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EX-32.2 - EXHIBIT 32.2 - SLM Corpslm20170630ex322.htm
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EX-31.1 - EXHIBIT 31.1 - SLM Corpslm20170630ex311.htm
EX-12.1 - EXHIBIT 12.1 - SLM Corpslm20170630ex121.htm
EX-10.1 - EXHIBIT 10.1 - SLM Corpslm20170630ex101.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 June 30, 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, a smaller reporting company, or an emerging growth 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 June 30, 2017
Common Stock, $0.20 par value
431,548,369 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
 
43
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
71
Item 4.
Controls and Procedures
 
75
PART II. Other Information
 
 
Item 1.
Legal Proceedings
 
76
Item 1A.
Risk Factors
 
77
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
77
Item 3.
Defaults Upon Senior Securities
 
78
Item 4.
Mine Safety Disclosures
 
78
Item 5.
Other Information
 
78
Item 6.
Exhibits
 
78



2



SLM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
 
 
June 30,
 
December 31,
 
 
2017
 
2016
Assets
 
 
 
 
Cash and cash equivalents
 
$
1,318,168

 
$
1,918,793

Available-for-sale investments at fair value (cost of $233,682 and $211,406, respectively)
 
229,479

 
208,603

Loans held for investment (net of allowance for losses of $207,448 and $184,701, respectively)
 
16,560,426

 
15,137,922

Restricted cash and investments
 
62,466

 
53,717

Other interest-earning assets
 
48,526

 
49,114

Accrued interest receivable
 
926,270

 
766,106

Premises and equipment, net
 
88,978

 
87,063

Tax indemnification receivable
 
233,142

 
259,532

Other assets
 
45,841

 
52,153

Total assets
 
$
19,513,296

 
$
18,533,003

 
 
 
 
 
Liabilities
 
 
 
 
Deposits
 
$
13,794,815

 
$
13,435,667

Long-term borrowings
 
2,872,231

 
2,167,979

Income taxes payable, net
 
140,138

 
184,324

Upromise member accounts
 
247,324

 
256,041

Other liabilities
 
121,078

 
141,934

Total liabilities
 
17,175,586

 
16,185,945

 
 
 
 
 
Commitments and contingencies
 

 

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

 
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: 441.8 million and 436.6 million shares issued, respectively
 
88,373

 
87,327

Additional paid-in capital
 
1,205,037

 
1,175,564

Accumulated other comprehensive loss (net of tax benefit of $4,833 and $5,364, respectively)
 
(7,852
)
 
(8,671
)
Retained earnings
 
750,973

 
595,322

Total SLM Corporation stockholders’ equity before treasury stock
 
2,436,531

 
2,414,542

Less: Common stock held in treasury at cost: 10.3 million and 7.7 million shares, respectively
 
(98,821
)
 
(67,484
)
Total equity
 
2,337,710

 
2,347,058

Total liabilities and equity
 
$
19,513,296

 
$
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
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2017
 
2016
 
2017
 
2016
Interest income:
 
 
 
 
 
 
 
 
Loans
 
$
336,739

 
$
251,675

 
$
661,496

 
$
496,905

Investments
 
2,201

 
2,371

 
4,344

 
4,962

Cash and cash equivalents
 
3,155

 
1,195

 
5,743

 
2,829

Total interest income
 
342,095

 
255,241

 
671,583

 
504,696

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
50,730

 
35,409

 
95,583

 
69,423

Interest expense on short-term borrowings
 
1,194

 
2,060

 
2,430

 
4,223

Interest expense on long-term borrowings
 
20,278

 
5,006

 
35,601

 
8,421

Total interest expense
 
72,202

 
42,475

 
133,614

 
82,067

Net interest income
 
269,893

 
212,766

 
537,969

 
422,629

Less: provisions for credit losses
 
50,215

 
41,793

 
75,511

 
74,395

Net interest income after provisions for credit losses
 
219,678

 
170,973

 
462,458

 
348,234

Non-interest income:
 
 
 
 
 
 
 
 
(Losses) gains on derivatives and hedging activities, net
 
(3,609
)
 
2,142

 
(8,987
)
 
1,788

Other income
 
10,629

 
13,683

 
21,975

 
34,711

Total non-interest income
 
7,020

 
15,825

 
12,988

 
36,499

Non-interest expenses:
 
 
 
 
 
 
 
 
Compensation and benefits
 
51,007

 
44,570

 
106,471

 
94,779

FDIC assessment fees
 
6,622

 
4,277

 
13,851

 
8,453

Other operating expenses
 
53,622

 
45,930

 
93,606

 
84,430

Total operating expenses
 
111,251

 
94,777

 
213,928

 
187,662

Acquired intangible asset amortization expense
 
117

 
261

 
234

 
521

Total non-interest expenses
 
111,368

 
95,038

 
214,162

 
188,183

Income before income tax expense
 
115,330

 
91,760

 
261,284

 
196,550

Income tax expense
 
44,713

 
34,555

 
95,724

 
73,430

Net income
 
70,617

 
57,205

 
165,560

 
123,120

Preferred stock dividends
 
3,974

 
5,243

 
9,549

 
10,382

Net income attributable to SLM Corporation common stock
 
$
66,643

 
$
51,962

 
$
156,011

 
$
112,738

Basic earnings per common share attributable to SLM Corporation
 
$
0.15

 
$
0.12

 
$
0.36

 
$
0.26

Average common shares outstanding
 
431,245

 
427,942

 
430,572

 
427,526

Diluted earnings per common share attributable to SLM Corporation
 
$
0.15

 
$
0.12

 
$
0.35

 
$
0.26

Average common and common equivalent shares outstanding
 
438,115

 
431,796

 
438,424

 
431,349





See accompanying notes to consolidated financial statements.

4



SLM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
70,617

 
$
57,205

 
$
165,560

 
$
123,120

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Unrealized gains (losses) on investments
 
167

 
1,293

 
(1,400
)
 
4,317

Unrealized gains (losses) on cash flow hedges
 
(2,029
)
 
(8,732
)
 
2,750

 
(33,106
)
Total unrealized gains (losses)
 
(1,862
)
 
(7,439
)
 
1,350

 
(28,789
)
Income tax (expense) benefit
 
701

 
2,855

 
(531
)
 
10,995

Other comprehensive income (loss), net of tax (expense) benefit
 
(1,161
)
 
(4,584
)
 
819

 
(17,794
)
Total comprehensive income
 
$
69,456

 
$
52,621

 
$
166,379

 
$
105,326


















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
 

 

 

 

 

 

 

 

 
123,120

 

 
123,120

Other comprehensive loss, net of tax
 

 

 

 

 

 

 

 
(17,794
)
 

 

 
(17,794
)
Total comprehensive income
 

 

 

 

 

 

 

 

 

 

 
105,326

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

 

 

 

 

 

 

 

 
(5,750
)
 

 
(5,750
)
Preferred Stock, series B ($.60 per share)
 

 

 

 

 

 

 

 

 
(4,632
)
 

 
(4,632
)
Dividend equivalent units related to employee stock-based compensation plans
 

 

 

 

 

 

 
400

 

 
(400
)
 
 
 

Issuance of common shares
 

 
3,166,474

 

 
3,166,474

 

 
633

 
3,224

 

 

 

 
3,857

Tax benefit related to employee stock-based compensation
 

 

 

 

 

 

 
(2,249
)
 

 

 

 
(2,249
)
Stock-based compensation expense
 

 

 

 

 

 

 
12,548

 

 

 

 
12,548

Shares repurchased related to employee stock-based compensation plans
 

 

 
(1,391,927
)
 
(1,391,927
)
 

 

 

 

 

 
(8,512
)
 
(8,512
)
Balance at June 30, 2016
 
7,300,000

 
433,843,908

 
(5,766,117
)
 
428,077,791

 
$
565,000

 
$
86,769

 
$
1,149,783

 
$
(33,853
)
 
$
478,947

 
$
(49,735
)
 
$
2,196,911












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
 

 

 

 

 

 

 

 

 
165,560

 

 
165,560

Other comprehensive income, net of tax
 

 

 

 

 

 

 

 
819

 

 

 
819

Total comprehensive income
 

 

 

 

 

 

 

 

 

 

 
166,379

Cumulative effect of the new stock compensation standard
 

 

 

 

 

 

 
429

 

 
(264
)
 

 
165

Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock, series A ($1.74 per share)
 

 

 

 

 

 

 

 

 
(3,961
)
 

 
(3,961
)
Preferred Stock, series B ($1.39 per share)
 

 

 

 

 

 

 

 

 
(5,588
)
 

 
(5,588
)
Redemption of Series A Preferred Stock
 
(3,300,000
)
 

 

 

 
(165,000
)
 

 

 

 

 

 
(165,000
)
Dividend equivalent units related to employee stock-based compensation plans
 

 

 

 

 

 

 
96

 

 
(96
)
 

 

Issuance of common shares
 

 
5,229,774

 

 
5,229,774

 

 
1,046

 
13,448

 

 

 

 
14,494

Stock-based compensation expense
 

 

 

 

 

 

 
15,500

 

 

 

 
15,500

Shares repurchased related to employee stock-based compensation plans
 

 

 
(2,584,964
)
 
(2,584,964
)
 

 

 

 

 

 
(31,337
)
 
(31,337
)
Balance at June 30, 2017
 
4,000,000

 
441,862,253

 
(10,313,884
)
 
431,548,369

 
$
400,000

 
$
88,373

 
$
1,205,037

 
$
(7,852
)
 
$
750,973

 
$
(98,821
)
 
$
2,337,710









See accompanying notes to consolidated financial statements.

7



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

 
 
Six Months Ended
 
 
June 30,
 
 
2017
 
2016
Operating activities
 
 
 
 
Net income
 
$
165,560

 
$
123,120

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
Provisions for credit losses
 
75,511

 
74,395

Income tax expense
 
95,724

 
71,181

Amortization of brokered deposit placement fee
 
4,339

 
5,179

Amortization of ABCP Facility upfront fee
 
668

 
502

Amortization of deferred loan origination costs and fees, net
 
4,069

 
2,720

Net amortization of discount on investments
 
872

 
793

Interest income on tax indemnification receivable
 
(3,427
)
 
(4,066
)
Depreciation of premises and equipment
 
5,365

 
2,295

Amortization of acquired intangibles
 
234

 
261

Stock-based compensation expense
 
15,500

 
12,548

Unrealized losses (gains) on derivatives and hedging activities, net
 
10,833

 
(835
)
Other adjustments to net income, net
 
2,998

 
1,101

Changes in operating assets and liabilities:
 
 
 
 
Increase in accrued interest receivable
 
(324,684
)
 
(277,582
)
Decrease in restricted cash and investments, net
 
4,004

 
2,053

Increase in other interest-earning assets
 
588

 
1,290

Decrease in tax indemnification receivable
 
29,817

 
29,816

Increase in other assets
 
(20,586
)
 
(14,591
)
Decrease in income taxes payable, net
 
(139,775
)
 
(149,193
)
Increase in accrued interest payable
 
3,275

 
2,924

Decrease in payable due to entity that is a subsidiary of Navient
 
(1,244
)
 
(808
)
(Decrease) increase in other liabilities
 
(35,267
)
 
7,976

Total adjustments
 
(271,186
)
 
(232,041
)
Total net cash used in operating activities
 
(105,626
)
 
(108,921
)
Investing activities
 
 
 
 
Loans acquired and originated
 
(2,347,344
)
 
(2,234,556
)
Net proceeds from sales of loans held for investment
 
3,472

 
5,736

Proceeds from claim payments
 
24,907

 
33,892

Net decrease in loans held for investment
 
980,234

 
624,040

Increase in restricted cash and investments - variable interest entities
 
(12,753
)
 
(8,369
)
Purchases of available-for-sale securities
 
(40,124
)
 
(23,362
)
Proceeds from sales and maturities of available-for-sale securities
 
16,976

 
15,492

Total net cash used in investing activities
 
(1,374,632
)
 
(1,587,127
)
Financing activities
 
 
 
 
Brokered deposit placement fee
 
(5,329
)
 
(2,875
)
Net decrease in certificates of deposit
 
308,069

 
56,272

Net increase in other deposits
 
51,447

 
322,959

Issuance costs for collateralized borrowings
 

 
(386
)
Borrowings collateralized by loans in securitization trusts - issued
 
767,244

 
499,393

Borrowings collateralized by loans in securitization trusts - repaid
 
(262,567
)
 
(40,618
)
Issuance costs for unsecured debt offering
 
(423
)
 

Unsecured debt issued
 
197,000

 

Borrowings under ABCP Facility
 

 
26,325

Repayment of borrowings under ABCP Facility
 

 
(526,500
)

8



Fees paid on ABCP Facility
 
(1,259
)
 
(1,444
)
Redemption of Preferred Stock Series A
 
(165,000
)
 

Preferred stock dividends paid
 
(9,549
)
 
(10,382
)
Net cash provided by financing activities
 
879,633

 
322,744

Net decrease in cash and cash equivalents
 
(600,625
)
 
(1,373,304
)
Cash and cash equivalents at beginning of period
 
1,918,793

 
2,416,219

Cash and cash equivalents at end of period
 
$
1,318,168

 
$
1,042,915

Cash disbursements made for:
 
 
 
 
Interest
 
$
121,601

 
$
75,165

Income taxes paid
 
$
139,828

 
$
149,173

Income taxes refunded
 
$
(833
)
 
$
(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 and six months ended June 30, 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 (as hereafter defined).
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.

10





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


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 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 27 percent and 26 percent of the loans granted forbearance as of June 30, 2017 and December 31, 2016, respectively, 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 June 30, 2017, $4.6 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 80.5 percent and 12.5 percent, respectively, of our total notional derivative contracts of $5.8 billion at June 30, 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

11





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


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.
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 six months ended June 30, 2017, we recorded a $6.5 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 the fourth quarter of 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 may be fixed rate or may carry a variable interest rate indexed to LIBOR. As of June 30, 2017 and December 31, 2016, 81.3 percent and 81.4 percent, respectively, 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:
 
 
June 30,
 
December 31,
 
 
2017
 
2016
Private Education Loans
 
$
15,679,457

 
$
14,251,675

Deferred origination costs
 
48,905

 
44,206

Allowance for loan losses
 
(205,024
)
 
(182,472
)
Total Private Education Loans, net
 
15,523,338

 
14,113,409

 
 
 
 
 
FFELP Loans
 
967,237

 
1,010,908

Unamortized acquisition costs, net
 
2,767

 
2,941

Allowance for loan losses
 
(1,606
)
 
(2,171
)
Total FFELP Loans, net
 
968,398

 
1,011,678

 
 
 
 
 
Personal Loans
 
69,508

 
12,893

Allowance for loan losses
 
(818
)
 
(58
)
Total Personal Loans, net
 
68,690

 
12,835

 
 
 
 
 
Loans held for investment, net
 
$
16,560,426

 
$
15,137,922


 
The estimated weighted average life of education loans in our portfolio was approximately 5.6 years and 6.0 years at June 30, 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
 
 
June 30,
 
 
2017
 
2016
 
 
Average Balance
 
Weighted Average Interest Rate
 
Average Balance
 
Weighted Average Interest Rate
Private Education Loans
 
$
15,687,803

 
8.33
%
 
$
12,217,890

 
7.98
%
FFELP Loans
 
980,478

 
3.87

 
1,076,419

 
3.48

Personal Loans
 
60,910

 
9.28

 

 

Total portfolio
 
$
16,729,191

 
 
 
$
13,294,309

 
 


 
 
Six Months Ended
 
 
June 30,
 
 
2017
 
2016
 
 
Average Balance
 
Weighted Average Interest Rate
 
Average Balance
 
Weighted Average Interest Rate
Private Education Loans
 
$
15,569,337

 
8.30
%
 
$
12,017,799

 
8.00
%
FFELP Loans
 
991,740

 
3.78

 
1,089,836

 
3.45

Personal Loans
 
48,894

 
9.19

 

 

Total portfolio
 
$
16,609,971

 
 
 
$
13,107,635

 
 



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 June 30, 2017
 
 
FFELP
Loans
 
Private
Education
Loans
 
Personal
Loans
 
Total
Allowance for Loan Losses
 
 
 
 
 
 
 
 
Beginning balance
 
$
1,637

 
$
185,103

 
$
346

 
$
187,086

Total provision
 
228

 
49,166

 
492

 
49,886

Net charge-offs:
 


 


 


 


Charge-offs
 
(259
)
 
(32,728
)
 
(20
)
 
(33,007
)
Recoveries
 

 
4,396

 

 
4,396

Net charge-offs
 
(259
)
 
(28,332
)
 
(20
)
 
(28,611
)
Loan sales(1)
 

 
(913
)
 

 
(913
)
Ending Balance
 
$
1,606

 
$
205,024

 
$
818

 
$
207,448

Allowance:
 

 

 

 

Ending balance: individually evaluated for impairment
 
$

 
$
95,177

 
$

 
$
95,177

Ending balance: collectively evaluated for impairment
 
$
1,606

 
$
109,847

 
$
818

 
$
112,271

Loans:
 

 

 

 

Ending balance: individually evaluated for impairment
 
$

 
$
803,456

 
$

 
$
803,456

Ending balance: collectively evaluated for impairment
 
$
967,237

 
$
14,876,001

 
$
69,508

 
$
15,912,746

Net charge-offs as a percentage of average loans in repayment (annualized)(2)
 
0.14
%
 
1.08
%
 
0.13
%
 

Allowance as a percentage of the ending total loan balance
 
0.17
%
 
1.31
%
 
1.18
%
 

Allowance as a percentage of the ending loans in repayment(2)
 
0.21
%
 
1.93
%
 
1.18
%
 

Allowance coverage of net charge-offs (annualized)
 
1.55

 
1.81

 
10.23

 

Ending total loans, gross
 
$
967,237

 
$
15,679,457

 
$
69,508

 

Average loans in repayment(2)
 
$
757,186

 
$
10,523,225

 
$
61,439

 

Ending loans in repayment(2)
 
$
765,980

 
$
10,615,105

 
$
69,508

 

____________
(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 June 30, 2016
 
 
FFELP Loans
 
Private Education
Loans
 
Total
Allowance for Loan Losses
 
 
 
 
 
 
Beginning balance
 
$
3,629

 
$
122,620

 
$
126,249

Total provision
 
(985
)
 
42,362

 
41,377

Net charge-offs:
 
 
 
 
 
 
Charge-offs
 
(347
)
 
(23,903
)
 
(24,250
)
Recoveries
 

 
3,082

 
3,082

Net charge-offs
 
(347
)
 
(20,821
)
 
(21,168
)
Loan sales(1)
 

 
(1,533
)
 
(1,533
)
Ending Balance
 
$
2,297

 
$
142,628

 
$
144,925

Allowance:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
63,370

 
$
63,370

Ending balance: collectively evaluated for impairment
 
$
2,297

 
$
79,258

 
$
81,555

Loans:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
400,969

 
$
400,969

Ending balance: collectively evaluated for impairment
 
$
1,061,517

 
$
11,889,740

 
$
12,951,257

Net charge-offs as a percentage of average loans in repayment (annualized)(2)
 
0.18
%
 
1.05
%
 
 
Allowance as a percentage of the ending total loan balance
 
0.22
%
 
1.16
%
 
 
Allowance as a percentage of the ending loans in repayment(2)
 
0.30
%
 
1.78
%
 
 
Allowance coverage of net charge-offs (annualized)
 
1.65

 
1.71

 
 
Ending total loans, gross
 
$
1,061,517

 
$
12,290,709

 
 
Average loans in repayment(2)
 
$
786,818

 
$
7,894,340

 
 
Ending loans in repayment(2)
 
$
773,321

 
$
8,029,034

 
 
____________
    
(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)
 

 
 
Allowance for Loan Losses
 
 
Six Months Ended June 30, 2017
 
 
FFELP
Loans
 
Private
Education
Loans
 
Personal
Loans
 
Total
Allowance for Loan Losses
 
 
 
 
 
 
 
 
Beginning balance
 
$
2,171

 
$
182,472

 
$
58

 
$
184,701

Total provision
 
(88
)
 
75,986

 
780

 
76,678

Net charge-offs:
 
 
 
 
 
 
 
 
Charge-offs
 
(477
)
 
(58,955
)
 
(20
)
 
(59,452
)
Recoveries
 

 
7,655

 

 
7,655

Net charge-offs
 
(477
)
 
(51,300
)
 
(20
)
 
(51,797
)
Loan sales(1)
 

 
(2,134
)
 

 
(2,134
)
Ending Balance
 
$
1,606

 
$
205,024

 
$
818

 
$
207,448

Allowance:
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
95,177

 
$

 
$
95,177

Ending balance: collectively evaluated for impairment
 
$
1,606

 
$
109,847

 
$
818

 
$
112,271

Loans:
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
803,456

 
$

 
$
803,456

Ending balance: collectively evaluated for impairment
 
$
967,237

 
$
14,876,001

 
$
69,508

 
$
15,912,746

Net charge-offs as a percentage of average loans in repayment (annualized)(2)
 
0.12
%
 
0.99
%
 
0.08
%
 
 
Allowance as a percentage of the ending total loan balance
 
0.17
%
 
1.31
%
 
1.18
%
 
 
Allowance as a percentage of the ending loans in repayment(2)
 
0.21
%
 
1.93
%
 
1.18
%
 
 
Allowance coverage of net charge-offs (annualized)
 
1.68

 
2.00

 
20.45

 
 
Ending total loans, gross
 
$
967,237

 
$
15,679,457

 
$
69,508

 
 
Average loans in repayment(2)
 
$
765,347

 
$
10,375,463

 
$
47,654

 
 
Ending loans in repayment(2)
 
$
765,980

 
$
10,615,105

 
$
69,508

 
 
____________
    
(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.




17




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

 
 
Allowance for Loan Losses
 
 
Six Months Ended June 30, 2016
 
 
FFELP Loans
 
Private Education
Loans
 
Total
Allowance for Loan Losses
 
 
 
 
 
 
Beginning balance
 
$
3,691

 
$
108,816

 
$
112,507

Total provision
 
(664
)
 
76,201

 
75,537

Net charge-offs:
 
 
 
 
 
 
Charge-offs
 
(730
)
 
(42,907
)
 
(43,637
)
Recoveries
 

 
4,125

 
4,125

Net charge-offs
 
(730
)
 
(38,782
)
 
(39,512
)
Loan sales(1)
 

 
(3,607
)
 
(3,607
)
Ending Balance
 
$
2,297

 
$
142,628

 
$
144,925

Allowance:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
63,370

 
$
63,370

Ending balance: collectively evaluated for impairment
 
$
2,297

 
$
79,258

 
$
81,555

Loans:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
400,969

 
$
400,969

Ending balance: collectively evaluated for impairment
 
$
1,061,517

 
$
11,889,740

 
$
12,951,257

Net charge-offs as a percentage of average loans in repayment (annualized)(2)
 
0.18
%
 
1.01
%
 
 
Allowance as a percentage of the ending total loan balance
 
0.22
%
 
1.16
%
 
 
Allowance as a percentage of the ending loans in repayment(2)
 
0.30
%
 
1.78
%
 
 
Allowance coverage of net charge-offs (annualized)
 
1.57

 
1.84

 
 
Ending total loans, gross
 
$
1,061,517

 
$
12,290,709

 
 
Average loans in repayment(2)
 
$
794,665

 
$
7,695,889

 
 
Ending loans in repayment(2)
 
$
773,321

 
$
8,029,034

 
 
____________
    
(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.


18




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. 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 27 percent and 26 percent of the loans granted forbearance as of June 30, 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 June 30, 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
 
 
 
 
 
 
 
June 30, 2017
 
 
 
 
 
 
TDR Loans
 
$
815,515

 
$
803,456

 
$
95,177

 
 
 
 
 
 
 
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 
 June 30,
 
 
2017
 
2016
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
 
 
 
 
 
 
 
 
TDR Loans
 
$
766,171

 
$
14,310

 
$
364,882

 
$
6,697


    


19




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

 
 
Six Months Ended 
 June 30,
 
 
2017
 
2016
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
 
 
 
 
 
 
 
 
TDR Loans
 
$
718,727

 
$
26,567

 
$
332,292

 
$
12,280


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

 
 
June 30,
 
December 31,
 
 
2017
 
2016
 
 
Balance
 
%
 
Balance
 
%
TDR loans in in-school/grace/deferment(1)
 
$
33,693

 
 
 
$
24,185

 
 
TDR loans in forbearance(2)
 
98,710

 
 
 
71,851

 
 
TDR loans in repayment(3) and percentage of each status:
 
 
 
 
 
 
 
 
Loans current
 
603,215

 
89.9
%
 
462,187

 
89.5
%
Loans delinquent 31-60 days(4)
 
35,120

 
5.2

 
28,452

 
5.5

Loans delinquent 61-90 days(4)
 
20,170

 
3.0

 
17,326

 
3.4

Loans delinquent greater than 90 days(4)
 
12,548

 
1.9

 
8,605

 
1.6

Total TDR loans in repayment
 
671,053

 
100.0
%
 
516,570

 
100.0