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EX-12.1 - EXHIBIT 12.1 - SLM Corpslm20170331ex121.htm
EX-31.2 - EXHIBIT 31.2 - SLM Corpslm20170331ex312.htm
EX-32.2 - EXHIBIT 32.2 - SLM Corpslm20170331ex322.htm
EX-32.1 - EXHIBIT 32.1 - SLM Corpslm20170331ex321.htm
EX-31.1 - EXHIBIT 31.1 - SLM Corpslm20170331ex311.htm
EX-10.3 - EXHIBIT 10.3 - SLM Corpslm20170331ex103.htm
EX-10.2 - EXHIBIT 10.2 - SLM Corpslm20170331ex102.htm
EX-10.1 - EXHIBIT 10.1 - SLM Corpslm20170331ex101.htm



 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
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 Number: 001-13251
 
SLM Corporation
(Exact name of registrant as specified in its charter)
 
Delaware
52-2013874
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
300 Continental Drive, Newark, Delaware
19713
(Address of principal executive offices)
(Zip Code)
(302) 451-0200
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
  þ
 
Accelerated filer
  ¨ 
Non-accelerated filer
  ¨
(Do not check if a smaller reporting company)
Smaller reporting company
  ¨
Emerging growth company
  ¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
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 whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨ No þ 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
Class
 
Outstanding at March 31, 2017
Common Stock, $0.20 par value
431,038,789 shares
 
 






SLM CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS
INDEX


Part I. Financial Information
 
 
Item 1.
Financial Statements
 
3
Item 1.
Notes to the Financial Statements
 
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
40
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
66
Item 4.
Controls and Procedures
 
70
PART II. Other Information
 
 
Item 1.
Legal Proceedings
 
71
Item 1A.
Risk Factors
 
72
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
72
Item 3.
Defaults Upon Senior Securities
 
72
Item 4.
Mine Safety Disclosures
 
73
Item 5.
Other Information
 
73
Item 6.
Exhibits
 
73



2



SLM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
 
 
March 31,
 
December 31,
 
 
2017
 
2016
Assets
 
 
 
 
Cash and cash equivalents
 
$
1,077,576

 
$
1,918,793

Available-for-sale investments at fair value (cost of $221,265 and $211,406, respectively)
 
216,896

 
208,603

Loans held for investment (net of allowance for losses of $187,086 and $184,701, respectively)
 
16,562,210

 
15,137,922

Restricted cash and investments
 
94,146

 
53,717

Other interest-earning assets
 
50,342

 
49,114

Accrued interest receivable
 
838,461

 
766,106

Premises and equipment, net
 
87,982

 
87,063

Tax indemnification receivable
 
261,033

 
259,532

Other assets
 
47,855

 
52,153

Total assets
 
$
19,236,501

 
$
18,533,003

 
 
 
 
 
Liabilities
 
 
 
 
Deposits
 
$
13,361,871

 
$
13,435,667

Long-term borrowings
 
2,837,347

 
2,167,979

Income taxes payable, net
 
234,414

 
184,324

Upromise member accounts
 
249,086

 
256,041

Other liabilities
 
118,427

 
141,934

Total liabilities
 
16,801,145

 
16,185,945

 
 
 
 
 
Commitments and contingencies
 

 

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

 
165,000

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

 
400,000

Common stock, par value $0.20 per share, 1.125 billion shares authorized: 440.4 million and 436.6 million shares issued, respectively
 
88,075

 
87,327

Additional paid-in capital
 
1,191,466

 
1,175,564

Accumulated other comprehensive loss (net of tax benefit of $4,132 and $5,364, respectively)
 
(6,691
)
 
(8,671
)
Retained earnings
 
684,165

 
595,322

Total SLM Corporation stockholders’ equity before treasury stock
 
2,522,015

 
2,414,542

Less: Common stock held in treasury at cost: 9.3 million and 7.7 million shares, respectively
 
(86,659
)
 
(67,484
)
Total equity
 
2,435,356

 
2,347,058

Total liabilities and equity
 
$
19,236,501

 
$
18,533,003


See accompanying notes to consolidated financial statements.

3



SLM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended
 
 
March 31,
 
 
2017
 
2016
Interest income:
 
 
 
 
Loans
 
$
324,757

 
$
245,230

Investments
 
2,143

 
2,591

Cash and cash equivalents
 
2,588

 
1,634

Total interest income
 
329,488

 
249,455

Interest expense:
 
 
 
 
Deposits
 
44,852

 
34,012

Interest expense on short-term borrowings
 
1,236

 
2,163

Interest expense on long-term borrowings
 
15,323

 
3,415

Other interest expense
 
1

 
2

Total interest expense
 
61,412

 
39,592

Net interest income
 
268,076

 
209,863

Less: provisions for credit losses
 
25,296

 
32,602

Net interest income after provisions for credit losses
 
242,780

 
177,261

Non-interest income:
 
 
 
 
Losses on derivatives and hedging activities, net
 
(5,378
)
 
(354
)
Other income
 
11,346

 
21,028

Total non-interest income
 
5,968

 
20,674

Non-interest expenses:
 
 
 
 
Compensation and benefits
 
55,464

 
50,209

FDIC assessment fees
 
7,229

 
4,176

Other operating expenses
 
39,984

 
38,500

Total operating expenses
 
102,677

 
92,885

Acquired intangible asset amortization expense
 
117

 
260

Total non-interest expenses
 
102,794

 
93,145

Income before income tax expense
 
145,954

 
104,790

Income tax expense
 
51,011

 
38,875

Net income
 
94,943

 
65,915

Preferred stock dividends
 
5,575

 
5,139

Net income attributable to SLM Corporation common stock
 
$
89,368

 
$
60,776

Basic earnings per common share attributable to SLM Corporation
 
$
0.21

 
$
0.14

Average common shares outstanding
 
429,891

 
427,111

Diluted earnings per common share attributable to SLM Corporation
 
$
0.20

 
$
0.14

Average common and common equivalent shares outstanding
 
438,735

 
430,903





See accompanying notes to consolidated financial statements.

4



SLM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
 
Three Months Ended
 
 
March 31,
 
 
2017
 
2016
Net income
 
$
94,943

 
$
65,915

Other comprehensive income (loss):
 
 
 
 
Unrealized (losses) gains on investments
 
(1,567
)
 
3,024

Unrealized gains (losses) on cash flow hedges
 
4,779

 
(24,374
)
Total unrealized gains (losses)
 
3,212

 
(21,350
)
Income tax (expense) benefit
 
(1,232
)
 
8,140

Other comprehensive income (loss), net of tax (expense) benefit
 
1,980

 
(13,210
)
Total comprehensive income
 
$
96,923

 
$
52,705


















See accompanying notes to consolidated financial statements.

5



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


 
 
 
 
Common Stock Shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock Shares
 
Issued
 
Treasury
 
Outstanding
 
Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained Earnings
 
Treasury Stock
 
Total Equity
Balance at December 31, 2015
 
7,300,000

 
430,677,434

 
(4,374,190
)
 
426,303,244

 
$
565,000

 
$
86,136

 
$
1,135,860

 
$
(16,059
)
 
$
366,609

 
$
(41,223
)
 
$
2,096,323

Net income
 

 

 

 

 

 

 

 

 
65,915

 

 
65,915

Other comprehensive loss, net of tax
 

 

 

 

 

 

 

 
(13,210
)
 

 

 
(13,210
)
Total comprehensive income
 

 

 

 

 

 

 

 

 

 

 
52,705

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

 

 

 

 

 

 

 

 
(2,875
)
 

 
(2,875
)
Preferred Stock, series B ($.56 per share)
 

 

 

 

 

 

 

 

 
(2,264
)
 

 
(2,264
)
Dividend equivalent units related to employee stock-based compensation plans
 

 

 

 

 

 

 
399

 

 
(399
)
 
 
 

Issuance of common shares
 

 
2,740,979

 

 
2,740,979

 

 
548

 
2,159

 

 

 

 
2,707

Tax benefit related to employee stock-based compensation
 

 

 

 

 

 

 
(2,132
)
 

 

 

 
(2,132
)
Stock-based compensation expense
 

 

 

 

 

 

 
6,216

 

 

 

 
6,216

Shares repurchased related to employee stock-based compensation plans
 

 

 
(1,128,709
)
 
(1,128,709
)
 

 

 

 

 

 
(6,755
)
 
(6,755
)
Balance at March 31, 2016
 
7,300,000

 
433,418,413

 
(5,502,899
)
 
427,915,514

 
$
565,000

 
$
86,684

 
$
1,142,502

 
$
(29,269
)
 
$
426,986

 
$
(47,978
)
 
$
2,143,925












See accompanying notes to consolidated financial statements.

6




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


 
 
 
 
 
Common Stock Shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock Shares
 
Issued
 
Treasury
 
Outstanding
 
Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings
 
Treasury Stock
 
Total Equity
Balance at December 31, 2016
 
7,300,000

 
436,632,479

 
(7,728,920
)
 
428,903,559

 
$
565,000

 
$
87,327

 
$
1,175,564

 
$
(8,671
)
 
$
595,322

 
$
(67,484
)
 
$
2,347,058

Net income
 

 

 

 

 

 

 

 

 
94,943

 

 
94,943

Other comprehensive income, net of tax
 

 

 

 

 

 

 

 
1,980

 

 

 
1,980

Total comprehensive income
 

 

 

 

 

 

 

 

 

 

 
96,923

Cumulative effect of the new stock compensation standard
 

 

 

 

 

 

 
594

 

 
(429
)
 

 
165

Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock, series A ($0.87 per share)
 

 

 

 

 

 

 

 

 
(2,875
)
 

 
(2,875
)
Preferred Stock, series B ($0.67 per share)
 

 

 

 

 

 

 

 

 
(2,700
)
 

 
(2,700
)
Dividend equivalent units related to employee stock-based compensation plans
 

 

 

 

 

 

 
96

 

 
(96
)
 

 

Issuance of common shares
 

 
3,738,717

 

 
3,738,717

 

 
748

 
5,787

 

 

 

 
6,535

Stock-based compensation expense
 

 

 

 

 

 

 
9,425

 

 

 

 
9,425

Shares repurchased related to employee stock-based compensation plans
 

 

 
(1,603,487
)
 
(1,603,487
)
 

 

 

 

 

 
(19,175
)
 
(19,175
)
Balance at March 31, 2017
 
7,300,000

 
440,371,196

 
(9,332,407
)
 
431,038,789

 
$
565,000

 
$
88,075

 
$
1,191,466

 
$
(6,691
)
 
$
684,165

 
$
(86,659
)
 
$
2,435,356









See accompanying notes to consolidated financial statements.

7



SLM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


 
 
Three Months Ended
 
 
March 31,
 
 
2017
 
2016
Operating activities
 
 
 
 
Net income
 
$
94,943

 
$
65,915

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
Provisions for credit losses
 
25,296

 
32,602

Income tax expense
 
51,011

 
38,875

Amortization of brokered deposit placement fee
 
2,130

 
2,615

Amortization of ABCP Facility upfront fee
 
352

 
122

Amortization of deferred loan origination costs and fees, net
 
1,777

 
1,223

Net amortization of discount on investments
 
452

 
342

Interest income on tax indemnification receivable
 
(1,501
)
 
(1,080
)
Depreciation of premises and equipment
 
2,585

 
2,104

Amortization of acquired intangibles
 
117

 
260

Stock-based compensation expense
 
9,425

 
6,216

Unrealized losses on derivative and hedging activities, net
 
5,364

 
832

Other adjustments to net income, net
 
1,258

 
250

Changes in operating assets and liabilities:
 
 
 
 
Increase in accrued interest receivable
 
(153,055
)
 
(147,257
)
Decrease in restricted cash and investments, net
 
5,636

 
6,778

Increase in other interest-earning assets
 
(1,228
)
 
(3,606
)
Increase in other assets
 
(13,435
)
 
(11,391
)
Decrease in income taxes payable, net
 
(1,689
)
 
(57,119
)
Increase in accrued interest payable
 
6,146

 
9,079

Increase in payable due to entity that is a subsidiary of Navient
 
227

 
1,169

(Decrease) increase in other liabilities
 
(39,424
)
 
2,159

Total adjustments
 
(98,556
)
 
(115,827
)
Total net cash used in operating activities
 
(3,613
)
 
(49,912
)
Investing activities
 
 
 
 
Loans acquired and originated
 
(1,892,697
)
 
(1,806,583
)
Net proceeds from sales of loans held for investment
 
1,972

 
3,365

Proceeds from claim payments
 
11,932

 
18,528

Net decrease in loans held for investment
 
506,637

 
332,414

Increase in restricted cash and investments - variable interest entities
 
(46,065
)
 
(3,410
)
Purchases of available-for-sale securities
 
(18,481
)
 
(12,090
)
Proceeds from sales and maturities of available-for-sale securities
 
8,170

 
6,566

Total net cash used in investing activities
 
(1,428,532
)
 
(1,461,210
)
Financing activities
 
 
 
 
Brokered deposit placement fee
 
(2,084
)
 
(2,759
)
Net decrease in certificates of deposit
 
(151,003
)
 
(209,411
)
Net increase in other deposits
 
83,018

 
245,893

Borrowings collateralized by loans in securitization trusts - issued
 
767,994

 

Borrowings collateralized by loans in securitization trusts - repaid
 
(99,884
)
 
(20,276
)
Issuance costs for unsecured debt offering
 
(23
)
 

Borrowings under ABCP Facility
 

 
26,325

Fees paid on ABCP Facility
 
(1,515
)
 
(1,250
)
Preferred stock dividends paid
 
(5,575
)
 
(5,139
)

8



Net cash provided by financing activities
 
590,928

 
33,383

Net decrease in cash and cash equivalents
 
(841,217
)
 
(1,477,739
)
Cash and cash equivalents at beginning of period
 
1,918,793

 
2,416,219

Cash and cash equivalents at end of period
 
$
1,077,576

 
$
938,480

Cash disbursements made for:
 
 
 
 
Interest
 
$
54,648

 
$
32,766

Income taxes paid
 
$
1,426

 
$
56,163

Income taxes refunded
 
$
(32
)
 
$
(86
)
See accompanying notes to consolidated financial statements.

9




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


1. Significant Accounting Policies

Basis of Presentation
The accompanying unaudited, consolidated financial statements of SLM Corporation (“Sallie Mae,” “SLM,” the “Company,” “we,” or “us”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all the information and footnotes required by GAAP for complete consolidated financial statements. The consolidated financial statements include the accounts of SLM Corporation and its majority-owned and controlled subsidiaries after eliminating the effects of intercompany accounts and transactions. In the opinion of management, all adjustments considered necessary for a fair statement of the results for the interim periods have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results for the year ending December 31, 2017 or for any other period. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”).
Consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned and controlled subsidiaries after eliminating the effects of intercompany accounts and transactions.
We consolidate any variable interest entity (“VIE”) where we have determined we are the primary beneficiary. The primary beneficiary is the entity which has both: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses or receive benefits of the entity that could potentially be significant to the VIE.
Allowance for Loan Losses
We maintain an allowance for loan losses at an amount sufficient to absorb probable losses incurred in our portfolios at the reporting date based on a projection of estimated probable credit losses incurred in the portfolio. Please refer to Note 2, “Significant Accounting Policies - Allowance for Loan Losses - Allowance for Private Education Loan Losses” in the 2016 Form 10-K for a description of certain information we use in estimating allowance amounts for Private Education Loans.
Troubled Debt Restructurings (“TDRs”)
For our TDR portfolio, we estimate an allowance amount sufficient to cover life-of-loan expected losses through an impairment calculation based on the difference between the loan’s basis and the present value of expected future cash flows (which would include life-of-loan default and recovery assumptions) discounted at the loan’s original effective interest rate. Our TDR portfolio is comprised mostly of loans with interest rate reductions and loans with forbearance usage greater than three months.
We modify the terms of loans for certain borrowers when we believe such modifications may increase the ability and willingness of a borrower to make payments and thus increase the ultimate overall amount collected on a loan. These modifications generally take the form of a forbearance, a temporary interest rate reduction or an extended repayment plan. We generally consider a loan that is in full principal and interest repayment status which has received more than three months of forbearance in a 24-month period to be a TDR; however, during the first nine months after a loan has entered full principal and interest repayment status, we do not count up to the first six months of forbearance received during that period against the three-month policy limit.
A loan also becomes a TDR when it is modified to reduce the interest rate on the loan (regardless of when such modification occurs and/or whether such interest rate reduction is temporary). The majority of our loans that are considered

10


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


TDRs involve a temporary forbearance of payments and do not change the contractual interest rate of the loan. Once a loan qualifies for TDR status, it remains a TDR for allowance purposes for the remainder of its life. Approximately 26 percent of the loans granted forbearance as of March 31, 2017 and December 31, 2016, were classified as TDRs due to their forbearance status.
Derivative Accounting
We account for our derivatives, consisting of interest rate swaps, at fair value on the consolidated balance sheets as either an asset or liability. Derivative positions are recorded as net positions by counterparty based on master netting arrangements (see Note 6, “Derivative Financial Instruments”), exclusive of accrued interest and cash collateral held or pledged. The Chicago Mercantile Exchange (“CME”) and the London Clearing House (“LCH”) made amendments to their respective rules that resulted in the prospective accounting treatment of certain daily payments historically treated as the posting of collateral (variation margin payments) being considered as the legal settlement of the outstanding exposure of the derivative. While the CME rule, which became effective in January 2017, is mandatory, the LCH allows a clearing member institution the option to adopt the rule changes on an individual contract or portfolio basis. As of March 31, 2017, $4.5 billion notional of our derivative contracts were cleared on the CME and $0.7 billion were cleared on the LCH. The derivative contracts cleared through the CME and LCH represent 79.8 percent and 13.1 percent, respectively, of our total notional derivative contracts of $5.6 billion at March 31, 2017.
Under this new rule, for derivatives cleared through the CME, the net gain (loss) position includes the variation margin amounts as settlement of the derivative and not collateral against the fair value of the derivative. Interest income (expense) related to variation margin on derivatives that are not designated as hedging instruments or are designated as fair value relationships is recognized as a gain (loss) rather than as interest income (expense). Changes in fair value for derivatives not designated as hedging instruments will be presented as realized gains (losses).
Our LCH clearing member institution has elected not to adopt the new rule change. Therefore, there has been no change to the accounting for the derivatives cleared through the LCH, and variation margin payments required to be exchanged based on the fair value of these derivatives remain accounted for as collateral.
We determine the fair value for our derivative contracts primarily using pricing models that consider current market conditions and the contractual terms of the derivative contracts. These pricing models consider interest rates, time value, forward interest rate curves, and volatility factors. Inputs are generally from active financial markets.
The majority of our derivatives qualify as effective hedges. For these derivatives, the relationship between the hedging instrument and the hedged items (including the hedged risk and method for assessing effectiveness), as well as the risk management objective and strategy for undertaking various hedge transactions at the inception of the hedging relationship, is documented.
Each derivative is designated to a specific (or pool of) liability(ies) on the consolidated balance sheets, and is designated as either a “fair value” hedge or a “cash flow” hedge. Fair value hedges are designed to hedge our exposure to changes in fair value of a fixed-rate liability. For effective fair value hedges, both the hedge and the hedged item (for the risk being hedged) are recorded at fair value with any difference reflecting ineffectiveness recorded immediately in the consolidated statements of income. Cash flow hedges are designed to hedge our exposure to variability in cash flows related to variable-rate deposits. The assessment of the hedge’s effectiveness is performed at inception and on an ongoing basis, generally using regression testing. For hedges of a pool of liabilities, tests are performed to demonstrate the similarity of individual instruments of the pool. When it is determined that a derivative is not currently an effective hedge, ineffectiveness is recognized for the full change in fair value of the derivative with no offsetting amount from the hedged item since the last time it was effective. If it is also determined the hedge will not be effective in the future, we discontinue the hedge accounting prospectively and begin amortization of any basis adjustments that exist related to the hedged item.

11


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


Stock-Based Compensation
We recognize stock-based compensation cost in our consolidated statements of income using the fair value method. Under this method, we determine the fair value of the stock-based compensation at the time of the grant and recognize the resulting compensation expense over the vesting period of the stock-based grant. On January 1, 2017, we adopted the Financial Accounting Standards Board’s (“FASB’s”) Accounting Standards Update (“ASU”) 2016-09 “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This new guidance requires that we record all excess tax benefits/deficiencies related to the settlement of employee stock-based compensation to the income tax expense line item on our consolidated statements of income, under a modified retrospective basis. In the quarter ended March 31, 2017, we recorded a $6 million benefit in income tax expense because of this new standard. We previously recorded the excess tax benefits/deficiencies to the additional paid-in capital line item on our consolidated balance sheets. Under the new guidance, we also elected the option to no longer apply a forfeiture rate to our stock-based compensation expense, but to record forfeitures when they occur, and, as a result, under a modified retrospective basis we recorded a cumulative effect of the new stock compensation standard in total equity of $0.2 million, net of tax, in the first quarter of 2017.


12




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

2. Loans Held for Investment
Loans held for investment consist of Private Education Loans, FFELP Loans and Personal Loans. 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”). We use “Personal Loans” to mean those unsecured loans to individuals that may be used for non-educational purposes. We began to opportunistically acquire Personal Loans in late 2016.
Our Private Education Loans are made largely to bridge the gap between the cost of higher education and the amount funded through financial aid, government loans and customers’ resources. Private Education Loans bear the full credit risk of the customer. We manage this risk through risk-performance underwriting strategies and qualified cosigners. Private Education Loans generally carry a variable rate indexed to LIBOR. As of March 31, 2017, 82 percent of all of our Private Education Loans were indexed to LIBOR. We provide incentives for customers to include a cosigner on the loan, and the vast majority of loans in our portfolio are cosigned. We also provide total cost incentives for customers to make payments while in school.
FFELP Loans are insured as to their principal and accrued interest in the event of default subject to a risk sharing level based on the date of loan disbursement. These insurance obligations are supported by contractual rights against the United States. For loans disbursed on or after July 1, 2006, we receive 97 percent reimbursement on all qualifying claims. For loans disbursed after October 1, 1993, and before July 1, 2006, we receive 98 percent reimbursement on all qualifying claims. For loans disbursed prior to October 1, 1993, we receive 100 percent reimbursement on all qualifying claims.
Loans held for investment are summarized as follows:
 
 
March 31,
 
December 31,
 
 
2017
 
2016
Private Education Loans
 
$
15,654,854

 
$
14,251,675

Deferred origination costs
 
46,692

 
44,206

Allowance for loan losses
 
(185,103
)
 
(182,472
)
Total Private Education Loans, net
 
15,516,443

 
14,113,409

 
 
 
 
 
FFELP Loans
 
989,393

 
1,010,908

Unamortized acquisition costs, net
 
2,855

 
2,941

Allowance for loan losses
 
(1,637
)
 
(2,171
)
Total FFELP Loans, net
 
990,611

 
1,011,678

 
 
 
 
 
Personal Loans
 
55,502

 
12,893

Allowance for loan losses
 
(346
)
 
(58
)
Total Personal Loans, net
 
55,156

 
12,835

 
 
 
 
 
Loans held for investment, net
 
$
16,562,210

 
$
15,137,922


 
The estimated weighted average life of education loans in our portfolio was approximately 6.0 years and 6.0 years at March 31, 2017 and December 31, 2016, respectively.

13




SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)
2.
Loans Held for Investment (Continued)
 


The average balance and the respective weighted average interest rates of loans in our portfolio are summarized as follows:


 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2017
 
2016
 
 
 
Average Balance
 
Weighted Average Interest Rate
 
Average Balance
 
Weighted Average Interest Rate
 
Private Education Loans
 
$
15,449,555

 
8.26
%
 
$
11,817,708

 
8.03
%
 
FFELP Loans
 
1,003,128

 
3.69

 
1,103,253

 
3.42

 
Personal Loans
 
35,830

 
9.16

 

 

 
Total portfolio
 
$
16,488,513

 
 
 
$
12,920,961

 
 
 



14




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

3. Allowance for Loan Losses
Our provision for loan losses represents the periodic expense of maintaining an allowance sufficient to absorb incurred probable losses in the held-for-investment loan portfolios. The evaluation of the allowance for loan losses is inherently subjective, as it requires material estimates that may be susceptible to significant changes. We believe the allowance for loan losses is appropriate to cover probable losses incurred in the loan portfolios. We began acquiring Personal Loans in the fourth quarter of 2016.

Allowance for Loan Losses Metrics
 
 
Allowance for Loan Losses
 
 
Three Months Ended March 31, 2017
 
 
FFELP
Loans
 
Private
Education
Loans
 
Personal
Loans
 
Total
Allowance for Loan Losses
 
 
 
 
 
 
 
 
Beginning balance
 
$
2,171


$
182,472


$
58


$
184,701

Total provision
 
(316
)

26,820


288


26,792

Net charge-offs:
 











Charge-offs
 
(218
)

(26,227
)



(26,445
)
Recoveries
 


3,259




3,259

Net charge-offs
 
(218
)

(22,968
)




(23,186
)
Loan sales(1)
 


(1,221
)



(1,221
)
Ending Balance
 
$
1,637


$
185,103


$
346


$
187,086

Allowance:
 







Ending balance: individually evaluated for impairment
 
$


$
87,150


$


$
87,150

Ending balance: collectively evaluated for impairment
 
$
1,637


$
97,953


$
346


$
99,936

Loans:
 







Ending balance: individually evaluated for impairment
 
$


$
701,860


$


$
701,860

Ending balance: collectively evaluated for impairment
 
$
989,393


$
14,952,994


$
55,502


$
15,997,889

Net charge-offs as a percentage of average loans in repayment (annualized)(2)
 
0.11
%

0.89
%

%


Allowance as a percentage of the ending total loan balance
 
0.17
%

1.18
%

0.62
%


Allowance as a percentage of the ending loans in repayment(2)
 
0.22
%

1.76
%

0.62
%


Allowance coverage of net charge-offs (annualized)
 
1.88


2.01





Ending total loans, gross
 
$
989,393


$
15,654,854


$
55,502



Average loans in repayment(2)
 
$
771,435


$
10,265,530


$
35,830



Ending loans in repayment(2)
 
$
757,052


$
10,526,782


$
55,502



____________
(1) Represents fair value adjustments on loans sold.
(2) Loans in repayment include loans on which borrowers are making interest only or fixed payments, as well as loans that have entered full principal and interest repayment status after any applicable grace period.

15




SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)
3.
Allowance for Loan Losses (Continued)
 

     
 
 
Allowance for Loan Losses
 
 
Three Months Ended March 31, 2016
 
 
FFELP Loans
 
Private Education
Loans
 
Total
Allowance for Loan Losses
 
 
 
 
 
 
Beginning balance
 
$
3,691

 
$
108,816

 
$
112,507

Total provision
 
321

 
33,839

 
34,160

Net charge-offs:
 
 
 
 
 
 
Charge-offs
 
(383
)
 
(19,004
)
 
(19,387
)
Recoveries
 

 
1,044

 
1,044

Net charge-offs
 
(383
)
 
(17,960
)
 
(18,343
)
Loan sales(1)
 

 
(2,075
)
 
(2,075
)
Ending Balance
 
$
3,629

 
$
122,620

 
$
126,249

Allowance:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
49,212

 
$
49,212

Ending balance: collectively evaluated for impairment
 
$
3,629

 
$
73,408

 
$
77,037

Loans:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
318,094

 
$
318,094

Ending balance: collectively evaluated for impairment
 
$
1,088,026

 
$
11,793,776

 
$
12,881,802

Net charge-offs as a percentage of average loans in repayment (annualized)(2)
 
0.19
%
 
0.95
%
 
 
Allowance as a percentage of the ending total loan balance
 
0.33
%
 
1.01
%
 
 
Allowance as a percentage of the ending loans in repayment(2)
 
0.45
%
 
1.56
%
 
 
Allowance coverage of net charge-offs (annualized)
 
2.37

 
1.71

 
 
Ending total loans, gross
 
$
1,088,026

 
$
12,111,870

 
 
Average loans in repayment(2)
 
$
804,690

 
$
7,534,234

 
 
Ending loans in repayment(2)
 
$
803,378

 
$
7,843,076

 
 
____________
    
(1) Represents fair value adjustments on loans sold.
(2) Loans in repayment include loans on which borrowers are making interest only or fixed payments, as well as loans that have entered full principal and interest repayment status after any applicable grace period.
 
 
 
 

16




SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)
3.
Allowance for Loan Losses (Continued)
 


Troubled Debt Restructurings
All of our loans are collectively assessed for impairment, except for loans classified as TDRs (where we conduct individual assessments of impairment). We modify the terms of loans for certain borrowers when we believe such modifications may increase the ability and willingness of a borrower to make payments and thus increase the ultimate overall amount collected on a loan. These modifications generally take the form of a forbearance, a temporary interest rate reduction or an extended repayment plan. We generally consider a loan that is in full principal and interest repayment status which has received more than three months of forbearance in a 24-month period to be a TDR; however, during the first nine months after a loan has entered full principal and interest repayment status, we do not count up to the first six months of forbearance received during that period against the three-month policy limit. Also, a loan becomes a TDR when it is modified to reduce the interest rate on the loan (regardless of when such modification occurs and/or whether such interest rate reduction is temporary). The majority of our loans that are considered TDRs involve a temporary forbearance of payments and do not change the contractual interest rate of the loan. Approximately 26 percent of the loans granted forbearance as of March 31, 2017 and December 31, 2016, respectively, have been classified as TDRs due to their forbearance status. For additional information, see Note 6, “Allowance for Loan Losses” in our 2016 Form 10-K.
Within the Private Education Loan portfolio, loans greater than 90 days past due are considered to be nonperforming. FFELP Loans are at least 97 percent guaranteed as to their principal and accrued interest by the federal government in the event of default and, therefore, we do not deem FFELP Loans as nonperforming from a credit risk perspective at any point in their life cycle prior to claim payment, and continue to accrue interest on those loans through the date of claim.
At March 31, 2017 and December 31, 2016, all TDR loans had a related allowance recorded. The following table provides the recorded investment, unpaid principal balance and related allowance for our TDR loans.
 
 
Recorded Investment
 
Unpaid Principal Balance
 
Allowance
 
 
 
 
 
 
 
March 31, 2017
 
 
 
 
 
 
TDR Loans
 
$
712,019

 
$
701,860

 
$
87,150

 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
TDR Loans
 
$
620,991

 
$
612,606

 
$
86,930


The following table provides the average recorded investment and interest income recognized for our TDR loans.
 
 
Three Months Ended 
 March 31,
 
 
2017
 
2016
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
 
 
 
 
 
 
 
 
TDR Loans
 
$
669,606

 
$
12,257

 
$
297,315

 
$
5,583


    

17




SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)
3.
Allowance for Loan Losses (Continued)
 

 
 
The following table provides information regarding the loan status and aging of TDR loans.

 
 
March 31,
 
December 31,
 
 
2017
 
2016
 
 
Balance
 
%
 
Balance
 
%
TDR loans in in-school/grace/deferment(1)
 
$
32,121

 
 
 
$
24,185

 
 
TDR loans in forbearance(2)
 
78,791

 
 
 
71,851

 
 
TDR loans in repayment(3) and percentage of each status:
 
 
 
 
 
 
 
 
Loans current
 
532,459

 
90.2
%
 
462,187

 
89.5
%
Loans delinquent 31-60 days(4)
 
29,733

 
5.0

 
28,452

 
5.5

Loans delinquent 61-90 days(4)
 
16,837

 
2.8

 
17,326

 
3.4

Loans delinquent greater than 90 days(4)
 
11,919

 
2.0

 
8,605

 
1.6

Total TDR loans in repayment
 
590,948

 
100.0
%
 
516,570

 
100.0
%
Total TDR loans, gross
 
$
701,860

 
 
 
$
612,606

 
 
_____
(1) 
Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on the loans (e.g., residency periods for medical students or a grace period for bar exam preparation).
(2) 
Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with established loan program servicing policies and procedures.
(3) 
Loans in repayment include loans on which borrowers are making interest only or fixed payments, as well as loans that have entered full principal and interest repayment status after any applicable grace period.
(4) 
The period of delinquency is based on the number of days scheduled payments are contractually past due.

The following table provides the amount of modified loans (which includes forbearance and reductions in interest rates) that became TDRs in the periods presented. Additionally, for the periods presented, the table summarizes charge-offs occurring in the TDR portfolio, as well as TDRs for which a payment default occurred in the relevant period presented and within 12 months of the loan first being designated as a TDR. We define payment default as 60 days past due for this disclosure.
 
 
Three Months Ended 
 March 31, 2017
 
Three Months Ended 
 March 31, 2016
 
 
Modified Loans(1)
 
Charge-offs
 
Payment-
Default
 
Modified Loans(1)
 
Charge-offs
 
Payment-
Default
 
 
 
 
 
 
 
 
 
 
 
 
 
TDR Loans
 
$
112,206

 
$
10,523

 
$
25,526

 
$
61,006

 
$
4,968

 
$
25,671

_____
(1) 
Represents the principal balance of loans that have been modified during the period and resulted in a TDR.



18




SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)
3.
Allowance for Loan Losses (Continued)
 


Key Credit Quality Indicators
For Private Education Loans, the key credit quality indicators are FICO scores, the existence of a cosigner, the loan status and loan seasoning. The FICO scores are assessed at original approval and periodically refreshed/updated through the loan’s term. The following table highlights the gross principal balance of our Private Education Loan portfolio stratified by key credit quality indicators.

 
 
Private Education Loans
 
 
Credit Quality Indicators
 
 
March 31, 2017
 
December 31, 2016
Credit Quality Indicators:
 
Balance(1)
 
% of Balance
 
Balance(1)
 
% of Balance
 
 
 
 
 
 
 
 
 
Cosigners:
 
 
 
 
 
 
 
 
With cosigner
 
$
14,097,920

 
90
%
 
$
12,816,512

 
90
%
Without cosigner
 
1,556,934

 
10

 
1,435,163

 
10

Total
 
$
15,654,854

 
100
%
 
$
14,251,675

 
100
%
 
 
 
 
 
 
 
 
 
FICO at Original Approval:
 
 
 
 
 
 
 
 
Less than 670
 
$
1,008,334

 
6
%
 
$
920,132

 
6
%
670-699
 
2,297,815

 
15

 
2,092,722

 
15

700-749
 
5,109,510

 
33

 
4,639,958

 
33

Greater than or equal to 750
 
7,239,195

 
46

 
6,598,863

 
46

Total
 
$
15,654,854

 
100
%
 
$
14,251,675

 
100
%
 
 
 
 
 
 
 
 
 
Seasoning(2):
 
 
 
 
 
 
 
 
1-12 payments
 
$
4,233,778

 
27
%
 
$
3,737,110

 
26
%
13-24 payments
 
2,937,448

 
19

 
2,841,107

 
20

25-36 payments
 
1,951,479

 
12

 
1,839,764

 
13

37-48 payments
 
978,576

 
6

 
917,633

 
7

More than 48 payments
 
775,278

 
5

 
726,106

 
5

Not yet in repayment
 
4,778,295

 
31

 
4,189,955

 
29

Total
 
$
15,654,854

 
100
%
 
$
14,251,675

 
100
%
(1) 
Balance represents gross Private Education Loans.
(2) 
Number of months in active repayment (whether interest only payment, fixed payment, or full principal and interest payment status) for which a scheduled payment was due.





19




SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)
3.
Allowance for Loan Losses (Continued)
 

Key Credit Quality Indicators
For Personal Loans, the key credit quality indicators are FICO scores and loan seasoning. The FICO scores are assessed at original approval and periodically refreshed/updated through the loan’s term. The following table highlights the gross principal balance of our Personal Loan portfolio stratified by key credit quality indicators.

 
 
Personal Loans
 
 
Credit Quality Indicators
 
 
March 31, 2017
 
December 31, 2016
Credit Quality Indicators:
 
Balance(1)
 
% of Balance
 
Balance(1)
 
% of Balance
 
 
 
 
 
 
 
 
 
FICO at Original Approval:
 
 
 
 
 
 
 
 
Less than 670
 
$
4,612

 
8
%
 
$
1,189

 
9
%
670-699
 
15,897

 
29

 
3,139

 
24

700-749
 
25,569

 
46

 
5,678

 
44

Greater than or equal to 750
 
9,424

 
17

 
2,888

 
23

Total
 
$
55,502

 
100
%
 
$
12,894

 
100
%
 
 
 
 
 
 
 
 
 
Seasoning(2):
 
 
 
 
 
 
 
 
0-12 payments
 
$
55,502

 
100
%
 
$
12,894

 
100
%
13-24 payments
 

 

 

 

25-36 payments
 

 

 

 

37-48 payments
 

 

 

 

More than 48 payments
 

 

 

 

Total
 
$
55,502

 
100
%
 
$
12,894

 
100
%
(1) 
Balance represents gross Personal Loans.
(2) 
Number of months in active repayment for which a scheduled payment was due.




20




SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)
3.
Allowance for Loan Losses (Continued)
 


 The following table provides information regarding the loan status of our Private Education Loans. Loans in repayment include loans making interest only or fixed payments, as well as loans that have entered full principal and interest repayment status after any applicable grace period.

 
 
Private Education Loans
 
 
March 31,
 
December 31,
 
 
2017
 
2016
 
 
Balance
 
%
 
Balance
 
%
Loans in-school/grace/deferment(1)
 
$
4,778,295

 
 
 
$
4,189,955

 
 
Loans in forbearance(2)
 
349,777

 
 
 
351,962

 
 
Loans in repayment and percentage of each status:
 
 
 
 
 
 
 
 
Loans current
 
10,327,843

 
98.1
%
 
9,509,394

 
97.9
%
Loans delinquent 31-60 days(3)
 
112,167

 
1.1

 
124,773

 
1.3

Loans delinquent 61-90 days(3)
 
54,128

 
0.5

 
51,423

 
0.5

Loans delinquent greater than 90 days(3)
 
32,644

 
0.3

 
24,168

 
0.3

Total Private Education Loans in repayment
 
10,526,782

 
100.0
%
 
9,709,758

 
100.0
%
Total Private Education Loans, gross
 
15,654,854

 
 
 
14,251,675

 
 
Private Education Loans deferred origination costs
 
46,692

 
 
 
44,206

 
 
Total Private Education Loans
 
15,701,546

 
 
 
14,295,881

 
 
Private Education Loans allowance for losses
 
(185,103
)
 
 
 
(182,472
)
 
 
Private Education Loans, net
 
$
15,516,443

 
 
 
$
14,113,409

 
 
Percentage of Private Education Loans in repayment
 
 
 
67.2
%
 
 
 
68.1
%
Delinquencies as a percentage of Private Education Loans in repayment
 
 
 
1.9
%
 
 
 
2.1
%
Loans in forbearance as a percentage of Private Education Loans in repayment and forbearance
 
 
 
3.2
%
 
 
 
3.5
%
(1)
Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on the loans (e.g., residency periods for medical students or a grace period for bar exam preparation).
(2)
Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with established loan program servicing policies and procedures.
(3) 
The period of delinquency is based on the number of days scheduled payments are contractually past due.
 




21




SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)
3.
Allowance for Loan Losses (Continued)
 

 
 Accrued Interest Receivable
The following table provides information regarding accrued interest receivable on our Private Education Loans. The table also discloses the amount of accrued interest on loans greater than 90 days past due as compared to our allowance for uncollectible interest. The allowance for uncollectible interest exceeds the amount of accrued interest on our 90 days past due Private Education Loan portfolio for all periods presented.
 
 
Private Education Loan
 
 
Accrued Interest Receivable
 
 
Total Interest Receivable
 
Greater Than 90 Days Past Due
 
Allowance for Uncollectible Interest
 
 
 
 
 
 
 
March 31, 2017
 
$
825,680

 
$
1,108

 
$
2,868

December 31, 2016
 
$
739,847

 
$
845

 
$
2,898




 



22




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

4. Deposits

The following table summarizes total deposits at March 31, 2017 and December 31, 2016.
 
 
March 31,
 
December 31,
 
 
 
2017
 
2016
 
Deposits - interest bearing
 
$
13,360,698

 
$
13,434,990

 
Deposits - non-interest bearing
 
1,173

 
677

 
Total deposits
 
$
13,361,871

 
$
13,435,667

 

Interest bearing deposits as of March 31, 2017 and December 31, 2016 consisted of retail non-maturity savings deposits, retail and brokered non-maturity money market deposits (“MMDAs”) and brokered and retail certificates of deposit (“CDs”). Interest bearing deposits include deposits from Educational 529 and Health Savings plans that diversify our funding sources and add deposits we consider to be core. These and other large omnibus accounts, aggregating the deposits of many individual depositors, represented $5.4 billion of our deposit total as of March 31, 2017.
Some of our deposit products are serviced by third-party providers. Placement fees associated with the brokered CDs are amortized into interest expense using the effective interest rate method. We recognized placement fee expense of $2.1 million and $2.6 million in the three months ended March 31, 2017 and 2016, respectively. Fees paid to third-party brokers related to brokered CDs were $2.1 million and $2.8 million for the three months ended March 31, 2017 and 2016, respectively.
Interest bearing deposits at March 31, 2017 and December 31, 2016 are summarized as follows: