodies and be responsive to any such requests.
Pursuant to the terms of the Spin-Off and applicable law, Navient assumed responsibility for all liabilities (whether accrued, contingent or otherwise and whether known or unknown) arising out of or resulting from the conduct of pre-Spin-Off SLM and its subsidiaries’ businesses prior to the Spin-Off, other than certain specifically identified liabilities relating to the conduct of our consumer banking business. Nonetheless, given the prior usage of the Sallie Mae and SLM names by entities now owned by Navient, we and our subsidiaries may from time to time be improperly named as defendants in legal proceedings where the allegations at issue are the legal responsibility of Navient. Most of these legal proceedings involve matters that arose in whole or in part in the ordinary course of business of pre-Spin-Off SLM. Likewise, as the period of time since the Spin-Off increases, so does the likelihood any allegations that may be made may be in part for our own actions in a post-Spin-Off time period and in part for Navient’s conduct in a pre-Spin-Off time period. We will not be providing information on these proceedings unless there are material issues of fact or disagreement with Navient as to the bases of the proceedings or responsibility therefor that we believe could have a material, adverse impact on our business, assets, financial condition, liquidity or outlook if not resolved in our favor.
Regulatory Update
At the time of this filing, the Bank remains subject to the FDIC Consent Order and the DOJ Consent Order. On May 13, 2014, the Bank reached a settlement with the DOJ, and agreed to the DOJ Consent Order, regarding compliance issues with the SCRA. At the same time, the Bank reached a settlement with the FDIC regarding disclosures and assessments of certain late fees, as well as compliance with the SCRA. Under the FDIC Consent Order, the Bank agreed to pay $3.3 million in fines and oversee the refund of up to $30 million in late fees assessed on loans owned or originated by the Bank since its inception in November 2005. The DOJ Consent Order was approved by the U.S. District Court for the District of Delaware on September 29, 2014. Under the terms of the Separation and Distribution Agreement, Navient is responsible for funding all liabilities under the regulatory orders and, as of the date hereof, has funded all liabilities other than fines directly levied against the Bank in connection with these matters which the Bank is required to pay.
We believe the Bank has complied with all the requirements of the FDIC Consent Order and the DOJ Consent Order. This includes implementing new SCRA policies, procedures and training, updated billing statement disclosures, steps to ensure its third-party service providers are also fully compliant in these regards, and overseeing Navient’s restitution responsibilities. Notwithstanding the assumption by the CFPB of the role of the Bank’s primary consumer compliance regulator in January 2015, the FDIC will continue to monitor the Bank’s improved compliance management system, policies and procedures until it is satisfied the Bank has demonstrated its ability to sustain the enhancements and additions implemented in response to the FDIC Consent Order. Pursuant to the terms of the DOJ Consent Order, the Bank will remain subject to certain DOJ reporting and record-keeping requirements until September 29, 2018.
In May 2014, the Bank received a CID from the CFPB as part of the CFPB’s separate investigation relating to customer complaints, fees and charges assessed in connection with the servicing of student loans and related collection practices of pre-Spin-Off SLM by entities now subsidiaries of Navient during a time period prior to the Spin-Off. Two state attorneys general provided the Bank identical CIDs and other state attorneys general have become involved in the inquiry over time. To the extent requested, the Bank has been cooperating fully with the CFPB and the attorneys general but is not in a position at this time to predict the duration or outcome of these matters. Given the timeframe covered by the CIDs and the focus on practices and procedures previously conducted by Navient and its servicing subsidiaries prior to the Spin-Off, as contemplated by the Separation and Distribution Agreement relating to, and the structure of, the Spin-Off, Navient is leading the response to these investigations, is legally responsible for, and has accepted responsibility to indemnify the Company against all costs, expenses, losses and remediation that may arise from these matters. Additionally, on January 18, 2017, the Illinois Attorney General filed a separate lawsuit against Navient - its subsidiaries Navient Solutions, Inc., Pioneer Credit Recovery, Inc., and General Revenue

35


Corporation - and the Bank arising out of the aforementioned multi-state investigation of various lending, servicing, and collection practices. As contemplated by the Separation and Distribution Agreement relating to, and the structure of, the Spin-Off, Navient is legally responsible for, and has accepted responsibility to indemnify the Company against, all costs, expenses, losses and remediation that may arise from these matters.
On January 18, 2017, the CFPB filed a complaint in federal court in Pennsylvania against Navient, along with its subsidiaries, Navient Solutions, Inc., and Pioneer Credit Recovery, Inc. The complaint alleges these Navient entities, among other things, engaged in deceptive practices with respect to its historic servicing and debt collection practices. Neither SLM, the Bank, nor any of their current subsidiaries are named in, or otherwise a party to, the lawsuit and are not alleged to have engaged in any wrongdoing.
Item 4.
Mine Safety Disclosures
N/A

36



PART II.
Item  5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed and has traded on the Nasdaq Global Select Market (“Nasdaq”) under the symbol SLM since December 12, 2011. Previously, our common stock was listed and traded on the New York Stock Exchange. As of January 31, 2017, there were 429,101,108 shares of our common stock outstanding and 384 holders of record. The following table sets forth the high and low sales prices for our common stock for each full quarterly period within the two most recent fiscal years.
Common Stock Prices
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
2016
 
High
 

$6.61

 

$7.19

 

$7.58

 

$11.52

 
 
Low
 
5.38

 
5.58

 
6.11

 
6.98

 
 
 
 
 
 
 
 
 
 
 
2015
 
High
 

$10.32

 

$10.70

 

$10.02

 

$7.32

 
 
Low
 
8.97

 
9.38

 
7.40

 
6.31


For the years ended December 31, 2016 and 2015, we have not paid dividends on our common stock and we do not currently anticipate paying dividends on our common stock.


37


Issuer Purchases of Equity Securities

The following table provides information relating to our purchase of shares of our common stock in the three months ended December 31, 2016.
We do not intend to initiate share repurchase programs as a means to return capital to shareholders. We only expect to repurchase common stock acquired as a result of taxes withheld in connection with award exercises and vesting under our employee stock-based compensation plans. 
(In thousands, except per share data)
Total Number
of Shares
Purchased(1)
 
Average Price
Paid per
Share 
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs  
 
Approximate Dollar
Value
of Shares That
May Yet Be
Purchased  Under
Publicly Announced
Plans or
Programs
Period:
 
 
 
 
 
 
 
October 1 - October 31, 2016
46

 
$
7.02

 

 

November 1 - November 30, 2016
1,103

 
$
9.02

 

 

December 1 - December 31, 2016
443

 
$
10.84

 

 

 
 

 
 

 
 

 
 
Total fourth-quarter 2016
1,592

 
$
9.47

 

 
 
     _
(1) 
All shares purchased are shares of our common stock tendered to us to satisfy the exercise price in connection with cashless exercises of stock options, and tax withholding obligations in connection with exercise of stock options and vesting of restricted stock and restricted stock units.

The closing price of our common stock on Nasdaq on December 30, 2016 was $11.02.

38



Stock Performance

The following graph compares the five-year cumulative total returns of SLM Corporation, the S&P Midcap 400 Index and the KBW Bank Index.
This graph assumes $100 was invested in the stock or the relevant index on December 31, 2011, and also assumes the reinvestment of dividends through December 31, 2016, including the Company’s distribution to its shareholders of one share of Navient Corporation common stock for every share of SLM Corporation on April 30, 2014. For the purpose of this graph, the Navient Corporation distribution is treated as a non-taxable cash dividend of $16.56 that would have been reinvested in SLM Corporation common stock at the close of business on April 30, 2014.

Five-Year Cumulative Total Stockholder Return
image2a50.jpg
Company/Index
12/31/11
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
SLM Corporation

$100.0


$131.9


$207.6


$229.6


$146.9


$248.3

S&P Midcap 400 Index
100.0

116.1

152.7

165.2

159.1

188.9

KBW Bank Index
100.0

130.2

175.9

188.6

185.6

233.1

_________
Source: Bloomberg Total Return Analysis





39



Item 6.
Selected Financial Data.
Selected Financial Data 2012-2016
(Dollars in millions, except per share amounts)
The following table sets forth our selected financial and other operating information. The selected financial data in the table is derived from our consolidated financial statements. The data should be read in conjunction with the consolidated financial statements, related notes, and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 
 
2016
 
2015
 
2014
 
2013
 
2012
Operating Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
891

 
$
702

 
$
578

 
$
462

 
$
408

Non-interest income
 
$
69

 
$
183

 
$
157

 
$
298

 
$
267

Total revenue
 
$
960

 
$
885

 
$
735

 
$
760

 
$
675

Net income attributable to SLM Corporation
 
$
250

 
$
274

 
$
194

 
$
259

 
$
218

Basic earnings per common share attributable to SLM Corporation
 
$
0.54

 
$
0.60

 
$
0.43

 
$
0.59

 
$
0.46

Diluted earnings per common share attributable to SLM Corporation
 
$
0.53

 
$
0.59

 
$
0.42

 
$
0.58

 
$
0.45

Dividends per common share attributable to SLM Corporation common shareholders(1)
 
$

 
$

 
$

 
$
0.60

 
$
0.50

Return on common stockholders’ equity
 
14
%
 
18
%
 
15
%
 
22
%
 
18
%
Net interest margin
 
5.68

 
5.49

 
5.26

 
5.06

 
5.54

Return on assets
 
1.52

 
2.04

 
1.68

 
2.70

 
2.84

Average equity/average assets
 
13.40

 
14.49

 
13.92

 
12.50

 
15.49

Non-GAAP operating efficiency ratio(2)
 
40
%
 
47
%
 
45
%
 
49
%
 
61
%
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Total education loan portfolio, net
 
$
15,125

 
$
11,631

 
$
9,510

 
$
7,931

 
$
6,487

Total assets
 
18,533

 
15,214

 
12,972

 
10,707

 
9,084

Total deposits
 
13,436

 
11,488

 
10,541

 
9,002

 
7,497

Total borrowings
 
2,168

 
1,079

 

 

 

Total SLM Corporation stockholders’ equity
 
2,347

 
2,096

 
1,830

 
1,161

 
1,089

Book value per common share
 
4.15

 
3.59

 
2.99

 
2.71

 
2.41

_________
(1) Following completion of the Spin-Off, SLM has not paid dividends on its common stock and it does not anticipate paying dividends on its common stock in 2017.
(2) Our operating efficiency ratio is a non-GAAP measure because we adjust (a) the total non-interest expense numerator by deducting restructuring and other reorganization expenses, and (b) the net revenue denominator (which otherwise would consist of net interest income, before provisions for credit losses, plus non-interest income) by deducting gains on sales of loans, net. We believe doing so provides useful information to investors because it is a measure used by our management team to monitor our effectiveness in managing operating expenses. Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate our ratio. Accordingly, our non-GAAP operating efficiency ratio may not be comparable to similar measures used by other companies.


40



Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis also contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in “Forward-Looking and Cautionary Statements” and Item 1A. “Risk Factors” in this Annual Report on Form 10-K.
Through this discussion and analysis, we intend to provide the reader with some narrative context for how our management views our consolidated financial statements, additional context within which to assess our operating results, and information on the quality and variability of our earnings, liquidity and cash flows.

Overview
The following discussion and analysis presents a review of our business and operations as of and for the year ended December 31, 2016.
On April 30, 2014, we completed the Spin-Off and separated pre-Spin-Off SLM into two distinct publicly traded entities: Navient and SLM.
For periods before the Spin-Off, the financial information contained in this report and in the accompanying consolidated balance sheets, statements of income, changes in equity, and cash flows is presented on a basis of accounting that reflects a change in reporting entity and has been adjusted for the effects of the Spin-Off. These carved-out financial statements and selected financial information represent only those operations, assets, liabilities and equity that form SLM 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 comparably determined carved-out amounts. The year ended December 31, 2015 was the first full year where the financial results did not include the effect of carved-out amounts.
For more information regarding the basis of presentation of these statements, see Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies — Basis of Presentation.” Since the Spin-Off, we have completed the operational separation of our servicing platforms and personnel from Navient, established our own new loan originations platform, and made changes to policies to further conform to the applicable regulations and procedures of our prudential and consumer protection regulators. While we still have certain ongoing business arrangements with Navient, we now consider our operational separation from Navient to be complete. The following discussion and analysis provides more detail regarding the steps taken and costs incurred to complete this operational separation in 2015. For a more detailed description of ongoing arrangements among the Company and Navient, see Notes to Consolidated Financial Statements, Note 16, “Arrangements with Navient Corporation.”
Key Financial Measures
Set forth below are brief summaries of our key financial measures. Our operating results are primarily driven by net interest income from our Private Education Loan portfolio, gains and losses on loan sales, provision expense for credit losses, and operating expenses. The growth of our business and the strength of our financial condition are primarily driven by our ability to achieve our annual Private Education Loan origination goals while sustaining credit quality and maintaining cost-efficient funding sources to support our originations.
Net Interest Income
Most of our earnings are generated from the interest income earned on assets in our education loan portfolios, net of the interest expense we pay on the funding for these loans. We report these earnings as net interest income. We also often refer to the net interest margin, which is the net interest yield earned on a portfolio less the rate paid on our related interest bearing liabilities. The majority of our interest income comes from our Private Education Loan portfolio. FFELP Loans have a lower net interest yield and carry lower risk than Private Education Loans, as a result of the federal government guarantee supporting FFELP Loans. We do not expect to acquire more FFELP Loans, and the balance of our FFELP Loan portfolio is expected to decline due to normal amortization.

41


Loan Sales and Secured Financings
We may sell Private Education Loans to third-parties through securitizations and an auction process. We retain servicing of these Private Education Loans subsequent to their sale and earn revenue for this servicing at prevailing market rates for such services. Selling Private Education Loans removes the loan assets from our balance sheet and helps us manage our asset growth, capital and liquidity needs. Alternatively, we may use Private Education Loans as collateral in connection with the creation of asset-backed securitizations or securitized commercial paper facilities structured as financings. These types of transactions may provide us long-term financing, but they do not remove Private Education Loan assets from our balance sheet, nor do they generate gains on sales of loans, net. Consequently, our operating results may be significantly affected by whether we choose to sell loans and recognize current gains on sale or continue to hold or finance loans, thereby retaining some or all of the net interest income from those loans. See Notes to Consolidated Financial Statements, Note 10, “Private Education Loan Term Securitizations,” for further discussion regarding these transactions. We did not sell loans in 2016 and currently do not expect to sell loans in 2017.
Allowance for Loan Losses
Management estimates and maintains an allowance for loan losses for Private Education Loans at a level sufficient to cover charge-offs expected over the next year, plus an additional allowance to cover life-of-loan expected losses for loans classified as a troubled debt restructuring (“TDR”). See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Allowance for Loan Losses.” Allowances for loan losses are an important indicator of management’s perspective on the future performance of a loan portfolio. Each quarter, management makes an adjustment to the allowance for loan losses for Private Education Loans to reflect its most up-to-date estimate of future losses by recording a charge against quarterly revenues known as provision expense. As they occur, actual loan charge-offs and recoveries are then charged or credited, respectively, against the allowance for loan losses for Private Education Loans rather than against earnings.
The allowance for loan losses and provision expense rise when future charge-offs are expected to increase and fall when future charge-offs are expected to decline. We bear the full credit exposure on our Private Education Loans. Losses on our Private Education Loans are affected by risk characteristics such as loan status (in-school, grace, forbearance, repayment and delinquency), loan seasoning (number of months in active repayment), underwriting criteria (e.g., credit scores), presence of a cosigner and the current economic environment. Losses typically emerge once a borrower separates from school and enters full principal and interest repayment after the borrower’s six month grace period ends. Our experience indicates that approximately 50 percent of expected losses on loans occur in the first two years after a loan enters full principal and interest repayment. Therefore, changes in our allowance for loan losses will be driven in large measure by the amount and age of our loans in full principal and interest repayment. As a larger proportion of our portfolio enters full principal and interest repayment in the coming years, we would expect the amount of TDRs, as well as our allowance for loan losses and charge-offs, to increase.
Our allowance for loan losses for FFELP Loans and related periodic provision expense are small because we generally bear a maximum of three percent loss exposure due to the federal guarantee. We maintain an allowance for loan losses for our FFELP Loans at a level sufficient to cover charge-offs expected over the next two years.
Charge-Offs and Delinquencies
Delinquencies are another important indicator of potential future credit performance. When a Private Education Loan reaches 120 days delinquent, it is charged against the allowance for loan losses. Charge-off data provides relevant information with respect to the actual performance of a loan portfolio over time. Management focuses on delinquencies as well as the progression of loans from early to late stage delinquency as a key metric in estimating the allowance for loan losses and tailoring its future collections strategies. Prior to the Spin-Off, the Bank would sell delinquent loans to an entity that is now a subsidiary of Navient when the loans became 90 days delinquent. As a result, there were no charge-offs recorded against our allowance for loan losses prior to April 1, 2014. In addition, because loans were sold earlier in their delinquency status prior to the Spin-Off, delinquency statistics for those periods are not comparable to those post-Spin-Off and are not indicative of expected future performance. Since the Spin-Off, the Bank has been responsible for collecting all delinquent loans and, until late 2015, all charged-off loans were sold to a third-party. In November 2015, we began to retain and collect on a portion of our charged-off loans using our own collection personnel. The levels of delinquencies since the Spin-Off have been additionally affected somewhat by these changes in collection approach. In the future, we expect to manage our charged-off loans through a mix of in-house collectors, third-party collectors and third-party sales.

42


Operating Expenses
The cost of operating our business directly affects our profitability. Since the Spin-Off, our operating expenses include those that are directly attributable to running our business, as well as the costs of building out our servicing and origination platforms and establishing the Company as a stand-alone entity. We separately disclose “restructuring and other reorganization expenses,” which represent costs we believe are one-time in nature and directly attributable to completing the Spin-Off.
We continue to measure our effectiveness in managing operating expenses by monitoring our non-GAAP operating efficiency ratio. Our operating efficiency ratio is a non-GAAP measure because we adjust (a) the total non-interest expense numerator by deducting restructuring and other reorganization expenses, and (b) the net revenue denominator (which otherwise would consist of net interest income, before provisions for credit losses, plus non-interest income) by deducting gains on sales of loans, net. We believe doing so provides useful information to investors because it is a measure used by our management team to monitor our effectiveness in managing operating expenses. Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate our ratio. Accordingly, our non-GAAP operating efficiency ratio may not be comparable to similar measures used by other companies. Our long-term objective is to achieve steady declines in this ratio over the next several years.
Core Earnings
We prepare financial statements in accordance with GAAP. However, we also produce and report our after-tax earnings on a separate basis which we refer to as “Core Earnings.” While pre-Spin-Off SLM also reported a metric by that name, what we now report and what we describe below is significantly different and should not be compared to any Core Earnings reported by pre-Spin-Off SLM. The difference between our “Core Earnings” and GAAP results for periods presented generally is driven by the unrealized, mark-to-market gains (losses) on derivatives contracts recognized in GAAP, but not in “Core Earnings.”
“Core Earnings” recognizes the difference in accounting treatment based upon whether a derivative qualifies for hedge accounting treatment and eliminates the earnings impact associated with hedge ineffectiveness and derivatives we use as an economic hedge but which do not qualify for hedge accounting treatment. We enter into derivatives instruments to economically hedge interest rate and cash flow risk associated with our portfolio. We believe that our derivatives are effective economic hedges, and as such, are a critical element of our interest rate risk management strategy. Those derivative instruments that qualify for hedge accounting treatment have their related cash flows recorded in interest income or interest expense along with the hedged item. Hedge ineffectiveness related to these derivatives is recorded in “(Losses) gains on derivatives and hedging activities, net.” Some of our derivatives do not qualify for hedge accounting treatment and the stand-alone derivative must be marked-to-fair value in the income statement with no consideration for the corresponding change in fair value of the hedged item. These gains and losses, recorded in “(Losses) gains on derivative and hedging activities, net,” are primarily caused by interest rate volatility and changing credit spreads during the period as well as the volume and term of derivatives not receiving hedge accounting treatment. Cash flows on derivative instruments that do not qualify for hedge accounting are not recorded in interest income and interest expense; they are recorded in non-interest income: “(Losses) gains on derivative and hedging activities, net.”
The adjustments required to reconcile from our “Core Earnings” results to our GAAP results of operations, net of tax, relate to differing treatments for our derivative instruments used to hedge our economic risks that do not qualify for hedge accounting treatment or that do qualify for hedge accounting treatment but result in ineffectiveness, net of tax. The amount recorded in “(Losses) gains on derivative and hedging activities, net” includes (a) the accrual of the current payment on the interest rate swaps that do not qualify for hedge accounting treatment, (b) the change in fair values related to future expected cash flows for derivatives that do not qualify for hedge accounting treatment and (c) ineffectiveness on derivatives that receive hedge accounting treatment. For purposes of “Core Earnings”, we are including in GAAP earnings the current period accrual amounts (interest reclassification) on the swaps and excluding the remaining ineffectiveness (and change in fair values for those derivatives not qualifying for hedge accounting treatment). “Core Earnings” is meant to represent what earnings would have been had these derivatives qualified for hedge accounting and there was no ineffectiveness.
“Core Earnings” are not a substitute for reported results under GAAP. We provide a “Core Earnings” basis of presentation because (i) earnings per share computed on a “Core Earnings” basis is one of several measures we utilize in establishing management incentive compensation and (ii) we believe it better reflects the financial results for derivatives that are economic hedges of interest rate risk but which do not qualify for hedge accounting treatment.
GAAP provides a uniform, comprehensive basis of accounting. Our “Core Earnings” basis of presentation differs from GAAP in the way it treats derivatives as described above.

43


The following table shows the amount in “(Losses) gains on derivative and hedging activities, net” that relates to the interest reclassification on the derivative contracts.
 
 
Years Ended December 31,
(Dollars in thousands)
 
2016
 
2015
 
2014
 
 
 
 
 
 
 
Hedge ineffectiveness (losses) gains
 
$
(2,615
)
 
$
1,268

 
$
1,198

Unrealized (losses) gains on instruments not in a hedging relationship
 
(513
)
 
581

 
(2,944
)
Interest reclassification
 
2,170

 
3,451

 
(2,250
)
(Losses) gains on derivatives and hedging activities, net
 
$
(958
)
 
$
5,300

 
$
(3,996
)

The following table reflects adjustments associated with our derivative activities.
 
 
 
Years Ended December 31,
(Dollars in thousands, except per share amounts)
 
2016
 
2015
 
2014
 
 
 
 
 
 
 
Core Earningsadjustments to GAAP:
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP net income attributable to SLM Corporation
 
$
250,327

 
$
274,284

 
$
194,219

Preferred stock dividends
 
21,204

 
19,595

 
12,933

GAAP net income attributable to SLM Corporation common stock
 
$
229,123

 
$
254,689

 
$
181,286

 
 
 
 
 
 
 
Adjustments:
 
 
 
 
 
 
Net impact of derivative accounting(1)
 
3,127

 
(1,849
)
 
1,746

Net tax effect(2)
 
1,199

 
(711
)
 
659

Total “Core Earnings” adjustments to GAAP
 
1,928

 
(1,138
)
 
1,087

 
 
 
 
 
 
 
“Core Earnings” attributable to SLM Corporation common stock
 
$
231,051

 
$
253,551

 
$
182,373

 
 
 
 
 
 
 
GAAP diluted earnings per common share
 
$
0.53

 
$
0.59

 
$
0.42

Derivative adjustments, net of tax
 

 

 

“Core Earnings” diluted earnings per common share
 
$
0.53

 
$
0.59

 
$
0.42

______
(1) Derivative Accounting: “Core Earnings” exclude periodic unrealized gains and losses caused by the mark-to-market valuations on derivatives that do not qualify for hedge accounting treatment under GAAP, as well as the periodic unrealized gains and losses that are a result of ineffectiveness recognized related to effective hedges under GAAP. Under GAAP, for our derivatives held to maturity, the cumulative net unrealized gain or loss over the life of the contract will equal $0.

(2) “Core Earnings” tax rate is based on the effective tax rate at the Bank where the derivative instruments are held.


44


Private Education Loan Originations
Private Education Loans are the principal asset on our balance sheet, and the amount of new Private Education Loan originations we generate each year is a key indicator of the trajectory of our business, including our future earnings and asset growth.
Funding Sources
Deposits
We utilize brokered, retail and other core deposits to meet funding needs and enhance our liquidity position. These deposits can be term or liquid deposits. Term brokered deposits may have terms as long as seven years. Interest rates on most of our long-term deposits are swapped into one-month LIBOR. This structure has the effect of matching our interest rate exposure to the index on which our assets reset, thereby minimizing our financing cost exposure to interest rate risk. Retail deposits are sourced through a direct banking platform and serve as an important source of diversified funding. Brokered deposits are sourced through a network of brokers and provide a stable source of funding. In addition, we accept certain deposits that are considered non-brokered that are held in large accounts structured to allow FDIC insurance to flow through to underlying individual depositors. During 2016, we added $1.5 billion in deposits from Educational 529 and Health Savings Accounts as a way to diversify our funding sources. These and other large omnibus accounts, aggregating the deposits of many individual depositors, represented $5.4 billion of our deposit total as of December 31, 2016.
Loan Securitizations
We have diversified our funding sources by issuing term ABS and by entering into a Private Education Loan asset-backed commercial paper facility (the “ABCP Facility”). Term ABS financing provides long-term funding for our Private Education Loan portfolio at attractive interest rates and at terms that effectively match the average life of the assets. Loans associated with these transactions will remain on our balance sheet if we retain the residual interest in these trusts. The ABCP Facility provides an extremely flexible source of funds that can be drawn upon on short notice to meet funding needs within the Bank. Borrowings under our ABCP Facility are accounted for as secured financings.
2016 Management Objectives
For 2016, we set out the following major goals for ourselves: (1) prudently grow Private Education Loan assets and revenues; (2) maintain our strong capital position; (3) enhance our customers’ experience by further improving the delivery of our products and services; (4) sustain the consumer protection improvements we have made to our policies, procedures and compliance management system since the Spin-Off and further enhance our risk oversight infrastructure; (5) successfully launch one or more complementary new products to increase the level of engagement we have with our customers; and (6) manage operating expenses while improving efficiency.
The following describes our performance relative to each of these goals.
Prudently Grow Private Education Loan Assets and Revenues
We originated $4.7 billion in new Private Education Loans in 2016, compared with $4.3 billion in 2015, an increase of 8 percent. As our business, capital and balance sheet continued to grow, we were able to exceed our annual Private Education Loan origination targets for the year. This growth in originations was accomplished while maintaining our FICO scores and cosigner rates on our 2016 originations at levels similar to those at which we ended 2015. The average FICO scores at approval and the cosigner rates for originations for the year ended December 31, 2016 were 748 and 89 percent, compared with 749 and 90 percent in the year ended December 31, 2015.
Our allowance for loan losses for Private Education Loans was $182 million at December 31, 2016, compared with $109 million at the prior year-end. The provision expense on our Private Education Loans was $160 million for the year ended December 31, 2016, compared with $87 million in 2015.

45


Maintain Our Strong Capital Position
The Bank is required by its regulators, the UDFI and the FDIC, to maintain sufficient capital to support its assets and operations. At December 31, 2016, the Bank had a Common Equity Tier 1 risk-based capital ratio and a Tier 1 risk-based capital ratio of 12.6 percent, a Total risk-based capital ratio of 13.8 percent, and a Tier 1 leverage ratio of 11.1 percent, which are each well in excess of the current “well capitalized” standard for insured depository institutions and in line with the levels established by the Bank’s Board of Directors. In 2016, we completed our first Dodd-Frank Act Stress Test (“DFAST”) exercise, which demonstrated that our current capital levels are more than adequate to support our student loan portfolio even in times of severe adverse economic stress. For a further discussion of regulatory capital requirements, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Regulatory Capital” in this Form 10-K for the year ended December 31, 2016.
Enhance Customers’ Experience By Further Improving Delivery of Products and Services
The Spin-Off provided us the opportunity to redesign our processes, procedures and customer experiences exclusively around our Private Education Loan products, rather than accommodating the servicing of those products as well as FFELP and Direct Student Loans serviced under direction of the Department of Education (the “DOE”). In 2016, we continued to focus on our new servicing platform and processes to specifically target further simplifications in our customers’ Private Education Loan experience. Recent enhancements include:
All servicing is now conducted by in-house Sallie Mae associates;
Additional customer service sites have opened to provide redundancy during key processing periods;
We continued to provide agents with improved procedures and technology;
We increased our efforts to further clarify and simplify customer communications on important topics, such as payment options, by seeking to standardize information across platforms; and
We continued to expand functionality and information available to our customers online.
In 2016, we also implemented a customer feedback process, which provides us the ability to gain insights from customers at key points of interaction with us. This enables us to identify areas of opportunity and improve customer satisfaction on an ongoing basis.
Sustain Consumer Protection Improvements Made Since the Spin-Off and Further Enhance Our Risk Oversight Infrastructure
We continue to undertake significant work to establish that all customer protection policies, procedures and compliance management systems are sufficient to meet or exceed currently applicable regulatory standards. Our redesigned SCRA processes and procedures have the approval of the DOJ and all required restitution activities under the FDIC Consent Order and DOJ Consent Order have been completed. In 2014, we engaged a third-party firm to conduct independent audits of consumer protection processes and procedures, including our own compliance management system. At this time, that engagement is ongoing and we are nearing the end of our second full cycle of those audits. To date, these audits have produced no high risk findings.
During 2016, we continued the development of our Enterprise Risk Management capability, including significant advances in the Model Risk Management area and enhancements to our Governance, Risk and Compliance platform.  These programs contributed to our successful DFAST submission during the year. Additionally, the Manager’s Assessment of Risk and Controls entered its second year of use and is proving effective in assisting the first lines of defense in the management of their internal controls.   
Successfully Launch One or More Complementary New Products to Increase Level of Engagement With Customers
In 2015, our management team began to consider expanding the suite of products we provide to customers.  Given our limited time and experience with our new originations platform and servicing capabilities, we prioritized opportunities to focus first on those that can leverage our core competencies and capabilities, rather than require the development or acquisition of new or alternative ones. For example, in the first quarter of 2016, we leveraged our experience with our Smart Option Student Loan products by launching a Private Education Loan product permitting parents to borrow and fund their children’s education without a student co-borrower (“Parent Loans”). The Parent Loan program is designed for parents who wish to separately finance their children’s education, rather than cosign loans with their children. We believe there is a market for this product that

46


is separate from the Smart Option Student Loan market, and we believe our product is a competitive alternative to PLUS loans being offered by the DOE. This product complements our portfolio of Private Education Loan offerings, but did not have a material impact on 2016 earnings. We originated $31 million of Parent Loans in 2016.
In 2016, we also explored other product opportunities by researching products that will be easily understood and attractive to our customers.
Manage Operating Expenses While Improving Efficiency
We will continue to measure our effectiveness in managing operating expenses by monitoring our non-GAAP operating efficiency ratio. (See Item 6. “Selected Financial Data,” for the definition of this measure.) This ratio was 40.2 percent for the year ended December 31, 2016, compared with 46.8 percent and 45.3 percent for the years ended December 31, 2015 and 2014, respectively. The large improvement in the non-GAAP operating efficiency ratio in the year ended December 31, 2016 compared with the year-ago period was partially due to a $9 million increase in other income as a result of an increase in the tax indemnification receivable related to uncertain tax positions and the one-time $10 million change in reserve estimates related to our Upromise rewards business recorded in the first quarter of 2016. Excluding these two items, the non-GAAP operating efficiency ratio for the year ended December 31, 2016 would have been 41.1 percent.

2017 Management Objectives
In 2017, we intend to devote ourselves to further growing our business and improving our customers’ experience. We plan to do so by further continuing to improve the delivery of our products and services and incrementally adding to our product offerings to reinforce and expand our existing customer relationships and foster new ones.
For 2017, we have set out the following major goals for ourselves: (1) prudently grow our Private Education Loan assets and revenues while continuing to diversify the mix of our funding sources; (2) maintain our strong capital position; (3) enhance our customers’ experience by further improving the delivery of our products and services; (4) sustain the consumer protection improvements we have made since the Spin-Off and maintain our strong governance, risk oversight and compliance infrastructure; (5) continue our disciplined expansion of new products to increase the level of engagement we have with our existing customers and attract new customers; (6) manage operating expenses while improving efficiency; and (7) continue to promote a culture centered on our core values (collaboration, mutual respect, honesty, integrity, performance, and accountability), sustained through ongoing employee engagement, recognition and development, and aligned with our mission and business plan for growth. Here is how we plan to achieve these objectives:
Prudently Grow Private Education Loan Assets and Revenues
We will continue to pursue managed growth in our Private Education Loan portfolio in 2017 by leveraging our Sallie Mae brand, our relationship with more than two thousand colleges and universities, and our direct consumer marketing efforts. In order to help facilitate the expected increase in our Private Education Loan originations, we plan to continue diversifying the mix of our funding sources in 2017. We are determined to maintain overall credit quality and cosigner rates in our Smart Option Student Loan originations.
Maintain Our Strong Capital Position
We intend to maintain levels of capital at the Bank that significantly exceed those necessary to be considered “well capitalized” by the FDIC. The Company is a source of strength for the Bank and will obtain or provide additional capital as, and if, necessary to the Bank. We regularly evaluate the quality of assets, stability of earnings, and adequacy of our allowance for loan losses, and we continue to believe our existing capital levels are sufficient to support the Bank’s plan for significant growth over the next several years while remaining “well capitalized.” As our balance sheet grows in 2017, these ratios will decline but will remain significantly in excess of the capital levels required to be considered “well capitalized” by our regulators. We do not plan to pay a common stock dividend or repurchase shares in 2017 (except to repurchase common stock acquired as a result of taxes withheld in connection with award exercises and vesting under our employee stock-based compensation plans). 


47



Enhance Customers’ Experience By Further Improving Delivery of Products and Services
We have made significant improvements in our customers’ experience over the last two years, and we will continue to implement strategies and tactics to fulfill our brand and customer experience visions. In 2017, we will focus on initiatives that will further simplify the application, fulfillment and servicing experience for our customers, including:
Creating an integrated online origination and servicing experience with a single point of entry and improved customer messaging;
Providing enhanced functionality to our customers that will give them more flexibility to service their accounts online and over the phone; and
Continuing to support customers throughout the Private Education Loan experience with enhanced communication and tools.
Sustain Consumer Protection Improvements Made Since the Spin-Off and Maintain Our Strong Governance, Risk Oversight and Compliance Infrastructure
We have continued to undertake significant work to establish that all customer protection policies, procedures and compliance management systems are sufficient to meet or exceed currently applicable regulatory standards. Our redesigned SCRA processes and procedures received the approval of the DOJ and all required restitution activities under the FDIC Consent Order and DOJ Consent Order were completed in 2016. In compliance with the FDIC Consent Order, a third-party firm conducted independent audits of our consumer protection processes and procedures, including our compliance management system, with no high risk findings to date. We will continue to work closely with the FDIC in 2017 to demonstrate sustainability of the improvements made in connection with the FDIC Consent Order and will begin conducting our own audits of consumer protection processes and procedures, including our compliance management system, primarily using internal audit staff supplemented with staff from the same third-party firm that has conducted the compliance audits since 2014. Our goal is to sustain the improvements implemented to date and consistently comply with or exceed regulatory standards while continuing to improve our customers’ experience and satisfaction levels.
Continue Disciplined Expansion of New Products to Increase Level of Engagement With Our Existing Customers and Attract New Customers
In 2016, we began to expand the suite of products we provide to customers. We did so by leveraging our core competencies and capabilities, rather than requiring the development or acquisition of new or alternative ones. For example, we leveraged our experience with our Smart Option Student Loan products to launch a Parent Loan program designed for parents who wish to separately finance their children’s education, rather than cosign loans with their children.
In 2017, through an affiliation with another lender, we plan to launch a credit card program for young professionals. We do not expect this product to have a material impact on 2017 earnings. We also plan to continue developing our infrastructure in 2017 so that in early 2018 we have the capability to originate and service unsecured personal loans to be used for non-educational purposes. We will also continue to explore other product opportunities in 2017. In this process, we will place a high premium on designing and launching products that meet the needs of our existing customers, attract new customers, and assist both populations in achieving their financial goals. Any 2017 activity will focus on implementation success. We are not forecasting significant contributions to our originations, revenues or net income from any potential new products in 2017.
Manage Operating Expenses While Improving Efficiency
We will continue to measure our effectiveness in managing operating expenses by monitoring our operating efficiency ratio. We expect our operating efficiency ratio to decline steadily over the next several years as the number of loans on which we earn either net interest income or servicing revenue grows to a level commensurate with our loan origination platform and we control the growth of our expense base. Our operating efficiency ratio is a non-GAAP measure. See Item 6. “Selected Financial Data,” for more information about the measure.

48


Continue to Promote a Culture Centered on Our Core Values (Collaboration, Mutual Respect, Honesty, Integrity, Performance, and Accountability), Sustained Through Ongoing Employee Engagement, Recognition, and Development and Aligned with our Mission and Business Plan for Growth
In 2017, we plan to further promote a culture centered on our core values - collaboration, mutual respect, honesty, integrity, performance, and accountability - as we seek to grow our business. When evaluating employee performance, we will review not only what was accomplished by employees, but whether and how they demonstrated our core values in achieving those accomplishments. We will continue to encourage and enable high performance in a variety of ways, including by encouraging employee engagement, and differentiating, recognizing, and rewarding high performing employees. In addition, we plan to invest in our employees by identifying and providing development opportunities that align with our business plan and support succession plans throughout our organization.


49


Results of Operations
We present the results of operations below first on a consolidated basis in accordance with GAAP.
 GAAP Statements of Income
 
 
 
 
 
 
 
 
 
Increase (Decrease)
 
 
Years Ended December 31,
 
2016 vs. 2015
 
2015 vs. 2014
(Dollars in millions, except per share data)
 
2016
 
2015
 
2014
 
$
 
%
 
$
 
%
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
$
1,060

 
$
817

 
$
661

 
$
243

 
30
 %
 
$
156

 
24
 %
Investments
 
9

 
10

 
9

 
(1
)
 
(10
)
 
1

 
11

Cash and cash equivalents
 
8

 
4

 
4

 
4

 
100

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest income
 
1,077

 
831

 
674

 
246

 
30

 
157

 
23

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest expense
 
186

 
129

 
96

 
57

 
44

 
33

 
34

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
891

 
702

 
578

 
189

 
27

 
124

 
21

Less: provisions for credit losses
 
159

 
90

 
85

 
69

 
77

 
5

 
6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income after provisions for credit losses
 
732

 
612

 
493

 
120

 
20

 
119

 
24

Non-interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gains on sales of loans, net
 

 
135

 
121

 
(135
)
 
(100
)
 
14

 
12

(Losses) gains on derivatives and hedging activities, net
 
(1
)
 
5

 
(4
)
 
(6
)
 
(120
)
 
9

 
225

Other income
 
70

 
43

 
40

 
27

 
63

 
3

 
8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total non-interest income
 
69

 
183

 
157

 
(114
)
 
(62
)
 
26

 
17

Non-interest expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
 
385

 
349

 
275

 
36

 
10

 
74

 
27

Acquired intangible asset amortization expense
 
1

 
2

 
3

 
(1
)
 
(50
)
 
(1
)
 
(33
)
Restructuring and other reorganization expenses
 

 
5

 
38

 
(5
)
 
(100
)
 
(33
)
 
(87
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total non-interest expenses
 
386

 
356

 
316

 
30

 
8

 
40

 
13

 
 
 
 
 
 
 
 
 
 
 
 

 

Income before income tax expense
 
415

 
439

 
334

 
(24
)
 
(5
)
 
105

 
31

Income tax expense
 
165

 
165

 
140

 

 

 
25

 
18

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
250

 
274

 
194

 
(24
)
 
(9
)
 
80

 
41

Preferred stock dividends
 
21

 
19

 
13

 
2

 
11

 
6

 
46

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to SLM Corporation common stock
 
$
229

 
$
255

 
$
181

 
$
(26
)
 
(10
)%
 
$
74

 
41
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per common share attributable to SLM Corporation
 
$
0.54

 
$
0.60

 
$
0.43

 
$
(0.06
)
 
(10
)%
 
$
0.17

 
40
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per common share attributable to SLM Corporation
 
$
0.53

 
$
0.59

 
$
0.42

 
$
(0.06
)
 
(10
)%
 
$
0.17

 
40
 %



50


 GAAP Consolidated Earnings Summary

Year Ended December 31, 2016 Compared with Year Ended December 31, 2015

For the year ended December 31, 2016, net income was $250 million, or $.53 diluted earnings per common share, compared with net income of $274 million, or $.59 diluted earnings per common share, for the year ended December 31, 2015. The decrease in net income was primarily due to a $135 million decrease in gains on sales of loans, net, a $69 million increase in provisions for credit losses and a $30 million increase in total non-interest expenses, which were partially offset by a $189 million increase in net interest income and a $27 million increase in other income.
The primary contributors to each of the identified drivers of change in net income for the current year period compared with the year-ago period are as follows:
Net interest income increased by $189 million primarily due to a $2.9 billion increase in average Private Education Loans outstanding and a 19 basis point increase in net interest margin. Net interest margin increased primarily as a result of an increase in the ratio of higher yielding Private Education Loans relative to our other interest earning assets, which more than offset a 17 basis point increase in our cost of funds. Cost of funds increased primarily as a result of the full year impact of the increase in LIBOR rates that occurred at the end of 2015, as well as a $1.1 billion increase in the average balance of securitized financings that have a longer term and higher cost than retail and brokered deposits.
Provisions for credit losses increased $69 million compared with the year-ago period. This increase was primarily the result of an additional $1.0 billion loans entering repayment in the year ended December 31, 2016, compared with loans entering repayment in the year-ago period, and a $153 million increase in Private Education Loans becoming classified as TDRs (where we provide for life-of-loan losses) compared with Private Education Loans becoming classified as TDRs in the year-ago period. In the period in which Private Education Loans become classified as a TDR, we record a life of loan allowance against these loans through a charge to the provision for credit losses.
Gains on sales of loans, net, decreased $135 million in 2016 compared with the year-ago period, as there were no loan sales in 2016. In 2015, we sold $1.5 billion of loans through Private Education Loan sales and securitization transactions with third-parties. We discontinued the practice of selling loans in 2016 and chose to retain all loans originated on our balance sheet.
(Losses) gains on derivatives and hedging activities, net, resulted in a net loss of $1 million in 2016 compared with a gain of $5 million in the year-ago period. The primary factors affecting the change were interest rates and whether derivatives qualified for hedge accounting treatment. In 2016, we used fewer derivatives to economically hedge risk that qualified for hedge accounting treatment than we did in the year-ago period.
Other income increased $27 million compared with the year-ago period. Of this increase, $10 million relates to a one-time gain resulting from a change in reserve estimates for our Upromise rewards program. Also contributing to this increase is an increase in the tax indemnification receivable related to uncertain tax positions and an increase in third-party servicing income.
Total non-interest expenses were $386 million compared with $356 million in the year-ago period. Full-year operating expenses grew 10 percent year-over-year while the non-GAAP operating efficiency ratio decreased to 40.2 percent in 2016, from 46.8 percent in 2015. The improvement in the non-GAAP operating efficiency ratio was primarily due to the continued infrastructure efficiency as the portfolio grew, operational improvements resulting from 2015 customer experience investments, and, to a lesser extent, the one-time items recorded in other income during 2016.
The effective income tax rate increased to 39.6 percent in 2016 from 37.5 percent in 2015. The increase in the effective income tax rate for 2016 was primarily the result of an increase in uncertain tax positions. The uncertain tax positions contributing to the increase in our effective income tax rate had minimal impact to net income for the year as we recorded a largely matching offset in other income. For additional information regarding the uncertain tax positions, see Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies - Correction Recorded in the Current Period.”



51


Year Ended December 31, 2015 Compared with Year Ended December 31, 2014
For the year ended December 31, 2015, net income was $274 million, or $.59 diluted earnings per common share, compared with net income of $194 million, or $.42 diluted earnings per common share, for the year ended December 31, 2014. The increase in net income was primarily due to a $124 million increase in net interest income and a $14 million increase in net gains on sales of loans, which were partially offset by a $40 million increase in total expenses.
The primary contributors to each of the identified drivers of change in net income for 2015 compared with 2014 are as follows:
Net interest income increased by $124 million primarily due to a $2.3 billion increase in average Private Education Loans outstanding and a 22 basis point increase in net interest margin. Net interest margin increased primarily as a result of an increase in the ratio of higher yielding Private Education Loans relative to our other interest earning assets, which more than offset a 14 basis point increase in our cost of funds. Cost of funds increased primarily as a result of the use of higher cost funding such as our ABCP Facility and the issuance of $631 million in term ABS financing to third-parties in July 2015 (which term ABS financing has a significantly longer average life and higher cost than deposit funding). Costs of funds were also higher in 2015 because several interest rate swaps that were not designated for hedge accounting treatment for seven months of 2014 were designated for the full year of 2015. Therefore, all interest costs associated with these hedges were included in the cost of funds in 2015, as opposed to only five months of interest costs in 2014.
Provisions for credit losses for 2015 increased $5 million compared with 2014. This increase was primarily as a result of a $1.3 billion increase in Private Education Loans in repayment and a $206 million increase in Private Education Loans classified as TDRs (where we provide for life-of-loan losses). The impact on provision expense from loan sales in 2014 compared with 2015 was greater because we sold $306 million more in credit impaired loans in 2014 than in 2015. When we sell a credit impaired loan at a loss, the loss is recorded as additional provision expense. Also included in 2014 provision expense was a $14 million benefit from the change in our charge-off policy.
Gains on sales of loans, net, increased $14 million. In 2015, we sold $1.5 billion of loans through Private Education Loan sales and securitization transactions with third-parties. As a result, we recorded gains of $135 million. In 2014, we sold $1.9 billion of loans through Private Education Loan sales and a securitization transaction with third-parties and recorded gains of $121 million. Gains on sales of loans, net, were higher in 2015 as these loans were sold at a higher price.
Gains (losses) on derivatives and hedging activities, net, resulted in a net gain of $5 million in 2015 compared with a loss of $4 million in 2014. The primary factors affecting the change were interest rates and whether derivatives qualified for hedge accounting treatment. In 2015, we used more derivatives to economically hedge risk that qualified for hedge accounting treatment than we did in 2014.
Operating expenses were $349 million in 2015 compared with $275 million in 2014. The year-over-year increase in operating expenses was primarily the result of increased personnel costs related to being a stand-alone company and an increase in loans serviced for the Company and third-parties. In addition, we made investments in our servicing platform to improve customer service, such as expanding weekend service hours and improved response times. Operating expenses in 2014 benefited from an $8 million reversal of reserves for remediation costs relating to the FDIC Consent Order.
Restructuring and other reorganization expenses were $5 million in 2015 compared with $38 million in 2014. The decrease was primarily the result of the wind-down of our separation efforts related to the Spin-Off.
The effective tax rate decreased to 37.5 percent in 2015 from 41.9 percent in 2014. The decrease in the effective tax rate for 2015 was primarily the result of additional reserves recorded in fourth-quarter 2014 related to uncertain historical tax positions and the release of reserves for uncertain tax positions and lower state tax rates in 2015, as a result of the favorable outcome of several state matters.




52


Financial Condition
Average Balance Sheets - GAAP
The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities and reflects our net interest margin on a consolidated basis.  
 
 
Years Ended December 31,
 
 
2016
 
2015
 
2014
(Dollars in thousands)
 
Balance 
 
 
Rate 
 
 
Balance 
 
 
Rate 
 
 
Balance 
 
 
Rate 
 
Average Assets
 
 
 
 
 
 
 
 
 
 
 
 
Private Education Loans
 
$
12,747,756

 
8.02
%
 
$
9,819,053

 
7.93
%
 
$
7,563,356

 
8.16
%
FFELP Loans
 
1,063,325

 
3.53

 
1,179,723

 
3.26

 
1,353,497

 
3.24

Other loans
 
1,114

 
6.77

 

 

 

 

Taxable securities
 
407,860

 
2.24

 
395,718

 
2.59

 
331,479

 
2.68

Cash and other short-term investments
 
1,480,170

 
0.51

 
1,407,158

 
0.27

 
1,746,839

 
0.26

Total interest-earning assets
 
15,700,225

 
6.86
%
 
12,801,652

 
6.49
%
 
10,995,171

 
6.13
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest-earning assets
 
772,167

 
 
 
670,084

 
 
 
549,237

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
16,472,392

 
 
 
$
13,471,736

 
 
 
$
11,544,408

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
Brokered deposits
 
$
7,154,218

 
1.31
%
 
$
6,640,078

 
1.19
%
 
$
5,588,569

 
1.12
%
Retail and other deposits
 
5,095,631

 
1.06

 
3,869,359

 
0.95

 
3,593,817

 
0.92

Other interest-bearing liabilities(1)
 
1,476,740

 
2.58

 
398,851

 
3.27

 
26,794

 
0.91

Total interest-bearing liabilities
 
13,726,589

 
1.35
%
 
10,908,288

 
1.18
%
 
9,209,180

 
1.04
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing liabilities
 
539,153

 
 
 
610,715

 
 
 
727,806

 
 
Equity
 
2,206,650

 
 
 
1,952,733

 
 
 
1,607,422

 
 
Total liabilities and equity
 
$
16,472,392

 
 
 
$
13,471,736

 
 
 
$
11,544,408

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin
 
 
 
5.68
%
 
 
 
5.49
%
 
 
 
5.26
%
 

_________________
(1) 
For the years ended December 31, 2016 and 2015, includes the average balance of our secured borrowings and amortization expense of transaction costs related to our term asset-backed securitizations and our ABCP Facility.







53


Rate/Volume Analysis - GAAP

The following rate/volume analysis shows the relative contribution of changes in interest rates and asset volumes.
 
(Dollars in thousands)
 
Increase
(Decrease)
 
Change Due To(1)
 
Rate 
 
Volume
2016 vs. 2015
 
 
 
 
 
 
Interest income
 
$
246,128

 
$
49,394

 
$
196,734

Interest expense
 
57,289

 
20,924

 
36,365

Net interest income
 
$
188,839

 
$
25,007

 
$
163,832

 
 
 
 
 
 
 
2015 vs. 2014
 
 
 
 
 
 
Interest income
 
$
156,824

 
$
40,302

 
$
116,522

Interest expense
 
32,804

 
13,817

 
18,987

Net interest income
 
$
124,020

 
$
24,943

 
$
99,077

 
(1) 
Changes in income and expense due to both rate and volume have been allocated in proportion to the relationship of the absolute dollar amounts of the change in each. The changes in income and expense are calculated independently for each line in the table. The totals for the rate and volume columns are not the sum of the individual lines.
Summary of Our Education Loan Portfolio
Ending Education Loan Balances, net
 
 
 
December 31, 2016
 
December 31, 2015
(Dollars in thousands)
 
Private
Education
Loans 
 
FFELP
Loans
 
Total
Portfolio
 
Private
Education
Loans
 
FFELP
Loans
 
Total
Portfolio
Total education loan portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
In-school(1)
 
$
3,371,870

 
$
377

 
$
3,372,247

 
$
2,823,035

 
$
582

 
$
2,823,617

Grace, repayment and other(2)
 
10,879,805

 
1,010,531

 
11,890,336

 
7,773,402

 
1,115,081

 
8,888,483

Total, gross
 
14,251,675

 
1,010,908

 
15,262,583

 
10,596,437

 
1,115,663

 
11,712,100

Deferred origination costs and unamortized premium
 
44,206

 
2,941

 
47,147

 
27,884

 
3,114

 
30,998

Allowance for loan losses
 
(182,472
)
 
(2,171
)
 
(184,643
)
 
(108,816
)
 
(3,691
)
 
(112,507
)
Total education loan portfolio
 
$
14,113,409

 
$
1,011,678

 
$
15,125,087

 
$
10,515,505

 
$
1,115,086

 
$
11,630,591

 
 
 
 
 
 
 
 
 
 
 
 
 
% of total
 
93
%
 
7
%
 
100
%
 
90
%
 
10
%
 
100
%
_________ 
(1)      Loans for customers still attending school and who are not yet required to make payments on the loan.
(2)     Includes loans in deferment or forbearance.
 

54





 
 
December 31, 2014
 
December 31, 2013
(Dollars in thousands)
 
Private
Education
Loans 
 
FFELP
Loans
 
Total
Portfolio
 
Private
Education
Loans
 
FFELP
Loans
 
Total
Portfolio
Total education loan portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
In-school(1)
 
$
2,548,721

 
$
1,185

 
$
2,549,906

 
$
2,191,445

 
$
2,477

 
$
2,193,922

Grace, repayment and other(2)
 
5,762,655

 
1,263,622

 
7,026,277

 
4,371,897

 
1,424,495

 
5,796,392

Total, gross
 
8,311,376

 
1,264,807

 
9,576,183

 
6,563,342

 
1,426,972

 
7,990,314

Deferred origination costs and unamortized premium
 
13,845

 
3,600

 
17,445

 
5,063

 
4,081

 
9,144

Allowance for loan losses
 
(78,574
)
 
(5,268
)
 
(83,842
)
 
(61,763
)
 
(6,318
)
 
(68,081
)
Total education loan portfolio
 
$
8,246,647

 
$
1,263,139

 
$
9,509,786

 
$
6,506,642

 
$
1,424,735

 
$
7,931,377

 
 
 
 
 
 
 
 
 
 
 
 
 
% of total
 
87
%
 
13
%
 
100
%
 
82
%
 
18
%
 
100
%

_________ 
(1)  Loans for customers still attending school and who are not yet required to make payments on the loan.
(2)  Includes loans in deferment or forbearance.


 
 
December 31, 2012
(Dollars in thousands)
 
Private
Education
Loans
 
FFELP
Loans
 
Total
Portfolio
Total education loan portfolio
 
$
5,447,699

 
$
1,039,755

 
$
6,487,454

 
 
 
 
 
 
 
% of total
 
84
%
 
16
%
 
100
%


Average Education Loan Balances (net of unamortized premium/discount)

 
 
 
Years Ended December 31,
(Dollars in thousands)
 
2016
 
2015
 
2014
Private Education Loans
 
$
12,747,756

 
92
%
 
$
9,819,053

 
89
%
 
$
7,563,356

 
85
%
FFELP Loans
 
1,063,325

 
8

 
1,179,723

 
11

 
1,353,497