Document



 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-13251
 
SLM Corporation
(Exact name of registrant as specified in its charter)
 
Delaware
52-2013874
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
300 Continental Drive, Newark, Delaware
19713
(Address of principal executive offices)
(Zip Code)
(302) 451-0200
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
  ¨ 
(Do not check if a smaller reporting company)
Smaller reporting company
  ¨ 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨ No þ 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
Class
 
Outstanding at September 30, 2016
Common Stock, $0.20 par value
428,267,726 shares
 
 






SLM CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS
INDEX
 

Part I. Financial Information
 
 
Item 1.
Financial Statements
 
3
Item 1.
Notes to the Financial Statements
 
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
41
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
67
Item 4.
Controls and Procedures
 
71
PART II. Other Information
 
 
Item 1.
Legal Proceedings
 
72
Item 1A.
Risk Factors
 
73
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
73
Item 3.
Defaults Upon Senior Securities
 
73
Item 4.
Mine Safety Disclosures
 
74
Item 5.
Other Information
 
74
Item 6.
Exhibits
 
74



2


SLM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 
 
 
September 30,
 
December 31,
 
 
2016
 
2015
Assets
 
 
 
 
Cash and cash equivalents
 
$
1,454,938

 
$
2,416,219

Available-for-sale investments at fair value (cost of $209,464 and $196,402, respectively)
 
213,176

 
195,391

Loans held for investment (net of allowance for losses of $164,839 and $112,507, respectively)
 
14,760,504

 
11,630,591

Restricted cash and investments
 
38,256

 
27,980

Other interest-earning assets
 
47,283

 
54,845

Accrued interest receivable
 
805,647

 
564,496

Premises and equipment, net
 
86,721

 
81,273

Tax indemnification receivable
 
276,543

 
186,076

Other assets
 
62,545

 
57,227

Total assets
 
$
17,745,613

 
$
15,214,098

 
 
 
 
 
Liabilities
 
 
 
 
Deposits
 
$
12,941,345

 
$
11,487,707

Short-term borrowings
 
350,000

 
500,175

Long-term borrowings
 
1,577,689

 
579,101

Income taxes payable, net
 
199,813

 
166,662

Upromise related liabilities
 
259,290

 
275,384

Other liabilities
 
157,980

 
108,746

Total liabilities
 
15,486,117

 
13,117,775

 
 
 
 
 
Commitments and contingencies
 

 

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

 
165,000

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

 
400,000

Common stock, par value $0.20 per share, 1.125 billion shares authorized: 434.4 million and 430.7 million shares issued, respectively
 
86,881

 
86,136

Additional paid-in capital
 
1,157,248

 
1,135,860

Accumulated other comprehensive loss (net of tax benefit of $17,253 and $9,949, respectively)
 
(27,813
)
 
(16,059
)
Retained earnings
 
530,594

 
366,609

Total SLM Corporation stockholders’ equity before treasury stock
 
2,311,910

 
2,137,546

Less: Common stock held in treasury at cost: 6.1 million and 4.4 million shares, respectively
 
(52,414
)
 
(41,223
)
Total equity
 
2,259,496

 
2,096,323

Total liabilities and equity
 
$
17,745,613

 
$
15,214,098


See accompanying notes to consolidated financial statements.

3


SLM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Interest income:
 
 
 
 
 
 
 
 
Loans
 
$
268,341

 
$
205,274

 
$
765,246

 
$
598,417

Investments
 
2,193

 
2,640

 
7,155

 
7,746

Cash and cash equivalents
 
2,003

 
987

 
4,832

 
2,568

Total interest income
 
272,537

 
208,901

 
777,233

 
608,731

Interest expense:
 
 
 
 
 
 
 
 
Deposits
 
38,210

 
29,110

 
107,633

 
86,961

Interest expense on short-term borrowings
 
1,604

 
1,951

 
5,827

 
4,719

Interest expense on long-term borrowings
 
9,448

 
2,398

 
17,869

 
2,398

Total interest expense
 
49,262

 
33,459

 
131,329

 
94,078

Net interest income
 
223,275

 
175,442

 
645,904

 
514,653

Less: provisions for credit losses
 
41,784

 
27,497

 
116,179

 
59,673

Net interest income after provisions for credit losses
 
181,491

 
147,945

 
529,725

 
454,980

Non-interest income:
 
 
 
 
 
 
 
 
Gains on sales of loans, net
 
—

 
—

 
—

 
76,874

Gains (losses) on derivatives and hedging activities, net
 
1,368

 
(547
)
 
3,156

 
4,347

Other income
 
21,598

 
10,455

 
56,309

 
29,374

Total non-interest income
 
22,966

 
9,908

 
59,465

 
110,595

Non-interest expenses:
 
 
 
 
 
 
 
 
Compensation and benefits
 
43,380

 
39,304

 
138,659

 
119,079

FDIC assessment fees
 
5,095

 
3,801

 
13,548

 
10,230

Other operating expenses
 
51,234

 
49,759

 
135,164

 
134,541

Total operating expenses
 
99,709

 
92,864

 
287,371

 
263,850

Acquired intangible asset amortization expense
 
226

 
370

 
747

 
1,110

Restructuring and other reorganization expenses
 
—

 
910

 
—

 
6,311

Total non-interest expenses
 
99,935

 
94,144

 
288,118

 
271,271

Income before income tax expense
 
104,522

 
63,709

 
301,072

 
294,304

Income tax expense
 
47,557

 
17,985

 
120,987

 
109,865

Net income
 
56,965

 
45,724

 
180,085

 
184,439

Preferred stock dividends
 
5,316

 
4,913

 
15,698

 
14,606

Net income attributable to SLM Corporation common stock
 
$
51,649

 
$
40,811

 
$
164,387

 
$
169,833

Basic earnings per common share attributable to SLM Corporation
 
$
0.12

 
$
0.10

 
$
0.38

 
$
0.40

Average common shares outstanding
 
428,077

 
426,019

 
427,711

 
425,384

Diluted earnings per common share attributable to SLM Corporation
 
$
0.12

 
$
0.09

 
$
0.38

 
$
0.39

Average common and common equivalent shares outstanding
 
433,523

 
432,547

 
432,079

 
432,531





See accompanying notes to consolidated financial statements.

4


SLM CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
56,965

 
$
45,724

 
$
180,085

 
$
184,439

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Unrealized gains (losses) on investments
 
406

 
2,008

 
4,723

 
(499
)
Unrealized gains (losses) on cash flow hedges
 
9,324

 
(21,751
)
 
(23,782
)
 
(19,284
)
Total unrealized gains (losses)
 
9,730

 
(19,743
)
 
(19,059
)
 
(19,783
)
Income tax (expense) benefit
 
(3,690
)
 
7,676

 
7,305

 
7,661

Other comprehensive income (loss), net of tax (expense) benefit
 
6,040

 
(12,067
)
 
(11,754
)
 
(12,122
)
Total comprehensive income
 
$
63,005

 
$
33,657

 
$
168,331

 
$
172,317


















See accompanying notes to consolidated financial statements.

5


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


 
 
 
 
Common Stock Shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock Shares
 
Issued
 
Treasury
 
Outstanding
 
Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained Earnings
 
Treasury Stock
 
Total Equity
Balance at December 31, 2014
 
7,300,000

 
424,804,125

 
(1,365,277
)
 
423,438,848

 
$
565,000

 
$
84,961

 
$
1,090,511

 
$
(11,393
)
 
$
113,066

 
$
(12,187
)
 
$
1,829,958

Net income
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
184,439

 
—

 
184,439

Other comprehensive loss, net of tax
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(12,122
)
 
—

 
—

 
(12,122
)
Total comprehensive income
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
172,317

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

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(8,625
)
 
—

 
(8,625
)
Preferred Stock, series B ($.51 per share)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(5,981
)
 
—

 
(5,981
)
Dividend equivalent units related to employee stock-based compensation plans
 
—

 
—

 
—

 
—

 
—

 
—

 
1,138

 
—

 
(1,138
)
 
 
 
—

Issuance of common shares
 
—

 
5,569,853

 
—

 
5,569,853

 
—

 
1,114

 
14,329

 
—

 
—

 
—

 
15,443

Tax benefit related to employee stock-based compensation
 
—

 
—

 
—

 
—

 
—

 
—

 
6,093

 
—

 
—

 
—

 
6,093

Stock-based compensation expense
 
—

 
—

 
—

 
—

 
—

 
—

 
16,423

 
—

 
—

 
—

 
16,423

Shares repurchased related to employee stock-based compensation plans
 
—

 
—

 
(2,900,266
)
 
(2,900,266
)
 
—

 
—

 
—

 
—

 
—

 
(28,294
)
 
(28,294
)
Balance at September 30, 2015
 
7,300,000

 
430,373,978

 
(4,265,543
)
 
426,108,435

 
$
565,000

 
$
86,075

 
$
1,128,494

 
$
(23,515
)
 
$
281,761

 
$
(40,481
)
 
$
1,997,334














See accompanying notes to consolidated financial statements.

6



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


 
 
 
 
 
Common Stock Shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock Shares
 
Issued
 
Treasury
 
Outstanding
 
Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained Earnings
 
Treasury Stock
 
Total Equity
Balance at December 31, 2015
 
7,300,000

 
430,677,434

 
(4,374,190
)
 
426,303,244

 
$
565,000

 
$
86,136

 
$
1,135,860

 
$
(16,059
)
 
$
366,609

 
$
(41,223
)
 
$
2,096,323

Net income
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
180,085

 
—

 
180,085

Other comprehensive loss, net of tax
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(11,754
)
 
—

 
—

 
(11,754
)
Total comprehensive income
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
168,331

Cash dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Stock, series A ($0.87 per share)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(8,625
)
 
—

 
(8,625
)
Preferred Stock, series B ($0.65 per share)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(7,073
)
 
—

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

 
—

 
—

 
—

 
—

 
—

 
402

 
—

 
(402
)
 
—

 
—

Issuance of common shares
 
—

 
3,727,574

 

 
3,727,574

 
—

 
745

 
5,493

 
—

 
—

 
—

 
6,238

Tax deficiency related to employee stock-based compensation
 
—

 
—

 
—

 
—

 
—

 
—

 
(2,457
)
 
—

 
—

 
—

 
(2,457
)
Stock-based compensation expense
 
—

 
—

 
—

 
—

 
—

 
—

 
17,950

 
—

 
—

 
—

 
17,950

Shares repurchased related to employee stock-based compensation plans
 
—

 
—

 
(1,763,092
)
 
(1,763,092
)
 
—

 
—

 
—

 
—

 
—

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

 
434,405,008

 
(6,137,282
)
 
428,267,726

 
$
565,000

 
$
86,881

 
$
1,157,248

 
$
(27,813
)
 
$
530,594

 
$
(52,414
)
 
$
2,259,496













See accompanying notes to consolidated financial statements.

7


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


 
 
Nine Months Ended
 
 
September 30,
 
 
2016
 
2015
Operating activities
 
 
 
 
Net income
 
$
180,085

 
$
184,439

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
Provisions for credit losses
 
116,179

 
59,673

Income tax expense
 
120,987

 
109,865

Amortization of brokered deposit placement fee
 
7,766

 
8,006

Amortization of ABCP Facility upfront fee
 
866

 
1,790

Amortization of deferred loan origination costs and fees, net
 
4,304

 
2,563

Net amortization of discount on investments
 
1,387

 
1,332

Interest income on tax indemnification receivable
 
(14,386
)
 
(5,118
)
Depreciation of premises and equipment
 
6,896

 
5,427

Amortization of acquired intangibles
 
747

 
1,110

Stock-based compensation expense
 
17,950

 
16,423

Unrealized gains on derivative and hedging activities, net
 
(1,881
)
 
(1,985
)
Gains on sale of loans, net
 
—

 
(76,874
)
Other adjustments to net income, net
 
2,540

 
216

Changes in operating assets and liabilities:
 
 
 
 
Net decrease in loans held for sale
 
—

 
55

Origination of loans held for sale
 
—

 
(55
)
Increase in accrued interest receivable
 
(430,441
)
 
(316,263
)
Decrease (increase) in restricted cash and investments - other
 
1,564

 
(2,596
)
Decrease in other interest-earning assets
 
7,562

 
24,875

Decrease in tax indemnification receivable
 
44,725

 
44,725

Increase in other assets
 
(22,879
)
 
(18,022
)
Decrease in income taxes payable, net
 
(201,338
)
 
(176,172
)
Increase in accrued interest payable
 
10,202

 
7,227

Increase (decrease) in payable due to entity that is a subsidiary of Navient
 
658

 
(5,368
)
Increase in other liabilities
 
7,131

 
5,895

Total adjustments
 
(319,461
)
 
(313,271
)
Total net cash used in operating activities
 
(139,376
)
 
(128,832
)
Investing activities
 
 
 
 
Loans acquired and originated
 
(4,072,631
)
 
(3,786,946
)
Net proceeds from sales of loans held for investment
 
7,912

 
790,094

Proceeds from claim payments
 
49,742

 
91,000

Net decrease in loans held for investment
 
953,715

 
672,665

Increase in restricted cash and investments - variable interest entities
 
(11,840
)
 
(18,205
)
Purchases of available-for-sale securities
 
(40,767
)
 
(50,062
)
Proceeds from sales and maturities of available-for-sale securities
 
26,318

 
26,222

Total net cash used in investing activities
 
(3,087,551
)
 
(2,275,232
)
Financing activities
 
 
 
 
Brokered deposit placement fee
 
(3,953
)
 
(477
)
Net increase in certificates of deposit
 
481,623

 
161,096

Net increase (decrease) in other deposits
 
961,123

 
(129,412
)
Issuance costs for collateralized borrowings
 
(1,351
)
 
—

Borrowings collateralized by loans in securitization trusts - issued
 
1,104,551

 
620,681

Borrowings collateralized by loans in securitization trusts - repaid
 
(106,567
)
 
(27,195
)

8


Borrowings under ABCP Facility
 
376,325

 
713,746

Repayment of borrowings under ABCP Facility
 
(526,500
)
 
(3,741
)
Fees paid on ABCP Facility
 
(1,450
)
 
(104
)
Excess tax (expense) benefit from the exercise of stock-based awards
 
(2,457
)
 
6,093

Preferred stock dividends paid
 
(15,698
)
 
(14,606
)
Net cash provided by financing activities
 
2,265,646

 
1,326,081

Net decrease in cash and cash equivalents
 
(961,281
)
 
(1,077,983
)
Cash and cash equivalents at beginning of period
 
2,416,219

 
2,359,780

Cash and cash equivalents at end of period
 
$
1,454,938

 
$
1,281,797

Cash disbursements made for:
 
 
 
 
Interest
 
$
119,812

 
$
79,917

Income taxes paid
 
$
201,218

 
$
171,194

Income taxes received
 
$
(86
)
 
$
(80
)
See accompanying notes to consolidated financial statements.

9



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


1. Significant Accounting Policies

Basis of Presentation
The accompanying unaudited, consolidated financial statements of SLM Corporation (“Sallie Mae,” “SLM,” the “Company,” “we,” or “us”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all the information and footnotes required by GAAP for complete consolidated financial statements. The consolidated financial statements include the accounts of SLM Corporation and its majority-owned and controlled subsidiaries after eliminating the effects of intercompany accounts and transactions. In the opinion of management, all adjustments considered necessary for a fair statement of the results for the interim periods have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results for the year ending December 31, 2016 or for any other period. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”).

Correction Recorded in the Current Period
We recognized in the current period adjustments for tax positions relating to historical transactions among entities that are now subsidiaries of Navient Corporation (“Navient”) that should have been recorded at the time of the separation of Navient from SLM (the “Spin-Off”), which occurred on April 30, 2014. We have evaluated the quantitative and qualitative materiality of these errors to all of the relevant periods and concluded that the out of period correction to recognize the asset, liabilities and income statement impacts in the quarter ended September 30, 2016 is not material to our consolidated financial statements for any of the relevant periods. The adjustments increased our tax indemnification receivable and income taxes payable by $120 million and increased our other income and income tax expense by $9 million, as we believe we are indemnified by Navient for these additional tax liabilities. Accordingly, there was no effect on equity or net income as a result of these errors in the current or prior periods. Prospectively, these uncertain tax position liabilities and related assets will be accounted for consistent with our existing accounting policies for these kinds of assets and liabilities.
Consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned and controlled subsidiaries after eliminating the effects of intercompany accounts and transactions.
We consolidate any variable interest entity (“VIE”) where we have determined we are the primary beneficiary. The primary beneficiary is the entity which has both: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses or receive benefits of the entity that could potentially be significant to the VIE.
Loan Interest Income
For loans classified as “held for investment,” we recognize interest income as earned, adjusted for the amortization of deferred direct origination costs. This adjustment is recognized based upon the expected yield of the loan over its life after giving effect to prepayments and extensions. We consider our constant prepayment rate (“CPR”) estimates a significant accounting assumption used to measure the expected prepayment activity in our education loan portfolio. The estimates are based on a number of factors such as historical prepayment rates for loans with similar loan characteristics, assumptions about portfolio composition and loan terms, and the prepayment curve’s tendency to follow a ramp pattern (i.e., the prepayment rate typically increases during the in-school and early repayment periods, then stabilizes). The CPR measures the expected prepayment activity over the life of the loan and is applied as a flat-rate input assumption when used in forecasting.

10

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



Our CPR estimates include the effect of voluntary prepayments, education loan defaults, and consolidation (if the loans are consolidated to third parties), all of which shorten the lives of loans. CPR estimates also consider the utilization of deferment, forbearance, and extended repayment plans, which lengthen the lives of loans. We regularly evaluate the assumptions used to estimate the CPRs. In instances where there are changes to the assumptions, amortization of deferred direct origination costs is adjusted on a cumulative basis to reflect the change since the origination of the loan. We also pay to the U.S. Department of Education (“ED”) an annual 105 basis point Consolidation Loan Rebate Fee on FFELP consolidation loans, which is netted against loan interest income. Additionally, interest earned on education loans reflects potential non-payment adjustments in accordance with our uncollectible interest recognition policy. We do not amortize any adjustments to the basis of education loans when they are classified as “held-for-sale.”
We recognize certain fee income (primarily late fees) on education loans when earned according to the contractual provisions of the promissory notes, as well as our expectation of collectibility. Fee income is recorded when earned in “other non-interest income” in the accompanying consolidated statements of income.
Recently Issued but Not Yet Adopted Accounting Pronouncements
On February 25, 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases,” a comprehensive new lease standard which will supersede previous lease guidance. The standard requires a lessee to recognize in its balance sheet assets and liabilities related to long-term leases that were classified as operating leases under previous guidance. An asset will be recognized related to the right to use the underlying asset and a liability will be recognized related to the obligation to make lease payments over the term of the lease. The standard also requires expanded disclosures surrounding leases. The standard is effective for fiscal periods beginning after December 15, 2018, and requires modified retrospective adoption, with early adoption permitted. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements and related disclosures.
On March 30, 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” which amends the current stock compensation guidance. The amendments simplify the accounting for the taxes related to stock-based compensation, including adjustments to how excess tax benefits and a company’s payments for tax withholdings should be classified. The standard is effective for fiscal periods beginning after December 15, 2016, with early adoption permitted. We continue to evaluate the impact of the adoption of this standard on our consolidated financial statements, and at this time we expect the standard to result in immaterial volatility in earnings caused by the change in the treatment of the tax benefits or deficiencies related to share-based payments at settlement (or expiration) through “income tax expense” in our consolidated statements of income.
On June 16, 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses for financial assets held. Under this standard, we will be required to hold an allowance equal to the expected life-of-loan losses on our loan portfolio. The standard is effective for fiscal periods beginning after December 15, 2019. While we are currently evaluating the impact of our pending adoption of this standard on our consolidated financial statements, we expect the adoption to have a material impact on our consolidated financial statements and capital ratios.


11



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

2. Loans Held for Investment
Loans held for investment consist of Private Education Loans and FFELP Loans. We use “Private Education Loans” to mean education loans to students or their families that are not made, insured or guaranteed by any state or federal government. Private Education Loans do not include loans insured or guaranteed under the previously existing Federal Family Education Loan Program (“FFELP”).
Our Private Education Loans are made largely to bridge the gap between the cost of higher education and the amount funded through financial aid, government loans and customers’ resources. Private Education Loans bear the full credit risk of the customer. We manage this risk through risk-performance underwriting strategies and qualified cosigners. Private Education Loans generally carry a variable rate indexed to LIBOR. As of September 30, 2016, 81 percent of all of our Private Education Loans were indexed to LIBOR. We provide incentives for customers to include a cosigner on the loan, and the vast majority of loans in our portfolio are cosigned. We also provide total cost incentives for customers to make payments while in school.
FFELP Loans are insured as to their principal and accrued interest in the event of default subject to a Risk Sharing level based on the date of loan disbursement. These insurance obligations are supported by contractual rights against the United States. For loans disbursed on or after July 1, 2006, we receive 97 percent reimbursement on all qualifying claims. For loans disbursed after October 1, 1993, and before July 1, 2006, we receive 98 percent reimbursement on all qualifying claims. For loans disbursed prior to October 1, 1993, we receive 100 percent reimbursement on all qualifying claims.
Loans held for investment are summarized as follows:
 
 
September 30,
 
December 31,
 
 
2016
 
2015
Private Education Loans
 
$
13,848,262

 
$
10,596,437

Deferred origination costs
 
40,327

 
27,884

Allowance for loan losses
 
(162,630
)
 
(108,816
)
Total Private Education Loans, net
 
13,725,959

 
10,515,505

 
 
 
 
 
FFELP Loans
 
1,033,929

 
1,115,663

Unamortized acquisition costs, net
 
2,825

 
3,114

Allowance for loan losses
 
(2,209
)
 
(3,691
)
Total FFELP Loans, net
 
1,034,545

 
1,115,086

 
 
 
 
 
Loans held for investment, net
 
$
14,760,504

 
$
11,630,591


 
The estimated weighted average life of education loans in our portfolio was approximately 6.0 years and 6.2 years at September 30, 2016 and December 31, 2015, respectively.

12



SLM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise noted)
2.
Loans Held for Investment (Continued)
 


The average balance and the respective weighted average interest rates of education loans in our portfolio are summarized as follows:


 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
Average Balance
 
Weighted Average Interest Rate
 
Average Balance
 
Weighted Average Interest Rate
 
Average Balance
 
Weighted Average Interest Rate
 
Average Balance
 
Weighted Average Interest Rate
Private Education Loans
 
$
12,881,890

 
8.00
%
 
$
9,869,025

 
7.87
%
 
$
12,307,932

 
8.00
%
 
$
9,563,290

 
7.96
%
FFELP Loans
 
1,049,803

 
3.52

 
1,161,288

 
3.27

 
1,076,394

 
3.48

 
1,196,491

 
3.22

Total portfolio
 
$
13,931,693

 
 
 
$
11,030,313

 
 
 
$
13,384,326

 
 
 
$
10,759,781

 
 



13



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

3. Allowance for Loan Losses
Our provision for loan losses represents the periodic expense of maintaining an allowance sufficient to absorb incurred probable losses in the held-for-investment loan portfolios. The evaluation of the allowance for loan losses is inherently subjective, as it requires material estimates that may be susceptible to significant changes. We believe the allowance for loan losses is appropriate to cover probable losses incurred in the loan portfolios.

Allowance for Loan Losses Metrics

 
 
Allowance for Loan Losses
 
 
Three Months Ended September 30, 2016
 
 
FFELP Loans
 
Private Education
Loans
 
Total
Allowance for Loan Losses
 
 
 
 
 
 
Beginning balance
 
$
2,297

 
$
142,628

 
$
144,925

Total provision
 
268

 
40,502

 
40,770

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

 
2,973

 
2,973

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

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

 
$
162,630

 
$
164,839

Allowance:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$
—

 
$
77,521

 
$
77,521

Ending balance: collectively evaluated for impairment
 
$
2,209

 
$
85,109

 
$
87,318

Loans:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$
—

 
$
503,632

 
$
503,632

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

 
$
13,344,630

 
$
14,378,559

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

 
2.13

 
 
Ending total loans, gross
 
$
1,033,929

 
$
13,848,262

 
 
Average loans in repayment(2)
 
$
791,296

 
$
8,420,625

 
 
Ending loans in repayment(2)
 
$
795,665

 
$
8,905,812

 
 

____________
(1) Represents fair value adjustments on loans sold.
(2) Loans in repayment include loans on which borrowers are making interest only or fixed payments, as well as loans that have entered full principal and interest repayment status after any applicable grace period.

14



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


     
 
 
Allowance for Loan Losses
 
 
Three Months Ended September 30, 2015
 
 
FFELP Loans
 
Private Education
Loans
 
Total
Allowance for Loan Losses
 
 
 
 
 
 
Beginning balance
 
$
4,556

 
$
87,310

 
$
91,866

Total provision
 
143

 
27,354

 
27,497

Net charge-offs:
 
 
 
 
 
 
Charge-offs
 
(529
)
 
(14,121
)
 
(14,650
)
Recoveries
 
—

 
1,361

 
1,361

Net charge-offs
 
(529
)
 
(12,760
)
 
(13,289
)
Loan sales(1)
 
—

 
(1,871
)
 
(1,871
)
Ending Balance
 
$
4,170

 
$
100,033

 
$
104,203

Allowance:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$
—

 
$
43,001

 
$
43,001

Ending balance: collectively evaluated for impairment
 
$
4,170

 
$
57,032

 
$
61,202

Loans:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$
—

 
$
231,286

 
$
231,286

Ending balance: collectively evaluated for impairment
 
$
1,143,595

 
$
10,608,975

 
$
11,752,570

Net charge-offs as a percentage of average loans in repayment (annualized)(2)
 
0.25
%
 
0.83
%
 
 
Allowance as a percentage of the ending total loan balance
 
0.36
%
 
0.92
%
 
 
Allowance as a percentage of the ending loans in repayment(2)
 
0.50
%
 
1.50
%
 
 
Allowance coverage of net charge-offs (annualized)
 
1.97

 
1.96

 
 
Ending total loans, gross
 
$
1,143,595

 
$
10,840,261

 
 
Average loans in repayment(2)
 
$
839,090

 
$
6,118,678

 
 
Ending loans in repayment(2)
 
$
836,585

 
$
6,657,228

 
 
____________
    
(1) Represents fair value adjustments on loans sold.
(2) Loans in repayment include loans on which borrowers are making interest only or fixed payments, as well as loans that have entered full principal and interest repayment status after any applicable grace period.



    


15



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


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

 
$
108,816

 
$
112,507

Total provision
 
(396
)
 
116,703

 
116,307

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

 
7,098

 
7,098

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

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

 
$
162,630

 
$
164,839

Allowance:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$
—

 
$
77,521

 
$
77,521

Ending balance: collectively evaluated for impairment
 
$
2,209

 
$
85,109

 
$
87,318

Loans:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$
—

 
$
503,632

 
$
503,632

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

 
$
13,344,630

 
$
14,378,559

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

 
2.11

 
 
Ending total loans, gross
 
$
1,033,929

 
$
13,848,262

 
 
Average loans in repayment(2)
 
$
795,452

 
$
7,952,469

 
 
Ending loans in repayment(2)
 
$
795,665

 
$
8,905,812

 
 

____________
(1) Represents fair value adjustments on loans sold.
(2) Loans in repayment include loans on which borrowers are making interest only or fixed payments, as well as loans that have entered full principal and interest repayment status after any applicable grace period.





16



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


 
 
Allowance for Loan Losses
 
 
Nine Months Ended September 30, 2015
 
 
FFELP Loans
 
Private Education
Loans
 
Total
Allowance for Loan Losses
 
 
 
 
 
 
Beginning balance
 
$
5,268

 
$
78,574

 
$
83,842

Total provision
 
1,044

 
58,629

 
59,673

Net charge-offs:
 
 
 
 
 
 
Charge-offs
 
(2,142
)
 
(36,127
)
 
(38,269
)
Recoveries
 
—

 
4,529

 
4,529

Net charge-offs
 
(2,142
)
 
(31,598
)
 
(33,740
)
Loan sales(1)
 
—

 
(5,572
)
 
(5,572
)
Ending Balance
 
$
4,170

 
$
100,033

 
$
104,203

Allowance:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$
—

 
$
43,001

 
$
43,001

Ending balance: collectively evaluated for impairment
 
$
4,170

 
$
57,032

 
$
61,202

Loans:
 
 
 
 
 
 
Ending balance: individually evaluated for impairment
 
$
—

 
$
231,286

 
$
231,286

Ending balance: collectively evaluated for impairment
 
$
1,143,595

 
$
10,608,975

 
$
11,752,570

Net charge-offs as a percentage of average loans in repayment (annualized)(2)
 
0.33
%
 
0.72
%
 
 
Allowance as a percentage of the ending total loan balance
 
0.36
%
 
0.92
%
 
 
Allowance as a percentage of the ending loans in repayment(2)
 
0.50
%
 
1.50
%
 
 
Allowance coverage of net charge-offs (annualized)
 
1.46

 
2.37

 
 
Ending total loans, gross
 
$
1,143,595

 
$
10,840,261

 
 
Average loans in repayment(2)
 
$
868,649

 
$
5,848,345

 
 
Ending loans in repayment(2)
 
$
836,585

 
$
6,657,228

 
 

____________
(1) Represents fair value adjustments on loans sold.
(2) Loans in repayment include loans on which borrowers are making interest only or fixed payments, as well as loans that have entered full principal and interest repayment status after any applicable grace period.



17



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



Troubled Debt Restructurings (“TDRs”)
All of our loans are collectively assessed for impairment, except for loans classified as TDRs (where we conduct individual assessments of impairment). We modify the terms of loans for certain borrowers when we believe such modifications may increase the ability and willingness of a borrower to make payments and thus increase the ultimate overall amount collected on a loan. These modifications generally take the form of a forbearance, a temporary interest rate reduction or an extended repayment plan. The majority of our loans that are considered TDRs involve a temporary forbearance of payments and do not change the contractual interest rate of the loan. Approximately 25 percent and 23 percent of the loans granted forbearance as of September 30, 2016 and December 31, 2015, respectively, have been classified as TDRs due to their forbearance status. For additional information, see Note 6, “Allowance for Loan Losses” in our 2015 Form 10-K.
Within the Private Education Loan portfolio, loans greater than 90 days past due are considered to be nonperforming. FFELP Loans are at least 97 percent guaranteed as to their principal and accrued interest by the federal government in the event of default and, therefore, we do not deem FFELP Loans as nonperforming from a credit risk perspective at any point in their life cycle prior to claim payment, and continue to accrue interest on those loans through the date of claim.
At September 30, 2016 and December 31, 2015, all of our TDR loans had a related allowance recorded. The following table provides the recorded investment, unpaid principal balance and related allowance for our TDR loans.
 
 
 
Recorded Investment
 
Unpaid Principal Balance
 
Allowance
 
 
 
 
 
 
 
September 30, 2016
 
 
 
 
 
 
TDR Loans
 
$
510,361

 
$
503,632

 
$
77,521

 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
TDR Loans
 
$
269,628

 
$
265,831

 
$
43,480


The following table provides the average recorded investment and interest income recognized for our TDR loans.
 
 
Three Months Ended 
 September 30,
 
 
2016
 
2015
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
 
 
 
 
 
 
 
 
TDR Loans
 
$
454,395

 
$
8,116

 
$
210,039

 
$
4,198


    

18



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

 
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
 
 
 
 
 
 
 
 
TDR Loans
 
$
373,747

 
$
20,396

 
$
150,240

 
$
9,314



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

 
 
September 30,
 
December 31,
 
 
2016
 
2015
 
 
Balance
 
%
 
Balance
 
%
TDR loans in in-school/grace/deferment(1)
 
$
22,544

 
 
 
$
6,869

 
 
TDR loans in forbearance(2)
 
72,386

 
 
 
43,756

 
 
TDR loans in repayment(3) and percentage of each status:
 
 
 
 
 
 
 
 
Loans current
 
366,000

 
89.6
%
 
185,936

 
86.4
%
Loans delinquent 31-60 days(4)
 
21,781

 
5.3

 
14,948

 
6.9

Loans delinquent 61-90 days(4)
 
13,411

 
3.3

 
9,239

 
4.3

Loans delinquent greater than 90 days(4)
 
7,510

 
1.8

 
5,083

 
2.4

Total TDR loans in repayment
 
408,702

 
100.0
%
 
215,206

 
100.0
%
Total TDR loans, gross
 
$
503,632

 
 
 
$
265,831

 
 
_____
(1) 
Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on the loans (e.g., residency periods for medical students or a grace period for bar exam preparation).
(2) 
Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with established loan program servicing policies and procedures.
(3) 
Loans in repayment include loans on which borrowers are making interest only or fixed payments, as well as loans that have entered full principal and interest repayment status after any applicable grace period.
(4) 
The period of delinquency is based on the number of days scheduled payments are contractually past due.

    

19



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

The following table provides the amount of modified loans (which includes forbearance and reductions in interest rates) that became TDRs in the periods presented. Additionally, for the periods presented, the table summarizes charge-offs occurring in the TDR portfolio, as well as TDRs for which a payment default occurred in the relevant period presented and within 12 months of the loan first being designated as a TDR. We define payment default as 60 days past due for this disclosure.
 
 
Three Months Ended 
 September 30, 2016
 
Three Months Ended 
 September 30, 2015
 
 
Modified Loans(1)
 
Charge-offs
 
Payment-
Default
 
Modified Loans(1)
 
Charge-offs
 
Payment-
Default
 
 
 
 
 
 
 
 
 
 
 
 
 
TDR Loans
 
$
116,419

 
$
5,925

 
$
23,326

 
$
49,975

 
$
3,456

 
$
16,719


 
 
Nine Months Ended 
 September 30, 2016
 
Nine Months Ended 
 September 30, 2015
 
 
Modified Loans(1)
 
Charge-offs
 
Payment-
Default
 
Modified Loans(1)
 
Charge-offs
 
Payment-
Default
 
 
 
 
 
 
 
 
 
 
 
 
 
TDR Loans
 
$
270,266

 
$
16,357

 
$
70,401

 
$
189,066

 
$
5,845

 
$
29,895

_____
(1) 
Represents the principal balance of loans that have been modified during the period and resulted in a TDR.



20



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


Key Credit Quality Indicators
For Private Education Loans, the key credit quality indicators are FICO scores, the existence of a cosigner, the loan status and loan seasoning. The FICO scores are assessed at original approval and periodically refreshed/updated through the loan’s term. The following table highlights the gross principal balance of our Private Education Loan portfolio stratified by key credit quality indicators.

 
 
Private Education Loans
 
 
Credit Quality Indicators
 
 
September 30, 2016
 
December 31, 2015
Credit Quality Indicators:
 
Balance(1)
 
% of Balance
 
Balance(1)
 
% of Balance
 
 
 
 
 
 
 
 
 
Cosigners:
 
 
 
 
 
 
 
 
With cosigner
 
$
12,456,310

 
90
%
 
$
9,515,136

 
90
%
Without cosigner
 
1,391,952

 
10

 
1,081,301

 
10

Total
 
$
13,848,262

 
100
%
 
$
10,596,437

 
100
%
 
 
 
 
 
 
 
 
 
FICO at Original Approval:
 
 
 
 
 
 
 
 
Less than 670
 
$
889,151

 
6
%
 
$
700,779

 
7
%
670-699
 
2,025,444

 
15

 
1,554,959

 
15

700-749
 
4,492,235

 
32

 
3,403,823

 
32

Greater than or equal to 750
 
6,441,432

 
47

 
4,936,876

 
46

Total
 
$
13,848,262

 
100
%
 
$
10,596,437

 
100
%