Edgar Filing: SLM CORP

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


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	2
Item 1.	Notes to the Financial Statements	11
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	69
Item 4.	Controls and Procedures	71
PART II. Other Information
Item 1.	Legal Proceedings	72
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

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.

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.

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.

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.

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.

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.

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.

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



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.

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

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).

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:

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

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.

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

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.

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.

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.

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.

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