Edgar Filing: SLM CORP

SLM-3Q_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 September 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) 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 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 September 30, 2014
Common Stock, $0.20 par value	423,164,643 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	42
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	71
Item 4.	Controls and Procedures	74
PART II. Other Information
Item 1.	Legal Proceedings	75
Item 1A.	Risk Factors	76
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	76
Item 3.	Defaults Upon Senior Securities	76
Item 4.	Mine Safety Disclosures	76
Item 5.	Other Information	76
Item 6.	Exhibits	77

SLM CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)



	September 30,			December 31,
	2014			2013
Assets
Cash and cash equivalents	$	1,570,378		$	2,182,865
Available-for-sale investments at fair value (cost of $155,136 and $106,977, respectively)	153,893			102,105
Loans held for investment (net of allowance for losses of $65,715 and $68,081, respectively)	9,095,373			7,931,377
Other interest-earning assets	52,191			4,355
Accrued interest receivable	453,522			356,283
Premises and equipment, net	78,806			74,188
Acquired intangible assets, net	3,733			6,515
Tax indemnification receivable	253,681			—
Other assets	53,375			48,976
Total assets	$	11,714,952		$	10,706,664

Liabilities
Deposits	$	9,173,022		$	9,001,550
Income taxes payable, net	283,118			162,205
Upromise related liabilities	296,594			307,518
Other liabilities	143,790			69,248
Total liabilities	9,896,524			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: 424 million and 0 shares issued, respectively	84,777			—
Additional paid-in capital	1,078,501			—
Navient's subsidiary investment	—			1,164,495
Accumulated other comprehensive (loss) income (net of tax (benefit) expense of ($1,275) and ($1,849), respectively)	(1,852		)	(3,024		)
Retained earnings	98,210			—
Total SLM Corporation stockholders' equity before treasury stock	1,824,636			1,161,471
Less: Common stock held in treasury at cost: 1 million and 0 shares, respectively	(6,208		)	—
Noncontrolling interest	—			4,672
Total equity	1,818,428			1,166,143
Total liabilities and equity	$	11,714,952		$	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					Nine Months Ended
	September 30,					September 30,
	2014		2013			2014			2013
Interest income:
Loans	$	164,106	$	131,030		$	486,379		$	384,811
Investments	2,917		5,826			6,121			17,450
Cash and cash equivalents	1,180		837			3,145			2,608
Total interest income	168,203		137,693			495,645			404,869
Interest expense:
Deposits	24,177		20,849			67,801			64,857
Other interest expense	—		61			41			110
Total interest expense	24,177		20,910			67,842			64,967
Net interest income	144,026		116,783			427,803			339,902
Less: provisions for loan losses	14,898		20,404			55,071			40,081
Net interest income after provisions for loan losses	129,128		96,379			372,732			299,821
Non interest income:
Gains on sales of loans, net	85,147		43,434			120,963			192,097
Gains (losses) on derivatives and hedging activities, net	5,401		297			(4,821		)	855
Other	5,461		9,416			28,826			25,880
Total noninterest income	96,009		53,147			144,968			218,832
Expenses:
Compensation and benefits	31,597		26,031			92,931			82,616
Other operating expenses	40,482		42,509			103,226			113,111
Total operating expenses	72,079		68,540			196,157			195,727
Acquired intangible asset impairment and amortization expense	1,150		1,657			4,145			3,085
Restructuring and other reorganization expenses	14,079		—			27,828			107
Total expenses	87,308		70,197			228,130			198,919
Income before income tax expense	137,829		79,329			289,570			319,734
Income tax expense	54,903		30,272			115,502			122,011
Net income	82,926		49,057			174,068			197,723
Less: net loss attributable to noncontrolling interest	—		(333		)	(434		)	(1,020		)
Net income attributable to SLM Corporation	82,926		49,390			174,502			198,743
Preferred stock dividends	4,850		—			8,078			—
Net income attributable to SLM Corporation common stock	$	78,076	$	49,390		$	166,424		$	198,743

Basic earnings per common share attributable to SLM Corporation	$	0.18	$	0.11		$	0.39		$	0.45
Average common shares outstanding	423,079		436,109			424,187			442,208
Diluted earnings per common share attributable to SLM Corporation	$	0.18	$	0.11		$	0.38		$	0.44
Average common and common equivalent shares outstanding	431,604		444,939			432,324			450,437

See accompanying notes to consolidated financial statements.

SLM CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Net income	$	82,926		$	49,057		$	174,068		$	197,723
Other comprehensive income (loss):
Unrealized gains (losses) on investments	(525		)	3,613			3,629			41,382
Unrealized losses on cash flow hedges	(1,883		)	—			(1,883		)	—
Total unrealized gains (losses)	(2,408		)	3,613			1,746			41,382
Income tax (expense) benefit	921			(1,368		)	(574		)	(15,695		)
Other comprehensive income (loss), net of tax benefit (expense)	(1,487		)	2,245			1,172			25,687
Comprehensive income	81,439			51,302			175,240			223,410
Less: comprehensive loss attributable to noncontrolling interest	—			(333		)	(434		)	(1,020		)
Total comprehensive income attributable to SLM Corporation	$	81,439		$	51,635		$	175,674		$	224,430

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		Total SLM Corporation Equity			Non-controlling interest			Total Equity

Balance at June 30, 2013	$	1,162,822		$	37,790	$	1,200,612		$	5,338		$	1,205,950
Net income (loss)	49,390			—		49,390			(333		)	49,057
Other comprehensive income, net of tax	—			2,245		2,245			—			2,245
Total comprehensive income (loss)	—			—		51,635			(333		)	51,302
Net transfers to affiliate	(84,080		)	—		(84,080		)	—			(84,080		)
Balance at September 30, 2013	$	1,128,132		$	40,035	$	1,168,167		$	5,005		$	1,173,172

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 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
Net income	—	—	—		—		—		—		—		—		—			82,926			—			82,926			—		82,926
Other comprehen-sive loss, net of tax	—	—	—		—		—		—		—		—		(1,487		)	—			—			(1,487		)	—		(1,487		)
Total comprehensive income	—	—	—		—		—		—		—		—		—			—			—			81,439			—		81,439
Cash dividends:
Preferred Stock, series A ($.87 per share)	—	—	—		—		—		—		—		—		—			(2,875		)	—			(2,875		)	—		(2,875		)
Preferred Stock, series B ($.49 per share)	—	—	—		—		—		—		—		—		—			(1,975		)	—			(1,975		)	—		(1,975		)
Dividend equivalent units related to employee stock-based compensation plans	—	—	—		—		—		—		33		—		—			(33		)	—			—			—		—
Issuance of common shares	—	584,787	—		584,787		—		118		2,047		—		—			—			—			2,165			—		2,165
Stock-based compensation expense	—	—	—		—		—		—		4,505		—		—			—			—			4,505			—		4,505
Shares repurchased related to employee stock-based compensation plans	—	—	(356,622	)	(356,622	)	—		—		—		—		—			—			(3,095		)	(3,095		)	—		(3,095		)
Balance at September 30, 2014	7,300,000	423,880,036	(715,393	)	423,164,643		$	565,000	$	84,777	$	1,078,501	$	—	$	(1,852	)	$	98,210		$	(6,208	)	$	1,818,428		$	—	$	1,818,428

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		$	6,025		$	1,089,301
Net income (loss)	198,743					198,743			(1,020		)	197,723
Other comprehensive income, net of tax	—			25,687		25,687			—			25,687
Total comprehensive (loss)	—			—		224,430			(1,020		)	223,410
Net transfers to affiliate	(139,539		)	—		(139,539		)	—			(139,539		)
Balance at September 30, 2013	$	1,128,132		$	40,035	$	1,168,167		$	5,005		$	1,173,172

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			—			106,329			—			174,502			(434		)	174,068
Other comprehensive income, net of tax	—	—	—		—		—		—		—		—			1,172			—			—			1,172			—			1,172
Total comprehensive income (loss)	—	—	—		—		—		—		—		—			—			—			—			175,674			(434		)	175,240
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 ($.87 per share)	—	—	—		—		—		—		—		—			—			(4,792		)	—			(4,792		)	—			(4,792		)
Preferred Stock, series B ($.49 per share)	—	—	—		—		—		—		—		—			—			(3,286		)	—			(3,286		)	—			(3,286		)
Dividend equivalent units related to employee stock-based compensation plans	—	—	—		—		—		—		41		—			—			(41		)				—			—			—
Issuance of common shares	—	1,089,716	—		1,089,716		—		219		4,391		—			—			—			—			4,610			—			4,610
Stock-based compensation expense	—	—	—		—		—		—		11,550		—			—			—			—			11,550			—			11,550
Shares repurchased related to employee stock-based compensation plans	—	—	(715,393	)	(715,393	)	—		—		—		—			—			—			(6,208		)	(6,208		)	—			(6,208		)
Balance at September 30, 2014	7,300,000	423,880,036	(715,393	)	423,164,643		$	565,000	$	84,777	$	1,078,501	$	—		$	(1,852	)	$	98,210		$	(6,208	)	$	1,818,428		$	—		$	1,818,428

See accompanying notes to consolidated financial statements.

SLM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine Months Ended
	September 30,
	2014			2013
Operating activities
Net income	$	174,068		$	197,723
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses	55,071			40,081
Tax provision	115,502			122,011
Amortization of FDIC fees	—			1,046
Amortization of brokered deposit placement fee	7,548			7,128
Amortization of deferred loan origination costs and fees, net	1,446			753
Net amortization (accretion) of discount on investments	433			(6,442		)
Depreciation of premises and equipment	2,326			2,977
Amortization and impairment of acquired intangibles	4,145			3,085
Stock-based compensation expense	20,127			12,420
Interest rate swap	1,307			(641		)
Gains on sale of loans, net	(120,963		)	(192,097		)
Changes in operating assets and liabilities:
Net decrease in loans held for sale	6,448			2,674
Origination of loans held for sale	(6,448		)	(2,674		)
Increase in accrued interest receivable	(220,273		)	(184,590		)
(Increase) decrease in other interest-earning assets	(47,836		)	87
(Increase) decrease in other assets	11,499			8,148
Decrease in income tax payable	(294,116		)	(209,362		)
Increase (decrease) in accrued interest payable	2,639			(130		)
Increase in payable due to Navient	18,114			228,243
Increase (decrease) in other liabilities	30,741			(23,584		)
Total adjustments	(412,290		)	(190,867		)
Total net cash (used in) provided by operating activities	(238,222		)	6,856
Investing activities
Loans acquired and originated	(38,165		)	(274,975		)
Net proceeds from sales of loans held for investment	1,994,017			2,428,404
Net increase in loans held for investment	(2,932,369		)	(2,809,567		)
Purchases of available-for-sale securities	(55,928		)	(33,037		)
Proceeds from sales and maturities of available-for-sale securities	7,337			14,313
Total net cash used in investing activities	(1,025,108		)	(674,862		)
Financing activities
Brokered deposit placement fee	(5,533		)	—
Net decrease in brokered certificates of deposit	(601,685		)	(552,908		)
Net (decrease) increase in NOW account deposits	(18,214		)	6,558
Net (decrease) increase in High Yield Savings Deposits	(39,359		)	22,083
Net (decrease) increase in Retail Certificates of Deposit	(13,268		)	27,759
Net increase in MMDA deposits	862,447			927,997
Net decrease in deposits with entity that is a subsidiary of Navient	(5,633		)	(122,870		)
Special cash contribution from Navient	472,718			—
Net capital contributions from entity that is a subsidiary of Navient	7,448			28,164
Preferred stock dividends paid	(8,078		)	—
Dividend paid to entity that is a subsidiary of Navient	—			(120,000		)
Net cash provided by financing activities	650,843			216,783
Net decrease in cash and cash equivalents	(612,487		)	(451,223		)



Cash and cash equivalents at beginning of period	2,182,865		1,599,082
Cash and cash equivalents at end of period	$	1,570,378	$	1,147,859
Cash disbursements made for:
Interest	$	64,987	$	58,573
Income taxes paid	$	294,116	$	209,362

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, for periods before the Spin-Off, 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, the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 was 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 Series A Preferred Stock and the Series B Preferred Stock, substantially similar to pre-Spin-Off SLM's respective series of preferred stock.

For periods before the Spin-Off, these 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 include the carved out financial results for the first four months of 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.

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, unless otherwise noted)



1.	Significant Accounting Policies (Continued)

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 various stages of delinquency 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 a 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 at its fair value. 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 (at fair value) 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 September 30, 2014, we held approximately $126 million of Split Loans.

Pre-Spin-Off SLM charged off loans when they were 212 days delinquent. As such, default aversion strategies were focused on the final stages of delinquency, from 150 days to 212 days. In connection with the Spin-Off, we changed our charge-off policy for Private Education Loans to charging off loans when they reach 120 days delinquent. 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 on loans 30 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, at the time of the Spin-Off, 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 recognizing a $14 million net reduction in our allowance for loan losses in second quarter 2014 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.

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, unless otherwise noted)



1.	Significant Accounting Policies (Continued)

Securitization Accounting

In the third quarter 2014, we entered into our first securitization transaction. We accounted for this as a sale of loans and we do not consolidate the securitization trust. This securitization used a two-step structure with a special purpose entity that legally isolated the transferred assets from us, even in the event of bankruptcy. The transaction was also structured to ensure the holders of the beneficial interests issued are not constrained from pledging or exchanging their interests, and we do not maintain effective control over the transferred assets. If these criteria had not been met, then the transaction would be accounted for as an on-balance sheet secured borrowing. Our securitization transaction was legally structured to be a sale of assets that isolated the transferred assets from us. If a securitization qualifies as a sale, we then assess whether we are the primary beneficiary of the securitization trust and are required to consolidate such trust. If we are the primary beneficiary then no gain or loss is recognized.

The investors in the securitization trust have no recourse to our assets should there be a failure of the trust to pay when due. Generally, the only recourse the trust has to us is in the event we breach a seller representation or warranty or our duties as master servicer, in which event we agree to repurchase the related loans from the trust. As master servicer, our primary responsibility will be to monitor the performance of the subservicer and find a substitute subservicer in the event the subservicer of the trust defaults.

We did not record a servicing asset or servicing liability related to the securitization transaction we entered into in third quarter 2014 because we determined the master servicing fee we receive is at market rate.

Gains on Sale of Loans, net

We participate and sell loans to third parties and affiliates (including entities that were related parties prior to the Spin-off Transaction). These sales may be through whole loan sales or securitization transactions that qualify for sales treatment. These loans were initially recorded as held for investment, and were transferred to held-for-sale immediately prior to sale or securitization. Beginning in April 2012, loans were sold at fair value. Details of these transactions are further discussed in Note 12, “Arrangements with Navient Corporation.”

In the third quarter 2014, we sold $1.2 billion of loans through loan sales and a securitization transaction with third parties. As a result of these loan sales we recorded net gains of $85 million. In the third quarter 2013, we recorded $43 million in net gains from the sale of $0.6 billion of loan sales.

For the nine months ended September 30, 2014, we sold $1.9 billion of loans through loan sales and a securitization transaction. As a result of these loan sales we recorded net gains of $121 million. In the nine months ended September 30, 2013, we recorded $192 million in net gains from the sale of $2.3 billion of loans.

Income Taxes

In connection with the Spin-Off, the Company has become 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 on 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.

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, unless otherwise noted)



1.	Significant Accounting Policies (Continued)

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 September 30, 2014, the liability balance is $299 million ($283 million related to deferred taxes and $16 million related to uncertain tax positions) and the indemnification receivable balance is $254 million ($238 million related to deferred taxes and $16 million related to uncertain tax positions).

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. We have determined that this new guidance will have an immaterial impact on the financial results of the Company.

2. Investments

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



	As of September 30, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available for sale:
Mortgage-backed securities	$	155,136	$	1,332	$	(2,575	)	$	153,893

	As of December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available for sale:
Mortgage-backed securities	$	106,977	$	706	$	(5,578	)	$	102,105

Our investment portfolio is comprised of mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac with amortized costs of $76,274, $67,163 and $11,699, respectively, at September 30, 2014. We own these securities to meet our requirements under the Community Reinvestment Act. As of September 30, 2014, there were 22 of 51 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 September 30, 2014, 11 of the 22 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 and Freddie Mac. 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.

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, unless otherwise noted)



2.	Investments (Continued)

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 $149,057 and $103,049 par value of mortgage-backed securities pledged to this borrowing facility at September 30, 2014 and December 31, 2013, respectively, as discussed further in Note 6, “Borrowed Funds.”

As of September 30, 2014, the amortized cost and fair value of securities, by contractual maturities, were as follows:



Year of Maturity	Amortized Cost		Estimated Fair Value
2038	$	611	$	662
2039	12,079		12,888
2042	28,317		26,719
2043	74,701		74,307
2044	39,428		39,317
Total	$	155,136	$	153,893

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 risk through historical risk-performance underwriting strategies and the addition of qualified cosigners. Private Education Loans generally carry a variable rate indexed to LIBOR; as of September 30, 2014, 83 percent of all 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 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, in which case the loan is 100 percent guaranteed.

Loans held for investment are summarized as follows:



	September 30,			December 31,
	2014			2013
Private Education Loans	$	7,829,420		$	6,563,342
Deferred origination costs	9,975			5,063
Allowance for loan losses	(59,973		)	(61,763		)
Total Private Education Loans, net	7,779,422			6,506,642

FFELP Loans	1,317,963			1,426,972
Unamortized acquisition costs, net	3,730			4,081
Allowance for loan losses	(5,742		)	(6,318		)
Total FFELP Loans, net	1,315,951			1,424,735

Loans held for investment, net	$	9,095,373		$	7,931,377

The estimated weighted average life of Private Education Loans in our portfolio was approximately 6.7 years and 7.0 years at September 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 September 30, 2014				Three Months Ended September 30, 2013
	Average Balance		Weighted Average Interest Rate		Average Balance		Weighted Average Interest Rate
Private Education Loans	$	7,407,774	8.20	%	$	5,846,241	8.22	%
FFELP Loans	1,339,748		3.23		1,167,174		3.38
Total portfolio	$	8,747,522			$	7,013,415



	Nine Months Ended September 30, 2014				Nine Months Ended September 30, 2013
	Average Balance		Weighted Average Interest Rate		Average Balance		Weighted Average Interest Rate
Private Education Loans	$	7,394,985	8.19	%	$	5,860,864	8.15	%
FFELP Loans	1,373,945		3.25		1,099,436		3.33
Total portfolio	$	8,768,930			$	6,960,300

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands, unless otherwise noted)

4. Allowance for Loan Losses

Our provision 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 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 September 30, 2014
	FFELP Loans			Private Education Loans			Total
Allowance for Loan Losses
Beginning balance	$	6,212		$	54,315		$	60,527
Total provision	291			14,607			14,898
Charge-offs⁽¹⁾	(761		)	(4,378		)	(5,139		)
Student loan sales⁽²⁾	—			(4,571		)	(4,571		)
Ending Balance	$	5,742		$	59,973		$	65,715
Allowance:
Ending balance: individually evaluated for impairment	$	—		$	2,966		$	2,966
Ending balance: collectively evaluated for impairment	$	5,742		$	57,007		$	62,749
Loans:
Ending balance: individually evaluated for impairment	$	—		$	13,115		$	13,115
Ending balance: collectively evaluated for impairment	$	1,317,963		$	7,816,305		$	9,134,268
Charge-offs as a percentage of average loans in repayment (annualized)	0.32		%	0.39		%
Allowance as a percentage of the ending total loan balance	0.44		%	0.77		%
Allowance as a percentage of the ending loans in repayment	0.61		%	1.31		%
Allowance coverage of charge-offs (annualized)	1.89			3.42
Ending total loans, gross	$	1,317,963		$	7,829,420
Average loans in repayment	$	953,620		$	4,453,775
Ending loans in repayment	$	945,230		$	4,575,143

⁽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 loans sold.

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 September 30, 2013
	FFELP Loans			Private Education Loans			Total
Allowance for Loan Losses
Beginning balance	$	4,616		$	50,868		$	55,484
Total provision	1,403			19,001			20,404
Charge-offs⁽¹⁾	(671		)	—			(671		)
Student loan sales⁽²⁾	—			(15,632		)	(15,632		)
Ending Balance	$	5,348		$	54,237		$	59,585
Allowance:
Ending balance: individually evaluated for impairment	$	—		$	—		$	—
Ending balance: collectively evaluated for impairment	$	5,348		$	54,237		$	59,585
Loans:
Ending balance: individually evaluated for impairment	$	—		$	—		$	—
Ending balance: collectively evaluated for impairment	$	1,217,404		$	6,214,840		$	7,432,244
Charge-offs as a percentage of average loans in repayment (annualized)	0.30		%	—		%
Allowance as a percentage of the ending total loan balance	0.44		%	0.87		%
Allowance as a percentage of the ending loans in repayment	0.59		%	1.54		%
Allowance coverage of charge-offs (annualized)	1.99			—
Ending total loans, gross	$	1,217,404		$	6,214,840
Average loans in repayment	$	896,801		$	3,400,620
Ending loans in repayment	$	902,766		$	3,518,997

⁽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
	Nine Months Ended September 30, 2014
	FFELP Loans			Private Education Loans			Total
Allowance for Loan Losses
Beginning balance	$	6,318		$	61,763		$	68,081
Total provision	1,482			53,589			55,071
Charge-offs⁽¹⁾	(2,058		)	(4,378		)	(6,436		)
Student loan sales⁽²⁾	—			(51,001		)	(51,001		)
Ending Balance	$	5,742		$	59,973		$	65,715
Allowance:
Ending balance: individually evaluated for impairment	$	—		$	2,966		$	2,966
Ending balance: collectively evaluated for impairment	$	5,742		$	57,007		$	62,749
Loans:
Ending balance: individually evaluated for impairment	$	—		$	13,115		$	13,115
Ending balance: collectively evaluated for impairment	$	1,317,963		$	7,816,305		$	9,134,268
Charge-offs as a percentage of average loans in repayment (annualized)	0.28		%	0.13		%
Allowance as a percentage of the ending total loan balance	0.44		%	0.77		%
Allowance as a percentage of the ending loans in repayment	0.61		%	1.31		%
Allowance coverage of charge-offs (annualized)	2.09			10.27
Ending total loans, gross	$	1,317,963		$	7,829,420
Average loans in repayment	$	980,733		$	4,408,852
Ending loans in repayment	$	945,230		$	4,575,143

⁽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⁾ Post-Spin-Off represents fair value write-downs on loans sold. Pre-Spin-Off represents fair value write-downs on delinquent loans sold 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
	Nine Months Ended September 30, 2013
	FFELP Loans			Private Education Loans			Total
Allowance for Loan Losses
Beginning balance	$	3,971		$	65,218		$	69,189
Total provision	2,802			37,279			40,081
Charge-offs⁽¹⁾	(1,425		)	—			(1,425		)
Student loan sales⁽²⁾	—			(48,260		)	(48,260		)
Ending Balance	$	5,348		$	54,237		$	59,585
Allowance:
Ending balance: individually evaluated for impairment	$	—		$	—		$	—
Ending balance: collectively evaluated for impairment	$	5,348		$	54,237		$	59,585
Loans:
Ending balance: individually evaluated for impairment	$	—		$	—		$	—
Ending balance: collectively evaluated for impairment	$	1,217,404		$	6,214,840		$	7,432,244
Charge-offs as a percentage of average loans in repayment (annualized)	0.23		%	—		%
Allowance as a percentage of the ending total loan balance	0.44		%	0.87		%
Allowance as a percentage of the ending loans in repayment	0.59		%	1.54		%
Allowance coverage of charge-offs (annualized)	2.81			—
Ending total loans, gross	$