FORM 10-12B

As filed with the Securities and Exchange Commission on December 6, 2013

File No.     

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10

 

 

GENERAL FORM FOR REGISTRATION OF SECURITIES

Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934

 

 

New Corporation

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   46-4054283
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. employer
identification number)
300 Continental Drive, Newark, Delaware   19713
(Address of principal executive offices)   (Zip Code)

(302) 283-8000

(Registrant’s telephone number, including area code)

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

 

Title of Each Class to be so Registered

 

Name of Each Exchange on which Each Class is to be  Registered

Common Stock, par value $0.01 per share   NASDAQ Global Select Market

Securities to be registered pursuant to Section 12(g) of the Act: None

 

 

 


NEW CORPORATION

Preliminary Note: Due to the relative significance of New Corporation (“NewCo”) to SLM Corporation (“Existing SLM”), among other factors, NewCo will be treated as the “accounting successor” to Existing SLM for financial reporting purposes, notwithstanding the legal form of the separation described in the information statement filed herewith as Exhibit 99.1. As a result, the historical financial statements of Existing SLM will become the historical financial statements of NewCo. Accordingly, and consistent with Staff Legal Bulletin No. 4, NewCo will qualify as a “well known–seasoned issuer” immediately following the separation based on the reporting history of Existing SLM under the Securities Exchange Act of 1934, as amended.

“New Corporation” is the temporary name of NewCo. The actual and brand name of NewCo will be included in an amendment to this registration statement.

INFORMATION REQUIRED IN REGISTRATION STATEMENT

CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT

AND ITEMS OF FORM 10

Certain information required to be included herein is incorporated by reference to specifically identified portions of the body of the information statement filed herewith as Exhibit 99.1. None of the information contained in the information statement shall be incorporated by reference herein or deemed to be a part hereof unless such information is specifically incorporated by reference.

Item 1. Business.

The information required by this item is contained under the sections of the information statement entitled “Information Statement Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “Certain Relationships and Related Party Transactions,” and “Where You Can Find More Information.” Those sections are incorporated herein by reference.

Item 1A. Risk Factors.

The information required by this item is contained under the section of the information statement entitled “Risk Factors.” That section is incorporated herein by reference.

Item 2. Financial Information.

The information required by this item is contained under the sections of the information statement entitled “Unaudited Pro Forma Combined Financial Statements,” “Selected Historical Combined Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Those sections are incorporated herein by reference.

Item 3. Properties.

The information required by this item is contained under the section of the information statement entitled “Business—Properties.” That section is incorporated herein by reference.

Item 4. Security Ownership of Certain Beneficial Owners and Management.

The information required by this item is contained under the section of the information statement entitled “Ownership of Common Stock by Certain Beneficial Owners and Management.” That section is incorporated herein by reference.

Item 5. Directors and Executive Officers.

The information required by this item is contained under the section of the information statement entitled “Management.” That section is incorporated herein by reference.


Item 6. Executive Compensation.

The information required by this item is contained under the sections of the information statement entitled “Compensation Discussion and Analysis” and “Executive Compensation.” Those sections are incorporated herein by reference.

Item 7. Certain Relationships and Related Transactions.

The information required by this item is contained under the sections of the information statement entitled “Management” and “Certain Relationships and Related Party Transactions.” Those sections are incorporated herein by reference.

Item 8. Legal Proceedings.

The information required by this item is contained under the section of the information statement entitled “Business—Legal Proceedings.” That section is incorporated herein by reference.

Item 9. Market Price of, and Dividends on, the Registrant’s Common Equity and Related Stockholder Matters.

The information required by this item is contained under the sections of the information statement entitled “Capital Return Policies,” “Capitalization,” “The Separation and Distribution,” and “Description of NewCo’s Capital Stock.” Those sections are incorporated herein by reference.

Item 10. Recent Sales of Unregistered Securities.

The information required by this item is contained under the sections of the information statement entitled “Description of Material Indebtedness” and “Description of NewCo’s Capital Stock—Sale of Unregistered Securities.” Those sections are incorporated herein by reference.

Item 11. Description of Registrant’s Securities to be registered.

The information required by this item is contained under the sections of the information statement entitled “Capital Return Policies,” “The Separation and Distribution,” and “Description of NewCo’s Capital Stock.” Those sections are incorporated herein by reference.

Item 12. Indemnification of Directors and Officers.

The information required by this item is contained under the section of the information statement entitled “Description of NewCo’s Capital Stock—Limitations on Liability, Indemnification of Officers and Directors, and Insurance.” That section is incorporated herein by reference.

Item 13. Financial Statements and Supplementary Data.

The information required by this item is contained under the section of the information statement entitled “Index to Financial Statements” and the financial statements referenced therein. That section is incorporated herein by reference.

Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 15. Financial Statements and Exhibits.

(a) Financial Statements

The information required by this item is contained under the section of the information statement entitled “Index to Financial Statements” and the financial statements referenced therein. That section is incorporated herein by reference.


(b) Exhibits

See below.

The following documents are filed as exhibits hereto:

 

Exhibit
Number

    

Exhibit Description

  2.1       Form of Separation and Distribution Agreement by and among SLM Corporation, SLM BankCo and New Corporation.*
  3.1       Form of Amended and Restated Certificate of Incorporation of New Corporation.*
  3.2       Form of Amended and Restated By-Laws of New Corporation.*
  4.1       Indenture, dated as of October 1, 2000, between SLM Corporation and The Bank of New York Mellon, as successor to J.P. Morgan Chase Bank, National Association, formerly Chase Manhattan Bank (incorporated by reference to Exhibit 4.1 to SLM Corporation’s Current Report on Form 8-K (File No. 001-13251) filed on October 5, 2000).
  4.2       Fourth Supplemental Indenture, dated as of January 16, 2003, between SLM Corporation and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 4.1 to SLM Corporation’s Current Report on Form 8-K (File No. 001-13251) filed on January 17, 2003).
  4.3       Amended Fourth Supplemental Indenture, dated as of December 17, 2004, between SLM Corporation and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 4.1 to SLM Corporation’s Current Report on Form 8-K (File No. 001-13251) filed on December 17, 2004).
  4.4       Second Amended Fourth Supplemental Indenture, dated as of July 22, 2008, between SLM Corporation and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 4.1 to SLM Corporation’s Current Report on Form 8-K (File No. 001-13251) filed on July 25, 2008).
  4.5       Sixth Supplemental Indenture, dated as of October 15, 2008, between SLM Corporation and The Bank of New York Mellon (incorporated by reference to Exhibit 4.1 to SLM Corporation’s Current Report on Form 8-K (File No. 001-13251) filed on October 15, 2008).
  4.6       Form of Supplemental Indenture between             , LLC and The Bank of New York Mellon.*
  4.7       Medium Term Note Master Note, Series A (incorporated by reference to Exhibit 4.1.1 to SLM Corporation’s Current Report on Form 8-K (File No. 001-13251) filed on November 7, 2001).
  4.8       Medium Term Note Master Note, Series B (incorporated by reference to Exhibit 4.2 to SLM Corp.’s Current Report on Form 8-K (File No. 001-13251) filed on January 28, 2003).
  10.1       Form of Transition Services Agreement by and between SLM Corporation and New Corporation.*
  10.2       Form of Tax Sharing Agreement by and between SLM Corporation and New Corporation.*
  10.3       Form of Employee Matters Agreement by and between SLM Corporation and New Corporation.*
  10.4       Form of Loan Servicing and Administration Agreement by and between SLM Corporation and New Corporation.*
  10.5       Form of Master Lease Agreement by and between SLM Corporation and New Corporation.*
  21.1       Subsidiaries of New Corporation.*
  99.1       Information Statement of New Corporation, preliminary and subject to completion, dated December 6, 2013.**

 

* To be filed by amendment.
** Filed herewith.


SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

 

NEW CORPORATION
By:   /s/ John F. Remondi
  Name:    John F. Remondi
  Title:   Chief Executive Officer

Date: December 6, 2013

EXHIBIT 99.1
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Exhibit 99.1

 

LOGO

                    , 2014

To Our Stockholders:

On May 29, 2013, we first announced plans to explore the separation of our business into two distinct publicly-traded entities—an education loan management business and a consumer banking business—to further unlock value and enhance long-term growth potential. The education loan management business will be comprised primarily of our portfolios of federally guaranteed (FFELP) and private education loans, as well as servicing and collection activities on these loans. The consumer banking business, comprised primarily of Sallie Mae Bank and its private education loan origination business, the private education loans it currently holds and a related servicing business, will be the leading consumer education lending franchise with expertise in helping families save, plan and pay for college.

I am pleased to report that on                     , 2014, your Board of Directors approved the distribution to stockholders of record on                     , 2014, of all of the common stock of New Corporation, which we refer to as NewCo, and a related internal corporate reorganization. NewCo is the company we formed to hold the assets and liabilities of our education loan management business.

As a result of the separation, NewCo will be better positioned to focus on improving operating and cost efficiencies and maximizing the cash flow provided by its servicing business and loan portfolios, including by acquiring additional education loans and expanding its servicing business. As a separate, independent company operating under the Sallie Mae brand, our consumer banking business will be able to focus on growing its consumer lending business and accelerating preparation for additional regulatory requirements that will eventually apply to Sallie Mae Bank under the Dodd-Frank Act.

To effect the distribution of NewCo common stock, the existing SLM Corporation (Existing SLM) will first undergo an internal corporate reorganization as a result of which your Existing SLM common stock will be converted, on a 1-to-1 basis, into common stock of a new publicly-traded holding company that we refer to as SLM BankCo. This new holding company will take the name SLM Corporation and will retain and continue to operate the consumer banking business under the Sallie Mae brand. All of the outstanding classes and shares of preferred stock of Existing SLM will be converted, on a 1-to-1 basis, into substantially identical shares of preferred stock of SLM BankCo. Existing SLM will become a subsidiary of NewCo and retain directly or indirectly the assets and liabilities associated with Existing SLM’s businesses, other than the consumer banking business that will be held by SLM BankCo. Existing SLM’s liabilities include unsecured public debt which, as of September 30, 2013, aggregated $18.7 billion.

As a result of the foregoing, you will become a stockholder of two publicly-traded companies: SLM BankCo and NewCo. For each share of Existing SLM common stock you own on the record date, you will receive one share of SLM BankCo common stock (which will replace your Existing SLM common stock) and one share of NewCo common stock. You do not need to take any action to receive the shares of SLM BankCo or NewCo common stock to which you are entitled. In addition, you do not need to pay any consideration or surrender or exchange your Existing SLM common stock.

For over 40 years, we have made a difference in students’ and families’ lives, helping more than 31 million Americans pay for college. We see the separation of our education loan management business and our consumer banking business as the next step in helping students and families finance the cost of their education.


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I encourage you to read the attached information statement, which is being provided to all Sallie Mae stockholders as of the close of business on                     , 2014. The information statement describes the internal corporate reorganization, the separation and the distribution in detail and contains important business and financial information about NewCo.

I look forward to your continued support as a stockholder. We remain committed to working on your behalf to continue to build long-term stockholder value. This step is a positive one for our businesses, our stockholders and all the students and families we serve.

 

Sincerely,

John (Jack) F. Remondi

President and Chief Executive Officer,

SLM Corporation


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NewCo LOGO

                    , 2014

Dear Future NewCo Stockholder:

It is a great pleasure to welcome you as a future stockholder of New Corporation (“NewCo”), which will soon begin independent operation as the largest education loan management company. NewCo will be the largest holder of outstanding loans made under the Federal Family Education Loan Program (“FFELP”), the largest holder of outstanding private education student loans, and a leading servicer and collector of these types of loans and education loans disbursed by the United States Department of Education (“ED”) under its Direct Student Loan Program (“DSLP”).

Our goal is to maximize the cash flow provided by our portfolios of education loans and acquire other third-party loan portfolios. With the discontinuance of FFELP in 2010, our FFELP loan portfolio is expected to amortize over a period of approximately 20 years.

Given the volume of education loans we service, we are uniquely situated to adapt to the changing economic and regulatory environment governing these types of loans. This will enable us to expand our servicing business to more third party owners of education loan portfolios and guarantors while pursuing further operating and cost efficiencies to create stockholder value.

NewCo’s business model differs substantially from Sallie Mae’s consumer banking model. As a result of the separation, our stockholders will be able to evaluate the distinct merits, performance, and future prospects of NewCo. NewCo expects to apply to have its common stock authorized for listing on the NASDAQ Global Select Market under the symbol “    .”

We expect NewCo’s liquidity to allow us to continue returning capital to stockholders through dividends and share repurchases.

I encourage you to learn more about NewCo by reading the attached information statement. It describes the separation in detail, including the conditions to the separation. We look forward to your support and participation as a stockholder of NewCo.

 

Sincerely,

John (Jack) F. Remondi

Chief Executive Officer,

New Corporation


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Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934, as amended.

 

SUBJECT TO COMPLETION, DATED DECEMBER 6, 2013

INFORMATION STATEMENT

New Corporation

 

 

This information statement is being furnished in connection with the distribution to holders of SLM Corporation common stock of all of the outstanding shares of common stock of New Corporation, which is referred to herein as NewCo. NewCo was formed to hold directly or indirectly the assets and liabilities associated with SLM Corporation’s existing education loan management business, which consists primarily of portfolios of federally guaranteed (FFELP) and private education loans, as well as servicing and collection activities on these and other student loans. All of the issued and outstanding shares of NewCo common stock will be distributed to stockholders in a manner that is intended to be tax-free in the United States, on the basis of one share of NewCo common stock for each outstanding share of SLM Corporation stock.

Prior to the distribution, SLM Corporation will undergo an internal corporate reorganization in which (i) a new holding company, which is referred to herein as SLM BankCo, will become the publicly-traded successor to the existing SLM Corporation, which is referred to herein as Existing SLM, pursuant to a holding company merger in which the outstanding shares of Existing SLM common stock will be converted, on a 1-to-1 basis, into shares of SLM BankCo, and (ii) Existing SLM will become a subsidiary of NewCo and retain directly or indirectly the assets and liabilities associated with Existing SLM’s businesses other than the consumer banking business. Existing SLM’s liabilities include its unsecured public debt which, as of September 30, 2013, aggregated $18.7 billion. SLM BankCo will take the name SLM Corporation and will hold and continue to operate the consumer banking business under the Sallie Mae brand.

Pursuant to the distribution, for every share of Existing SLM common stock held of record by you as of the close of business on                     , 2014, the record date for the distribution, you will receive one share of NewCo common stock. We expect the shares of NewCo common stock to be distributed to you on                     , 2014. We refer to the date of the distribution of the NewCo common stock as the “distribution date.” NewCo has applied to have its common stock authorized for listing on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “    .”

You do not need to take any action to receive your shares of SLM BankCo common stock and NewCo common stock. No vote of Sallie Mae stockholders is required in connection with the internal corporate reorganization or the distribution. Therefore, you are not being asked for a proxy, and you are requested not to send Sallie Mae a proxy, in connection with the internal corporate reorganization and the distribution. You do not need to pay any consideration, exchange or surrender your Existing SLM common stock or take any other action to receive your shares of SLM BankCo and NewCo common stock.

 

 

In reviewing this information statement, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 19.

 

 

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

The date of this information statement is                     , 2014.

This information statement was first mailed to Sallie Mae stockholders on or about                     , 2014.

 


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TABLE OF CONTENTS

 

     Page  

Information Statement Summary

     1   

Questions and Answers About the Separation and Distribution

     9   

Transaction Structure

     16   

Risk Factors

     19   

Cautionary Statement Concerning Forward-Looking Statements

     38   

The Separation and Distribution

     38   

Capital Return Policies

     47   

Capitalization

     48   

Unaudited Pro Forma Condensed Consolidated Financial Statements

     49   

Selected Historical Consolidated Financial Data

     58   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     60   

Business

     137   

Management

     150   

Compensation Discussion and Analysis

     162   

Executive Compensation

     174   

Certain Relationships and Related Party Transactions

     184   

Material U.S. Federal Income Tax Consequences

     193   

Description of Material Indebtedness

     197   

Ownership of Common Stock By Certain Beneficial Owners and Management

     201   

Description of NewCo’s Capital Stock

     203   

Where You Can Find More Information

     207   

Index to Financial Statements

     208   

Appendix A Glossary

     A-1   

Appendix B Description of Federal Family Education Loan Program

     B-1   

 

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Presentation of Information

Except as otherwise indicated or unless the context otherwise requires, the information included in this information statement about NewCo assumes the completion of all of the transactions referred to in this information statement in connection with the separation and distribution. Unless the context otherwise requires, references in this information statement to:

 

   

“NewCo” and “the company” refer to New Corporation and its consolidated subsidiaries.

 

   

“Existing SLM” refers to SLM Corporation, as it exists on the date of this information statement, and its consolidated subsidiaries. As part of the internal corporate reorganization described in this information statement, Existing SLM will become a subsidiary of NewCo and change its name to “            .”

 

   

NewCo’s historical business and operations refer to Existing SLM’s portfolio of FFELP and private education student loans not held by Sallie Mae Bank, together with the servicing and collections businesses that will be retained by or transferred to NewCo in connection with the internal corporate reorganization.

 

   

NewCo historical information on a “pro forma basis” refers to NewCo’s businesses, net income, assets and liabilities, as adjusted to giving effect to the separation and the distribution. See “Unaudited Pro Forma Condensed Consolidated Financial Statements.”

 

   

“SLM BankCo” refers to New BLC Corporation, which will become the publicly-traded successor to Existing SLM by virtue of a merger pursuant to Section 251(g) of the Delaware General Corporation Law (“DGCL”), and its consolidated subsidiaries. Upon consummation of the merger, SLM BankCo will change its name to SLM Corporation. After the separation and distribution, SLM BankCo’s business will consist primarily of Sallie Mae Bank and its portfolio of private education loans, a new private education loan servicing business, the Upromise Rewards business and the insurance business.

Trademarks, Trade Names and Service Marks

NewCo owns or has rights to use the trademarks, service marks and trade names that it uses in conjunction with the operation of its business. Some of the more important trademarks that NewCo owns or has rights to use that appear in this information statement include: CLASS®, EdNotes®, GRC®, Pioneer Credit Recovery® which may be registered or trademarked in the United States and other jurisdictions. NewCo’s rights to some of these trademarks may be limited to select markets. Each trademark, trade name or service mark of any other company appearing in this information statement is, to NewCo’s knowledge, owned by such other company. Following the separation and distribution, SLM BankCo will own Existing SLM’s rights to use the “Sallie Mae” and “SLM” trade names, related trademarks and service marks.

 

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INFORMATION STATEMENT SUMMARY

The following is a summary of material information discussed in this information statement. This summary may not contain all the details concerning the separation or other information that may be important to you. To better understand the separation and NewCo’s business and financial position, you should carefully review this entire information statement.

Explanatory Note

Due to the relative significance of NewCo to Existing SLM, among other factors, for financial reporting purposes NewCo will be treated as the “accounting spinnor” and therefore will be the “accounting successor” to Existing SLM, notwithstanding the legal form of the separation and distribution described in this information statement. As a result, the historical financial statements of Existing SLM will become the historical financial statements of NewCo.

When we refer in this information statement to NewCo’s historic business activities, we are referring to those activities as they were historically operated as part of Existing SLM prior to their transfer to NewCo in connection with the separation and the distribution.

NewCo

NewCo will hold the largest portfolio of education loans insured or guaranteed under the Federal Family Education Loan Program (referred to as FFELP Loans), as well as the largest portfolio of private education loans (referred to as Private Education Loans). FFELP Loans are insured or guaranteed by state or not-for-profit agencies and are also protected by contractual rights to recovery from the United States pursuant to guaranty agreements among the U.S. Department of Education (referred to as ED) and these agencies. Private Education Loans are education loans to students or their families that are non-federal loans and not insured or guaranteed under FFELP. Private Education Loans bear the full credit risk of the customer and any cosigner and are made primarily to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans or students’ and families’ resources. As of September 30, 2013, approximately 83 percent of the FFELP Loans and 51 percent of the Private Education Loans held by NewCo were funded to term with non-recourse, long-term securitization debt through the use of securitization trusts.

NewCo will service and collect on its own portfolio of education loans, as well as on those owned by numerous banks, credit unions and non-profit education lenders. It will provide servicing support for guaranty agencies, which serve as intermediaries between the U.S. federal government and FFELP lenders and are responsible for paying claims on defaulted FFELP Loans. These services include account maintenance, default aversion, post default collections and claim processing. NewCo will also be one of four large servicers to ED under its Direct Student Loan Program, and provide collection services to ED. NewCo will also generate revenue through collection of delinquent debt (consisting of both education loans as well as other asset classes) on behalf of its clients on a contingent basis.

In 2010, Congress passed legislation ending the origination of education loans under the FFELP program. FFELP Loans that remain outstanding will amortize over approximately the next 20 years, and NewCo’s goal is to maximize the cash flow generated by its FFELP Loan portfolio, including by acquiring additional FFELP Loans from third parties and expanding its related servicing business. For a detailed description of FFELP, see “Appendix B—Description of Federal Family Education Loan Program.”

As of September 30, 2013, on a pro forma basis, NewCo’s principal assets consisted of:

 

   

$105 billion in FFELP Loans, which yield an average of 2.0 percent annually on a “Core Earnings” basis and have a weighted average life of 7.7 years;

 

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$32 billion in Private Education Loans, which yield an average of 6.3 percent annually on a “Core Earnings” basis and have a weighted average life of 7.1 years;

 

   

$7.8 billion of other interest-earning assets, including securitization trust restricted cash;

 

   

a leading student loan servicing platform that services loans for more than 10 million federal education loan customers, including 5.7 million customer accounts serviced under NewCo’s contract with ED; and

 

   

a leading student loan contingent collection platform with an outstanding inventory of contingent collections receivables of approximately $15.2 billion, of which approximately $12.9 billion was student loans and the remainder was other debt.

In connection with the internal corporate reorganization described below, Existing SLM will become a subsidiary of NewCo and retain all of its liabilities and obligations, including as obligor on its $18.7 billion of unsecured public debt outstanding as of September 30, 2013. Existing SLM also is party to derivative contracts on which it had a net liability of $792 million as of September 30, 2013.

SLM BankCo, as the publicly-traded successor to Existing SLM and as part of the internal corporate reorganization, will replace Existing SLM as the issuer of the outstanding shares of Existing SLM preferred stock. Holders of shares of Existing SLM preferred stock will not be entitled to vote on the internal corporate reorganization, will not have appraisal rights under Delaware law, and will not participate in the distribution of NewCo common stock.

For the first nine months of 2013, NewCo’s business generated, on a pro forma basis, net income and “Core Earnings” of $1,103 million and $969 million, respectively. In 2012, NewCo’s net income and “Core Earnings”, on a pro forma basis, were $874 million and $987 million, respectively. See “Unaudited Pro Forma Condensed Consolidated Financial Statements.” NewCo provides “Core Earnings” because its management evaluates the performance of each of NewCo’s operating segments based on “Core Earnings” performance measures. For NewCo’s definition of “Core Earnings” and reconciliation of “Core Earnings” to net income as determined under generally accepted accounting principles, see “Unaudited Pro Forma Condensed Consolidated Financial Statements—Alternative performance measures—“Core Earnings” presentation,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—“Core Earnings”—Definition and Limitations” and “Note 16—Segment Reporting” to the audited consolidated financial statements included elsewhere in this information statement.

NewCo’s Strengths

NewCo will possess a number of competitive advantages that will distinguish it from its competitors, including:

Premier servicing market share and infrastructure well-positioned for evolving marketplace. NewCo will be the largest servicer of education loans. It will also provide account maintenance, default aversion, post default collections and claim processing to 15 of the 30 guaranty agencies that serve as an intermediary between the U.S. federal government and FFELP lenders, and are responsible for paying the claims made on defaulted loans. NewCo’s premier market share and tested servicing and collections infrastructure make it well-positioned to expand its servicing and collections businesses to additional third-party FFELP, federal, private education and other loan portfolios.

NewCo will have substantial institutional knowledge and expertise in student loan assets and finance markets. Sallie Mae was a pioneer in the student loan-backed securitization market and NewCo will continue as the largest participant in this market. NewCo will have established relationships with institutions that underwrite and invest in such securities and years of historical data to use in estimating loan default rates and expected cash flows.

 

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Strong cash flow generation with ample debt service coverage. NewCo will own the single largest portfolio of FFELP Loans. This portfolio generates steady cash flows, as FFELP lenders generally bear a maximum three percent loss exposure due to the guarantee under FFELP. NewCo will also own the largest portfolio of Private Education Loans, which bear the full credit risk of the borrower and cosigner. NewCo expects that cash flows from its FFELP Loan and Private Education Loan portfolios will significantly exceed future debt service obligations. NewCo also expects it will be able to continue Existing SLM’s policy of returning capital to stockholders through dividends and share repurchases, subject to limitations under a tax sharing agreement with SLM BankCo. See “Capital Return Policies.”

Servicing platforms that offer substantial economies of scale. Existing SLM has internally developed and purchased technology platforms, which will be owned by NewCo. NewCo will service and collect on DSLP loans for ED, on FFELP Loans for guarantor and other clients and on its own $105 billion portfolio of FFELP Loans and $32 billion portfolio of Private Education Loans (on a pro forma basis, as of September 30, 2013). These platforms are robust and scalable and will enable NewCo to add additional accounts at low cost.

Strong management team with extensive industry experience. NewCo’s management team will have extensive experience in investing in and funding student education loan portfolios and operating student education loan servicing businesses. Our management team, led by our Chief Executive Officer Jack Remondi, includes members that have held senior executive positions at Existing SLM for many years, including in operations, financial planning, treasury, credit, collections, enterprise project management and risk management. See “Management—Executive Officers Following the Separation.”

NewCo’s Strategies

NewCo will seek to create value for stockholders by, among other things:

Expanding its leading education loan portfolio manager, servicer and collection business. NewCo intends to make opportunistic acquisitions of FFELP Loans, both to increase cash flow from its loan portfolio and to expand its FFELP Loan servicing business. In addition, although NewCo will not originate new Private Education Loans, it will seek to purchase portfolios of Private Education Loans, subject to the limitations of any non-competition arrangements with SLM BankCo. NewCo may also acquire portfolios of Private Education Loans from SLM BankCo, through participation in an arm’s-length bidding or auction process.

Diversifying fee revenue through expansion and growth of federal and other service contracts. NewCo intends to leverage its platform to expand its servicing and collections business to more third party owners of education loan portfolios and guarantors, including ED.

Maintaining stable dividends and actively managing capital structure. NewCo expects to have sufficient liquidity to pursue a policy of returning capital to stockholders through dividends and share repurchases, without impairing its ability to service its $18.7 billion of unsecured public debt outstanding as of September 30, 2013.

Efficiently managing expense base. NewCo will align its cost structure with its business operations, including by pursuing operating efficiencies in its businesses that create value for its stockholders. These initiatives will include exploring new procurement strategies as well as enhancements to its web-based customer service interface.

Maintaining access to capital markets. Upon completion of the separation, NewCo will be a publicly-traded company listed on NASDAQ. NewCo expects that its significant loan portfolio, supplemented by its servicing business, will afford it the opportunity to access the debt markets when appropriate. NewCo also intends to leverage its experience in the student loan-backed securitization market to continue to finance its acquisition of student loan portfolios through securitization debt.

 

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Risks Associated with NewCo’s Business and the Separation and Distribution

An investment in NewCo common stock is subject to a number of risks, including risks relating to the separation and distribution. The following list of risk factors is not exhaustive. Please read the information in the section captioned “Risk Factors” for a more thorough description of these and other risks.

Risks Relating to NewCo’s Business

 

   

Economic conditions could have a material adverse effect on NewCo’s business, results of operations, financial condition and stock price.

 

   

NewCo will not originate education loans, and it may not be able to add additional revenues to replace or supplement the net interest income and fee-based revenue from servicing its education loans that will decline over time.

 

   

New education lending initiatives could, among other things, encourage or require borrowers to consolidate FFELP Loans into the DSLP program.

 

   

NewCo’s business will be heavily focused on its portfolio of FFELP Loans, such that any new legislation by Congress impacting FFELP Loans may have a material, negative impact on NewCo’s business, financial condition or results of operations.

 

   

NewCo’s business is affected by the cost and availability of funding in the capital markets.

 

   

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

 

   

Higher than expected prepayments could reduce net interest income and servicing revenues or reduce or delay payments NewCo receives as the holder of the residual interests of securitization trusts holding FFELP Loans and Private Education Loans.

 

   

NewCo’s failure to manage its costs in line with its revenues would adversely affect NewCo’s results of operations and financial condition.

 

   

NewCo’s use of derivatives to manage interest rate sensitivity exposes it to credit and market risk that could have a material adverse effect on its earnings.

 

   

Increasing interest rate environments may cause NewCo’s Floor Income to decline.

 

   

Failure by NewCo’s loan servicing business to comply with applicable rules and regulations could result in the loss of insurance or guarantees on FFELP Loans and other penalties that could have a material, negative impact on NewCo’s business, financial condition or results of operations.

 

   

Increases in defaults on student loans held by NewCo, particularly on Private Education Loans, could adversely affect NewCo’s earnings.

 

   

Adverse market conditions or an inability to effectively manage liquidity risk could negatively impact NewCo’s ability to meet liquidity and funding needs, which could materially and adversely impact its business operations and overall financial condition as well as its ability to return capital to stockholders through dividends or stock buybacks.

 

   

A failure of the operating systems or infrastructure utilized by NewCo could disrupt its business, produce significant losses, result in regulatory action or damage its reputation.

 

   

NewCo depends on secure information technology, and a breach of its information technology systems could result in significant losses, disclosure of confidential customer information and reputational damage, which would adversely affect NewCo’s business.

 

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Federal funding constraints and spending policy changes triggered by associated federal spending deadlines may result in disruption of federal payments for services NewCo provides to the government, which could materially and adversely affect NewCo’s business strategy or future business prospects.

 

   

Changes in law, regulation or regulatory policy or interpretations thereof involving loans generally and FFELP Loans or Private Education Loans in particular could have a material impact on NewCo’s profitability, results of operations, financial condition, cash flows or future business prospects.

 

   

NewCo’s failure to comply with applicable laws and regulations may result in significant costs, sanctions and litigation.

Risks Relating to the Separation and Distribution

 

   

NewCo’s historical and pro forma financial information is not necessarily representative of the results that it would have achieved as a separate, publicly-traded company for the periods presented and may not be a reliable indicator of its future results.

 

   

NewCo may not achieve some or all of the expected benefits of the separation, and the separation may adversely affect its business.

 

   

During an up to 18-month transition period NewCo and SLM BankCo will undertake the division of a shared information technology platform, which may be disruptive to NewCo’s business and customers.

 

   

The Federal Deposit Insurance Corporation (the “FDIC”), the Utah Department of Financial Institutions (the “UDFI”), or the Consumer Financial Protection Bureau (the “CFPB”) may seek to assert control over the manner, timing or terms of the separation, which could result in the separation not being effected on the terms or within the period currently contemplated or being withdrawn.

The Separation and Distribution

On May 29, 2013, Existing SLM first announced that it intended to separate into two distinct publicly-traded entities — an education loan management business and a consumer banking business. The education loan management business will be comprised primarily of Existing SLM’s portfolios of education loans not currently held in Sallie Mae Bank, as well as servicing and collection activities on these loans and loans held by third parties. The consumer banking business, comprised primarily of Sallie Mae Bank and its Private Education Loan origination business, the Private Education Loans it holds and a related servicing business, will be a consumer banking franchise with expertise in helping families save, plan and pay for college.

On                     , 2014, the Existing SLM board of directors approved the distribution of all of the issued and outstanding shares of NewCo common stock on the basis of one share of NewCo common stock for each share of Existing SLM common stock issued and outstanding as of the close of business on                     , 2014, the record date for the distribution.

Internal Corporate Reorganization

In connection with and just prior to the separation and distribution, Existing SLM will undergo an internal corporate reorganization. This reorganization is necessary to implement the separation of the education loan management business from the consumer banking business in a manner intended to be largely tax-free to SLM BankCo.

As part of the internal corporate reorganization, Existing SLM will form the following three new companies:

 

   

NewCo, which is initially a wholly owned subsidiary of Existing SLM;

 

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SLM BankCo, is initially a wholly owned subsidiary of Existing SLM; and

 

   

a limited liability company wholly owned by SLM BankCo that we refer to as “Merger Sub.”

Pursuant to Section 251(g) of the DGCL, by action of the Existing SLM board of directors and without the requirement for a stockholder vote, Existing SLM will merge with and into Merger Sub (the “SLM Merger”). As a result of the SLM Merger:

 

   

all issued and outstanding shares of Existing SLM common stock will be converted, through no action on the part of the holders thereof and by operation of law, into shares of SLM BankCo common stock, on a 1-to-1 basis;

 

   

each series issued and outstanding shares of Existing SLM preferred stock will be converted, through no action on the part of the holders thereof and by operation of law, into the same series of substantially identical shares of SLM BankCo preferred stock, on a 1-to-1 basis; and

 

   

Existing SLM will become a limited liability company wholly owned by SLM BankCo and will change its name to “    , LLC.”

SLM BankCo will change its name to “SLM Corporation”. Following the SLM Merger, through a series of internal transactions, all of the assets and liabilities related to the consumer banking business of Existing SLM, including Sallie Mae Bank, the student education loans it holds, a new private education loan servicing company, the Upromise Rewards business and the insurance business, will be distributed by Existing SLM to SLM BankCo. Existing SLM will also distribute the capital stock of NewCo to SLM BankCo. In addition, Existing SLM will contribute $566 million in cash to SLM BankCo primarily to offset the liability represented by the transfer of the preferred stock obligation from Existing SLM to SLM BankCo pursuant to the SLM Merger. Existing SLM, which will continue to hold substantially all of the assets and liabilities related to its education loan management businesses, will then be contributed by SLM BankCo to NewCo. Existing SLM’s liabilities included, as of September 30, 2013, its outstanding unsecured public debt of $18.7 billion and derivative contracts with a net liability of $792 million.

Once the internal corporate reorganization is completed, SLM BankCo (as the publicly-traded successor holding company to Existing SLM) will distribute all of the issued and outstanding shares of NewCo common stock, on the basis of one share of NewCo common stock for each share of Existing SLM common stock issued and outstanding as of the close of business on                     , 2014, the record date for the distribution. The completion of the internal corporate reorganization is a condition to the distribution. See “The Separation and Distribution—Conditions to the Distribution.” For additional information regarding the internal corporate reorganization, see the sections entitled “Transaction Structure” and “The Separation and Distribution— Internal Corporate Reorganization of Existing SLM Prior to the Distribution.”

NewCo’s Post-Separation Relationship with SLM BankCo

NewCo will enter into a separation and distribution agreement with Existing SLM and SLM BankCo, which we refer to as the “separation and distribution agreement.” In connection with the separation, NewCo will enter into various other agreements with SLM BankCo to effect the separation and provide a framework for its relationship with SLM BankCo after the separation, such as a transition services agreement, a tax sharing agreement, an employee matters agreement, a loan servicing and administration agreement, a joint marketing agreement, a key services agreement, a data sharing agreement and a master lease agreement. These agreements will provide for the allocation between NewCo and SLM BankCo of Existing SLM’s assets, employees, liabilities and obligations (including its intellectual property, information systems, investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after the separation and will govern the relationship between NewCo and SLM BankCo after the separation. During an up to 18-month transition period, SLM BankCo will own a series of preferred stock of the primary operating subsidiary of NewCo that will entitle SLM BankCo to nominate and elect one member of the subsidiary’s five-member board of directors which will have oversight authority regarding a variety of transition activities, including the

 

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transition and migration of certain customer data and service functions initially shared by the two companies. See “Certain Relationships and Related Party Transactions—Preferred Stock Rights in SMI.” Under the separation and distribution agreement, NewCo and SLM BankCo will also enter into a non-competition arrangement pursuant to which they will agree not to compete in each other’s primary line of business for an agreed period. For additional information regarding the separation and distribution agreement and the other transaction agreements, see the sections entitled “Risk Factors—Risks Related to the Separation” and “Certain Relationships and Related Party Transactions.”

Reasons for the Separation

The Existing SLM board of directors believes that separating Sallie Mae into two companies—an education loan management business and a consumer banking business—is in the best interests of Existing SLM and its stockholders for a number of reasons, including that:

 

   

The consumer banking business and the education loan management business have evolved independently over time. The separation will allow investors to separately value SLM BankCo and NewCo based on their unique operating identities and strategies, including the merits, performance and future prospects of their respective businesses. The separation will also provide investors with two distinct and targeted investment opportunities.

 

   

NewCo expects that its future cash flows will significantly exceed future debt service obligations, allowing NewCo to continue to return capital to stockholders through dividends and share repurchases, without the financial aid and capital support risks associated with ownership of a federally insured financial institution.

 

   

The separation will allow each of NewCo and SLM BankCo to more effectively pursue its respective distinct operating priorities and strategies, which have diverged over time, and will enable the management of each company to focus on pursuing unique opportunities for long-term growth and profitability. The FFELP Loan portfolio and related servicing businesses generate highly predictable income, but are in wind down as the universe of FFELP Loans amortizes over a period of approximately 20 years. By contrast, the Private Education Loan business is expected to grow over time as Sallie Mae Bank continues to originate and service more Private Education Loans.

 

   

NewCo and SLM BankCo will have distinct regulatory profiles post-separation:

 

   

SLM BankCo’s subsidiary Sallie Mae Bank, a Utah industrial bank and insured depository institution, will continue to be subject to prudential bank regulatory oversight and periodic examination by both the UDFI and the FDIC. Sallie Mae Bank has voluntarily entered into the FDIC’s large bank supervision program. In addition, it is further expected that by the end of 2014 Sallie Mae Bank and SLM BankCo will be subject to the requirements established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) applicable to institutions with total assets greater than $10 billion, including regulation by the CFPB and the establishment of an independent risk committee.

 

   

NewCo will continue to be subject to CFPB enforcement, supervisory and examination authority. As a FFELP loan servicer, NewCo will continue to be subject to the Higher Education Act (“HEA”) and related regulations, in addition to regulation, and periodic examinations, by the ED. As a third-party service provider to financial institutions, NewCo will also continue to be subject to examination by the FFIEC. Although NewCo will not be subject to direct regulatory oversight by the FDIC, certain subsidiaries of NewCo that will continue to be third-party vendors of services to, and “institution affiliated parties” of, Sallie Mae Bank will continue to be subject to the FDIC’s examination and enforcement authority. In addition, in order to facilitate compliance with certain consumer information privacy laws during an information technology transition period post-separation in which both NewCo and SLM BankCo loans and associated customer accounts will continue to be serviced from a single information technology system hosted by SMI,

 

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SMI will remain an affiliate of each of NewCo and SLM BankCo for broader bank regulatory purposes for the duration of that transition period. Among other things, this will mean that transactions between SMI and Sallie Mae Bank will remain subject to the affiliate transaction restrictions of Sections 23A and 23B of the Federal Reserve Act during this transition period.

 

   

The separation of NewCo from SLM BankCo will reduce the complexity of both organizations, creating greater transparency for investors and potentially unlocking further value in each company.

 

   

The separation will create an independent equity structure for each of NewCo and SLM BankCo that will afford each company direct access to the capital markets for the purpose of pursuing their unique operating strategies and facilitate the ability of each company to effect future alliances and acquisitions utilizing their respective common stock.

The Existing SLM board of directors also considered a number of potentially negative factors in evaluating the separation, including risks relating to the creation of a new publicly-traded company, possible increased expenses and one-time separation costs and the diversion of management time to oversee the separation and transition of services and functions between the two companies, but concluded that the potential benefits of the separation outweighed these factors. For more information, see the sections entitled “The Separation and Distribution—Reasons for the Separation” and “Risk Factors” included elsewhere in this information statement.

Corporate Information

New Corporation was incorporated in Delaware on November 7, 2013 for the purpose of holding the assets and liabilities of Existing SLM’s education loan management business in connection with the separation and distribution described in this information statement. Prior to the contribution of these businesses to NewCo, which will be completed immediately prior to the distribution, NewCo will have no operations. The address of NewCo’s principal executive offices is 300 Continental Drive, Newark, Delaware 19713. NewCo’s telephone number is (302) 283-8000.

Beginning                     , 2014, NewCo will maintain an Internet site at www.                    .com. NewCo’s website and the information contained therein or connected thereto shall not be deemed to be incorporated herein, and you should not rely on any such information in making an investment decision.

Reason for Furnishing this Information Statement

This information statement is being furnished solely to provide information to stockholders of Existing SLM who will receive shares of NewCo common stock in the distribution. It is not and is not to be construed as an inducement or encouragement to buy or sell any of NewCo’s securities. The information contained in this information statement is believed by NewCo to be accurate as of the date set forth on its cover. Changes may occur after that date and none of Existing SLM, SLM BankCo or NewCo will update the information except in the normal course of their respective disclosure obligations and practices.

 

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QUESTIONS AND ANSWERS ABOUT THE SEPARATION AND DISTRIBUTION

 

What is NewCo and why is Sallie Mae separating NewCo’s business and distributing NewCo’s stock?   

NewCo is currently a wholly owned subsidiary of Existing SLM. It was formed to hold the assets and liabilities of Sallie Mae’s education loan management business.

 

The separation of NewCo and the distribution of shares of NewCo common stock are intended to provide you with equity investments in two distinct companies—SLM BankCo and NewCo—that will be able to focus on each of their respective businesses. The separation is expected to result in improved long-term performance of their respective businesses for the reasons discussed in the sections entitled “The Separation and Distribution—Background” and “—Reasons for the Separation.”

Why am I receiving this document?    You are receiving this document because you are a holder of shares of Existing SLM common stock. If you are a holder of that common stock as of the close of business on                     , 2014, the record date, you will be entitled to receive one share of NewCo common stock for each share of Existing SLM common stock that you hold at the close of business on that date. This document will help you understand how the separation and distribution will affect your investment in Existing SLM and NewCo.
How will the separation of NewCo from Sallie Mae work?   

The separation will be preceded by an internal corporate reorganization, which is a necessary first step to the separation of the consumer banking business and the education loan management business. As a result of a holding company merger under Section 251(g) of the DGCL, which is referred to herein as the SLM Merger, all of your shares of Existing SLM common stock will be converted, on a 1-to-1 basis, into shares of common stock of SLM BankCo. Pursuant to the SLM Merger, SLM BankCo will replace Existing SLM as the publicly-traded parent company of Sallie Mae. As part of the internal corporate reorganization, the assets and liabilities associated with the education loan management business will be transferred to NewCo, and those assets and liabilities associated with the consumer banking business will remain with or be transferred to SLM BankCo. See “The Separation and Distribution—Internal Corporate Reorganization of Existing SLM Prior to the Distribution.”

 

Immediately following the internal corporate reorganization, SLM BankCo will own all of the issued and outstanding shares of NewCo common stock, which it will distribute to Existing SLM stockholders. This is referred to as the distribution. On the date of the distribution, all of the outstanding shares of NewCo common stock will be distributed to holders of shares of Existing SLM common stock as of the close of business on the record date, on a 1-to-1 basis. Stockholders will not be required to take any action to receive their shares of SLM BankCo common stock in the internal corporate reorganization or their shares of NewCo common stock in the distribution. The separation and distribution is subject to the conditions described in this information statement.

 

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Apart from the separation and distribution of NewCo, how will the corporate reorganization affect my SLM Corporation common stock?    Stockholders are not required to take any action to receive their shares of SLM BankCo common stock in the internal corporate reorganization. Your Existing SLM common stock will be converted into SLM BankCo common stock, on a 1-to-1 basis, by virtue of the SLM Merger effected pursuant to Section 251(g) of the DGCL. In accordance with Section 251(g) of the DGCL, the merger will be approved by the Existing SLM board of directors and effected just prior to the separation and distribution. No stockholder vote is required under the DGCL or the charter or by-laws of Existing SLM to approve the SLM Merger. As required by Section 251(g), the charter and by-laws of SLM BankCo will contain provisions substantially identical to the charter and by-laws of Existing SLM immediately prior to the merger. SLM BankCo will change its name to SLM Corporation and its common stock will be listed and traded on the NASDAQ Global Select Market under the symbol “SLM.”
Will the number of shares of SLM Corporation common stock that I own change as a result of the corporate reorganization or the distribution?    No. The number of shares of SLM Corporation common stock that you own will not change as a result of the corporate reorganization or the distribution.
What is the record date for the distribution?    The record date for the distribution will be                     , 2014.
When will the distribution occur?    It is expected that all of the shares of NewCo common stock will be distributed on                     , 2014, to holders of record of Existing SLM common stock at the close of business on the record date.
What do stockholders need to do to participate in the distribution?    Stockholders as of the record date will not be required to take any action to receive shares of NewCo common stock in the distribution, but are urged to read this entire information statement carefully. No stockholder approval of the distribution is required. You are not being asked for a proxy. You do not need to pay any consideration, exchange or surrender your shares of Existing SLM common stock or take any other action to receive your shares of NewCo common stock. Please do not send in your Existing SLM stock certificates. The distribution will not affect the number of outstanding shares of SLM Corporation common stock or any rights of Existing SLM stockholders, although it will affect the market value of each share of SLM Corporation common stock outstanding after the distribution.
How will shares of NewCo common stock be issued?    You will receive shares of NewCo common stock through the same channels that you currently use to hold or trade shares of Existing SLM common stock, whether through a brokerage account, 401(k) plan or other channel. Receipt of NewCo shares will be documented for you in the same manner that you typically receive stockholder updates, such as monthly broker statements and 401(k) statements.

 

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   If you own shares of Existing SLM common stock as of the close of business on the record date, including shares owned in certificated form, SLM BankCo, with the assistance of Computershare Trust Company, N.A., the settlement and distribution agent, will electronically distribute shares of NewCo common stock to you or to your brokerage firm on your behalf in book-entry form. Computershare Trust Company, N.A. will mail you a book-entry account statement that reflects your shares of NewCo common stock, or your bank or brokerage firm will credit your account with the shares. If you own your Existing SLM common stock through the SLM Corporation dividend reinvestment plan, the shares of NewCo common stock you receive will be distributed to a new NewCo dividend reinvestment plan account that will be created for you. Following the distribution, stockholders whose shares are held in book-entry form may request that their shares of NewCo common stock held in book-entry form be transferred to a brokerage or other account at any time, without charge.
If I was enrolled in the SLM Corporation dividend reinvestment plan, will I automatically be enrolled in the NewCo dividend reinvestment plan?    Yes. If you elected to have your cash dividends applied toward the purchase of additional shares of SLM Corporation common stock, the shares of NewCo common stock you receive in the distribution will be automatically enrolled in the NewCo dividend reinvestment plan sponsored by Computershare Trust Company, N.A. (NewCo’s transfer agent and registrar), unless you notify Computershare Trust Company, N.A. that you do not want to reinvest any NewCo cash dividends in additional shares of NewCo common stock. For contact information for Computershare Trust Company, N.A., see “Description of NewCo’s Capital Stock—Transfer Agent and Registrar.”
How many shares of NewCo common stock will I receive in the distribution?    You will receive one share of NewCo common stock for each share of Existing SLM common stock held by you as of the record date. Based on the number of shares of Existing SLM common stock outstanding as of                     , 2014, were the distribution date to have occurred on that date a total of approximately      million shares of NewCo common stock would have been distributed. For additional information on the distribution, see “The Separation and Distribution.”
Is the distribution subject to conditions?    Yes. The distribution of shares of NewCo common stock as described in this information statement is subject to the satisfaction or waiver of several conditions. No assurance can be given that any or all of these conditions will be met. In addition, Existing SLM can decline at any time to go forward with the distribution. For a discussion of the conditions to the distribution, see “The Separation and Distribution—Conditions to the Distribution.”
What is the expected date of completion of the separation and distribution?    The completion and timing of the separation and distribution are dependent upon a number of conditions. It is expected that the shares of NewCo common stock will be distributed on                     , 2014 to the holders of record of Existing SLM common stock at the close of business on the record date. However, no assurance can be provided as to the timing of the separation and distribution or that all conditions to the separation will be met.

 

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Can Existing SLM decide to cancel the distribution of NewCo common stock even if all the conditions have been met?    Yes. Until the distribution has occurred, Existing SLM has the right to terminate the distribution, even if all of the conditions are satisfied. See “The Separation and Distribution—Conditions to the Distribution.”
Will NewCo have any debt?   

As part of the internal corporate reorganization that will occur in connection with the separation and distribution, Existing SLM will become a limited liability company wholly owned by NewCo. Existing SLM’s liabilities included, as of September 30, 2013, its outstanding unsecured public debt of approximately $18.7 billion in the form of senior unsecured notes and medium-term notes and derivative contracts on which it had a net liability of $792 million. Existing SLM is also the guarantor of its subsidiaries under a secured borrowing facility. For more detailed discussion of NewCo’s expected indebtedness, see “Description of Material Indebtedness.” NewCo expects that the value of future cash flows will significantly exceed its future debt service obligations.

 

Approximately 83 percent of NewCo’s FFELP Loan portfolio and 51 percent of NewCo’s Private Education Loan portfolio has been funded with non-recourse, long-term debt securities issued by securitization trusts. The asset-backed securities issued by these trusts are not obligations of NewCo. Nevertheless, NewCo currently consolidates the financing trusts that have issued these asset-backed securities. As of September 30, 2013, NewCo had approximately $92 billion of FFELP Loan securitization debt and $19 billion of Private Education Loan securitization debt.

What is “regular-way” and “ex-distribution” trading of SLM Corporation stock?    Beginning on or shortly before the record date and continuing up to and through the distribution date, it is expected that there will be two markets in SLM Corporation common stock: a “regular-way” market and an “ex-distribution” market. Shares of SLM Corporation common stock that trade in the “regular-way” market will trade with an entitlement to shares of NewCo common stock distributed pursuant to the distribution. Shares that trade in the “ex-distribution” market will trade without an entitlement to shares of NewCo common stock distributed pursuant to the distribution.
   If you decide to sell any shares of SLM Corporation common stock before the distribution date, including between the record date and the distribution date, you should make sure your stockbroker, bank or other nominee understands whether you want to sell your shares of SLM Corporation common stock with or without your entitlement to shares of NewCo common stock pursuant to the distribution.

 

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Where will I be able to trade shares of NewCo common stock?    NewCo expects to apply to list its common stock on the NASDAQ Global Select Market under the symbol “    .” NewCo anticipates that trading in shares of its common stock will begin on a “when-issued” basis on or shortly before the record date and will continue up to and through the distribution date and that “regular-way” trading in shares of NewCo common stock will begin on the first trading day following the distribution date. If trading begins on a “when-issued” basis, you may purchase or sell shares of NewCo common stock up to and through the distribution date, but your transaction will not settle until after the distribution date. NewCo cannot predict the trading prices for its common stock before, on or after the distribution date.
What will happen to the listing of SLM Corporation common stock?    There will be no change to the listing. SLM BankCo will replace Existing SLM as the publicly-traded parent company and change its name to SLM Corporation. Its common stock will trade on the NASDAQ Global Select Market under the symbol “SLM.”
What will happen to Existing SLM stock options, restricted stock units, and performance stock unit?   

The treatment of outstanding Existing SLM equity awards in the separation has not been finally determined, and we will include information regarding their treatment in an amendment to this information statement.

 

For additional information on the treatment of Existing SLM equity-based compensation awards, see “The Separation and Distribution—Treatment of Equity-Based Compensation” and “Certain Relationships and Related Party Transactions—Employee Matters Agreement.”

What will happen to the shares of Existing SLM preferred stock in connection with the internal corporate reorganization and the distribution?    In the internal corporate reorganization, by virtue of the SLM Merger, the shares of each series of outstanding Existing SLM preferred stock will be converted, on a 1-to-1 basis, into substantially identical shares of the same series of SLM BankCo preferred stock. No vote of Existing SLM preferred stockholders is required under the DGCL or Existing SLM’s charter and by-laws to approve the SLM Merger, and the Existing SLM preferred stockholders will not have appraisal rights in connection with the SLM Merger. Holders of shares of Existing SLM preferred stock will not receive any shares of NewCo common stock in the distribution.

 

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What are the material U.S. federal income tax consequences of the corporate reorganization and the separation and distribution?   

It is a condition to the completion of the distribution that (i) Existing SLM receive a private letter ruling from the Internal Revenue Service (“IRS”) to the effect that, among other things, (A) the SLM Merger (together with the conversion of the shares of Existing SLM common and preferred stock into the shares of SLM BankCo common and preferred stock) will qualify as a “reorganization” within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (the Code), and will not be integrated with the rest of the separation and distribution and (B) the separation and distribution will qualify as a transaction that is a “reorganization” for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code, and (ii) such ruling shall not have been revoked or modified in any material respect. It is also a condition to the separation and distribution that Existing SLM and SLM BankCo receive an opinion from their outside tax counsel, Baker Botts L.L.P., to the effect that certain requirements for tax-free treatment under Section 355 of the Code on which the IRS will not rule will be satisfied.

 

Accordingly, and based on the foregoing private letter ruling from the IRS, you will not recognize any gain or loss on the conversion of your Existing SLM common stock into SLM BankCo common stock.

 

If the private letter ruling is received from the IRS, the separation and the distribution will qualify as a reorganization for U.S. federal income tax purposes under Section 355 and Section 368(a)(1)(D) of the Code, and accordingly, gain or loss generally will not be recognized by SLM BankCo in connection with the separation and distribution and no gain or loss will be recognized by you, and no amount will be included in your income, upon the receipt of shares of NewCo common stock in the distribution for U.S. federal income tax purposes. For more information regarding the private letter ruling and the potential U.S. federal income tax consequences to Existing SLM, SLM BankCo, NewCo and you of the SLM Merger and the separation and distribution, see the section entitled “Material U.S. Federal Income Tax Consequences.”

How will I determine my tax basis in the NewCo shares I receive in the distribution?    For U.S. federal income tax purposes, the aggregate tax basis in the shares of Existing SLM common stock held by you immediately before the SLM Merger and subsequent separation and distribution will be allocated between (i) the shares of SLM BankCo common stock that you receive as a result of the SLM Merger and (ii) the shares of NewCo common stock that you receive in the distribution, with such allocation being in proportion to the relative fair market values of such shares of SLM BankCo common stock and NewCo common stock on the distribution date.
   You should consult your tax advisor about the particular consequences of the SLM Merger and the separation and distribution to you, including the application of the tax basis allocation rules and the application of state, local and foreign tax laws.

 

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Does NewCo plan to pay dividends?    NewCo expects to follow a capital return policy that is consistent with Existing SLM’s current policy, including dividends, subject to servicing outstanding unsecured indebtedness. However, the declaration and payment of any dividends in the future by NewCo will be subject to the sole discretion of its board of directors and will depend upon many factors. See “Capital Return Policies.”
Who will be the distribution agent, transfer agent, registrar and information agent for the NewCo common stock?   

The distribution agent, transfer agent and registrar for the NewCo common stock will be Computershare Trust Company, N.A. For questions relating to the transfer or mechanics of the stock distribution, you should contact:

 

Computershare

250 Royall Street

Canton, MA 02021

[        ]

   If your shares of Existing SLM common stock are held by a bank, broker or other nominee, you may call the information agent for the distribution, Georgeson, toll free at     . Banks and brokers should call         .
Where can I find more information about SLM Corporation and NewCo?    Before the distribution, if you have any questions relating to NewCo or SLM Corporation you should contact:
  

SLM Corporation

Investor Relations

300 Continental Drive

Newark, DE 19713

Tel: 302-283-8000

https://www.salliemae.com/about/investors/

   After the distribution, NewCo stockholders who have any questions relating to NewCo should contact NewCo at:
  

New Corporation

Investor Relations

 

 

Tel:                         

www.                         .com

   The NewCo investor website will be operational as of                     , 2014.

 

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TRANSACTION STRUCTURE

(simplified for illustrative purposes)

 

The diagram below shows the structure of Existing SLM before the internal corporate reorganization and the separation and distribution:

 

 

LOGO

The diagram below shows the structure of SLM BankCo, as the publicly-traded successor to Existing SLM, immediately after completion of the internal corporate reorganization but before the separation and distribution:

 

LOGO

 

 

The diagram below shows the structure of SLM BankCo and NewCo immediately after completion of the separation and distribution:

 

LOGO

 

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See the section entitled “The Separation and Distribution—Internal Corporate Reorganization of Existing SLM Prior to the Distribution” for more information. As used in the three diagrams above and the descriptions of the internal corporate reorganization in this information statement:

 

   

“Existing SLM” refers to the Delaware corporation that is SLM Corporation as of the date of this information statement. As part of the internal corporate reorganization, Existing SLM will become a limited liability company and ultimately be contributed to, and become a wholly owned subsidiary of, NewCo.

 

   

“SLM BankCo” refers to New BLC Corporation, a newly-formed Delaware corporation that (a) is currently a subsidiary of Existing SLM and (b) after the internal corporate reorganization, will replace Existing SLM as the publicly-traded parent company pursuant to the SLM Merger and change its name to “SLM Corporation.” SLM BankCo will own and operate the consumer banking business and will be the company that distributes all of the issued and outstanding shares of NewCo common stock in the distribution.

 

   

“NewCo” refers to New Corporation, a Delaware corporation that (a) is currently a subsidiary of Existing SLM, (b) as part of the internal corporate reorganization will be transferred by Existing SLM to, and become a subsidiary of, SLM BankCo and (c) will be distributed to the Existing SLM stockholders pursuant to the distribution. NewCo was formed to own and operate Sallie Mae’s education loan management business.

 

   

“Bank” refers to Sallie Mae Bank, a Utah industrial bank that (a) is currently a subsidiary of Existing SLM and (b) as part of the internal corporate reorganization, will be transferred by Existing SLM to, and become a subsidiary of, SLM BankCo.

 

   

“Upromise” refers to Upromise, Inc., a Delaware corporation that operates the Upromise Rewards program that (a) is currently a subsidiary of Existing SLM and (b) as part of the internal corporate reorganization will be transferred by Existing SLM to, and become a subsidiary of, SLM BankCo.

 

   

“Insurance Business” refers to the Existing SLM insurance services business which offers tuition insurance, renters insurance and student health insurance to college students and higher education institutions. The Insurance Business (a) is currently operated through one or more subsidiaries of Existing SLM and (b) as part of the internal corporate reorganization will be transferred by Existing SLM to, and be operated through one or more subsidiaries of, SLM BankCo.

 

   

“SMI” refers to Sallie Mae, Inc., a Delaware corporation that is currently a subsidiary of Existing SLM and is responsible for most of its servicing and collection businesses. In connection with the corporate reorganization, SMI will contribute some of the assets and liabilities of its private education loan servicing business to a new subsidiary, referred to herein as Private ServiceCo. After the internal corporate reorganization, SMI will remain a subsidiary of Existing SLM and be an indirect subsidiary of NewCo.

 

   

“Private ServiceCo” refers to SMB Servicing Company, Inc., a Delaware corporation formed to hold the private education loan services assets to be transferred to it by SMI. Private ServiceCo is currently a subsidiary of SMI and as part of the internal corporate reorganization will be transferred to, and become a subsidiary of, SLM BankCo.

 

   

“SLMIC” refers to Sallie Mae Investment Corporation, a Rhode Island corporation that owns the residual interests of the FFELP Loans and Private Education Loans that have been funded through securitization trusts. SLMIC is currently a subsidiary of Existing SLM and after the internal corporate reorganization will remain a subsidiary of Existing SLM and be an indirect subsidiary of NewCo.

 

   

“Unsecured Debt” refers to Existing SLM’s unsecured public indebtedness of $18.7 billion outstanding as of September 30, 2013, consisting of the senior notes and medium term notes described in the section entitled “Description of Material Indebtedness. After the internal corporate

 

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reorganization, the Unsecured Debt will remain the obligation of Existing SLM, which will be a subsidiary of NewCo.

 

   

“Preferred Stockholders” refers to the holders of Existing SLM’s outstanding shares of Series A, 6.97 percent cumulative redeemable preferred stock and Series B, floating rate non-cumulative preferred stock. As part of the internal corporate reorganization and pursuant to the SLM Merger, all of the outstanding shares of Existing SLM preferred stock will be converted, on a 1-to-1 basis, into shares of SLM BankCo preferred stock without any action being required by these holders.

 

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RISK FACTORS

You should carefully consider the following risks and other information in this information statement in evaluating NewCo and NewCo’s common stock. Any of the following risks could materially and adversely affect NewCo’s results of operations or financial condition. The risk factors generally have been separated into three groups: risks related to NewCo’s business, risks related to the separation, and risks related to NewCo’s common stock.

Risks Related to NewCo’s Business

Economic conditions could have a material adverse effect on NewCo’s business, results of operations, financial condition and stock price.

NewCo’s business will be influenced by economic conditions. Economic growth in the United States remains slow and uneven. NewCo’s earnings are dependent on the expected future creditworthiness of its student loan customers, especially with respect to its Private Education Loan portfolio. 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 NewCo’s FFELP Loan and Private Education Loan portfolios. Since 2009, the unemployment rate has been higher than historical norms. In 2008, the unemployment rate was 5.8 percent, it reached a high of 9.6 percent in 2010 and declined to 8.1 percent in 2012. Forbearance programs may have the effect of delaying default emergence as customers are granted a temporary waiver from having to make payments on their loans.

Further deterioration in the economy could adversely affect the credit quality of our borrowers. Higher credit-related losses and weaker credit quality could negatively affect NewCo’s business, financial condition and results of operations and limit funding options, including NewCo’s access to the capital markets, which could also adversely impact its liquidity position.

Legislation passed by Congress in 2010 prohibits new loan originations under the FFELP program, and, as a result, interest income on the existing FFELP Loan portfolio and fee-based revenue from servicing FFELP Loans will decline over time. NewCo may not be able to develop revenue streams to replace the declining revenue from FFELP loans.

In 2010, Congress passed legislation ending the origination of student loans under the FFELP program. All federal student loans are now originated through the DSLP of the ED. The law did not alter or affect the terms and conditions of existing FFELP Loans. As a result of this legislation, interest income on NewCo’s FFELP Loan portfolio and fee-based revenue from servicing that portfolio and third-party FFELP Loans will decline over time as existing FFELP Loans are paid down, refinanced or repaid after default by guarantors. During the twelve months ended December 31, 2012, NewCo’s FFELP Loan portfolio declined by approximately $12.5 billion, or 9.1 percent, and NewCo’s FFELP Loan servicing revenue declined by $59 million, or 6.8 percent, compared to the prior year. If NewCo does not acquire new loan or otherwise grow or develop new revenue streams to replace or supplement its existing, and declining, FFELP Loan net interest and servicing revenue, NewCo’s consolidated revenue and operating income will continue to decrease which could materially and adversely impact NewCo’s earnings.

NewCo’s business is affected by the cost and availability of funding in the capital markets.

The capital markets have from time to time experienced periods of significant volatility. This volatility can dramatically and adversely affect financing costs when compared to historical norms. Additional factors that could make financing more expensive or unavailable to NewCo include, but are not limited to, financial losses, events that have an adverse impact on NewCo’s reputation, changes in the activities of NewCo’s business partners, events that have an adverse impact on the financial services industry generally, counterparty

 

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availability, changes affecting NewCo’s assets, corporate and regulatory actions, absolute and comparative interest rate changes, ratings agencies’ actions, general economic conditions and the legal, regulatory and tax environments governing funding transactions. If financing becomes more difficult, expensive or unavailable, NewCo’s business, financial condition and results of operations could be materially and adversely affected.

Our credit ratings are important to our liquidity. A reduction in our credit ratings could adversely affect our liquidity, increase our borrowing costs, limit our access to the markets or trigger obligations under certain provisions in collateralized agreements.

Following the internal corporate reorganization and the separation and distribution, Existing SLM will be a wholly owned subsidiary of NewCo. Existing SLM has unsecured debt that totaled, as of September 30, 2013, approximately $18.7 billion. In connection with Existing SLM’s announcement in May 2013 of the proposed separation and distribution of NewCo, the rating agencies took certain negative ratings actions with regard to Existing SLM, including, in one instance, lowering Existing SLM’s senior unsecured long-term credit rating to below investment grade level with negative implications and with respect to certain other rating agencies, placing its senior unsecured long-term credit ratings on negative watch. Existing SLM’s senior unsecured long-term credit rating had already been rated below investment grade level by one ratings agency. There can be no assurance that Existing SLM’s credit ratings prior to the separation and distribution of NewCo will not be reduced further or reduced by other rating agencies at the conclusion of their credit review. There can be no assurance as to the ratings, if any, of the senior unsecured debt of Existing SLM following the separation and distribution, at which time Existing SLM will be a subsidiary of NewCo, or that one or more rating agencies will not lower Existing SLM’s senior unsecured credit below that accorded to it prior to the distribution. A reduction in the credit ratings of Existing SLM’s unsecured debt could adversely affect NewCo’s liquidity, increase its borrowing costs, limit its access to the markets or trigger obligations under certain provisions in collateralized agreements to which Existing SLM is a party.

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

Net interest income will be the primary source of cash flow generated by NewCo’s portfolios of FFELP Loans and Private Education Loans. Interest earned on FFELP Loans and Private Education Loans is primarily indexed to one-month LIBOR rates and either one-month LIBOR rates or the one-month Prime rate, respectively, but NewCo’s cost of funds will be primarily indexed to three-month LIBOR, creating the possibility of repricing risk related to these assets. In a declining interest rate environment, this difference in timing may compress the net interest margin on FFELP Loans and Private Education Loans.

The different interest rate characteristics of NewCo’s loan portfolios and liabilities funding these loan portfolios also result in basis risk and repricing risk. It is not possible to hedge all of NewCo’s exposure to such risks. While the asset and hedge indices are short-term with rate movements that 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 NewCo’s control. In these circumstances, NewCo’s earnings could be materially adversely affected.

Higher than expected prepayments of loans could reduce servicing revenues or reduce or delay payments NewCo receives as the holder of the residual interests of securitization trusts holding student loans.

FFELP Loans and Private Education Loans may be voluntarily prepaid without penalty by borrowers or, in the case of FFELP Loans, consolidated with the borrowers’ other education loans through refinancing into the federal DSLP. FFELP Loans may also be repaid after default by the guarantors of FFELP Loans. Prepayment rates and levels are subject to many factors beyond NewCo’s control, including repayment through loan consolidation programs. When education loans contained within a securitization trust are prepaid, the fees

 

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NewCo earns as servicer decrease and the value of any residual interest NewCo owns in the securitization trust may decline. While some fluctuation in prepayment levels is to be expected, extraordinary or extended increases in prepayment levels could materially adversely affect our liquidity, income and the value of those residual interests.

During the fourth quarter of 2011, ED announced its Special Direct Consolidation Loan (“SDCL”) initiative. The initiative provided an incentive to borrowers who have at least one student loan owned by ED and at least one held by a FFELP lender to consolidate the FFELP lender’s loans into the DSLP by providing a 0.25 percentage point interest rate reduction on the FFELP Loans eligible for consolidation. The program was available from January 17, 2012 through June 30, 2012. As a result of the SDCL initiative, borrowers consolidated approximately $5.2 billion of Existing SLM’s FFELP Loans to the DSLP. The consolidation of these loans resulted in the acceleration of non-cash loan premium and debt discount amortization, which reduced net interest margin by 4 basis points for the year ended December 31, 2012. Future initiatives by ED to encourage or force consolidation or other factors affecting borrowers’ repayment of their loans could similarly reduce NewCo’s cash flows from servicing and interest income as well as its net interest margin, which could materially adversely affect NewCo’s liquidity and income.

NewCo’s use of derivatives to manage interest rate sensitivity exposes it to credit and market risk that could have a material adverse effect on its earnings.

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

NewCo’s use of derivatives also exposes it to market risk and credit risk. Market risk is the chance of financial loss resulting from changes in interest rates, foreign exchange rates and market liquidity. NewCo’s Floor Income contracts and some of the basis swaps it uses to manage earnings variability caused by having different reset characteristics on interest-earning assets and interest-bearing 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 NewCo’s statement of income. A decline in the fair value of these derivatives could have a material adverse effect on NewCo’s reported earnings.

Credit risk is the risk that a counterparty will not perform its obligations under a contract. Credit risk is limited to the loss of the fair value gain in a derivative that the counterparty owes NewCo and therefore exists for derivatives with a positive fair value. At September 30, 2013, Existing SLM had a net positive exposure (derivative gain positions less collateral posted by counterparties) related to derivatives of $935 million. If a counterparty fails to perform its obligations, NewCo could, depending on the type of counterparty arrangement, experience a loss of liquidity or an economic loss. In addition, NewCo might not be able to cost effectively replace the derivative position depending on the type of derivative and the current economic environment.

NewCo’s securitization trusts, which it is required to consolidate on its balance sheet, have $11.3 billion of Euro and British Pound Sterling denominated bonds outstanding as of September 30, 2013. To convert these non-U.S. dollar denominated bonds into U.S. dollar liabilities, the trusts have entered into foreign-currency swaps with highly rated counterparties. In addition, the trusts have entered into $13.1 billion of interest rate swaps

 

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which are primarily used to convert Prime rate payments received on securitized loans to LIBOR paid on the bonds. At September 30, 2013, the net positive exposure on swaps in securitization trusts is $860 million. A failure by a swap counterparty to perform its obligations could, if the swap has a positive fair value to NewCo, materially and adversely affect NewCo’s earnings.

High or increasing interest rate environments may cause NewCo’s Floor Income to decline, which may adversely affect its earnings.

FFELP Loans disbursed before April 1, 2006, generally earn interest at the higher of either the borrower rate, which is fixed over a period of time, or a floating rate based on a Special Allowance Payment (“SAP”) formula set by ED. NewCo has generally financed its FFELP Loans with floating rate debt whose interest is matched closely to the floating nature of the applicable SAP formula. If a decline in interest rates causes the borrower rate to exceed the SAP formula rate, NewCo will continue to earn interest on the loan at the fixed borrower rate while the floating rate interest on NewCo debt will continue to decline. The additional spread earned between the fixed borrower rate and the SAP formula rate is referred to as “Floor Income.”

Depending on the type of FFELP Loan and when it was originated, the borrower rate is either fixed to term or is reset to a market rate each July 1. For loans where the borrower rate is fixed to term, NewCo may earn Floor Income for an extended period of time; for those loans where the borrower interest rate is reset annually on July 1, NewCo may earn Floor Income to the next reset date. In accordance with legislation enacted in 2006, holders of FFELP Loans are required to rebate Floor Income to ED for all FFELP Loans disbursed on or after April 1, 2006. After accounting for these required rebates, as of September 30, 2013, approximately $57.9 billion of NewCo’s FFELP Loan portfolio was eligible to earn Floor Income.

Floor Income can be volatile as rates on the underlying student loans move up and down. NewCo generally hedges this risk by selling Floor Income contracts to counterparties which lock in the value of the Floor Income over the term of the contract. As of September 30, 2013, approximately $31.7 billion of NewCo’s FFELP Loans eligible to earn Floor Income was economically hedged with Floor Income contracts. A rise in interest rates will reduce the amount of Floor Income received on the approximately $26.2 million of FFELP Loans not hedged with Floor Income contracts, which will compress NewCo’s interest margins and depress its earnings.

Failure to comply with applicable rules and regulations could result in the loss of insurance or guarantees on FFELP Loans and other penalties that could have a material, negative impact on NewCo’s business, financial condition or results of operations.

Loans serviced under the FFELP are subject to the HEA and related regulations. Our servicing operations are designed and monitored to comply with the HEA, related regulations and program guidance; however, ED could determine that we are not in compliance for a variety of reasons, including that we misinterpreted ED guidance or incorrectly applied the HEA and its related regulations or policies. Failure to comply could result in fines, the loss of the insurance and related federal guarantees on affected FFELP Loans, expenses required to cure servicing deficiencies, suspension or termination of our right to participate as a FFELP servicer, negative publicity and potential legal claims. The imposition of significant fines, the loss of the insurance and related federal guarantees on a material number of FFELP Loans, the incurrence of additional expenses and/or the loss of our ability to participate as a FFELP servicer could individually or in the aggregate have a material, negative impact on our business, financial condition or results of operations.

Defaults on student education loans held by NewCo, particularly Private Education Loans, could adversely affect NewCo’s earnings.

FFELP Loans are insured or guaranteed by state or not-for-profit agencies and are also protected by contractual rights to recovery from the United States pursuant to guaranty agreements among ED and these agencies. These guarantees generally cover at least 97 percent of a FFELP Loan’s principal and accrued interests

 

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for loans disbursed and, in limited circumstances, 100 percent of the loan’s principal and accrued interest. Nevertheless, NewCo is exposed to credit risk on the non-guaranteed portion of the FFELP Loans in its portfolio and to the possible loss of the insurance or guarantee due to a failure by NewCo to comply with HEA and related regulations.

NewCo bears the full credit exposure on Private Education Loans. For the quarter ended September 30, 2013 and year ended December 31, 2012, on a pro forma basis, the annualized charge-off rate for NewCo’s Private Education Loans (as a percentage of loans in repayment) was 2.9 and 3.9 percent, respectively. Delinquencies are an important indicator of the potential future credit performance for Private Education Loans. NewCo’s delinquencies on a pro forma basis, as a percentage of Private Education Loans in repayment, were 10.4 percent at December 31, 2012 and 9.8 percent at September 30, 2013.

The evaluation of NewCo’s allowance for loan losses is inherently subjective, as it requires material estimates that may be subject to significant changes. As of September 30, 2013, NewCo’s allowance for FFELP Loan and Private Education Loan losses, on a pro forma basis, was approximately $125 million and $2.1 billion, respectively. For the nine months ended September 30, 2013, NewCo recognized provisions for FFELP Loan and Private Education Loan losses, on a pro forma basis, of $39 million and $570 million, respectively. During the year ended December 31, 2012, NewCo recognized provisions for FFELP Loan and Private Education Loan losses, on a pro forma basis, of $68 million and $946 million, respectively. 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 NewCo’s 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), 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 student loan defaults. Although default rates have decreased recently as economic conditions have improved, they remain higher than pre-recession levels. If actual loan performance is worse than currently estimated, it could materially affect NewCo’s estimate of the allowance for loan losses and the related provision for loan losses in NewCo’s statements of income and as a result adversely affect NewCo’s results of operations.

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

NewCo must effectively manage the liquidity risk to which it is exposed. NewCo requires liquidity to meet cash requirements such as day-to-day operating expenses, required payments of principal and interest on borrowings, and distributions to stockholders. NewCo’s primary sources of liquidity and funding are from fees collected for servicing education loans, payments made on the loan portfolio, proceeds and distributions from securitization transactions and trusts that NewCo undertakes and, potentially, offerings of debt and equity securities. NewCo may maintain too much liquidity, which can be costly, or may be too illiquid, which could result in financial distress during times of financial stress or capital market disruptions.

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

A failure of NewCo’s operating systems or infrastructure could disrupt its business. NewCo’s business is dependent on its ability to process and monitor large numbers of daily transactions in compliance with legal and regulatory standards and its own product specifications, which change to reflect its business needs and new or revised regulatory requirements. As NewCo’s processing demands and loan portfolios change, both in volume and in terms and conditions, NewCo’s ability to develop and maintain its operating systems and infrastructure will become increasingly challenging. There is no assurance that NewCo will adequately or efficiently develop, maintain or acquire access to such systems and infrastructure.

 

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The servicing, financial, accounting, data processing and other operating systems and facilities that support NewCo’s business may fail to operate properly or become disabled as a result of events that are beyond NewCo’s control, adversely affecting its ability to timely process transactions. Any such failure could adversely affect NewCo’s ability to service its clients, result in financial loss or liability to its clients, disrupt its business, and result in regulatory action or cause reputational damage.

Despite the plans and facilities NewCo has in place, its ability to conduct business may be adversely affected by a disruption in the infrastructure that supports its business. This may include a disruption involving electrical, communications, Internet, transportation or other services used by NewCo or third parties with which it conducts business. Notwithstanding efforts to maintain business continuity, a disruptive event impacting NewCo’s processing locations could adversely affect its business, financial condition and results of operations.

NewCo depends on secure information technology, and a breach of its information technology systems could result in significant losses, disclosure of confidential customer information and reputational damage, which would adversely affect NewCo’s business.

NewCo’s operations rely on the secure processing, storage and transmission of personal, confidential and other information in its computer systems and networks. Although NewCo takes protective measures it deems reasonable and appropriate, its computer systems, software and networks may be vulnerable to unauthorized access, computer viruses, malicious attacks and other events that could have a security impact beyond NewCo’s control. These technologies, systems and networks, and those of third parties, may become the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of NewCo’s or its customers’ confidential, proprietary and other information, or otherwise disrupt NewCo’s business operations or those of its customers or other third parties. Information security risks for institutions that handle large numbers of financial transactions on a daily basis such as NewCo 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, NewCo’s computer systems and networks could be jeopardized or could cause interruptions or malfunctions in NewCo’s operations that could result in significant losses or reputational damage. NewCo routinely transmits and receives personal, confidential and proprietary information, some of it through third parties. NewCo has sought to put in place secure transmission capability and works to ensure that third parties follow similar procedures. Nevertheless, 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, NewCo may need to expend significant additional resources to modify its protective measures or to investigate and remediate vulnerabilities or other exposures, and it may be subject to fines, penalties, litigation and settlement costs and financial losses that are either not insured against or not fully covered through insurance. If one or more of such events occur, NewCo’s business, financial condition or results of operations could be significantly and adversely affected.

NewCo depends on third parties for a wide array of services, systems and information technology applications, and a breach or violation of law by one of these third parties could disrupt NewCo’s business or provide its competitors with an opportunity to enhance their position at NewCo’s expense.

Third-party vendors are significantly involved in aspects of NewCo’s software and systems development, the timely transmission of information across its data communication network, and for other telecommunications, processing, remittance and technology-related services in connection with NewCo’s payment services businesses. If a service provider fails to provide the services required or expected, or fails to meet applicable contractual or regulatory requirements such as service levels or compliance with applicable laws, the failure could negatively

 

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impact NewCo’s business by adversely affecting its ability to process customers’ transactions in a timely and accurate manner, otherwise hampering NewCo’s ability to serve its customers, or subjecting NewCo 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 also adversely affect the perception of the reliability of NewCo’s networks and services and the quality of its brands, which could materially adversely affect NewCo’s business and results of operations.

Federal funding constraints and spending policy changes triggered by associated federal spending deadlines and ongoing lawmaker and regulatory efforts to change the student lending sector may result in disruption of federal payments for services NewCo provides to the government, which could materially and adversely affect NewCo’s business strategy or future business prospects.

NewCo receives payments from the federal government on its FFELP Loan portfolio and for other services it provides, including servicing loans under the DSLP and providing default aversion and contingency collections to ED. Payments for these services may be affected by various factors, including the following:

 

   

Debt Limit: In October 2013, after a partial shutdown of the federal government, Congress temporarily approved funding for government operations until January 15, 2014 and raised the debt ceiling. However, the federal government is expected to again reach the statutory borrowing limit by mid-February 2014 and, once the limit is reached, the federal government will not be able to borrow to meet its payment obligations.

 

   

2014 Appropriations: Congress and the Administration must address the expiration at the beginning of 2014 of funding for federal government operations.

 

   

Sequestration: In August 2011, Congress passed the Budget Control Act of 2011, which committed the federal government to reduce the federal deficit over 10 years by $1 trillion relative to the fiscal year 2012 Administration budget submission. Pursuant to this Act, as amended, substantial automatic spending cuts, known as “sequestration,” began to be implemented on March 1, 2013. ED has indicated that its implementation of the sequester could result in cuts to contracts with private-sector entities such as NewCo.

 

   

President’s Budget: The President’s fiscal 2015 budget is expected to be released in the first quarter of 2014. Previous budgets have included a number of education lending-related initiatives, including proposed reductions in payments by ED to service providers assisting students with the rehabilitation of defaulted federal loans.

 

   

Other Higher Education Legislation: As Congress considers the reauthorization of the Higher Education Act, it could consider legislation that would reduce the payments to guarantors or change the consolidation program to incentivize student loan borrowers to refinance their existing student loans, both private and federal. Such reforms could reduce NewCo’s cash flows from servicing and interest income as well as its net interest margin.

It is possible that the Administration and Congress could engage in a prolonged debate linking the federal deficit, debt ceiling and other budget issues resulting in a similar debate to the one that occurred around the Budget Control Act of 2011 and the raising of the debt ceiling in October 2013. If U.S. lawmakers now or in the future fail to reach agreement on these issues, the federal government could stop or delay payment on its obligations, including those on services NewCo provides. NewCo cannot predict how or what programs will be impacted by any actions that the Administration, Congress or the federal government may take. Further, legislation to address the federal deficit and spending could include proposals that would adversely affect FFELP and DSLP-related servicing businesses. A protracted reduction, suspension or cancellation of the demand for the services NewCo provides, or proposed changes to the terms or pricing of services provided under existing contracts with the federal government, including its contract with ED, could have a material adverse effect on

 

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NewCo’s revenues, cash flows, profitability and business outlook, and, as a result, could materially adversely affect its business, financial condition and results of operations.

If NewCo does not effectively align its cost structure with its business operations, its results of operations and financial condition could be materially adversely affected.

NewCo will need to align its cost structure with its business operations to remain profitable. Existing SLM has previously undertaken cost cutting initiatives in response to legislative changes, including the ending of FFELP in 2010 and the wind down of NewCo’s FFELP Loan portfolio over the next approximately 20 years. NewCo intends to make opportunistic acquisitions of additional FFELP Loans, both to increase cash flow from its loan portfolio and to expand its FFELP Loan servicing business. It will further seek to undertake other initiatives to grow its business. NewCo’s ability to properly size its cost structure will be dependent upon a number of variables, including its ability to successfully execute on its business plan and future legislative changes that may increase its compliance costs or otherwise impact its business. If NewCo undertakes cost reductions based on its business plan, those reductions could be too dramatic and could cause disruptions in its business, reductions in the quality of the services it provides or cause it to fail to comply with applicable regulatory standards. Alternatively, NewCo may fail to implement, or be unable to achieve, necessary cost savings commensurate with its business and prospects. In either case, NewCo’s business, results of operations and financial condition could be adversely affected.

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

The preparation of NewCo’s 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 could adversely affect NewCo’s reported amounts of assets, liabilities, income and expenses during the reporting periods. A description of critical accounting estimates and assumptions may be found in the section entitled “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 audited consolidated financial statements included elsewhere in this information statement. If NewCo makes incorrect assumptions or estimates, it may under- or overstate reported financial results, which could materially and adversely affect its business, financial condition and results of operations and the reliability of its financial statements.

Acquisitions or strategic investments that NewCo pursues may not be successful and could disrupt its business, harm its financial condition or reduce its earnings.

NewCo’s strategy includes making opportunistic acquisitions of, or material investments in, complementary businesses, products and portfolios of loans. NewCo may not be able to identify suitable opportunities and, if not, this strategy could fail. NewCo may not be able to obtain financing necessary to allow NewCo to make such acquisitions or investments on satisfactory terms or at all or obtain necessary regulatory approvals, or be able to complete the transactions on satisfactory terms. If the purchase price of any acquisition or investment is paid in cash, it may have an adverse effect on NewCo’s financial condition; if the purchase price is paid with NewCo stock, it could be dilutive to stockholders. NewCo may assume liabilities, including unrecorded liabilities that are not discovered at the time of the transaction, and the repayment of those liabilities may have an adverse effect on NewCo’s financial condition.

NewCo may not be able to successfully integrate personnel, operations, businesses, products, or technologies of an acquisition. There may be additional risks if NewCo enters into a line of business in which it has limited experience or the business operates in a legal, regulatory or competitive environment with which it is not familiar. NewCo may not have or be able to maintain the expertise needed to manage the new business. The

 

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expected benefits of acquisitions and investments also may not be realized for various reasons, including the loss of key personnel, customers or vendors. If NewCo fails to integrate or realize the expected benefits of its acquisitions or investments, it may lose the return on these acquisitions or investments or incur additional transaction costs, and its business and financial condition may be harmed as a result.

NewCo’s student loan servicing business operates in a competitive environment and could lose market share and revenues if competitors compete more aggressively or effectively.

NewCo competes in the student loan servicing business with for-profit and non-profit servicing institutions, many with strong records of performance. NewCo competes based on capability and customer service metrics. To the extent competitors compete aggressively or more effectively than NewCo, NewCo could lose market share to them or NewCo’s service offerings may not prove to be profitable.

Existing SLM serviced approximately 5.7 million accounts under a DSLP servicing contract with ED as of September 30, 2013, and NewCo will continue as the service provider under this contract. NewCo competes for DSLP servicing volume from ED with three other servicing companies with whom it shares the contract. New account allocations for each contract year are awarded annually based on each company’s performance on five different metrics over the most recently ended contract year: defaulted borrower count, defaulted borrower dollar amount, a survey of borrowers, a survey of schools and a survey of ED personnel. Pursuant to the contract terms related to annual volume allocation of new loans, the maximum a servicer can be awarded for any new contract year is 40 percent of net new borrowers in that contract year. Existing SLM ranked last in the allocation of net accounts for the upcoming contract year. Its allocation of new customer loans serviced for ED under the DSLP servicing contract was 15 percent for the most recent contract year and is 18 percent for the upcoming contract year. If NewCo is unable to improve on Existing SLM’s performance metrics and increase its relative standing compared to the three other servicing companies it competes with for account allocations under the DSLP servicing contract, its ability to increase its servicing business with ED may be materially adversely affected. In November 2013, ED exercised its renewal right with respect to the DSLP servicing contract for an additional five-year term through June 16, 2019. No assurance can be given that the terms of the renewal will be as favorable to NewCo as the current contract terms.

Unexpected and sharp changes in the overall economic environment may negatively impact the performance of NewCo’s loan portfolios.

Unexpected changes in the overall economic environment, including unemployment, may result in the credit performance of NewCo’s loan portfolio being materially different from expectations. NewCo’s earnings are dependent on the expected future creditworthiness of its student loan customers, especially with respect to its Private Education Loan portfolio. NewCo maintains a reserve for credit losses based on future charge-offs expected over primarily the next two years, which takes into account many factors, including levels of past due loans and forbearances and expected economic conditions. However, management’s determination of the appropriate reserve level may under- or over-estimate future losses. If the credit quality of NewCo’s customer base materially decreases, if a market risk changes significantly, or if NewCo’s reserves for credit losses are not adequate, NewCo’s business, financial condition and results of operations could suffer.

NewCo is also subject to the creditworthiness of other third parties, including counterparties to derivative transactions. For example, NewCo has exposure to the financial conditions of various lending, investment and derivative counterparties. If a counterparty fails to perform its obligations, NewCo could, depending on the type of counterparty arrangement, experience a loss of liquidity or an economic loss. In addition, NewCo 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 and/or foreign currency exchange rate risk which could lead to additional losses. NewCo’s counterparty exposure is more fully discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—

 

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Liquidity and Capital Resources—Counterparty Exposure.” If counterparties are unable to perform their obligations, NewCo’s business, financial condition and results of operations could suffer.

Changes in law, regulation or regulatory policy involving student loans could have a material impact on NewCo’s profitability, results of operations, financial condition, cash flows or future business prospects.

NewCo’s businesses are subject to numerous state and federal laws and regulations and its failure to comply with these laws and regulations may result in significant costs, including litigation costs, and/or business sanctions. In addition, changes to such laws and regulations could adversely impact NewCo’s business and results of operations if it is not able to adequately mitigate the impact of such changes.

Existing SLM’s FFELP Loan business has been affected extensively by changes in law, most notably by the legislation Congress passed in 2010 to eliminate new FFELP Loans. Changes in the laws, regulations and policies governing federal loan servicing or the terms and conditions of existing FFELP Loans could have an even greater adverse effect on NewCo’s results of operations, financial condition, cash flows and business prospects as NewCo’s business will be more concentrated in FFELP Loans than Existing SLM’s business has been.

NewCo’s Private Education Loan business may also be impacted by changes in law, regulations or regulatory policy. For example, the CFPB’s July 2012 Report on the Private Education Loan marketplace provided a number of recommendations, including reconsideration by Congress of the federal Bankruptcy Code’s treatment of Private Education Loans and subjecting additional credit products to the disclosure and consumer protection framework applicable to Private Education Loans. In the future, Congress or the Administration may act on these recommendations or choose to take actions beyond or unrelated to the CFPB’s recommendations to further regulate the Private Education Loan market or dictate the terms and conditions applicable to Private Education Loans NewCo owns. The taking of any such actions may adversely impact the profitability and growth of our business and/or significantly alter the costs and manner in which we choose to conduct this business.

In addition, the Dodd-Frank Act contains comprehensive provisions that govern the practices and oversight of financial institutions (including large non-bank financial institutions) and other participants in the financial markets. It imposes significant regulations on almost every aspect of the U.S. financial services industry, including enhanced supervisory authority over NewCo’s business. Many of the Dodd-Frank Act’s provisions have become effective but remain subject to interpretation and formal implementation by regulatory authorities through final rulemaking. As a result of the Dodd-Frank Act, the CFPB and other financial regulators have introduced and continue to introduce new regulations and guidance, even as they impose enforcement actions against financial institutions and financial service providers which often contain additional cautions and guidance which must be taken into consideration. Due to the uncertainty engendered by these new regulations, guidance and actions, coupled with the likelihood of additional changes or additions to the statutes, regulations and practices applicable to its business, NewCo is not able to estimate the ultimate impact of changes in law on its financial results, business operations or strategies. NewCo believes that the cost of responding to and complying with these evolving laws and regulations, as well as any guidance from enforcement actions, will continue to increase, as will the risk of penalties and fines from any enforcement actions that may be imposed on its businesses. NewCo’s profitability, results of operations, financial condition, cash flows or future business prospects could be materially and adversely affected as a result.

NewCo’s business may be adversely impacted by increased expenditures due to changes in law or agency interpretations, increased regulatory oversight or supervision and possible remediation efforts and penalties.

The CFPB has broad authority with respect to NewCo’s loan servicing business. It has authority to write regulations under federal consumer financial protection laws and to directly or indirectly enforce those laws and examine NewCo for compliance. The CFPB also has examination and enforcement authority with respect to various federal consumer financial laws for some providers of consumer financial products and services,

 

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including NewCo, and in December 2013, the CFPB issued a final rule defining “larger participants” in the student loan servicing market that will be subject to supervision and examination by the CFPB, a category that will include NewCo’s student loan servicing subsidiaries. The CFPB 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. The CFPB has authority to prevent unfair, deceptive or abusive acts or practices and to ensure that all consumers have access to fair, transparent and competitive markets for consumer financial products and services. The review of products and practices to prevent unfair, deceptive or abusive conduct will be a continuing focus of the CFPB. The ultimate impact of this heightened scrutiny is uncertain, but it has resulted in, and could continue to result in, changes to pricing, practices, products and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination, additional remediation efforts and possible penalties.

The Dodd-Frank Act authorizes state officials to enforce regulations issued by the CFPB and to enforce the Dodd-Frank Act’s general prohibition against unfair, deceptive or abusive practices. To the extent states enact requirements that differ from federal standards or state officials and courts adopt interpretations of federal consumer laws that differ from those adopted by the CFPB, our compliance costs could increase and reduce our ability to offer the same products and services to consumers nationwide and we may be subject to a higher risk of state enforcement actions.

In furtherance of its regulatory and supervisory powers, the CFPB has the authority to impose monetary penalties for violations of applicable federal consumer financial laws, require remediation of practices and pursue administrative proceedings or litigation for violations of applicable federal consumer financial laws (including the CFPB’s own rules). The CFPB has the authority to issue cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief) and monetary penalties ranging from $5,000 per day for ordinary violations of federal consumer financial laws to $25,000 per day for reckless violations and $1 million per day for knowing violations. Also, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations implemented under Title X of the Dodd-Frank Act, the Dodd-Frank Act empowers state attorneys general and state regulators to bring civil actions to remedy violations of state law. If the CFPB or one or more state attorneys general or state regulators believe that we have violated any of the applicable laws or regulations, they could exercise their enforcement powers in ways that could have a material adverse effect on us or our business.

NewCo’s collection business is subject to significant regulation and oversight by state and federal agencies, and a failure to comply with applicable laws and regulations may result in significant costs, sanctions and litigation.

NewCo’s debt collection business is subject to regulation and oversight by various state and federal agencies, particularly in the area of consumer protection. In October 2012, the CFPB issued its final debt collection larger participants rule and examination procedures that will allow the CFPB to federally supervise larger consumer debt collectors for the first time, including NewCo’s collection subsidiaries. Some state attorneys general continue to be active in this area of consumer protection regulation. NewCo is subject, and may be subject in the future, to inquiries and audits from state and federal regulators as well as frequent litigation from private plaintiffs.

The failure by NewCo’s collection business to comply with the state and federal laws and regulations to which it is subject may result in significant costs, including litigation costs and business sanctions. Changes to such laws and regulations could adversely impact NewCo’s collection business and results of operations if it is not able to adequately mitigate the impact of such changes.

 

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NewCo’s ability to continue to operate its businesses related to contracting with state and federal governments is partly reliant on its ability to remain compliant with the laws and regulations applicable to those contracts.

NewCo is subject to a variety of laws and regulations related to its government contracting businesses, including its contracts with ED. In addition, these government contracts are subject to termination rights, audits and investigations. If NewCo were found in noncompliance with the contract provisions or applicable laws or regulations, or the government exercised its termination or other rights for that or other reasons, NewCo’s reputation could be negatively affected, and its ability to compete for new contracts with ED and other third parties could be diminished. If this were to occur, the future prospects, revenues and results of operations of this portion of NewCo’s business could be negatively affected.

The Financial Stability Oversight Council (“FSOC”) could designate NewCo as an important non-bank financial company to be supervised by the Federal Reserve Bank (“FRB”). Designation as a systemically important financial institution (“SIFI”) would impose significant additional statutorily–defined monitoring and compliance regimes on our business and could significantly increase the levels of risk-based capital and highly liquid assets we are required to hold. Required implementation of some or all of the measures currently proposed by the FRB to be applicable to SIFIs would have a material impact on our business, results of operations and financial condition.

As directed by the Dodd-Frank Act, on April 3, 2012, FSOC approved the final rule and interpretive guidance regarding the designation of non-bank financial companies as SIFIs (the “SIFI Rules”). If designated as a SIFI, a non-bank financial company will be supervised by the FRB and be subject to enhanced prudential supervision and regulatory standards. While the separation of NewCo from Sallie Mae Bank will reduce the complexity of both organizations and may reduce the risk of NewCo’s designation as a SIFI under the SIFI Rules, no assurance can be given that such a designation will not occur.

In December 2011, the FRB proposed enhanced prudential supervisory and regulatory standards that would require SIFIs, among other things, to meet minimum risk-based capital ratios, comply with formal liquidity standards based on projected 30-day liquidity stress events, be subject to liquidity risk management and governance requirements, implement liquidity monitoring and compliance regimes, be subject to periodic company and FRB-run supervisory stress tests and periodically report to the FDIC and FRB on plans for rapid and orderly resolution of company affairs in the event of a material financial distress or failure. Unless an exception were made to recognize the unique, federally insured nature of FFELP Loans, if we were designated as a SIFI our capital requirements would significantly increase. While we maintain our own contingency funding plans and conduct our own internal periodic stress tests, neither Existing SLM nor NewCo has ever been subject to an FRB-supervised stress test nor has NewCo developed a plan for orderly resolution of the scope and magnitude currently demanded of financial companies subject to those requirements. Complying with these measures and implementing any or all of these monitoring and compliance requirements could significantly increase our cost of doing business and the levels of capital and liquidity we are required to hold and, consequently, have a material and adverse impact on our business, results of operations and financial condition.

NewCo’s framework for managing risks may not be effective in mitigating the risk of loss.

NewCo’s risk management framework seeks to mitigate risk and appropriately balance risk and returns. NewCo has established processes and procedures intended to identify, measure, monitor, control and report the types of risk to which it is subject. NewCo seeks to monitor and control 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 forecasting models. If the models that NewCo uses to mitigate these risks are inadequate or ineffective, it may incur increased losses. In addition, there may be risks that exist, or that develop in the future, that NewCo has not appropriately anticipated, identified or mitigated. If NewCo’s risk management framework does not effectively identify or mitigate risks, NewCo could suffer unexpected losses, and its financial condition and results of operations could be materially adversely affected.

 

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NewCo is subject to evolving and complex tax laws, which may result in additional liabilities that may affect its results of operations.

NewCo is subject to evolving and complex federal and state tax laws. Significant judgment is required for determining NewCo’s tax liabilities, and Existing SLM’s tax returns have been, and NewCo’s tax returns will continue to be, periodically examined by various tax authorities. NewCo will have, among other tax liabilities, risks for future tax contingencies arising from operations post-separation. Due to the complexity of tax contingencies, the ultimate resolution of any tax matters related to operations post-separation may result in payments greater or less than amounts accrued.

In addition, NewCo may be impacted by changes in tax laws, including tax rate changes, changes to the laws related to the treatment and remittance of foreign earnings, new tax laws and subsequent interpretations of tax laws by federal and state tax authorities.

Risks Related to the Separation

NewCo’s historical and pro forma financial information is not necessarily representative of the results that it would have achieved as a separate, publicly-traded company and may not be a reliable indicator of its future results.

Due to the relative significance of NewCo to Existing SLM, among other factors, NewCo will be treated as the “accounting successor” to Existing SLM for financial reporting purposes, notwithstanding the legal form of the separation described in this information statement. Hence, NewCo’s historical consolidated financial statements included in this information statement are the consolidated financial statements of Existing SLM. Accordingly, the historical and pro forma financial information for NewCo included in this information statement does not necessarily reflect the financial condition, results of operations or cash flows that NewCo would have achieved as a separate, publicly-traded company during the periods presented or those that NewCo will achieve in the future primarily as a result of the factors described below:

 

   

Prior to the separation, NewCo’s business has been operated by Existing SLM as part of its broader corporate organization in combination with those businesses that will be held by SLM BankCo after the separation and distribution. Some of the SLM BankCo businesses performed services for or engaged in intercompany transactions with the businesses that will be held by NewCo after the separation and distribution. NewCo’s historical and pro forma financial results reflect allocations of corporate expenses from Existing SLM for such functions and are likely to be less than the expenses NewCo would have incurred had it operated as a separate company from Existing SLM. After the separation and distribution, NewCo may not be able to operate its business efficiently or at comparable costs, and its profitability may decline.

 

   

Prior to the separation, NewCo’s historical financial statements include the assets, liabilities, results of operations and cash flows attributable to Existing SLM’s consumer banking business, including Sallie Mae Bank, which will be held by SLM BankCo after the separation and distribution.

 

   

NewCo’s historical financial information does not reflect its obligations under the various transitional and other agreements it will enter into with SLM BankCo in connection with the separation and distribution.

Other significant changes may occur in NewCo’s cost structure, management, financing and business operations as a result of operating as a company separate from the combined businesses of Existing SLM. For additional information about the historical financial performance of NewCo’s business and the basis of presentation of the historical consolidated financial statements and the unaudited pro forma condensed consolidated financial statements of NewCo’s business, see “Unaudited Pro Forma Condensed Consolidated Financial Statements,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and accompanying notes of Existing SLM included elsewhere in this information statement.

 

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The migration of systems from NewCo’s information technology platform to support SLM BankCo may be disruptive to NewCo’s business and NewCo’s ability to service its customers.

Sallie Mae, Inc. (SMI), a wholly owned subsidiary of Existing SLM, currently services substantially all the education loans held by Existing SLM, including those held by Sallie Mae Bank. In connection with the corporate reorganization and separation, SMI will become a subsidiary of NewCo and will service and collect the education loans owned by NewCo as well as provide servicing and collection activities on loans of third parties, including ED. A portion of the private education loan servicing assets of SMI will be transferred to a new servicing company we refer to as Private ServiceCo, which will be a subsidiary of SLM BankCo that will service the Private Education Loans held by Sallie Mae Bank. During an estimated up to 18-month transition period after the separation and distribution, SMI, as a subsidiary of NewCo, will continue to host and provide Private ServiceCo, as a subsidiary of SLM BankCo, with access to NewCo’s information technology systems and services to enable Private ServiceCo to service the Private Education Loans held at Sallie Mae Bank. During this transition period, SLM BankCo will work to create its own, or engage third parties to provide, the information systems and services to replace those provided by NewCo. Disruptions to NewCo’s information technology systems caused by the transition, including the inability of customers with more than one type of student loan to speak to a single customer service representative, could occur. Any perceived disruption of NewCo’s or SLM BankCo’s ability to service their customers may damage NewCo’s reputation and have a material adverse impact on its business, financial condition or results of operations. Further, although the transition period is expected to be less than 18 months, unforeseen circumstances or significant third-party delays could significantly extend this period. Any extension of the transition period will increase the costs incurred by NewCo to provide transition assistance to SLM BankCo and may increase the chance of a disruption to NewCo’s information technology systems and its businesses.

NewCo will owe obligations, including service and indemnification obligations, to SLM BankCo under various transaction agreements that have or will be executed as part of the separation, which could be materially disruptive to NewCo’s business or subject it to substantial liabilities.

In connection with the separation and distribution, NewCo, Existing SLM and SLM BankCo will enter into a separation and distribution agreement and NewCo and SLM BankCo will enter into various other agreements, including, among others, a transition services agreement, a tax sharing agreement, an employee matters agreement, a loan servicing and administration agreement and a master lease agreement. These agreements are discussed in greater detail under the caption “Certain Relationships and Related Party Transactions.” Under the transition services agreement, a subsidiary of NewCo will host and provide SLM BankCo with access to NewCo’s information technology systems and services, and NewCo will assist SLM BankCo as it seeks to migrate its customer data and service functions to a separate platform. The performance by NewCo of its obligations to SLM BankCo under these agreements may require the diversion of a significant amount of NewCo management’s time from NewCo’s operations and could be disruptive to its business operations.

The separation and distribution agreement with Existing SLM and SLM BankCo will provide for, among other things, indemnification obligations designed to make NewCo financially responsible for substantially all liabilities that may exist whether incurred prior to or after the separation, relating to the business activities, of Existing SLM prior to the separation and distribution, other than those arising out of the consumer banking business and expressly assumed by SLM BankCo pursuant to the separation and distribution agreement. If NewCo is required to indemnify SLM BankCo under the circumstances set forth in the separation and distribution agreement, NewCo may be subject to substantial liabilities.

There could be significant liability to NewCo if the distribution is determined to be a taxable transaction.

The separation and distribution condition on the receipt by Existing SLM of a private letter ruling from the IRS to the effect that, among other things, (i) the SLM Merger (together with the conversion of the shares of Existing SLM common and preferred stock into shares of SLM BankCo common and preferred stock pursuant to

 

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the SLM Merger) will qualify as a “reorganization” within the meaning of Section 368(a)(1)(F) of the Code and will not be integrated with the rest of the separation and distribution, and (ii) the separation and distribution will qualify as a “reorganization” for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. It also is a condition to the distribution that this private letter ruling shall not be revoked or modified in any material respect. In addition, the distribution is conditioned on SLM BankCo’s receipt of an opinion from outside tax counsel to the effect that, with respect to certain requirements for tax-free treatment under Section 355 of the Code on which the IRS will not rule, such requirements will be satisfied. The ruling and the opinion rely on facts, assumptions, representations and undertakings from Existing SLM, SLM BankCo and NewCo regarding the past and future conduct of the companies’ respective businesses and other matters. If any of these facts, assumptions, representations or undertakings is incorrect or not satisfied, SLM BankCo and its stockholders may not be able to rely on the ruling or the opinion of tax counsel and could be subject to significant tax liabilities. Notwithstanding receipt of the private letter ruling from the IRS and opinion of tax counsel, the IRS could determine on audit that the SLM Merger and/or separation and distribution is taxable if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the private letter ruling, or for other reasons, including as a result of significant changes in the share ownership of SLM BankCo or NewCo after the separation. If the SLM Merger and/or separation and distribution is determined to be taxable for U.S. federal income tax purposes, SLM BankCo and its stockholders that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities and NewCo could incur significant liabilities related thereto. For a description of the sharing of such liabilities between SLM BankCo and NewCo, see “Certain Relationships and Related Party Transactions—Tax Sharing Agreement.”

NewCo’s ability to engage in stockholder distributions and other strategic corporate transactions in the near term could be limited.

To preserve the tax-free treatment to SLM BankCo of the separation and the distribution, NewCo and SLM BankCo will enter into a tax sharing agreement that will restrict NewCo from engaging in certain transactions that could prevent the distribution and related transactions from being tax-free to SLM BankCo and its stockholders for U.S. federal income tax purposes. In general terms, under the tax sharing agreement, for up to a two-year period following the distribution (the “Restricted Period”), NewCo will be prohibited from:

 

   

issuing shares of NewCo stock equal to or exceeding 25 percent of the shares of NewCo stock issued and outstanding immediately following the distribution date, including to raise capital or as acquisition currency in furtherance of strategic transactions, such as for the purchase of additional portfolios of student loans;

 

   

selling all or substantially all of its assets or engaging in mergers or other strategic transactions that may result in a change of control of NewCo (as determined under U.S. federal income tax law);

 

   

repurchasing outstanding shares of its common stock, other than in open market repurchases constituting less than 25 percent of such stock outstanding immediately following the distribution date; and

 

   

ceasing to actively conduct its business or liquidating.

The foregoing prohibitions are in some cases more restrictive than that required under the Code due to the potential significant liability to SLM BankCo and its stockholders were the separation and the distribution determined to be a taxable transaction. Under the tax sharing agreement, NewCo will have the ability to engage in certain otherwise prohibited transactions, such as additional stock issuances or stock repurchases during the Restricted Period, provided it first delivers to SLM BankCo a tax opinion or IRS ruling that doing so will not adversely affect the tax-free treatment of the separation and the distribution.

The foregoing prohibitions could limit NewCo’s ability to pursue strategic transactions or other transactions during the Restricted Period that it may believe to be in the best interests of its stockholders or that might

 

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increase the value of its business. In addition, under the tax sharing agreement, NewCo is required to indemnify SLM BankCo against any tax liabilities incurred as a result of the violation of any of the foregoing restrictions, as well as any transaction (or series of transactions) that results in the distribution being considered part of a plan that includes a later change in control of NewCo during the Restricted Period (as determined under U.S. federal income tax law).

NewCo may not achieve some or all of the expected benefits of the separation, and the separation may adversely affect its business.

NewCo may not be able to achieve the full strategic and financial benefits expected to result from the separation, or such benefits may be delayed or not occur at all. The separation and distribution 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 NewCo separately from SLM BankCo; (ii) cash flows significantly in excess of debt service obligations; (iii) more efficient allocation of capital for both NewCo and SLM BankCo; (iv) reducing the likelihood that NewCo is designated a SIFI; and (v) a separate equity structure that allows direct access by NewCo to the capital markets and the use of NewCo equity for acquisitions and equity compensation.

NewCo may not achieve these and other anticipated benefits for a variety of reasons, including, among others: (a) the separation will require significant amounts of management’s time and effort, which may divert management’s attention from operating NewCo’s business; (b) following the separation, NewCo may be more susceptible to market fluctuations and other adverse events than if it were still a part of Sallie Mae; (c) following the separation, NewCo’s business will be less diversified than Existing SLM’s business prior to the separation; (d) absent the acquisition of new loan portfolios or new sources of fee income, NewCo’s revenue and operating margin will decline as its FFELP Loan portfolio amortizes over the next 20 years; and (e) other actions required to separate SLM BankCo’s and NewCo’s respective businesses could disrupt NewCo’s operations. If NewCo fails to achieve some or all of the benefits expected to result from the separation, or if such benefits are delayed, the business, financial condition and results of operations of NewCo could be adversely affected and the value of its stock could be impacted.

The FDIC, UDFI or CFPB may seek to assert control over the manner, timing or terms of the separation, which could result in the separation and distribution not being effected on the terms or timeline currently contemplated or at all.

Sallie Mae Bank is subject to state and FDIC regulation, oversight and regular examination, including by the CFPB. The FDIC and state regulators have the authority to impose fines, penalties or other limitations on Sallie Mae Bank’s operations should they conclude that its operations are not compliant with applicable laws and regulations. Sallie Mae Bank is currently subject to a 2008 cease and desist order issued jointly by the FDIC and the UDFI for weaknesses in its compliance function. Many of these weaknesses have previously been attributed to Sallie Mae Bank’s oversight of significant activities performed outside Sallie Mae Bank by Sallie Mae affiliates, including by companies that will become subsidiaries of NewCo. The separation is expected to ameliorate this condition due to the separation of NewCo and SLM BankCo (which will include Sallie Mae Bank) into two, independent publicly-traded companies.

In July 2013, the FDIC notified Sallie Mae Bank that it plans to replace the existing cease and desist order with a new formal enforcement action that will more specifically address certain cited violations of Section 5 of the Federal Trade Commission Act (the “FTCA”), including with respect to the Servicemember Civil Relief Act (the “SCRA”), and the Equal Credit Opportunity Act (“ECOA”), and its implementing regulation, Regulation B. In November 2013, the FDIC notified Sallie Mae Bank that the new formal enforcement action will include civil money penalties and restitution. Sallie Mae Bank has been notified by the UDFI that it does not intend to join the FDIC in issuing the new enforcement action.

 

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In addition, in November 2013, the FDIC notified SMI that it intends to take formal enforcement action against it as an “institution-affiliated party” of Sallie Mae Bank to address certain cited violations of Section 5 of the Federal Trade Commission Act that are substantially similar and related to those that will be addressed in Sallie Mae Bank’s new enforcement action, including with respect to the SCRA and the ECOA and its implementing Regulation B. The enforcement action will include civil money penalties and could include restitution obligations.

With respect to the alleged civil violations of Section 5 of the FTCA relating to the SCRA, Existing SLM is also in discussions with the DOJ, as the agency having primary authority for enforcement of SCRA matters, regarding settlement, remediation and a comprehensive restitution plan. In September 2013 SMI also received a cease and desist order from the CFPB as part of its separate investigation regarding SMI’s payment allocation practices and procedures. It is not possible at this time to estimate a range of potential exposure, if any, to amounts that may be payable or costs that must be incurred by Existing SLM to comply with the terms of any order, settlement, remediation or restitution plan.

Though we are unaware of any applicable requirement that the FDIC, UDFI, or CFPB approve of the separation and distribution, there can be no assurances that these or other federal or state consumer or financial regulators will not seek to affect the timing, manner or terms of the separation and distribution, or prohibit the separation and distribution altogether.

Challenges in the commercial and credit environment may adversely affect NewCo’s business and results of operations.

NewCo’s ability to issue debt, securitize FFELP Loans and Private Education Loans, or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the ability of student borrowers to repay their loans or if there are significantly unfavorable changes in economic conditions. Volatility in the world financial markets could increase borrowing costs. If any of these events were to occur, it could materially adversely affect NewCo’s business, financial condition and results of operations.

No vote of stockholders is required in connection with the separation and distribution. As a result, if the distribution occurs and you do not want to receive shares of NewCo common stock in the distribution, your sole recourse will be to divest yourself of your shares of Existing SLM common stock prior to the record date.

No vote of stockholders is required in connection with the separation and distribution. Accordingly, if the distribution occurs and you do not want to receive shares of NewCo common stock in the distribution, your only recourse will be to divest yourself of your shares of Existing SLM common stock prior to the record date for the distribution.

Risks Related to NewCo’s Common Stock

NewCo cannot be certain that an active trading market for its common stock will develop or be sustained after the separation and distribution, and following the separation and distribution, NewCo’s stock price may fluctuate significantly.

A public market for NewCo’s common stock does not currently exist. NewCo anticipates that on or prior to the record date for the distribution, trading of shares of its common stock will begin on a “when-issued” basis and will continue through the distribution date. However, NewCo cannot guarantee that an active trading market will develop or be sustained for its common stock after the separation and distribution. Nor can NewCo predict the prices at which shares of its common stock may trade after the separation and distribution. Similarly, NewCo cannot predict the effect of the separation on the trading prices of its common stock or whether the combined market value of the shares of NewCo common stock and the shares of SLM BankCo common stock will be less than, equal to or greater than the market value of Existing SLM common stock immediately prior to the separation and distribution.

 

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

 

   

actual or anticipated fluctuations in NewCo’s operating results;

 

   

changes in earnings estimated by securities analysts or NewCo’s ability to meet those estimates;

 

   

the operating and stock price performance of comparable companies;

 

   

changes to the regulatory and legal environment under which NewCo operates; and

 

   

domestic and worldwide economic conditions.

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 lawsuit against NewCo 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 NewCo’s business, financing condition and results of operations.

A number of shares of NewCo common stock are or will be eligible for future sale, which may cause NewCo’s stock price to decline.

Any sales of substantial amounts of NewCo’s common stock in the public market or the perception that such sales might occur, in connection with the distribution or otherwise, may cause the market price of shares of NewCo common stock to decline. Upon completion of the distribution and based upon the number of issued and outstanding shares of Existing SLM common stock on                 , 2014 and assuming no exercise of outstanding stock options. NewCo estimates that it will initially have an aggregate of approximately      million shares of its common stock issued and outstanding. These shares will be freely tradable without restriction or further registration under the U.S. Securities Act of 1933, as amended (the “Securities Act”), except as to shares owned by NewCo’s “affiliates,” as that term is defined in Rule 405 under the Securities Act.

NewCo is unable to predict whether large amounts of its common stock will be sold in the open market following the distribution or as the stockholder base of NewCo and SLM BankCo begins to diverge, or the impact any such trading might have on the market price of shares of NewCo common stock.

NewCo cannot guarantee the timing, amount or payment of dividends on its common stock.

Although NewCo expects to pay regular cash dividends following the separation, the timing, declaration, amount and payment of future dividends to stockholders will fall within the discretion of NewCo’s board of directors. The board’s decisions regarding the payment of dividends will depend on many factors, such as NewCo’s financial condition, earnings, capital requirements, debt service obligations, industry practice, legal requirements, regulatory constraints and other factors that the board deems relevant. For more information, see “Capital Return Policies.” NewCo’s ability to pay dividends will also depend on its ongoing ability to generate cash from its operations and loan portfolio. NewCo cannot guarantee that, after the distribution, it will follow the dividend practices of Existing SLM prior to the distribution.

Your percentage ownership in NewCo may be diluted in the future.

In the future, your percentage ownership in NewCo may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including equity awards that NewCo may grant to NewCo’s directors, officers and employees. NewCo’s and SLM BankCo’s employees will have options to purchase shares of NewCo common stock after the distribution as a result of conversion of a portion of their Existing SLM stock options to NewCo stock options. NewCo also anticipates that its compensation committee will grant additional stock options or other equity based awards to its employees after the distribution. Such awards will have a dilutive effect on NewCo’s earnings per share, which could adversely affect the market price

 

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of shares of NewCo common stock. From time to time, NewCo will issue additional stock options or other equity-based awards to its employees under NewCo’s employee benefits plans.

In addition, NewCo’s amended and restated certificate of incorporation will authorize NewCo to issue, without the approval of NewCo’s stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over NewCo’s common stock with respect to dividends and distributions, as NewCo’s board of directors generally may determine. If NewCo’s board were to approve the issuance of preferred stock in the future, the terms of one or more classes or series of such preferred stock could dilute the voting power or reduce the value of NewCo’s common stock. For example, NewCo could grant the holders of preferred stock the right to elect some number of NewCo’s directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences NewCo could assign to holders of preferred stock could affect the residual value of the common stock. See “Description of NewCo’s Capital Stock.”

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This information statement contains certain forward-looking statements regarding business strategies, market potential, future financial performance and other matters. The words “believe,” “expect,” “anticipate” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. In particular, information included under “Risk Factors,” “Unaudited Pro Forma Condensed Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and “The Separation and Distribution” contain forward-looking statements. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of NewCo management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. Factors that could cause actual results or events to differ materially from those anticipated include the matters described under “Risk Factors,” “Unaudited Pro Forma Condensed Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

THE SEPARATION AND DISTRIBUTION

Background

On May 29, 2013, Existing SLM first announced that it intended to separate into two, distinct, publicly-traded entities—an education loan management business and a consumer banking business. The education loan management business would be comprised of Existing SLM’s portfolios of student loans not held by Sallie Mae Bank, as well as most student loan servicing and collection activities on these loans and loans held by third parties. The consumer banking business, comprised primarily of Sallie Mae Bank and its private education loan origination business, the Private Education Loans it holds and a related servicing business, would be a consumer banking franchise with expertise in helping families save, plan and pay for college. Existing SLM announced that it intended to effect the separation through the distribution of the common stock of a new entity, which we refer to as NewCo, formed to hold the assets and liabilities associated with Existing SLM’s education loan management business.

On                 , 2014, the Existing SLM board of directors approved the distribution of all of the issued and outstanding shares of NewCo common stock on the basis of one share of NewCo common stock for each share of Existing SLM common stock held as of the close of business on                 , 2014, the record date for the distribution.

As part of the separation and prior to the distribution, Existing SLM will undergo an internal corporate reorganization that will result in:

 

   

All of the outstanding shares of Existing SLM common and preferred stock of Existing SLM being converted pursuant to the SLM Merger, on a 1-to-1 basis, into the same class and series of stock of SLM BankCo common and preferred stock;

 

   

Existing SLM contributing $566 million in cash to SLM BankCo primarily to offset the liability represented by the transfer pursuant to the SLM Merger of the preferred stock obligation from Existing SLM to SLM BankCo;

 

   

SLM BankCo changing its name to “SLM Corporation”;

 

   

SLM BankCo replacing Existing SLM as the publicly-traded parent company, and directly and indirectly owning all of the capital stock of Existing SLM and its subsidiaries, including NewCo;

 

   

Existing SLM merging with and into a limited liability company and a subsidiary of SLM BankCo pursuant to the SLM Merger, and in turn being contributed to, and becoming a subsidiary, of NewCo;

 

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SMI contributing certain assets and liabilities relating to the Private Education Loan servicing business to Private ServiceCo and the capital stock of Private ServiceCo being distributed to SLM BankCo; and

 

   

Existing SLM, as a wholly owned subsidiary of NewCo, owning through its subsidiaries substantially all of the assets, liabilities and operations of Existing SLM’s education loan management business.

The internal corporate reorganization is necessary to implement the separation of the education loan management business from the consumer banking business in a manner intended to be largely tax-free to SLM BankCo. To complete the separation, SLM BankCo will distribute to holders of shares of Existing SLM common stock all of the issued and outstanding shares of NewCo common stock. On                 , 2014, the distribution date, each Existing SLM stockholder of record as of the close of business on the record date will receive one share of NewCo common stock for each share of Existing SLM common stock held at the close of business on the record date. You will not be required to make any payment, surrender or exchange your shares of Existing SLM common stock, or take any other action to receive your shares of SLM BankCo common stock in the internal corporate reorganization or shares of NewCo common stock in the distribution. After the completion of the distribution:

 

   

SLM BankCo, as the publicly-traded successor to Existing SLM, will own the assets, liabilities and operations of Sallie Mae Bank, including the student loans it holds, a new private education loan servicing business that will service the Private Education Loans currently held and subsequently originated by Sallie Mae Bank, Upromise and the Insurance Business; and

 

   

NewCo will be an independent, publicly-traded company and will own, through its wholly owned subsidiary Existing SLM, Existing SLM’s portfolio of student loans not held by Sallie Mae Bank, together with substantially all of Existing SLM’s student loan servicing and collections businesses.

NO VOTE OF EXISTING SLM’S STOCKHOLDERS IS REQUIRED OR IS BEING SOUGHT IN

CONNECTION WITH THE INTERNAL CORPORATE REORGANIZATION OR THE SEPARATION

AND DISTRIBUTION.

The distribution of NewCo’s common stock as described in this information statement is subject to the satisfaction or waiver of several conditions. For a more detailed description of these conditions, see “—Conditions to the Distribution” below.

Reasons for the Separation

The Existing SLM board of directors has determined that separating Existing SLM into two companies— an education loan management business and a consumer banking business—would be in the best interests of Existing SLM and its stockholders. A wide variety of factors were considered by the Existing SLM board of directors in evaluating the separation. Among other things, the Existing SLM board of directors considered the following potential benefits of the separation:

 

   

Enhanced strategic and management focus. The separation will allow each business to more effectively pursue its own distinct operating priorities and strategies, which have diverged over time. It will also enable management of each company to focus on unique opportunities for long-term growth and profitability. For example, NewCo will seek to acquire additional student loan portfolios and grow its servicing and collections businesses, while SLM BankCo will initially be focused on Private Education Loan origination, servicing those loans and other activities related to or associated with Sallie Mae Bank, including the Upromise Rewards program and the Insurance Business.

 

   

Distinct identities and strategies. The consumer banking business and the education loan management business have evolved independently over time. The FFELP Loan portfolio and related servicing businesses generate highly predictable income, but are in wind down as the universe of FFELP Loans amortizes over a period of approximately 20 years. By contrast, the Private Education Loan business is expected to grow over time as Sallie Mae Bank continues to originate and service more Private

 

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Education Loans. The additional expense of originating these loans, their higher rates of return and growth, their higher risk profile, the capital support risks associated with ownership of a federally insured financial institution and increasing demands of regulatory compliance require a different business model than that of the education loan management business. As a result, the investor bases for these two businesses are different. The separation will also allow investors to separately value NewCo and SLM BankCo based on their unique operating identities and strategies, including the merits, performance and future prospects of their respective businesses. The separation will also provide investors with two distinct and targeted investment opportunities.

 

   

Distinct regulatory profiles. NewCo and SLM BankCo will have distinct regulatory profiles post-separation:

 

   

SLM BankCo’s subsidiary Sallie Mae Bank, a Utah industrial bank and insured depository institution, will continue to be subject to prudential bank regulatory oversight and periodic examination by both the UDFI and the FDIC. Sallie Mae Bank has voluntarily entered the FDIC’s large bank supervision program. In addition, it is further expected that by the end of 2014 Sallie Mae Bank and SLM BankCo will be subject to those requirements established under the Dodd-Frank Act applicable to institutions with total assets exceeding $10 billion, including regulation by the CFPB and the establishment of an independent risk committee.

 

   

NewCo will continue to be subject to CFPB enforcement, supervisory and examination authority. As a FFELP Loan servicer, NewCo will continue to be subject to the HEA and related regulations, in addition to regulation, and periodic examinations, by the ED. As a third-party service provider to financial institutions, NewCo will also continue to be subject to examination by the FFIEC. Although NewCo will not be subject to direct regulatory oversight by the FDIC, certain subsidiaries of NewCo that will continue to be third-party vendors of services to, and “institution affiliated parties” of, Sallie Mae Bank will continue to be subject to the FDIC’s examination and enforcement authority. In addition, in order to facilitate compliance with certain consumer information privacy laws, during an information technology transition period post-separation in which both NewCo and SLM BankCo loans and associated customer accounts will continue to be serviced from a single information technology system hosted by SMI. SMI will remain an affiliate of each of NewCo and SLM BankCo for broader bank regulatory purposes for the duration of that transition period. Among other things, this will mean that transactions between SMI and Sallie Mae Bank will remain subject to the affiliate transaction restrictions of Sections 23A and 23B of the Federal Reserve Act during this transition period.

 

   

Reduced Complexity. The separation of NewCo from SLM BankCo will reduce the complexity of both organizations, creating greater transparency for investors and potentially unlocking further value.

 

   

Direct access to capital markets. The separation will create an independent equity structure for each of NewCo and SLM BankCo that will afford each company direct access to the capital markets to raise funds for various purposes and will facilitate the ability of NewCo and SLM BankCo to effect future acquisitions utilizing their respective common stock. As a result, each company will have more flexibility to capitalize on its unique opportunities.

There can be no assurance that following the separation, any of the benefits described above or otherwise will be realized to the extent anticipated or at all.

The Existing SLM board of directors also considered a number of potentially negative factors in evaluating the separation, including the following:

 

   

Possible loss of synergies and joint purchasing power and increased costs. As part of Existing SLM, the consumer banking business has historically taken advantage of Existing SLM’s size and purchasing power in procuring goods and services. After the separation, SLM BankCo may be unable to obtain

 

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these goods and services at prices or on terms as favorable as those Existing SLM obtained prior to the separation. SLM BankCo will also incur costs to build systems and administrative functions that will be retained by NewCo.

 

   

Disruptions to the business as a result of the separation. The actions required to separate SLM BankCo’s and NewCo’s respective businesses will take significant management time and attention and could disrupt Existing SLM’s operations.

 

   

One-time costs of the separation. NewCo and SLM BankCo will incur costs in connection with the transition to being two stand-alone publicly-traded companies, including costs to separate information systems, accounting, tax, legal and other professional services costs, recruiting and relocation costs associated with hiring key senior management personnel and costs related to establishing a new brand identity in the marketplace for NewCo.

 

   

NewCo may not realize anticipated benefits of the separation. NewCo may not achieve the anticipated benefits of the separation for a variety of reasons, including, among others: (a) the separation will require significant amounts of management’s time and effort, which may divert management’s attention from operating NewCo’s business; (b) following the separation, NewCo may be more susceptible to market fluctuations and other adverse events than if it were still a part of Existing SLM; (c) following the separation, NewCo’s business will be less diversified than Existing SLM’s business prior to the separation; and (d) NewCo may be unable to replace or supplement the revenue and servicing fees from its FFELP Loan portfolio, which has a weighted average life of 7.7 years and will amortize over the next 20 years.

 

   

Limitations placed upon NewCo as a result of the tax sharing agreement. To preserve the tax-free treatment to Existing SLM of the separation and distribution, under the tax sharing agreement that NewCo will enter into with SLM BankCo, NewCo will be restricted from taking any action that prevents the distribution and related transactions from being tax-free for U.S. federal income tax purposes. These restrictions could limit NewCo’s near–term ability to repurchase its shares or to issue additional shares, pursue strategic transactions or engage in other transactions that might increase the value of its business. See “Risk Factors—Risks Related to the Separation—NewCo’s ability to engage in stockholder distributions and other strategic corporate transactions in the near term could be limited.”

The Existing SLM board of directors concluded that the potential benefits of the separation outweighed these negative factors.

Formation of NewCo

New Corporation was incorporated in Delaware on November 7, 2013, for the purpose of holding Existing SLM’s education loan management business in connection with the separation and distribution described herein. Prior to the contribution of this business to NewCo, which will be completed immediately prior to the distribution, NewCo will have no operations and nominal assets.

Internal Corporate Reorganization of Existing SLM Prior to the Distribution

Immediately prior to the distribution, Existing SLM will complete an internal corporate reorganization to facilitate the separation of the education loan management business and the consumer banking business in a manner intended to be largely tax-free to SLM BankCo.

 

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As part of the internal corporate reorganization, SLM BankCo will replace Existing SLM as the publicly-traded parent company by means of the SLM Merger, which will be effected pursuant to Section 251(g) of the DGCL. Pursuant to Section 251(g) of the DGCL, by action of Existing SLM’s board of directors and without the requirement for a stockholder vote, Existing SLM will be merged with and into a limited liability company merger subsidiary of SLM BankCo. As a result of this merger:

 

   

all issued and outstanding shares of Existing SLM common stock will be converted, through no action on the part of the holders thereof and by operation of law, into shares of SLM BankCo common stock, on a 1-to-1 basis;

 

   

each series of issued and outstanding shares of Existing SLM preferred stock will be converted, through no action on the part of the holders thereof and by operation of law, into the same series of substantially identical shares of SLM BankCo preferred stock, on a 1-to-1 basis; and

 

   

Existing SLM will be merged with and into Merger Sub and come a limited liability company wholly owned by SLM BankCo named “    , LLC.”

Immediately following the consummation of the SLM Merger, SLM BankCo will change its name to “SLM Corporation.” The charter and by-laws of SLM BankCo following the SLM Merger will be substantially identical to the charter and by-laws of Existing SLM as they exist today.

In the second step of the internal corporate reorganization, Existing SLM will distribute to SLM BankCo all of the assets and liabilities related to the consumer banking business of Existing SLM, including Sallie Mae Bank, the student education loans it holds, a new private education student loan servicing company, Upromise and the Insurance Business. Existing SLM will also distribute to SLM BankCo all of the issued and outstanding shares of NewCo common stock. In addition, $566 million in cash will be contributed by Existing SLM to SLM BankCo, which is to primarily offset the liability represented by the transfer of the Existing SLM preferred stock obligations from Existing SLM to SLM BankCo pursuant to the SLM Merger. SLM BankCo will then contribute to NewCo, its direct subsidiary, the limited liability company interests of Existing SLM, which will continue to own substantially all of the assets and liabilities associated with its portfolio of FFELP and private education student loans not owned by Sallie Mae Bank, as well as substantially all of Existing SLM’s business of servicing and collecting student education loans.

Once the internal corporate reorganization is complete, SLM BankCo will distribute all of the issued and outstanding shares of NewCo common stock to the Existing SLM common stockholders, on the basis of one share of NewCo common stock for each share of Existing SLM common stock held as of the close of business on                 , 2014, the record date for the distribution. The internal corporate reorganization, including the SLM Merger, is a condition to the distribution. See “—Conditions to the Distribution” below.

 

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The following diagrams show the progression of Existing SLM through the internal corporate reorganization and the structure of SLM BankCo and NewCo after the separation and distribution, simplified for illustrative purposes only.

 

The diagram below shows the structure of Existing SLM before the internal corporate reorganization and the separation and distribution:

 

 

 

LOGO

The diagram below shows the structure of SLM BankCo, as the publicly-traded successor to Existing

SLM, immediately after completion of the internal corporate reorganization but before the separation and distribution:

 

LOGO

 

 

The diagram below shows the structure of SLM BankCo and NewCo immediately after completion of the separation and distribution:

 

LOGO

 

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When and How You Will Receive the Distribution

With the assistance of Computershare Trust Company, N.A., Existing SLM expects to distribute shares of NewCo common stock on                 , 2014, the distribution date, to all holders of outstanding shares of Existing SLM common stock as of the close of business on                 , 2014, the record date for the distribution. Computershare Trust Company, N.A., which currently serves as the transfer agent and registrar for Existing SLM’s common stock, will serve as the settlement and distribution agent in connection with the distribution and the transfer agent and registrar for NewCo common stock.

If you own shares of Existing SLM common stock as of the close of business on the record date, the shares of NewCo common stock that you are entitled to receive in the distribution will be issued electronically, as of the distribution date, to you in direct registration (book-entry) form or to your bank or brokerage firm on your behalf. If you are a registered holder of Existing SLM common stock, Computershare Trust Company, N.A. will then mail you a direct registration account statement that reflects your shares of NewCo common stock. If you hold your shares of Existing SLM common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the shares of NewCo common stock. If you own Existing SLM common stock through the Existing SLM dividend reinvestment plan, the shares of NewCo common stock you receive will be distributed to a new NewCo dividend reinvestment plan account that will be created for you. Direct registration refers to a method of recording share ownership when no physical share certificates are issued to stockholders, as will be the case in the distribution.

Commencing on or shortly after the distribution date, if you hold physical share certificates that represent your shares of Existing SLM common stock and you are the registered holder of the shares represented by those certificates, the distribution agent will mail to you an account statement that indicates the number of shares of NewCo’s common stock that have been registered in book-entry form in your name.

Many Existing SLM stockholders hold their shares of Existing SLM common stock through a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the shares in “street name” and ownership would be recorded on the bank or brokerage firm’s books. If you hold your shares of Existing SLM common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the shares of NewCo common stock that you are entitled to receive in the distribution. If you have any questions concerning the mechanics of having shares held in “street name,” please contact your bank or brokerage firm.

Transferability of Shares You Receive

Shares of NewCo common stock distributed to holders in connection with the distribution will be transferable without registration under the Securities Act, except for shares received by persons who may be deemed to be affiliates of NewCo. Persons who may be deemed to be affiliates of NewCo after the distribution generally include individuals or entities that control, are controlled by or are under common control with NewCo, which may include NewCo’s executive officers, directors or principal stockholders. Securities held by NewCo affiliates will be subject to resale restrictions under the Securities Act. NewCo affiliates will be permitted to sell shares of NewCo common stock only pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Rule 144 under the Securities Act.

The Number of Shares of NewCo Common Stock You Will Receive

Common stock: For each share of Existing SLM common stock that you own at the close of business on                 , 2014, the record date, you will receive one share of NewCo common stock on the distribution date.

Preferred stock: No shares of NewCo common stock will be distributed with respect to any outstanding shares of Existing SLM preferred stock owned on the record date or shares of SLM BankCo preferred stock received pursuant to the SLM Merger.

 

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Treatment of Equity-Based Compensation

The treatment of outstanding Existing SLM equity awards in the separation has not been finally determined. We will include information regarding their treatment in an amendment to this information statement.

Results of the Distribution

After its separation from SLM BankCo, NewCo will be an independent, publicly-traded company. The actual number shares of NewCo common stock to be distributed will be determined at the close of business on                 , 2014, the record date for the distribution, and will reflect the exercise of any options to purchase Existing SLM common stock between the date the Existing SLM board of directors declares the distribution and the record date for the distribution. The distribution will not affect the number of shares of SLM Corporation common stock outstanding after the distribution or any rights of SLM Corporation’s stockholders. NewCo will not issue any fractional shares of common stock in the distribution. Holders of Existing SLM preferred stock will not be entitled to receive any shares of NewCo common stock in the distribution.

Existing SLM, NewCo and SLM BankCo will enter into a separation and distribution agreement, and NewCo and SLM BankCo will enter into various other agreements before the distribution to effect the separation and provide a framework for NewCo’s relationship with SLM BankCo after the separation. These agreements will provide for the allocation between SLM BankCo and NewCo of Existing SLM’s assets, liabilities and obligations (including employee benefits, information systems, intellectual property and tax-related assets and liabilities) attributable to periods prior to NewCo’s separation from SLM BankCo and will govern the relationship between SLM BankCo and NewCo after the separation. For a more detailed description of these agreements, see “Certain Relationships and Related Party Transactions.”

Market for Shares of NewCo Common Stock

There is currently no public trading market for shares of NewCo’s common stock. NewCo expects to apply to list its common stock on the NASDAQ Global Select Market under the symbol “        .” NewCo has not and will not set the initial price of its common stock. The initial price will be established by the public markets.

NewCo cannot predict the price at which its common stock will trade after the distribution. In addition, the combined trading prices, after the separation and distribution, the trading price of a share of NewCo common stock and a share of SLM BankCo common stock following the distribution may not equal the “regular-way” trading price of a share of Existing SLM common stock immediately prior to the distribution. The price at which shares of NewCo common stock trade may fluctuate significantly, particularly until an orderly public market develops. Trading prices for shares of NewCo common stock will be determined in the public markets and may be influenced by many factors. See “Risk Factors—Risks Related to NewCo’s Common Stock.”

Trading Between the Record Date and Distribution Date

Beginning on or shortly before the record date and continuing up to and including through the distribution date, Existing SLM expects that there will be two markets in its common stock: a “regular-way” market and an “ex-distribution” market. Existing SLM common stock that trades on the “regular-way” market will trade with an entitlement to NewCo common stock distributed pursuant to the separation. Existing SLM common stock that trades on the “ex-distribution” market will trade without an entitlement to NewCo common stock distributed pursuant to the distribution. Therefore, if you sell Existing SLM common stock in the “regular-way” market up to and including through the distribution date, you will be selling your right to receive NewCo common stock in the distribution. If you own shares of Existing SLM common stock at the close of business on the record date and sell those shares on the “ex-distribution” market up to and including through the distribution date, you will receive the shares of NewCo common stock that you are entitled to receive pursuant to your ownership as of the record date of Existing SLM common stock.

 

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Furthermore, beginning on or shortly before the record date and continuing up to and including the distribution date, NewCo expects that there will be a “when-issued” market in its common stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for NewCo common stock that will be distributed on the distribution date to holders of record of Existing SLM common stock. If you own Existing SLM common stock at the close of business on the record date, you will be entitled to NewCo common stock distributed pursuant to the distribution. You may trade this entitlement to shares of NewCo common stock, without the shares of Existing SLM common stock you own, on the “when-issued” market. On the first trading day following the distribution date, “when-issued” trading with respect to shares of NewCo common stock will end, and “regular-way” trading will begin.

Conditions to the Distribution

The distribution will not occur until the following conditions shall have been satisfied:

 

   

(i) receipt of a private letter ruling from the IRS to the effect that, among other things, (A) the SLM Merger (together with the conversion of the shares of Existing SLM common and preferred stock into shares of SLM BankCo common and preferred stock ) will qualify as a “reorganization” within the meaning of Section 368(a)(1)(F) of the Code and will not be integrated with the rest of the separation and distribution and (B) the separation and the distribution will qualify as a “reorganization” for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code and will generally not result in the recognition of any gain or loss to Existing SLM, NewCo or their stockholders and (ii) such private letter ruling shall not have been revoked or modified in any material respect (for more information regarding the private letter ruling and the potential U.S. federal income tax consequences to SLM BankCo and to you of the merger and the separation and the distribution, see the section entitled “Material U.S. Federal Income Tax Consequences”);

 

   

receipt of an opinion from Baker Botts L.L.P., tax counsel to Existing SLM and SLM BankCo, to the effect that, with respect to certain requirements for tax-free treatment under Section 355 of the Code on which the IRS will not rule, such requirements will be satisfied;

 

   

receipt of an opinion from an independent appraisal firm confirming the solvency and financial viability of SLM BankCo before the distribution and each of SLM BankCo and NewCo after the distribution that is in form and substance acceptable to SLM BankCo in its sole discretion;

 

   

completion of the internal corporate reorganization (described in this section of the information statement under the heading “—Internal Corporate Reorganization of Existing SLM Prior to the Distribution”);

 

   

completion of the transfer of assets and liabilities of Existing SLM to the extent provided under the separation and distribution agreement;

 

   

the SEC having declared effective under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) the registration statement on Form 10 of which this information statement forms a part;

 

   

all other actions and filings necessary or appropriate under applicable U.S. federal, state or other securities laws shall have been taken and, where applicable, have become effective or been accepted by the applicable governmental authority;

 

   

execution and delivery of the transaction agreements relating to the separation (as described in “Certain Relationships and Related Party Transactions—Agreements with SLM BankCo”);

 

   

acceptance for listing on the NASDAQ Global Select Market, subject to official notice of distribution, of the shares of NewCo common stock to be distributed;

 

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the absence of any order, injunction, or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the separation, distribution or any of the related transactions; and

 

   

no other event or development existing or having occurred that, in the judgment of Existing SLM’s board of directors, in its sole discretion, makes it inadvisable to effect the separation, distribution and other related transactions.

Existing SLM may waive any of these conditions in its sole and absolute discretion. If Existing SLM waives any material condition, it will promptly issue a press release disclosing such fact and file a report on Form 8-K describing such waiver.

Existing SLM will have the sole and absolute discretion to determine (and change) the terms of, and whether to proceed with, the distribution and, to the extent it determines to so proceed, to determine the record date and the distribution date and the distribution ratio. Existing SLM does not intend to notify its stockholders of any modifications to the terms of the separation that, in the judgment of its board of directors, are not material. For example, the Existing SLM board of directors might consider material such matters as significant changes to the distribution ratio, the assets to be contributed or the liabilities to be assumed in the separation. To the extent that the Existing SLM board of directors determines that any modifications by Existing SLM materially change the terms of the distribution, Existing SLM will notify Existing SLM stockholders in a manner reasonably calculated to inform them about the modification as may be required by law, by, for example, publishing a press release, filing a current report on Form 8-K or circulating a supplement to this information statement.

CAPITAL RETURN POLICIES

NewCo expects to follow a capital return policy that includes dividends and share repurchases. The timing, declaration, amount, and payment of any dividends and the timing, amount and purchase price of any repurchases of outstanding shares of NewCo common stock will be within the discretion of the NewCo board and will depend upon many factors, including NewCo’s financial condition, earnings, capital requirements of its operating subsidiaries, covenants associated with NewCo’s debt service obligations, legal requirements, regulatory constraints, industry practice, and other factors deemed relevant by its board of directors. Moreover, if NewCo determines to pay a dividend in the future, there can be no assurance that it will continue to pay such dividend or the amount of any future dividends.

NewCo’s repurchase of outstanding shares will also be limited by the terms of its tax sharing agreement with SLM BankCo, which generally will limit share repurchases, over a two-year period commencing on the distribution date, to open market repurchases constituting less than 25 percent of its outstanding common stock. This limitation may only be exceeded by NewCo following the delivery of a legal opinion or an IRS ruling to SLM BankCo to the effect that any particular additional share repurchases in excess of the foregoing will not adversely affect the tax-free treatment of the separation and the distribution. See “Risk Factors—NewCo’s ability to engage in stockholder distributions and other strategic corporate transactions in the near term could be limited.”

 

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CAPITALIZATION

The following table sets forth the capitalization, as of September 30, 2013, of Existing SLM on a historical basis and of NewCo on a pro forma basis to give effect to the pro forma adjustments included in NewCo’s unaudited pro forma condensed consolidated financial information. Due to the relative significance of NewCo to Existing SLM, among other factors, for financial reporting purposes NewCo will be treated as the “accounting spinnor” and therefore the “accounting successor” to Existing SLM following the separation, notwithstanding the legal form of the separation and distribution described in this information statement. Hence, the historical capitalization of Existing SLM will constitute the historical capitalization of NewCo. The information below is not necessarily indicative of what NewCo’s capitalization would have been had the separation and distribution been completed as of September 30, 2013. In addition, it is not indicative of NewCo’s future capitalization. This table should be read in conjunction with “Unaudited Pro Forma Condensed Consolidated Financial Statements,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Existing SLM’s consolidated financial statements and notes thereto included elsewhere in this information statement.

 

     As of September 30, 2013
(unaudited)
 

(dollars in millions)

   Existing
SLM
Actual
    NewCo
As Adjusted(1)
 

Borrowed funds:

    

Short-term borrowings

   $ 15,572      $ 9,521   

Long-term borrowings

     136,944        135,627   
  

 

 

   

 

 

 

Total borrowed funds

     152,516        145,148   

Stockholders’ equity:

    

Preferred stock, par value $.20 per share; 20 million shares authorized, 7.3 million shares issued and outstanding, actual, and none issued and outstanding, as adjusted

     565          

Common stock, par value $.20 per share; 1.125 billion shares authorized and 544 million shares issued and outstanding, actual, and 544 million shares issued and outstanding, as adjusted

     109        109   

Additional paid in capital

     4,373        3,617   

Accumulated other comprehensive income (loss)

     8        (32

Retained earnings

     2,385        2,015   
  

 

 

   

 

 

 

Total stockholders’ equity before treasury stock

     7,440        5,709   

Less: Common stock held in treasury at cost: 83 million shares, actual, and 83 million shares, as adjusted

     (1,813     (1,813
  

 

 

   

 

 

 

Total stockholders’ equity

     5,627        3,896   

Noncontrolling interest

     5          
  

 

 

   

 

 

 

Total equity

     5,632        3,896   
  

 

 

   

 

 

 

Total capitalization

   $ 158,148      $ 149,044   
  

 

 

   

 

 

 

 

(1) 

This column sets forth pro forma adjustments reflected in NewCo’s unaudited pro forma consolidated balance sheet as of September 30, 2013. See “Unaudited Pro Forma Condensed Consolidated Financial Statements.”

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The unaudited pro forma condensed consolidated financial statements of NewCo presented below consist of unaudited pro forma consolidated statements of income for the nine months ended September 30, 2013 and for the fiscal year ended December 31, 2012, and an unaudited pro forma consolidated balance sheet as of September 30, 2013. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the information under “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and notes thereto of SLM Corporation, or “Existing SLM,” included elsewhere in this information statement.

The unaudited pro forma condensed consolidated financial statements are not intended to be a complete presentation of NewCo’s financial position or results of operations had the separation and distribution and related agreements summarized under “Certain Relationships and Related Party Transactions” occurred as of and for the periods indicated. In addition, they are provided for illustrative and informational purposes only and are not necessarily indicative of NewCo’s future results of operations or financial condition as an independent, publicly-traded company. The pro forma adjustments are based upon available information and assumptions that management believes are reasonable, that reflect the expected impacts of events directly attributable to the separation and distribution and related agreements, and that are factually supportable and for the purposes of the statement of operations, are expected to have a continuing impact on NewCo. However, such adjustments are subject to change based on the finalization of the separation and distribution agreement with SLM BankCo and related agreements.

The unaudited pro forma consolidated statement of operations for the nine months ended September 30, 2013 and fiscal year ended December 31, 2012 reflect NewCo’s results as if the separation and distribution and related transactions described in this information statement had occurred as of January 1, 2012. The unaudited pro forma consolidated balance sheet as of September 30, 2013 reflects our results as if the separation and distribution and such related transactions had occurred as of such date.

As described elsewhere in this information statement, from a legal standpoint, SLM BankCo, the post-separation successor to Existing SLM, is distributing NewCo. However, due to the relative significance of NewCo to Existing SLM, among other factors, for financial reporting purposes NewCo will be treated as the “accounting spinnor” and therefore will be the “accounting successor” to Existing SLM, notwithstanding the legal form of the separation and distribution described in this information statement. As a result, the “Historical” financial statements for the periods presented herein are those of Existing SLM, which will be NewCo’s accounting predecessor.

The unaudited pro forma condensed consolidated financial statements have been adjusted to give effect to the distribution by means of a tax-free dividend, at a 1-to-1 ratio, for U.S. stockholders and other adjustments resulting from the distribution, the transfer of certain assets and liabilities historically operated by NewCo that will be contributed to Existing SLM’s post-separation successor SLM BankCo, NewCo’s anticipated post-separation capital structure and the impact of, and transactions contemplated by, the separation and distribution agreement, tax matters agreement, employee matters agreement, a transition services agreement and other commercial agreements between NewCo and SLM BankCo summarized under “Certain Relationships and Related Party Transactions.”

NewCo is currently in the process of implementing plans, which are subject to further refinement, to separate from Existing SLM certain of the internal functions that NewCo needs to operate effectively and fulfill its responsibilities as a stand-alone public company. These plans reflect anticipated recurring activities that are different than our current activities, as well as certain nonrecurring activities that NewCo expects will be required during our transition to a stand-alone public company.

 

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The unaudited pro forma condensed consolidated financial statements do not give effect to future estimated annual operating expenses after separation, ranging from approximately $30 million to $45 million, attributed to various factors such as the following:

 

   

Personnel required to operate as a stand-alone public company;

 

   

Possible changes in compensation with respect to new and existing positions;

 

   

The level of assistance required from professional service providers; and

 

   

The amount of capital expenditures for information technology infrastructure investments associated with being a stand-alone public company.

We have estimated the costs of the nonrecurring activities and will continue to revise our estimates as we implement our plans. We currently estimate the nonrecurring costs that we will incur during our transition to being a stand-alone public company to range from approximately $135 million to $160 million. Of this amount, $30 million relates to expected severance, with the remainder related to other costs. We anticipate that substantially all of these costs will be incurred during the period from July 1, 2013 to a date approximately nine months after the distribution date. Our historical consolidated statements of income for the fiscal year ended December 31, 2012 includes no such costs. Our historical consolidated statements of income for the nine months ended September 30, 2013 includes approximately $46 million of such costs. These costs relate to the following:

 

   

one-time legal, accounting, tax and consulting costs pertaining to structuring transactions and the separation and distribution and establishing NewCo as a stand-alone public company;

 

   

costs to separate information systems;

 

   

office relocation costs;

 

   

recruiting and relocation costs associated with hiring key senior management personnel new to our company;

 

   

severance and related costs; and

 

   

other one-time costs.

We are continuing to refine our transition plan including specific arrangements for certain significant elements of our cost structure as a stand-alone public company. Although we believe our estimates of nonrecurring transition costs are reasonable based on the information we have to date, certain significant components of our estimates are preliminary and subject to change. A substantial portion of our estimated costs are thus not considered to be factually supportable.

Except for the pro forma adjustments described in footnote (d) to the tables below, we have not adjusted the unaudited pro forma consolidated statements of income presented below for nonrecurring transition costs as these costs are not expected to have an ongoing impact on our operating results.

The unaudited pro forma condensed consolidated financial statements of NewCo presented herein constitute forward-looking information and are subject to uncertainties that could cause our actual results to differ materially from those inferred by such statements. See “Cautionary Statement Concerning Forward-Looking Statements.”

 

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NewCo

Unaudited Pro Forma Consolidated Balance Sheet

As of September 30, 2013

($ in millions except per share amounts)

 

    “Existing
SLM”

(a)
    Less:
Stand-alone
SLM
BankCo

(b)
    Less: Historical
I/C charges,
receivables and
payables that are
3rd party for
stand-alone
SLM BankCo (c)
    Add:
Separation
adjustments
        NewCo
Pro forma
 

Assets

           

FFELP loans (net of allowance for losses)

  $ 106,350      $ 1,215      $      $        $ 105,135   

Private Education loans (net of allowance for losses)

    37,752        6,162                        31,590   

Investments

           

Available-for-sale

    85        584        (584              85   

Other

    911        78                        833   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total investments

    996        662        (584         918   

Cash and cash equivalents

    4,329        1,148               (566   (h)     2,615   

Restricted cash and investments

    4,287        4                        4,283   

Goodwill and acquired intangible assets, net

    436        7                        429   

Other assets

    7,420        448        (329     (17   (g)(h)     7,284   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total assets

  $ 161,570      $ 9,646      $ (913   $ (583     $ 152,254   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Liabilities

           

Short-term borrowings

  $ 15,572      $ 6,051      $      $        $ 9,521   

Long-term borrowings

    136,944        1,901               584      (h)     135,627   

Other liabilities

    3,422        527        (313     2      (h)     3,210   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total liabilities

    155,938        8,479        (313     586          148,358   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Equity

           

Preferred stock, par value $.20 per share; 20 million shares authorized, 7.3 million shares issued and outstanding, actual, and none issued and outstanding, as adjusted

    565                      (565   (h)       

Common stock, par value $.20 per share; 1.125 billion shares authorized and 544 million shares issued and outstanding, actual, and 544 million shares issued and outstanding, as adjusted

    109                               109   

Additional paid in capital

    4,373        752        (600     (604       3,617   

Accumulated other comprehensive income

    8        40                        (32

Retained earnings

    2,385        370                        2,015   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total stockholders’ equity before treasury stock

    7,440        1,162        (600     (1,169       5,709   

Less: Common stock held in treasury at cost: 83 million shares, actual and 83 million shares, as adjusted

    (1,813                            (1,813
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total stockholders’ equity

    5,627        1,162        (600     (1,169       3,896   

Noncontrolling interest

    5        5                          
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total equity

    5,632        1,167        (600     (1,169       3,896   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Total liabilities and equity

  $ 161,570      $ 9,646      $ (913   $ (583     $ 152,254   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

 

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NewCo

Unaudited Pro Forma Consolidated Statement of Income

Nine Months Ended September 30, 2013

($ in millions except per share amounts)

 

    “Existing
SLM”

(a)
    Less:
Stand-alone
SLM
BankCo

(b)
    Less: Historical I/C
charges, receivables
and payables that are
3rd party for
stand-alone
SLM BankCo

(c)
    Add:
Separation
adjustments
        NewCo
Pro
forma
     

Total interest income

  $ 4,044      $ 405      $ (16   $        $ 3,655     

Total interest expense

    1,666        65               16      (h)     1,617     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net interest income

    2,378        340        (16     (16       2,038     

Less: provisions for loan losses

    649        40                        609     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net interest income after provisions for loan losses

    1,729        300        (16     (16       1,429     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Other income (loss):

             

Gains on sales of loans and investments

    307        192        (192              307     

Gain (losses) on derivative and hedging activities, net

    (140     1                        (141  

Servicing revenue

    223        3        (2     2      (e)     224     

Contingency revenue

    312                               312     

Gains on debt repurchases

    42                               42     

Other

    66        23               8      (e)     51     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total other income (loss)

    810        219        (194     10          795     

Expenses:

             

Total operating expenses

    737        202        (18     (10   (e)     543     

Goodwill and intangible expenses

    10        2                        8     

Restructuring and other reorganization expenses

    46        1               (45   (d)         
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total expenses

    793        205        (18     (55       551     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Income from continuing operations, before income tax expense

    1,746        314        (192     49          1,673     

Income tax expense

    645        117        (71     18      (f)     617     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net income from continuing operations

    1,101        197        (121     31          1,056     

Income from discontinued operations, net of tax
expense

    47                               47     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net income

    1,148        197        (121     31          1,103     

Less: net loss attributable to noncontrolling interest

    (1     (1                         
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net income attributable to the Company

    1,149        198        (121     31          1,103     

Preferred stock dividends

    15                      (15   (h)         
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net income attributable to common stock

  $ 1,134      $ 198      $ (121   $ 46        $ 1,103     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Basic earnings (loss) per common share:

             

Continuing operations

  $ 2.46              $ 2.40     

Discontinued operations

    0.10                0.10     
 

 

 

           

 

 

   

Total

  $ 2.56              $ 2.50      (i)
 

 

 

           

 

 

   

Average common shares outstanding

    442                442      (i)
 

 

 

           

 

 

   

Diluted earnings (loss) per common share:

             

Continued operations

  $ 2.42              $ 2.35     

Discontinued operations

    0.10                0.10     
 

 

 

           

 

 

   

Total

  $ 2.52              $ 2.45      (i)
 

 

 

           

 

 

   

Average common and common equivalent shares outstanding

    450                450      (i)
 

 

 

           

 

 

   

 

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NewCo

Unaudited Pro Forma Consolidated Statement of Income

Fiscal Year Ended December 31, 2012

($ in millions except per share amounts)

 

    “Existing
SLM”

(a)
    Less:
Stand-alone
SLM
BankCo

(b)
    Less:
Historical  I/C
charges,
receivables and
payables that are
3rd party for
stand-alone
SLM BankCo

(c)
    Add:
Separation
adjustments
        NewCo
Pro
forma
     

Total interest income

  $ 5,769      $ 492      $ (25   $ (1   (h)   $ 5,301     

Total interest expense

    2,561        83        (1     24      (h)     2,503     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net interest income

    3,208        409        (24     (25       2,798     

Less: provisions for loan losses

    1,080        66                        1,014     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net interest income after provisions for loan losses

    2,128        343        (24     (25       1,784     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Other income (loss):

             

Gains on sales of loans and investments

           235        (235                  

Losses on derivative and hedging activities, net

    (628     (5                     (623  

Servicing revenue

    279        3               3      (e)     279     

Contingency revenue

    356                               356     

Gains on debt repurchases

    145                               145     

Other

    92        34               33      (e)     91     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total other income (loss)

    244        267        (235     36          248     

Expenses:

             

Total operating expenses

    897        254        (20     8      (e)     671     

Goodwill and intangible expenses

    27        12                        15     

Restructuring and other reorganization expenses

    11        1                        10     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Total expenses

    935        267        (20     8          696     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Income from continuing operations, before income tax expense

    1,437        343        (239     3          1,336     

Income tax expense

    498        126        (87     1      (f)     460     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net income from continuing operations

    939        217        (152     2          876     

Loss from discontinued operations, net of tax benefit

    (2                            (2  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net income

    937        217        (152     2          874     

Less: net loss attributable to noncontrolling interest

    (2     (2                         
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net income attributable to the Company

    939        219        (152     2          874     

Preferred stock dividends

    20                      (20   (h)         
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net income attributable to common stock

  $ 919      $ 219      $ (152   $ 22        $ 874     
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Basic earnings (loss) per common share:

             

Continuing operations

  $ 1.93              $ 1.84     

Discontinued operations

                       
 

 

 

           

 

 

   

Total

  $ 1.93              $ 1.84      (i)
 

 

 

           

 

 

   

Average common shares outstanding

    476                476      (i)
 

 

 

           

 

 

   

Diluted earnings (loss) per common share:

             

Continued operations

  $ 1.90              $ 1.81     

Discontinued operations

                       
 

 

 

           

 

 

   

Total

  $ 1.90              $ 1.81      (i)
 

 

 

           

 

 

   

Average common and common equivalent shares outstanding

    483                483      (i)
 

 

 

           

 

 

   

 

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NewCo

Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

 

(a) Represents the historical financial statements of Existing SLM, the accounting predecessor of NewCo.

 

(b) Represents the operations, assets, liabilities and equity of SLM BankCo, which will be comprised of Sallie Mae Bank, Upromise Rewards, the Insurance Business, and the Private Education Loan origination functions. Included in these amounts are certain general corporate overhead expenses related to SLM BankCo.

 

(c) Represents intercompany transactions between SLM BankCo and NewCo that were eliminated in consolidation of the historical Existing SLM financial statements but not eliminated from the historical financial statements of SLM BankCo. Examples of historical intercompany revenues, charges, receivables and payables that are third party for stand-alone SLM BankCo include, but are not limited to, the following:

 

  1. Gains on intercompany loan sales of $192 million and $235 million for the nine months ended September 30, 2013 and fiscal year 2012, respectively, presented on SLM BankCo’s historical statement of operations;

 

  2. FFELP and private education loan servicing fees paid by SLM BankCo to NewCo of $18 million and $20 million for the nine months ended September 30, 2013 and fiscal year 2012, respectively;

 

  3. Deferred tax assets and/or liabilities presented on SLM BankCo’s historical balance sheet that were not presented on Existing SLM’s historical financial statements;

 

  4. During 2008, Existing SLM contributed $629 million (par value) of asset-backed securities to Sallie Mae Bank as additional capital. The asset-backed securities, which were issued by securitization trusts owned and consolidated by Existing SLM, were recorded at Sallie Mae Bank at fair value of $584 million at September 30, 2013. In addition, Sallie Mae Bank had a deferred tax asset of $14 million at September 30, 2013 related to these securities. Sallie Mae Bank recorded $16 million and $24 million of income associated with the asset-backed securities for the nine months ended September 30, 2013 and fiscal year 2012, respectively. For the purposes of the Existing SLM historical financial statements, the asset-backed securities held by Sallie Mae Bank, the associated debt at Existing SLM and related intercompany interest income/expense were eliminated in consolidation. Refer to footnote (h) for further discussion; and

 

  5. Intercompany payable from SLM BankCo to NewCo in the amount of $325 million and $2 million of accrued interest receivable at Sallie Mae Bank related to the asset-backed securities described above.

 

(d) Reflects the removal of separation costs directly related to the separation and distribution that were incurred during the historical period. These costs were primarily for third-party tax, accounting, legal and other consulting fees as well as severance costs.

 

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(e) Represents the anticipated impact of (i) a tax matters agreement, (ii) an employee matters agreement, (iii) a transition services agreement and (iv) other commercial agreements which will be in place at the time of the distribution. The impacts of these agreements were determined based on the anticipated contractual provisions of the final agreements in comparison with our historical operations on an as managed basis. No amounts have been included for a tax matters agreement and an employee matters agreement because key terms have not yet been finalized. Any difference between the as managed basis and the impacts of these agreements are presented as a separation adjustment. The individual effects of each agreement are detailed in the table below:

 

     Nine Months Ended September 30, 2013  
     Agreements               

(Dollars in millions)

   Tax
Matters
Agreement
     Employee
Matters
Agreement
     Transition
Services
Agreement
     Other
Commercial
Agreements
     Total      Other
Separation
Adjustments(1)
    Total
Separation
Adjustments
 

Earnings data:

                   

Net interest income after provision for loan losses

   $       $       $       $       $       $ (16   $ (16

Total other income (loss)

                             10         10                10   

Total expenses

                             5         5         (60     (55

Income tax expense

                             2         2         16        18   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net income

                             3         3         28        31   

Preferred stock dividends

                                             (15     (15
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net income attributable to common stock

   $       $       $       $ 3       $ 3       $ 43      $ 46   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

     Fiscal Year Ended December 31, 2012  
     Agreements               

(Dollars in millions)

   Tax
Matters
Agreement
     Employee
Matters
Agreement
     Transition
Services
Agreement
     Other
Commercial
Agreements
     Total      Other
Separation
Adjustments(1)
    Total
Separation
Adjustments
 

Earnings data:

                   

Net interest income after provision for loan losses

   $       $       $       $       $       $ (25   $ (25

Total other income (loss)

                     23         13         36                36   

Total expenses

                     21         6         27         (19     8   

Income tax expense

                     1         2         3         (2     1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net income

                     1         5         6         (4     2   

Preferred stock dividends

                                             (20     (20
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net income attributable to common stock

   $       $       $ 1       $ 5       $ 6       $ 16      $ 22   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

(1)     Other separation adjustments are comprised of the items in footnotes (d), (f), (g), and (h).

        

 

(f)

Reflects adjustment for the income tax effects of the pro forma and separation adjustments at the statutory tax rate in effect in the respective tax jurisdictions during the periods presented. The pro forma effective tax rates for the fiscal year ended December 31, 2012 and period ending September 30, 2013 were 34.4 percent and 36.8 percent, respectively. The effective tax rates for Existing SLM on a historical basis for the fiscal

 

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  year ended December 31, 2012 and period ending September 30, 2013 were 34.6 percent and 37.0 percent, respectively. For further discussion on effective rates changes year over year see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

(g) Reflects a $3 million valuation allowance against deferred tax assets that will be required as a result of the separation, and $14 million deferred tax liabilities related to the intercompany transfer of asset-backed securities to Sallie Mae Bank. There will be certain indemnifications extended between SLM BankCo and NewCo in accordance with the terms of the tax matters agreement. At the time of separation, NewCo will record a liability necessary to recognize the fair value of such indemnifications. NewCo is currently in the process of determining the impact, if any, on the amount of the liability to be recorded.

 

(h) Reflects changes in the capital structure of NewCo as a result of the separation and distribution. Changes in the capital structure are a result of the following:

 

  1. In connection with the separation and distribution, SLM BankCo will succeed Existing SLM, by means of a merger, as the issuer of the preferred stock. An adjustment has been made to reflect this transfer of the $565 million of Existing SLM preferred stock to SLM BankCo for the periods presented. Adjustments of $15 million and $20 million for the nine months ended September 30, 2013 and the twelve months ended December 31, 2012, respectively, reflect the related reduction in preferred stock dividends recognized by NewCo.

 

  2. In connection with the separation and distribution, it is anticipated that $566 million in cash will be contributed to SLM BankCo. $565 million of this cash is being contributed to support the $565 million of preferred stock discussed above with the remaining $1 million being contributed as additional common stock paid-in-capital. An adjustment has been made to reflect the cash contribution at September 30, 2013. Adjustments to interest income of $0.3 million and $0.8 million for the nine months ended September 30, 2013 and the fiscal year ended December 31, 2012, respectively, reflect the removal of interest income historically earned on the cash contributed. The adjustment to interest income reflects interest rates of approximately 0.08 percent and 0.14 percent for the nine months ended September 30, 2013 and the twelve months ended December 31, 2012, respectively, estimated using rates earned on comparable investments during the respective periods.

 

  3. During 2008, Existing SLM contributed $629 million (par value) of asset-backed securities to Sallie Mae Bank as additional capital. The asset-backed securities, which were issued by securitization trusts owned by Existing SLM, were recorded at Sallie Mae Bank at fair value of $584 million at September 30, 2013. In addition, Sallie Mae Bank had a deferred tax asset of $14 million at September 30, 2013 related to these securities. Sallie Mae Bank recorded $16 million and $24 million of income associated with the asset-backed securities for the nine months ended September 30, 2013 and fiscal year 2012, respectively. For the purposes of the Existing SLM historical financial statements, the asset-backed securities held by Sallie Mae Bank, the associated debt at Existing SLM and related intercompany interest income/expense were eliminated in consolidation. However, as a result of the separation, these asset backed securities are considered outstanding to a third party and are recognized as $584 million of additional long-term borrowings as NewCo consolidates the related securitization trust. Adjustments reflect the recognition of additional debt and accrued interest payable by NewCo associated with the asset-backed securities and the related interest expense of $16 million and $24 million for the nine months ended September 30, 2013 and fiscal year 2012, respectively.

 

(i) Common stock and pro forma weighted average basic and diluted shares outstanding reflect the issuance of NewCo common stock as a result of the separation and distribution. Pro forma basic earnings per share and pro forma weighted-average basic shares outstanding are based on the number of shares of Existing SLM common stock outstanding on the applicable balance sheet date, adjusted for a 1-to-1 distribution ratio. Pro forma diluted earnings per share and pro forma weighted-average diluted shares outstanding reflect common shares from NewCo equity plans in which employees participate based on the distribution ratio.

 

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Alternative performance measures — “Core Earnings” presentation

“Core Earnings” — Definition and Limitations

We prepare financial statements in accordance with GAAP. However, we also evaluate our business segments on a basis that differs from GAAP. We refer to this different basis of presentation as “Core Earnings.” We provide this “Core Earnings” basis of presentation on a consolidated basis for each business segment because this is what we review internally when making management decisions regarding our performance and how we allocate resources. We also refer to this information in our presentations with credit rating agencies, lenders and investors. Because our “Core Earnings” basis of presentation corresponds to our segment financial presentations, we are required by GAAP to provide “Core Earnings” disclosure in the notes to our consolidated financial statements for our business segments.

“Core Earnings” are not a substitute for reported results under GAAP. We use “Core Earnings” to manage each business segment because “Core Earnings” reflect adjustments to GAAP financial results for two items, discussed below, that create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that “Core Earnings” provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information as we believe it provides investors with additional information regarding the operational and performance indicators that are most closely assessed by management. The two items for which we adjust our “Core Earnings” presentations are (1) 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 and (2) the accounting for goodwill and acquired intangible assets.

While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, our “Core Earnings” basis of presentation does not. “Core Earnings” are subject to certain general and specific limitations that investors should carefully consider. For example, there is no comprehensive, authoritative guidance for management reporting. Our “Core Earnings” are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Accordingly, our “Core Earnings” presentation does not represent a comprehensive basis of accounting. Investors, therefore, may not be able to compare our performance with that of other financial services companies based upon “Core Earnings.” “Core Earnings” results are only meant to supplement GAAP results by providing additional information regarding the operational and performance indicators that are most closely used by management, our board of directors, rating agencies, lenders and investors to assess performance.

Differences between “Core Earnings” and GAAP

The two adjustments required to reconcile from NewCo’s “Core Earnings” results to NewCo’s GAAP results of operations relate to differing treatments for: (1) 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 and (2) the accounting for goodwill and acquired intangible assets. Substantially all of the Existing SLM GAAP to “Core Earnings” differences relate to NewCo activities. Please see “Management’s Discussion and Analysis — ‘Core Earnings’ — Definition and Limitations” and “— Differences between ‘Core Earnings’ and GAAP” for further discussion of the adjustments required to reconcile “Core Earnings” results to GAAP results. The following table reflects aggregate adjustments associated with these areas.

 

     Nine Months
Ended

September 30,
2013
    Fiscal year
ended
December 31,
2012
 

“Core Earnings” adjustments to GAAP:

    

Pro forma NewCo GAAP net income

   $ 1,103      $ 874   

Net impact of derivative accounting

     (231     190   

Net impact of goodwill and acquired intangible assets

     8        15   

Net income tax effect

     89        (92
  

 

 

   

 

 

 

Pro forma NewCo “Core Earnings” net income

   $ 969      $ 987   
  

 

 

   

 

 

 

Pro forma NewCo “Core Earnings” EPS

   $ 2.15      $ 2.05   
  

 

 

   

 

 

 

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following tables present selected historical financial statement information relating to Existing SLM’s financial condition and results of operations for the past five years. Due to the relative significance of NewCo to Existing SLM, among other factors, for financial reporting purposes NewCo will be treated as the “accounting spinnor” and therefore the “accounting successor” to Existing SLM following the separation, notwithstanding the legal form of the separation described in this information statement. Accordingly, the historical financial statements information set forth below is for Existing SLM which will be the accounting predecessor of NewCo.

The historical financial statement information set forth below for the years ended December 31, 2012, 2011, 2010, 2009 and 2008 has been derived from Existing SLM’s audited consolidated financial statements. Existing SLM’s audited financial statements for the years ended December 31, 2012, 2011 and 2010 are included elsewhere in this information statement. The historical unaudited financial statement information for the nine-month periods ended September 30, 2013 and 2012 has been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, included all adjustments necessary for a fair presentation of the information set forth therein.

The selected historical consolidated financial and other data presented below should be read in conjunction with Existing SLM’s consolidated financial statements and accompanying notes and “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this information statement. Existing SLM’s consolidated financial data may not be indicative of NewCo’s future performance and does not necessarily reflect what NewCo’s financial position and results of operations would have been had NewCo been operating as an independent, publicly–traded company during the periods presented, including changes that will occur in our operations and capitalization as a result of our separation and distribution from SLM BankCo. See “Unaudited Pro Forma Condensed Consolidated Financial Statements” for a description of these anticipated changes.

 

   

Nine Months
Ended September 30,

    Years Ended December 31,  

(Dollars in millions)

      2013         2012     2012     2011     2010     2009     2008  

Operating Data:

             

Net interest income

  $ 2,378      $ 2,376      $ 3,208      $ 3,529      $ 3,479      $ 1,723      $ 1,365   

Net income (loss) attributable to SLM Corporation:

             

Continuing operations, net of tax

  $ 1,102      $ 593      $ 941      $ 598      $ 729      $ 531      $ (17

Discontinued operations, net of tax

    47        (2     (2     35        (199     (207     (196
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to SLM Corporation

  $ 1,149      $ 591      $ 939      $ 633      $ 530      $ 324      $ (213
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per common share attributable to SLM Corporation:

             

Continuing operations

  $ 2.46      $ 1.19      $ 1.93      $ 1.12      $ 1.35      $ 0.82      $ (0.27

Discontinued operations

    0.10                      0.07        (0.41     (0.44     (0.42
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2.56      $ 1.19      $ 1.93      $ 1.19      $ 0.94      $ 0.38      $ (0.69
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per common share attributable to SLM Corporation:

             

Continuing operations

  $ 2.42        1.18      $ 1.90      $ 1.11      $ 1.35      $ 0.82      $ (0.27

Discontinued operations

    0.10                      .07        (0.41     (0.44     (0.42
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2.52      $ 1.18      $ 1.90      $ 1.18      $ 0.94      $ 0.38      $ (0.69
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Nine Months
Ended September 30,

    Years Ended December 31,  

(Dollars in millions)

      2013         2012     2012     2011     2010     2009     2008  

Dividends per common share attributable to SLM Corporation common shareholders

  $ 0.45      $ 0.375      $ 0.50      $ 0.30      $      $      $   

Return on common stockholders’ equity

    32     17     21     14     13     5     (9 )% 

Net interest margin

    1.96        1.74        1.78        1.85        1.82        1.05        0.93   

Return on assets

    0.95        0.43        0.52        0.33        0.28        0.20        (0.14

Dividend payout ratio

    18        32        26        25                        

Average equity/average assets

    3.19        2.67        2.69        2.54        2.47        2.96        3.45   

 

    September 30,     December 31,  

(Dollars in millions)

  2013     2012     2012     2011     2010     2009     2008  

Balance Sheet Data:

             

Student loans, net

  $ 144,102      $ 164,848      $ 162,546      $ 174,420      $ 184,305      $ 143,807      $ 144,802   

Total assets

    161,570        184,203        181,260        193,345        205,307        169,985        168,768   

Total borrowings

    152,516        175,243        172,257        183,966        197,159        161,443        160,158   

Total SLM Corporation stockholders’ equity

    5,627        4,940        5,060        5,243        5,012        5,279        4,999   

Book value per common share

    11.60        9.47        9.92        9.20        8.44        8.05        7.03   

Other Data:

             

Off-balance sheet securitized student loans, net

  $      $      $      $      $      $ 32,638      $ 35,591   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our results of operations and financial condition together with the audited and unaudited historical consolidated financial statements and the notes thereto of Existing SLM included elsewhere in this information statement as well as the discussion in the section of this information statement entitled “Business.” This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, and are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those made, projected or implied in these forward-looking statements, including those discussed in the sections of this information statement entitled “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements.”

The consolidated financial statements, which are discussed below, reflect the historical financial condition, results of operations and cash flows of Existing SLM. The financial information discussed below and included in this information statement, however, may not necessarily reflect what NewCo’s financial condition, results of operations or cash flows would have been had we been separated from Existing SLM and a stand alone company during the periods presented or what our financial condition, results of operations and cash flows may be in the future. For purposes of the following discussion, “we,” “us,” and “our” refer to Existing SLM and its consolidated subsidiaries.

Explanatory Note

Although SLM BankCo, as the publicly-traded successor to Existing SLM, will be the entity that distributes the shares of NewCo common stock to Existing SLM common stockholders after completion of the internal corporate reorganization described in this information statement, for financial reporting purposes NewCo will be treated as the “accounting spinnor” and therefore it will be NewCo, and not SLM BankCo, that will be the “accounting successor” to Existing SLM. Hence, the following discussion and analysis relates to the historical results of operations and financial condition of Existing SLM, which will be the accounting predecessor of NewCo. The following discussion should be read in conjunction with “Unaudited Pro Forma Condensed Consolidated Financial Statements.”

Separation

On                 , 2014, Existing SLM’s board of directors authorized the separation and distribution, as a result of which shares of NewCo will be distributed to Existing SLM’s common stockholders. The transaction will be effected as a dividend of shares, on a 1-to-1 ratio, of NewCo common stock to Existing SLM stockholders. Prior to the distribution, Existing SLM will complete an internal corporate reorganization. In the first step of the internal corporate reorganization, Existing SLM will become a wholly owned subsidiary of a new publicly-traded successor parent holding company, referred to as SLM BankCo, by means of a merger effected pursuant to Section 251(g) of the DGCL, which we refer to as the SLM Merger. As a result of the SLM Merger, all stockholders of Existing SLM will become stockholders of SLM BankCo and Existing SLM will merge with and into and become a limited liability company that is initially wholly owned by SLM BankCo.

In the second step of the internal corporate reorganization, Existing SLM will distribute to SLM BankCo all of the assets and liabilities related to the consumer banking business of Existing SLM, including Sallie Mae Bank, the student education loans it holds, a new private education student loan servicing company, Upromise and the Insurance Business. In addition, it is anticipated that $566 million in cash will be distributed by Existing SLM to SLM BankCo. SLM BankCo will then contribute to NewCo, its direct subsidiary, the limited liability company interests of Existing SLM, which will continue to own substantially all of the assets and liabilities associated with its portfolio of FFELP and private education student loans not owned by Sallie Mae Bank, as well as substantially all of Existing SLM’s business of servicing and collecting student education loans. After the completion of the internal corporate reorganization, and subject to the conditions described elsewhere in this information statement, SLM BankCo will distribute all of the outstanding shares of NewCo common stock in the distribution to holders of Existing SLM common stock as of the record date for the distribution. For additional

 

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information regarding this internal corporate reorganization, see the sections entitled “Transaction Structure” and “The Separation and Distribution — Internal Corporate Reorganization of Existing SLM Prior to the Distribution.”

The separation and distribution is intended to be tax-free to stockholders of Existing SLM and its completion is subject to various conditions, including the completion of the internal corporate reorganization, receipt of an IRS private letter ruling and an opinion of tax counsel and registration of the shares to be distributed. These conditions, as well as all other conditions to the separation, may be waived by the Existing SLM board of directors in its sole discretion. Neither the internal corporate reorganization nor the separation will require a stockholder vote.

Following the separation and distribution, NewCo and SLM BankCo will operate independently and neither will have any equity ownership in the other. In connection with the separation, however, NewCo and SLM BankCo will enter into certain agreements in order to govern the ongoing relationships between the two entities and to provide for an orderly transition. See “Certain Relationships and Related Party Transactions.”

Overview

Our primary business is to originate, service and collect loans we make to students and their families to finance the cost of education. The core of our marketing strategy is to generate student loan originations by promoting our products on campus through the financial aid office and through direct marketing to students and their families. We also provide servicing, loan default aversion and defaulted loan collection services for loans owned by other institutions, including ED, as well as providing a consumer savings network.

In addition we are the largest holder, servicer and collector of loans made under FFELP, a program that was discontinued as to new originations of loans in 2010, and hold a sizeable portfolio of Private Education Loans that we service.

We monitor and assess our ongoing operations and results based on the following four reportable segments: (1) Consumer Lending, (2) Business Services, (3) FFELP Loans and (4) Other.

Consumer Lending Segment

In this segment, we originate, acquire, finance and service 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. In this segment, we earn net interest income on the Private Education Loan portfolio (after provision for loan losses) as well as servicing fees, primarily late fees. As of September 30, 2013, we had a $37.8 billion Private Education Loan portfolio, of which $6.2 billion in Private Education Loans was held at Sallie Mae Bank.

Our origination business is operated at Sallie Mae Bank. Sallie Mae Bank, together with the Private Education Loans it holds and a new private education loan servicing business that will service those loans, will be transferred to SLM BankCo as part of the internal corporate reorganization. Hence, following the separation and distribution, NewCo will no longer originate student loans nor will it service the Private Education Loans held at Sallie Mae Bank, which will be owned by SLM BankCo. See “The Separation and Distribution” and “Certain Relationships and Related Party Transactions — Agreements with SLM BankCo — Separation and Distribution Agreement.”

Business Services Segment

Our Business Services segment generates the majority of its revenue from servicing our FFELP Loan portfolio. We also provide servicing, loan default aversion and defaulted loan collection services for loans on behalf of Guarantors of FFELP Loans and other institutions, including ED. We also operate a consumer savings network that provides financial rewards on everyday purchases to help families save for college.

 

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NewCo will retain all of the FFELP Loan servicing business in connection with the separation and distribution, and will continue to be the service provider to ED. It will not operate the consumer savings network subsequent to the separation and distribution, as that business will be transferred to SLM BankCo as part of the internal corporate reorganization. See “The Separation and Distribution” and “Certain Relationships and Related Party Transactions — The Separation and Distribution Agreement.”

FFELP Loans Segment

Our FFELP Loans segment consists, as of September 30, 2013, of our $106.3 billion FFELP Loan portfolio and underlying debt and capital funding these loans. Even though FFELP Loans are no longer originated we continue to seek to acquire FFELP Loan portfolios to leverage our servicing scale to generate incremental earnings and cash flow. This segment is expected to generate significant amounts of cash flow as the FFELP portfolio amortizes over the next 20 years.

As of September 30, 2013, approximately $1.2 billion of FFELP Loans was held at Sallie Mae Bank. At the time of the separation and distribution, Sallie Mae Bank and its small portfolio of FFELP Loans will be distributed to SLM BankCo. NewCo will continue to service the FFELP Loans held by SLM BankCo after the separation and distribution. See “Certain Relationships and Related Party Transactions — Loan Servicing and Administration Agreement.”

Other

Our Other segment primarily consists of activities of our holding company, including the repurchase of debt, the corporate liquidity portfolio and all overhead. We also include results from smaller wind-down and discontinued operations within this segment.

Key Financial Measures

Our operating results are primarily driven by net interest income from our student loan portfolios (which include financing costs), provision for loan losses, the revenues and expenses generated by our service businesses, and gains and losses on loan sales and debt repurchases. We manage and assess the performance of each business segment separately as each is focused on different customers and each derives its revenue from different activities and services. A brief summary of our key financial measures are listed below.

Net Interest Income

The most significant portion of our earnings is generated by the spread earned between the interest income we receive on assets in our student loan portfolios and the interest expense on debt funding these loans. We report these earnings as net interest income. Net interest income in our Consumer Lending and FFELP Loans segments are driven by significantly different factors.

Consumer Lending Segment

Net interest income in this segment is determined by the balance of Private Education Loans outstanding, Private Education Loan asset yields (determined by interest rates we establish based upon the credit of the customer and any cosigner) and the level of price competition in the Private Education Loan market less our cost of funds. As of September 30, 2013 and December 31, 2012, we had $37.8 billion and $36.9 billion, respectively, of Private Education Loans outstanding. During the nine months ended September 30, 2013, we originated $3.3 billion of Private Education Loans, up 16 percent from $2.8 billion during the first nine months of 2012. In 2012, we originated $3.3 billion of Private Education Loans, up 22 percent from $2.7 billion in the prior year. The majority of our Private Education Loans earns variable rate interest and is funded primarily with variable rate liabilities. For the first nine months of 2013, the “Core Earnings” net interest margin was 4.17 percent compared with 4.15 percent during the first nine months of 2012. The Consumer Lending segment’s “Core Earnings” net

 

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interest margin was 4.13 percent in 2012 compared with 4.09 percent in 2011. For an explanation of Core Earnings, see “— Core Earnings” below. Our cost of funds can be influenced by a number of factors including the quality of the loans in our portfolio, our corporate credit rating, general economic conditions, investor demand for Private Education Loan asset-backed securities (ABS) and corporate unsecured debt and competition in the deposit market. At September 30, 2013 and December 31, 2012, approximately 51 percent and 52 percent, respectively, of our Private Education Loan portfolio was funded to term with non-recourse, long-term securitization debt.

FFELP Loans Segment

Net interest income will be the primary source of cash flow generated by this segment over the next 20 years as this portfolio amortizes. Interest earned on our FFELP Loans is indexed to one-month LIBOR rates and our cost of funds is primarily indexed to three-month LIBOR, creating the possibility of repricing risk related to these assets. For the first nine months of 2013, the FFELP Loans segment’s “Core Earnings” net interest margin was 0.87 percent compared with 0.82 percent during the first nine months of 2012. In 2012, the “Core Earnings” net interest margin was 0.84 percent compared with 0.98 percent in 2011.

The major source of variability in net interest income is expected to be Floor Income we earn on certain FFELP Loans. Pursuant to the terms of the FFELP, certain FFELP Loans continue to earn interest at the stated fixed rate of interest as underlying debt costs decrease. We refer to this additional spread income as “Floor Income.” Floor Income can be volatile. We frequently hedge this volatility by selling Floor Income Contracts which lock in the value of the Floor Income over the term of the contract.

As of September 30, 2013 and December 31, 2012, we had $106.3 billion and $125.6 billion, respectively, of FFELP Loans outstanding. At September 30, 2013 and December 31, 2012, approximately 83 percent and 82 percent, respectively, of our FFELP Loan portfolio was funded to term with non-recourse, long-term securitization debt.

Provisions for Loan Losses

Management estimates and maintains an allowance for loan losses at a level sufficient to cover charge-offs expected over the next two years, plus an additional allowance to cover life-of-loan expected losses for loans classified as a troubled debt restructuring (TDR). The provision for loan losses increases the related allowance for loan losses. Generally, the allowance for loan losses rises when charge-offs are expected to increase and falls when charge-offs are expected to decline. 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. In contrast, we bear the full credit exposure on our Private Education Loans. Our provision for losses in our FFELP Loans segment was $42 million in the first nine months of 2013 compared with $54 million in the same period in 2012 and $72 million in 2012 compared with $86 million in 2011. Losses in our Consumer Lending segment are 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), a cosigner and the current economic environment. Our provision for loan losses in our Consumer Lending segment was $607 million in the first nine months of 2013, down from $712 million in the same period last year and $1.0 billion in 2012 compared with $1.2 billion in 2011.

Charge-Offs and Delinquencies

When we conclude a loan is uncollectible, the unrecoverable portion of the loan is charged against the allowance for loan losses in the applicable segment. 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. The Consumer Lending segment’s charge-off rate was 2.7 percent of loans in repayment over the first nine months of 2013 compared with 3.1 percent in the same period in 2012 and 3.4 percent of loans in repayment in 2012 compared with 3.7 percent of loans in repayment in 2011. Delinquencies are a very important indicator of potential future credit performance. Private Education Loan

 

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delinquencies as a percentage of Private Education Loans in repayment decreased from 10.1 percent as of December 31, 2011 to 9.3 percent as of December 31, 2012, and decreased from 10.0 percent as of September 30, 2012 to 8.8 percent as of September 30, 2013.

Servicing and Contingency Revenues

We earn servicing revenues from servicing student loans and contingency revenue related to default aversion and contingency collections work we perform primarily on federal loans. The fees we recognize are primarily driven by our success in collecting or rehabilitating defaulted loans, the number of transactions processed and the underlying volume of loans we are servicing on behalf of others.

Other Income / (Loss)

In managing our loan portfolios and funding sources we periodically engage in sales of loans and the repurchase of our outstanding debt. In each case, depending on market conditions, we may incur gains or losses from these transactions that affect our results from operations.

Operating Expenses

The operating expenses reported for our Consumer Lending and Business Services segments are those that are directly attributable to the generation of revenues by those segments. The operating expenses for the FFELP Loans segment primarily represent an intercompany servicing charge from the Business Services segment and do not reflect our actual underlying costs incurred to service the loans. We have included corporate overhead expenses and certain information technology costs (together referred to as “Overhead”) in our Other segment rather than allocate those expenses by segment. Overhead expenses include executive management, the board of directors, accounting, finance, legal, human resources, stock-based compensation expense and certain information technology and infrastructure costs.

Core Earnings

We report financial results on a GAAP basis and also present certain “Core Earnings” performance measures. Our management, equity investors, credit rating agencies and debt capital providers use these “Core Earnings” measures to monitor our business performance. “Core Earnings” is the basis in which we prepare our segment disclosures as required by GAAP under ASC 280 “Segment Reporting.” See “Note 16 — Segment Reporting” to the audited consolidated financial statements included elsewhere in this information statement. For a full explanation of the contents and limitations of “Core Earnings,” see the discussion under “‘Core Earnings’ —Definition and Limitations” below.

Interim 2013 Summary of Results

GAAP net income for the first nine months of 2013 was $1.1 billion ($2.52 diluted earnings per common share), versus net income of $591 million ($1.18 diluted earnings per common share) in the same period last year. The changes in GAAP net income are driven by the same types of “Core Earnings” items discussed below as well as changes in “mark-to-market” unrealized gains and losses on derivative contracts and amortization and impairment of goodwill and intangible assets that are recognized in GAAP but not in “Core Earnings” results. Results for the first nine months of 2013 included $234 million of gains from derivative accounting treatment that is excluded from “Core Earnings” results. In the year-ago period, these amounts were losses of $324 million.

“Core Earnings” for the first nine months of 2013 were $1.015 billion ($2.22 diluted earnings per share), compared with $804 million ($1.61 diluted earnings per share) in the year-ago period. The increase in the first nine months of 2013 “Core Earnings” diluted earnings per share is primarily due to a $312 million gain from the sale of residual interests in FFELP Loan securitization trusts, a $117 million decline in the provision for loan

 

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losses, a $62 million increase in servicing and contingency revenue, a $38 million after-tax gain from the sale of our Campus Solutions business, as well as fewer common shares outstanding. These items more than offset a decrease in net interest income before provision for loan losses of $67 million (primarily as a result of the sales of residual interests in FFELP loan securitization trusts), lower debt repurchase gains of $54 million, higher operating expenses of $65 million (in part due to higher servicing and contingency volumes) and higher restructuring and other reorganization expenses of $37 million.

During the first nine months of 2013, we:

 

   

issued $5.5 billion of FFELP asset-backed securities (ABS), $3.1 billion of Private Education Loan ABS and $2.8 billion of unsecured bonds;

 

   

closed on a new $6.8 billion credit facility that matures in June 2014, to facilitate the term securitization of FFELP Loans;

 

   

closed on a new $1.1 billion asset-backed borrowing facility that matures in August 2015, which was used to fund the call and redemption of our SLM 2009-D Private Education Loan Trust ABS;

 

   

repurchased $997 million of debt and realized “Core Earnings” gains of $48 million, compared with $520 million of debt repurchased and $102 million of gains in the first nine months of 2012;

 

   

repurchased 19 million common shares for $400 million on the open market, fully utilizing our February 2013 share repurchase program authorization;

 

   

authorized $400 million in July 2013 to be utilized in a new common share repurchase program;

 

   

sold Residual Interests in FFELP Loan securitization trusts to third parties. We will continue to service the student loans in the trusts under existing agreements. The sales removed securitization trust assets of $12.5 billion and related liabilities of $12.1 billion from our balance sheet;

 

   

sold our Campus Solutions business for an after-tax gain of $38 million; and

 

   

announced the pending sale of our 529 college savings plan administration business in September 2013; upon the transaction’s closing, which is anticipated to occur in the fourth quarter of 2013, we expect to recognize a gain of approximately $0.14 per diluted share.

2013 Management Objectives

In 2013 we have set out five major goals to create stockholder value. They are: (1) prudently grow Consumer Lending segment assets and revenues; (2) maximize cash flows from FFELP Loans; (3) reduce operating expenses while improving efficiency and customer experience; (4) maintain our financial strength; and (5) expand the capabilities of Sallie Mae Bank. Here is how we plan to achieve these objectives and the progress we have made to date:

Prudently Grow Consumer Lending Segment Assets and Revenues

We will continue to pursue managed growth in our Private Education Loan portfolio in 2013 by leveraging our Sallie Mae and Upromise brand while sustaining the credit quality of, and percentage of cosigners for, new originations. We are currently targeting $3.8 billion in new loan originations for 2013, compared with $3.3 billion in 2012. We will also continue to help our customers manage their borrowings and succeed in their payoff, which we expect will result in lower charge-offs and provision for loan losses. Originations were 16 percent higher in the nine months ended September 30, 2013 compared with the year-ago period. For the nine months ended September 30, 2013, the provision for Private Education Loan losses decreased $105 million from the year-ago period. Charge-offs were 2.7 percent for the nine months ended September 30, 2013 down from 3.1 percent in the year-ago period. Our quarterly charge-off rate in the third quarter of 2013 was at the lowest level in five years.

 

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Maximize Cash Flows from FFELP Loans

In 2013, we will continue to purchase additional FFELP Loan portfolios. Through September 30, 2013, we sold our ownership interest in five of our FFELP Loan securitization trusts ($12.5 billion of securitization trust assets and $12.1 billion of related liabilities). We will continue to explore alternative transactions and structures that can increase our ability to maximize the value of our ownership interests in these trusts and allow us to diversify our holdings while maintaining servicing fee income. We must also continue to reduce operating and overhead costs attributable to the maintenance and management of this segment. During the first nine months of 2013, we purchased $396 million of FFELP Loans, down from $3.011 billion in the year-ago period.

Reduce Operating Expenses While Improving Efficiency and Customer Experience

For 2013, we will reduce unit costs, and balance our Private Education Loan growth and the challenge of increased regulatory oversight. We also plan to improve efficiency and customer experience by replacing certain of our legacy systems and making enhancements to our self-service platform and call centers (including improved call segmentation that routes an in-bound customer call directly to the appropriate agent who can answer the customer’s inquiry). Operating expenses for the nine months ended September 30, 2013 were $737 million compared with $672 million in the year-ago period. The increase is primarily the result of increases in our third-party servicing and collections activities, increased Private Education Loan marketing activities, continued investments in technology, and an increase in pending litigation settlement expense. An example of becoming more efficient can be seen in our Consumer Lending segment; direct operating expenses as a percentage of revenues (revenues calculated as net interest income after provision plus total other income) were 33 percent and 35 percent in the nine months ended September 30, 2013 and 2012, respectively.

Maintain Our Financial Strength

In February 2013, we announced an increase in our quarterly common stock dividend to $0.15 per share and a new $400 million common share repurchase program. It is management’s objective for 2013 to provide these stockholder distributions while ending 2013 with capital and reserve positions as strong as those with which we ended 2012. We repurchased an aggregate of 19 million shares for $400 million in the six months ended June 30, 2013, fully utilizing the February 2013 share repurchase program authorization. On July 16, 2013, we authorized $400 million to be utilized in a new common share repurchase program that does not have an expiration date. There were no share repurchases during the third quarter of 2013. Additionally, on June 10, 2013, we closed on a new $6.8 billion credit facility that matures in June 2014, to facilitate the term securitization of FFELP Loans. The facility was used in June 2013 to refinance all of the FFELP Loans previously financed through the ED Conduit Program. As a result, we ended our participation in the ED Conduit Program. On July 17, 2013, we closed on a $1.1 billion asset-backed borrowing facility that matures on August 15, 2015. The facility was used to fund the call and redemption of our SLM 2009-D Private Education Loan Trust ABS, which occurred on August 15, 2013.

Expand Sallie Mae Bank Capabilities

Sallie Mae Bank continues to fund our Private Education Loan originations in 2013. We are continuing to evolve the operational and enterprise risk oversight program at Sallie Mae Bank in preparation for expected growth and becoming subject to the requirements established under the Dodd-Frank Act applicable to institutions with total assets greater than $10 billion, which will entail enhanced regulatory scrutiny. Following the separation and distribution, Sallie Mae Bank will be a wholly-owned subsidiary of SLM BankCo and NewCo will not originate Private Education Loans.

2012 Summary of Results

We operate in a challenging economic environment marked by high unemployment and uncertainty which adds uncertainty to Private Education Loan collectability. On July 1, 2010, the Health Care and Education

 

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Reconciliation Act of 2010 (HCERA) eliminated FFELP Loan originations, a major source of our net income. All federal loans to students are now made through the DSLP.

GAAP 2012 net income was $939 million ($1.90 diluted earnings per share), versus net income of $633 million ($1.18 diluted earnings per share) in the prior year. The changes in GAAP net income are driven by the same “Core Earnings” items discussed below as well as changes in “mark-to-market” unrealized gains and losses on derivative contracts and amortization and impairment of goodwill and intangible assets that are recognized in GAAP but not in “Core Earnings” results. In 2012 and 2011, GAAP results included losses of $194 million and $540 million, respectively, resulting from derivative accounting treatment which is excluded from “Core Earnings” results.

“Core Earnings” for the year were $1.06 billion compared with $977 million in 2011. “Core Earnings” were up due to an $81 million increase in debt repurchase gains, a $215 million lower loan loss provision and a $108 million reduction in operating expenses, offset in part by a $246 million decrease in net interest income.

During 2012, we raised $2.7 billion of unsecured debt and issued $9.7 billion of FFELP ABS and $4.2 billion of Private Education Loan ABS. We also repurchased $711 million of debt and realized “Core Earnings” gains of $145 million in 2012, compared with $894 million and $64 million, respectively, in 2011.

2012 Management Objectives

In 2012 we set out five major goals to create stockholder value. They were: (1) prudently grow Consumer Lending segment assets and revenue; (2) sustain Business Services segment revenue; (3) maximize cash flows from FFELP Loans; (4) reduce our operating expenses; and (5) improve our financial strength. We believe we achieved each of these objectives in 2012. The following describes our performance relative to each of our 2012 goals.

Prudently Grow Consumer Lending Segment Assets and Revenues

We continued to pursue managed growth in our Private Education Loan portfolio in 2012, exceeding our target with $3.3 billion in new originations for the year compared with $2.7 billion in 2011, a 22 percent increase. The average FICO score of our 2012 originations was 748 and 90 percent of the originated loans were cosigned. We have reduced our Private Education Loan charge-off rate and provision for loan losses in the three years since 2009. For the year ended December 31, 2012 compared with the year ended December 31, 2009, “Core Earnings” charge-off rates (as a percentage of loans in repayment) and “Core Earnings” provision for loan losses declined by 43 percent and 28 percent, respectively.

“Core Earnings” net interest margin increased from 4.09 percent in 2011 to 4.13 percent. Charge-offs decreased to 3.37 percent of loans in repayment from 3.72 percent in 2011. Provision for loan losses decreased to $1.01 billion from $1.18 billion in 2011.

Sustain Business Services Segment Revenue

Our Business Services segment generates the majority of its net income from servicing and collecting on our FFELP Loan portfolio and FFELP Loans for others. As a result of the elimination of FFELP in 2010, these revenues are in decline. In 2012 we worked to offset these declines through two primary means — pursuing additional growth and expansion of our non-FFELP-related servicing and collection businesses and seeking to increase the FFELP-related loan servicing and collection work we do for third parties. In 2012 we also targeted significant growth in the total assets under management in our 529 college-savings plans. For the year ended December 31, 2012, our Business Services segment revenue was down 5 percent from the year-ago period primarily due to the amortization of our FFELP Loan portfolio. While we considered several servicing

 

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acquisitions beyond the education loan market we chose not to pursue them. Nonetheless, in 2012 we did achieve meaningful growth in a number of Business Services activities:

 

   

We serviced approximately 4.3 million accounts under the ED Servicing Contract as of December 31, 2012 compared to 3.6 million accounts at December 31, 2011. Market share under the ED Servicing Contract is set annually based on the performance rankings of the four servicing companies that are parties to the contracts. For the current contract year ending August 15, 2013, our allocation of new customer loans awarded under the ED Servicing Contract is 15 percent. We are not pleased with our overall 2012 performance ranking and remain focused on improving our performance relative to other servicers to increase our allocation for the next contract year. We plan to make these improvements by maintaining our focus on remaining a top performer in helping borrowers repay their loans and enhancing our customer experience, as further discussed below in our 2013 Management Objectives.

 

   

We provide collection services on defaulted student loans to ED. There are 21 other collection providers, of which we compete with 16 other providers for account allocation based on quarterly performance metrics. As a consistent top performer, first in the last quarterly performance metric, our share of allocated accounts has ranged from six percent to eight percent.

Maximize Cash Flows from FFELP Loans

In 2012 and the first nine months of 2013, we continued to purchase FFELP Loan portfolios from others. As cash flows from our existing FFELP Loans decline it becomes increasingly important that we reduce operating and overhead costs attributable to this segment. During 2012, we purchased $3.7 billion of FFELP Loans. We expect to make additional purchases during 2013. These acquisitions partially offset the approximately $5.2 billion of loans that were consolidated to ED in 2012 as part of their Special Direct Consolidation Loan Initiative, or SDCL.

Reduce Operating Expenses

In 2012 we remained focused on reducing operating expenses and achieved our 2012 cost-reduction goals. Our 2012 operating expenses were $897 million, a reduction from the $1.0 billion incurred in 2011.

Improve Our Financial Strength

It was management’s objective for 2012 to provide increased shareholder distributions while at the same time ending 2012 with a balance sheet and capital position as strong as or stronger than those with which we ended in 2011. We increased our regular quarterly common stock dividends to $0.125 per share in 2012, up from $0.10 per share for the last three quarters of 2011. During the year ended December 31, 2012, we repurchased 58 million shares of common stock, fully utilizing all $900 million of existing share repurchase authorizations. We did so while achieving $2.16 diluted “Core Earnings” per common share and maintaining our strong balance sheet and capital positions.

In 2012 we issued $9.7 billion in FFELP ABS, $4.2 billion in Private Education Loan ABS and $2.7 billion of unsecured bonds, while reducing our total debt to $169 billion at December 31, 2012, compared to $181 billion at December 31, 2011.

Results of Operations Nine Months ended September 30, 2013 and September 30, 2012

We first present the results of operations below for the nine months ended September 30, 2013 and 2012, on a consolidated basis in accordance with GAAP. Following our discussion of consolidated earnings results on a GAAP basis, we present our results on a segment basis: Consumer Lending, Business Services, FFELP Loans and Other. Since these segments operate in distinct business environments and we manage and evaluate the financial performance of these segments using non-GAAP financial measures, these segments are presented on a “Core Earnings” basis. See “‘Core Earnings’ — Definition and Limitations” below.

 

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GAAP Statement of Income (Unaudited)

 

     Nine Months
Ended
September 30,
    Increase
(Decrease)
 

(In millions, except per share data)

   2013     2012     $     %  

Interest income:

        

FFELP Loans

   $ 2,138      $ 2,459      $ (321     (13 )% 

Private Education Loans

     1,884        1,856        28        2   

Other loans

     9        13        (4     (31

Cash and investments

     13        16        (3     (19
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     4,044        4,344        (300     (7

Total interest expense

     1,666        1,968        (302     (15
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     2,378        2,376        2          

Less: provisions for loan losses

     649        766        (117     (15
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provisions for loan losses

     1,729        1,610        119        7   

Other income (loss):

        

Gains on sales of loans and investments

     307        1        306        30,600   

Losses on derivative and hedging activities, net

     (140     (600     460        (77

Servicing revenue

     223        212        11        5   

Contingency revenue

     312        261        51        20   

Gains on debt repurchases

     42        102        (60     (59

Other income

     66        39        27        69   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     810        15        795        5,300   

Expenses:

        

Operating expenses

     737        672        65        10   

Goodwill and acquired intangible asset impairment and amortization expense

     10        13        (3     (23

Restructuring and other reorganization expenses

     46        9        37        411   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     793        694        99        14   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, before income tax expense

     1,746        931        815        88   

Income tax expense

     645        340        305        90   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     1,101        591        510        86   

Income (loss) from discontinued operations, net of tax expense (benefit)

     47        (2     49        2,450   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,148        589        559        95   

Less: net loss attributable to noncontrolling interest

     (1     (2     1        (50
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to SLM Corporation

     1,149        591        558        94   

Preferred stock dividends

     15        15                 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to SLM Corporation common stock

   $ 1,134      $ 576      $ 558        97
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share attributable to SLM Corporation:

        

Continuing operations

   $ 2.46      $ 1.19      $ 1.27        107

Discontinued operations

     .10               .10        100   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2.56      $ 1.19      $ 1.37        115
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share attributable to SLM Corporation:

        

Continuing operations

   $ 2.42      $ 1.18      $ 1.24        105

Discontinued operations

     .10               .10        100   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2.52      $ 1.18      $ 1.34        114
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per common share attributable to SLM Corporation

   $ .45      $ .375      $ .075        20
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Consolidated Earnings Summary — GAAP-basis

Nine Months Ended September 30, 2013 Compared with Nine Months Ended September 30, 2012

For the nine months ended September 30, 2013, net income was $1.1 billion, or $2.52 diluted earnings per common share, compared with net income of $591 million, or $1.18 diluted earnings per common share, for the nine months ended September 30, 2012. The increase in net income was primarily due to a $460 million decrease in net losses on derivative and hedging activities, a $306 million increase in net gains on sales of loans and investments, a $117 million decrease in provisions for loan losses, a $49 million after-tax increase in income from discontinued operations and a $62 million increase in servicing and contingency revenue, which were partially offset by $60 million of lower gains on debt repurchases, higher operating expenses of $65 million and higher restructuring and other reorganization expenses of $37 million.

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

 

   

Net interest income increased by $2 million primarily due to a $50 million acceleration of non-cash premium expense recorded in the first half of 2012 related to ED’s consolidation of $5.2 billion of loans under the SDCL initiative that ended June 30, 2012. Offsetting this increase was a $19.5 billion decline in average FFELP Loans outstanding in part due to the sale of Residual Interests in FFELP Loan securitization trusts in the first half of 2013. There were approximately $12 billion of FFELP Loans in these trusts.

 

   

Provisions for loan losses declined $117 million primarily as a result of the overall improvement in Private Education Loans’ credit quality, delinquency and charge-off trends leading to decreases in expected future charge-offs.

 

   

Gains on sales of loans and investments increased by $306 million as a result of $312 million in gains on the sales of the Residual Interests in FFELP Loan securitization trusts.

 

   

Losses on derivative and hedging activities, net, resulted in a net loss of $140 million in the current nine-month period compared with a net loss of $600 million in the year-ago period. The primary factors affecting the change were interest rate and foreign currency fluctuations, which primarily affected the valuations of our Floor Income Contracts, basis swaps and foreign currency hedges during each period. Valuations of derivative instruments vary based upon many factors including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, net gains and losses on derivative and hedging activities may continue to vary significantly in future periods.

 

   

Servicing and contingency revenue increased $62 million primarily from an increase in the number of accounts serviced and collection volumes in the nine months ended September 30, 2013 compared with the year-ago period.

 

   

Gains on debt repurchases decreased $60 million as we repurchased less debt in the current period. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.

 

   

Operating expenses increased $65 million primarily as a result of increases in our third-party servicing and collections activities, investments in technology, increased Private Education Loan marketing and an increase in pending litigation settlement expense.

 

   

Restructuring and other reorganization expenses were $46 million compared with $9 million in the year-ago period. For the first nine months of 2013, these consisted of $24 million primarily related to third-party costs incurred in connection with Existing SLM’s previously announced plan to separate its existing organization into two, separate, publicly-traded companies and $22 million related to severance. The $9 million of expenses in 2012 related to restructuring expenses.

 

   

Income from discontinued operations increased $49 million primarily as a result of the sale of our Campus Solutions business in the second quarter of 2013 which resulted in a $38 million after-tax gain.

 

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In addition, we repurchased 19 million shares of our common stock for $400 million during the first nine months of 2013 as part of a common share repurchase program. Primarily as a result of ongoing common share repurchases, our average outstanding diluted shares decreased by 40 million shares from the year-ago period.

Results of Operations — 2012, 2011 and 2010

Set forth below are our annual results of operations for 2012, 2011 and 2010 on a consolidated basis in accordance with GAAP. As discussed earlier, we have four business segments: Consumer Lending, Business Services, FFELP Loans and Other. Since these segments operate in distinct business environments, the discussion following the Consolidated Earnings Summary is presented on a segment basis and is shown on a “Core Earnings” basis. See “Business” for further discussion on the components of each segment.

 

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GAAP Consolidated Statements of Income

 

          Increase (Decrease)  
    Years Ended December 31,     2012 vs. 2011     2011 vs. 2010  

(Dollars in millions, except per share amounts)

  2012     2011     2010     $     %     $     %  

Interest income

             

FFELP Loans

  $ 3,251      $ 3,461      $ 3,345      $ (210     (6 )%    $ 116        3

Private Education Loans

    2,481        2,429        2,353        52        2        76        3   

Other loans

    16        21        30        (5     (24     (9     (30

Cash and investments

    21        19        26        2        11        (7     (27
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    5,769        5,930        5,754        (161     (3     176        3   

Total interest expense

    2,561        2,401        2,275        160        7        126        6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    3,208        3,529        3,479        (321     (9     50        1   

Less: provisions for loan losses

    1,080        1,295        1,419        (215     (17     (124     (9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provisions for loan losses

    2,128        2,234        2,060        (106     (5     174        8   

Other income (loss):

             

Gains (losses) on loans and investments, net

           (35     325        35        (100     (360     (111

Losses on derivative and hedging activities, net

    (628     (959     (361     331        (35     (598     166   

Servicing revenue

    279        283        311        (4     (1     (28     (9

Contingency revenue

    356        333        330        23        7        3        1   

Gains on debt repurchases

    145        38        317        107        282        (279     (88

Other income

    92        69        5        23        33        64        1,260   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    244        (271     927        515        190