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EX-32.2 - EXHIBIT 32.2 - SLM Corpslm20170930ex322.htm
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EX-31.1 - EXHIBIT 31.1 - SLM Corpslm20170930ex311.htm
EX-12.1 - EXHIBIT 12.1 - SLM Corpslm20170930ex121.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 September 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 September 30, 2017
Common Stock, $0.20 par value
431,889,664 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
 
73
Item 4.
Controls and Procedures
 
77
PART II. Other Information
 
 
Item 1.
Legal Proceedings
 
78
Item 1A.
Risk Factors
 
79
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
80
Item 3.
Defaults Upon Senior Securities
 
80
Item 4.
Mine Safety Disclosures
 
80
Item 5.
Other Information
 
80
Item 6.
Exhibits
 
81



2



SLM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
 
 
September 30,
 
December 31,
 
 
2017
 
2016
Assets
 
 
 
 
Cash and cash equivalents
 
$
1,247,764

 
$
1,918,793

Available-for-sale investments at fair value (cost of $236,018 and $211,406, respectively)
 
232,549

 
208,603

Loans held for investment (net of allowance for losses of $229,919 and $184,701, respectively)
 
18,040,465

 
15,137,922

Restricted cash and investments
 
66,625

 
53,717

Other interest-earning assets
 
31,303

 
49,114

Accrued interest receivable
 
1,019,735

 
766,106

Premises and equipment, net
 
88,975

 
87,063

Tax indemnification receivable
 
214,496

 
259,532

Other assets
 
74,258

 
52,153

Total assets
 
$
21,016,170

 
$
18,533,003

 
 
 
 
 
Liabilities
 
 
 
 
Deposits
 
$
15,034,052

 
$
13,435,667

Short-term borrowings
 
300,000

 

Long-term borrowings
 
2,738,662

 
2,167,979

Income taxes payable, net
 
96,404

 
184,324

Upromise member accounts
 
245,094

 
256,041

Other liabilities
 
180,118

 
141,934

Total liabilities
 
18,594,330

 
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: 442.3 million and 436.6 million shares issued, respectively
 
88,458

 
87,327

Additional paid-in capital
 
1,213,198

 
1,175,564

Accumulated other comprehensive loss (net of tax benefit of $2,720 and $5,364, respectively)
 
(4,417
)
 
(8,671
)
Retained earnings
 
824,316

 
595,322

Total SLM Corporation stockholders’ equity before treasury stock
 
2,521,555

 
2,414,542

Less: Common stock held in treasury at cost: 10.4 million and 7.7 million shares, respectively
 
(99,715
)
 
(67,484
)
Total equity
 
2,421,840

 
2,347,058

Total liabilities and equity
 
$
21,016,170

 
$
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
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
Interest income:
 
 
 
 
 
 
 
 
Loans
 
$
359,610

 
$
268,341

 
$
1,021,106

 
$
765,246

Investments
 
1,928

 
2,193

 
6,272

 
7,155

Cash and cash equivalents
 
4,686

 
2,003

 
10,429

 
4,832

Total interest income
 
366,224

 
272,537

 
1,037,807

 
777,233

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
61,890

 
38,210

 
157,473

 
107,633

Interest expense on short-term borrowings
 
1,804

 
1,604

 
4,234

 
5,827

Interest expense on long-term borrowings
 
20,469

 
9,448

 
56,070

 
17,869

Total interest expense
 
84,163

 
49,262

 
217,777

 
131,329

Net interest income
 
282,061

 
223,275

 
820,030

 
645,904

Less: provisions for credit losses
 
54,930

 
41,784

 
130,441

 
116,179

Net interest income after provisions for credit losses
 
227,131

 
181,491

 
689,589

 
529,725

Non-interest income:
 
 
 
 
 
 
 
 
Gains (losses) on derivatives and hedging activities, net
 
1,661

 
1,368

 
(7,326
)
 
3,156

Other income
 
4,455

 
21,598

 
26,430

 
56,309

Total non-interest income
 
6,116

 
22,966

 
19,104

 
59,465

Non-interest expenses:
 
 
 
 
 
 
 
 
Compensation and benefits
 
51,052

 
43,380

 
157,523

 
138,659

FDIC assessment fees
 
7,626

 
5,095

 
21,477

 
13,548

Other operating expenses
 
57,464

 
51,234

 
151,070

 
135,164

Total operating expenses
 
116,142

 
99,709

 
330,070

 
287,371

Acquired intangible asset amortization expense
 
117

 
226

 
351

 
747

Total non-interest expenses
 
116,259

 
99,935

 
330,421

 
288,118

Income before income tax expense
 
116,988

 
104,522

 
378,272

 
301,072

Income tax expense
 
40,617

 
47,557

 
136,341

 
120,987

Net income
 
76,371

 
56,965

 
241,931

 
180,085

Preferred stock dividends
 
3,028

 
5,316

 
12,577

 
15,698

Net income attributable to SLM Corporation common stock
 
$
73,343

 
$
51,649

 
$
229,354

 
$
164,387

Basic earnings per common share attributable to SLM Corporation
 
$
0.17

 
$
0.12

 
$
0.53

 
$
0.38

Average common shares outstanding
 
431,718

 
428,077

 
430,958

 
427,711

Diluted earnings per common share attributable to SLM Corporation
 
$
0.17

 
$
0.12

 
$
0.52

 
$
0.38

Average common and common equivalent shares outstanding
 
438,419

 
433,523

 
438,422

 
432,079





See accompanying notes to consolidated financial statements.

4



SLM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
76,371

 
$
56,965

 
$
241,931

 
$
180,085

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Unrealized gains (losses) on investments
 
734

 
406

 
(666
)
 
4,723

Unrealized gains (losses) on cash flow hedges
 
4,814

 
9,324

 
7,564

 
(23,782
)
Total unrealized gains (losses)
 
5,548

 
9,730

 
6,898

 
(19,059
)
Income tax (expense) benefit
 
(2,113
)
 
(3,690
)
 
(2,644
)
 
7,305

Other comprehensive income (loss), net of tax (expense) benefit
 
3,435

 
6,040

 
4,254

 
(11,754
)
Total comprehensive income
 
$
79,806

 
$
63,005

 
$
246,185

 
$
168,331


















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
 

 

 

 

 

 

 

 

 
180,085

 

 
180,085

Other comprehensive loss, net of tax
 

 

 

 

 

 

 

 
(11,754
)
 

 

 
(11,754
)
Total comprehensive income
 

 

 

 

 

 

 

 

 

 

 
168,331

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

 

 

 

 

 

 

 

 
(8,625
)
 

 
(8,625
)
Preferred Stock, series B ($.65 per share)
 

 

 

 

 

 

 

 

 
(7,073
)
 

 
(7,073
)
Dividend equivalent units related to employee stock-based compensation plans
 

 

 

 

 

 

 
402

 

 
(402
)
 
 
 

Issuance of common shares
 

 
3,727,574

 

 
3,727,574

 

 
745

 
5,493

 

 

 

 
6,238

Tax benefit related to employee stock-based compensation
 

 

 

 

 

 

 
(2,457
)
 

 

 

 
(2,457
)
Stock-based compensation expense
 

 

 

 

 

 

 
17,950

 

 

 

 
17,950

Shares repurchased related to employee stock-based compensation plans
 

 

 
(1,763,092
)
 
(1,763,092
)
 

 

 

 

 

 
(11,191
)
 
(11,191
)
Balance at September 30, 2016
 
7,300,000

 
434,405,008

 
(6,137,282
)
 
428,267,726

 
$
565,000

 
$
86,881

 
$
1,157,248

 
$
(27,813
)
 
$
530,594

 
$
(52,414
)
 
$
2,259,496












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
 

 

 

 

 

 

 

 

 
241,931

 

 
241,931

Other comprehensive income, net of tax
 

 

 

 

 

 

 

 
4,254

 

 

 
4,254

Total comprehensive income
 

 

 

 

 

 

 

 

 

 

 
246,185

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 ($2.15 per share)
 

 

 

 

 

 

 

 

 
(8,616
)
 

 
(8,616
)
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
 

 
5,652,886

 

 
5,652,886

 

 
1,131

 
15,336

 

 

 

 
16,467

Stock-based compensation expense
 

 

 

 

 

 

 
21,773

 

 

 

 
21,773

Shares repurchased related to employee stock-based compensation plans
 

 

 
(2,666,781
)
 
(2,666,781
)
 

 

 

 

 

 
(32,231
)
 
(32,231
)
Balance at September 30, 2017
 
4,000,000

 
442,285,365

 
(10,395,701
)
 
431,889,664

 
$
400,000

 
$
88,458

 
$
1,213,198

 
$
(4,417
)
 
$
824,316

 
$
(99,715
)
 
$
2,421,840









See accompanying notes to consolidated financial statements.

7



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

 
 
Nine Months Ended
 
 
September 30,
 
 
2017
 
2016
Operating activities
 
 
 
 
Net income
 
$
241,931

 
$
180,085

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
Provisions for credit losses
 
130,441

 
116,179

Income tax expense
 
136,341

 
118,530

Amortization of brokered deposit placement fee
 
6,831

 
7,766

Amortization of ABCP Facility upfront fee
 
995

 
866

Amortization of deferred loan origination costs and fees, net
 
6,122

 
4,304

Net amortization of discount on investments
 
1,504

 
1,387

Loss (income) on tax indemnification receivable
 
311

 
(14,386
)
Depreciation of premises and equipment
 
8,194

 
6,896

Amortization of acquired intangibles
 
351

 
747

Stock-based compensation expense
 
21,773

 
17,950

Unrealized losses (gains) on derivatives and hedging activities, net
 
6,931

 
(1,881
)
Other adjustments to net income, net
 
4,601

 
2,540

Changes in operating assets and liabilities:
 
 
 
 
Increase in accrued interest receivable
 
(506,451
)
 
(430,441
)
Decrease in restricted cash and investments, net
 
5,701

 
1,564

Decrease in other interest-earning assets
 
17,811

 
7,562

Decrease in tax indemnification receivable
 
44,725

 
44,725

Increase in other assets
 
(53,276
)
 
(22,879
)
Decrease in income taxes payable, net
 
(217,235
)
 
(201,338
)
Increase in accrued interest payable
 
15,240

 
10,202

(Decrease) increase in payable due to entity that is a subsidiary of Navient
 
(305
)
 
658

Increase in other liabilities
 
6,143

 
7,131

Total adjustments
 
(363,252
)
 
(321,918
)
Total net cash used in operating activities
 
(121,321
)
 
(141,833
)
Investing activities
 
 
 
 
Loans acquired and originated
 
(4,314,711
)
 
(4,072,631
)
Net proceeds from sales of loans held for investment
 
5,497

 
7,912

Proceeds from claim payments
 
34,759

 
49,742

Net decrease in loans held for investment
 
1,488,087

 
953,715

Increase in restricted cash and investments - variable interest entities
 
(18,608
)
 
(11,840
)
Purchases of available-for-sale securities
 
(55,569
)
 
(40,767
)
Proceeds from sales and maturities of available-for-sale securities
 
29,452

 
26,318

Total net cash used in investing activities
 
(2,831,093
)
 
(3,087,551
)
Financing activities
 
 
 
 
Brokered deposit placement fee
 
(9,668
)
 
(3,953
)
Net increase in certificates of deposit
 
1,087,486

 
481,623

Net increase in other deposits
 
516,343

 
961,123

Issuance costs for collateralized borrowings
 

 
(1,351
)
Borrowings collateralized by loans in securitization trusts - issued
 
767,245

 
1,104,551

Borrowings collateralized by loans in securitization trusts - repaid
 
(397,106
)
 
(106,567
)
Issuance costs for unsecured debt offering
 
(1,057
)
 

Unsecured debt issued
 
197,000

 

Borrowings under ABCP Facility
 
300,000

 
376,325

Repayment of borrowings under ABCP Facility
 

 
(526,500
)

8



Fees paid on ABCP Facility
 
(1,281
)
 
(1,450
)
Redemption of Preferred Stock Series A
 
(165,000
)
 

Preferred stock dividends paid
 
(12,577
)
 
(15,698
)
Net cash provided by financing activities
 
2,281,385

 
2,268,103

Net decrease in cash and cash equivalents
 
(671,029
)
 
(961,281
)
Cash and cash equivalents at beginning of period
 
1,918,793

 
2,416,219

Cash and cash equivalents at end of period
 
$
1,247,764

 
$
1,454,938

Cash disbursements made for:
 
 
 
 
Interest
 
$
191,488

 
$
119,812

Income taxes paid
 
$
216,321

 
$
201,218

Income taxes refunded
 
$
(986
)
 
$
(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 nine months ended September 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, as further described below.
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. As of September 30, 2017 and December 31, 2016, approximately 69 percent of TDRs were classified as such 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 September 30, 2017, $5.1 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 85.8 percent and 11.9 percent, respectively, of our total notional derivative contracts of $5.9 billion at September 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 the 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, 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 nine months ended September 30, 2017, we recorded a $7.3 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.
Recently Issued but Not Yet Adopted Accounting Pronouncements
On August 28, 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities,” which improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance. The guidance expands the ability to hedge nonfinancial and financial risk components, reduces complexity in fair value hedges of interest rate risk, eliminates the requirement to separately measure and report hedge ineffectiveness, as well as eases certain hedge effectiveness assessment requirements. The effective date for the standard is January 1, 2019, with early adoption permitted. We are currently evaluating if we will adopt this standard prior to its final effective date, and we currently do not expect the adoption to materially affect our consolidated financial statements.





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 September 30, 2017 and December 31, 2016, 78.2 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:
 
 
September 30,
 
December 31,
 
 
2017
 
2016
Private Education Loans
 
$
17,132,907

 
$
14,251,675

Deferred origination costs
 
53,501

 
44,206

Allowance for loan losses
 
(227,167
)
 
(182,472
)
Total Private Education Loans, net
 
16,959,241

 
14,113,409

 
 
 
 
 
FFELP Loans
 
949,180

 
1,010,908

Unamortized acquisition costs, net
 
2,696

 
2,941

Allowance for loan losses
 
(1,352
)
 
(2,171
)
Total FFELP Loans, net
 
950,524

 
1,011,678

 
 
 
 
 
Personal Loans
 
132,100

 
12,893

Allowance for loan losses
 
(1,400
)
 
(58
)
Total Personal Loans, net
 
130,700

 
12,835

 
 
 
 
 
Loans held for investment, net
 
$
18,040,465

 
$
15,137,922


 
The estimated weighted average life of education loans in our portfolio was approximately 5.6 years and 6.0 years at September 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
 
 
September 30,
 
 
2017
 
2016
 
 
Average Balance
 
Weighted Average Interest Rate
 
Average Balance
 
Weighted Average Interest Rate
Private Education Loans
 
$
16,228,751

 
8.50
%
 
$
12,881,890

 
8.00
%
FFELP Loans
 
960,185

 
4.02

 
1,049,803

 
3.52

Personal Loans
 
86,441

 
9.66

 

 

Total portfolio
 
$
17,275,377

 
 
 
$
13,931,693

 
 


 
 
Nine Months Ended
 
 
September 30,
 
 
2017
 
2016
 
 
Average Balance
 
Weighted Average Interest Rate
 
Average Balance
 
Weighted Average Interest Rate
Private Education Loans
 
$
15,791,557

 
8.37
%
 
$
12,307,932

 
8.00
%
FFELP Loans
 
981,106

 
3.86

 
1,076,394

 
3.48

Personal Loans
 
61,263

 
9.44

 

 

Total portfolio
 
$
16,833,926

 
 
 
$
13,384,326

 
 



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 September 30, 2017
 
 
FFELP
Loans
 
Private
Education
Loans
 
Personal
Loans
 
Total
Allowance for Loan Losses
 
 
 
 
 
 
 
 
Beginning balance
 
$
1,606

 
$
205,024

 
$
818

 
$
207,448

Total provision
 
(73
)
 
53,120

 
800

 
53,847

Net charge-offs:
 


 


 


 


Charge-offs
 
(181
)
 
(34,280
)
 
(220
)
 
(34,681
)
Recoveries
 

 
4,560

 
2

 
4,562

Net charge-offs
 
(181
)
 
(29,720
)
 
(218
)
 
(30,119
)
Loan sales(1)
 

 
(1,257
)
 

 
(1,257
)
Ending Balance
 
$
1,352

 
$
227,167

 
$
1,400

 
$
229,919

Allowance:
 

 

 

 

Ending balance: individually evaluated for impairment
 
$

 
$
100,999

 
$

 
$
100,999

Ending balance: collectively evaluated for impairment
 
$
1,352

 
$
126,168

 
$
1,400

 
$
128,920

Loans:
 

 

 

 

Ending balance: individually evaluated for impairment
 
$

 
$
942,561

 
$

 
$
942,561

Ending balance: collectively evaluated for impairment
 
$
949,180

 
$
16,190,346

 
$
132,100

 
$
17,271,626

Net charge-offs as a percentage of average loans in repayment (annualized)(2)
 
0.10
%
 
1.08
%
 
0.96
%
 

Allowance as a percentage of the ending total loan balance
 
0.14
%
 
1.33
%
 
1.06
%
 

Allowance as a percentage of the ending loans in repayment(2)
 
0.20
%
 
1.99
%
 
1.06
%
 

Allowance coverage of net charge-offs (annualized)
 
1.87

 
1.91

 
1.60

 

Ending total loans, gross
 
$
949,180

 
$
17,132,907

 
$
132,100

 

Average loans in repayment(2)
 
$
734,613

 
$
10,971,028

 
$
90,850

 

Ending loans in repayment(2)
 
$
690,849

 
$
11,406,581

 
$
132,100

 

____________
(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 September 30, 2016
 
 
FFELP Loans
 
Private Education
Loans
 
Total
Allowance for Loan Losses
 
 
 
 
 
 
Beginning balance
 
$
2,297

 
$
142,628

 
$
144,925

Total provision
 
268

 
40,502

 
40,770

Net charge-offs:
 
 
 
 
 
 
Charge-offs
 
(356
)
 
(22,072
)
 
(22,428
)
Recoveries
 

 
2,973

 
2,973

Net charge-offs
 
(356
)
 
(19,099
)
 
(19,455
)
Loan sales(1)
 

 
(1,401
)
 
(1,401
)
Ending Balance
 
$
2,209

 
$
162,630

 
$
164,839

Allowance:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
77,521

 
$
77,521

Ending balance: collectively evaluated for impairment
 
$
2,209

 
$
85,109

 
$
87,318

Loans:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
503,632

 
$
503,632

Ending balance: collectively evaluated for impairment
 
$
1,033,929

 
$
13,344,630

 
$
14,378,559

Net charge-offs as a percentage of average loans in repayment (annualized)(2)
 
0.18
%
 
0.91
%
 
 
Allowance as a percentage of the ending total loan balance
 
0.21
%
 
1.17
%
 
 
Allowance as a percentage of the ending loans in repayment(2)
 
0.28
%
 
1.83
%
 
 
Allowance coverage of net charge-offs (annualized)
 
1.55

 
2.13

 
 
Ending total loans, gross
 
$
1,033,929

 
$
13,848,262

 
 
Average loans in repayment(2)
 
$
791,296

 
$
8,420,625

 
 
Ending loans in repayment(2)
 
$
795,665

 
$
8,905,812

 
 
____________
    
(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
 
 
Nine Months Ended September 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
 
(161
)
 
129,105

 
1,580

 
130,524

Net charge-offs:
 
 
 
 
 
 
 
 
Charge-offs
 
(658
)
 
(93,235
)
 
(240
)
 
(94,133
)
Recoveries
 

 
12,216

 
2

 
12,218

Net charge-offs
 
(658
)
 
(81,019
)
 
(238
)
 
(81,915
)
Loan sales(1)
 

 
(3,391
)
 

 
(3,391
)
Ending Balance
 
$
1,352

 
$
227,167

 
$
1,400

 
$
229,919

Allowance:
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
100,999

 
$

 
$
100,999

Ending balance: collectively evaluated for impairment
 
$
1,352

 
$
126,168

 
$
1,400

 
$
128,920

Loans:
 
 
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
942,561

 
$

 
$
942,561

Ending balance: collectively evaluated for impairment
 
$
949,180

 
$
16,190,346

 
$
132,100

 
$
17,271,626

Net charge-offs as a percentage of average loans in repayment (annualized)(2)
 
0.12
%
 
1.02
%
 
0.51
%
 
 
Allowance as a percentage of the ending total loan balance
 
0.14
%
 
1.33
%
 
1.06
%
 
 
Allowance as a percentage of the ending loans in repayment(2)
 
0.20
%
 
1.99
%
 
1.06
%
 
 
Allowance coverage of net charge-offs (annualized)
 
1.54

 
2.10

 
4.41

 
 
Ending total loans, gross
 
$
949,180

 
$
17,132,907

 
$
132,100

 
 
Average loans in repayment(2)
 
$
752,990

 
$
10,589,725

 
$
62,747

 
 
Ending loans in repayment(2)
 
$
690,849

 
$
11,406,581

 
$
132,100

 
 
____________
    
(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
 
 
Nine Months Ended September 30, 2016
 
 
FFELP Loans
 
Private Education
Loans
 
Total
Allowance for Loan Losses
 
 
 
 
 
 
Beginning balance
 
$
3,691

 
$
108,816

 
$
112,507

Total provision
 
(396
)
 
116,703

 
116,307

Net charge-offs:
 
 
 
 
 
 
Charge-offs
 
(1,086
)
 
(64,979
)
 
(66,065
)
Recoveries
 

 
7,098

 
7,098

Net charge-offs
 
(1,086
)
 
(57,881
)
 
(58,967
)
Loan sales(1)
 

 
(5,008
)
 
(5,008
)
Ending Balance
 
$
2,209

 
$
162,630

 
$
164,839

Allowance:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
77,521

 
$
77,521

Ending balance: collectively evaluated for impairment
 
$
2,209

 
$
85,109

 
$
87,318

Loans:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
503,632

 
$
503,632

Ending balance: collectively evaluated for impairment
 
$
1,033,929

 
$
13,344,630

 
$
14,378,559

Net charge-offs as a percentage of average loans in repayment (annualized)(2)
 
0.18
%
 
0.97
%
 
 
Allowance as a percentage of the ending total loan balance
 
0.21
%
 
1.17
%
 
 
Allowance as a percentage of the ending loans in repayment(2)
 
0.28
%
 
1.83
%
 
 
Allowance coverage of net charge-offs (annualized)
 
1.53

 
2.11

 
 
Ending total loans, gross
 
$
1,033,929

 
$
13,848,262

 
 
Average loans in repayment(2)
 
$
795,452

 
$
7,952,469

 
 
Ending loans in repayment(2)
 
$
795,665

 
$
8,905,812

 
 
____________
    
(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. As of September 30, 2017 and December 31, 2016, approximately 69 percent of TDRs were classified as such 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 September 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
 
 
 
 
 
 
 
September 30, 2017
 
 
 
 
 
 
TDR Loans
 
$
957,605

 
$
942,561

 
$
100,999

 
 
 
 
 
 
 
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 
 September 30,
 
 
2017
 
2016
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
 
 
 
 
 
 
 
 
TDR Loans
 
$
877,011

 
$
16,517

 
$
454,395

 
$
8,116


    


19




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

 
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
 
 
 
 
 
 
 
 
TDR Loans
 
$
772,362

 
$
43,084

 
$
373,747

 
$
20,396


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

 
 
September 30,
 
December 31,
 
 
2017
 
2016
 
 
Balance
 
%
 
Balance
 
%
TDR loans in in-school/grace/deferment(1)
 
$
49,287

 
 
 
$
24,185

 
 
TDR loans in forbearance(2)
 
118,034

 
 
 
71,851

 
 
TDR loans in repayment(3) and percentage of each status:
 
 
 
 
 
 
 
 
Loans current
 
692,282

 
89.3
%
 
462,187

 
89.5
%
Loans delinquent 31-60 days(4)
 
43,362

 
5.6

 
28,452

 
5.5

Loans delinquent 61-90 days(4)
 
25,268

 
3.3

 
17,326

 
3.4

Loans delinquent greater than 90 days(4)
 
14,328

 
1.8

 
8,605

 
1.6

Total TDR loans in repayment
 
775,240