Edgar Filing: SLM CORP

2014 Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)


þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the fiscal year ended December 31, 2014


¨	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the transition period from to

Commission file numbers 001-13251

SLM Corporation

(Exact Name of Registrant as Specified in Its Charter)



Delaware	52-2013874
(State of 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)

Securities registered pursuant to Section 12(b) of the Act

Common Stock, par value $.20 per share.

Name of Exchange on which Listed:

The NASDAQ Global Select Market

6.97% Cumulative Redeemable Preferred Stock, Series A, par value $.20 per share

Floating Rate Non-Cumulative Preferred Stock, Series B, par value $.20 per share

Name of Exchange on which Listed:

The NASDAQ Global Select Market

Name of Exchange on which Listed:

The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No þ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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 þ			Accelerated filer ¨
Non-accelerated filer ¨			Smaller reporting company ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 2014 was $3.5 billion (based on closing sale price of $8.31 per share as reported for the NASDAQ Global Select Market).

As of January 31, 2015, there were 423,476,360 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement relating to the Registrant’s 2015 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on

Form 10-K.

SLM CORPORATION

TABLE OF CONTENTS



		Page Number

	Forward-Looking and Cautionary Statements; Available Information	1
PART I
Item 1.	Business	2
Item 1A.	Risk Factors	16
Item 1B.	Unresolved Staff Comments	27
Item 2.	Properties	28
Item 3.	Legal Proceedings	29
Item 4.	Mine Safety Disclosures	29
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	30
Item 6.	Selected Financial Data	33
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	34
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	71
Item 8.	Financial Statements and Supplementary Data	73
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	73
Item 9A.	Controls and Procedures	73
Item 9B.	Other Information	74
PART III.
Item 10.	Directors, Executive Officers and Corporate Governance	75
Item 11.	Executive Compensation	75
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	75
Item 13.	Certain Relationships and Related Transactions, and Director Independence	75
Item 14.	Principal Accounting Fees and Services	75
PART IV
Item 15.	Exhibits, Financial Statement Schedules	76

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

This Annual Report on Form 10-K contains "forward-looking" statements and information based on management’s current expectations as of the date of this report. Statements that are not historical facts, including statements about our beliefs, opinions or expectations and statements that assume or are dependent upon future events, are forward-looking statements. Forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in Item 1A “Risk Factors” and elsewhere in this Annual Report on Form 10-K and subsequent filings with the Securities and Exchange Commission (“SEC”); increases in financing costs; limits on liquidity; increases in costs associated with compliance with laws and regulations; changes in accounting standards and the impact of related changes in significant accounting estimates; any adverse outcomes in any significant litigation to which we are a party; credit risk associated with our exposure to third parties, including counterparties to our derivative transactions; and changes in the terms of education loans and the educational credit marketplace (including changes resulting from new laws and the implementation of existing laws). We could also be affected by, among other things: changes in our funding costs and availability; reductions to our credit ratings; failures or breaches of our operating systems or infrastructure, including those of third-party vendors; damage to our reputation; failures or breaches to successfully implement cost-cutting and restructuring initiatives and adverse effects of such initiatives on our business; risks associated with restructuring initiatives; changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; changes in law and regulations with respect to the student lending business and financial institutions generally; increased competition from banks and other consumer lenders; the creditworthiness of our customers; changes in the general interest rate environment, including the rate relationships among relevant money-market instruments and those of our earning assets versus our funding arrangements; rates of prepayment on the loans that we make; changes in general economic conditions and our ability to successfully effectuate any acquisitions; and other strategic initiatives. The preparation of our consolidated financial statements also requires management to make certain estimates and assumptions, including estimates and assumptions about future events. These estimates or assumptions may prove to be incorrect. All forward-looking statements contained in this Annual Report on Form 10-K are qualified by these cautionary statements and are made only as of the date of this report. We do not undertake any obligation to update or revise these forward-looking statements to conform such statements to actual results or changes in our expectations.

References in this Annual Report on Form 10-K to “we,” “us,” “our” “Sallie Mae” and the “Company,” refer to SLM Corporation and its subsidiaries, except as otherwise indicated or unless the context otherwise requires.

The financial information contained herein and in the accompanying consolidated balance sheets, statements of income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2014, present information on our business as configured after the Spin-Off, as hereafter defined. For more information regarding the basis of presentation of these statements, see notes to the consolidated financial statements, Note 2, “Significant Accounting Policies - Basis of Presentation.”

AVAILABLE INFORMATION

Our website address is www.salliemae.com. Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments to those reports, and any significant investor presentations, are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. In addition, copies of our Board Governance Guidelines, Code of Business Conduct (which includes the code of ethics applicable to our Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) and the governing charters for each committee of our Board of Directors are available free of charge on our website, as well as in print to any stockholder upon request. We intend to disclose any amendments to or waivers from our Code of Business Conduct (to the extent applicable to our Principal Executive Officer or Principal Financial Officer) by posting such information on our website. Information contained or referenced on our website is not incorporated by reference into and does not form a part of this Annual Report on Form 10-K.

PART I.

Item 1. Business

Company History

SLM Corporation, more commonly known as Sallie Mae, is the nation’s leading saving, planning and paying for education company. For 40 years, we have made a difference in students’ and families’ lives, helping more than 31 million Americans pay for college. We recognize there is no single way to achieve this task, so we provide a range of products to help families whether college is a long way off or right around the corner. We promote responsible financial habits that help our customers dream, invest and succeed.

Our primary business is to originate and service Private Education Loans we make to students and their families. We use “Private Education Loans” to mean education loans to students or their families that are not issued, insured or guaranteed by any state or federal government. We also operate a consumer savings network that provides financial rewards on everyday purchases to help families save for college.

We were formed in 1972 as the Student Loan Marketing Association, a federally chartered government sponsored enterprise (“GSE”), with the goal of furthering access to higher education by providing liquidity to the education loan marketplace. On December 29, 2004, we terminated the federal charter, incorporated SLM Corporation as a Delaware corporation, and subsequently dissolved the GSE.

On April 30, 2014, we completed our plan to legally separate (“the Spin-Off”) 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.

Our principal executive offices are located at 300 Continental Drive, Newark, Delaware 19713, and our telephone number is (302) 451-0200.

Our Business

Growing our Private Education Loan portfolio is our primary business. In 2014, we originated $4.1 billion of Private Education Loans, an increase of 7 percent from the year ended December 31, 2013. As of December 31, 2014, we had $8.3 billion of Private Education Loans outstanding.

Private Education Loans

The Private Education Loans we make are primarily to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans or customers’ resources. We continue to offer Private Education Loans to students and families where we believe our prices are competitive with similar federal education loan products. We earn interest income on our Private Education Loan portfolio, net of provisions for loan losses. Operating expenses associated with interest income include costs incurred to acquire and to service our loans.

In 2009, we introduced the Smart Option Student Loan, our Private Education Loan product emphasizing in-school payment features to minimize customers’ total finance charges. The Smart Option product features three primary repayment types. The first two, Interest Only and Fixed Payment options, require monthly payments while the student is in school and accounted for approximately 56 percent of the Private Education Loans the Bank originated during 2014. The third repayment option is the more traditional deferred Private Education Loan product where customers do not begin making payments until after graduation. Lower interest rates on the Interest Only and Fixed Payment options incentivize customers to elect those options.

We regularly review and update the terms of our Private Education Loan products. Our Private Education Loans include important protections for the family, including tuition insurance, and loan forgiveness in case of death or permanent disability of the student borrower. In 2014, we added a new, free, quarterly FICO Score benefit to students with a Smart Option Student Loan disbursed in academic year 2014-2015. We are the first Private Education Loan lender to offer this important benefit.

Private Education Loans bear the full credit risk of the customer and cosigner. We manage this risk by underwriting and pricing based upon customized credit scoring criteria and the addition of qualified cosigners. At December 31, 2014, our average FICO scores were 745 at the time of origination and approximately 90 percent of our loans were cosigned. In addition, we voluntarily require school certification of both the need for, and the amount of, every Private Education Loan we originate, and we disburse the loans directly to the higher education institution.

The core of our marketing strategy is to promote our products on campuses through the financial aid offices and through direct marketing to students and their families. Our on-campus efforts are driven by over 40 sales professionals who work with 2,400 higher education institutions. This sales force is the largest in the industry and has become a trusted resource for campus-based financial aid advisers.

Our loans are of high credit quality and the overwhelming majority of our borrowers are managing their payments with great success. At December 31, 2014, 2.0 percent of loans in repayment were delinquent, and loans in forbearance were 2.6 percent of loans in repayment and forbearance. Our annualized charge-off rate was 0.72 percent at the end of the fourth quarter 2014. Prior to the Spin-Off, Sallie Mae Bank sold, at fair value, substantially all of the Private Education Loans we originated that became delinquent or were granted forbearance to one or more of our then affiliates. Post-Spin-Off, these practices have largely ceased. As a result, Sallie Mae Bank historically had very little forbearance activity and very few loans over 90 days delinquent.

Sallie Mae Bank

Since the beginning of 2006, virtually all of our Private Education Loans have been originated and funded by Sallie Mae Bank (the “Bank”), our Utah industrial bank subsidiary, which is regulated by the Utah Department of Financial Institutions (“UDFI”), the Federal Deposit Insurance Corporation (“FDIC”), and the Consumer Financial Protection Bureau (“CFPB”). At December 31, 2014, the Bank had total assets of $12.8 billion, including $8.3 billion in Private Education Loans and $1.3 billion of FFELP Loans. As of the same date, the Bank had total deposits of $11.3 billion.

Our ability to obtain deposit funding and offer competitive interest rates on deposits will be necessary to sustain the growth of our Private Education Loan originations. Our ability to obtain such funding is also dependent in part on the capital level of the Bank and its compliance with other applicable regulatory requirements. At the time of this filing, there are no restrictions on our ability to obtain deposit funding or the interest rates we charge other than those restrictions generally applicable to all similarly situated banks. We plan to supplement our deposit base by raising term funding in the long-term asset backed securities (“ABS”) market in 2015, collateralized by pools of Private Education Loans. We currently estimate that in three years ABS transactions will provide approximately a third of our total funding. This will diversify our funding sources and reduce our reliance on deposits to fund our growth. Our intention is to complete our first ABS transaction within the first half of 2015.

The Bank is currently limited by the FDIC to total balance sheet growth of 20 percent per year. As a result, we also intend to sell Private Education Loans as may be necessary to keep the Bank's balance sheet growth at or below the 20 percent level. Private Education Loan sales most likely will be completed through an open auction process or the sale of residuals in connection with our ABS transactions.

We expect the Bank to retain servicing of all Private Education Loans it originates, regardless of whether held, sold or securitized. Loan sales and securitization volumes will be driven by growth in our loan originations, our asset values, and capital and liquidity needs.

See the subsection under “Supervision and Regulation” titled “Regulation of Sallie Mae Bank” for additional details about Sallie Mae Bank.

Operational Infrastructure

In April 2014, we began to independently perform collection activity on our portfolio of Private Education Loans.

In October 2014, we launched our stand-alone servicing platform and began servicing our portfolio of Private Education Loans. Going forward, we will provide servicing and loan collection services for all Private Education loans we originated.

Our servicing operation includes resources dedicated to assist customers with specialized needs and escalated inquiries. We also have a group of customer service representatives dedicated to assisting military personnel with available military benefits. In addition, our Office of Consumer Advocate (“OCA”) works with customers to resolve escalated concerns, and more recently, to address customer inquiries received via the student loan complaint portal the CFPB established in 2012. In 2014, OCA received 151 inquiries from our customers through the CFPB portal. As of December 31, 2014, 100 percent of those inquiries were successfully reviewed and closed within prescribed timeframes.

We expect to complete the build-out of our operational infrastructure to independently originate Private Education Loans in the first half of 2015. This will include finalizing the development, testing and implementation of a new loan originations platform.

Upromise by Sallie Mae

The Upromise by Sallie Mae save-for-college rewards program is a consumer service committed to helping Americans save for higher education. Membership is free and each year approximately 700,000 consumers enroll to use the service. Members earn money for college by receiving cash back when shopping at participating on-line or brick-and-mortar retailers, booking travel or dining out at participating merchants or by using their Upromise MasterCard. As of December 31, 2014, more than 1,000 merchants participated by providing discounts that are returned to the consumer. Since inception, Upromise members have saved approximately $900 million for college, and more than 340,000 members actively use the Upromise credit card for everyday purchases.

Our Approach to Advising Students and Families How to Pay for College

Our annual research on How America Pays for College¹ confirms students and their families cover the cost of college using multiple sources, including savings, current income, grants, scholarships, federal education loans and Private Education Loans.

According to this research, just 41 percent of families have a plan to pay for college. Sallie Mae has created online financial literacy resources, including interactive tools, calculators and content, at SallieMae.com/PlanforCollege to help families create a comprehensive financial plan to save and pay for college. Plan for College features the College Planning Calculator, an interactive tool families may use to set college savings goals, project the full cost of a college degree and estimate future student loan payments and the annual starting salary level needed to keep payments manageable. In addition, Sallie Mae launched a free mobile app, College Ahead, a tool to help high school juniors and seniors prepare for college.

To encourage responsible borrowing, Sallie Mae advises students and their families to follow this three-step process to pay for college:

Step 1: Use scholarships, grants, savings and income.

We provide free access to an extensive online database of scholarships which includes information about more than 3 million scholarships with an aggregate value in excess of $18 billion.

Through the Bank, we offer traditional savings products, like High-Yield Savings Accounts, Money Market Accounts and CDs.

In addition, our Upromise by Sallie Mae save-for-college rewards program helps families jumpstart their save-for-college plans by providing financial rewards on everyday purchases made at participating merchants.

Step 2: Pursue federal government loan options.

We encourage students to explore federal government loan options, including Perkins loans, Direct loans and PLUS loans. Students apply for federal student aid, including federal student loans, by completing the Free Application for Federal Student Aid ("FAFSA"). For additional information, we encourage consumers to contact their schools’ financial aid office or the Department of Education.

Step 3: Consider affordable Private Education Loans to fill the gap.

We offer Private Education Loan products to bridge the gap between family resources, federal loans, grants, student aid and scholarships, and the cost of a college education. To ensure applicants borrow only what they need to cover their school’s cost of attendance, we actively engage with schools and require school certification before we disburse a Private Education Loan. To help applicants understand their loan and its terms, we provide multiple, customized disclosures explaining the applicant’s starting interest rate, the interest rate during the life of the loan and their loan’s total cost under the available repayment options. Our Smart Option Student Loan features no origination fees and no prepayment penalties, provides rewards for paying on time, and offers a choice of repayment options, and either variable or fixed interest rates.

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¹Sallie Mae’s How America Pays for College 2014, conducted by Ipsos, www.salliemae.com/howamericapays.

Our Approach to Assisting Students and Families Repaying Private Education Loans

One of the hallmarks of our responsible borrowing philosophy is to encourage payments, even small ones, instead of no payment while in school. Most of our Smart Option Student Loan repayment options promote in-school repayment. By making in-school payments, customers stay informed on loans, learn to establish good repayment patterns, and graduate with less debt. When done while the student is in school, even when not required, nominal payments help minimize the accumulation of total indebtedness. We send monthly communications to customers while they are in school to highlight this fact and to encourage them to reduce the amount they will owe when they leave school.

Our experience has taught us the transition from school to full repayment requires making and carrying out a financial plan. As customers approach repayment, Sallie Mae communicates what to expect as they transition from in-school to principal and interest repayment. In addition, an informational section of SallieMae.com, Managing Your Loans, provides information to help customers organize their loans, set up a monthly budget and understand their repayment options. Examples are provided that help explain how payments are applied and allocated, and calculators help visitors estimate payments and see how accrued interest could affect a loan balance. The site also explains special benefits for servicemen and women under the Servicemembers Civil Relief Act.

Most customers tell us they want to repay their loans as quickly as they can, thus minimizing their borrowing costs. We provide incentives and programs to reward and encourage repayment, such as reduced interest charges for elections such as signing up for automatic debit payments.

Some customers transitioning from school to the work force, however, require more time before making full payments of principal and interest. As a result, Sallie Mae created a Graduated Repayment Plan to assist new graduates with additional payment flexibility. Smart Option Student Loans disbursed on or after July 1, 2013, offer customers a Graduated Repayment Plan that allows 12 interest-only payments instead of full principal and interest payments, after their six-month grace period.

After graduation, a customer may apply for their cosigner to be released from the loan. This option is available once there have been 12 consecutive, on-time principal and interest payments and the student borrower adequately meets our credit requirements. In the event of a cosigner’s death, the student borrower automatically continues as the sole individual on the loan with the same terms.

We recognize that, during periods of repayment, customers may struggle to meet their financial obligations. Our experience shows customers who request additional payment flexibility are most frequently in the early years of repayment. If a customer’s account becomes delinquent, we will work with the customer and/or the cosigner to understand their ability to make ongoing payments. If the customer is in financial hardship, we work with the customer and/or the cosigner to understand their financial circumstances and identify alternative repayment arrangements, including reduced monthly payment programs such as extended repayment schedules and temporary interest rate reductions and, if appropriate, short-term forbearance are scaled to their individual circumstances and ability to make payments. These loan modification programs, which were first implemented in 2009, have the potential to increase the overall costs of education financing to customers. Consequently, when used, we counsel our customers on the impact delaying repayment has on total borrowing costs.

We recognize that, in some cases, loan modifications and other efforts may be insufficient. That is why Sallie Mae continues to support bankruptcy reform that (i) would permit the discharge of education loans, both private and federal, after a required period of good faith attempts to repay and (ii) is prospective in application, so as not to rewrite existing contracts. Any reform should recognize education loans have unique characteristics and benefits as compared to other consumer loan classes.

Key Drivers of Private Education Loan Market Growth

The size of the Private Education Loan market is based on three primary factors: college enrollment levels, the costs of attending college and the availability of funds from the federal government to pay for a college education. The amounts that students and their families can contribute toward a college education and the availability of scholarships and institutional grants are also important. If the cost of education continues to increase at a pace exceeding the sum of family income, savings, federal subsidies, and scholarships, more students and families can be expected to borrow privately. If enrollment levels or college costs decline or the availability of federal education loans, grants or subsidies and scholarships significantly increases, Private Education Loan originations could decrease. Our competitors¹ in the Private Education Loan market include large banks such as Wells Fargo Bank NA, Discover Bank, RBS Citizens, and PNC Bank NA, as well as a number of smaller specialty finance companies.

Our primary lending focus is on public and private not-for-profit four-year degree granting institutions. We do limited business with two-year and for-profit schools. Due to the low cost of two-year programs, federal grant and loan programs are typically sufficient for the financing needs of these students. The for-profit industry has been the subject of increased scrutiny and regulation over the last several years. Since 2007, we have significantly reduced the number of for-profit institutions we do business with. The institutions we continue to do business with are focused on career training and are subject to regular performance review. We expect students attending for-profit schools to be able to support the same repayment performance as students attending public and private not-for-profit four-year degree granting institutions.

•

Undergraduate and graduate enrollments at public and private not-for-profit four-year institutions increased by approximately 11 percent from Academic Years (“AYs”) 2003-2004 to 2007-2008. Post-secondary enrollment increased considerably during the recession of 2007-2009, especially in areas most affected by high unemployment. Enrollment has been stable post-recession. According to ED’s projections released in February 2014, the high school graduate population is projected to remain relatively flat from 2013 to 2022.²Based on these projections and recent trends, we expect modest enrollment growth in the next several years.

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¹	Source: MeasureOne CBA Report, December 2014. www.measureone.com.


²	Source: U.S. Department of Education, National Center for Education Statistics, Projections of Education Statistics to 2022 (NCES, February 2014), Enrollment in Postsecondary Institutions (NCES, December 2013) and Enrollment in Postsecondary Institutions (NCES, October 2014).

•

Average published tuition and fees (exclusive of room and board) at four-year public and private not-for-profit institutions increased at compound annual growth rates of 6.0 percent and 4.5 percent, respectively, between AYs 2004-2005 through 2014-2015. Growth rates have been more modest the last two academic years, with these average published tuition and fees at public and private four-year not-for-profit institutions increasing 2.8 percent and 3.9 percent, respectively, between AYs 2012-2013 and 2013-2014 and 2.9 percent and 3.7 percent, respectively, between AYs 2013-2014 and 2014-2015.³ Tuition and fees are likely to continue to grow at the more modest rates of recent years.

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•

Borrowing from federal education loan programs increased at a compound annual growth rate of 10 percent between AY 2003-2004 and 2011-2012. Federal borrowing increased considerably during the recession with borrowing increasing 26 percent between AYs 2007-2008 and 2008-2009 alone. A major driver of this activity was that in AY 2007-2008, the Higher Education Reconciliation Act of 2005 increased annual Stafford loan limits for the first time since 1992 and introduced the Graduate PLUS loan. In response to the financial crisis in AY 2008-2009, The Ensuring Continued Access to Student Loans Act of 2008 increased the unsubsidized Stafford loan limits for undergraduate students again by $2,000. Federal education loan program borrowing continued to increase through AY 2011-2012 but declined by 4 percent in AY 2012-2013 and by another 7 percent in AY 2013-2014. We believe these declines are principally driven by enrollment declines in the for-profit schools sector.⁴ Between AYs 2003-2004 and 2013-2014, federal grants increased 186 percent to $48.9 billion. As household balance sheets continue to improve, families will be better able to meet expected increases in tuition costs.⁵

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⁴Source: The College Board-Trends in Student Aid 2014. © 2014 The College Board. www.collegeboard.org. The College Board states that full-time equivalent enrollment (FTE) in the for-profit sector has dropped 23 percent from AY 2010-2011 to AY 2013-2014.

•

This increase in federal subsidies had a significant impact on the market for Private Education Loans. Annual originations peaked at $21.1 billion in AY 2007-2008 and declined to $6.0 billion in AY 2010-2011. Contributing to the decline in the market for Private Education Loans was a significant tightening of underwriting standards by Private Education Loan providers, including Sallie Mae. Private Education Loan originations increased to an estimated $8.4 billion in AY 2013-2014, up 6.0 percent over the previous year. ^6,7

⁵ Source: The College Board-How Students and Parents Pay for College. © 2013 The College Board. www.collegeboard.org. From AY 2008-09 through AY 2012-2013 at four-year public institutions the per student rate of increase in family contributions has exceeded the per student rate of total family borrowings. We expect this trend may continue.

⁶ Source: The College Board-Trends in Student Aid 2014. ^© 2014 The College Board. www.collegeboard.org. Funding sources in current dollars and includes Federal Grants, Federal Loans, Education Tax Benefits, Work Study, State, Institutional and Private Grants and Non-Federal Loans.


⁷	Source: FinAid, History of Student Financial Aid and Historical Loan Limits. © 2014 by FinAid. www.FinAid.org.

•

Using data from the College Board, Measure One⁸ and the federal government, we estimate that total spending on higher education was $397 billion in the AY 2013-2014, up from $310 billion in the AY 2008-2009. Private Education Loans represent just 2 percent of total spending on higher education. Modest growth in total spending can lead to meaningful increases in Private Education Loans in the absence of growth in other sources of funding.⁹

⁸ Source: MearureOne CBA Report, December 2014. MeasureOne is a third party aggregator of Private Education Loan data. The six largest Private Education Loan providers submit originations data each month to MeasureOne. MeasureOne aggregates this data and provides blind monthly reporting back to the providers. www.measureone.com

⁹ Source: Total post-secondary education spend is estimated by Sallie Mae determining the full-time equivalents for both graduates and undergraduates and multiplying by the estimated total per person cost of attendance for each school type. In doing so, we utilize information from the US Department of Education, National Center for Education Statistics, Projections of Education Statistics to 2022 (NCES 2014-, February 2014), The Integrated Postsecondary Education Data System, College Board -Trends in Student Aid 2014. © 2014 The College Board. www.collegeboard.org, College Board -Trends in Student Pricing 2014. © 2014 The College Board. www.collegeboard.org, MeasureOne Private Student Loan quarterly dataset, National Student Clearinghouse - Term Enrollment Estimates and Company Analysis. Other sources for these data points also exist publicly and may vary from our computed estimates. College Board restates their data annually, which may cause previously reported results to vary.

Supervision and Regulation

Overview

We are subject to extensive regulation, examination and supervision by various federal, state and local authorities. The more significant aspects of the laws and regulations that apply to us and our subsidiaries are described below. These descriptions are qualified in their entirety by reference to the full text of the applicable statutes, legislation, regulations and policies, as they may be amended, and as interpreted and applied, by federal, state and local agencies. Such statutes, regulations and policies are continually under review and are subject to change at any time, particularly in the current economic and regulatory environment.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) was adopted to reform and strengthen regulation and supervision of the U.S. financial services industry. It contains comprehensive provisions to govern the practices and oversight of financial institutions and other participants in the financial markets. It mandates significant regulations, additional requirements and oversight on almost every aspect of the U.S. financial services industry, including increased capital and liquidity requirements, limits on leverage and enhanced supervisory authority. It requires the issuance of many implementing regulations which will take effect over several years, making it difficult to anticipate the overall impact to us, our affiliates, including the Bank, as well as our customers and the financial industry more generally.

Consumer Protection Laws and Regulations

Our origination, servicing and first-party collection activities related to our Private Education Loans subject us to federal and state consumer protection, privacy and related laws and regulations. Some of the more significant laws and regulations that are applicable to our business include:


•	various laws governing unfair, deceptive or abusive acts or practices;


•	the federal Truth-In-Lending Act and Regulation Z issued by the CFPB, which governs disclosures of credit terms to consumer borrowers;


•	the Fair Credit Reporting Act and Regulation V issued by the CFPB, which governs the use and provision of information to consumer reporting agencies;


•	the Equal Credit Opportunity Act (“ECOA”) and Regulation B issued by the CFPB, which prohibits discrimination on the basis of race, creed or other prohibited factors in extending credit;


•	the Servicemembers Civil Relief Act (“SCRA”), which applies to all debts incurred prior to commencement of active military service (including education loans) and limits the amount of interest, including service and renewal charges and any other fees or charges (other than bona fide insurance) that are related to the obligation or liability;


•	the Fair Debt Collection Act, which governs the manner in which consumer debts may be collected by collection agencies;


•	the Truth in Savings Act and Regulation DD issued by the CFPB, which requires disclosure of deposit terms to consumers;


•	Regulation CC issued by the Federal Reserve Bank (“FRB”), which relates to the availability of deposit funds to consumers;


•	the Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;


•	the Electronic Funds Transfer Act and Regulation E issued by the CFPB, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights


•	the Telephone Consumer Protection Act, which governs communication methods that may be used to contact customers; and


•	the Gramm-Leach-Bliley Act, which governs the ability of financial institutions to disclose nonpublic information about consumers to non-affiliated third parties.

Consumer Financial Protection Bureau

The Consumer Financial Protection Act, a part of the Dodd-Frank Act, established the CFPB, which has broad authority to write regulations under federal consumer financial protection laws and to directly or indirectly enforce those laws, including regulatory oversight of the Private Education Loan industry, and to examine financial institutions for compliance. It is authorized to collect fines and provide consumer restitution in the event of violations, engage in consumer financial education, track consumer complaints, request data and promote the availability of financial services to underserved consumers and communities. It has authority to prevent unfair, deceptive or abusive acts and practices by issuing regulations that define the same or by using its enforcement authority without first issuing regulations. The CFPB has been active in its supervision, examination and enforcement of financial services companies, most notably bringing enforcement actions, imposing fines and mandating large refunds to customers of several large banking institutions. As of January 1, 2015, the CFPB has become the Bank’s primary consumer compliance supervisor with compliance examination authority and primary consumer protection enforcement authority. The UDFI and FDIC remain the prudential regulatory authorities with respect to the Bank’s financial strength.

The Dodd-Frank Act created the Private Education Loan Ombudsman within the CFPB to receive and attempt to informally resolve inquiries about Private Education Loans. The Private Education Loan Ombudsman reports to Congress annually on the trends and issues identified through this process. The CFPB continues to take an active interest in the student loan industry, undertaking a number of initiatives related to the Private Education Loan market and student loan servicing. On October 16, 2014, the Private Education Loan Ombudsman within the CFPB submitted its third report based on Private Education Loan inquiries received by the CFPB from October 1, 2013 through September 30, 2014.

Regulation of Sallie Mae Bank

The Bank was chartered in 2005 and is a Utah industrial bank regulated by the FDIC, the UDFI and the CFPB. We are currently not a bank holding company and therefore are not subject to the federal regulations applicable to bank holding companies. However, we and our non-bank subsidiaries are subject to regulation and oversight as institution-affiliated parties. The following discussion sets forth some of the elements of the bank regulatory framework applicable to us, the Bank and our other non-bank subsidiaries.

General

The Bank is currently subject to prudential regulation and examination by the FDIC and the UDFI, and consumer compliance regulation and examination by the CFPB. Numerous other federal and state laws as well as regulations promulgated by the FDIC and the state banking regulator govern almost all aspects of the operations of the Bank and, to some degree, our operations and those of our non-bank subsidiaries as institution-affiliated parties.

Actions by Federal and State Regulators

Like all depository institutions, the Bank is regulated extensively under federal and state law. Under federal and state laws and regulations pertaining to the safety and soundness of insured depository institutions, the UDFI and separately the FDIC as the insurer of bank deposits have the authority to compel or restrict certain actions on the Bank’s part if they determine it has insufficient capital or other resources, or is otherwise operating in a manner that may be deemed to be inconsistent with safe and sound banking practices. Under this authority, the Bank’s regulators can require it to enter into informal or formal supervisory agreements, including board resolutions, memoranda of understanding, written agreements and consent or cease and desist orders, pursuant to which the Bank would be required to take identified corrective actions to address cited concerns and to refrain from taking certain actions.

Enforcement Powers

We and our nonbank subsidiaries are “institution-affiliated parties” of the Bank, including our management, employees, agents, independent contractors and consultants, and are generally subject to potential civil and criminal penalties for violations of law, regulations or written orders of a government agency. Violations can include failure to timely file required reports, filing false or misleading information or submitting inaccurate reports. Civil penalties may be as high as $1,000,000 a day for such violations and criminal penalties for some financial institution crimes may include imprisonment for 20 years. Regulators have flexibility to commence enforcement actions against institutions and institution-affiliated parties, and the FDIC has the authority to terminate deposit insurance. When issued by a banking agency, cease and desist and similar orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions determined to be appropriate by the ordering

agency. The federal banking regulators also may remove a director or officer from an insured depository institution (or bar them from the industry) if a violation is willful or reckless.

On May 13, 2014, the Bank reached settlements with the FDIC and the Department of Justice regarding disclosures and assessments of certain late fees, as well as compliance with the SCRA. Under the FDIC Order, the Bank agreed to pay $3.3 million in fines and oversee the refund of up to $30 million in late fees assessed on loans owned or originated by the Bank since its inception in November 2005. Under the terms of the Separation and Distribution Agreement, Navient is responsible for funding all liabilities under the regulatory orders, other than fines directly levied against the Bank in connection with these matters. Under the Department of Justice Order, Navient is solely responsible for reimbursing SCRA benefits and related compensation on behalf of both its subsidiary, Navient Solutions, Inc., and the Bank. At the time of this filing, the Bank is continuing to implement both the FDIC Order and the Department of Justice Order.

As required by the 2014 FDIC Order and the Department of Justice order, the Bank is implementing new SCRA policies, procedures and training, has updated billing statement disclosures, and is taking additional steps to ensure its third-party service providers are also fully compliant in these regards. The 2014 FDIC Order also requires the Bank to have its current compliance with consumer protection regulations audited by independent qualified audit personnel. The Bank is focused on achieving timely and comprehensive remediation of each item contained in the orders and on further enhancing its policies and practices to promote responsible financial practices, customer experience and compliance.

In May 2014, the Bank, in its capacity as a former affiliate of Navient, received a Civil Investigative Demand from the CFPB as part of the CFPB’s separate investigation relating to fees and policies of pre-Spin-Off SLM during the period prior to the Spin-Off of Navient. We have been cooperating fully with the CFPB but are not in a position at this time to predict the duration or outcome of the investigation. Given the timeframe covered by this demand, Navient is responsible for all costs, expenses, losses or remediation that may arise from this investigation.

Standards for Safety and Soundness

The Federal Deposit Insurance Act (the “FDIA”) requires the federal bank regulatory agencies such as the FDIC to prescribe, by regulation or guidance, operational and managerial standards for all insured depository institutions, such as the Bank, relating to internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, and asset quality. The agencies also must prescribe standards for asset quality, earnings, and stock valuation, as well as standards for compensation, fees and benefits. The federal banking regulators have adopted regulations and interagency guidance prescribing standards for safety and soundness to implement these required standards. These guidelines set forth the safety and soundness standards used to identify and address problems at insured depository institutions before capital becomes impaired. Under the regulations, if a regulator determines a bank fails to meet any prescribed standards, the regulator may require the bank to submit an acceptable plan to achieve compliance, consistent with deadlines for the submission and review of such safety and soundness compliance plans.

Dividends

The Federal Deposit Insurance Corporation Improvement Act and Utah’s industrial bank laws generally prohibit a depository institution from making any capital distribution, including payment of a dividend, or paying any management fee to its holding company if the institution would thereafter be undercapitalized. In addition, federal banking regulations applicable to the Bank require minimum levels of capital that may limit the amounts available for payment of dividends. In addition, many regulators have a policy, but not a requirement, that a dividend payment should not exceed net income to date in the current year. Finally, the ability of the Bank to pay dividends, and the contents of its respective dividend policy, could be impacted by a range of regulatory changes made pursuant to the Dodd-Frank Act, many of which will require final implementing rules to become effective. The Bank paid no dividends for the year ended December 31, 2014. Total dividends paid by the Bank were $120 million and $420 million in the years ended December 31, 2013 and 2012, respectively.

Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the FDIC and the UDFI. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material adverse effect on our business, results of operations and financial position. Under the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of our assets, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.

We must comply with the FDIC’s final rule implementing the Basel III capital framework related to regulatory capital measurement and reporting. The rule strengthens both the quantity and quality of risk-based capital for all banks, placing greater emphasis on Tier 1 common equity capital. Under the new rule, well-capitalized institutions will be required to maintain a minimum Tier 1 Leverage ratio of 5 percent, a minimum Tier 1 common equity risk-based capital ratio of 6.5 percent, a minimum Tier 1 risk-based capital of 8 percent and minimum total risk-based capital of 10 percent. In addition, a capital conservation buffer will be phased in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625 percent of risk weighted assets for 2016, 1.25 percent for 2017, 1.875 percent for 2018 and 2.5 percent for 2019 and beyond, resulting in the following minimum ratios beginning in 2019: a Tier 1 common equity risk-based capital ratio of a minimum 7.0 percent, a Tier 1 capital ratio of a minimum 8.5 percent and a total risk-based capital ratio of a minimum 10.5 percent.

Stress Testing Requirements

The Dodd-Frank Act imposes stress testing requirements on banking organizations with total consolidated assets, averaged over the four most recent consecutive quarters, of more than $10 billion. As of September 30, 2014, the Bank has met this asset threshold. Under the FDIC’s implementing regulations, the Bank is required to conduct annual company-run stress tests utilizing scenarios provided by the FDIC and publish a summary of those results. The Bank must conduct its first annual stress test under the rules in the January 1, 2016 stress testing cycle and submit the results of that stress test to the FDIC by July 31, 2016.

Deposit Insurance and Assessments

Deposits at the Bank are insured by the Deposit Insurance Fund (the “DIF”), as administered by the FDIC, up to the applicable limits established by law. The Dodd-Frank Act amended the statutory regime governing the DIF. Among other things, the Dodd-Frank Act established a minimum designated reserve ratio (“DRR”) of 1.35 percent of estimated insured deposits, required that the fund reserve ratio reach 1.35 percent by September 30, 2020, and directed the FDIC to amend its regulations to redefine the assessment base used for calculating deposit insurance assessments. Specifically, the Dodd-Frank Act requires the assessment base to be an amount equal to the average consolidated total assets of the insured depository institution during the assessment period, minus the sum of the average tangible equity of the insured depository institution during the assessment period and an amount the FDIC determines is necessary to establish assessments consistent with the risk-based assessment system found in the FDIA.

In December of 2010, the FDIC adopted a final rule setting the DRR at 2.0 percent. Furthermore, on February 7, 2011, the FDIC issued a final rule changing its assessment system from one based on domestic deposits to one based on the average consolidated total assets of a bank minus its average tangible equity during each quarter. The February 7, 2011 final rule modifies two adjustments added to the risk-based pricing system in 2009 (an unsecured debt adjustment and a brokered deposit adjustment), discontinues a third adjustment added in 2009 (the secured liability adjustment), and adds an adjustment for long-term debt held by an insured depository institution where the debt is issued by another insured depository institution. Under the February 7, 2011 final rule, the total base assessment rates will vary depending on the DIF reserve ratio.

With respect to brokered deposits, an insured depository institution must be well-capitalized in order to accept, renew or roll over such deposits without FDIC clearance. An adequately capitalized insured depository institution must obtain a waiver from the FDIC to accept, renew or roll over brokered deposits. Undercapitalized insured depository institutions generally may not accept, renew or roll over brokered deposits. For more information on the Bank’s deposits, see Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations - Key Financial Measures — Funding Sources”.

Regulatory Examinations

The Bank currently undergoes regular on-site examinations by the Bank’s regulators, which examine for adherence to a range of legal and regulatory compliance responsibilities. A regulator conducting an examination has complete access to the books and records of the examined institution. The results of the examination are confidential. The cost of examinations may be assessed against the examined institution as the agency deems necessary or appropriate.

Source of Strength

Under the Dodd-Frank Act, we are required to serve as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances when we might not do so absent the statutory requirement. Any loan by us to the Bank would be subordinate in right of payment to depositors and to certain other indebtedness of the Bank.

Community Reinvestment Act

The Community Reinvestment Act requires the FDIC to evaluate the record of the Bank in meeting the credit needs of its local community, including low- and moderate-income neighborhoods. These evaluations are considered in evaluating mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could result in additional requirements and limitations on the Bank.

Privacy Laws

The federal banking regulators, as required by the Gramm-Leach-Bliley Act, have adopted regulations that limit the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. Financial institutions are required to disclose to consumers their policies for collecting and protecting confidential customer information. Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties, with some exceptions, such as the processing of transactions requested by the consumer. Financial institutions generally may not disclose certain consumer or account information to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing. The privacy regulations also restrict information sharing among affiliates for marketing purposes and govern the use and provision of information to consumer reporting agencies. Federal and state banking agencies have prescribed standards for maintaining the security and confidentiality of consumer information, and Sallie Mae Bank is subject to such standards, as well as certain federal and state laws or standards for notifying consumers in the event of a security breach.

Other Sources of Regulation

Many aspects of our businesses are subject to regulation by federal and state regulation and administrative oversight. Some of the most significant of these are described below.

Oversight of Derivatives

Title VII of the Dodd-Frank Act requires all standardized derivatives, including most interest rate swaps, to be submitted for clearing to central counterparties to reduce counterparty risk. As of December 31, 2014, $4.0 billion notional of our derivative contracts were cleared on the Chicago Mercantile Exchange and the London Clearing House. All derivative contracts cleared through an exchange require collateral to be exchanged based on the fair value of the derivative. Our exposure is limited to the value of the derivative contracts in a gain position net of any collateral we are holding. We have liquidity exposure related to collateral movements between us and our derivative counterparties. Movements in the value of the derivatives, which are primarily affected by changes in interest rate and foreign exchange rates, may require us to return cash collateral held or may require us to access primary liquidity to post collateral to counterparties.

Credit Risk Retention

In October 2014, the Department of the Treasury, the Federal Reserve, the Office of the Comptroller of the Currency (“OCC”), the FDIC, the Securities Exchange Commission (“SEC”), the Federal Housing Finance Agency and the Department of Housing and Urban Development issued final rules to implement the credit risk retention requirements of Section 941 of the Dodd-Frank Act for asset-backed securitizations (“ABS”), including those backed by residential and commercial mortgages and automobile, commercial, credit card, and student loans, except for certain transactions with limited connections to the United States and U.S. investors. The regulations generally require securitizers of asset-backed securities, such as Sallie Mae, to retain at least five percent of the credit risk of the assets being securitized. The final rules provide reduced risk retention requirements for securitization transactions collateralized solely (excluding servicing assets) by FFELP loans. The regulations will take effect in December 2015 for securitization transactions backed by residential mortgages and in December 2016 for any other securitization transaction.

Anti-Money Laundering, the USA PATRIOT Act, and U.S. Economic Sanctions

The USA PATRIOT Act of 2001 (the “USA Patriot Act”), which amended the Bank Secrecy Act, substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The U.S. Treasury Department has issued and, in some cases proposed, a number of regulations that apply various requirements of the USA Patriot Act to financial institutions such as the Bank. These regulations impose obligations on financial institutions to maintain appropriate internal policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. In addition, U.S. law generally prohibits or substantially restricts U.S. persons from doing business with countries designated by the U.S. Department of State as state sponsors of terrorism, which currently are Cuba, Iran, Sudan and Syria. Under U.S. law, there are similar prohibitions or restrictions with countries subject to other U.S. economic sanctions administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control or other agencies. We maintain policies and procedures designed to ensure compliance with relevant U.S. laws and regulations applicable to U.S. persons.

Volcker Rule

In December 2013, the U.S. banking agencies, SEC and U.S. Commodity Futures Trading Commission (“CFTC”) issued final rules to implement the “Volcker Rule” provisions of Dodd-Frank. The rules prohibit insured depository institutions and their affiliates (collectively, “banking entities”) from engaging in proprietary trading and from investing in, sponsoring, or having certain financial relationships with certain private funds. These prohibitions are subject to a number of important exclusions and exemptions that, for example, permit banking entities to trade for risk mitigating hedging and liquidity management, subject to certain conditions and restrictions. A conformance period is currently scheduled to end on July 21, 2015, subject to extension at the discretion of the Federal Reserve Board. We do not currently expect the Volcker Rule to have a meaningful effect on our operations or those of our subsidiaries, as we do not materially engage in the businesses prohibited by the Volcker Rule. We may incur costs in connection with implementing the compliance program required by the Volcker Rule, but any such costs are not expected to be material.

Employees

At December 31, 2014, we had approximately 1,000 employees, none of whom are covered by collective bargaining agreements.

Item 1A. Risk Factors

Economic Environment

Economic conditions could have a material adverse effect on our business, results of operations, financial condition and liquidity.

Our business is significantly influenced by economic conditions. Economic growth in the United States remains slow and uneven. High unemployment rates and the failure of our in-school borrowers to graduate are two of the most significant macroeconomic factors that could increase loan delinquencies, defaults and forbearance, or otherwise negatively affect performance of our existing education loan portfolios. Since 2009, the unemployment rate of 20-24 year old college graduates has been higher than historical norms. It reached a high of 13.3 percent in 2011 and declined to 6.6 percent in December 2014. Likewise, high unemployment and decreased savings rates may impede Private Education Loan originations growth as loan applicants and their co-borrowers that experience trouble repaying credit obligations may not meet our credit standards. Current borrowers may experience more trouble in repaying credit obligations, which could increase loan delinquencies, defaults and forbearance. Forbearance programs may have the further effect of delaying default emergence, and alternative payment plans may reduce the utilization of basic forbearance. In addition, some consumers may find that higher education is an unnecessary investment during turbulent economic times and defer enrollment in educational institutions until the economy improves or turn to less costly forms of secondary education, thus decreasing education loan application and funding volumes. Higher credit-related losses and weaker credit quality negatively affect our business, financial condition and results of operations and limit funding options, which could also adversely impact our liquidity position.

Competition

We operate in a competitive environment. Our product offerings are primarily concentrated in loan and savings products for higher education.

We compete in the Private Education Loan market with banks and other consumer lending institutions, many with strong consumer brand name recognition and greater financial resources. We compete based on our products, origination capability and customer service. To the extent our competitors compete aggressively or more effectively, we could lose market share to them or subject our existing loans to refinancing risk. Our product offerings may not prove to be profitable and may result in higher than expected losses.

In addition to competition with banks and other consumer lending institutions, the federal government, through the Direct Student Loan Program (“DSLP”), poses significant competition to our Private Education Loan products. The availability and terms of loans the government originates or guarantees affects the demand for Private Education Loans because students and their families often rely on Private Education Loans to bridge a gap between available funds, including family savings, scholarships, grants and federal and state loans, and the costs of post-secondary education. The federal government currently places both annual and aggregate limitations on the amount of federal loans any student can receive and determines the criteria for student eligibility. These guidelines are generally adjusted in connection with funding authorizations from the U.S. Congress for programs under the Higher Education Act of 1965. Recent federal legislation expanded federal grant and loan assistance, which could weaken the demand for Private Education Loans. The reinstatement of FFELP, or similar federal or state programs which make additional government loan funds available, could decrease the demand for Private Education Loans.

We are a leading provider of saving- and paying-for-college products and programs. This concentration gives us a competitive advantage in the marketplace. This concentration also creates risks in our business, particularly in light of our concentrations as a Private Education Loan lender. If population demographics result in a decrease in college-age individuals, if demand for higher education decreases, if the cost of attendance of higher education decreases, if public resistance to higher education costs increases, or if the demand for higher education loans decreases, our ability to grow Private Education Loan originations could be negatively affected. This concentration in our business also subjects us to risks associated with changes in repayment and prepayment rates on Private Education Loans. Most of our Smart Option Education Loan products promote accelerated repayment. Increases in employment levels, wages, family income or alternative sources financing may also contribute to higher prepayment rates.

Access to alternative means of financing the costs of education may reduce demand for Private Education Loans.

The demand for Private Education Loans could weaken if families and student borrowers use other vehicles to bridge the gap between available funds and costs of post-secondary education. These vehicles include, among others:


•	Home equity loans or other borrowings available to families to finance their education costs;


•	Pre-paid tuition plans, which allow students to pay tuition at today’s rates to cover tuition costs in the future;


•	Section 529 plans, which include both prepaid tuition plans and college savings plans that allow a family to save funds on a tax-advantaged basis;


•	Education IRAs, now known as Coverdell Education Savings Accounts, under which a holder can make annual contributions for education savings;


•	Government education loan programs such as the DSLP; and


•	Direct loans from colleges and universities.

If demand for Private Education Loans weakens, we would experience reduced demand for our products and services, which could have a material adverse effect on our business, financial condition and results of operations.

We are dependent on key personnel and the loss of one or more of those key personnel could harm our business.

Our future success depends significantly on the continued services and performance of our management team. We believe our management team’s depth and breadth of experience in our industry is integral to executing our business plan. We also will need to continue to attract, motivate and retain other key personnel. The loss of the services of members of our management team or other key personnel to our competitors or the inability to attract additional qualified personnel as needed could have a material adverse effect on our business, financial position, results of operations and cash flows.

Regulatory

Failure to comply with consumer protection laws could subject us to civil and criminal penalties or litigation, including class actions, and have a material adverse effect on our business.

We are subject to a broad range of federal and state consumer protection laws applicable to our Private Education Loan lending and retail banking activities, including laws governing fair lending, unfair, deceptive and abusive acts and practices, service member protections, interest rates and loan fees, disclosures of loan terms, marketing, servicing and collections.

Violations or changes in federal or state consumer protection laws or related regulations, or in the prevailing interpretations thereof, may expose us to litigation, result in greater compliance costs, constrain the marketing of Private Education Loans, adversely affect the collection of balances due on the loan assets held by us or by securitization trusts or otherwise adversely affect our business. We could incur substantial additional expense complying with these requirements and may be required to create new processes and information systems. Moreover, changes in federal or state consumer protection laws and related regulations, or in the prevailing interpretations thereof, could invalidate or call into question the legality of certain of our services and business practices.

For example, the Bank is currently subject to a Consent Order, Order to Pay Restitution and Order to Pay Civil Money Penalty issued by the FDIC and a Consent Order entered into with the Department of Justice. Specifically, on May 13, 2014, the Bank reached settlements with the FDIC and the Department of Justice regarding disclosures and assessments of certain late fees, as well as compliance with the SCRA.

Violations of the laws or regulations governing our operations could result in the imposition of civil or criminal penalties or our exclusion from participating in education loan programs. These penalties or exclusions, were they to occur, would impair our business reputation and ability to operate our business. In some cases, such violations may render the loan assets unenforceable.

We operate in a highly regulated environment and the laws and regulations that govern our operations, or changes in them, or our failure to comply with them, may adversely affect us.

In addition to consumer protection laws, we are also subject to extensive regulation and supervision that govern almost all aspects of our operations. Intended to protect clients, depositors, the DIF, and the overall financial system, these laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on the business activities in which we can engage, limit the dividend or distributions the Bank can pay to us, restrict the ability of institutions to guarantee our debt, limit proprietary trading and investments in certain private funds, impose certain specific accounting requirements on us that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than generally accepted accounting principles, among other things. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations, as well as increased intensity in supervision, often impose additional compliance costs. We, like the rest of the banking sector, are facing increased regulation and supervision of our industry by the federal bank regulatory agencies and expect that there will be additional and changing requirements and conditions imposed on us. Effective January 1, 2015, the CFPB became the Bank’s primary consumer compliance supervisor, with consumer compliance examination authority and primary consumer compliance enforcement authority. CFPB jurisdiction could result in additional

regulation and supervision, which could increase our costs and limit our ability to pursue business opportunities. Consent orders, decrees or settlements entered into with governmental agencies may also increase our compliance costs or restrict certain of our activities. Further, our failure to comply with these laws and regulations, even if the failure is inadvertent or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of which could adversely affect our results of operations, capital base and the price of our securities. Finally, we operate in an environment of heightened political and regulatory scrutiny of student loan lending, servicing and originations, which could lead to further laws and regulations limiting our business.

Regulatory agencies have increased their expectations with respect to how regulated institutions oversee their relationships with service providers.

The CFPB and the FDIC have issued guidance to supervised banks with respect to increased responsibilities to vet and supervise the activities of service providers to ensure compliance with federal consumer protection laws. The FDIC Consent Order of May 13, 2014, among other things, imposes strict requirements on the Bank with respect to oversight of third-party agreements and services. The issuance of regulatory guidance, the FDIC Consent Order, and the enforcement of the enhanced vendor management standards via examination and investigation of us or any third party with whom we do business, may increase our costs, require increased management attention and adversely impact our operations. In the event we should fail to meet the heightened standards for management of service providers, we could in the future be subject to further supervisory orders to cease and desist, civil monetary penalties or other actions due to claimed noncompliance, which could have an adverse effect on our business, financial condition and operating results.

Capital and Liquidity

For at least the next several years, our ability to grow our business to its fullest potential will be heavily reliant on our ability to obtain deposits and sell some of the loans we originate.

If we are unable to obtain funding or generate sufficient proceeds from loan sales to fund new Private Education Loan originations, our business, financial condition, results of operations and cash flows could be materially adversely affected.

We fund Private Education Loan originations through term and liquid brokered and retail deposits raised by the Bank. Assets funded in this manner result in refinancing risk because the average term of the deposits is shorter than the expected term of the Private Education Loan assets we create. Also, our ability to maintain our current level of deposits or grow our deposit base could be affected by regulatory restrictions, including the possible imposition of prior approval requirements or restrictions on deposit growth through brokered deposits. As a supervisory matter, reliance on brokered deposits as a significant source of funding is discouraged. As a result, in order to grow our deposit base, we will need to expand our non-brokered channels for deposit generation, including through new marketing and advertising efforts, which may require significant time, capital, and effort to implement. Further, the significant competition for deposits from other banking organizations that are also seeking stable deposits to support their funding needs may affect deposit renewal rates, costs or availability. If we are unable to develop new channels for deposit generation on favorable terms, it could have a material adverse effect on our business, results in operations, and financial position. In addition, our ability to maintain existing or obtain additional deposits may be affected by factors, including those beyond our control, such as perceptions about our financial strength, quality of deposit servicing or online banking generally, with could reduce the number of consumers choosing to make deposits with us.

Until such time as our asset base becomes significantly larger, we cannot increase the rate of growth on Private Education Loan originations and remain within FDIC-stipulated annual growth rates on the Bank unless we can sell significant amounts of our loan production in secondary capital markets transactions. There is no assurance that third party sales of our Private Education Loans will be achievable at sufficient levels to make the origination of new Private Education Loans possible or profitable.

A number of factors, some of which are beyond our control, may adversely affect our loan portfolio funding and disposition activities and thereby adversely affect our business, financial position, results of operations and cash flows.

Our success may depend on our ability to sell significant numbers of our Private Education Loans, structure securitizations containing those loans or execute other secured funding transactions. Several factors may have a material adverse effect on both our ability and the time it takes us to structure and execute these transactions, including the following:


•	Persistent and prolonged disruption or volatility in the capital markets or in the education loan ABS sector specifically;


•	Our inability to generate sufficient Private Education Loan volume;


•	Degradation of the credit quality or performance of the Private Education Loans we sell to third-parties or to securitization trusts, or adverse rating agency assumptions, ratings or conclusions with respect to those trusts;


•	Material breach of our obligations to purchasers of our Private Education Loans, including securitization trusts;


•	The timing and size of education loan asset-backed securitizations that other parties issue, or the adverse performance of, or other problems with, such securitizations;


•	Challenges to the enforceability of Private Education Loans based on violations of, or subsequent changes to, federal or state consumer protection or licensing laws and related regulations, or imposition of penalties or liabilities on assignees of Private Education Loans for violation of such laws and regulations; or


•	Our inability to structure and gain market acceptance for new products or services to meet new demands of ABS investors, rating agencies, or credit facility providers.

In structuring and facilitating securitizations of Private Education Loans, administering securitization trusts or providing portfolio management, we may incur liabilities to transaction parties.

Under applicable state and federal securities laws, if investors incur losses as a result of purchasing ABS that our securitization trusts issue, we could be deemed responsible and could be liable to investors for damages. We could also be liable to investors or other parties for certain updated information that we may provide subsequent to the original ABS issuances by the trusts. If we fail to cause the securitization trusts or other transaction parties to disclose adequately all material information regarding an investment in any securities, if we or the trusts make statements that are misleading in any material respect in information delivered to investors in any securities or if we breach any other duties as the administrator or servicer of the securitization trusts, it is possible we could be sued and ultimately held liable by an investor or other transaction party. This risk includes failure to properly administer or oversee servicing or collections and may increase if the performance of the securitization trusts’ loan portfolios degrades. In addition, under various agreements, we may be contractually bound to indemnify transaction parties if an investor is successful in seeking to recover any loss from those parties and the securitization trusts are found to have made a materially misleading statement or to have omitted material information.

If we are liable to an investor or other transaction party for a loss incurred in any securitization we facilitate or structured and any insurance that we may have does not cover this liability or proves to be insufficient, our business, financial position, results of operations and cash flows could be materially adversely affected.

The interest rate characteristics of our earning assets do not always match the interest rate characteristics of our funding arrangements, which may increase the price of, or decrease our ability to obtain, necessary liquidity.

Net interest income is the primary source of cash flow generated by our portfolios of Private Education Loans and FFELP Loans. Interest earned on Private Education Loans and FFELP Loans is primarily indexed to one-month LIBOR rates, but our cost of funds is primarily related to deposit rates. Certain of our Private Education Loans bear fixed interest rates. These loans are not specifically match funded with fixed-rate deposits. Likewise, the average term of our deposits is shorter than the expected term of our Private Education Loans.

The different interest rate and maturity characteristics of our loan portfolio and the liabilities funding that portfolio result in interest rate risk, basis risk and re-pricing risk. In certain interest rate environments, this mismatch may compress our net interest margin. It is not possible to hedge all of our exposure to such risks. While the assets, liabilities and related hedging derivative contract repricing indices are typically highly correlated, there can be no assurance that the historically high correlation will not be disrupted by capital market dislocations or other factors not within our control. In these circumstances, our earnings could be materially adversely affected.

Adverse market conditions or an inability to effectively manage our liquidity risk could negatively impact our ability to meet our liquidity and funding needs, which could materially and adversely impact our business operations and our overall financial condition.

We must effectively manage the liquidity risk to which we are exposed. We require liquidity to meet cash requirements such as day-to-day operating expenses, extensions of credit on our Private Education Loans, meet demand for deposit withdrawals and payment of required dividends on our preferred stock. Our primary sources of liquidity and funding are from customer deposits, payments made on Private Education Loans and FFELP Loans that we hold, and proceeds from loan sales and securitization transactions we undertake. We may maintain too much liquidity, which can be costly, or we may be too illiquid, which could result in financial distress during times of financial stress or capital market disruptions.

Unexpected and sharp changes in the overall economic environment may negatively impact the performance of our loan and credit portfolios and cause increases in our provision for loan losses and charge-offs.

Unexpected changes in the overall economic environment, including unemployment, may result in the credit performance of our loan portfolio being materially different from what we expect. Our earnings are dependent on the expected future creditworthiness of our education loan customers, especially with respect to our Private Education Loan portfolio. We maintain an allowance for Private Education Loan losses based on expected future charge-offs expected over primarily the next year, which considers many factors, including levels of past due loans and forbearances and expected economic conditions. However, management’s determination of the appropriate allowance level may under- or over-estimate future losses. If the credit quality of our customer base materially decreases, if a market risk changes significantly, or if our reserves for credit losses are not adequate, our business, financial position, results of operations and cash flows could be adversely affected.

Our use of derivatives to manage interest rate sensitivity exposes us to credit and market risk that could have a material adverse effect on our earnings.

We maintain an overall interest rate strategy that uses derivatives to minimize the economic effect of interest rate changes. Developing an effective hedging strategy for dealing with movements in interest rates is complex, and no strategy can completely avoid the risks associated with these fluctuations. For example, our education loan portfolio remains subject to prepayment risk that could cause it to be under- or over-hedged, which could result in material losses. In addition, our interest rate risk management activities expose us to mark-to-market losses if interest rates move in a materially different way than was expected when we entered into the related derivative contracts. As a result, there can be no assurance hedging activities using derivatives will effectively manage our interest rate sensitivity, have the desired beneficial impact on our results of operations or financial condition or not adversely impact our liquidity and earnings.

Our use of derivatives also exposes us to market risk and credit risk. Market risk is the chance of financial loss resulting from changes in interest rates and market liquidity. Some of the swaps we use to economically hedge interest rate risk between our assets and liabilities do not qualify for hedge accounting treatment. Therefore, the change in fair value, called the “mark-to-market,” of these derivative instruments is included in our statement of income. A decline in the fair value of these derivatives could have a material adverse effect on our reported earnings.

We are also subject to the creditworthiness of other third parties, including counterparties to derivative transactions. For example, we have exposure to the financial conditions of various lending, investment and derivative counterparties. If a counterparty fails to perform its obligations, we could, depending on the type of counterparty arrangement, experience a loss of liquidity or an economic loss. In addition, we might not be able to cost effectively replace the derivative position depending on the type of derivative and the current economic environment, and thus be exposed to a greater level of interest rate which could lead to additional losses. Our counterparty exposure is more fully discussed in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Counterparty Exposure.” If our counterparties are unable to perform their obligations, our business, financial condition and results of operations could suffer.

Defaults on education loans, particularly Private Education Loans, could adversely affect our business, financial position, results of operations and cash flows.

We bear the full credit exposure on Private Education Loans. Delinquencies are an important indicator of the potential future credit performance for Private Education Loans. Our delinquencies, as a percentage of Private Education Loans in repayment, were 2.0 percent at December 31, 2014.

In connection with the Spin-Off, we conformed our policy with that of the Bank to charge off loans after 120 days of delinquency. We also changed our loss confirmation period — the expected time between a loss event and management's estimates of the uncollectability of debt — from two years to one year to reflect both the shorter charge-off policy and its related servicing practices. Prior to the Spin-Off, the Bank sold all loans past 90 days delinquent to an entity that is now a subsidiary of Navient. Post-Spin-Off, sales of delinquent loans to Navient will be significantly curtailed. Similarly, pre-Spin-Off SLM’s Private Education Loan 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 to charging off at 120 days delinquent and greatly reducing the number of potentially delinquent loans we sell to Navient, our default aversion strategies must now focus more on loans 30 to 120 days delinquent. We have little experience in executing our default aversion strategies on such compressed collection timeframes. If we are unable to maintain or improve on our existing default aversion levels during these shortened collection timeframes default rates on our Private Education Loans could increase.

Our allowance for loan losses may not be adequate to cover actual losses, and we may be required to materially increase our allowance, which may adversely affect our capital, financial condition, and results of operations.

The evaluation of our allowance for loan losses is inherently subjective, as it requires material estimates that may be subject to significant changes. As of December 31, 2014, our allowance for Private Education Loan losses was approximately $79 million. During the year ended December 31, 2014, we recognized provisions for Private Education Loan losses of $84 million. The provision for loan losses reflects the activity for the applicable period and provides an allowance at a level that management believes is appropriate to cover probable losses inherent in the loan portfolio. However, future defaults can be higher than anticipated due to a variety of factors outside of our control, such as downturns in the economy, regulatory or operational changes and other unforeseen future trends. Losses on Private Education Loans are also determined by risk characteristics such as school type, loan status (in-school, grace, forbearance, repayment and delinquency), loan seasoning (number of months in active repayment), underwriting criteria (e.g., credit scores), presence of a cosigner and the current economic environment. General economic and employment conditions, including employment rates for recent college graduates during the recent recession, led to higher rates of education loan defaults. If actual loan performance is worse than currently estimated, it could materially affect our estimate of the allowance for loan losses and the related provision for loan losses in our statements of income and, as a result, adversely affect our financial condition and results of operations.

Under the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of our assets, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.

Beginning January 1, 2015, the Bank must comply with the FDIC’s final rule implementing the Basel III capital framework related to regulatory capital measurement and reporting. The rule strengthens both the quantity and quality of risk-based capital for all banks, placing greater emphasis on Tier 1 common equity capital. Under the new rule, well-capitalized institutions will be required to maintain a minimum Tier 1 Leverage ratio of 5 percent, a minimum Tier 1 common equity risk-based capital ratio of 6.5 percent, a minimum Tier 1 risk-based capital of 8 percent and minimum total risk-based capital of 10 percent. In addition, a capital conservation buffer will be phased in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625 percent of risk weighted assets for 2016, 1.25 percent for 2017, 1.875 percent for 2018 and 2.5 percent for 2019 and beyond, resulting in the following minimum ratios beginning in 2019: a Tier 1 common equity risk-based capital ratio of a minimum 7.0 percent, a Tier 1 capital ratio of a minimum 8.5 percent and a total risk-based capital ratio of a minimum 10.5 percent. As of December 31, 2014, the Bank had a Tier 1 leverage ratio of 11.5 percent, a Tier 1 risk-based capital ratio of 15.0 percent and total risk-based capital ratio of 15.9 percent. If the FDIC’s final rule were effective on December 31, 2014, the ratios would be Tier 1 leverage ratio of 11.5 percent, Tier 1 risk-based capital ratio of 14.6 percent and total risk-based capital ratio of 15.5 percent.

Institutions that do not maintain the capital conservation buffer could face restrictions on dividend payments, share repurchases and the payment of discretionary bonuses. If the Bank fails to satisfy regulatory capital or leverage capital requirements, it may be subject to serious regulatory sanctions which could also have an impact on us. If any of these sanctions were to occur, they could prevent us from successfully executing our business plan and may have a material adverse effect on our business, results of operations and financial position.

Unfavorable results from ongoing stress tests conducted by us may adversely affect our capital position.

The Dodd-Frank Act imposes stress test requirements on banking organizations with total consolidated assets, averaged over the four most recent consecutive quarters, of more than $10 billion. As of December 31, 2014, the Bank has met this asset threshold. Under the FDIC’s implementing regulations, the Bank is required to conduct annual stress tests utilizing scenarios provided by the FDIC and publish a summary of those results. The Bank must conduct its first annual stress test under the rules in the January 1, 2016 stress testing cycle and submit the results of that stress test to the FDIC by July 31, 2016. Published summary results will be required to include certain measures that evaluate the Bank’s ability to absorb losses in severely adverse economic and financial conditions. Our regulators may require the Bank to raise additional capital or take other actions,

or may impose restrictions on our business, based on the results of the stress tests. We may not be able to raise additional capital if required to do so, or may not be able to do so on terms which are advantageous to us or our current shareholders. Any such capital raises, if required, may also be dilutive to our existing stockholders.

Operations

A failure of our operating systems or infrastructure could disrupt our business, cause significant losses, result in regulatory action or damage our reputation.

On October 13, 2014, we completed the operational separation of our servicing platforms and personnel from Navient and launched our new customer service operation. One major project remains to be completed before full operational separation from Navient can be achieved: establishing the Bank’s own loan originations platform which we currently expect to achieve sometime in the first half of 2015.

Our business is dependent on our ability to process and monitor large numbers of daily transactions in compliance with legal and regulatory standards and our product specifications, which change to reflect our business needs and new or revised regulatory requirements. As processing demands change and our Private Education Loan portfolio grows in both volume and differing terms and conditions, developing and maintaining our operating systems and infrastructure becomes increasingly challenging. There is no assurance we can adequately or efficiently develop, maintain or acquire access to such systems and infrastructure.

Our loan originations and conversions of the servicing, financial, accounting, data processing or other operating systems and facilities that support them may fail to operate properly or become disabled as a result of events beyond our control, adversely affecting our ability to process these transactions. Any such failure could adversely affect our ability to service our clients, result in financial loss or liability to our clients, disrupt our business, result in regulatory action or cause reputational damage. Despite the plans and facilities we have in place, our ability to conduct business may be adversely affected by a disruption in the infrastructure that supports our businesses. This may include a disruption involving electrical, communications, Internet, transportation or other services used by us or third parties with which we conduct business. Notwithstanding our efforts to maintain business continuity, a disruptive event impacting our processing locations could adversely affect our business, financial condition and results of operations.

Our business processes are becoming increasingly dependent upon technological advancement, and we could lose market share if we are not able to keep pace with rapid changes in technology.

Our future success depends, in part, on our ability to process loan applications and payments in an automated manner with high-quality service standards. The volume of loan originations we are able to process is based, in large part, on the systems and processes we have implemented and developed. These systems and processes are becoming increasingly dependent upon technological advancement, such as the ability to process loans and payments over the Internet, accept electronic signatures and provide initial decisions instantly. Our future success also depends, in part, on our ability to develop and implement technology solutions that anticipate and keep pace with continuing changes in technology, industry standards and client preferences. We may not be successful in anticipating or responding to these developments on a timely basis. We have made, and need to continue to make, investments in our technology platform to provide competitive products and services. If competitors introduce products, services, systems and processes that are better than ours or that gain greater market acceptance, those we offer or use may become obsolete or noncompetitive. Any one of these circumstances could have a material adverse effect on our business reputation and ability to obtain and retain clients.

We may be required to expend significant funds to develop or acquire new technologies. If we cannot offer new technologies as quickly as our competitors, we could lose market share. We also could lose market share if our competitors develop more cost effective technologies than those we offer or develop.

We depend on secure information technology, and a breach of those systems or those of third party vendors could result in significant losses, disclosure of confidential customer information and reputational damage, which would adversely affect our business.

Our operations rely on the secure processing, storage and transmission of personal, confidential and other information in our computer systems and networks. Although we take protective measures, our computer systems, software and networks, as well as those of third party vendors we utilize, may be vulnerable to unauthorized access, computer viruses, malicious attacks and other events that could have a security impact beyond our control. Our technologies, systems, networks and those of third parties we utilize may become the target of cyber-attacks, malicious code, computer viruses, denial of service attacks, social engineering and physical attacks that could result in information security breaches, the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our customers’ confidential, proprietary and other information, or otherwise disrupt our or our customers’ or other third parties’ business operations. Moreover, information security risks for large financial

institutions have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties.

If one or more of such events occur, personal, confidential and other information processed and stored in, and transmitted through our computer systems and networks, or those of third party vendors, could be jeopardized or could cause interruptions or malfunctions in our operations that could result in significant losses or reputational damage. We also routinely transmit and receive personal, confidential and proprietary information, some through third parties. We have put in place secure transmission capability, and work to ensure third parties follow similar procedures. An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer or third party could result in legal liability, regulatory action and reputational harm. In the event personal, confidential or other information is jeopardized, intercepted, misused or mishandled, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to fines, penalties, litigation costs and settlements and financial losses that are either not insured against or not fully covered through any insurance maintained by us. If one or more of such events occur, our business, financial condition or results of operations could be significantly and adversely affected.

We increasingly depend on third parties for a wide array of services, systems and information technology applications, and a breach of service levels, or violation of law by one of these third parties could disrupt our business or provide our competitors with an opportunity to enhance their position at our expense.

We increasingly depend on third parties for a wide array of services, systems and information technology applications. Third-party vendors are significantly involved in aspects of our software and systems development, the timely and secure transmission of information across our data communication network, and for other telecommunications, processing, remittance and technology-related services in connection with our business. If a service provider fails to provide the services we require or expect, or fails to meet applicable contractual or regulatory requirements, such as service levels or compliance with applicable laws, the failure could negatively impact our business by adversely affecting our ability to process customers’ transactions in a timely and accurate manner, otherwise hampering our ability to serve our customers, or subjecting us to litigation and regulatory risk for matters as diverse as poor vendor oversight or improper release or protection of personal information. Such a failure could adversely affect the perception of the reliability of our networks and services, and the quality of our brands, and could materially adversely affect our revenues and/or our results of operations.

We may face risks related to litigation that could result in significant legal expenses and settlement or damage awards.

Navient has agreed to be responsible, and indemnify us, for all claims, actions, damages, losses or expenses that may arise from the conduct of all activities of pre-Spin-Off SLM occurring prior to the Spin-Off other than those specifically excluded in the Separation and Distribution Agreement, including the settlement or damage awards and legal expenses associated with any litigation arising from most of our pre-Spin-Off activities. Consequently, due to Navient’s indemnification and the smaller, relatively younger vintages of our Private Education Loans, over the near term our litigation-related expenses may be lower than might otherwise be expected. As our business grows, we will likely be subject to claims and litigation, which could seriously harm our business and require us to incur significant costs. We are also generally obligated, to the extent permitted by law, to indemnify our current and former officers and directors who are named as defendants in these lawsuits. Defending against litigation may require significant attention and resources of management and, regardless of the outcome, such litigation could result in significant legal expenses. If we are a party to material litigation and if the defenses we assert are ultimately unsuccessful, or if we are unable to achieve a favorable settlement, we could be liable for large damages and that could have a material adverse effect on our business, results of operations and financial position. Likewise, similar material adverse effects could occur if Navient is unwilling or unable to honor its indemnification obligations under the Separation and Distribution Agreement.

Incorrect estimates and assumptions by management in connection with the preparation of our consolidated financial statements could adversely affect the reported assets, liabilities, income and expenses.

The preparation of our consolidated financial statements requires management to make critical accounting estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses during the reporting periods. Incorrect estimates and assumptions by management in connection with the preparation of our consolidated financial statements could adversely affect the reported amounts of assets and liabilities and the reported amounts of income and expenses. A description of our critical accounting estimates and assumptions may be found in Part I, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” and in Note 2, “Significant Accounting Policies” to the consolidated financial statements included in this Form 10-K. If we make incorrect assumptions or estimates, we may under- or overstate reported financial results, which could materially and adversely affect our business, financial condition and results of operations.

Our framework for managing risks may not be effective in mitigating our risk of loss.

Our risk management framework seeks to mitigate risk and appropriately balance risk and return. We have established processes and procedures intended to identify, measure, monitor, control and report the types of risk to which we are subject. We seek to monitor and control our risk exposure through a framework of policies, procedures, limits and reporting requirements. Management of risks in some cases depends upon the use of analytical and/or forecasting models. If the models that we use to mitigate these risks are inadequate, we may incur increased losses. In addition, there may be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated. If our risk management framework does not effectively identify or mitigate our risks, we could suffer unexpected losses and our financial condition and results of operations could be materially adversely affected.

Risks Related to the Spin-Off

The actions required to implement the complete separation of our pre-Spin-Off businesses into two, distinct, publicly traded entities have and will continue to take significant management time and attention and could disrupt operations. Our success is highly dependent on hiring, training and retaining new employees in numbers sufficient to sustain the growth of our business.

The complete separation of the pre-Spin-Off organization into two publicly traded companies will continue to require significant ongoing execution and administration at all levels of the internal organization. A team of employees is charged with implementing the Spin-Off, reporting frequently to management on status and progress of the project. High-level employees and management continue to dedicate a significant amount of time to the implementation of the Spin-Off to ensure it is carried out timely and appropriately. We must also hire and train significant numbers of new employees to build out and operate our stand alone operations which could impinge on the time spent on managing our business. Our inability to hire, train, and retain new employees sufficient to support our stand alone operations could disrupt or impair current and future operations.

We will incur significant costs in connection with being a stand-alone company and lose the advantage of our larger size and purchasing power that existed prior to the Spin-Off.

We will incur significant costs in connection with the transition to being a stand-alone public company and implementing the Spin-Off, including costs to separate information systems, accounting, tax, legal and other professional services costs and recruiting and relocation costs associated with hiring key senior management personnel new to us. In addition, the businesses we operate have historically taken advantage of our larger size and purchasing power prior to the Spin-Off in procuring goods and services. After the Spin-Off, we are no longer able to rely on this purchasing power and, as a result, we may not be able to obtain goods and services from third-party service providers and vendors at prices or on terms as favorable as those we obtained prior to the Spin-Off. Furthermore, prior to the Spin-Off, our businesses have obtained services from, or engaged in transactions with, our affiliates under intercompany agreements. Navient and its affiliates will provide services to us and our affiliates following the Spin-Off under a transition services agreement for a transition period and potentially thereafter. The fees charged by Navient and its affiliates for the provision of these services to us and our affiliates may be higher than those charged prior to the Spin-Off. All of these factors will result in costs that are higher than the amounts reflected in historical financial statements which could cause our profitability to decrease.

We continue to have significant exposures to risks related to Navient’s loan servicing operations and its creditworthiness. If we are unable to obtain services, complete the transition of our origination operations as planned, or obtain indemnification payments from Navient, we could experience higher than expected costs and operating expenses and our results of operations and financial condition could be materially and adversely affected.

At the time of this filing, our loan origination capabilities continue to be provided by Navient pursuant to a transition services agreement. Pursuant to the Separation and Distribution Agreement and transition services agreement, Navient will also continue to bear significant responsibility for its activities undertaken for the Bank during this transition period. We are continuing to work with Navient to complete an orderly and staged transition to our own separate, stand-alone loan origination platform. Any unexpected delays or additional costs or expenses to complete this transition or to provide the origination activities conducted by Navient on our behalf, whether or not due to Navient’s actions, could significantly affect our operating expenses and earnings.

Navient has also agreed to be responsible, and indemnify us, for all claims, actions, damages, losses or expenses that may arise from the conduct of all activities of pre-Spin-Off SLM occurring prior to the Spin-Off other than those specifically excluded in the Separation and Distribution Agreement. Some significant examples of the types of indemnification obligations Navient has include:


•	Pursuant to a tax sharing agreement, Navient has agreed to indemnify us for $283 million in deferred taxes that the Company will be legally responsible for but that relate to gains recognized by the Company’s predecessor on debt

repurchases made prior to the Spin-Off. The remaining amount of this indemnification receivable at December 31, 2014 is $240 million.


•	Navient has responsibility to assume new or ongoing litigation matters relating to the conduct of most pre-Spin-Off SLM businesses operated or conducted prior to the Spin-Off.

•

Under the terms of the Separation and Distribution Agreement, Navient is responsible for funding all liabilities under the recently agreed upon regulatory orders with the FDIC and the Department of Justice, other than fines directly levied against the Bank in connection with these matters. Under the Department of Justice order, Navient is solely responsible for reimbursing SCRA benefits and related compensation on behalf of both its subsidiary, Navient Solutions, Inc., and the Bank.

The Separation and Distribution Agreement provides specific processes and procedures pursuant to which we may submit claims for indemnification to Navient and, to date, Navient has acknowledged and accepted all claims. Nonetheless, if for any reason Navient is unable or unwilling to pay claims made against it, our costs, operating expenses and financial condition could be materially and adversely affected over time.

We may not achieve some or all of the expected benefits of the Spin-Off, and the Spin-Off may adversely affect our business.

We may not be able to achieve the full strategic and financial benefits expected to result from the Spin-Off, or such benefits may be delayed or not occur at all. The Spin-Off is expected to provide the following benefits, among others: (i) a distinct investment identity allowing investors to evaluate the merits, performance, and future prospects of the Company separately from Navient; (ii) separation of responsibility for most pre-Spin-Off activities of Old SLM from the Company (iii) cash flows significantly in excess of preferred stock dividend and debt service obligations; (iv) more efficient allocation of capital for the Company and Navient; (v) reducing the likelihood the Company is designated a systemically important financial institution; and (vi) a separate equity structure that allows direct access by the Company to the capital markets and the use of our equity for acquisitions and equity compensation. If we fail to achieve some or all of the benefits expected to result from the Spin-Off, or if such benefits are delayed, the business, financial condition and results of our operations could be adversely affected and the value of our stock could be impacted.

Sallie Mae and Navient will each be subject to restrictions under a tax sharing agreement between them, and a violation of the tax sharing agreement may result in tax liability to Sallie Mae and to its stockholders.

In connection with the Spin-Off, we entered into a tax sharing agreement with Navient to preserve the tax-free treatment of the separation and distribution of Navient. Under this tax sharing agreement, both we and Navient will be restricted from engaging in certain transactions that could prevent the Spin-Off from being tax-free to us and our stockholders at the time of the Spin-Off for U.S. federal income tax purposes. Compliance with the tax sharing agreement and the restrictions therein may limit our near-term ability to pursue certain strategic transactions or engage in activities that might be beneficial from a business perspective, including M&A transactions. This may result in missed opportunities or the pursuit of business strategies that may not be as beneficial for us and which may negatively affect our anticipated profitability. If Navient fails to comply with the restrictions in the tax sharing agreement and as a result the Spin-Off was determined to be taxable for U.S. federal income tax purposes, we and our stockholders at the time of the Spin-Off that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities. Although the tax sharing agreement provides that Navient is required to indemnify us for taxes incurred that may arise were Navient to fail to comply with its obligations under the tax sharing agreement, there is no assurance that Navient will have the funds to satisfy that liability. Also, Navient will not be required to indemnify our stockholders for any tax liabilities they may incur for its violation of the tax sharing agreement.

Risks Related to Our Securities

Our common and preferred stock prices may fluctuate significantly.

The market price of shares of our common stock may fluctuate significantly due to a number of factors, some of which may be beyond our control, including:


•	Actual or anticipated fluctuations in our operating results;


•	Our smaller market capitalization as compared to pre-Spin-Off SLM;


•	Changes in earnings estimated by securities analysts or our ability to meet those estimates;


•	Our policy of paying no common stock dividends;


•	The operating and stock price performance of comparable companies;


•	news reports relating to trends, concerns and other issues in the financial services industry, including regulatory actions against other financial institutions;


•	perceptions in the marketplace regarding us and/or our competitors;


•	new technology used, or services offered, by competitors;


•	significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors;


•	Changes to the regulatory and legal environment under which we and our subsidiaries operate; and


•	Domestic and worldwide economic conditions.

The market price of shares of our preferred stock may fluctuate significantly due to a number of factors, some of which may be beyond our control, including:


•	Significant sales of our preferred stock, or the expectation of these sales or expectations of same;


•	Lack of credit agency ratings or FDIC insurance;


•	Movements in interest rates and spreads that negatively affect return; and


•	Call and redemption features.

In addition, when the market price of a company’s common stock drops significantly, stockholders often institute securities class action lawsuits against the company. A securities class action lawsuit against the Company could cause it to incur substantial costs and could divert the time and attention of its management and other resources, which could materially adversely affect our business, financing condition and results of operations.

An investment in our securities is not an insured deposit.

Our common stock, preferred stock and indebtedness are not bank deposits and, therefore, are not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of securities of any company. As a result, if you acquire our common stock, preferred stock or indebtedness, you may lose some or all of your investment.

The holders of our preferred stock have rights that are senior to those of our common shareholders.

At December 31, 2014, we had issued and outstanding 3.3 million shares of our 6.97 percent Cumulative Redeemable Preferred Stock, Series A and 4 million shares of our Floating-Rate Non-Cumulative Preferred Stock, Series B.

Our preferred stock is senior to our shares of common stock in right of payment of dividends and other distributions. We must be current on dividends payable to holders of preferred stock before any dividends can be paid on our common stock. In the event of our bankruptcy, dissolution or liquidation, the holders of our preferred stock must be satisfied before any distributions can be made to our common shareholders.

We do not intend pay dividends on our common stock.

We have not paid dividends on our common stock since the Spin-Off and we do not expect to do so for the foreseeable future. We are dependent on funds obtained from the Bank to fund our obligations. Regulatory and other legal restrictions may limit our ability to transfer funds freely, either to or from our subsidiaries. In particular, the Bank is subject to laws and regulations that authorize regulatory bodies to block or reduce the flow of funds to us, or that prohibit such transfers altogether in certain circumstances. These laws, regulations and rules may hinder our ability to access funds that we may need to make payments on our obligations. The FDIC has the authority to prohibit or to limit the payment of dividends by the banking organizations they supervise, including us and our bank subsidiaries.

Restrictions on Ownership

The ability of a third party to acquire us is limited under applicable U.S. and state banking laws and regulations.

Under the Change in Bank Control Act of 1978, as amended, (“CIBC Act”), the FDIC’s regulations thereunder, and similar Utah banking laws, any person, either individually or acting through or in concert with one or more other persons, must provide notice to, and effectively receive prior approval from, the FDIC and UDFI before acquiring “control” of us. In practice, the process for obtaining such approval is complicated and time-consuming, often taking longer than six months, and a proposed acquisition may be disapproved for a variety of factors, including, but not limited to: antitrust concerns, financial condition and managerial competence of the applicant, and failure of the applicant to furnish all required information. Under the FDIC’s CIBC Act regulations, control is rebuttably presumed to exist, and notice is required, where a person owns, controls

or holds with the power to vote 10 percent or more of any class of our voting shares and no other person owns, controls or holds with the power to vote a greater percentage of that class of voting shares.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The following table lists the principal facilities owned by us as of December 31, 2014:



Location	Function	Related Business Area(s)	Approximate Square Feet
Newark, DE	Headquarters	Consumer Lending; Business Services; FFELP Loans; Other	160,000
Indianapolis, IN	Loan Servicing Center	Business Services	50,000

The following table lists the principal facilities leased by us as of December 31, 2014:



Location	Function	Related Business Area(s)	Approximate Square Feet
Reston, VA	Administrative Offices	Consumer Lending; Business Services; FFELP Loans; Other	18,000
Newton, MA	Administrative Offices	Business Services and Upromise by Sallie Mae	18,000
Salt Lake City, UT	Sallie Mae Bank	Consumer Lending	11,400

None of the facilities that we own is encumbered by a mortgage. We believe that our headquarters, loan servicing centers, data center, back-up facility and data management and collection centers are generally adequate to meet our long-term lending and business goals. Our headquarters are currently located in owned space at 300 Continental Drive, Newark, Delaware, 19713.


Item 3.	Legal Proceedings

We and our subsidiaries and affiliates are subject to various claims, lawsuits and other actions that arise in the normal course of business. We believe that these claims, lawsuits and other actions will not, individually or in the aggregate, have a material adverse effect on our business, financial condition or results of operations. In the ordinary course of business, it is common for the Company, our subsidiaries and affiliates to receive information and document requests and investigative demands from state attorneys general, legislative committees and administrative agencies. These requests may be for informational or regulatory purposes and may relate to our business practices, the industries in which we operate, or other companies with whom we conduct business. Our practice has been and continues to be to cooperate with these bodies and be responsive to any such requests.

Pursuant to the terms of the Spin-Off and applicable law, Navient assumed responsibility for all liabilities (whether accrued, contingent or otherwise and whether known or unknown) arising out of or resulting from the conduct of pre-Spin-Off SLM and its subsidiaries’ businesses prior to the Spin-Off, other than certain specifically identified liabilities relating to the conduct of our consumer banking business. Nonetheless, given the prior usage of the Sallie Mae and SLM names by entities now owned by Navient, we and our subsidiaries may from time to time be improperly named as defendants in legal proceedings where the allegations at issue are the legal responsibility of Navient. Most of these legal proceedings involve matters that arose in the ordinary course of business of pre-Spin-Off SLM and we will not be providing information on these proceedings unless there are material issues of fact or disagreement with Navient as to the bases of the proceedings or responsibility therefor that we believe could have a material, adverse impact on our business, assets, financial condition, liquidity or outlook if not resolved in our favor.

Regulatory Update

At the time of this filing, the Bank remains subject to the consent order (the “2014 FDIC Order”) relating to the settlement of previously disclosed regulatory matters with the FDIC. Specifically, on May 13, 2014, the Bank reached settlements with the FDIC and the Department of Justice (the “DOJ”) regarding disclosures and assessments of certain late fees, as well as compliance with the SCRA. The DOJ Order was approved by the U.S. District Court for the District of Delaware on September 29, 2014. Under the 2014 FDIC Order, the Bank agreed to pay $3.3 million in fines and oversee the refund of up to $30 million in late fees assessed on loans owned or originated by the Bank since its inception in November 2005.

Under the terms of the Separation and Distribution Agreement, Navient is responsible for funding all liabilities under the regulatory orders, other than fines directly levied against the Bank in connection with these matters. Under the DOJ Order, Navient is solely responsible for reimbursing SCRA benefits and related compensation on behalf of both its subsidiary, Navient Solutions, Inc., and the Bank.

As required by the 2014 FDIC Order and the DOJ Order, the Bank is implementing new SCRA policies, procedures and training, has updated billing statement disclosures, and is taking additional steps to ensure its third-party service providers are also fully compliant in these regards. The 2014 FDIC Order also requires the Bank to have its current compliance with consumer protection regulations audited by independent qualified audit personnel. The Bank is focused on achieving timely and comprehensive remediation of each item contained in the orders and on further enhancing its policies and practices to promote responsible financial practices, customer experience and compliance.

In May 2014, the Bank received a Civil Investigative Demand from the CFPB in the Bank’s capacity as a former affiliate of Navient as part of the CFPB’s separate investigation relating to fees and policies of pre-Spin-Off SLM during the period prior to the Spin-Off of Navient. We are cooperating fully with the CFPB but are not in a position at this time to predict the duration or outcome of the investigation. Given the timeframe covered by this demand, Navient would be responsible for all costs, expenses, losses or remediation likely to arise from this investigation.


Item 4.	Mine Safety Disclosures

N/A

PART II.


Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed and traded on the NASDAQ under the symbol SLM since December 12, 2011. Previously, our common stock was listed and traded on the New York Stock Exchange. As of January 31, 2015, there were 423,476,360 shares of our common stock outstanding and 397 holders of record. The following table sets forth the high and low sales prices for our common stock for each full quarterly period within the two most recent fiscal years. The prices on and before April 30, 2013 include the value of Navient, which was spun off on that date. The prices after that date reflect only the business of SLM Corporation, after the Spin-Off.

Common Stock Prices



(Post-Spin-Off Prices)
		2nd Quarter (May 1, 2014 to June 30, 2014)		3rd Quarter		4th Quarter
2014	High		$9.09		$9.14		$10.34
	Low	8.26		8.23		8.47

(Pre-Spin-Off Prices)
		1st Quarter		2nd Quarter (April 1, 2014 to April 30, 2014)
2014	High		$27.24		$25.93
	Low	21.91		24.22

		1st Quarter		2nd Quarter		3rd Quarter		4th Quarter
2013	High		$20.50		$26.17		$25.49		$26.81
	Low	16.57		19.32		22.69		23.93

We paid quarterly cash dividends on our common stock of $0.150 per share for the four quarters of 2013 and the first quarter of 2014. Following completion of the Spin-Off, we have not paid dividends on our common stock nor do we currently anticipate paying dividends on our common stock.

Issuer Purchases of Equity Securities

The following table provides information relating to our purchase of shares of our common stock in the three months ended December 31, 2014.

We do not intend to initiate share repurchase programs as a means to return capital to shareholders. We only expect to repurchase common stock acquired in connection with taxes withheld in connection with award exercises and vesting under our employee stock based compensation plans.



(In thousands, except per share data)	Total Number of Shares Purchased⁽¹⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares That May Yet Be Purchased Under Publicly Announced Plans or Programs
Period:
October 1 - October 31, 2014	492	$	8.94	—	—
November 1 - November 30, 2014	47	$	9.88	—	—
December 1 - December 31, 2014	111	$	10.05	—	—

Total fourth-quarter 2014	650	$	9.20	—


⁽¹⁾	All shares purchased are pursuant to the shares of our common stock tendered to us to satisfy the exercise price in connection with cashless exercise of stock options, and tax withholding obligations in connection with exercise of stock options and vesting of restricted stock and restricted stock units.

The closing price of our common stock on the NASDAQ Global Select Market on December 31, 2014 was $10.19.

Stock Performance

The following graph compares the five-year cumulative total returns of SLM Corporation, the S&P Midcap 400 Index and the KBW Bank Index.

This graph assumes $100 was invested in the stock or the relevant index on December 31, 2009, and also assumes the reinvestment of dividends through December 31, 2014, including the Company’s distribution to its shareholders of one share of Navient Corporation common stock for every share of SLM Corporation on April 30, 2014. For the purpose of this graph, the Navient Corporation distribution is treated as a non-taxable cash dividend of $16.56 that would have been reinvested in SLM Corporation common stock at the close of business April 30, 2014.

Five Year Cumulative Total Stockholder Return



Company/Index	12/31/09		12/31/10		12/31/11		12/31/12		12/31/13		12/31/14
SLM Corporation		$100.0		$112.1		$121.9		$160.7		$253.0		$279.8
S&P Midcap 400 Index*	100.0		126.4		124.2		146.2		194.9		213.7
KBW Bank Index*	100.0		123.3		94.9		125.8		172.9		188.9

_________

Source: Bloomberg Total Return Analysis

*Prior to the Spin-Off, we compared our stock performance with the S&P 500 Financials Index and the S&P Index. Due to the relatively smaller size of our post-Spin-Off balance sheet and business, we believe comparisons against the S&P Midcap 400 Index and KBW Bank Index are now more appropriate.


Item 6.	Selected Financial Data.

Selected Financial Data 2010-2014

(Dollars in millions, except per share amounts)

The following table sets forth our selected financial and other operating information prepared in accordance with GAAP. The selected financial data in the table is derived from our consolidated financial statements. The data should be read in conjunction with the consolidated financial statements, related notes, and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”



	2014			2013			2012			2011			2010
Operating Data:

Net interest income	$	578		$	462		$	408		$	367		$	261
Net income (loss) attributable to SLM Corporation	$	194		$	259		$	218		$	54		$	(94	)
Basic earnings (loss) per common share attributable to SLM Corporation	$	0.43		$	0.59		$	0.46		$	0.10		$	(0.19	)
Diluted earnings (loss) per common share attributable to SLM Corporation	$	0.42		$	0.58		$	0.45		$	0.10		$	(0.18	)
Dividends per common share attributable to SLM Corporation common shareholders⁽¹⁾	$	—		$	0.60		$	0.50		$	0.30		$	—
Return on common stockholders’ equity	15		%	22		%	18		%	4		%	(0.7		)%
Net interest margin	5.26			5.06			5.54			5.22			3.56
Return on assets	1.77			2.83			2.95			0.77			(1.29		)
Average equity/average assets	13.92			12.50			15.49			16.79			18.30
Balance Sheet Data:
Student loans, net	$	9,510		$	7,931		$	6,487		$	5,302		$	4,659
Total assets	12,972			10,707			9,084			7,670			7,665
Total deposits	10,541			9,002			7,497			6,018			6,108
Total SLM Corporation stockholders’ equity	1,830			1,161			1,089			1,244			1,116
Book value per common share	2.99			2.71			2.41			2.44			2.12

_________

(1) Following completion of the Spin-Off, SLM has not paid dividends on its common stock nor does it anticipate paying dividends on its common stock in 2015.


Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis also contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in “Forward-Looking and Cautionary Statements” and Item 1A. “Risk Factors” in this Annual Report on Form 10-K.

Through this discussion and analysis, we intend to provide the reader with some narrative context for how our management views our consolidated financial statements, additional context within which to assess our operating results, and information on the quality and variability of our earnings, liquidity and cash flows.

Overview

The following discussion and analysis presents a review of our business and operations as of and for the year ended December 31, 2014.

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.

On October 13, 2014, we completed the operational separation of our servicing platforms and related personnel from Navient and launched our new customer service operation. As a result of the launch of our servicing platforms, we now have responsibility for servicing the vast majority of the 840,000 loans contained within our existing Private Education Loan portfolio and maintaining customer relationships with the 1 million borrowers and related cosigners to whom these loans have been made. One major project remains to be completed before full operational separation from Navient can be achieved: establishing our own loan originations platform which we currently expect to achieve in the first half of 2015. For a more detailed description of ongoing arrangements among the Company and Navient, see notes to consolidated financial statements contained in this Form 10-K, Note 16, “Arrangements with Navient Corporation.”

Recent Development

Asset-Backed Commercial Paper Facility

On December 19, 2014, we closed a new $750 million private asset backed commercial paper (“ABCP”) education loan funding facility. The new facility had not been drawn upon as of December 31, 2014 and the facility’s scheduled maturity date is December 18, 2015. For additional details regarding this facility see “Item 7. — Management's Discussion and Analysis iof Financial Condition and Results of Operations — Liquidity and Capital Resources ” and Note 9 to the consolidated financial statements contained in this Form 10-K, “Asset-Backed Commercial Paper Funding Facility.”

Key Financial Measures

Set forth below are brief summaries of our key financial measures. Our operating results are primarily driven by net interest income from our Private Education Loan portfolio (which include financing costs), provision for loan losses, gains and losses on loan sales and operating expenses. The growth of our business and the strength of our financial condition are primarily driven by our ability to achieve our annual Private Education Loan origination goals while sustaining credit quality and maintaining diversified, cost-efficient funding sources to support our originations.

Net Interest Income

The most significant portion of our earnings is generated by the spread between the interest income we receive on assets in our education loan portfolios and the interest expense we pay on funds we use to originate these loans. We report these earnings as net interest income.

Net interest income is predominantly determined by the balance of Private Education Loans. As of December 31, 2014, we held $8.3 billion and $1.3 billion of Private Education and FFELP Loans, respectively. For Private Education Loans and FFELP Loans, net interest margin is determined by the interest on our interest earning assets less our cost of funds. The majority of our interest income comes from our Private Education Loan portfolio which earns variable rate interest and is funded primarily with deposits. Our cost of funds is primarily influenced by competition in the deposit market and by the overall level of interest rates.

FFELP Loans carry lower risk and have a much lower net interest margin as a result of the federal government guarantee supporting these loans. We do not expect to acquire any more FFELP Loans and the balance of our FFELP portfolio is expected to decline due to normal amortization.

Gains on Sale of Loans, Net

To prudently manage the growth of our balance sheet, capital and liquidity needs and to generate non-interest income we intend to periodically sell Private Education Loans to third parties through an auction process. We intend to retain servicing of these Private Education Loans subsequent to their sale at prevailing market rates for such services. We will execute this strategy through the sale of whole loans or securitizing a loan portfolio and selling the senior bonds as well as the residual interest in the securitization trust. Both strategies effectively deconsolidate the loans from our balance sheet and generate cash income for the company. Prior to the Spin-Off the Bank sold loans to an affiliate (now Navient) when the loans became 90 days delinquent and to facilitate securitization transactions. Subsequent to the Spin-Off, we sold $1.2 billion of loans during 2014, through whole loan sales to Navient and a securitization transaction with a third party. We recorded gains of $85 million on those sales. See notes to consolidated financial statements, Note 16, “Arrangements with Navient Corporation,” for further discussion regarding loan purchase agreements.

Allowance for Loan Losses

Management estimates and maintains an allowance for loan losses for Private Education Loans at a level sufficient to cover charge-offs expected over the next year, plus an additional allowance to cover life-of-loan expected losses for loans classified as a troubled debt restructuring (“TDR”). The allowance for loan losses is increased when we record provision expense and for recoveries and is reduced by charge-offs. Generally, the provision for loan losses and the allowance for loan losses rise when charge-offs are expected to increase and fall when charge-offs are expected to decline. We bear the full credit exposure on our Private Education Loans. Losses on our Private Education Loans are determined by risk characteristics such as loan status (in-school, grace, forbearance, repayment and delinquency), loan seasoning (number of months in active repayment), underwriting criteria (e.g., credit scores), presence of a cosigner and the current economic environment. Losses typically emerge once a borrower completes school and enters full principal and interest repayment after their grace period ends. Our experience indicates that approximately 50 percent of expected losses on loans can occur in the first two years after a loan enters full principal and interest repayment. Therefore, changes in our allowance for loan losses will be driven by the amount and age of our loans in full principal and interest repayment. At December 31, 2014, 28 percent of our portfolio of Private Education Loans have entered full principal and interest repayment status after any applicable grace periods.

Our provision for loan losses on our Private Education Loans was $84 million for the year ended December 31, 2014 compared with $65 million in 2013. Our allowance for loan losses was $79 million at December 31, 2014 compared to $62 million at the prior year-end. In connection with the Spin-Off, we changed our policy of charging off Private Education Loans when they are delinquent for 212 days to charging off loans after they are 120 days delinquent. In addition, we changed our loss confirmation period for Private Education Loans from two years to one year to reflect the shorter charge-off period and recent changes in our servicing practices. A 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.

Our loss exposure and resulting provision for losses is small for FFELP Loans because we generally bear a maximum of three percent loss exposure on them. We maintain an allowance for loan losses for our FFELP Loans at a level sufficient to cover charge-offs expected over the the next two years. Our provision for losses in our FFELP Loans portfolio was $2 million for the year ended December 31, 2014 compared with $4 million in 2013.

Charge-Offs and Delinquencies

Delinquencies are a very important indicator of potential future credit performance. When a Private Education Loan reaches 120 days delinquent it is charged against the allowance for loan losses. Charge-off data provides relevant information with respect to the performance of our loan portfolios. Management focuses on delinquencies as well as the progression of loans from early to late stage delinquency. Prior to the Spin-Off, the Bank would sell delinquent loans to an entity that is now a subsidiary of Navient when the loans became 90 days delinquent. As a result, there were no charge-offs recorded in our financial statements prior to April 1, 2014. In addition, because loans were sold earlier in their delinquency status, the historical delinquency statistics are not necessarily indicative of expected future performance.

Private Education Loan delinquencies as a percentage of Private Education Loans in repayment increased from 1.0 percent at December 31, 2013 to 2.0 percent at December 31, 2014. Private Education Loans in forbearance as a percentage of Private Education Loans in repayment and forbearance increased from 0.4 percent at December 31, 2013 to 2.6 percent at December 31, 2014.

Operating Expenses

The operating expenses reported are those that are directly attributable to the Company, the costs of Transition Services Agreements with Navient, and restructuring costs associated with the build-out of our servicing platform and the remaining costs of the Spin-Off. We separately disclose “restructuring and other reorganization expenses”, which represent costs we believe are directly attributable to completing the Spin-Off. Restructuring and other reorganization expenses were $38 million for the year ended December 31, 2014 compared with $1 million in 2013. Our efficiency ratio is calculated as operating expense, excluding restructuring and other reorganization expenses, divided by net interest income after provision for loan losses and other income. For the year ended December 31, 2014 this ratio was 43 percent compared to 40 percent from the year-ago period. Our long-term objective is to achieve steady declines in this ratio over the next several years as the balance sheet and revenue grows to a level commensurate our loan origination platform and we control the growth of our expense base.

Core Earnings

We prepare financial statements in accordance with GAAP. However, we also produce and report our after-tax earnings on a separate basis which we refer to as “Core Earnings.” While pre-Spin-Off SLM also reported a metric by that name, what we now report and what we describe below is significantly different and should not be compared to any Core Earnings reported by pre-Spin-Off SLM.

“Core Earnings” recognizes the difference in accounting treatment based upon whether the derivative qualifies for hedge accounting treatment and eliminates the earnings impact associated with hedge ineffectiveness and derivatives we use as an economic hedge but do not qualify for hedge accounting treatment. We enter into derivatives instruments to economically hedge interest rate and cash flow risk associated with our portfolio. We believe that our derivatives are effective economic hedges, and as such, are a critical element of our interest rate risk management strategy. Those derivative instruments that qualify for hedge accounting treatment have their related cash flows recorded in interest income or interest expense along with the hedged item. Hedge ineffectiveness related to these derivatives is recorded in "Gains (losses) on derivatives and hedging activities, net." Some of our derivatives do not qualify for hedge accounting treatment and the stand-alone derivative must be marked-to-fair value in the income statement with no consideration for the corresponding change in fair value of the hedged item. These gains and losses, recorded in “Gains (losses) on derivative and hedging activities, net”, are primarily caused by interest rate volatility and changing credit spreads during the period as well as the volume and term of derivatives not receiving hedge accounting treatment. Cash flows on derivative instruments that do not qualify for hedge accounting are not recorded in interest income and interest expense; they are recorded in non-interest income: “gains (losses) on derivative and hedging activities, net.”

The adjustments required to reconcile from our “Core Earnings” results to our GAAP results of operations, net of tax, relate to differing treatments for our use of derivative instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness, net of tax. The amount recorded in “Gains (losses) on derivative and hedging activities, net” includes the accrual of the current payment on the interest rate swaps that do not qualify for hedge accounting treatment as well as the change in fair values related to future expected cash flows for derivatives and accounting hedges. For purposes of “Core Earnings” we are including in GAAP earnings the current period accrual amounts (interest reclassification) on the swaps and exclude the remaining ineffectiveness. “Core Earnings” is meant to represent what earnings would have been had these derivatives qualified for hedge accounting and there was no ineffectiveness.

“Core Earnings” are not a substitute for reported results under GAAP. We provide “Core Earnings” basis of presentation because (i) earnings per share computed on a “Core Earnings” basis is one of several measures we utilize in establishing

management incentive compensation and (ii) we believe it better reflects the financial results for derivatives that are economic hedges of interest rate risk but do not qualify for hedge accounting treatment.

GAAP provides a uniform, comprehensive basis of accounting. Our “Core Earnings” basis of presentation differs from GAAP in the way it treats ineffective hedges as described above.

The following table shows the amount in “Gains (losses) on derivative and hedging activities, net” that relates to the interest reclassification on the derivative contracts.



	Years Ended December 31,
(Dollars in thousands)	2014			2013			2012

Hedge ineffectiveness losses	$	(1,746	)	$	(645	)	$	(5,548	)
Interest reclassification	(2,250		)	1,285			87
(Losses) gains on derivatives and hedging activities, net	$	(3,996	)	$	640		$	(5,461	)

The following table reflects adjustments associated with our derivative activities.



	Years Ended December 31,
(Dollars in thousands, except per share amounts)	2014		2013		2012

“Core Earnings” adjustments to GAAP:

GAAP net income attributable to SLM Corporation	$	194,219	$	258,945	$	217,620
Preferred stock dividends	12,933		—		—
GAAP net income attributable to SLM Corporation common stock	$	181,286	$	258,945	$	217,620

GAAP net income attributable to SLM Corporation	$	194,219	$	258,945	$	217,620

Adjustments:
Net impact of derivative accounting⁽¹⁾	1,746		645		5,548
Net tax effect⁽²⁾	659		246		2,047
Total “Core Earnings” adjustments to GAAP	1,087		399		3,501

“Core Earnings”	$	195,306	$	259,344	$	221,121

GAAP diluted earnings per common share	$	0.42	$	0.58	$	0.45
Derivative adjustments, net of tax	—		—		0.01
“Core Earnings” diluted earnings per common share	$	0.42	$	0.58	$	0.46

______

(1) Derivative Accounting: “Core Earnings” exclude periodic unrealized gains and losses caused by the mark-to-market valuations on derivatives that do not qualify for hedge accounting treatment under GAAP, as well as the periodic unrealized gains and losses that are a result of ineffectiveness recognized related to effective hedges under GAAP. Under GAAP, for our derivatives held to maturity, the cumulative net unrealized gain or loss over the life of the contract will equal $0.

(2) “Core Earnings” tax rate is based on the effective tax rate at the Bank where the derivative instruments are held.

Private Education Loan Originations

Private Education Loans are the principal asset on our balance sheet and the main driver of our future earnings and asset growth. The size of the Private Education Loan market and, hence, our ability to grow is determined by several primary factors: college enrollment levels, the costs of attending college, the availability of grants and loans from the federal government and the ability of families to contribute to the cost of education from income and savings. If the cost of education increases at a pace that exceeds income and savings growth, and the availability of federal funds does not significantly increase, we can expect more students and families to borrow privately. If the costs of attending college remain constant or decrease and/or the availability of federal funds increases, our ability to sustain Private Education Loan origination growth will be challenged. For the year ended December 31, 2014, we originated $4.1 billion of Private Education Loans, up 7 percent, from the last year.

Funding Sources

Deposits

We utilize both brokered and retail deposits to meet funding needs and enhance our liquidity position. These deposits can be term or liquid deposits. Term brokered deposits are issued across tenors, and have original terms as long as seven years. Most are swapped into one-month LIBOR. This structure has the effect of increasing the average life of our liabilities and matching the index our assets reset on, minimizing our exposure to interest rate risk. Retail deposits are sourced through a direct banking platform and serve as an important source of diversified funding. Brokered deposits are sourced through a small network of brokers and provide a stable source of funding. As of December 31, 2014, the Bank had $11.3 billion of customer deposits, representing 95 percent of interest earning assets, composed of $3.0 billion of retail deposits, $6.7 billion of brokered deposits and $1.6 billion of other deposits.

Loan Sales and Securitizations

We intend to diversify our funding by issuing term asset backed securities. Term asset backed securities provide long-term funding for our Private Education Loan portfolio at attractive interest rates and at terms that effectively match the average life of the asset. These funding securitizations will remain on our balance sheet if we retain the residual interest in these trusts. In addition, to prudently manage the growth of our balance sheet, capital and liquidity needs, we intend to periodically sell whole loans and residual interests in securitizations of Private Education Loans to third parties through an auction process. When we sell Private Education Loans or residual interests in ABS trusts, the principal of these loans is removed from our balance sheet. We will retain servicing of these Private Education Loans subsequent to such future sales.

2014 Management Objectives

Post Spin-Off, we set out five major goals for the remainder of the year to create shareholder value. They were: (1) prudently grow Private Education Loan assets and revenues; (2) maintain our strong capital position; (3) complete necessary steps to permit the Bank to independently originate and service Private Education Loans; (4) continue to expand the Bank's capabilities and enhance risk oversight and internal controls; and (5) manage operating expenses while improving efficiency and customer experience.

The following describes our performance relative to each of these goals.

Prudently Grow Private Education Loan Assets and Revenues

We continued to pursue managed growth in our Private Education Loan portfolio in 2014 by leveraging our Sallie Mae and Upromise brands and our relationships with more than two thousand colleges and universities while sustaining the credit quality of, and percentage of cosigners for, new originations. We originated $4.1 billion in new loans in 2014, compared with $3.8 billion in 2013. We also continued to help our customers manage their borrowings and succeed in their repayment, which we expect will result in lower charge-offs and provision for loan losses.

Maintain Our Strong Capital Position

The Bank’s goal is to remain well-capitalized at all times. The Bank is required by its regulators, the UDFI and the FDIC, to comply with mandated capital ratios. The Company is a source of strength for the Bank. The Board of Directors and management evaluated the change in the Bank’s ownership structure, the quality of assets, the stability of earnings, and the adequacy of the allowance for loan losses and believe that current and projected capital levels are appropriate at December 31,

2014. As of December 31, 2014, the Bank had a Tier 1 leverage ratio of 11.5 percent, a Tier 1 risk-based capital ratio of 15.0 percent and total risk-based capital ratio of 15.9 percent, exceeding the current regulatory guidelines for well capitalized institutions by a significant amount.

Complete Necessary Steps to Permit the Bank to Independently Originate and Service Private Education Loans

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, and a consumer banking business, SLM Corporation. On October 13, 2014, we completed the operational separation of our servicing platforms and related personnel from Navient and launched our new customer service operation. At the time of this filing, the Bank continues to rely on Navient for loan origination capabilities provided under a transition services agreement entered into with Navient in connection with the Spin-Off. The key project remaining to complete the Bank’s full separation from Navient is the separation of these origination functions. We are currently in the process of completing and testing a new loan originations platform. Our objectives are to implement, complete and begin use of the new loan originations platform in the first half of 2015. While the Bank is not at risk of losing access to Navient's originations platform for 2015 and beyond, completing the full separation of the Bank’s operations from Navient resources is one of our top goals for 2015.

Continue to Expand the Bank’s Capabilities and Enhance Risk Oversight and Internal Controls

Since the beginning of the year we have added approximately 720 employees to the Bank, primarily through transfers of the Company’s or its subsidiaries’ existing employees, complemented by external hires. We have also undertaken significant work to establish that all functions, policies and procedures transferred to the Bank in the Spin-Off are sufficient to meet currently applicable bank regulatory standards. We continue to prepare for our expected growth and designation of the Bank as a “large bank,” which will result in enhanced regulatory scrutiny. For 2014, the following key initiatives have been completed.

Creation of Board-level Risk and Compliance Committees. In connection with the Spin-Off, we have created additional Board-level committees at the Company and Sallie Mae Bank to provide more focused resources and oversight with respect to the continuing development of our enterprise risk management functions and framework, as well as our consumer protection regulatory compliance management system.

Significant Additions to Management Team and Risk Functions. We hired a new Chief Executive Officer, Chief Audit Officer and Chief Risk Officer, all with extensive experience in the banking and financial services industries. In 2014, we have doubled our Internal Audit staff through experienced external hires. In addition, our new Chief Risk Officer is in the process of enhancing the talent and capabilities of the Enterprise Risk Management organization.

Continuing Development of our Internal Controls Environment. During 2014, our management and Board of Directors reviewed and approved the Enterprise Risk Management Framework and Policy, the Risk Appetite Statement and related metrics, thresholds and limits. Our Chief Risk Officer is responsible for maintaining the Enterprise Risk Management Framework and its components across the organization to identify, remediate, control and monitor significant risks. Additionally, the internal risk oversight committee structure has been revised to achieve greater clarity and to consolidate decision making. Prior management committees have been incorporated into the Enterprise Risk Committee and its sub-committees.

Enhanced Compliance with Consumer Protection Laws. As part of our compliance with the terms of the 2014 FDIC Order discussed elsewhere, we made significant changes and enhancements to our compliance management systems and program in 2014. This work will be ongoing through 2015.

Enhanced Vendor Management Function. As part of the transition and development of the Bank’s capabilities in connection with the Spin-Off, we undertook a full review and redesign of our vendor management function. While Navient will, over time, cease to be the Bank’s dominant, third-party vendor, the number of third-party vendors on whom we rely and the volume of work we obtain from them has increased significantly.

Manage Operating Expenses While Improving Efficiency and Customer Experience

In 2014 we incurred the costs of the Spin-Off and related operational separation as well as expenses associated with having to add additional employees to fully staff up as a stand-alone company. Throughout this process we remained disciplined in our expenditures while making sure we are making the necessary investments to improve our customer experience. We will measure our effectiveness by our efficiency ratio. Our efficiency ratio is calculated as operating expense, excluding restructuring and other reorganization expenses, divided by net interest income after provision for loan losses and other income. For the year ended December 31, 2014 this ratio was 43 percent compared with 40 percent from the year-ago

period. Our long-term objective is to achieve steady declines in this ratio over the next several years as the balance sheet and revenue grows to a level commensurate with our loan origination platform and we control the growth of our expense base.

2015 Outlook

Having now completed the majority of post-Spin-Off separation activities from Navient, in 2015 we intend to complete the remainder of these activities and be able to invest significantly more time and resources into growing our business and improving the experience of our customers. Slow but steady economic improvement, low interest rates and relatively stable, liquid capital markets are increasing secondary demand from purchasers and investors interested in acquiring or financing our Private Education Loans. While overall rates of college enrollment may be moderating somewhat, growth at four-year public and private institutions that represent the core of our business is likely to remain strong.

Congressional efforts to achieve reauthorization of The Higher Education Act ( the “HEA”) in 2015, as well as the run up to the 2016 Presidential election, will continue to keep the debate over the funding of the costs of higher education, and the role of Private Education Loans in that regard, in the public eye. While most of the HEA’s provisions relate to the levels and types of Federal funding of education loans, various aspects of the disclosures, servicing, and rehabilitation of Private Education Loans could directly affect our business and decisions regarding the form, loan limits and budget scoring of federal education loan programs could indirectly affect our business. As of January 1, 2015, the CFPB became the primary consumer protection regulator for Sallie Mae Bank; however, the FDIC will also continue its oversight of these important matters. We believe our significant and ongoing efforts to improve our consumer protection compliance infrastructure are equally suited to support our efforts to work cooperatively with both the CFPB and FDIC.

2015 Management Objectives

For 2015 we have again set out five major goals to create shareholder value. They are: (1) prudently grow our Private Education Loan assets and revenues; (2) maintain our strong capital position; (3) complete the necessary steps to permit the Bank to independently originate Private Education Loans; (4) continue to expand the Bank's capabilities and enhance risk oversight and internal controls; and (5) manage operating expenses while improving efficiency and customer experience. Here is how we plan to achieve these objectives:

Prudently Grow Private Education Loan Assets and Revenues

We will continue to pursue managed growth in our Private Education Loan portfolio in 2015 by leveraging our Sallie Mae and Upromise brands and our relationship with more than two thousand colleges and universities. We recently expanded our campus-focused sales force to provide deeper support for universities in all regions of the United States and, as a result, we expect to be able to demonstrate increased 2015 originations through this effort. We are determined to maintain the average FICO scores and cosigner rates on our originations at levels similar to those at which we ended 2014. We will also increase our efforts to help our customers manage their borrowings and succeed in making their payments, which we expect will result in lower charge-offs and provision for loan losses.

Maintain Our Strong Capital Position

The Bank is required by its regulators, the UDFI and the FDIC, to comply with mandated capital ratios. We intend to maintain levels of capital at the Bank that significantly exceed those necessary to be considered “well capitalized” by the FDIC. The Company is a source of strength for the Bank and will provide additional capital as, and if, necessary to the Bank. Our Board of Directors and management evaluate the anticipated change in the Bank’s ownership structure, the quality of assets, stability of earnings, adequacy of our Allowance for Loan Losses and we continue to believe our existing capital levels are sufficient to support the Bank’s plan for significant growth over the next several years and remain “well capitalized”. As our balance sheet grows in 2015, these ratios will decline but will remain significantly in excess of the capital levels required to be considered “well capitalized” by our regulators. We do not plan to pay a common stock dividend or repurchase shares in 2015.

We expect to be active in the capital markets in 2015. We plan to sell Private Education Loans in whole or through securitization transactions, as well as partially finance the cash needed for the funding of new originations through ABS transactions. We expect the market for loan sales and financing sources to continue to be strong in 2015. We will be opportunistic and sell additional loans if the market is significantly stronger than our expectations. It is likely, regardless of the structures utilized, we will realize gains on sales of whole Private Education Loans.

We also expect to use the ABS market to complement our deposit funding to raise term funding for our loan portfolio. Private Education Loans financed through these transactions will remain on our balance sheet as we will retain the residual interest in these trusts.

Complete Necessary Steps to Permit the Bank to Independently Originate Private Education Loans

At the time of this filing, the Bank continues to be reliant on Navient for its loan origination capabilities provided under a transition services agreement entered into with Navient in connection with the Spin-Off. While the Bank is not at risk of losing access to Navient originations applications for 2015 and beyond, completing the full separation of the Bank’s operations from Navient resources is one of our top goals. The key project remaining to complete the Bank’s full separation from Navient is the separation of these origination functions. We are currently in the process of completing and testing a new loan origination platform. Our objectives are to implement, complete and begin use of the new loan originations platform in the first half of 2015.

Continue to Expand the Bank’s Capabilities and Enhance Risk Oversight and Internal Controls

In preparation for and subsequent to the Spin-Off we have undertaken significant work to establish that all functions, policies and procedures transferred to the Bank in the Spin-Off are sufficient to meet currently applicable bank regulatory standards. We must continue to prepare for our expected growth and designation of the Bank as a “large bank,” which will entail enhanced regulatory scrutiny. For 2015, the following key initiatives remain to be completed or are underway.


•	Complete the build-out of our Enterprise Risk Management team under the Chief Risk Officer and conduct our initial internal stress testing exercises in preparation for our initial 2016 regulatory required stress testing and report.

•

Continue to make significant changes and enhancements to our compliance management system and program and related consumer protection processes and procedures. Our redesigned SCRA processing processes and procedures have now received the approval of the DOJ. In 2014, we engaged a third-party firm to conduct independent audits of certain key consumer protection processes and procedures, including our compliance management system, receiving no high risk findings. In 2015, the third-party firm will conduct additional independent audits over the remainder of those processes and procedures.


•	In 2015 we will further enhance our internal controls over financial reporting through adoption of the COSO 2013 framework.

Manage Operating Expenses While Improving Efficiency and Customer Experience

We will continue to measure our effectiveness in managing operating expenses by monitoring our efficiency ratio, excluding restructuring costs associated with the Spin-Off. Our efficiency ratio is calculated as operating expense, excluding restructuring and reorganization expenses, divided by total interest income and other income. For fiscal year 2014 this ratio was 43 percent. We expect this ratio to decline steadily over the next several years as the number of loans we service grows to a level commensurate with our loan origination platform and we control the growth of our expense base. We intend for the Bank to retain servicing of all Private Education Loans we originate, regardless of whether we hold them in our portfolio or sell all or portions of these Private Education Loans via loan sales and ABS transactions.

In 2015, the Company will focus on further enhancing a culture that values customer satisfaction and the efficient delivery of its products and services. We understand the challenges of simplifying and carefully considering our customers’ requests, personal circumstances and requirements. In 2015 we will onshore our loan sales call center to provide more tailored service for our customers. We will also invest in technology that we expect to improve our mobile application and loan management capabilities to deliver to our customers the access they expect from their financial service providers. We expect these investments will result in increased customer satisfaction, higher loan originations and a more efficient operation.

Results of Operations

We present the results of operations below first on a consolidated basis in accordance with GAAP.

GAAP Statements of Income



										Increase (Decrease)
	Years Ended December 31,									2014 vs. 2013					2013 vs. 2012
(Dollars in millions, except per share data)	2014			2013			2012			$			%		$			%
Interest income:
Loans	$	661		$	527		$	463		$	134		25	%	$	64		14	%
Investments	9			20			26			(11		)	(55	)	(6		)	(23	)
Cash and cash equivalents	4			4			2			—			—		2			100

Total interest income	674			551			491			123			22		60			12

Total interest expense	96			89			83			7			8		6			7

Net interest income	578			462			408			116			25		54			13
Less: provisions for loan losses	85			69			66			16			23		3			5

Net interest income after provisions for loan losses	493			393			342			100			25		51			15
Noninterest income:
Gains on sales of loans, net	121			197			235			(76		)	(39	)	(38		)	(16	)
Gains on sales of securities	—			64			—			(64		)	(100	)	64			—
Gains (losses) on derivatives and hedging activities, net	(4		)	1			(5		)	(5		)	(500	)	6			(120	)
Other income	40			36			37			4			11		(1		)	(3	)

Total noninterest income	157			298			267			(141		)	(47	)	31			12
Expenses:
Operating expenses	275			270			254			5			2		16			6
Acquired intangible asset impairment and amortization expense	3			3			13			—			—		(10		)	(77	)
Restructuring and other reorganization expenses	38			1			—			37			3,700		1			—

Total expenses	316			274			267			42			15		7			3

Income before income tax expense	334			417			342			(83		)	(20	)	75			22
Income tax expense	140			159			126			(19		)	(12	)	33			26

Net income	194			258			216			(64		)	(25	)	42			19
Less: net loss attributable to noncontrolling interest	—			(1		)	(2		)	1			(100	)	1			(50	)

Net income attributable to SLM Corporation	194			259			218			(65		)	(25	)	41			19
Preferred stock dividends	13			—			—			13			—		—			—

Net income attributable to SLM Corporation common stock	$	181		$	259		$	218		$	(78	)	(30	)%	$	41		19	%

Basic earnings per common share attributable to SLM Corporation	$	0.43		$	0.59		$	0.46		$	(0.16	)	(27	)%	$	0.13		28	%

Diluted earnings per common share attributable to SLM Corporation	$	0.42		$	0.58		$	0.45		$	(0.16	)	(28	)%	$	0.13		29	%

GAAP Consolidated Earnings Summary

Year Ended December 31, 2014 Compared with Year Ended December 31, 2013

For the year ended December 31, 2014, net income was $194 million, or $.42 diluted earnings per common share, compared with net income of $259 million, or $.58 diluted earnings per common share for the year ended December 31, 2013. The decrease in net income was primarily due to a $76 million decrease in net gains on sales of loans, a $64 million decrease in gains on sales of securities, a $16 million increase in provisions for loan losses and a $42 million increase in total expenses which were partially offset by a $116 million increase in net interest income.

The primary contributors to each of the identified drivers of changes in net income for the current year period compared with the year-ago period are as follows:


•	Net interest income increased by $116 million primarily due to a $1.6 billion increase in average Private Education Loans outstanding and a 20 basis point increase in net interest margin. Net interest margin increased 20 basis points primarily as a result of an increase in the proportion of higher yielding Private Education Loans in our loan portfolio.

•

Provisions for loan losses increased $16 million compared with the year-ago period primarily as a result of a $13 million increase in charge-offs during 2014, an increase in the amount of troubled debt restructurings entered into during 2014 for which we provide for life of loan losses, an increase in the percentage of loans in full principal and interest repayment and the effect of fewer loan sales. These amounts were partially offset by a $14 million benefit from the net effect of a change in our loss emergence period from two years to one year and a change in our charge-off policy that was recorded in the second quarter of 2014.

•

Gains on sales of loans, net, decreased $76 million. In 2014, we sold $1.9 billion of loans through Private Education Loan sales and a securitization transaction with third parties. As a result, we recorded gains of $121 million. In 2013, we recorded $197 million in gains from the sale of $2.4 billion of loans to an entity that is now a subsidiary of Navient. Gains on sales of loans, net, were higher in the year-ago period as a result of a larger volume of loans sold and those loans were sold to and entity that is now a subsidiary of Navient at a higher price.


•	Gains on sales of securities, net decreased $64 million in 2014 compared with 2013 because there were no sales in 2014 and a $585 million sale of securities in 2013. The securities sold in 2013 were ABS backed by FFELP Loans and were originally contributed by the Company to the Bank in 2008.

•

Gains (losses) on derivatives and hedging activities, net, resulted in a net loss of $4 million in 2014 compared with a gain of $1 million in the year-ago period. The primary factors affecting the change were interest rates and whether the derivative qualified for hedge accounting treatment. In 2014, we had more derivatives used to economically hedge risk that did not qualify for hedge accounting treatment than we did in the year-ago period.

•

Operating expenses were $275 million compared with $270 million in the year-ago period. Operating expenses increased in 2014 due to increased servicing and marketing costs as well as increased personnel and other costs related to being a stand-alone company. In addition, in 2013 we recorded an $11 million reserve for estimated remediation costs relating to the 2014 FDIC order. In 2014, we reversed approximately $8 million of that reserve based upon the final determination of the Bank’s liability.


•	Restructuring and other reorganization expenses were $38 million compared with $1 million in the year-ago period. The increase is primarily the result of costs related to the Spin-Off.


•	The increase in 2014's effective tax rate to 41.9 percent from 38.2 percent in the year-ago period was primarily the result of additional reserves related to uncertain tax positions and additional state tax expense as a result of the Spin-Off.

Year Ended December 31, 2013 Compared with Year Ended December 31, 2012

For the year ended December 31, 2013, net income was $259 million, or $.58 diluted earnings per common share, compared with net income of $218 million, or $.45 diluted earnings per common share for the year ended December 31, 2012. The increase in net income was primarily due to a $54 million increase in net interest income and a $64 million increase in gains on sales of securities, offset by a $39 million decrease in net gains on sales of loans.

The primary contributors to each of the identified drivers of changes in net income for the 2013 compared with the 2012 are as follows:

•

Net interest income increased by $54 million primarily due to a $0.6 billion increase in average Private Education Loans outstanding and an increase of $0.6 billion in average FFELP loans outstanding. This was offset by a 48 basis point decline in the net interest margin. The decline in the net interest margin was primarily a result of an increase the proportion of lower yielding FFELP loans in our loan portfolio and an increase in the average amount of cash held, which has a negative effect on our net interest margin.


•	Gains on sales of loans, net, decreased $39 million. For the year ended December 31, 2013, we sold $2.4 billion of loans to an entity that is now a subsidiary of Navient. As a result, we recorded gains of $197 million. In the year ended December 31, 2012, we recorded $235 million in gains from the sale of $2.6 billion of loans to Navient.


•	Gains on sales of securities, net, increased $64 million as a result of a $585 million sale of securities in 2013. There were no security sales in 2012.


•	Operating expenses were $270 million in 2013 compared with $254 million in 2012. Operating expenses increased in 2013 due to increased servicing and marketing costs as well as an $11 million reserve for estimated remediation costs relating to the 2014 FDIC order. In 2012 we recorded a $9 million write-down of intangible assets.


•	The increase in 2013 of the effective tax rate to 38.2 percent from 36.9 percent in the prior year period was primarily the result of additional state tax expense.

Financial Condition

Average Balance Sheets - GAAP

The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities and reflects our net interest margin on a consolidated basis.



	Years Ended December 31,
	2014				2013				2012
(Dollars in thousands)	Balance		Rate		Balance		Rate		Balance		Rate
Average Assets
Private Education Loans	$	7,563,356	8.16	%	$	5,996,651	8.16	%	$	5,347,239	8.34	%
FFELP Loans	1,353,497		3.24		1,142,979		3.32		527,935		2.85
Taxable securities	331,479		2.68		523,883		3.75		569,018		4.50
Cash and other short-term investments	1,746,839		0.26		1,473,392		0.3		929,284		0.48
Total interest-earning assets	10,995,171		6.13	%	9,136,905		6.03	%	7,373,476		6.66	%

Non-interest-earning assets	549,237				463,584				298,317

Total assets	$	11,544,408			$	9,600,489			$	7,671,793

Average Liabilities and Equity
Brokered deposits	$	5,588,569	1.12	%	$	5,015,201	1.24	%	$	4,009,807	1.61	%
Retail and other deposits	3,593,817		0.92		2,675,879		0.96		1,741,304		1.02
Other interest-bearing liabilities	26,794		0.91		120,546		0.92		253,512		0.29
Total interest-bearing liabilities	9,209,180		1.04	%	7,811,626		1.14	%	6,004,623		1.38	%

Non-interest-bearing liabilities	727,806				588,586				478,856
Equity	1,607,422				1,200,277				1,188,314

Total liabilities and equity	$	11,544,408			$	9,600,489			$	7,671,793

Net interest margin			5.26	%			5.06	%			5.54	%

Rate/Volume Analysis - GAAP

The following rate/volume analysis shows the relative contribution of changes in interest rates and asset volumes.



(Dollars in thousands)	Increase (Decrease)		Change Due To⁽¹⁾
(Dollars in thousands)	Increase (Decrease)		Rate			Volume
2014 vs. 2013
Interest income	$	123,094	$	9,270		$	113,824
Interest expense	6,730		(8,468		)	15,198
Net interest income	$	116,364	$	17,738		$	98,978

2013 vs. 2012
Interest income	$	59,919	$	(49,610	)	$	109,529
Interest expense	6,173		(15,560		)	22,170
Net interest income	$	53,746	$	(34,050	)	$	87,390


⁽¹⁾	Changes in income and expense due to both rate and volume have been allocated in proportion to the relationship of the absolute dollar amounts of the change in each. The changes in income and expense are calculated independently for each line in the table. The totals for the rate and volume columns are not the sum of the individual lines.

Summary of Our Education Loan Portfolio

Ending Education Loan Balances, net



	December 31, 2014									December 31, 2013
(Dollars in thousands)	Private Education Loans			FFELP Loans			Total Portfolio			Private Education Loans			FFELP Loans			Total Portfolio
Total education loan portfolio:
In-school⁽¹⁾	$	2,548,721		$	1,185		$	2,549,906		$	2,191,445		$	2,477		$	2,193,922
Grace, repayment and other⁽²⁾	5,762,655			1,263,622			7,026,277			4,371,897			1,424,495			5,796,392
Total, gross	8,311,376			1,264,807			9,576,183			6,563,342			1,426,972			7,990,314
Deferred origination costs and unamortized premium	13,845			3,600			17,445			5,063			4,081			9,144
Allowance for loan losses	(78,574		)	(5,268		)	(83,842		)	(61,763		)	(6,318		)	(68,081		)
Total education loan portfolio	$	8,246,647		$	1,263,139		$	9,509,786		$	6,506,642		$	1,424,735		$	7,931,377

% of total	87		%	13		%	100		%	82		%	18		%	100		%

^_________

⁽¹⁾ Loans for customers still attending school and are not yet required to make payments on the loan.

⁽²⁾ Includes loans in deferment or forbearance.



	December 31, 2012									December 31, 2011
(Dollars in thousands)	Private Education Loans			FFELP Loans			Total Portfolio			Private Education Loans			FFELP Loans			Total Portfolio
Total education loan portfolio	$	5,447,699		$	1,039,755		$	6,487,454		$	5,062,788		$	239,452		$	5,302,240

% of total	84		%	16		%	100		%	95		%	5		%	100		%



	December 31, 2010
(Dollars in thousands)	Private Education Loans			FFELP Loans			Total Portfolio
Total education loan portfolio	$	4,457,244		$	202,226		$	4,659,470

% of total	96		%	4		%	100		%

Average Education Loan Balances (net of unamortized premium/discount)



	Years Ended December 31,
(Dollars in thousands)	2014				2013				2012
Private Education Loans	$	7,563,356	85	%	$	5,996,651	84	%	$	5,347,239	91	%
FFELP Loans	1,353,497		15		1,142,979		16		527,935		9
Total portfolio	$	8,916,853	100	%	$	7,139,630	100	%	$	5,875,174	100	%

Education Loan Activity



	Year Ended December 31, 2014
(Dollars in thousands)	Private Education Loans			FFELP Loans			Total Portfolio
Beginning balance	$	6,506,642		$	1,424,735		$	7,931,377
Acquisitions and originations	4,087,320			7,470			4,094,790
Capitalized interest and deferred origination cost premium amortization	170,306			46,093			216,399
Sales	(1,873,414		)	(7,654		)	(1,881,068		)
Loan consolidation to third parties	(14,811		)	(41,760		)	(56,571		)
Repayments and other	(629,396		)	(165,745		)	(795,141		)
Ending balance	$	8,246,647		$	1,263,139		$	9,509,786



	Year Ended December 31, 2013
(Dollars in thousands)	Private Education Loans			FFELP Loans			Total Portfolio
Beginning balance	$	5,447,699		$	1,039,755		$	6,487,454
Acquisitions and originations	3,803,262			478,384			4,281,646
Capitalized interest and deferred origination cost premium amortization	112,122			49,313			161,435
Sales	(2,347,521		)	(1,182		)	(2,348,703		)
Loan consolidation to third parties	(13,445		)	(23,456		)	(36,901		)
Repayments and other	(495,475		)	(118,079		)	(613,554		)
Ending balance	$	6,506,642		$	1,424,735		$	7,931,377



	Year Ended December 31, 2012
(Dollars in thousands)	Private Education Loans			FFELP Loans			Total Portfolio
Beginning balance	$	5,062,788		$	239,452		$	5,302,240
Acquisitions and originations	3,344,732			817,305			4,162,037
Capitalized interest and deferred origination cost premium amortization	74,619			23,814			98,433
Sales	(2,535,304		)	(460		)	(2,535,764		)
Loan consolidation to third parties	(15,283		)	(17,716		)	(32,999		)
Repayments and other	(483,853		)	(22,640		)	(506,493		)
Ending balance	$	5,447,699		$	1,039,755		$	6,487,454

Private Education Loan Originations

The following table summarizes our Private Education Loan originations.