10-Q 1 slm-2q_2014x10xq.htm 10-Q SLM-2Q_2014_10-Q



 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
or
c
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-13251
 
SLM Corporation
(Exact name of registrant as specified in its charter)
 
Delaware
52-2013874
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
300 Continental Drive, Newark, Delaware
19713
(Address of principal executive offices)
(Zip Code)
(302) 283-8000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  c
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
x
 
Accelerated filer
c
 
 
 
 
 
Non-accelerated filer
c
(Do not check if a smaller reporting company)
Smaller reporting company
c
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   c
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  c    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
Class
 
Outstanding at June 30, 2014
 
Common Stock, $0.20 par value
422,936,478 shares
 






SLM CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS
INDEX
 

Part I. Financial Information
 
 

Item 1.
Financial Statements
 

Item 1.
Notes to the Financial Statements
 

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

Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 

Item 4.
Controls and Procedures
 

PART II. Other Information
 
 
Item 1.
Legal Proceedings
 

Item 1A.
Risk Factors
 
73

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
81

Item 3.
Defaults Upon Senior Securities
 
81

Item 4.
Mine Safety Disclosures
 
81

Item 5.
Other Information
 
81

Item 6.
Exhibits
 
87




1



SLM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
 
 
June 30,
 
December 31,
 
 
2014
 
2013
Assets
 
 
 
 
Cash and cash equivalents
 
$
1,524,176

 
$
2,182,865

Available-for-sale investments at fair value (cost of $150,117 and $106,977, respectively)
 
149,399

 
102,105

Loans held for investment (net of allowance for losses of $60,527 and $68,081, respectively)
 
8,793,971

 
7,931,377

Other interest-earning assets
 
45,417

 
4,355

Accrued interest receivable
 
453,461

 
356,283

Premises and equipment, net
 
77,833

 
74,188

Acquired intangible assets, net
 
4,241

 
6,515

Tax indemnification receivable
 
270,198

 

Other assets
 
60,643

 
48,976

Total assets
 
$
11,379,339

 
$
10,706,664

 
 
 
 
 
Liabilities
 
 
 
 
Deposits
 
$
8,890,209

 
$
9,001,550

Income taxes payable, net
 
323,467

 
162,205

Upromise related liabilities
 
301,160

 
307,518

Other liabilities
 
126,239

 
69,248

Total liabilities
 
9,641,075

 
9,540,521

 
 
 
 
 
Commitments and contingencies
 

 

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

 

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

 

Common stock, par value $0.20 per share, 1.125 billion shares authorized: 423 million and 0 shares issued, respectively
 
84,659

 

Additional paid-in capital
 
1,071,916

 

Navient's subsidiary investment
 

 
1,164,495

Accumulated other comprehensive (loss) income (net of tax (benefit) expense of ($354) and ($1,849), respectively)
 
(365
)
 
(3,024
)
Retained earnings
 
20,167

 

Total SLM Corporation stockholders' equity before treasury stock
 
1,741,377

 
1,161,471

Less: Common stock held in treasury at cost: 359 million and 0 shares, respectively
 
(3,113
)
 

Noncontrolling interest
 

 
4,672

Total equity
 
1,738,264

 
1,166,143

Total liabilities and equity
 
$
11,379,339

 
$
10,706,664


See accompanying notes to consolidated financial statements.

2



SLM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Interest income:
 
 
 
 
 
 
 
 
Loans
 
$
162,238

 
$
122,212

 
$
322,273

 
$
253,781

Investments
 
2,236

 
5,638

 
3,204

 
11,624

Cash and cash equivalents
 
1,099

 
1,038

 
1,965

 
1,770

Total interest income
 
165,573

 
128,888

 
327,442

 
267,175

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
21,034

 
21,439

 
43,624

 
44,008

Other interest expense
 

 
32

 
41

 
49

Total interest expense
 
21,034

 
21,471

 
43,665

 
44,057

Net interest income
 
144,539

 
107,417

 
283,777

 
223,118

Less: provisions for loan losses
 
1,014

 
(1,015
)
 
40,173

 
19,677

Net interest income after provisions for loan losses
 
143,525

 
108,432

 
243,604

 
203,441

Noninterest income:
 
 
 
 
 
 
 
 
Gains on sales of loans to affiliates, net
 
1,928

 
73,441

 
35,816

 
148,663

(Losses) gains on derivatives and hedging activities, net
 
(9,458
)
 
(52
)
 
(10,222
)
 
558

Other
 
15,229

 
8,665

 
23,365

 
16,465

Total noninterest income
 
7,699

 
82,054

 
48,959

 
165,686

Expenses:
 
 
 
 
 
 
 
 
Compensation and benefits
 
31,667

 
26,821

 
61,334

 
56,585

Other operating expenses
 
28,812

 
39,772

 
62,744

 
70,602

Total operating expenses
 
60,479

 
66,593

 
124,078

 
127,187

Acquired intangible asset impairment and amortization expense
 
1,156

 
714

 
2,995

 
1,428

Restructuring and other reorganization expenses
 
13,520

 
84

 
13,749

 
107

Total expenses
 
75,155

 
67,391

 
140,822

 
128,722

Income before income tax expense
 
76,069

 
123,095

 
151,741

 
240,405

Income tax expense
 
31,941

 
46,973

 
60,599

 
91,738

Net income
 
44,128

 
76,122

 
91,142

 
148,667

Less: net loss attributable to noncontrolling interest
 

 
(347
)
 
(434
)
 
(686
)
Net income attributable to SLM Corporation
 
44,128

 
76,469

 
91,576

 
149,353

Preferred stock dividends
 
3,228

 

 
3,228

 

Net income attributable to SLM Corporation common stock
 
$
40,900

 
$
76,469

 
$
88,348

 
$
149,353

 
 
 
 
 
 
 
 
 
Basic earnings per common share attributable to SLM Corporation
 
$
0.10

 
$
0.17

 
$
0.21

 
$
0.34

Average common shares outstanding
 
422,805

 
439,972

 
424,751

 
445,309

Diluted earnings per common share attributable to SLM Corporation
 
$
0.09

 
$
0.17

 
$
0.20

 
$
0.33

Average common and common equivalent shares outstanding
 
430,750

 
448,064

 
432,689

 
453,231



See accompanying notes to consolidated financial statements.

3



SLM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
 
Three Months Ended June 30,  
 
Six Months Ended June 30,  
 
 
2014
 
2013
 
2014
 
2013
Net income
 
$
44,128

 
$
76,122

 
$
91,142

 
$
148,667

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Unrealized gain (loss) on investments
 
2,749

 
(15,625
)
 
4,155

 
37,769

Total unrealized gains (losses) on investments
 
2,749

 
(15,625
)
 
4,155

 
37,769

Income tax (expense) benefit
 
(962
)
 
5,955

 
(1,496
)
 
(14,327
)
Other comprehensive income (loss), net of tax benefit (expense)
 
1,787

 
(9,670
)
 
2,659

 
23,442

Comprehensive income
 
45,915

 
66,452

 
93,801

 
172,109

Less: comprehensive loss attributable to noncontrolling interest
 

 
(347
)
 
(434
)
 
(686
)
Total comprehensive income attributable to SLM Corporation
 
$
45,915

 
$
66,799

 
$
94,235

 
$
172,795


















See accompanying notes to consolidated financial statements.

4



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



 
 
 
 
 
 
 
 
 
 
 
 
 
 
Navient's Subsidiary Investment
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
Total SLM Corporation Equity
 
Non-controlling interest
 
Total Equity
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2013
 
$
1,056,783

 
$
47,460

 
 
$
1,104,243

 
$
5,685

 
$
1,109,928

Net income (loss)
 
76,469

 

 
 
76,469

 
(347
)
 
76,122

Other comprehensive loss, net of tax
 

 
(9,670
)
 
 
(9,670
)
 

 
(9,670
)
Total comprehensive income (loss)
 

 

 
 
66,799

 
(347
)
 
66,452

Net transfers from affiliate
 
29,570

 

 
 
29,570

 

 
29,570

Balance at June 30, 2013
 
$
1,162,822

 
$
37,790

 
 
$
1,200,612

 
$
5,338

 
$
1,205,950

 
 
 
 
 
 
 
 
 
 
 
 















See accompanying notes to consolidated financial statements.



5




SLM CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except share and per share amounts)(Unaudited) 
 
 
 
 
Common Stock Shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock Shares
 
Issued
 
Treasury
 
Outstanding
 
Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Navient's Subsidiary Investment
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings
 
Treasury Stock
 
Total SLM Corporation Equity
 
Non-controlling interest
 
Total Equity
Balance at March 31, 2014
 

 

 

 

 
$

 
$

 
$

 
$
1,229,187

 
$
(2,152
)
 
$

 
$

 
$
1,227,035

 
$
4,238

 
$
1,231,273

Net income
 

 

 

 

 

 

 

 
20,725

 

 
23,403

 

 
44,128

 

 
44,128

Other comprehen-sive income, net of tax
 

 

 

 

 

 

 

 

 
1,787

 

 

 
1,787

 

 
1,787

Total comprehensive income
 

 

 

 

 

 

 

 

 

 

 

 
45,915

 

 
45,915

Net transfers from affiliate
 

 

 

 

 

 

 

 
462,165

 

 

 

 
462,165

 

 
462,165

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

 
422,790,320

 

 
422,790,320

 
565,000

 
84,558

 
1,062,519

 
(1,712,077
)
 

 

 

 

 

 

Sale of non-controlling interest
 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 
(1,917
)
 

 
(1,917
)
 

 
(1,917
)
Preferred Stock, series B ($.49 per share)
 

 

 

 

 

 

 

 

 

 
(1,311
)
 

 
(1,311
)
 

 
(1,311
)
Dividend equivalent units related to employee stock-based compensation plans
 

 

 

 

 

 

 
8

 

 

 
(8
)
 

 

 

 

Issuance of common shares
 

 
504,929

 

 
504,929

 

 
101

 
2,344

 

 

 

 

 
2,445

 

 
2,445

Stock-based compensation expense
 

 

 

 

 

 

 
7,045

 

 

 

 

 
7,045

 

 
7,045

Shares repurchased related to employee stock-based compensation plans
 

 

 
(358,771
)
 
(358,771
)
 

 

 

 

 

 

 
(3,113
)
 
(3,113
)
 

 
(3,113
)
Balance at June 30, 2014
 
7,300,000

 
423,295,249

 
(358,771
)
 
422,936,478

 
$
565,000

 
$
84,659

 
$
1,071,916

 
$

 
$
(365
)
 
$
20,167

 
$
(3,113
)
 
$
1,738,264

 
$

 
$
1,738,264

See accompanying notes to consolidated financial statements.

6



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



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

 
$
14,348

 
$
1,083,276

 
$
6,024

 
$
1,089,300

Net income (loss)
 
149,353

 
 
 
149,353

 
(686
)
 
148,667

Other comprehensive income, net of tax
 

 
23,442

 
23,442

 

 
23,442

Total comprehensive (loss)
 

 

 
172,795

 
(686
)
 
172,109

Net transfers to affiliate
 
(55,459
)
 

 
(55,459
)
 

 
(55,459
)
Balance at June 30, 2013
 
$
1,162,822

 
$
37,790

 
$
1,200,612

 
$
5,338

 
$
1,205,950















See accompanying notes to consolidated financial statements.

7




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

 

 

 

 
$

 
$

 
$

 
$
1,164,495

 
$
(3,024
)
 
$

 
$

 
$
1,161,471

 
$
4,672

 
$
1,166,143

Net income (loss)
 

 

 

 

 

 

 

 
68,173

 

 
23,403

 

 
91,576

 
(434
)
 
91,142

Other comprehensive income, net of tax
 

 

 

 

 

 

 

 

 
2,659

 

 

 
2,659

 

 
2,659

Total comprehensive income (loss)
 

 

 

 

 

 

 

 

 

 

 

 
94,235

 
(434
)
 
93,801

Net transfers from affiliate
 

 

 

 

 

 

 

 
479,409

 

 

 

 
479,409

 

 
479,409

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

 
422,790,320

 

 
422,790,320

 
565,000

 
84,558

 
1,062,519

 
(1,712,077
)
 

 

 

 

 

 

Sale of non-controlling interest
 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 
(1,917
)
 

 
(1,917
)
 

 
(1,917
)
Preferred Stock, series B ($.49 per share)
 

 

 

 

 

 

 

 

 

 
(1,311
)
 

 
(1,311
)
 

 
(1,311
)
Dividend equivalent units related to employee stock-based compensation plans
 

 

 

 

 

 

 
8

 

 

 
(8
)
 
 
 

 

 

Issuance of common shares
 

 
504,929

 

 
504,929

 

 
101

 
2,344

 

 

 

 

 
2,445

 

 
2,445

Stock-based compensation expense
 

 

 

 

 

 

 
7,045

 

 

 

 

 
7,045

 

 
7,045

Shares repurchased related to employee stock-based compensation plans
 

 

 
(358,771
)
 
(358,771
)
 

 

 

 

 

 

 
(3,113
)
 
(3,113
)
 

 
(3,113
)
Balance at June 30, 2014
 
7,300,000

 
423,295,249

 
(358,771
)
 
422,936,478

 
$
565,000

 
$
84,659

 
$
1,071,916

 
$

 
$
(365
)
 
$
20,167

 
$
(3,113
)
 
$
1,738,264

 
$

 
$
1,738,264

See accompanying notes to consolidated financial statements.

8



SLM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Six Months Ended
 
 
June 30,
 
 
2014
 
2013
Operating activities
 
 
 
 
Net income
 
$
91,142

 
$
148,667

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
Provision for loan losses
 
40,173

 
19,677

Tax provision
 
60,599

 
91,738

Amortization of FDIC fees
 

 
1,046

Amortization of brokered deposit placement fee
 
5,222

 
4,879

Amortization of deferred loan origination costs and fees, net
 
847

 
616

Net amortization (accretion) of discount on investments
 
236

 
(4,342
)
Depreciation of premises and equipment
 
1,642

 
1,694

Amortization and impairment of acquired intangibles
 
2,995

 
1,428

Stock-based compensation expense
 
8,468

 
9,229

Interest rate swap
 
8,025

 
(452
)
Gains on sale of loans to affiliates, net
 
(35,816
)
 
(148,663
)
Changes in operating assets and liabilities:
 
 
 
 
Net decrease in loans held for sale
 
6,183

 
2,521

Origination of loans held for sale
 
(6,183
)
 
(2,521
)
Increase in accrued interest receivable
 
(175,919
)
 
(119,723
)
Increase in other interest-earning assets
 
(41,062
)
 
(1,107
)
(Increase) decrease in other assets
 
(18,946
)
 
(17,888
)
Increase (decrease) in income tax payable
 
(199,782
)
 
(10,315
)
Decrease in accrued interest payable
 
(2,931
)
 
(1,498
)
Increase in payable due to Navient
 
11,109

 
5,892

Increase (decrease) in other liabilities
 
12,140

 
(41,204
)
Total adjustments
 
(323,000
)
 
(208,993
)
Total net cash provided by (used in) operating activities
 
(231,858
)
 
(60,326
)
Investing activities
 
 
 
 
Loans acquired and originated
 
(32,796
)
 
(185,190
)
Net proceeds from sales of loans held for investment
 
755,746

 
1,825,406

Net increase in loans held for investment
 
(1,512,009
)
 
(1,465,830
)
Purchases of available-for-sale securities
 
(47,087
)
 
(15,966
)
Proceeds from sales and maturities of available-for-sale securities
 
3,712

 
10,996

Total net cash (used in) provided by investing activities
 
(832,434
)
 
169,416

Financing activities
 
 
 
 
Net (decrease) in brokered certificates of deposit
 
(841,965
)
 
(521,740
)
Net (decrease) increase in NOW account deposits
 
(18,214
)
 
2,179

Net increase in High Yield Savings Deposits
 
647,864

 
414

Net increase in Retail Certificates of Deposit
 
5,143

 
13,335

Net increase in MMDA deposits
 
133,510

 
484,357

Net decrease in deposits with entity that is a subsidiary of Navient
 
(5,633
)
 
(110,486
)
Special cash contribution from Navient
 
472,718

 

Net capital contributions (to) from entity that is a subsidiary of Navient
 
15,408

 
76,262

Preferred stock dividends paid
 
(3,228
)
 

Dividend paid to entity that is a subsidiary of Navient
 

 
(120,000
)
Net cash provided by (used in) financing activities
 
405,603

 
(175,679
)
Net decrease in cash and cash equivalents
 
(658,689
)
 
(66,589
)
Cash and cash equivalents at beginning of period
 
2,182,865

 
1,599,082


9



Cash and cash equivalents at end of period
 
$
1,524,176

 
$
1,532,493

Cash disbursements made for:
 
 
 
 
Interest
 
$
42,819

 
$
39,866

Income taxes paid
 
$
199,782

 
$
10,315
























See accompanying notes to consolidated financial statements.

10


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


1. Significant Accounting Policies

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

11


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


loan receivable may progress through the various delinquency stages and ultimately charge off. We may also take into account the current and future economic environment and other qualitative factors when calculating the allowance for loan losses.
The evaluation of the allowance for loan losses is inherently subjective, as it requires material estimates that may be susceptible to significant changes. Our default estimates are based on a loss confirmation period (loss confirmation period represents the expected period between a loss event and when management considers the debt to be uncollectible), taking into consideration account management practices that affect the timing of a loss, such as the usage of forbearance.
Prior to the Spin-Off, the Bank exercised its right and sold substantially all of the Private Education Loans it originated that became delinquent or were granted forbearance to one or more of its then affiliates. Because of this arrangement, the Bank did not hold many loans in forbearance. As a result, the Bank had very little historical forbearance activity and very few delinquencies.
In connection with the Spin-Off, the agreement under which the Bank previously made these sales was amended so that the Bank now only has the right to require Navient to purchase loans only where (a) the borrower has a lending relationship with both the Bank and Navient (“Split Loans”) and (b) the Split Loans either (1) are more than 90 days past due; (2) have been restructured; (3) have been granted a hardship forbearance or more than six months of administrative forbearance; or (4) have a borrower or cosigner who has filed for bankruptcy. At June 30, 2014, we held approximately $1.3 billion of Split Loans.
Pre-Spin-Off SLM’s default aversion strategies were focused on the final stages of delinquency, from 150 days to 212 days. As a result of changing our corporate charge-off policy and greatly reducing the number of potentially delinquent loans we sell to Navient, our default aversion strategies must now focus exclusively on loans 60 to 120 days delinquent. This change has the effect of accelerating the recognition of losses due to the shorter charge-off period (120 days). In addition, we changed our loss confirmation period from two years to one year to reflect the shorter charge-off policy and our revised servicing practices. These two changes resulted in a $14 million net reduction in our allowance for loan losses because we are now only reserving for one year of losses as compared with two years under the prior policy, which more than offset the impact of the shorter charge-off period.
The one-year estimate underlying the allowance for loan losses is subject to a number of assumptions. If actual future performance in delinquency, charge-offs and recoveries are significantly different than estimated, or account management assumptions or practices were to change, this could materially affect the estimate of the allowance for loan losses, the timing of when losses are recognized, and the related provision for loan losses on our consolidated statements of income.

Separately, for our troubled debt restructurings ("TDR") portfolio, we estimate an allowance amount sufficient to cover life-of-loan expected losses through an impairment calculation based on the difference between the loan’s basis and the present value of expected future cash flows (which would include life-of-loan default and recovery assumptions) discounted at the loan’s original effective interest rate. Our TDR portfolio is comprised mostly of loans with interest rate reductions and forbearance usage greater than three months.
Income Taxes
In connection with the Spin-Off, the Company will be the taxpayer legally responsible for $283 million of deferred taxes payable (installment payments due quarterly through 2018) in connection with gains recognized by pre-Spin-Off SLM on debt repurchases in prior years. As part of the tax sharing agreement between the Company and Navient, Navient has agreed to fully pay us for these deferred taxes due. An indemnification receivable of $264 million was recorded, which represents the fair value of the future payments under the agreement based a discounted cash flow model. We will accrue interest income on the indemnification receivable using the interest method.
The Company also recorded a liability related to uncertain tax positions of $27 million for which we are indemnified by Navient. If there is an adjustment to the indemnified uncertain tax liability, an offsetting adjustment to the indemnification receivable will be recorded as pre-tax adjustment to the income statement.
As of the date of the Spin-Off on April 30, 2014, we recorded a liability of $310 million ($283 million related to deferred taxes and $27 million related to uncertain tax positions) and an indemnification receivable of $291 million ($310 million less the $19 million discount). As of June 30, 2014, the liability balance is $303 million ($283 million related to deferred taxes and $20 million related to uncertain tax positions) and the indemnification receivable balance is $270 million ($250 million related to deferred taxes and $20 million related to uncertain tax positions).

12


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


Recently Issued Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance when it becomes effective. The new standard is effective on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.



2. Investments

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

 
 
 
As of June 30, 2014
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Mortgage-backed securities
 
$
150,117

 
$
1,736

 
$
(2,454
)
 
$
149,399

Available for sale securities
 
$
150,117

 
$
1,736

 
$
(2,454
)
 
$
149,399

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

 
$
706

 
$
(5,578
)
 
$
102,105

Available for sale securities
 
$
106,977

 
$
706

 
$
(5,578
)
 
$
102,105

     
Our investment portfolio is comprised of mortgage-backed securities issued by Ginnie Mae and Fannie Mae, with amortized cost of $74,563, $68,435 and $7,119, respectively, at June 30, 2014. We own these securities to meet our requirements under the Community Reinvestment Act. As of June 30, 2014, there were 13 of 47 separate mortgage-backed securities with unrealized losses in our investment portfolio. As of December 31, 2013, there were 20 of 33 separate mortgage-backed securities with unrealized losses in our investment portfolio. As of June 30, 2014, 7 of the 13 securities in a net loss position were issued under Ginnie Mae programs that carry a full faith and credit guarantee from the U.S. Government. The remaining securities in a net loss position carry a principal and interest guarantee by Fannie Mae. We have the ability and the intent to hold these securities for a period of time sufficient for the market price to recover to at least the adjusted amortized cost of the security.
The expected payments on mortgage-backed securities may not coincide with their contractual maturities because borrowers have the right to prepay certain obligations. Accordingly, these securities are not included in a maturities distribution.
The mortgage-backed securities have been pledged to the Federal Reserve Bank (“FRB”) as collateral against any advances and accrued interest under the Primary Credit program or any other program sponsored by the FRB. We had $138,458 and $103,049 par value of mortgage-backed securities pledged to this borrowing facility at June 30, 2014 and December 31, 2013, respectively, as discussed further in Note 6, “Borrowed Funds.”
As of June 30, 2014, the amortized cost and fair value of securities, by contractual maturities, were as follows:

13


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

Year of Maturity
 
Amortized Cost
 
Estimated Fair Value
2038
 
$
767

 
$
837

2039
 
13,186

 
14,111

2042
 
29,173

 
27,515

2043
 
76,126

 
75,974

2044
 
30,865

 
30,962

Total
 
$
150,117

 
$
149,399




14


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


3. Loans Held for Investment
Loans Held for Investment consist of Private Education Loans and FFELP Loans.
Our Private Education Loans are made largely to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans or customers’ resources. Private Education Loans bear the full credit risk of the customer. We manage this additional risk through historical risk-performance underwriting strategies and the addition of qualified cosigners. Private Education Loans generally carry a variable rate indexed to LIBOR. We provide incentives for customers to include a cosigner on the loan, and the vast majority of loans in our portfolio are cosigned. We also encourage customers to make payments while in school.
FFELP Loans are insured as to their principal and accrued interest in the event of default subject to a Risk Sharing level based on the date of loan disbursement. When a FFELP Loan first disbursed on and after July 1, 2006 defaults, the federal government guarantees 97 percent of the principal balance plus accrued interest (98 percent on loans disbursed before July 1, 2006) and the holder of the loan is at risk for the remaining amount not guaranteed as a Risk Sharing loss on the loan. FFELP Loans originated after October 1, 1993 are subject to Risk Sharing on loan default claim payments unless the default results from the borrower’s death, disability or bankruptcy.
Loans held for investment are summarized as follows:
 
 
June 30,
 
December 31,
 
 
2014
 
2013
Private Education Loans
 
$
7,482,794

 
$
6,563,342

Unearned discounts
 
7,746

 
5,063

Allowance for loan losses
 
(54,315
)
 
(61,763
)
Total Private Education Loans, net
 
7,436,225

 
6,506,642

 
 
 
 
 
FFELP Loans
 
1,360,107

 
1,426,972

Unamortized acquisition costs, net
 
3,851

 
4,081

Allowance for loan losses
 
(6,212
)
 
(6,318
)
Total FFELP Loans, net
 
1,357,746

 
1,424,735

 
 
 
 
 
Loans held for investment, net
 
$
8,793,971

 
$
7,931,377


 
The estimated weighted average life of Private Education Loans in our portfolio was approximately 6.6 years and 7.0 years at June 30, 2014 and December 31, 2013, respectively.

15


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


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

 
 
Three Months Ended June 30, 2014
 
Three Months Ended June 30, 2013
 
 
Average Balance
 
Weighted Average Interest Rate
 
Average Balance
 
Weighted Average Interest Rate
Private Education Loans
 
$
7,350,825

 
8.23
%
 
$
5,533,745

 
8.2
%
FFELP Loans
 
1,374,291

 
3.33

 
1,087,954

 
3.32

Total portfolio
 
$
8,725,116

 

 
$
6,621,699

 


 
 
Six Months Ended June 30, 2014
 
Six Months Ended June 30, 2013
 
 
Average Balance
 
Weighted Average Interest Rate
 
Average Balance
 
Weighted Average Interest Rate
Private Education Loans
 
$
7,382,565

 
8.19
%
 
$
5,863,633

 
8.13
%
FFELP Loans
 
1,387,358

 
3.27

 
1,064,303

 
3.3

Total portfolio
 
$
8,769,923

 
 
 
$
6,927,936

 
 



16


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


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

Allowance for Loan Losses Metrics

 
 
Allowance for Loan Losses
 
 
Three Months Ended June 30, 2014
 
 
FFELP Loans
 
Private Education
Loans
 
Total
Allowance for Loan Losses
 
 
 
 
 
 
Beginning balance
 
$
6,181

 
$
71,453

 
$
77,634

Total provision
 
685

 
329

 
1,014

Charge-offs(1)
 
(654
)
 

 
(654
)
Student loan sales(2)
 

 
(17,467
)
 
(17,467
)
Ending Balance
 
$
6,212

 
$
54,315

 
$
60,527

Allowance:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
1,037

 
$
1,037

Ending balance: collectively evaluated for impairment
 
$
6,212

 
$
53,278

 
$
59,490

Loans:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
4,508

 
$
4,508

Ending balance: collectively evaluated for impairment
 
$
1,360,107

 
$
7,478,286

 
$
8,838,393

Charge-offs as a percentage of average loans in repayment (annualized)
 
0.07
%
 
%
 
 
Allowance as a percentage of the ending total loan balance
 
0.46
%
 
0.73
%
 
 
Allowance as a percentage of the ending loans in repayment
 
0.66
%
 
1.23
%
 
 
Allowance coverage of charge-offs (annualized)
 
2.40

 

 
 
Ending total loans, gross
 
$
1,360,107

 
$
7,482,794

 
 
Average loans in repayment
 
$
973,894

 
$
4,322,356

 
 
Ending loans in repayment
 
$
947,972

 
$
4,425,573

 
 

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


17


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

 
 
Allowance for Loan Losses
 
 
Three Months Ended June 30, 2013
 
 
FFELP Loans
 
Private Education
Loans
 
Total
Allowance for Loan Losses
 
 
 
 
 
 
Beginning balance
 
$
4,199

 
$
65,381

 
$
69,580

Total provision
 
951

 
(1,966
)
 
(1,015
)
Charge-offs(1)
 
(534
)
 

 
(534
)
Student loan sales(2)
 

 
(12,546
)
 
(12,546
)
Ending Balance
 
$
4,616

 
$
50,869

 
$
55,485

Allowance:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$

 
$

Ending balance: collectively evaluated for impairment
 
$
4,616

 
$
50,869

 
$
55,485

Loans:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$

 
$

Ending balance: collectively evaluated for impairment
 
$
1,162,476

 
$
5,383,128

 
$
6,545,604

Charge-offs as a percentage of average loans in repayment (annualized)
 
0.06
%
 
%
 
 
Allowance as a percentage of the ending total loan balance
 
0.40
%
 
0.94
%
 
 
Allowance as a percentage of the ending loans in repayment
 
0.56
%
 
1.65
%
 
 
Allowance coverage of charge-offs (annualized)
 
2.16

 

 
 
Ending total loans, gross
 
$
1,162,476

 
$
5,383,128

 
 
Average loans in repayment
 
$
825,038

 
$
3,243,513

 
 
Ending loans in repayment
 
$
824,523

 
$
3,081,929

 
 

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

18


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

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

 
$
61,763

 
$
68,081

Total provision
 
1,191

 
38,982

 
40,173

Charge-offs(1)
 
(1,297
)
 

 
(1,297
)
Student loan sales(2)
 

 
(46,430
)
 
(46,430
)
Ending Balance
 
$
6,212

 
$
54,315

 
$
60,527

Allowance:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
1,037

 
$
1,037

Ending balance: collectively evaluated for impairment
 
$
6,212

 
$
53,278

 
$
59,490

Loans:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$
4,508

 
$
4,508

Ending balance: collectively evaluated for impairment
 
$
1,360,107

 
$
7,478,286

 
$
8,838,393

Charge-offs as a percentage of average loans in repayment (annualized)
 
0.13
%
 
%
 
 
Allowance as a percentage of the ending total loan balance
 
0.46
%
 
0.73
%
 
 
Allowance as a percentage of the ending loans in repayment
 
0.66
%
 
1.23
%
 
 
Allowance coverage of charge-offs (annualized)
 
2.40

 

 
 
Ending total loans, gross
 
$
1,360,107

 
$
7,482,794

 
 
Average loans in repayment
 
$
994,290

 
$
4,354,878

 
 
Ending loans in repayment
 
$
947,972

 
$
4,425,573

 
 

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

19


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

 
 
Allowance for Loan Losses
 
 
Six Months Ended June 30, 2013
 
 
FFELP Loans
 
Private Education
Loans
 
Total
Allowance for Loan Losses
 
 
 
 
 
 
Beginning balance
 
$
3,971

 
$
65,218

 
$
69,189

Total provision
 
1,399

 
18,278

 
19,677

Charge-offs(1)
 
(754
)
 

 
(754
)
Student loan sales(2)
 

 
(32,627
)
 
(32,627
)
Ending Balance
 
$
4,616

 
$
50,869

 
$
55,485

Allowance:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$

 
$

Ending balance: collectively evaluated for impairment
 
$
4,616

 
$
50,869

 
$
55,485

Loans:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$

 
$

 
$

Ending balance: collectively evaluated for impairment
 
$
1,162,476

 
$
5,383,128

 
$
6,545,604

Charge-offs as a percentage of average loans in repayment (annualized)
 
0.09
%
 
%
 
 
Allowance as a percentage of the ending total loan balance
 
0.40
%
 
0.94
%
 
 
Allowance as a percentage of the ending loans in repayment
 
0.56
%
 
1.65
%
 
 
Allowance coverage of charge-offs (annualized)
 
3.00

 

 
 
Ending total loans, gross
 
$
1,162,476

 
$
5,383,128

 
 
Average loans in repayment
 
$
825,038

 
$
3,670,291

 
 
Ending loans in repayment
 
$
824,523

 
$
3,081,929

 
 

(1) Prior to the Spin-Off, Private Education Loans were sold to an entity that is now a subsidiary of Navient prior to being charged-off.
(2) Represents fair value write-downs on delinquent loans sold prior to the Spin-Off to an entity that is now a subsidiary of Navient, recorded at the time of sale.
     
All of our loans are collectively assessed for impairment except for loans classified as TDR's. Prior to the Spin-Off transaction that occurred on April 30, 2014, we did not have TDR loans because the loans were generally sold in the same month that the terms were restructured. Subsequent to May 1, 2014, we have individually assessed $4.5 million of Private Education Loans as TDRs. When these loans are determined to be impaired, we provide for an allowance for losses 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 discounted at the loan's original effective interest rate.
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 standpoint at any point in their life cycle prior to claim payment, and continue to accrue interest through the date of claim.


20


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



Key Credit Quality Indicators
FFELP Loans are at least 97 percent insured and guaranteed as to their principal and accrued interest in the event of default; therefore, there is no key credit quality indicator that will have a material impact to our financial results. Included within our FFELP portfolio June 30, 2014 are $853 million of FFELP rehabilitation loans. These loans have previously defaulted but have subsequently been brought current according to a loan rehabilitation agreement. The credit performance on rehabilitation loans is worse than the remainder of our FFELP portfolio. At June 30, 2014 and December 31, 2013, 62.7 percent and 62.9 percent of our FFELP portfolio consisted of rehabilitation loans.
For Private Education Loans, the key credit quality indicators are school type, FICO scores, the existence of a cosigner, the loan status and loan seasoning. The school type/FICO score are assessed at origination and maintained through the loan designation. 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
 
 
June 30, 2014
 
December 31, 2013
Credit Quality Indicators:
 
Balance(1)
 
% of Balance
 
Balance(1)
 
% of Balance
 
 
 
 
 
 
 
 
 
Cosigners:
 
 
 
 
 
 
 
 
With cosigner
 
$
6,715,407

 
90
%
 
$
5,898,751

 
90
%
Without cosigner
 
767,387

 
10

 
664,591