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Amendment No. 2

As filed with the Securities and Exchange Commission on February 28, 2014

File No. 001-36228

 

 

 

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

(Amendment No. 2)

 

 

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 (which we refer to by its brand name “Navient”) to SLM Corporation (“Existing SLM”), among other factors, Navient 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 Navient. Accordingly, and consistent with Staff Legal Bulletin No. 4, Navient 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.

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 Navient’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 Navient’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 Navient’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 Navient’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 Amended and Restated Loan Servicing and Administration Agreement by and between SLM Corporation and New Corporation.*
  10.5       Form of Sublease Agreement by and between SLM Corporation and New Corporation.*
  10.6       Affiliate Collateral Pledge and Security Agreement between SLM Education Credit Finance Corporation, HICA Education Loan Corporation and the Federal Home Loan Bank of Des Moines, dated January 15, 2010 (incorporated by reference to Exhibit 10.38 to SLM Corporation’s Annual Report on Form 10-K (File No. 001-13251) filed on February 26, 2010).
  10.7       Advances, Pledge and Security Agreement between HICA Education Loan Corporation and the Federal Home Loan Bank of Des Moines, dated January 15, 2010 (incorporated by reference to Exhibit 10.39 to SLM Corporation’s Annual Report on Form 10-K (File No. 001-13251) filed on February 26, 2010).

Exhibit
Number

     

Exhibit Description

  10.8       Asset Purchase Agreement between The Student Loan Corporation; Citibank, N.A.; Citibank (South Dakota) National Association; SLC Student Loan Receivables I, Inc., SLM Corporation, Bull Run 1 LLC, SLM Education Credit Finance Corporation and Sallie Mae, Inc. (incorporated by reference to Exhibit 10.1 to SLM Corporation’s Quarterly Report on Form 10-Q (File No. 001-13251) filed on November 8, 2010).
  10.9       Employment Agreement between John F. Remondi and the Company (incorporated by reference to Exhibit 10.1 to SLM Corporation’s Quarterly Report on Form 10-Q (File No. 001-13251) filed on August 7, 2008).
  10.10       Agreement and Release, dated May 29, 2013, by and between SLM Corporation and Albert L. Lord (incorporated by reference to Exhibit 10.1 to SLM Corporation’s Quarterly Report on Form 10-Q (File No. 001-13251) filed on August 5, 2013).
  21.1       Subsidiaries of New Corporation.**
  99.1       Information Statement of New Corporation, preliminary and subject to completion, dated February 28, 2014.**

 

* 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: February 28, 2014

Exhibit 2.1

DRAFT

Exhibit 2.1

FORM OF

SEPARATION AND DISTRIBUTION AGREEMENT

BY AND AMONG

SLM CORPORATION,

SLM BANKCO

AND

NEW CORPORATION

DATED AS OF

[—], 2014

TABLE OF CONTENTS

 

             Page  
ARTICLE I DEFINITIONS      1   
ARTICLE II THE SEPARATION      18   
  2.1   The Reorganization and Separation      18   
  2.2   NewCo Assets; SLM BankCo Assets      22   
  2.3   NewCo Liabilities; SLM BankCo Liabilities      25   
  2.4   Transfer Documents      27   
  2.5   Treatment of Shared Contracts      28   
  2.6   Approvals and Notifications      29   
  2.7   Misallocations; Waiver of Bulk Sales Laws      33   
  2.8   Novation of NewCo Liabilities      34   
  2.9   Novation of SLM BankCo Liabilities      35   
  2.10   Termination of Certain Agreements      36   
  2.11   Bank Accounts; Cash Balances      37   
  2.12   Ancillary Agreements      38   
  2.13   Disclaimer of Representations and Warranties      38   
  2.14   Intellectual Property      39   
  2.15   Financial Information Certifications      42   
  2.16   Misdirected Communications      43   
  2.17   Parent Guarantee      43   
ARTICLE III THE DISTRIBUTION      43   
  3.1   Sole and Absolute Discretion; Cooperation      43   
  3.2   Actions Prior to the Distribution      44   
  3.3   Conditions to the Distribution      45   
  3.4   The Distribution      46   
ARTICLE IV MUTUAL RELEASES; INDEMNIFICATION      47   
  4.1   Release of Pre-Distribution Claims      47   
  4.2   Indemnification by NewCo      49   
  4.3   Indemnification by SLM BankCo      50   
  4.4   Indemnification Obligations Net of Insurance Proceeds and Other Amounts      51   
  4.5   Procedures for Indemnification of Third Party Claims      52   
  4.6   Additional Matters      53   
  4.7   Remedies Cumulative      54   
  4.8   Survival of Indemnities      55   
ARTICLE V CERTAIN OTHER MATTERS      55   
  5.1   Insurance Matters      55   
  5.2   Late Payments      57   
  5.3   Amendment to Existing SLM Holdco Operating Agreement      57   
  5.4   Non-Competition Matters      57   

 

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  5.5   Non-Solicitation Matters      57   
  5.6   Cooperation      58   
  5.7   Non-Disparagement      58   
  5.8   IT Transition      58   
  5.9   Joint Development Activities      59   
ARTICLE VI EXCHANGE OF INFORMATION; CONFIDENTIALITY      59   
  6.1   Agreement for Exchange of Information; Archives      59   
  6.2   Ownership of Information      59   
  6.3   Compensation for Providing Information      59   
  6.4   Record Retention      60   
  6.5   Limitations of Liability      60   
  6.6   Other Agreements Providing for Exchange of Information      60   
  6.7   In-House Lawyers and Other Legal Staff      60   
  6.8   Production of Witnesses; Records; Cooperation      63   
  6.9   Confidentiality      64   
  6.10   Protective Arrangements      65   
ARTICLE VII GOVERNANCE AND DISPUTE RESOLUTION      65   
  7.1   Program Managers; Separation Oversight Committee      65   
  7.2   Escalation Process; Good Faith Negotiation      67   
  7.3   Dispute Resolution      69   
  7.4   Continuation of Services and Commitments      71   
ARTICLE VIII FURTHER ASSURANCES AND ADDITIONAL COVENANTS      72   
  8.1   Further Assurances      72   
ARTICLE IX TERMINATION      73   
  9.1   Termination      73   
  9.2   Effect of Termination      73   
ARTICLE X MISCELLANEOUS      73   
  10.1   Counterparts; Entire Agreement; Corporate Power      73   
  10.2   Governing Law      74   
  10.3   Assignability      74   
  10.4   Third Party Beneficiaries      75   
  10.5   Notices      75   
  10.6   Severability      76   
  10.7   Force Majeure      76   
  10.8   Publicity      76   
  10.9   Expenses      76   
  10.10   Headings      76   
  10.11   Survival of Covenants      76   
  10.12   Waivers of Default      76   
  10.13   Specific Performance      77   
  10.14   Amendments      77   
  10.15   Interpretation      77   
  10.16   Limitations of Liability      77   
  10.17   Performance      78   

 

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EXHIBITS

 

Exhibit A   Certificate of Merger
Exhibit B   Existing SLM Holdco Operating Agreement
Exhibit C   NewCo Bylaws
Exhibit D   NewCo Certificate of Incorporation
Exhibit E   Plan of Merger
Exhibit F   SMI Certificate of Incorporation

SCHEDULES

 

Schedule 1.1(a)   Notes
Schedule 1.1(b)   Securitization Trusts
Schedule 1.2(b)   SLM BankCo Contracts
Schedule 1.3(a)   Registrable NewCo Intellectual Property
Schedule 1.4   SLM BankCo Intellectual Property
Schedule 1.5(a)   NewCo Names and NewCo Marks
Schedule 1.5(b)   SLM Names and SLM Marks
Schedule 1.6   Private Loan Servicing Assets and IP
Schedule 1.7   Private Loan Servicing Liabilities
Schedule 2.1(m)   Equity Interests to be Distributed
Schedule 2.2(a)(ii)   NewCo Entities
Schedule 2.2(a)(vi)(A)   NewCo Real Property
Schedule 2.2(a)(vi)(B)   NewCo Leases
Schedule 2.2(b)   Assets to be Transferred to SLM BankCo
Schedule 2.2(b)(iii)   SLM BankCo Entities
Schedule 2.2(b)(v)   SLM BankCo Systems
Schedule 2.2(b)(vi)(A)   SLM BankCo Real Property
Schedule 2.2(b)(vi)(B)   SLM BankCo Leases
Schedule 2.3(a)(v)   Discontinued Businesses
Schedule 2.3(b)(i)   Pre-Separation Consumer Banking Business Liabilities
Schedule 2.3(b)(i)(D)   SLM BankCo Third Party TSA Support Liabilities
Schedule 2.5(a)   Shared Contracts
Schedule 2.10(a)   Agreements to be Terminated
Schedule 2.10(b)(ii)   Exceptions to Agreements to be Terminated
Schedule 2.14   NewCo Licensed Materials
Schedule 2.14(d)   Permitted Use of SLM Names and SLM Marks
Schedule 5.6(a)   Third Party TSA Obligations
Schedule 7.1(a)   Program Managers
Schedule 7.1(b)   Separation Oversight Committee
Schedule 7.3   Dispute Resolution Procedures

 

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SEPARATION AND DISTRIBUTION AGREEMENT

This SEPARATION AND DISTRIBUTION AGREEMENT, dated as of [—], 2014 (this “Agreement”), is by and among SLM Corporation, a Delaware corporation (“Existing SLM”), New BLC Corporation, a Delaware corporation (“SLM BankCo”), and New Corporation, a Delaware corporation (“NewCo”). Capitalized terms used herein and not otherwise defined shall have the respective meanings assigned to them in Article I.

R E C I T A L S

WHEREAS, the Existing SLM Board has determined that it is in the best interests of Existing SLM and its stockholders to separate into two separate publicly-traded companies;

WHEREAS, in furtherance of the foregoing, the Existing SLM Board has determined that it is appropriate and desirable for Existing SLM to undergo an internal corporate reorganization as a first step in the separation of its education loan management business from its consumer banking business (the “Separation”), and to thereafter make a distribution, on a pro rata basis, to holders of shares of Existing SLM Common Stock on the Record Date of all the outstanding shares of NewCo Common Stock owned by SLM BankCo (the “Distribution”);

WHEREAS, for U.S. federal income tax purposes, the Separation and the Distribution, taken together, are intended to qualify as a transaction that is tax-free under Sections 355 and 368(a)(1)(D) of the Code; and

WHEREAS, it is appropriate and desirable to set forth the principal corporate transactions to be undertaken to effect the Separation and the Distribution and certain other agreements that will govern various matters relating to the Separation and the Distribution and the relationship of SLM BankCo, NewCo and their respective Subsidiaries following the Separation and the Distribution.

NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, the Parties, intending to be legally bound, hereby agree as follows:

ARTICLE I

DEFINITIONS

For the purpose of this Agreement, the following terms shall have the following meanings:

“AAA” shall have the meaning set forth in Section 7.3(c)(ii).

“Acquiring Person” shall have the meaning set forth in Section 5.4(e)(iii).

“Action” shall mean any demand, action, claim, dispute, suit, countersuit, arbitration, inquiry, subpoena, proceeding or investigation of any nature (whether criminal, civil, legislative, administrative, regulatory, prosecutorial or otherwise) by or before any federal, state, local, foreign or international Governmental Authority or any arbitration or mediation tribunal.

“Affiliate” shall mean, when used with respect to a specified Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with such specified Person. For the purpose of this definition, “control” (including with correlative meanings, “controlled by” and “under common control with”), when used with respect to any specified Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or other interests, by contract, agreement, obligation, indenture, instrument, lease, promise, arrangement, release, warranty, commitment, undertaking or otherwise. It is expressly agreed that, from and after the Effective Time, for purposes of this Agreement and the Ancillary Agreements, (a) no member of the NewCo Group shall be deemed an Affiliate of any member of the SLM BankCo Group and (b) no member of the SLM BankCo Group shall be deemed an Affiliate of any member of the NewCo Group, except that the foregoing shall not affect the treatment of SLM BankCo and SMI as “affiliates” for purposes of federal customer data privacy laws, including the Gramm-Leach-Bliley Act, during the Preferred Stock Period.

“Agent” shall mean Computershare Trust Company, N.A., or such other trust company or bank duly appointed by Existing SLM to act as distribution agent, transfer agent and registrar for the shares of NewCo Common Stock in connection with the Distribution.

“Agreement” shall have the meaning set forth in the Preamble.

“Ancillary Agreements” shall mean the Transition Services Agreement, the Tax Sharing Agreement, the Employee Matters Agreement, the Loan Servicing Agreement, the Joint Marketing Agreement, the Key Systems Agreement, the Data Sharing Agreement, the Sublease Agreement and the Transfer Documents.

“Applicable Deadline” shall have the meaning set forth in Section 7.3(c)(i).

“Approvals or Notifications” shall mean any consents, waivers, approvals, permits or authorizations to be obtained from, notices, registrations or reports to be submitted to, or other filings to be made with, any third Person, including any Governmental Authority.

“Arbitration Act” means the United States Arbitration Act, 9 U.S.C. §§ 1 et seq.

“Arbitration Demand Notice” shall have the meaning set forth in Section 7.3(c).

“Assets” shall mean, with respect to any Person, the assets, properties, claims and rights (including goodwill) of such Person, wherever located (including in the possession of vendors or other third Persons or elsewhere), of every kind, character and description, whether real, personal or mixed, tangible, intangible or contingent, in each case whether or not recorded or reflected or required to be recorded or reflected on the books and records or financial statements of such Person, including rights and benefits pursuant to any contract, license, permit, indenture, note, bond, mortgage, agreement, concession, franchise, instrument, undertaking, commitment, understanding or other arrangement.

 

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“ATLAS Derivative Works” shall have the meaning set forth in Section 2.1(k)(iii).

“ATLAS Software” shall mean the Software, Technology and related Intellectual Property that comprises the ATLAS System, excluding any Third Party Software.

“ATLAS System” shall mean the private credit originations engine that supports the primary business functions to (i) enable loan origination and (ii) conduct the core integration of all components necessary to complete loan originations, including all equipment, Software, and associated attachments, features, accessories, peripherals and cabling, and all additions, modifications, substitutions, upgrades or enhancements to such system as of the Effective Time.

“Auction Rate Securities and Reset Rate Notes” shall mean all outstanding notes of each series listed on Schedule 1.1(a).

“Certificate of Merger” shall mean the Certificate of Merger to be filed pursuant to Section 251(g) of the DGCL in furtherance of the Merger, substantially in the form of Exhibit A.

“Change of Control” shall mean, with respect to NewCo or SLM BankCo, as applicable, the occurrence after the Effective Time of any of the following: (a) the sale, conveyance, transfer or other disposition (however accomplished), in one or a series of related transactions, of all or substantially all of the assets of such party or such party’s Group to a third Person that is not an Affiliate of such party prior to such transaction or the first of such related transactions; (b) the consolidation, merger or other business combination of a party with or into any other entity, immediately following which the then-current stockholders of the party, as such, fail to own in the aggregate at least a majority of the voting power in the election of directors of all the outstanding voting securities of the surviving party in such consolidation, merger or business combination or of its ultimate publicly-traded parent entity; (c) a transaction or series of transactions in which any Person or “group” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) acquires at least a majority of the voting power in the election of directors of all the outstanding voting securities of such party (other than (i) a reincorporation, holding company merger or similar corporate transaction in which each of such party’s stockholders owns, immediately thereafter, interests in the new parent company in substantially the same percentage as such stockholder owned in such party immediately prior to such transaction, or (ii) in connection with a transaction described in clause (b), which shall be governed by such clause (b)); or (d) a majority of the board of directors of such party ceasing to consist of individuals who have become directors as a result of being nominated or elected by a majority of such party’s directors.

“Citibank Loan Agreement” shall mean that certain Term Loan Agreement dated as of September 17, 2010 by and among Bull Run 1 LLC, as Borrower, SLM, as Guarantor, Citibank, N.A., as the Administrative Agent, the Syndicate Agent, the Collateral Agent, and a Lender, and additional lenders that may become a party thereto.

 

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“Code” shall mean the Internal Revenue Code of 1986, as amended.

“Contribution” shall have the meaning set forth in Section 2.1(k).

“Covered Personnel” shall have the set forth in Section 5.5.

“CPR” shall have the meaning set forth in Section 7.3(b).

“Data Sharing Agreement” shall mean the Data Sharing Agreement to be entered into by and between SLM BankCo and NewCo or their respective Subsidiaries in connection with the Separation, the Distribution and the other transactions contemplated by this Agreement.

“Delayed NewCo Asset” shall have the meaning set forth in Section 2.6(c).

“Delayed NewCo Liability” shall have the meaning set forth in Section 2.6(c).

“Delayed SLM BankCo Asset” shall have the meaning set forth in Section 2.6(h).

“Delayed SLM BankCo Liability” shall have the meaning set forth in Section 2.6(h).

“DGCL” shall mean the General Corporation Law of the State of Delaware.

“Disclosure Document” shall mean (i) any registration statement (including the Form 10 and any Form S-8, Form S-1 or Form S-3) filed with the SEC by or on behalf of any Party or any of its controlled Affiliates, and also includes any information statement (including the Information Statement), prospectus, offering memorandum, offering circular, periodic report or similar disclosure document, whether or not filed with the SEC or any other Governmental Authority, in each case which describes the Separation or the Distribution or the NewCo Group or primarily relates to the transactions contemplated under this Agreement or any Ancillary Agreement and (ii) any registration statement, periodic report or other disclosure document filed with the SEC or any other Governmental Authority by any Party prior to the Effective Time.

“Dispute” shall have the meaning set forth in Section 7.2(a)(i).

“Dispute Notice” shall have the meaning set forth in Section 7.2(a)(i).

“Distribution” shall have the meaning set forth in the Recitals.

“Distribution Date” shall mean [—], 2014.

“DLLCA” shall mean the Delaware Limited Liability Company Act.

“D&O Tail Policy” shall mean the [—]-year directors’ and officers’ liability insurance policy purchased by Existing SLM with respect to liabilities arising prior to the Effective Time.

 

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“DSLP Loans” shall mean educational loans provided by the William D. Ford Federal Direct Loan Program to students and parent borrowers directly through the U.S. Department of Education rather than through a bank or other lender.

“Effective Time” shall mean 4:00 p.m., Eastern Standard Time, on the Distribution Date.

“Effective Time Sallie Mae” shall mean SLM BankCo and its Subsidiaries (including NewCo and Existing SLM), as constituted immediately prior to the Effective Time.

“Employee Matters Agreement” shall mean the Employee Matters Agreement to be entered into by and between SLM BankCo and NewCo or their respective Subsidiaries in connection with the Separation, the Distribution and the other transactions contemplated by this Agreement.

“Equity Distribution” shall have the meaning set forth in Section 2.1(m).

“Equity Interests” of any Person shall mean any membership interests, capital stock or other equity interest or any securities convertible into or exchangeable for equity interests, or any other rights, warrants or options (whether or not currently exercisable) to acquire any of the foregoing securities.

“Exchange Act” shall mean the U.S. Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder.

“Existing SLM” shall have the meaning set forth in the Preamble; provided, that all references to Existing SLM in this Agreement shall be to Existing SLM as it exists prior to the Merger Effective Time.

“Existing SLM Common Stock “ shall mean the common stock, par value $0.20 per share, of Existing SLM.

“Existing SLM Board” shall mean the Board of Directors of Existing SLM and any authorized committee thereof, as constituted prior to the Merger Effective Time.

“Existing SLM Holdco” shall mean the limited liability company that is the surviving Person in the Merger.

“Existing SLM Holdco Operating Agreement” shall mean the limited liability company agreement of Existing SLM Holdco, substantially in the form of Exhibit B.

“Existing SLM Lawyers” shall have the meaning set forth in Section 6.7(a).

“Existing SLM Series A Preferred Stock” shall mean the 6.97% Cumulative Redeemable Preferred Stock, Series A, par value $0.20 per share, of Existing SLM.

 

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“Existing SLM Series B Preferred Stock” shall mean the Floating Rate Non-Cumulative Preferred Stock, Series B, par value $0.20 per share, of Existing SLM.

“FFELP Loans” shall mean education loans to students and parents of students that are guaranteed or reinsured in accordance with the Federal Family Education Loan Program, initiated by Title IV of the Higher Education Act of 1965 and terminated (as to new loans) under the Health Care and Education Reconciliation Act of 2010.

“FHLB-DM Facility” shall mean (a) the Advances, Pledge and Security Agreement between HICA Education Loan Corporation and the Federal Home Loan Bank of Des Moines, dated January 15, 2010, and (b) the Affiliate Collateral Pledge and Security Agreement between SLM Education Credit Finance Corporation, HICA Education Loan Corporation and the Federal Home Loan Bank of Des Moines, dated January 15, 2010.

“Force Majeure” shall mean a force not reasonably within the control of the party (including acts of God, acts of war, riots, insurrections, illegality of performance, strikes or other industrial disturbances, breakage or accident to machinery or equipment, fires, earthquakes, hurricanes, floods and other disasters). For the avoidance of doubt, the following events shall not constitute Force Majeure events: (a) acts or omissions of subcontractors; and (b) delays or failures to the extent they could have been avoided or their impact mitigated through the use of commercially reasonable business continuity measures

“Form 10” shall mean the Registration Statement on Form 10 filed by NewCo with the SEC to effect the registration of shares of NewCo Common Stock pursuant to the Exchange Act in connection with the Distribution, as such Registration Statement may be amended (including by post-effective amendment) or supplemented from time to time prior to the Distribution Date.

“Governmental Approvals” shall mean any notices, reports or other filings to be made, or any consents, registrations, approvals, permits or authorizations to be obtained from, any Governmental Authority.

“Governmental Authority” shall mean any nation or government, any state, municipality or other political subdivision thereof, and any entity, body, agency, commission, department, board, bureau, court, tribunal or other instrumentality, whether federal, state, local, domestic, foreign or multinational, exercising executive, legislative, judicial, regulatory, administrative or other similar functions of, or pertaining to, government and any executive official thereof.

“Group” shall mean either the NewCo Group and/or the SLM BankCo Group, as the context requires.

“Historical P/C Policies” means any historical occurrence-based property and casualty policies of insurance held by Effective Time Sallie Mae or its predecessors at any time prior to the Effective Time.

 

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“Indemnifying Party” shall have the meaning set forth in Section 4.4(a).

“Indemnitee” shall have the meaning set forth in Section 4.4(a).

“Indemnity Payment” shall have the meaning set forth in Section 4.4(a).

“Indentures” shall mean (i) that certain Indenture, dated as of October 1, 2000, between Existing SLM (formerly USA Education, Inc.) and The Bank of New York Mellon, as successor to J.P. Morgan Chase Bank, National Association, formerly Chase Manhattan Bank, as amended or supplemented from time to time, and (ii) that certain Indenture, dated as of April 25, 2006, between Existing SLM and Deutsche Trustee Company Limited, as amended or supplemented from time to time.

“Information” shall mean information, whether or not patentable or copyrightable, in written, oral, electronic or other tangible or intangible forms, stored in any medium, including studies, reports, records, books, contracts, instruments, surveys, discoveries, ideas, concepts, know-how, techniques, designs, specifications, drawings, blueprints, diagrams, models, prototypes, samples, flow charts, data, computer data, disks, diskettes, tapes, computer programs or other software, marketing plans, customer names, communications by or to attorneys (including attorney-client privileged communications), memos and other materials prepared by attorneys or under their direction (including attorney work product), hard copy audit, external audit and internal control records and other technical, financial, employee or business information or data.

“Information Statement” shall mean the information statement forming part of the Form 10, which is to be delivered to Record Holders in connection with the Distribution, as such information statement may be amended or supplemented from time to time prior to the Distribution Date.

“Insurance Proceeds” shall mean those monies (a) received by an insured from an insurance carrier; or (b) paid by an insurance carrier on behalf of the insured.

“Intellectual Property” shall mean all of the following, whether arising under the Laws of the United States or of any foreign or multinational jurisdiction: (a) patents, patent applications (including patents issued thereon) and statutory invention registrations, including reissues, divisions, continuations, continuations in part, substitutions, renewals, extensions and reexaminations of any of the foregoing, and all rights in any of the foregoing provided by international treaties or conventions, (b) trademarks, service marks, trade names, service names, trade dress, logos and other source or business identifiers, including all goodwill associated with any of the foregoing, and any and all common law rights in and to any of the foregoing, registrations and applications for registration of any of the foregoing, all rights in and to any of the foregoing provided by international treaties or conventions, and all reissues, extensions and renewals of any of the foregoing, (c) Internet domain names, (d) copyrightable works, copyrights, moral rights, mask work rights, database rights and design rights, in each case, other than Software, whether or not registered, and all registrations and applications for registration of

 

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any of the foregoing, and all rights in and to any of the foregoing provided by international treaties or conventions, (e) confidential and proprietary information, including trade secrets, invention disclosures, processes and know-how, in each case, other than Software, and (f) intellectual property rights arising from or in respect of any Technology.

“IRS” shall mean the United States Internal Revenue Service.

“IRS Ruling” shall have the meaning set forth in Section 3.3(a)(iii).

“IT Transition” shall have the meaning set forth in Section 5.8.

“Joint Development Projects” shall have the meaning set forth in Section 5.9.

“Joint Legal Materials” shall have the meaning set forth in Section 6.7(d).

“Joint Marketing Agreement” shall mean the Joint Marketing Agreement to be entered into by and between SLM BankCo and NewCo or their respective Subsidiaries in connection with the Separation, the Distribution and the other transactions contemplated by this Agreement.

“Joint Materials” shall have the meaning set forth in Section 5.9.

“Key Systems Agreement” shall mean the Key Systems Agreement to be entered into by and between SLM BankCo and NewCo or their respective Subsidiaries in connection with the Separation, the Distribution and the other transactions contemplated by this Agreement.

“Law” shall mean any national, supranational, federal, state, provincial, local or similar law (including common law), statute, code, order, ordinance, rule, regulation, treaty (including any income tax treaty), license, permit, authorization, approval, consent, decree, injunction, binding judicial or administrative interpretation or other requirement, in each case, enacted, promulgated, issued or entered by a Governmental Authority.

“Legacy Indebtedness” shall mean (a) all unsecured notes issued by Existing SLM pursuant to the Indentures, (b) all Auction Rate Securities and Reset Rate Notes, (c) all advances under the FHLB-DM Facility and (d) any indebtedness for borrowed money under the Citibank Loan Agreement.

“Legal Materials” shall have the meaning set forth in Section 6.7(d).

“Liabilities” shall mean all debts, guarantees, assurances, commitments, liabilities, responsibilities, Losses, remediation, deficiencies, damages, fines, penalties, settlements, sanctions, costs, expenses, interest and obligations of any nature or kind, whether absolute or contingent, matured or unmatured, accrued or not accrued, asserted or unasserted, liquidated or unliquidated, foreseen or unforeseen, known or unknown, reserved or unreserved, or determined or determinable, including those arising under any Law, claim (including any

 

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Third Party Claim), demand, Action, or order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority or arbitration tribunal, and those arising under any contract, agreement, obligation, indenture, instrument, lease, promise, arrangement, release, warranty, commitment or undertaking, or any fines, damages or equitable relief that is imposed, in each case, including all costs and expenses relating thereto.

“linked” shall have the meaning set forth in Section 2.11(a).

“Loan Servicing Agreement” shall mean the Amended and Restated Loan Servicing and Administration Agreement to be entered into by and between SLM BankCo and NewCo or their respective Subsidiaries in connection with the Separation, the Distribution and the other transactions contemplated by this Agreement.

“Losses” shall mean actual losses (including any diminution in value), costs, amounts paid in settlement or restitution, damages, penalties and expenses (including reasonable legal and accounting fees and reasonable expenses and costs of investigation and litigation), whether or not involving a Third Party Claim.

“Mediation Request” shall have the meaning set forth in Section 7.3(b).

“Merger” shall have the meaning set forth in Section 2.1(i).

“MergerSub” shall mean [—] LLC, a Delaware limited liability company.

“Merger Effective Time” shall mean the date and time when the Merger shall become effective in accordance with the DGCL.

“NASDAQ” shall mean the NASDAQ Global Select Market.

“NewCo” shall have the meaning set forth in the Preamble.

“NewCo Accounts” shall have the meaning set forth in Section 2.11(a).

“NewCo Assets” shall have the meaning set forth in Section 2.2(a).

“NewCo Balance Sheet” shall mean the unaudited pro forma consolidated balance sheet of NewCo, including the notes thereto, as of December 31, 2013, as set forth under the caption “Unaudited Pro Forma Condensed Consolidated Financial Statements” in the Information Statement.

“NewCo Board” shall mean the Board of Directors of NewCo and any authorized committee thereof.

“NewCo Business” shall mean all businesses, operations and activities conducted at any time from and after the Effective Time by the NewCo Group.

 

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“NewCo Bylaws” shall mean the Amended and Restated Bylaws of NewCo, substantially in the form of Exhibit C.

“NewCo Certificate of Incorporation” shall mean the Amended and Restated Certificate of Incorporation of NewCo, substantially in the form of Exhibit D.

“NewCo Contracts” shall mean any contracts and agreements, other than SLM BankCo Contracts, to which Effective Time Sallie Mae is a party or by which Effective Time Sallie Mae’s Assets are bound at or prior to the Effective Time, whether or not in writing, including the following:

(a) any customer, marketing, co-marketing, supply or vendor contracts or agreements entered into prior to the Effective Time that relates to the Pre-Separation Education Loan Management Business;

(b) (i) any indenture, servicing agreement or administration agreement or other transaction documents entered into by the Securitization Trusts, (ii) any trust agreements governing the Securitization Trusts, (iii) the Excess Distribution Certificates issued by the Securitization Trusts and (iv) any underwriting agreement, pricing agreement, purchase agreement (and the master securitization terms thereto), sale agreement or interim trust agreement entered into by any member of the NewCo Group or the SLM BankCo Group in respect of the Securitization Trusts, but shall exclude purchase agreements and the like entered into by any member of the SLM BankCo Group;

(c) each FFELP Loan and each Private Education Loan that is not owned by Sallie Mae Bank;

(d) subject to Section 2.14, any license agreement related exclusively to the Pre-Separation Education Loan Management Business;

(e) any guarantee, indemnity, representation, warranty or other Liability of Effective Time Sallie Mae in respect of any other NewCo Contract, any NewCo Liability or the Pre-Separation Education Loan Management Business;

(f) any employment, change of control, retention, consulting, indemnification, termination, severance or other similar agreement with any employee, independent contractor or consultant of the NewCo Group that is in effect as of the Effective Time;

(g) any interest rate, currency, commodity or other swap, collar, cap or other hedging or similar agreements or arrangements related exclusively to the Pre-Separation Education Loan Management Business or entered into by or on behalf of any member (including any division or business unit) of the NewCo Group;

(h) the Indentures and the Legacy Indebtedness; and

(i) any other documents or agreements not entered into, retained by or expressly assumed by a member of the SLM BankCo Group pursuant to this Agreement or any Ancillary Agreement.

 

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“NewCo Counsel” shall have the meaning set forth in Section 6.7(a).

“NewCo Entities” shall have the meaning set forth in Section 2.2(a)(ii).

“NewCo Group” shall mean NewCo, each Subsidiary of NewCo and each Affiliate of NewCo, as constituted as of and after the Effective Time.

“NewCo Indemnitees” shall have the meaning set forth in Section 4.3.

“NewCo Intellectual Property” shall mean (a) the NewCo Names and NewCo Marks and other Registrable IP set forth on Schedule 1.3(a), (b) all Other IP that is not used or held for use exclusively in the Pre-Separation Consumer Banking Business, (c) SMI’s undivided joint ownership interest in the ATLAS Software and (d) the SMI Licensed IP.

“NewCo Liabilities” shall have the meaning set forth in Section 2.3(a).

“NewCo Names and NewCo Marks” shall mean the names, marks, trade dress, logos, monograms, domain names and other source or business identifiers of any word or element owned, held or licensed by Effective Time Sallie Mae, including those listed on Schedule 1.5(a) (in block letters or otherwise), either alone or in combination with other words or elements, and all names, marks, trade dress, logos, monograms, domain names and other source or business identifiers confusingly similar to or embodying any of the foregoing either alone or in combination with other words or elements, together with the goodwill associated with any of the foregoing, in each case other than names, marks, trade dress, logos, monograms, domain names and other source or business identifiers that are SLM Names and SLM Marks.

“NewCo Licensed Materials” shall have the meaning set forth in Section 2.14(a).

“NewCo Program Manager” shall have the meaning set forth in Section 7.1(a)(i).

“NewCo Common Stock” shall mean the common stock, par value $0.01 per share, of NewCo authorized by the NewCo Certificate of Incorporation.

“NewCo Software” shall mean all Software owned or licensed by Effective Time Sallie Mae other than the SLM BankCo Software; provided, that NewCo Software expressly excludes ATLAS Software.

“NewCo Technology” shall mean all Technology owned or by Effective Time Sallie Mae other than the SLM BankCo Technology; provided, that NewCo Technology expressly excludes ATLAS Software.

“NewCo Transfer Documents” shall have the meaning set forth in Section 2.4(b).

 

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“Non-assignable Contract” shall have the meaning set forth in Section 2.5(a).

“Non-Solicitation Period” shall have the meaning set forth in Section 5.5.

“Operating Agreement Amendment” shall have the meaning set forth in Section 5.3.

“Operating Agreement Amendment Proposal” shall have the meaning set forth in Section 5.3.

“Other IP” shall mean all Intellectual Property, other than Registrable IP, that is owned by, licensed by or to, or sublicensed by Effective Time Sallie Mae.

“Parties” shall mean (i) prior to the Effective Time, Existing SLM (including for this purpose only, Existing SLM Holdco after the Merger Effective Time), NewCo and SLM BankCo and (ii) from and after the Effective Time, NewCo and SLM BankCo.

“Person” shall mean an individual, a general or limited partnership, a corporation, a trust, a joint venture, an unincorporated organization, a limited liability entity, any other entity and any Governmental Authority.

“Plan of Merger” shall mean the Agreement and Plan of Merger by and among Existing SLM, SLM BankCo and MergerSub, substantially in the form of Exhibit E.

“Preferred Stock Period” shall have the meaning set forth in the SMI Certificate of Incorporation.

“Preferred Stock Purchase Agreement” shall mean the agreement between SMI and SLM BankCo pursuant to which SLM BankCo will purchase from SMI, for a purchase price of $1,000, [—] shares of SMI Preferred Stock.

“Pre-Separation Consumer Banking Business” shall mean the businesses, operations and activities conducted immediately prior to the Effective Time by Sallie Mae Bank, Upromise and Sallie Mae Business Services and their Subsidiaries.

“Pre-Separation Education Loan Management Business” shall mean (a) all businesses, operations and activities conducted at any time prior to the Merger Effective Time by or on behalf of Existing SLM and its Subsidiaries and Affiliates, other than the Pre-Separation Consumer Banking Business, and (b) all businesses, operations and conducted at any time prior to the Merger Effective Time by or on behalf of Existing SLM and its current and former Subsidiaries and Affiliates that have been sold, divested or discontinued, including the sold, divested or discontinued businesses and operations listed on Schedule 2.3(a)(v).

“Prime Rate” shall mean [—].

 

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“Private Education Loan” shall mean (A) a loan provided by a private educational lender that (i) is not made, insured or guaranteed under Title IV of the Higher Education Act of 1965 (20 U.S.C. 1070 et seq.); and (ii) is issued expressly for post-secondary educational expenses to a borrower, regardless of whether the loan is provided through the educational institution that the subject student attends or directly to the borrower from the private educational lender. For the avoidance of doubt, “Private Education Loan” does not include (x) an extension of credit under an open end consumer credit plan, a reverse mortgage transaction, a residential mortgage transaction or any other loan that is secured by real property or a dwelling or (y) a loan that consolidates or refinances an education loan.

“Private Loan Servicing Assets” shall mean (i) the Private Loan Servicing IP, (ii) all of the Equity Interests of Sallie Mae Business Services and (iii) those Assets and employees of SMI identified on Schedule 1.6, which are to be transferred to Private ServiceCo.

“Private Loan Servicing Business” shall mean the business, operations and activities conducted at any time after the Effective Time by Private Service Co.

“Private Loan Servicing IP” shall mean the Registrable IP set forth on Schedule 1.6 to be transferred to Private ServiceCo.

“Private Loan Servicing Liabilities” shall mean all of Liabilities of SMI that are to be transferred to Private ServiceCo and that are not NewCo Liabilities, as set forth on Schedule 1.7.

“Private ServiceCo” shall mean SMB Servicing Company, Inc., a Delaware corporation.

“Procedure” shall have the meaning set forth in Section 7.3(b).

“Program Managers” shall have the meaning set forth in Section 7.1(a)(ii).

“RE 2” shall have the meaning set forth in Section 2.1(d).

“RE 3” shall have the meaning set forth in Section 2.1(d).

“RE 5” shall have the meaning set forth in Section 2.1(g).

“Record Date” shall mean 4:00 p.m., Eastern Standard Time, on [—], 2014.

“Record Holders” shall mean the holders of record of issued and outstanding shares of Existing SLM Common Stock as of the Record Date.

“Registrable IP” shall mean all patents, patent applications, statutory invention registrations, registered trademarks, registered service marks, registered Internet domain names and copyright registrations.

 

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“Release” shall mean any release, spill, emission, discharge, leaking, pumping, pouring, dumping, injection, deposit, disposal, dispersal, leaching or migration of Hazardous Materials into the environment (including, ambient air, surface water, groundwater and surface or subsurface strata).

“Representatives” shall mean, with respect to any Person, any of such Person’s directors, officers, employees, agents, consultants, advisors, accountants, attorneys or other representatives.

“Sallie Mae Bank” shall mean Sallie Mae Bank, a Utah industrial bank and insured depository institution.

“Sallie Mae Board” shall mean (i) the Existing SLM Board prior to the Merger Effective Time and (ii) the SLM BankCo Board from and after the Merger Effective Time up to the Effective Time.

“Sallie Mae Business Services” shall mean Sallie Mae Business Services, LLC, a Delaware limited liability company.

“SEC” shall mean the United States Securities and Exchange Commission.

“Securitization Trust Notes” shall mean all notes backed by FFELP Loans or Private Education Loans issued by the Securitization Trusts.

“Securitization Trusts” shall mean any Delaware statutory trust established by any member of the NewCo Group or the SLM BankCo Group prior to the Effective Time for the purpose of issuing notes backed by FFELP Loans or Private Education Loans and listed on Schedule 1.1(b).

“Security Interest” shall mean any mortgage, security interest, pledge, lien, charge, claim, option, right to acquire, voting or other restriction, right-of-way, covenant, condition, easement, encroachment, restriction on transfer or other encumbrance of any nature whatsoever.

“Separation” shall have the meaning set forth in the Recitals.

“Separation Oversight Committee” shall have the meaning set forth in Section 7.1(b)(i).

“Separation Oversight Period” shall have the meaning set forth in Section 7.1(a)(iii).

“Shared Contract” shall have the meaning set forth in Section 2.5(a).

“Shared Policies” shall have the meaning set forth in Section 5.1(c).

 

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“SLM BankCo” shall have the meaning set forth in the Preamble.

“SLM BankCo Accounts” shall have the meaning set forth in Section 2.11(a).

“SLM BankCo Assets” shall have the meaning set forth in Section 2.2(b).

“SLM BankCo Balance Sheet” shall mean the consolidated balance sheet of SLM BankCo, including the notes thereto, as of December 31, 2013, to be filed as an exhibit on Form 8-K by SLM BankCo within four business days after the Distribution Date.

“SLM BankCo Board” shall mean the board of directors of SLM BankCo and any authorized committee thereof, as it is constituted from and after the Merger Effective Time.

“SLM BankCo Business” shall mean the businesses, operations and activities conducted at any time from and after the Effective Time by the SLM BankCo Group.

“SLM BankCo Bylaws” shall mean the Amended and Restated Bylaws of SLM BankCo in effect as of the Effective Time in effect as of the Effective Time.

“SLM BankCo Certificate of Incorporation” shall mean the Amended and Restated Certificate of Incorporation of SLM BankCo in effect as of the Effective Time.

“SLM BankCo Contracts” shall mean the contracts and agreements (whether or not in writing) listed on Schedule 1.2(b).

“SLM BankCo Common Stock” shall mean the common stock, par value $0.20 per share, authorized by the SLM BankCo Certificate of Incorporation.

“SLM BankCo Counsel” shall have the meaning set forth in Section 6.7(a).

“SLM BankCo Entities” shall have the meaning set forth in Section 2.2(b)(iii).

“SLM BankCo Group” shall mean SLM BankCo, each Subsidiary of SLM BankCo and each Affiliate of SLM BankCo, as constituted as of and after the Effective Time.

“SLM BankCo Indemnitees” shall have the meaning set forth in Section 4.2.

“SLM BankCo Intellectual Property” shall mean (a) the SLM Name and SLM Marks, and (b) all Other IP that is used or held for use exclusively in the Pre-Separation Consumer Banking Business, including the Intellectual Property set forth on Schedule 1.4.

“SLM BankCo Liabilities” shall have the meaning set forth in Section 2.3(b).

“SLM BankCo Program Manager” shall have the meaning set forth in Section 7.1(a)(ii).

 

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“SLM BankCo Series A Preferred Stock” shall mean the 6.97% Cumulative Redeemable Preferred Stock, Series A, par value $0.20 per shares, of SLM BankCo, as authorized by the SLM BankCo Certificate of Incorporation.

“SLM BankCo Series B Preferred Stock” shall mean the Floating Rate Non-Cumulative Preferred Stock, Series B, par value $0.20 per shares, of SLM BankCo, as authorized by the SLM BankCo Certificate of Incorporation.

“SLM BankCo Software” shall mean all Software that is owned or licensed by Effective Time Sallie Mae that is used or held for use exclusively in the Pre-Separation Consumer Banking Business.

“SLM BankCo Systems” shall have the meaning set forth in Section 2.2(b)(v).

“SLM BankCo Technology” shall mean all Technology that is owned or licensed by Effective Time Sallie Mae that is used or held for use exclusively in the Pre-Separation Consumer Banking Business.

“SLM BankCo Transfer Documents” shall have the meaning set forth in Section 2.4(a).

“SLM Names and SLM Marks” shall mean the names, marks, trade dress, logos, monograms, domain names and other source or business identifiers of Effective Time Sallie Mae using or containing “Sallie Mae,” “SLM,” or any other word or element listed on Schedule 1.5(b) (in block letters or otherwise), either alone or in combination with other words or elements, and all names, marks, trade dress, logos, monograms, domain names and other source or business identifiers confusingly similar to or embodying any of the foregoing either alone or in combination with other words or elements, together with the goodwill associated with any of the foregoing.

“SMI” shall mean Sallie Mae, Inc., a Delaware corporation.

“SMI Certificate of Incorporation” shall mean the Amended and Restated Certificate of Incorporation of SMI, substantially in the form of Exhibit F.

“SMI Board” shall mean the board of directors of SMI and any authorized committee thereof.

“SMI Licensed IP” shall have the meaning set forth in Section 2.1(k)(iv).

“SMI Preferred Stock” shall mean the preferred stock, par value $0.01 per share, of SMI authorized by the SMI Certificate of Incorporation.

“SMI Preferred Stock Issuance” shall have the meaning set forth in Section 2.1(n).

 

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“Software” shall mean any and all (a) computer programs, including any and all software implementation of algorithms, models and methodologies, whether in source code, object code, human readable form or other form, (b) databases and compilations, including any and all data and collections of data, whether machine readable or otherwise, (c) descriptions, flow charts and other work products used to design, plan, organize and develop any of the foregoing, (d) screens, user interfaces, report formats, firmware, development tools, templates, menus, buttons and icons and (e) documentation, including user manuals and other training documentation, relating to any of the foregoing.

“Sublease Agreement” shall mean the Sublease Agreement to be entered into by and between SLM BankCo and NewCo or their respective subsidiaries in connection with the Separation, the Distribution and the other transactions contemplated by this Agreement.

“Subsidiary” shall mean, with respect to any Person, any corporation, limited liability company, joint venture, trust or partnership of which such Person (a) beneficially owns, either directly or indirectly, more than fifty percent (50%) of (i) the total combined voting power of all classes of voting securities of such Person, (ii) the total combined equity interests or (iii) the capital or profit interests, in the case of a partnership, or (b) otherwise has the power to vote, either directly or indirectly, sufficient securities to elect a majority of the board of directors or similar governing body.

“Taxes” shall have the meaning set forth in the Tax Sharing Agreement.

“Tax Return” shall have the meaning set forth in the Tax Sharing Agreement.

“Tax Sharing Agreement” shall mean the Tax Sharing Agreement to be entered into by and between SLM BankCo and NewCo or their respective Subsidiaries in connection with the Separation, the Distribution and the other transactions contemplated by this Agreement.

“Technology” shall mean all technology, designs, formulae, algorithms, procedures, methods, discoveries, processes, techniques, ideas, know-how, research and development, technical data, tools, materials, specifications, processes, inventions (whether patentable or unpatentable and whether or not reduced to practice), apparatus, creations, improvements, works of authorship in any media, confidential, proprietary or nonpublic information, and other similar materials, and all recordings, graphs, drawings, reports, analyses and other writings, and other tangible embodiments of the foregoing in any form whether or not listed herein, in each case, other than Software.

“Third Party Claim” shall have the meaning set forth in Section 4.5(a).

“Transfer Documents” shall have the meaning set forth in Section 2.4(b).

“Transition Services Agreement” shall mean the Transition Services Agreement to be entered into by and between SLM BankCo and NewCo in connection with the Separation, the Distribution and the other transactions contemplated by this Agreement.

 

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“Unreleased NewCo Liability” shall have the meaning set forth in Section 2.8(b).

“Unreleased SLM BankCo Liability” shall have the meaning set forth in Section 2.9(b).

“Upromise” shall mean Upromise, Inc., a Delaware corporation.

ARTICLE II

THE SEPARATION

2.1 The Reorganization and Separation. Prior to the Distribution, the Parties shall take or cause to be taken the following actions (to the extent not taken prior to the date hereof):

(a) Formation of NewCo; Charter Documents. The Parties acknowledge that Existing SLM caused NewCo to be formed as a wholly owned Subsidiary of Existing SLM on November 7, 2013, for the purpose of holding the NewCo Assets following the Separation and the Distribution. By no later than the Merger Effective Time, Existing SLM and NewCo shall cause to be taken such action as may be required under the DGCL and NewCo’s charter documents to cause NewCo’s certificate of incorporation to become the NewCo Certificate of Incorporation and NewCo’s bylaws to become the NewCo Bylaws.

(b) Formation of Private ServiceCo. The Parties acknowledge that SMI caused Private ServiceCo to be formed as a wholly owned Subsidiary of SMI on September 12, 2013, for the purpose of holding the Private Loan Servicing Business following the Separation and the Distribution.

(c) Formation of SLM BankCo; Charter Documents. The Parties acknowledge that Existing SLM caused SLM BankCo to be formed as a wholly owned Subsidiary of Existing SLM on December 2, 2013, for the purpose of holding the SLM BankCo Assets following the Separation and the Distribution.

(d) Formation of RE 3. The Parties acknowledge that Existing SLM caused RE Services 2, LLC, a wholly owned subsidiary of Existing SLM (“RE 2”), to form RE Services 3, LLC, a Delaware limited liability company (“RE 3”), as a wholly owned Subsidiary of RE 2 on             , 201    , for the purpose of holding RE 2’s building located at 8320 Craig Street, Indianapolis, Indiana.

(e) Contribution to RE 3. The Parties acknowledge that Existing SLM caused RE 2 to contribute the building located at 8320 Craig Street, Indianapolis, Indiana, to RE 3 on [—], 2014.

 

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(f) Distribution of RE 3 to Existing SLM. On [—], 2014, RE 2 distributed 100% of the membership interests of RE 3 to Existing SLM, such that RE 3 is a wholly owned Subsidiary of Existing SLM.

(g) Contribution of RE 3 and RE 5 to Sallie Mae Bank. On [—], 2014, Existing SLM contributed 100% of the membership interests in RE 3 and 100% of the stock of RE Services 5, Inc., a Delaware corporation (“RE 5”), to Sallie Mae Bank, such that each of RE 3 and RE 5 is a wholly owned Subsidiary of Sallie Mae Bank.

(h) Formation of MergerSub. The Parties acknowledge that SLM BankCo caused MergerSub to be formed as a wholly owned Subsidiary of SLM BankCo on [—], 2014.

(i) Merger of Existing SLM and MergerSub. On the Distribution Date but prior to the Effective Time, Existing SLM shall merge with and into MergerSub (the “Merger”) in accordance with Section 251(g) of the DGCL, the Certificate of Merger and the Plan of Merger. As a result of the Merger and in accordance with the Plan of Merger: (i) MergerSub shall (x) continue as the surviving entity, (y) be governed by the Existing SLM Holdco Operating Agreement and (z) become a wholly owned Subsidiary of SLM BankCo; (ii) each issued and outstanding share of Existing SLM Common Stock shall be converted into one share of SLM BankCo Common Stock; (iii) each issued and outstanding share of Existing SLM Series A Preferred Stock shall be converted into one share of SLM BankCo Series A Preferred Stock; and (iv) each issued and outstanding share of Existing SLM Series B Preferred Stock shall be converted into one share of SLM BankCo Series B Preferred Stock. The directors and officers of Existing SLM immediately prior to the Merger Effective Time shall be the directors and officers of SLM BankCo as of the Merger Effective Time.

(j) Name Change of SLM BankCo. Immediately following the Merger Effective Time, SLM BankCo shall file an amendment to the SLM BankCo Certificate of Incorporation to change its name to “SLM Corporation,” and Existing SLM shall take such action as may be required under applicable Law to permit such filing.

(k) Contribution of Private Loan Servicing Business. Following the Merger Effective Time, Existing SLM Holdco shall cause SMI to contribute to Private ServiceCo all of the Private Loan Servicing Assets and Private Loan Servicing Liabilities, and Private ServiceCo shall accept such Private Servicing Loan Assets and assume such Private Loan Servicing Liabilities, as follows (the “Contribution”):

(i) Transfer and Assignment of Private Loan Servicing Assets. Existing SLM Holdco shall cause SMI to contribute, assign, transfer, convey and deliver to Private ServiceCo, and Private ServiceCo shall accept, from SMI, all of the direct or indirect right, title and interest in and to all of the Private Loan Servicing Assets.

 

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(ii) Acceptance and Assumption of Private Loan Servicing Liabilities. Existing SLM Holdco shall cause SMI to assign to Private ServiceCo, and Private ServiceCo shall assume and agree faithfully to timely perform, discharge and fulfill in accordance with their respective terms, all of the Private Loan Servicing Liabilities.

(iii) Contribution of Joint Ownership Interest in ATLAS Software. Existing SLM Holdco shall cause SMI to contribute, assign, transfer, convey and deliver to Private ServiceCo an undivided joint ownership interest in and to the ATLAS Software, subject to SMI’s retention of an undivided joint ownership interest and associated rights in the ATLAS Software. Subject to such joint ownership interest and Section 5.9, each joint owner of the Atlas Software shall otherwise have full rights of ownership with respect to the ATLAS Software, including, but not limited to the right to reproduce, use, develop, improve, perform, display, distribute, assign, nonexclusively sell, market, offer to sell, manufacture, license and sublicense, create derivative works of, perform, display and otherwise fully exploit the ATLAS Software, without the further consent of, or accounting to, the other joint owner. For the avoidance of doubt, all derivative works prepared from the ATLAS Software or any part thereof (collectively, “ATLAS Derivative Works”) after the Effective Time shall be and remain the exclusive property of the member of the NewCo Group or the SLM BankCo Group, as applicable, developing such ATLAS Derivative Work. Each joint owner of the Atlas Software shall have all right and ability to obtain registrations of the Registrable IP with respect to the ATLAS Derivative Works created by it.

(iv) Contribution of License to SMI Licensed IP. Existing SLM Holdco shall cause SMI to contribute, assign, transfer, convey and deliver to Private ServiceCo a nonexclusive, perpetual, royalty-free, transferable, assignable, sublicenseable, worldwide right and license to all Intellectual Property, Technology and Software, in each case (1) owned by SMI and (2) used or held for use in the Private Loan Servicing Business (the “SMI Licensed IP”), including, but not limited to the right to reproduce, use, develop, improve, perform, display, distribute, sell, offer to sell, nonexclusively license and sublicense, create derivative works from, and otherwise fully exploit without restriction, the SMI Licensed IP. For the avoidance of doubt, SMI Licensed IP expressly excludes (x) the ATLAS Software (as joint ownership of the same will be granted to Private ServiceCo in accordance with paragraph (iii) above), and (y) Private Loan Servicing IP (as the same will be contributed to Private ServiceCo in accordance with paragraph (ii) above).

(l) Distribution of Private ServiceCo Stock. Following the Contribution and the Merger Effective Time and prior to the Effective Time, Existing SLM Holdco shall cause SMI to distribute all of the Equity Interests of Private ServiceCo to Existing SLM Holdco, such that Private ServiceCo becomes a wholly owned Subsidiary of Existing SLM Holdco.

 

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(m) Distribution of Equity Interests of Certain Subsidiaries to SLM BankCo. Following the Contribution and the Merger Effective Time and prior to the Effective Time, Existing SLM Holdco shall distribute all of the Equity Interests of each of the Subsidiaries listed on Schedule 2.1(m) to SLM BankCo (the “Equity Distribution”), such that each of such Subsidiaries becomes a wholly owned Subsidiary of SLM BankCo.

(n) Issuance of SMI Preferred Stock. Following the Equity Distribution and prior to the Effective Time, SLM BankCo shall purchase from SMI [—] shares of SMI Preferred Stock for a purchase price of $1,000 pursuant to the Preferred Stock Purchase Agreement (the “SMI Preferred Stock Issuance”).

(o) Contribution of Existing SLM Holdco to NewCo. Following the Equity Distribution and the SMI Preferred Stock Issuance and prior to the Effective Time, SLM BankCo shall contribute all of the Equity Interests of Existing SLM Holdco to NewCo, such that Existing SLM Holdco becomes a wholly owned Subsidiary of NewCo.

(p) Transfer of Other Assets and Assumption of Other Liabilities. Prior to the Effective Time and to the extent not effected pursuant to the preceding provisions of this Section 2.1:

(i) Transfer and Assignment of any NewCo Assets held by SLM BankCo. SLM BankCo shall, and shall cause its Subsidiaries to, contribute, assign, transfer, convey and deliver to NewCo or a Subsidiary of NewCo designated by NewCo, and NewCo and such Subsidiary shall accept from SLM BankCo and its Subsidiaries, all of SLM BankCo’s and such Subsidiaries’ respective direct or indirect right, title and interest, in and to NewCo Assets, if any, owned or held for use by any member of the SLM BankCo Group immediately prior to the Effective Time.

(ii) Acceptance and Assumption of NewCo Liabilities. SLM BankCo shall, and shall cause its Subsidiaries to, assign to NewCo or a Subsidiary of NewCo designated by NewCo, and NewCo and such Subsidiary shall accept, assume and agree faithfully to timely perform, discharge and fulfill in accordance with their respective terms, NewCo Liabilities, if any, held by any member of the SLM BankCo Group immediately prior to the Effective Time.

(iii) Transfer and Assignment of any SLM BankCo Assets held by NewCo. NewCo shall, and shall cause its applicable Subsidiaries to, contribute, assign, transfer, convey and deliver to SLM BankCo, or a Subsidiary of SLM

 

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BankCo designated by SLM BankCo, and SLM BankCo or such Subsidiary shall accept from NewCo and its Subsidiaries, all of NewCo’s and such Subsidiaries’ respective direct or indirect right, title and interest in and to the SLM BankCo Assets, if any, owned or held for use by NewCo or any of its Subsidiaries immediately prior to the Effective Time.

(iv) Acceptance and Assumption of SLM BankCo Liabilities. NewCo shall, and shall cause its Subsidiaries to, assign to SLM BankCo or a Subsidiary of SLM BankCo designated by SLM BankCo, and SLM BankCo and such Subsidiary shall accept, assume and agree faithfully to timely perform, discharge and fulfill in accordance with their respective terms, SLM BankCo Liabilities, if any, held by any member of the NewCo Group immediately prior to the Effective Time.

(q) Contribution of Private ServiceCo to Sallie Mae Bank. SLM BankCo shall contribute all of the outstanding capital stock of Private ServiceCo to Sallie Mae Bank, such that Private ServiceCo becomes a wholly owned Subsidiary of Sallie Mae Bank.

2.2 NewCo Assets; SLM BankCo Assets.

(a) NewCo Assets. For purposes of this Agreement, “NewCo Assets” shall mean all Assets of Effective Time Sallie Mae other than the SLM BankCo Assets, including the following (without duplication):

(i) all NewCo Contracts and all rights, interests or claims of Effective Time Sallie Mae therein; provided that NewCo Contracts that are Shared Contracts shall be governed by Section 2.5 and be treated as NewCo Assets to the extent so treated therein;

(ii) all issued and outstanding Equity Interests in the entities listed on Schedule 2.2(a)(iii) (such Subsidiaries, the “NewCo Entities”);

(iii) all Assets included on the NewCo Balance Sheet, subject to any dispositions of Assets subsequent to the date of the NewCo Balance Sheet; provided that the amounts set forth on the NewCo Balance Sheet with respect to any Assets shall not be treated as minimum amounts or limitations on the amount of such Assets that are included in the definition of NewCo Assets pursuant to this clause (iv);

(iv) except with respect to the license rights granted pursuant to Section 2.14, all rights, interests and claims of Effective Time Sallie Mae to any NewCo Names and NewCo Marks, NewCo Intellectual Property, NewCo Software and NewCo Technology;

 

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(v) all Information or other rights and interests with respect to Information of Effective Time Sallie Mae that is exclusively related to the NewCo Assets, the NewCo Liabilities, the Pre-Separation Education Loan Management Business or the NewCo Entities and, subject to the provisions of any applicable Ancillary Agreements, a non-exclusive right to all Information of Effective Time Sallie Mae that is related to (but not exclusively related to) the NewCo Assets, the NewCo Liabilities, the Pre-Separation Education Loan Management Business or the NewCo Entities;

(vi) (A) the owned real property listed on Schedule 2.2(a)(vi)(A) and (B) the leases governing the leased real property listed on Schedule 2.2(a)(vi)(B);

(vii) any and all Assets of any member of the NewCo Group, as of the Effective Time, that are not SLM BankCo Assets; and

(viii) except as contemplated by Section 2.6(b), any and all other Assets (other than Intellectual Property, Software and Technology), owned or held by Effective Time Sallie Mae that have historically been used or held for use primarily in the Pre-Separation Education Loan Management Business that are not SLM BankCo Assets. The intention of this clause (viii) is to rectify any inadvertent omission of transfer or conveyance of any Asset to a member of the NewCo Group that, had the Parties given specific consideration to such Asset as of the date hereof, would have been designated a NewCo Asset. No Asset shall be deemed a NewCo Asset solely as a result of this clause (viii) if such Asset is within the category or type of Asset expressly covered by the terms of this Agreement or an Ancillary Agreement as being a SLM BankCo Asset unless NewCo can establish that the omission of the transfer or conveyance of such Asset to a member of the NewCo Group was inadvertent.

All rights of the NewCo Group in respect of Existing SLM insurance policies are set forth in Section 5.1 and shall not otherwise be included in the NewCo Assets.

(b) SLM BankCo Assets. For the purposes of this Agreement, “SLM BankCo Assets” shall mean (without duplication):

(i) all Assets that are expressly contemplated by this Agreement or any Ancillary Agreement (or the schedules hereto or thereto) to be Assets to be transferred to or retained by any member of the SLM BankCo Group, including the Private Loan Servicing Assets and the other Assets set forth on Schedule 2.2(b);

(ii) all SLM BankCo Contracts and all rights, interests or claims of Effective Time Sallie Mae therein, provided that SLM BankCo Contracts that are Shared Contracts shall be governed by Section 2.5 and be treated as SLM BankCo Assets to the extent so treated therein;

 

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(iii) all issued and outstanding Equity Interests in the entities listed on Schedule 2.2(b)(iii) (such Subsidiaries, the “SLM BankCo Entities”);

(iv) any cash or cash equivalents held at Sallie Mae Bank and $             to be withdrawn from NewCo Accounts prior to the Effective Time in accordance with Section 2.11(e);

(v) except with respect to the license rights granted pursuant to Section 2.14 and notwithstanding the separation and migration activities to be conducted pursuant to Section 5.8, any and all rights, interests and claims of Effective Time Sallie Mae to any of the SLM Names and SLM Marks, SLM BankCo Intellectual Property, SLM BankCo Software or SLM BankCo Technology, including, without limitation, the Intellectual Property, Software and Technology that are an integral part of the IT systems listed on Schedule 2.2(b)(v) (such systems, the “SLM BankCo Systems”);

(vi) (A) the owned real property listed on Schedule 2.2(b)(vi)(A) and (B) the leases governing the leased real property listed on Schedule 2.2(b)(vi)(B);

(vii) any and all Assets of any member of the SLM BankCo Group, as of the Effective Time, that are not expressly identified in this Agreement or in any Ancillary Agreement as NewCo Assets;

(viii) all Information or other rights or interests with respect to Information of Effective Time Sallie Mae that is exclusively related to the SLM BankCo Assets, the SLM BankCo Liabilities, the Pre-Separation Consumer Banking Business or the SLM BankCo Entities and, subject to the provisions of any applicable Ancillary Agreement, a non-exclusive right to all Information that is related to (but not exclusively related to) the SLM BankCo Assets, the SLM BankCo Liabilities, the Pre-Separation Consumer Banking Business or the SLM BankCo Entities; and

(ix) except as contemplated by Section 2.6(b), any and all other Assets (other than Intellectual Property, Software and Technology), owned or held by Effective Time Sallie Mae that have historically been used or held for use primarily in the Pre-Separation Consumer Banking Business. The intention of this clause (ix) is to rectify any inadvertent omission of transfer or conveyance of any Assets to a member of the SLM BankCo Group that, had the Parties given specific consideration to such Asset as of the date hereof, would have been designated a SLM BankCo Asset. No Asset shall be deemed to be a SLM BankCo Asset solely as a result of this clause (ix) if such Asset is within the category or type of Asset expressly covered by the terms of this Agreement or an Ancillary Agreement to be a NewCo Asset unless SLM BankCo can establish that the omission of the transfer or conveyance of such Asset to a member of the SLM BankCo Group was inadvertent.

 

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2.3 NewCo Liabilities; SLM BankCo Liabilities.

(a) NewCo Liabilities. For the purposes of this Agreement, “NewCo Liabilities” shall mean all Liabilities of Effective Time Sallie Mae other than SLM BankCo Liabilities, including the following Liabilities (without duplication):

(i) all Liabilities relating to, arising out of or resulting from:

(A) the operation of the Pre-Separation Education Loan Management Business and the Pre-Separation Consumer Banking Business at any time prior to the Effective Time, other than Liabilities relating to, arising out of or resulting from the Pre-Separation Consumer Banking Business that are expressly allocated to or assumed by a member of the SLM BankCo Group pursuant to this Agreement or any Ancillary Agreement;

(B) servicing and collections activities performed by Existing SLM or any of its Subsidiaries (including SMI) prior to the Effective Time with respect to Private Education Loans and FFELP Loans that are SLM BankCo Assets as of the Effective Time; provided, that such Liabilities are asserted on prior to the three-year anniversary of the Effective Time; and provided, further, that Liabilities which relate to corrective actions requiring SLM BankCo to change its practices or systems from those that existed prior to the Effective Time or arising from Government Authority interpretations of Laws or regulations that differ from the interpretations or positions that such Government Authority has previously taken shall be SLM BankCo Liabilities and not NewCo Liabilities; and

(C) the operation of the NewCo Business at any time from and after the Effective Time;

(ii) any and all Liabilities of any NewCo Entity that are not expressly provided by this Agreement or any Ancillary Agreement (or the schedules hereto or thereto) to be a SLM BankCo Liability;

(iii) all agreements, obligations and Liabilities of any member of the NewCo Group under the NewCo Contracts or any Non-Assignable Contracts;

(iv) all agreements, obligations and Liabilities of any member of the NewCo Group under this Agreement or any of the Ancillary Agreements;

(v) except to the extent set forth in Section 2.3(b)(iii), all Liabilities relating to, arising out of or resulting from any of the businesses and operations terminated, divested, sold or discontinued by Existing SLM or any of its current or former Subsidiaries of Affiliates prior to the Merger Effective Time, including the businesses and operations listed on Schedule 2.3(a)(v);

 

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(vi) all Liabilities reflected as liabilities or obligations of NewCo or its Subsidiaries on the NewCo Balance Sheet, subject to any discharge of such Liabilities subsequent to the date of the NewCo Balance Sheet; provided that the amounts set forth on the NewCo Balance Sheet with respect to any Liabilities shall not be treated as minimum amounts or limitations on the amount of such Liabilities that are included in the definition of NewCo Liabilities pursuant to this clause (v);

(vii) (A) all Liabilities relating to, arising out of or resulting from the Legacy Indebtedness, and (B) all Liabilities of any member of the SLM BankCo Group or the NewCo Group relating to, arising out of or resulting from the Securitization Trust Notes;

(viii) all Liabilities arising out of claims made by any current or former stockholder, director, officer, employee, or agent of any Party against such Party or any member of the SLM BankCo Group or the NewCo Group (or their respective directors, officers and employees) to the extent relating to, arising out of or resulting from (i) the Pre-Separation Education Loan Management Business or the other business, operations, activities or Liabilities referred to in clauses (i) through (vii) above, inclusive, (ii) the Pre-Separation Consumer Banking Business or (iii) the Separation and the Distribution; and

(ix) all Liabilities arising out of claims made by any current or former common or preferred stockholder of Existing SLM or SLM BankCo against any Party (or their respective directors, officers or employees) relating to, arising out of or resulting from the Separation and the Distribution.

(b) SLM BankCo Liabilities. For the purposes of this Agreement, “SLM BankCo Liabilities” shall mean (without duplication):

(i) those Liabilities related to, arising out of or resulting from the operation of the Pre-Separation Consumer Banking Business prior to the Effective Time identified on Schedule 2.3(b)(i);

(ii) all Liabilities reflected as liabilities or obligations of SLM BankCo or its Subsidiaries on the SLM BankCo Balance Sheet, subject to any discharge of such Liabilities subsequent to the date of the SLM BankCo Balance Sheet; provided that the amounts set forth on the SLM BankCo Balance Sheet with respect to any Liabilities shall not be treated as minimum amounts or limitations on the amount of such Liabilities that are included in the definition of SLM BankCo Liabilities pursuant to this clause (ii);

 

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(iii) the support activities set forth in the third party transition services agreements listed on Schedule 2.3(b)(i)(D);

(iv) all agreements, obligations and Liabilities of any member of the SLM BankCo Group under the SLM BankCo Contracts or any Non-Assignable Contracts;

(v) all agreements, obligations and Liabilities of any member of the SLM BankCo Group under this Agreement or any of the Ancillary Agreements;

(vi) the operation of the SLM BankCo Business at any time from and after the Effective Time; and

(vii) any and all Liabilities that are expressly contemplated by this Agreement or any Ancillary Agreement (or the schedules hereto or thereto) as Liabilities to be retained or assumed by SLM BankCo or any other member of the SLM BankCo Group.

2.4 Transfer Documents.

(a) SLM BankCo Transfer Documents. In furtherance of the contribution, assignment, transfer, conveyance and delivery of NewCo Assets and the assignment and assumption of NewCo Liabilities in accordance with Section 2.1, on or before the date that such NewCo Assets are contributed, assigned, transferred, conveyed or delivered or such NewCo Liabilities are assigned and assumed: (i) SLM BankCo shall execute and deliver, and shall cause its Subsidiaries to execute and deliver, such assignments, bills of sale, contribution agreements, distribution agreements, quitclaim deeds, stock powers, certificates of title, assignments of contracts and other instruments of transfer, conveyance and assignment as and to the extent necessary to evidence the contribution, assignment, transfer, conveyance and delivery of all of SLM BankCo’s and its Subsidiaries’ right, title and interest in and to the NewCo Assets to NewCo and its Subsidiaries, and (ii) NewCo shall execute and deliver, and shall cause its applicable Subsidiaries to execute and deliver, such assignments and assumptions of contracts and other instruments of assignment and assumption as and to the extent necessary to evidence the valid and effective assignment to and assumption by NewCo and its Subsidiaries of the NewCo Liabilities. All of the foregoing documents contemplated by this Section 2.4(a) shall be referred to collectively herein as the “SLM BankCo Transfer Documents.”

(b) NewCo Transfer Documents. In furtherance of the contribution, assignment, transfer, conveyance and delivery of SLM BankCo Assets and the assignment and assumption of SLM BankCo Liabilities set forth in Section 2.1, on or before the date that such SLM BankCo Assets are contributed, assigned, transferred, conveyed or delivered or such SLM BankCo Liabilities are assigned and assumed: (i) NewCo shall execute and deliver, and shall cause its Subsidiaries to execute and

 

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deliver, such assignments, bills of sale, contribution agreements, distribution agreements, quitclaim deeds, stock powers, certificates of title, assignments of contracts and other instruments of transfer, conveyance and assignment as and to the extent necessary to evidence the contribution, assignment, transfer, conveyance and delivery of all of NewCo’s and its Subsidiaries’ right, title and interest in and to the SLM BankCo Assets to SLM BankCo and its Subsidiaries and (ii) SLM BankCo shall execute and deliver, and shall cause its Subsidiaries to execute and deliver, such assignments and assumptions of contracts and other instruments of assignment and assumption as and to the extent necessary to evidence the valid and effective assignment to and assumption by SLM BankCo and its Subsidiaries of the SLM BankCo Liabilities. All of the foregoing documents contemplated by this Section 2.4(b) shall be referred to collectively herein as the “NewCo Transfer Documents” and, together with the SLM BankCo Transfer Documents, the “Transfer Documents.”

2.5 Treatment of Shared Contracts.

(a) Subject to applicable Law (including, in the case of the SLM BankCo Group, banking regulations and the advice of the SLM BankCo Group’s counsel in respect thereof), and without limiting the generality of the obligations set forth in this Article II, unless the Parties otherwise agree or the benefits of any contract, agreement, arrangement, commitment or understanding described in this Section 2.5 are expressly conveyed to a member of a Group pursuant to this Agreement or an Ancillary Agreement: (i) any contract, agreement, arrangement, commitment or understanding that is listed on Schedule 2.5(a) shall be assigned in part to one or more members of each Group, if so assignable, or appropriately duplicated, novated or amended prior to, on or after the Effective Time, so that each Party or one or more other members of its Group shall, as of the Effective Time, be entitled to the rights and benefits, and shall assume the related portion of any Liabilities, inuring to its respective businesses, in each case, in accordance with the allocation of benefits and burdens set forth on Schedule 2.5(a); and (ii) (A) any contract, agreement, arrangement, commitment or understanding that is an SLM BankCo Asset or SLM BankCo Liability but that, prior to the Effective Time, inured in part to the benefit or burden of any member of the NewCo Group (other than any such contract, agreement, arrangement, commitment or understanding covering substantially the same services or arrangements that are covered by a contract, agreement, arrangement, commitment or understanding entered into by a member of the NewCo Group in connection with the Separation), and (B) any contract, agreement, arrangement, commitment or understanding that is a NewCo Asset or a NewCo Liability but that, prior to the Effective Time, inured in part to the benefit or burden of any member of the SLM BankCo Group (other than any such contract, agreement, arrangement, commitment or understanding covering substantially the same services or arrangements that are covered by a contract, agreement, arrangement, commitment or understanding entered into by a member of the SLM BankCo Group in connection with the Separation), shall be assigned in part to the applicable member(s) of the other Group, if so assignable, or appropriately duplicated, novated or amended prior to, on or after the

 

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Effective Time, such that SLM BankCo and NewCo or the members of its respective Group shall, as of the Effective Time, be entitled to the rights and benefits, and shall assume the related portion of any Liabilities, that inured to its respective businesses immediately prior to the Effective Time (any contract, agreement, arrangement, commitment or understanding referred to in clause (i) or (ii) above, a “Shared Contract”); provided, however, that, in the case of each of clause (i) and (ii) above, (1) in no event shall any member of any Group be required to assign (or amend) any Shared Contract in its entirety or to assign a portion of any contract, agreement, arrangement, commitment or understanding which is not assignable (or cannot be amended) by its terms (including any terms imposing consents or conditions on an assignment where such consents or conditions have not been obtained or fulfilled) and (2) if any contract, agreement, arrangement, commitment or understanding cannot be so partially assigned by its terms or otherwise, or cannot be duplicated, novated or amended or if such assignment or amendment would impair the benefit the parties thereto derive therefrom (each, a “Non-assignable Contract”), then, each of NewCo and SLM BankCo shall, and shall cause their respective Subsidiaries to, take such other reasonable and permissible actions (including by providing prompt notice to SLM BankCo or NewCo, as the case may be, with respect to any relevant claim of Liability or other relevant matters arising in connection with a Non-assignable Contract so as to allow SLM BankCo or NewCo or other members of its respective Group the ability to exercise any applicable rights thereunder) to cause the appropriate member of the NewCo Group or the SLM BankCo Group, as the case may be, to receive the rights and benefits of that portion of each Non-assignable Contract that relates to the Pre-Separation Education Loan Management Business or the Pre-Separation Consumer Banking Business, as the case may be (in each case, to the extent so related), as if such Non-assignable Contract had been assigned to (or duplicated, novated or amended to allow) NewCo or SLM BankCo or a member of its Group, as the case may be, pursuant to this Section 2.5, and to bear the burden of the corresponding Liabilities (including any Liabilities that may arise by reason of such arrangement), as if such Liabilities had been assumed by a member of the applicable Group pursuant to this Section 2.5 as of the Effective Time, which shall be considered such Group’s Liabilities for purposes of Sections 4.2 and 4.3.

(b) Nothing in this Section 2.5 shall require any member of any Group to make any material payment (except to the extent advanced, assumed or agreed in advance to be reimbursed by any member of the other Group), incur any material obligation or grant any material concession for the benefit of any member of the other Group in order to effect any transaction contemplated by this Section 2.5.

2.6 Approvals and Notifications.

(a) Approvals and Notifications for NewCo Transfers. To the extent that the transfer or assignment of any NewCo Asset, the assignment and assumption of any NewCo Liability, the Separation or the Distribution requires any Approvals or Notifications, the Parties shall use their commercially reasonable efforts to obtain or

 

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make such Approvals or Notifications prior to the Effective Time or as soon as reasonably practicable thereafter; provided, however, that, except to the extent expressly provided in this Agreement or any of the Ancillary Agreements or as otherwise agreed between SLM BankCo and NewCo, neither SLM BankCo nor NewCo (nor any other member of its respective Group) shall be obligated to pay any consideration in any form (including providing any letter of credit, guaranty or other financial accommodation) to any Person in order to obtain or make such Approvals or Notifications.

(b) Delayed NewCo Transfers. If and to the extent that the valid, complete and perfected transfer or assignment to the NewCo Group of any NewCo Asset or assignment to or assumption by the NewCo Group of any NewCo Liability would be a violation of applicable Law or require any Approvals or Notifications in connection with the Separation or the Distribution that have not been obtained or made by the Effective Time, then, unless the Parties mutually shall otherwise determine, the transfer or assignment to the NewCo Group of such NewCo Assets or the assignment to and assumption by the NewCo Group of such NewCo Liabilities, as the case may be, shall be automatically deemed deferred and any such purported transfer, assignment or assumption shall be null and void until such time as all legal impediments are removed or such Approvals or Notifications have been obtained or made. Notwithstanding the foregoing, any such NewCo Assets or NewCo Liabilities shall continue to constitute NewCo Assets and NewCo Liabilities for all other purposes of this Agreement.

(c) Treatment of Delayed NewCo Assets and Delayed NewCo Liabilities. If any transfer or assignment of any NewCo Asset or any assumption of any NewCo Liability intended to be transferred, assigned or assumed hereunder, as the case may be, is not consummated on or prior to the Effective Time, whether as a result of the provisions of Section 2.6(b) or for any other reason (any such NewCo Asset, a “Delayed NewCo Asset” and any such NewCo Liability, a “Delayed NewCo Liability”), then, insofar as reasonably possible and subject to applicable Law (including banking regulations and the advice of the SLM BankCo Group’s counsel in respect thereof), the member of the SLM BankCo Group retaining such Delayed NewCo Asset or such Delayed NewCo Liability, as the case may be, shall thereafter hold such Delayed NewCo Asset or Delayed NewCo Liability in trust for the use and benefit of the member of the NewCo Group to whom such Delayed NewCo Asset is to be transferred or assigned, or which is to assume such Delayed NewCo Liability (at the expense of such member of the NewCo Group). In addition, the member of the SLM BankCo Group retaining such Delayed NewCo Asset or such Delayed NewCo Liability shall, insofar as reasonably possible and to the extent permitted by applicable Law (including banking regulations and the advice of the SLM BankCo Group’s counsel in respect thereof), treat such Delayed NewCo Asset or Delayed NewCo Liability as it did prior to the Effective Time in the ordinary course of business in accordance with past practice and take such other actions as may be reasonably requested by the member of the NewCo Group to whom such Delayed NewCo Asset is to be transferred or assigned, or which will assume such Delayed NewCo Liability, as the case may be, in order to place such member of the

 

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NewCo Group in a substantially similar position as if such Delayed NewCo Asset or Delayed NewCo Liability had been transferred, assigned or assumed as contemplated hereby and so that all the benefits and burdens of ownership relating to such Delayed NewCo Asset or Delayed NewCo Liability, as the case may be, including use, risk of loss, potential for gain, profit and dominion, control and command over such Delayed NewCo Asset or Delayed NewCo Liability, as the case may be, and all costs and expenses related thereto, shall inure from and after the Effective Time to the NewCo Group. Each of SLM BankCo and NewCo shall, and shall cause the members of its Group to, (i) treat for all Tax purposes the Delayed NewCo Assets and the Delayed NewCo Liabilities as Assets owned by, and/or Liabilities of, as applicable, NewCo, or its Subsidiaries, as applicable, not later than the Effective Time, and (ii) neither report nor take any Tax position (on a Tax Return or otherwise) inconsistent with such treatment (unless required by applicable Law).

(d) Transfer of Delayed NewCo Assets and Delayed NewCo Liabilities. If and when the Approvals or Notifications, the absence of which caused the deferral of the transfer or assignment of any Delayed NewCo Asset or the deferral of the assignment and assumption of any Delayed NewCo Liability pursuant to Section 2.6(b), are obtained or made, and, if and when any other legal impediments for the transfer or assignment of any Delayed NewCo Asset or the assignment and assumption of any Delayed NewCo Liability have been removed, the transfer or assignment of the applicable Delayed NewCo Asset or the assignment and assumption of the applicable Delayed NewCo Liability, as the case may be, shall be effected in accordance with the terms of this Agreement or any applicable Ancillary Agreement.

(e) Costs for Delayed NewCo Assets and Delayed NewCo Liabilities. No member of the SLM BankCo Group retaining a Delayed NewCo Asset or Delayed NewCo Liability due to the deferral of the transfer or assignment of such Delayed NewCo Asset or the deferral of the assignment and assumption of such Delayed NewCo Liability, as the case may be, shall be obligated, in connection with the foregoing, to expend any money unless the necessary funds are advanced (or otherwise made available) by NewCo or another member of the NewCo Group, other than reasonable out-of-pocket expenses, attorneys’ fees and recording or similar fees, all of which shall be promptly reimbursed by NewCo or the member of the NewCo Group entitled to such Delayed NewCo Asset or Delayed NewCo Liability.

(f) Approvals and Notifications for SLM BankCo Transfers. To the extent that the transfer or assignment of any SLM BankCo Asset or the assignment and assumption of any SLM BankCo Liability requires any Approvals or Notifications, the Parties shall use their commercially reasonable efforts to obtain or make such Approvals or Notifications prior to the Effective Time or as soon as reasonably practicable thereafter; provided, however, that, except to the extent expressly provided in this Agreement or in any Ancillary Agreement or as otherwise agreed between SLM BankCo and NewCo, neither SLM BankCo nor NewCo nor any member of their respective

 

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Groups shall be obligated to contribute capital or pay any consideration in any form (including providing any letter of credit, guaranty or other financial accommodation) to any Person in order to obtain or make such Approvals or Notifications.

(g) Delayed SLM BankCo Transfers. If and to the extent that the valid, complete and perfected transfer or assignment to the SLM BankCo Group of any SLM BankCo Asset or assignment to and assumption by the SLM BankCo Group of any SLM BankCo Liability would be a violation of applicable Law or require any Approval or Notification that has not been obtained or made by the Effective Time, then, unless the parties hereto mutually shall otherwise determine, the transfer or assignment to the SLM BankCo Group of such SLM BankCo Assets or the assignment to and assumption by the SLM BankCo Group of such SLM BankCo Liabilities, as the case may be, shall be automatically deemed deferred and any such purported transfer, assignment or assumption shall be null and void until such time as all legal impediments are removed or such Approval or Notification has been obtained or made. Notwithstanding the foregoing, any such SLM BankCo Assets or SLM BankCo Liabilities shall continue to constitute SLM BankCo Assets and SLM BankCo Liabilities for all other purposes of this Agreement.

(h) Treatment of Delayed SLM BankCo Assets and Delayed SLM BankCo Liabilities. If any transfer or assignment of any SLM BankCo Asset or any assignment to and assumption of any SLM BankCo Liability intended to be transferred, assigned or assumed hereunder, as the case may be, is not consummated on or prior to the Effective Time whether as a result of the provisions of Section 2.6(g) or for any other reason (any such SLM BankCo Asset, a “Delayed SLM BankCo Asset” and any such SLM BankCo Liability, a “Delayed SLM BankCo Liability”), then, insofar as reasonably possible, the member of the NewCo SLM BankCo Group to which such Delayed SLM BankCo Asset is to be transferred or assigned, or which is to assume such Delayed SLM BankCo Liability, as the case may be, and subject to applicable Law (including banking regulations and the advice of the SLM BankCo Group’s counsel in respect thereof), the member of the NewCo Group retaining such Delayed SLM BankCo Asset or such Delayed SLM BankCo Liability, as the case may be, shall thereafter hold such Delayed SLM BankCo Asset or Delayed SLM BankCo Liability in trust for the use and benefit of the member of the SLM BankCo Group to whom such Delayed SLM BankCo Asset is to be transferred or assigned, or which is to assume such Delayed SLM BankCo Liability (at the expense of such member of the SLM BankCo Group). In addition, the member of the NewCo Group retaining such Delayed SLM BankCo Asset or such Delayed SLM BankCo Liability shall, insofar as reasonably possible and to the extent permitted by applicable Law, treat such Delayed SLM BankCo Asset or Delayed SLM BankCo Liability as it did prior to the Effective Time in the ordinary course of business in accordance with past practice and take such other actions as may be reasonably requested by the member of the SLM Group to whom such Delayed SLM BankCo Asset is to be transferred or assigned, or which will assume such Delayed SLM BankCo Liability, as the case may be, in order to place such member of the SLM

 

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BankCo Group in a substantially similar position as if such Delayed SLM BankCo Asset or Delayed SLM BankCo Liability had been transferred, assigned or assumed as contemplated hereby and so that all the benefits and burdens of ownership relating to such Delayed SLM BankCo Asset or Delayed SLM BankCo Liability, as the case may be, including use, risk of loss, potential for gain, profits and dominion, control and command over such Delayed SLM BankCo Asset or Delayed SLM BankCo Liability, as the case may be, and all costs and expenses related thereto, shall inure from and after the Effective Time to the SLM BankCo Group. Each of SLM BankCo and NewCo shall, and shall cause the members of its Group to, (i) treat for all Tax purposes the Delayed SLM BankCo Assets and the Delayed SLM BankCo Liabilities as Assets owned by, and/or Liabilities of, as applicable, SLM BankCo, or its Subsidiaries, as applicable, not later than the Effective Time, and (ii) neither report nor take any Tax position (on a Tax Return or otherwise) inconsistent with such treatment (unless required by applicable Law).

(i) Transfer of Delayed SLM BankCo Assets and Delayed SLM BankCo Liabilities. If and when the Approvals or Notifications, the absence of which caused the deferral of the transfer or assignment of any Delayed SLM BankCo Asset or the deferral of the assignment and assumption of any Delayed SLM BankCo Liability, are obtained or made, and, if and when any other legal impediments for the transfer or assignment of any Delayed SLM BankCo Asset or the assignment and assumption of any Delayed SLM BankCo Liability have been removed, the transfer or assignment of the applicable Delayed SLM BankCo Asset or the assignment and assumption of the applicable Delayed SLM BankCo Liability, as the case may be, shall be effected in accordance with the terms of this Agreement and/or any applicable Ancillary Agreement.

(j) Costs for Delayed SLM BankCo Assets and Delayed SLM BankCo Liabilities. Any member of the NewCo Group retaining a Delayed SLM BankCo Asset or Delayed SLM BankCo Liability due to the deferral of the transfer or assignment of such Delayed SLM BankCo Asset or the deferral of the assignment and assumption of such Delayed SLM BankCo Liability, as the case may be, shall not be obligated, in connection with the foregoing, to expend any money unless the necessary funds are advanced (or otherwise made available) by a member of the SLM BankCo Group, other than reasonable out-of-pocket expenses, attorneys’ fees and recording or similar fees, all of which shall be promptly reimbursed by a member of the SLM BankCo Group.

2.7 Misallocations; Waiver of Bulk Sales Laws.

(a) Misallocations. In the event that at any time or from time to time (whether prior to, at or after the Effective Time), one Party hereto (or any member of such Party’s respective Group) shall receive or otherwise possess any Asset that is allocated to the other Party (or any member of such Party’s Group) pursuant to this Agreement or any Ancillary Agreement, such Party shall promptly transfer, or cause to

 

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be transferred, such Asset to the Party so entitled thereto (or to a member of such Party’s Group), and such Party (or member of its Group) shall accept such Asset. Prior to any such transfer, the Party (or member of its Group) receiving or possessing such Asset shall hold such Asset in trust for such other Party (or member of its Group). In the event that at any time or from time to time (whether prior to, at or after the Effective Time), one Party hereto (or any member of its Group) shall receive or otherwise assume any Liability that is allocated to the other Party (or a member of its Group) pursuant to this Agreement or any Ancillary Agreement, such Party (or member of its Group) shall promptly transfer, or cause to be transferred, such Liability to the other Party (or member of its Group) to which such Liability is allocated, and such Party (or member of its Group) shall accept, assume and agree to faithfully and time perform such Liability in accordance with its terms.

(b) Waiver of Bulk-Sale and Bulk-Transfer Laws. NewCo hereby waives compliance by each and every member of the SLM BankCo Group with the requirements and provisions of any “bulk-sale” or “bulk-transfer” Laws of any jurisdiction that may otherwise be applicable with respect to the transfer of any or all of the NewCo Assets to the members of the NewCo Group. SLM BankCo hereby waives compliance by each and every member of the NewCo Group with the requirements and provisions of any “bulk-sale” or “bulk-transfer” Laws of any jurisdiction that may otherwise be applicable with respect to the transfer of any or all of the SLM BankCo Assets to the members of the SLM BankCo Group.

2.8 Novation of NewCo Liabilities.

(a) Each of SLM BankCo and NewCo, at the request of the other, shall use its commercially reasonable efforts to obtain, or to cause to be obtained, as soon as reasonably practicable, any consent, substitution, approval or amendment required to novate or assign to NewCo or one or more other members of the NewCo Group designated by NewCo all NewCo Liabilities (including NewCo Contracts) and obtain in writing the unconditional release of each member of the SLM BankCo Group that is a party to any such NewCo Liabilities, so that, in any such case, the members of the NewCo Group shall be solely responsible for such NewCo Liabilities; provided, however, that, except as otherwise expressly provided in this Agreement or any of the Ancillary Agreements, neither SLM BankCo nor NewCo shall be obligated to contribute any capital or pay any consideration in any form (including providing any letter of credit, guaranty or other financial accommodation) to any third Person from whom any such consent, substitution, approval, amendment or release is requested.

(b) If SLM BankCo or NewCo is unable to obtain, or to cause to be obtained, any such required consent, substitution, approval, amendment or release and the applicable member of the SLM BankCo Group continues to be bound by a NewCo Liability (each, an “Unreleased NewCo Liability”), NewCo shall, to the extent not

 

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prohibited by Law, as indemnitor, guarantor, agent or subcontractor for such member of the SLM BankCo Group, as the case may be, (i) pay, perform and discharge fully all the obligations or other Liabilities of such member of the SLM BankCo Group that constitute Unreleased NewCo Liabilities from and after the Effective Time and (ii) use its commercially reasonable efforts to effect such payment, performance or discharge prior to any demand for such payment, performance or discharge is permitted to be made by the obligee thereunder on any member of the SLM BankCo Group. If and when any such consent, substitution, approval, amendment or release shall be obtained or the Unreleased NewCo Liabilities shall otherwise become assignable or able to be novated, SLM BankCo shall promptly assign, or cause to be assigned, and NewCo or the applicable NewCo Group member shall assume, such Unreleased NewCo Liabilities without exchange of further consideration.

2.9 Novation of SLM BankCo Liabilities.

(a) Each of SLM BankCo and NewCo, at the request of the other, shall use its commercially reasonable efforts to obtain, or to cause to be obtained, as soon as reasonably practicable, any consent, substitution, approval or amendment required to novate or assign to SLM BankCo or one or more other members of the SLM BankCo Group designated by SLM BankCo all SLM BankCo Liabilities and obtain in writing the unconditional release of each member of the NewCo Group that is a party to any such arrangements, so that, in any such case, the members of the SLM BankCo Group shall be solely responsible for such SLM BankCo Liabilities; provided, however, that, except as otherwise expressly provided in this Agreement or any of the Ancillary Agreements, neither SLM BankCo nor NewCo shall be obligated to contribute any capital or pay any consideration in any form (including providing any letter of credit, guaranty or other financial accommodation) to any third Person from whom any such consent, substitution, approval, amendment or release is requested.

(b) If SLM BankCo or NewCo is unable to obtain, or to cause to be obtained, any such required consent, substitution, approval, amendment or release and the applicable member of the NewCo Group continues to be bound by such SLM BankCo Liability (each, an “Unreleased SLM BankCo Liability”), SLM BankCo shall, to the extent not prohibited by Law, as indemnitor, guarantor, agent or subcontractor for such member of the NewCo Group, as the case may be, (i) pay, perform and discharge fully all the obligations or other Liabilities of such member of the NewCo Group that constitute Unreleased SLM BankCo Liabilities from and after the Effective Time and (ii) use its commercially reasonable efforts to effect such payment, performance or discharge prior to any demand for such payment, performance or discharge is permitted to be made by the obligee thereunder on any member of the NewCo Group. If and when any such consent, substitution, approval, amendment or release shall be obtained or the Unreleased SLM BankCo Liabilities shall otherwise become assignable or able to be novated, NewCo shall promptly assign, or cause to be assigned, and SLM BankCo or the applicable SLM BankCo Group member shall assume, such Unreleased SLM BankCo Liabilities without exchange of further consideration.

 

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2.10 Termination of Certain Agreements.

(a) Except as set forth in Section 2.10(b), in furtherance of the releases and other provisions of Section 4.1, NewCo and each member of the NewCo Group, on the one hand, and SLM BankCo and each member of the SLM BankCo Group, on the other hand, hereby terminate any and all agreements, arrangements, commitments or understandings, whether or not in writing, including each of the agreements set forth on Schedule 2.10(a), between or among NewCo and/or any member of the NewCo Group, on the one hand, and SLM BankCo and/or any member of the SLM BankCo Group, on the other hand, effective as of the Effective Time. No such terminated agreement, arrangement, commitment or understanding (including any provision thereof which purports to survive termination) shall be of any further force or effect after the Effective Time. At or prior to the Effective Time, each of NewCo and SLM BankCo shall deliver to the other Party a termination agreement executed by each member of such Party’s Group evidencing such terminations. Each Party shall, at the reasonable request of the other Party, take, or cause to be taken, such further actions as may be necessary to effect the foregoing.

(b) The provisions of Section 2.10(a) shall not apply to any of the following agreements, arrangements, commitments or understandings (or to any of the provisions thereof): (i) this Agreement and the Ancillary Agreements (and each other agreement or instrument expressly contemplated by this Agreement or any Ancillary Agreement to be entered into by any of the Parties or any of the members of their respective Groups which is to continue after the Effective Time); (ii) any agreements, arrangements, commitments or understandings listed or described on Schedule 2.10(b)(ii); (iii) any agreements, arrangements, commitments or understandings to which any Person other than the Parties hereto and their respective Affiliates is a party; (iv) any intercompany accounts payable or accounts receivable accrued as of the Effective Time that are reflected in the books and records of the Parties or otherwise documented in writing in accordance with past practices, which shall be settled in the manner contemplated by Section 2.10(c); (v) any agreements, arrangements, commitments or understandings to which any non-wholly owned Subsidiary of SLM BankCo or NewCo, as the case may be, is a party (it being understood that directors’ qualifying shares or similar interests will be disregarded for purposes of determining whether a Subsidiary is wholly owned); and (vi) any Shared Contracts.

(c) All outstanding intercompany accounts receivable and accounts payable between any member of the SLM BankCo Group, on the one hand, and any member of the NewCo Group, on the other hand, shall, prior to the Effective Time, be repaid, settled or otherwise eliminated by means of cash payments, a dividend, capital contribution, a combination of the foregoing, or otherwise as determined by Existing

 

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SLM in its sole and absolute discretion; provided, however, that any intercompany accounts payable or accounts receivable accrued as of the Effective Time that has not been invoiced prior to the Effective Time shall be paid in accordance with past practices and provided, further, that no indebtedness (i) between SMI and its Subsidiaries, on the one hand, and Private ServiceCo, on the other hand, and (ii) between a member of the SLM BankCo Group, on the one hand, and a member of the NewCo Group, on the other hand, will be settled or cancelled in connection with the Separation and Distribution other than the settlement of intercompany loans and intercompany open account balances attributable to the normal business operations of SMI or any member of the SLM BankCo Group prior to the Effective Time.

2.11 Bank Accounts; Cash Balances.

(a) SLM BankCo and NewCo each agrees to take, or cause the respective members of their respective Groups to take, as of the Effective Time (or such earlier time as SLM BankCo and NewCo may agree), all actions necessary to amend all contracts or agreements governing each bank and brokerage account owned by NewCo or any other member of the NewCo Group (collectively, the “NewCo Accounts”) and all contracts or agreements governing each bank or brokerage account owned by SLM BankCo or any other member of the SLM BankCo Group (collectively, the “SLM BankCo Accounts”) such that each such NewCo Account and SLM BankCo Account, if currently linked (whether by automatic withdrawal, automatic deposit or any other authorization to transfer funds from or to, hereinafter “linked”) to any SLM BankCo Account or NewCo Account, respectively, is delinked from such SLM BankCo Account or NewCo Account, respectively.

(b) It is intended that following consummation of the actions contemplated by Section 2.11(a) there will be in place a centralized cash management process pursuant to which the NewCo Accounts will be managed centrally and funds collected will be transferred into one or more centralized accounts maintained by NewCo.

(c) It is intended that following consummation of the actions contemplated by Section 2.11(a) there will continue to be in place a centralized cash management process pursuant to which the SLM BankCo Accounts will be managed centrally and funds collected will be transferred into one or more centralized accounts maintained by SLM BankCo.

(d) With respect to any outstanding checks issued or payments initiated by SLM BankCo, NewCo, or any of their respective Subsidiaries prior to the Effective Time, such outstanding checks and payments shall be honored following the Effective Time by the Person or Group owning the account on which the check is drawn or from which the payment was initiated, respectively.

 

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(e) As between SLM BankCo and NewCo (and the members of their respective Groups) all payments made to and reimbursements received by either Party (or member of its Group) after the Effective Time that relate to a business, Asset or Liability of the other Party (or member of its Group) shall be held by such Party (or member of its Group) in trust for the use and benefit of the Party (or member of its Group) entitled thereto and, promptly following receipt by such Party (or member of its Group) of any such payment or reimbursement, such Party shall pay over, or shall cause the applicable member of its Group to pay over, to the other Party (or the member of its Group) the amount of such payment or reimbursement without right of set-off.

2.12 Ancillary Agreements. Effective at or prior to the Effective Time, each of SLM BankCo and NewCo (and the applicable members of their respective Groups) will execute and deliver each Ancillary Agreement to which it is a party.

2.13 Disclaimer of Representations and Warranties. EACH OF SLM BANKCO (ON BEHALF OF ITSELF AND EACH MEMBER OF THE SLM BANKCO GROUP) AND NEWCO (ON BEHALF OF ITSELF AND EACH MEMBER OF THE NEWCO GROUP) UNDERSTANDS AND AGREES THAT, EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN ANY ANCILLARY AGREEMENT, NO PARTY TO THIS AGREEMENT, ANY ANCILLARY AGREEMENT OR ANY OTHER AGREEMENT OR DOCUMENT CONTEMPLATED BY THIS AGREEMENT, ANY ANCILLARY AGREEMENT OR OTHERWISE, IS REPRESENTING OR WARRANTING IN ANY WAY AS TO THE ASSETS, BUSINESSES OR LIABILITIES TRANSFERRED OR ASSUMED AS CONTEMPLATED HEREBY OR THEREBY, AS TO ANY CONSENTS OR APPROVALS REQUIRED IN CONNECTION THEREWITH, AS TO THE VALUE OR FREEDOM FROM ANY SECURITY INTERESTS OF, OR ANY OTHER MATTER CONCERNING, ANY ASSETS OF SUCH PARTY, OR AS TO THE ABSENCE OF ANY DEFENSES OR RIGHT OF SETOFF OR FREEDOM FROM COUNTERCLAIM WITH RESPECT TO ANY CLAIM OR OTHER ASSET, INCLUDING ANY ACCOUNTS RECEIVABLE, OF ANY PARTY, OR AS TO THE LEGAL SUFFICIENCY OF ANY ASSIGNMENT, DOCUMENT OR INSTRUMENT DELIVERED HEREUNDER TO CONVEY TITLE TO ANY ASSET OR THING OF VALUE UPON THE EXECUTION, DELIVERY AND FILING HEREOF OR THEREOF. EXCEPT AS MAY EXPRESSLY BE SET FORTH HEREIN OR IN ANY ANCILLARY AGREEMENT, ALL SUCH ASSETS ARE BEING TRANSFERRED ON AN “AS IS,” “WHERE IS” BASIS (AND, IN THE CASE OF ANY REAL PROPERTY, BY MEANS OF A QUITCLAIM OR SIMILAR FORM OF DEED OR CONVEYANCE) AND THE RESPECTIVE TRANSFEREES SHALL BEAR THE ECONOMIC AND LEGAL RISKS THAT (I) ANY CONVEYANCE WILL PROVE TO BE INSUFFICIENT TO VEST IN THE TRANSFEREE GOOD AND MARKETABLE TITLE, FREE AND CLEAR OF ANY SECURITY INTEREST, AND (II) ANY NECESSARY APPROVALS OR NOTIFICATIONS ARE NOT OBTAINED OR MADE OR THAT ANY REQUIREMENTS OF LAWS OR JUDGMENTS ARE NOT COMPLIED WITH.

 

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2.14 Intellectual Property.

(a) License Grant. As of the Effective Time, NewCo and the members of the NewCo Group hereby grant to SLM BankCo and the other members of the SLM BankCo Group a non-exclusive, perpetual, royalty-free, transferable, assignable, sublicenseable, worldwide right and license to all (x) Other IP constituting NewCo Intellectual Property, (y) NewCo Software and (z) NewCo Technology, in each case that is used or held for use in the Pre-Separation Consumer Banking Business (the “NewCo Licensed Materials”), including the NewCo Licensed Materials necessary for the operation of the systems identified on Schedule 2.14(a) in the ordinary course of the Pre-Separation Consumer Banking Business, and including, but not limited to the right to reproduce, use, develop, improve, perform, display, distribute, sell, offer to sell, nonexclusively license and sublicense, create derivative works from, and otherwise fully exploit without restriction, the NewCo Licensed Materials.

(b) Covenant to Enforce.

(i) If either of SLM BankCo or NewCo becomes aware of potential infringement by a third party of the ATLAS Software, then that Party will notify the other Party as soon as possible, and the Parties agree to discuss and determine how best to secure the cessation of such infringement. If the Parties agree to begin an action for infringement against a third party, then prior to asserting such action, the Parties shall negotiate in good faith to determine the allocation of the expenses and disbursements paid in connection with such action and the allocation of all monies actually received as a result of the infringement action. If the Parties cannot agree to begin such an action or cannot agree on the allocation of expenses and disbursements, then either Party will have the right to prosecute the infringement action, and that Party will bear all the expense and be entitled to retain all monies received from such action. If during a joint infringement action either Party decides to discontinue its participation in the action, then if the other Party wishes to continue it shall pay all future expenses associated with such action and will retain all monies or consideration from such action after first reimbursing any action-related expenses incurred by the discontinuing Party at a rate equal to the percentage of total expenses contributed by the discontinuing Party up to the date of discontinuance.

(ii) If at any time, SLM BankCo (on its behalf or on the behalf of any member of the SLM BankCo Group) brings to the attention of NewCo any unlicensed infringement of the NewCo Licensed Materials (as they exist as of the Effective Time and excluding any modifications or enhancements made by SLM BankCo or the members of the SLM BankCo Group) that is affecting or could reasonably be expected to affect SLM BankCo’s or the members of the SLM BankCo Group’s rights hereunder, including SLM BankCo and the members of the SLM BankCo Group’s rights to use the NewCo Licensed Materials, then NewCo will (i) use commercially reasonable efforts to secure cessation of the

 

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infringement and (ii) if commercially reasonable under the circumstances (taking into consideration, among other things, costs and expected financial outcome), bring and diligently prosecute a lawsuit against the infringer. NewCo in its own name will bring and prosecute such suit. SLM BankCo will join in such suit with NewCo to the extent required by Law, but may otherwise join in such suit at its option.

(iii) If SLM BankCo joins in such suit with NewCo, the Parties shall jointly control such suit and cooperate with each other with respect to such suit. If either NewCo or SLM BankCo fails to jointly diligently prosecute any such suit, the other Party may solely prosecute such suit and the Party failing to jointly bring or prosecute shall use commercially reasonable efforts to cooperate with the other Party if it determines to proceed with such suit.

(iv) NewCo and SLM BankCo will be entitled to any separate recoveries from such suit as may be awarded to each of them, respectively.

(v) If NewCo fails to (i) secure cessation of the infringement or bring and diligently prosecute suit against the infringer within 60 days after the receipt by NewCo of SLM BankCo’s notice pursuant to paragraph (i) above, or (ii) diligently prosecute any suit joined by SLM BankCo pursuant to paragraph (i) above, then, subject to paragraph (iii) above, SLM BankCo shall be entitled to bring and prosecute actions or claims against such infringer on behalf of SLM Bankco, the members of the SLM BankCo Group and NewCo.

(vi) Each Party will bear its own costs and expenses (including legal fees and expenses) incurred in connection with any suits brought pursuant to this paragraph (b), including suits brought by SLM BankCo pursuant to subparagraphs (iii) and (v) above.

(c) Covenants Not to Sue.

(i) NewCo covenants and agrees on behalf of itself and the members of the NewCo Group to take no action, directly or indirectly, to file or to cause to be filed any suit or institute or assist in instituting any proceeding in any court or tribunal, wherever located, against SLM BankCo or any other member of the SLM BankCo Group for any claims or causes of action arising from or relating to the infringement of NewCo Intellectual Property by the modifications, enhancements or derivative works of the ATLAS Software, the SMI Licensed Materials or NewCo Licensed Materials created in compliance with this Agreement, any Ancillary Agreement and Intellectual Property associated therewith, which NewCo and the members of the NewCo Group has, may have or hereafter might have, for or because of any matter or thing done, omitted or suffered to be done from and after the Effective Time.

 

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(ii) SLM BankCo covenants and agrees on behalf of itself and the members of the SLM BankCo Group to take no action, directly or indirectly, to file or to cause to be filed any suit or institute or assist in instituting any proceeding in any court or tribunal, wherever located, against NewCo or any member of the NewCo Group for any claims or causes of action arising from or relating to the infringement of SLM BankCo Intellectual Property (excluding the Private Loan Servicing IP) by the modifications, enhancements or derivative works of the ATLAS Software created in compliance with this Agreement, any Ancillary Agreement and Intellectual Property associated therewith, which SLM BankCo and the members of the SLM BankCo Group has, may have or hereafter might have, for or because of any matter or thing done, omitted or suffered to be done from and after the Effective Time.

(d) Names and Marks.

(i) Except as provided in, contemplated by or required in connection with the provision of services pursuant to any Ancillary Agreement or as provided in this Section 2.14(d), as of the Effective Time (A) NewCo shall not have any right to use or display the SLM Names or the SLM Marks in any form and (B) SLM BankCo shall not have the right to use or display the NewCo Names or the NewCo Marks in any form; provided, however, that (x) to the extent such SLM Names and SLM Marks were used or displayed by any member of the NewCo Group prior to the Effective Time, the members of the NewCo Group shall, as soon as reasonably practicable, but in any event within one year after the Effective Time, at their expense, cease all use or display of all SLM Names and SLM Marks and shall remove any and all references to the SLM Names and SLM Marks on Assets owned or held by them (including on business cards, stationary, commercial signs and similar identifiers) that refer or pertain specifically to the SLM Names and SLM Marks, (y) to the extent such NewCo Names and NewCo Marks were used or displayed by any member of the SLM BankCo Group prior to the Effective Time, the members of the SLM BankCo Group shall, as soon as reasonably practicable, but in any event within one year after the Effective Time, at their expense, cease all use or display of all NewCo Names and NewCo Marks and shall remove any and all references to the NewCo Names and NewCo Marks on Assets owned or held by them (including on business cards, stationary, commercial signs and similar identifiers) that refer or pertain specifically to the NewCo Names and NewCo Marks and (z) that NewCo shall have the right to continue to use the SLM Names and SLM Marks in perpetuity (i) to the extent they are incorporated into historical memorabilia, awards, customer benefit programs, and the like prior to the Effective Time, (ii) in new material that refers to the SLM Names and SLM Marks in the context of the loans made to any customer that carry such trademarked/service-marked benefit or name and (iii) as set forth on Schedule 2.14(d). In addition, each party shall have the right to use the others’ respective Names and Marks in perpetuity to the extent they are

 

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incorporated into materials that speak generally to the history of the respective companies. Each Party hereby grants to the other Party’s Group, for a period of up to one year following the Effective Time, a worldwide, non-exclusive, non-transferable, royalty-free license to use the SLM Name and SLM Marks or NewCo Name and NewCo Marks, as applicable, on the Assets used in the licensee’s respective businesses as of the Effective Time. Each Party shall use the names and marks of the other Party as allowed hereunder only in connection with goods or services that are of a level of quality at least equal to the quality of comparable goods or services marketed by that Party (or members of its respective Group) before the Effective Time.

(ii) Notwithstanding the foregoing, nothing contained in this Agreement will prevent any Party (or any member of its respective Group) from using the other’s names or marks in filings with Governmental Authorities, materials intended for distribution to such Party’s stockholders or any other communication (including correspondence) in any medium that describes the current or former relationship between the Parties (or members of their respective Groups).

2.15 Financial Information Certifications.

(a) If requested by SLM BankCo, and in order to assist or enable the principal executive officer or officers, principal financial officer or officers and controller or controllers of SLM BankCo to make the certifications required of them under Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 (“SOX Certifications”), NewCo shall provide certification statement as to the NewCo Group for the fiscal quarter during which the Distribution Date occurs to those certifying officers of SLM BankCo, which certifications shall be in substantially the same form as had been provided by officers of Existing SLM in SOX Certifications delivered prior to the Distribution Date (provided that such certifications shall be made by NewCo rather than individual officers), or as otherwise agreed upon between the Parties. Such certification statements shall also reflect any changes from prior SOX Certifications necessitated by the transactions contemplated by this Agreement.

(b) If requested by NewCo, and in order to enable the principal executive officer or officers, principal financial officer or officers and controller or controllers of NewCo to make the SOX Certifications, SLM BankCo shall provide a certification statements as to the SLM BankCo Group for the fiscal quarter during which the Distribution Date occurs to those certifying officers of NewCo, which certifications shall be in substantially the same form as had been provided by officers of Subsidiaries of Existing SLM to support SOX Certifications delivered by officers of Existing SLM prior to the Distribution Date (provided that such certification shall be made by SLM BankCo rather than individual officers), or as otherwise agreed upon between the Parties. Such certification statements shall also reflect any changes necessitated by the transactions contemplated by this Agreement.

 

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2.16 Misdirected Communications. If, on or after the Effective Time, any member of a Group receives any mail, courier package, facsimile transmission, invoice, purchase order, written service request or other written document that is intended for a member of the other Group or that, in the case of the SLM BankCo Group, relates to the Pre-Separation Education Loan Management Business or the NewCo Business or, in the case of the NewCo Group, relates to the Pre-Separation Consumer Banking Business or the SLM BankCo Business, such documents shall be forwarded to the other Group, no later than [—] Business Days after the date of receipt thereof, as follows: (a) if to the NewCo Group, by email addressed to [—] or delivery at the following address: [—] and (b) if to the SLM BankCo Group, by email addressed to [—] or delivery at the following address: [—].

2.17 Parent Guarantee. Prior to or as of the Effective Time, NewCo shall execute a full and unconditional guarantee of all unsecured notes of Existing SLM Holdco issued under the Indentures and outstanding as of the Effective Time, and shall take such further action as may be necessary pursuant to Rule 12h-5 under the Exchange Act and Rule 3-10 of Regulation S-X to eliminate any requirement that Existing SLM Holdco, after the Effective Time, continue to file periodic reports under the Exchange Act.

ARTICLE III

THE DISTRIBUTION

3.1 Sole and Absolute Discretion; Cooperation.

(a) The Sallie Mae Board shall, in its sole and absolute discretion, determine the timing of the Distribution and the conditions to the consummation of the Distribution. In addition, Existing SLM may, at any time and from time to time until the Effective Time, delay the timing of, or cancel, the Distribution. For the avoidance of doubt, nothing in this Agreement shall in any way limit the right of the Sallie Mae Board to terminate the Distribution or cancel this Agreement and the Ancillary Agreements prior to the Effective Time.

(b) Each of the Parties shall cooperate with the others to accomplish the Distribution and shall take any and all actions necessary or desirable to effect the Distribution, including in respect of the registration under the Exchange Act of shares of NewCo Common Stock pursuant to the Form 10.

 

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3.2 Actions Prior to the Distribution. Prior to the Effective Time and subject to the terms and conditions set forth herein, the Parties shall take, or cause to be taken, the following actions in connection with the Distribution:

(a) Notice to NASDAQ. Existing SLM shall, to the extent practicable, give the NASDAQ (i) not less than 15 days’ advance notice of the Merger and (ii) not less than 10 days’ advance notice of the Record Date in compliance with Rule 10b-17 under the Exchange Act.

(b) Certificate of Incorporation and Bylaws. Prior to the Effective Time, Existing SLM and NewCo shall take all necessary actions so that, as of the Effective Time, the NewCo Certificate of Incorporation and NewCo Bylaws shall be the certificate of incorporation and bylaws of NewCo.

(c) NewCo Directors and Officers. Existing SLM and NewCo shall take all necessary actions so that as of the Effective Time: (i) the directors and executive officers of NewCo shall include those set forth in the Information Statement mailed to the Record Holders; and (ii) each individual referred to in clause (i) shall have resigned from his or her position, if any, as a member of the SLM BankCo Board and/or as an executive officer of SLM BankCo or the Sallie Mae Bank.

(d) Exchange Listing. NewCo shall prepare and file, and shall use its reasonable best efforts to have approved, an application for the listing on the NASDAQ, subject to official notice of distribution, of the shares of NewCo Common Stock to be distributed in the Distribution.

(e) Securities Law Matters. NewCo shall file such amendments to the Form 10 or supplements to the Information Statement as may be necessary or advisable in order to cause the Form 10 to remain effective and the Information Statement to remain current in compliance with federal securities Laws. The Parties shall cooperate in preparing, filing with the SEC and causing to become effective registration statements or amendments thereof which are required to reflect the establishment of, or amendments to, any employee benefit and other plans necessary or advisable in connection with the transactions contemplated by this Agreement and the Ancillary Agreements (including the Employee Matters Agreement) . Existing SLM and NewCo will prepare, and NewCo will, to the extent required under applicable Law, file with the SEC such documentation, including no-action letters, which Existing SLM may determine to be necessary or desirable to lawfully effectuate the Distribution, and Existing SLM and NewCo shall each use its reasonable best efforts to obtain all necessary approvals from the SEC with respect thereto as soon as practicable. The Parties shall take all such action, if any, as may be necessary or appropriate under the securities or blue sky laws of any State of the United States (and any comparable Laws under any foreign jurisdiction) in connection with the Distribution.

 

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(f) Mailing of Information Statement. Existing SLM shall cause the Information Statement to be mailed to the Record Holders.

(g) The Distribution Agent. Existing SLM and SLM BankCo shall enter into a distribution agent agreement with the Agent or otherwise provide instructions to the Agent regarding the Distribution.

3.3 Conditions to the Distribution.

(a) The consummation of the Distribution will be subject to the satisfaction, or waiver by the Sallie Mae Board in its sole and absolute discretion, of the following conditions:

(i) The SEC declaring effective the Form 10, with no order suspending the effectiveness of the Form 10 in effect and no proceedings for such purposes pending before or threatened by the SEC.

(ii) The Information Statement and such other information concerning NewCo, its business, operations and management, the Distribution and such other matters as Existing SLM shall determine, in its sole and absolute discretion and as may otherwise be required by Law, shall have been mailed to the Record Holders.

(iii) Existing SLM shall have received a private letter ruling from the IRS (the “IRS Ruling”) to the effect that, among other things, (A) the 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 Distribution, together with the contribution described in Section 2.1(o), 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 such IRS Ruling shall not have been revoked or modified in any material respect.

(iv) Existing SLM and SLM BankCo shall have received an opinion from Baker Botts L.L.P. to the effect that the Distribution, together with the contribution described in Section 2.1(o), shall qualify as a transaction that is described in Sections 355(a) and 368(a)(1)(D) of the Code.

(v) An independent appraisal firm acceptable to Existing SLM shall have delivered one or more opinions to the Existing SLM Board confirming the solvency and financial viability of Existing SLM and SLM BankCo before the consummation of the Distribution and each of SLM BankCo and NewCo after consummation of the Distribution, and such opinions shall be acceptable to the Sallie Mae Board in its sole and absolute discretion and such opinions shall not have been withdrawn or rescinded.

 

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(vi) The Separation shall have occurred as contemplated by Section 2.1.

(vii) The actions and filings necessary or appropriate under applicable U.S. federal, U.S. state or other securities Laws or blue sky Laws and the rules and regulations thereunder shall have been taken or made, and, where applicable, have become effective or been accepted.

(viii) Each of the Ancillary Agreements shall have been duly executed and delivered by the parties thereto.

(ix) No order, injunction or decree issued by any Governmental Authority of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Separation, the Distribution or any of the transactions related thereto shall be pending, threatened, issued or in effect.

(x) The approval for listing on the NASDAQ of the shares of NewCo Common Stock to be delivered in the Distribution shall have been obtained, subject to official notice of distribution.

(xi) No other events or developments shall exist or shall have occurred that, in the judgment of the Sallie Mae Board, in its sole and absolute discretion, makes it inadvisable to effect the Separation, the Distribution or the transactions related thereto.

(b) The foregoing conditions are for the sole benefit of Existing SLM and, following the Merger Effective Time, Effective Time Sallie Mae, and shall not give rise to or create any duty on the part of the Sallie Mae Board to waive or not waive any of such conditions or in any way limit the Sallie Mae Board’s right to terminate this Agreement as set forth in Article IX. Any determination made by the Existing SLM Board prior to the Distribution concerning the satisfaction or waiver of any or all of the conditions. If the Sallie Mae Board waives any condition set forth in Section 3.3(a), it shall promptly issue a press release disclosing such fact and file a Current Report on Form 8-K with the SEC describing such waiver.

3.4 The Distribution.

(a) Subject to Section 3.3, prior to the Effective Time, NewCo will deliver to the Agent authorizations for such number of outstanding shares of NewCo Common Stock as is necessary to effect the Distribution, and shall cause the transfer agent for the Existing SLM Common Stock to instruct the Agent to credit on the stock transfer records of the Agent, on the Distribution Date, for the benefit of each holder of SLM BankCo Common Stock on the Record Date, or its designated transferee or transferees, the appropriate number of shares of NewCo Common Stock by way of direct registration in book-entry form. The Distribution shall be deemed effective at the Effective Time.

(b) Subject to Sections 3.3, each record holder of shares of Existing SLM Common Stock on the Record Date will be entitled to receive in the Distribution one share of NewCo Common Stock for each whole share of Existing SLM Common Stock held by such record holder on the Record Date. For the avoidance of doubt, holders of shares of Existing SLM Preferred Stock shall not be entitled to receive any shares of capital stock of NewCo in the Distribution.

 

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ARTICLE IV

MUTUAL RELEASES; INDEMNIFICATION

4.1 Release of Pre-Distribution Claims.

(a) Except as provided in Sections 4.1(c) and 4.1(d) and any Ancillary Agreement, effective as of the Effective Time, NewCo does hereby, for itself and each other member of the NewCo Group, their respective successors and assigns, remise, release and forever discharge SLM BankCo and the other members of the SLM BankCo Group, their respective successors and assigns, and all Persons who at any time prior to the Effective Time have been shareholders, directors, officers, agents or employees of any member of the SLM BankCo Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from any and all Liabilities whatsoever, whether at law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed at or before the Effective Time, including in connection with the transactions and all other activities to implement the Separation and the Distribution. Prior to or at the Effective Time, NewCo shall deliver to SLM BankCo a release to the foregoing effect executed by each member of the NewCo Group.

(b) Except as provided in Sections 4.1(c) and 4.1(d) and any Ancillary Agreement, effective as of the Effective Time, SLM BankCo does hereby, for itself and each other member of the SLM BankCo Group, their respective successors and assigns, remise, release and forever discharge NewCo, the respective members of the NewCo Group, their respective successors and assigns, and all Persons who at any time prior to the Effective Time have been shareholders, directors, officers, agents or employees of any member of the NewCo Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from any and all Liabilities whatsoever, whether at law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from any acts or events occurring or failing to

 

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occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the Effective Time, including in connection with the transactions and all other activities to implement the Separation and the Distribution. Prior to or at the Effective Time, SLM BankCo shall deliver to NewCo a release to the foregoing effect executed by each member of the SLM BankCo Group.

(c) Nothing contained in Section 4.1(a) or 4.1(b) shall impair the right of any member of a Group to enforce this Agreement, any Ancillary Agreement or any agreements, arrangements, commitments or understandings that are specified in Section 2.10(b) or an applicable Schedule as not to terminate as of the Effective Time. Nothing contained in Section 4.1(a) or 4.1(b) shall release any Person from:

(i) any Liability provided in or resulting from any agreement between or among any members of the SLM BankCo Group and/or the NewCo Group that is specified in Section 2.10(b) or an applicable Schedule as not to terminate as of the Effective Time, or any other Liability specified in Section 2.10(b) as not to terminate as of the Effective Time;

(ii) any Liability, contingent or otherwise, assumed, transferred, assigned or allocated to the Group of which such Person is a member in accordance with, or any other Liability of any member of any Group under, this Agreement or any Ancillary Agreement;

(iii) any Liability for unpaid amounts for products or services or refunds owing on products or services due on a value-received basis for work done by a member of one Group at the request or on behalf of a member of the other Group;

(iv) any Liability that a Party may have with respect to indemnification or contribution pursuant to this Agreement, any Ancillary Agreement or otherwise for claims brought against one or more Parties by third Persons, which Liability shall be governed by the provisions of this Article IV and Article V and, if applicable, the appropriate provisions of the Ancillary Agreements; or

(v) any Liability the release of which would result in the release of any Person other than the Party or other members of its Group intended to be released pursuant to this Section 4.1.

In addition, nothing contained in Section 4.1(a) shall release (i) any member of the SLM BankCo Group from honoring its pre-existing obligations to indemnify, pursuant to its charter documents or otherwise, any director, officer or employee of NewCo who was a director, officer or employee of any member of the SLM BankCo Group on or prior to the Effective Time, to the extent such director, officer or employee becomes a named defendant in any Action with respect to which such director, officer or employee was entitled to such indemnification pursuant to such pre-existing obligations; it being

 

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understood that, if the underlying obligation giving rise to such Action is a NewCo Liability, NewCo shall indemnify SLM BankCo for such Liability (including SLM BankCo’s costs to indemnify the director, officer or employee) in accordance with the provisions set forth in this Article IV or (ii) any member of the NewCo Group (including Existing SLM Holdco (as the successor to Existing SLM)) from honoring its pre-existing obligations to indemnify, pursuant to its charter documents or otherwise, any director, officer or employee of SLM BankCo who was a director, officer or employee of any member of the NewCo Group on or prior to the Effective Time, to the extent such director, officer or employee becomes a named defendant in any Action with respect to which such director, officer or employee was entitled to such indemnification pursuant to such pre-existing obligations; it being understood that, if the underlying obligation giving rise to such Action is a SLM BankCo Liability, SLM BankCo shall indemnify NewCo for such Liability (including NewCo’s costs to indemnify the director, officer or employee) in accordance with the provisions set forth in this Article IV.

(d) NewCo shall not make, and shall not permit any other member of the NewCo Group to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against SLM BankCo or any other member of the SLM BankCo Group, or any other Person released pursuant to Section 4.1(a), with respect to any Liabilities released pursuant to Section 4.1(a). SLM BankCo shall not make, and shall not permit any other member of the SLM BankCo Group to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification against NewCo or any other member of the NewCo Group, or any other Person released pursuant to Section 4.1(b), with respect to any Liabilities released pursuant to Section 4.1(b).

(e) It is the intent of each of SLM BankCo and NewCo, by virtue of the provisions of this Section 4.1, to provide for a full and complete release and discharge of all Liabilities existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed at or before the Effective Time, between or among NewCo or any other member of the NewCo Group, on the one hand, and SLM BankCo or any other member of the SLM BankCo Group, on the other hand (including any contractual agreements or arrangements existing or alleged to exist between or among any such members on or before the Effective Time), except as expressly set forth in Section 4.1(c). At any time, at the request of any other Party, each Party shall cause each member of its respective Group to execute and deliver further releases reflecting the provisions hereof.

4.2 Indemnification by NewCo. Except as provided in Section 4.4, NewCo shall, and shall cause the other members of the NewCo Group to, indemnify, defend and hold harmless SLM BankCo, each member of the SLM BankCo Group and each of their respective directors, officers, employees and agents, in each case in their respective capacities as such, and

 

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each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the “SLM BankCo Indemnitees”), from and against any and all Liabilities of the SLM BankCo Indemnitees relating to, arising out of or resulting from, directly or indirectly, any of the following items (without duplication):

(a) NewCo Liabilities;

(b) any breach by NewCo or any other member of the NewCo Group of this Agreement or any of the Ancillary Agreements;

(c) any legal, regulatory or administrative Action involving SLM BankCo or any of its Subsidiaries or their respective directors, executive officers, employees or agents that arises out of or primarily relates to the Separation or the Distribution (including the Action captioned William McCrady v. SLM Corporation et. al., C.A. No. 9285-VCL and James L. Myers v. SLM Corporation et. al., C.A. No. 9371-VCL);

(d) except to the extent it relates to a SLM BankCo Liability, any guarantee, indemnification obligation, surety bond or other credit support agreement, arrangement, commitment or understanding for the benefit of any member of the NewCo Group or provided in connection with any NewCo Asset or NewCo Liability by any member of the SLM BankCo Group that continues after the Effective Time; and

(e) any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained in the Form 10, the Information Statement or any other Disclosure Document.

4.3 Indemnification by SLM BankCo. SLM BankCo shall, and shall cause the other members of the SLM BankCo Group to, indemnify, defend and hold harmless NewCo, each other member of the NewCo Group and each of their respective directors, officers, employees or agents, in each case in their respective capacities as such, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the “NewCo Indemnitees”), from and against any and all Liabilities of the NewCo Indemnitees relating to, arising out of or resulting from, directly or indirectly, any of the following items (without duplication):

(a) the SLM BankCo Liabilities; and

(b) any breach by SLM BankCo or any other member of the SLM BankCo Group of this Agreement or any of the Ancillary Agreements.

 

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4.4 Indemnification Obligations Net of Insurance Proceeds and Other Amounts.

(a) The Parties intend that any Liability subject to indemnification or reimbursement payment owed or made pursuant to this Article IV or Article V will be net of Insurance Proceeds that actually reduce the amount of the Liability. Accordingly, the amount which any Party (an “Indemnifying Party”) is required to pay to any Person entitled to indemnification hereunder (an “Indemnitee”) will be reduced by any Insurance Proceeds theretofore actually recovered by or on behalf of the Indemnitee on account of a covered claim under any applicable policy of insurance and in respect of the related Liability. If an Indemnitee receives a payment (an “Indemnity Payment”) required by this Agreement from an Indemnifying Party in respect of any Liability and subsequently receives Insurance Proceeds, then the Indemnitee will promptly pay to the Indemnifying Party the amount of the Insurance Proceeds for such Liability, not to exceed the amount of the Indemnity Payment previously paid by the Indemnifying Party. The Parties acknowledge and agree that payment by an Indemnifying Party of an Indemnity Payment shall not be subject to, or conditioned upon, the prior receipt of Insurance Proceeds by the Indemnitee or the completion by any insurance company of its processes and procedures in respect of the same claim.

(b) An insurer who would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto or, solely by virtue of the indemnification provisions hereof, it being expressly understood and agreed that no insurer or any other third party shall be entitled to a “windfall” (i.e., a benefit they would not be entitled to receive in the absence of the indemnification provisions) by virtue of the indemnification provisions hereof.

(c) The Parties intend that any indemnification or reimbursement payment in respect of a Liability pursuant to this Article IV or Article V shall be (i) reduced to take into account the amount of any Tax benefit to the indemnified or reimbursed Person resulting from the Liability so indemnified or reimbursed and (ii) increased so that the amount of such payment, reduced by the amount of all Taxes payable with respect to the receipt thereof (but taking into account all correlative Tax benefits resulting from the payment of such Taxes), shall equal the amount of the payment which the Person receiving such payment would otherwise be entitled to receive pursuant to this Agreement. For purposes of this Section 4.4(c), the amount of any Tax benefit and any Taxes shall be calculated on the basis that the indemnified or reimbursed Person is subject to the highest marginal regular statutory income Tax rate, has sufficient taxable income to permit the realization or receipt of any relevant Tax benefit at the earliest possible time and is not subject to the alternative minimum tax. To the extent permitted by applicable Law, the Parties will treat any indemnification or reimbursement payment in respect of a Liability pursuant to this Article IV or Article V as a capital contribution made by SLM BankCo to NewCo or as a distribution made by NewCo to SLM BankCo, as the case may be, on the date recited above on which the parties entered into the Agreement.

 

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4.5 Procedures for Indemnification of Third Party Claims.

(a) If an Indemnitee shall receive notice or otherwise learn of the assertion by a Person (including any Governmental Authority) who is not a member of the SLM BankCo Group or the NewCo Group of any claim or of the commencement by any such Person of any Action (collectively, a “Third Party Claim”) with respect to which an Indemnifying Party may be obligated to provide indemnification to such Indemnitee pursuant to Section 4.2 or 4.3, or any other Section of this Agreement or any Ancillary Agreement, such Indemnitee shall give such Indemnifying Party written notice thereof within five business days after becoming aware of such Third Party Claim. Any such notice shall describe the Third Party Claim in reasonable detail and include copies of all notices and documents (including court papers) received by the Indemnitee relating to the Third Party Claim. Notwithstanding the foregoing, the failure of an Indemnitee to provide timely written notice in accordance with this Section 4.5(a) shall not relieve an Indemnifying Party of its indemnification obligations under this Agreement, except to the extent to which the Indemnifying Party is actually prejudiced by the Indemnitee’s failure to provide notice in accordance with this Section 4.5(a).

(b) Subject to the terms and conditions of any applicable insurance policy in place from and after the Effective Time, an Indemnifying Party may elect to defend (and, unless the Indemnifying Party has specified any reservations or exceptions, to seek to settle or compromise), at such Indemnifying Party’s own expense and by such Indemnifying Party’s own counsel, any Third Party Claim if (i) the Third Party Claim involves only money damages and does not seek an injunction or other equitable relief against an Indemnified Party; and (ii) the Third Party Claim is not made by a Governmental Authority. Within 30 days after the receipt of notice from an Indemnitee in accordance with Section 4.5(a) (or sooner, if the nature of such Third Party Claim so requires), the Indemnifying Party shall notify the Indemnitee of its election, if available to it, whether the Indemnifying Party will assume responsibility for defending such Third Party Claim, which election shall specify any reservations or exceptions. After notice from an Indemnifying Party to an Indemnitee of its election to assume the defense of a Third Party Claim, such Indemnitee shall have the right to employ separate counsel and to participate in (but not control) the defense, compromise or settlement thereof, but the fees and expenses of such counsel shall be the expense of such Indemnitee except as set forth in the next sentence. In the event that the Indemnifying Party has elected to assume the defense of the Third Party Claim but has specified, and continues to assert, any reservations or exceptions in such notice, then, in any such case, the reasonable fees and expenses of one separate counsel for all Indemnitees shall be borne by the Indemnifying Party.

 

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(c) If an Indemnifying Party elects not to assume responsibility for defending a Third Party Claim or does not have the right to elect to assume responsibility therefor pursuant to Section 4.5(b), or fails to timely notify an Indemnitee of its election as provided in Section 4.5(b), such Indemnitee may defend such Third Party Claim at the cost and expense of the Indemnifying Party. If an Indemnifying Party is not permitted to assume the defense of a Third Party Claim pursuant to Section 4.5(b), the Indemnitee shall have the right to employ, at the Indemnifying Party’s expense, one counsel of its choice (subject to the approval of the Indemnifying Party, which approval shall not be unreasonably withheld or delayed) to represent the Indemnitee, and the Indemnifying Party shall only be obligated to indemnify the Indemnitee for reasonable costs and expenses in connection with such Third Party Claim.

(d) In the case of a Third Party Claim, (i) no Indemnifying Party shall consent to entry of any judgment or enter into any settlement of the Third Party Claim without the written consent of the Indemnitee if (A) the effect thereof is to permit any injunction, declaratory judgment, other order or other non-monetary relief to be entered, directly or indirectly against any Indemnitee, (B) such settlement or judgment requires or contains any admission of liability by the Indemnitee, (C) such settlement does not include a full and unconditional release of the Indemnitee, or (D) such judgment or settlement imposes any obligation or restriction on the Indemnitee other than the payment of money and (ii) unless the Indemnifying Party has failed to assume the defense of the Third Party Claim that it is permitted to assume in accordance with the terms of this Agreement, no Indemnitee shall consent to entry of any judgment or enter into any settlement of the Third Party Claim (including in circumstances under which an Indemnifying Party is not permitted to assume the defense of a Third Party Claim pursuant to Section 4.5(b) without the written consent of the Indemnifying Party.

(e) The above provisions of this Section 4.5 and the provisions of Section 4.6 do not apply to Taxes (which are governed by the Tax Sharing Agreement). In the case of any conflict between this Agreement and the Tax Sharing Agreement in relation to any matters addressed by the Tax Sharing Agreement, the Tax Sharing Agreement shall prevail.

4.6 Additional Matters.

(a) Subject to the terms, conditions and limitations of any applicable insurance policy, indemnification payments in respect of any Liabilities for which an Indemnitee is entitled to indemnification under this Article IV shall be paid by the Indemnifying Party to the Indemnitee as such Liabilities are incurred upon written demand by the Indemnitee, including reasonably satisfactory documentation setting forth the basis for the amount of such indemnification payment, including documentation with respect to calculations made and consideration of any Insurance Proceeds that actually reduce the amount of such indemnification payment or reimbursement. The indemnity agreements contained in this Article IV shall remain

 

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operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Indemnitee, (ii) the knowledge by the Indemnitee of Liabilities for which it might be entitled to indemnification hereunder and (iii) any termination of this Agreement.

(b) Any claim on account of a Liability which does not result from a Third Party Claim shall be asserted by written notice given by the Indemnitee to its Indemnifying Party. The written notice shall describe the Liability asserted and the Indemnity Payment due in reasonable detail. Such Indemnifying Party shall have a period of 15 business days (unless a shorter period is required under the circumstances) after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such 10- business day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to make payment. If such Indemnifying Party does not respond within such 10-business day period or rejects such claim in whole or in part, such Indemnitee shall be free to pursue such remedies as may be available to such party as contemplated by this Agreement and the Ancillary Agreements.

(c) In the event of payment by or on behalf of any Indemnifying Party to any Indemnitee in connection with any Third Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right, defense or claim relating to such Third Party Claim against any claimant or plaintiff asserting such Third Party Claim or against any other Person. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right, defense or claim.

(d) In the event of an Action relating to or arising out of a Liability subject to indemnification or reimbursement pursuant to Article IV or Article V in which the Indemnifying Party is not a named defendant, if either the Indemnitee or Indemnifying Party shall so request, the Parties shall endeavor to substitute the Indemnifying Party for the named defendant. If such substitution or addition cannot be achieved for any reason or is not requested, the named defendant shall allow the Indemnifying Party to manage the Action as set forth in this Section 4.6(d), and the Indemnifying Party shall fully indemnify the named defendant against all costs of defending the Action (including court costs, sanctions imposed by a court, attorneys’ fees, experts fees and all other external expenses), the costs of any judgment or settlement and the cost of any interest or penalties relating to any judgment or settlement.

4.7 Remedies Cumulative. The remedies provided in this Article IV shall be cumulative and, subject to the provisions of Article VIII, shall not preclude assertion by any Indemnitee of any other rights or the seeking of any and all other remedies against any Indemnifying Party.

 

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4.8 Survival of Indemnities. The rights and obligations of each of SLM BankCo and NewCo and their respective Indemnitees under this Article IV shall survive the sale or other transfer by any party of any Assets or businesses or the transfer or assignment by it of any Liabilities and the termination or expiration of this Agreement.

ARTICLE V

CERTAIN OTHER MATTERS

5.1 Insurance Matters.

(a) Existing SLM, SLM BankCo and NewCo agree to cooperate in good faith to provide for an orderly transition of insurance coverage. Following the Effective Time, SLM BankCo and NewCo agree to cooperate with respect to insurance coverage matters as described in this Section 5.1.

(b) From and after the Effective Time, other than as expressly provided in Section 5.1(c) with respect to any Shared Policies, neither SLM BankCo nor NewCo, nor any member of its respective Group, shall have any rights to or under any of the other Group’s insurance policies, including not having access to and not having the right to make claims under any of the other Group’s insurance policies. At the Effective Time, each of NewCo and SLM BankCo shall have in effect insurance policies as reasonably necessary or customary for companies operating a similar business. Such insurance programs may include, but are not limited to, comprehensive general liability, umbrella/excess liability, above ground/underground storage tank liability, surety bonds, commercial auto liability, workers’ compensation, employer’s liability, professional liability, property, employee dishonesty/crime, directors’ and officers’ liability and fiduciary liability.

(c) From and after the Effective Time, with respect to any losses, damages and liability incurred by any member of the NewCo Group or the SLM BankCo Group prior to the Effective Time for which such member is entitled to coverage under the D&O Tail Policy or Historical P/C Policies of insurance (collectively, the “Shared Policies”), each Party will provide the other Party (or any member of the other Party’s Group) with access to, and may make claims under, the Shared Policies, but solely to the extent that such Shared Policies provide coverage for acts, losses or events that occurred prior to the Effective Time; provided that such access to, and the right to make claims under, such insurance policies, shall be subject to the terms, conditions, and exclusions of such insurance policies, including any limits on coverage or scope, any deductibles or retentions and other fees and expenses, and shall be subject to the following additional conditions:

(i) each of NewCo and SLM BankCo shall provide, as promptly as practicable, notice to the other Party with respect to any claims to be made under any Shared Policy and shall report, as promptly as practicable, claims in accordance with Effective Time Sallie Mae’s claim reporting procedures in effect immediately prior to the Effective Time;

 

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(ii) except with respect to claims made by the SLM BankCo Group that relate to Liabilities that are NewCo Liabilities, SLM BankCo shall reimburse the NewCo Group for any deductibles, self-insured retention, fees and expenses incurred by any member of the NewCo Group to the extent resulting from any access to or any claims made by any member of the SLM BankCo Group under any Shared Policy;

(iii) except with respect to claims made by the NewCo Group that relate to Liabilities that are SLM BankCo Liabilities, NewCo shall reimburse the SLM BankCo Group for any deductibles, self-insured retention, fees and expenses incurred by any member of the SLM BankCo Group to the extent resulting from any access to or any claims made by any member of the NewCo Group under any Shared Policy; and

(iv) except to the extent for payments and reimbursements required pursuant to Section 5.1(c)(ii) and (iii), neither the NewCo Group nor the SLM BankCo Group shall have any liability or indemnification obligation to repay or reimburse the other Party for any uninsured, uncovered, unavailable or uncollectible insurance amounts under the Shared Policies to the extent resulting from any access to or any good-faith claims made by any member of either Group under any Shared Policy; provided, however, that any such uninsured, uncovered, unavailable or uncollectible insurance amounts under the Shared Policies shall not relieve or reduce an Indemnifying Party of its indemnification obligations under this Agreement.

(d) All payments and reimbursements pursuant to Section 5.1(c)(ii) and (iii) will be made on demand after receipt of an invoice therefor from the other Party. If a Party incurs costs to enforce the other Party’s obligations under Section 5.1(c)(ii) or (iii), as applicable, the other Party shall indemnify such Party for reasonable enforcement costs, including reasonable attorneys’ fees.

(e) Each of NewCo and SLM BankCo shall have the right to erode, exhaust limits, settle, release or otherwise resolve disputes relating to claims made by such Party under any Shared Policy, subject to the written consent of the other Party (which consent shall not be unreasonably withheld or delayed). No member of the SLM BankCo Group or the NewCo Group may amend, modify or waive any rights with respect to any Shared Policy without the prior written consent of the other Party. NewCo and SLM BankCo shall cooperate and share such information as is reasonably necessary in order to permit the Parties to manage and conduct their insurance matters with respect to the Shared Policies.

(f) This Agreement shall not be considered as an attempted assignment of any policy of insurance or as a contract of insurance and shall not be construed to waive any right or remedy of any member of the SLM BankCo Group or the NewCo Group in respect of any insurance policy.

 

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5.2 Late Payments. Except as expressly provided to the contrary in this Agreement or in any Ancillary Agreement, any undisputed amount not paid when due pursuant to this Agreement or any Ancillary Agreement (and any amounts billed or otherwise invoiced or demanded and properly payable that are not paid within 30 days of such bill, invoice or other demand) shall accrue interest at a rate per annum equal to the Prime Rate plus [—]%.

5.3 Amendment to Existing SLM Holdco Operating Agreement. As promptly as practicable (and in any event within five Business Days) after the Effective Time, NewCo, as the sole member of Existing SLM Holdco, shall approve an amendment to the Existing SLM Holdco Operating Agreement to eliminate the requirement, set forth in Section      thereof, for SLM BankCo stockholders to approve certain actions by or involving Existing SLM Holdco as required by Section 251(g) of the DGCL (the “Operating Agreement Amendment”). SLM BankCo shall use its reasonable best efforts to (a) include in the proxy statement for the 2014 annual meeting of common stockholders of SLM BankCo (or any earlier meeting of such stockholders as determined by the SLM BankCo Board) a proposal to approve the Operating Agreement Amendment (the “Operating Agreement Amendment Proposal”), along with a recommendation of the SLM BankCo Board that the common stockholders of SLM BankCo approve the Operating Agreement Amendment Proposal, and (b) solicit the approval of the common stockholders of SLM BankCo of the Operating Agreement Amendment Proposal. In the event that the Operating Agreement Amendment Proposal is not approved at such annual meeting (or earlier meeting), SLM BankCo shall use its reasonable best efforts to obtain the approval of the Operating Agreement Amendment Proposal at each subsequent annual or special meeting of common stockholders of SLM BankCo until such approval is obtained.

5.4 Non-Competition Matters.

[Reserved]

5.5 Non-Solicitation Matters. During the Non-Solicitation Period, each of SLM BankCo and NewCo agrees not to solicit (and to cause its Subsidiaries not to solicit) Covered Personnel of the other Party’s Group; provided, however, that it is understood that the obligations in this Section 5.5 shall not prohibit (i) generalized solicitations by advertising and the like that are not directed to Covered Personnel, (ii) solicitations of individuals whose employment was terminated by the other Party or a member of its Group or (iii) the transfer of any Delayed Transfer Employees. “Covered Personnel” means any employee, personnel or

 

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individual consultant or independent contractor that is employed by, or provides services to, the SLM BankCo Group or the NewCo Group, as applicable, as of the Distribution Date. The “Non-Solicitation Period” shall mean (i) two years following the Distribution for Covered Personnel located in Newark, Delaware, Reston, Virginia Newton, Massachusetts or Fishers, Indiana and (ii) one year following the Distribution for Covered Personnel located in any other location.

5.6 Cooperation.

(a) Third Party TSA Obligations. Each of NewCo and SLM BankCo shall use commercially reasonable efforts to assist and coordinate with the other Party to perform the long-term obligations identified on Schedule 5.6(a) under the transition services agreements listed on Schedule 5.6(a) and other matters that may arise in connection with the sale of the Campus Solutions and UII businesses.

(b) First Look.

[Reserved]

5.7 Non-Disparagement. For a period of five years following the Effective Time, each of SLM BankCo and NewCo agree (and will cause the members of its respective Group and its and their employees acting in their capacity as employees) not to make written statements that are disparaging to the other Party or any member of such other Party’s Group, unless reasonably required in response to any legal process or subpoena, to comply with Law or otherwise in connection with the enforcement of this Agreement or any Ancillary Agreement.

5.8 IT Transition. Prior to the Effective Time, SLM BankCo and NewCo will enter into the Transition Services Agreement to, among other things, (i) facilitate the separation and migration of SLM BankCo Information, SLM BankCo Intellectual Property, SLM BankCo Software, SLM BankCo Technology, SLM BankCo Systems and any IT hardware included within the SLM BankCo Assets into an independent IT environment operated by or for the benefit of SLM BankCo, (ii) duplicate and transfer the NewCo Licensed Materials to SLM BankCo into such IT environment, and (iii) transfer operational responsibility to SLM BankCo for the systems and capabilities responsible for the servicing and collection functions of the Pre-Separation Consumer Banking Business (the “IT Transition”). As part of the IT Transition, (x) NewCo shall provide SLM BankCo with access to NewCo’s IT environment (including the NewCo Licensed Materials, SLM BankCo Information, SLM BankCo Intellectual Property, SLM BankCo Software and SLM BankCo Technology hosted thereon) to enable SLM BankCo to operate the Pre-Separation Consumer Banking Business in the ordinary course, (y) NewCo shall host and operate the SLM BankCo Systems for the benefit of SLM BankCo, and (z) NewCo and SLM BankCo shall jointly perform the IT migration projects and related activities specified in the Transition Services Agreement as required to transition the NewCo Licensed Materials, SLM BankCo Intellectual Property, SLM BankCo Technology, SLM BankCo Software and the SLM BankCo Systems into an independent SLM BankCo IT environment.

 

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5.9 Joint Development Activities. Pursuant to the Transition Services Agreement, SLM BankCo and NewCo will cooperate to jointly complete certain application development projects, including those with respect to ATLAS and [—] (“Joint Development Projects”). SLM BankCo and NewCo shall jointly own all Intellectual Property in all Materials created pursuant to Joint Development Projects (“Joint Materials”). Each Party shall, without limitation, have and retain the right to make, have made, use, lease, import, offer for sale, or sell, have sold and practice methods used in the creation or provision of products or services that incorporate the Joint Materials to the extent that such actions do not infringe upon the intellectual property rights of the other Party. Each Party shall retain the right to grant non-exclusive licenses to any Intellectual Property in the Joint Materials without any payment or accounting to the other Party.

ARTICLE VI

EXCHANGE OF INFORMATION; CONFIDENTIALITY

6.1 Agreement for Exchange of Information; Archives . Subject to Section 6.9 and any other applicable confidentiality obligations, for a period of seven years following the Effective Time, each of SLM BankCo and NewCo, on behalf of its respective Group, agrees to allow representatives of the other Group reasonable access during normal business hours to, or to provide, any Information in the possession or under the control of such respective Group as of the Effective Time which the requesting Party reasonably needs (a) to comply with reporting, disclosure, filing or other requirements imposed on the requesting Party (including under applicable securities or Tax Laws) by a Governmental Authority having jurisdiction over the requesting party, (b) for use in any other judicial, regulatory, administrative, tax or other proceeding or in order to satisfy audit, accounting, claims, regulatory, tax or other similar requirements, in each case other than claims or allegations that one Party to this Agreement has against another Party or a member of its respective Group, or (c) subject to the foregoing clause (b), to comply with its obligations under this Agreement or any Ancillary Agreement; provided, however, that, in the event that any Party determines that any such provision of Information could be commercially detrimental, violate any Law or agreement or waive any privilege otherwise available under applicable Law, including attorney-client privilege, the Parties shall take all reasonable measures to permit the compliance with such obligations in a manner that avoids any such harm or consequence, but if such measures are not reasonably possible, then such Party shall not be required to provide such Information.

6.2 Ownership of Information. Any Information owned by one Group that is provided to a requesting Party pursuant to Section 6.1 or Section 6.8 shall be deemed to remain the property of the providing Party. Unless specifically set forth herein, nothing contained in this Agreement or any Ancillary Agreement shall be construed as granting or conferring rights of license or otherwise in any such Information.

6.3 Compensation for Providing Information. The Party requesting Information agrees to reimburse the other Party for the reasonable costs, if any, of creating, gathering and copying such Information, to the extent that such costs are incurred for the benefit

 

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of the requesting Party. Except as may be otherwise specifically provided elsewhere in this Agreement, any Ancillary Agreement or any other agreement between the Parties, such costs shall be computed in accordance with the providing Party’s standard methodology and procedures.

6.4 Record Retention. To facilitate the possible exchange of Information pursuant to this Article VI and other provisions of this Agreement or any applicable Ancillary Agreement after the Effective Time, the Parties agree to use their reasonable best efforts to retain all Information in their respective possession or control on the Effective Time in accordance with the record retention policies of Effective Time Sallie Mae as in effect as of the Effective Time. No Party will destroy, or permit any of its Subsidiaries to destroy, any Information which another Party may have the right to access or obtain pursuant to this Agreement or any Ancillary Agreement prior to the end of the retention period set forth in such record retention policies without first notifying the other Party of the proposed destruction and giving the other Party a reasonable opportunity to take possession of such information prior to such destruction. Notwithstanding the foregoing, Section [—] of the Tax Sharing Agreement will govern the retention of Tax Records (as defined in the Tax Sharing Agreement) and Section [—] of the Employee Matters Agreement will govern the retention of Employee Records (as defined in the Employee Matters Agreement).

6.5 Limitations of Liability. No Party shall have any liability to any other Party if any Information is destroyed in accordance with the applicable record retention policies referenced in Section 6.4 or after reasonable best efforts by such Party to comply with the provisions of Section 6.4.

6.6 Other Agreements Providing for Exchange of Information. The rights and obligations granted under this Article VI are subject to any specific limitations, qualifications or additional provisions on the sharing, exchange, retention or confidential treatment of Information set forth in any Ancillary Agreement.

6.7 In-House Lawyers and Other Legal Staff.

(a) In-house lawyers employed by Existing SLM and its Affiliates (the “Existing SLM Lawyers”) have for many years provided legal services to and jointly represented Existing SLM and its Subsidiaries and Affiliates, including Subsidiaries conducting the Pre-Separation Education Loan Management Business and the Pre-Separation Consumer Banking Business. After the Effective Time, certain of those Existing SLM Lawyers will remain employees of one or more members of the NewCo Group and jointly represent the NewCo Group (“NewCo Counsel”). Others will resign from their positions with members of the NewCo Group, and become employees of one or more members of the SLM BankCo Group and provide legal services to and represent only the SLM BankCo Group (“SLM BankCo Counsel”). After the Effective Time, (i) SLM BankCo Counsel will represent only the SLM BankCo Group, (ii) NewCo Counsel will represent only the NewCo Group, and (iii) SLM BankCo Counsel and NewCo Counsel will owe a duty of loyalty and other professional obligations only to their respective clients.

 

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(b) The Parties have previously been jointly represented by the Existing SLM Lawyers in various legal matters of common interest. This joint representation existed at all times before the Effective Time. The joint representation included in its scope all matters prior to the Effective Time in which a Party or another member of its Group was represented by any of the Existing SLM Lawyers. The Parties agree that a joint representation privilege applies to such joint representation.

(c) After the Effective Time, the SLM BankCo Group and the NewCo Group will both continue to jointly own and control all privileges relating to all documents and Information created prior to the Effective Time as a result of the representation of any Party or any member of its respective Group by the Existing SLM Lawyers, and the Parties agree that the Separation shall not waive or affect any applicable privileges, including the attorney-client privilege, the litigation work product doctrine, the common interest privilege and the joint-client/joint representation privilege.

(d) In advance of the Effective Time, the Parties agree to cause the Existing SLM Lawyers to endeavor to separate all legal files, documents and electronic information created prior to the Effective Time (the “Legal Materials”) relating primarily to the Pre-Separation Education Loan Management Business from those relating primarily to the Pre-Separation Consumer Banking Business and deliver them at or after the Effective Time into the possession of the appropriate Party or member of its Group to which they relate. All such Legal Materials not separated as of the Effective Time shall be deemed “Joint Legal Materials.” Both NewCo Counsel and SLM BankCo Counsel will have the right, after the Effective Time, (i) to access, review and duplicate all Joint Legal Materials in the possession of the other that relate to their respective legal matters and (ii) only with the consent of the other Party, to separate and take sole possession of Joint Legal Materials relating solely to either the Pre-Separation Education Loan Management Business or the Pre-Separation Consumer Banking Business. Both SLM BankCo Counsel and NewCo Counsel shall maintain and continue compliance with all litigation holds applicable to any Legal Materials or Joint Legal Materials they possess or come to possess.

(e) The Parties acknowledge that the Legal Materials and Joint Legal Materials are products of the joint representation by the Existing SLM Lawyers and are privileged from disclosure to others as a result of the attorney-client privilege, the litigation work product doctrine, the common interest/joint defense privilege, the joint-client/joint representation privilege and other applicable privileges and protections. Neither the SLM BankCo Group nor the NewCo Group shall have any right, ability or authority to waive any such privilege or protection on behalf of the other, nor shall any waiver of any applicable privilege or protection by one be effective or applicable to the other.

 

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(f) Unless and until the Parties agree in writing to waive any and all claims of privilege over any portion of the Legal Materials or Joint Legal Materials, the Parties shall assert all applicable privileges to resist production of any Legal Materials or Joint Legal Materials requested by any third party. If any third party requests or demands, by subpoena or otherwise, any Legal Materials or Joint Legal Materials, the Party (which for purposes of this section includes any member of its Group) which has received the request or demand shall immediately notify the other Party in writing. Each Party will then take all reasonable steps necessary to preserve all applicable rights and privileges with respect to such Legal Materials or Joint Legal Materials and shall cooperate fully with the other in any proceedings relating to the disclosure of such Legal Materials or Joint Legal Materials. Each Party has standing to enforce claims of privilege or similar grounds for withholding disclosure in response to any request or demand for the production of Legal Materials or Joint Legal Materials. In the event that any Party is served with or otherwise subject to legal process (including a subpoena) requiring it to testify about, produce or otherwise divulge Legal Materials or Joint Legal Materials, the Party subject to such process will (i) promptly supply the other Party with a copy of such subpoena or process; (ii) assert all applicable privileges, protections and objections; (iii) not waive any such privilege; and (iv) make every other reasonable effort to prevent or limit disclosure of the Legal Materials or Joint Legal Materials.

(g) Nothing contained in this Agreement shall limit the right of any Party to use or disclose (i) documents or information generated by any member of its Group after the Effective Time (unless such documents or information contain information from the Legal Materials or Joint Legal Materials) or (ii) documents or information that are now, or hereafter become, public information without violation of this Agreement.

(h) The Parties acknowledge that the SLM BankCo Group and the NewCo Group may have or develop interests adverse to each other following the Effective Time. Each Party hereby waives (i) any and all current and future objections to SLM BankCo Counsel, NewCo Counsel and any outside counsel that represented Existing SLM or any of its Affiliates prior to the Effective Time from continuing to represent or in the future representing their respective clients in any matter, including matters in which the SLM BankCo Group and the NewCo Group are adverse and disputes relating to this Agreement, and (ii) all current and future rights to seek disqualification, whether based on the possession or disclosure of confidential information or otherwise, of any of the SLM BankCo Counsel, NewCo Counsel and such outside counsel from any representation of their clients in any matter, including matters in which the SLM BankCo Group and the NewCo Group are adverse and disputes relating to this Agreement. If a dispute arises between or among the Parties (or members of their respective Groups) in the future, no Party may assert privilege against the other as to any Legal Materials or Joint Legal Materials created before the Effective Time, and both Parties shall be free to make use of such materials for the purpose of advancing their interests in such dispute.

 

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(i) The Parties acknowledge that disclosure of any Legal Materials or Joint Legal Materials in violation of this Agreement, or in violation of the continuing duty to maintain the confidentiality of Legal Materials or Joint Legal Materials, will cause the Parties to suffer irreparable harm for which there is no adequate remedy at law, and that immediate injunctive relief without the necessity of posting a bond is an appropriate and necessary remedy for any such violation or threatened violation, in addition to other remedies and relief that might be available at law or equity.

(j) SLM BankCo and NewCo shall, and shall seek to cause SLM BankCo Counsel and NewCo Counsel and their respective outside counsel to, cooperate with each other and take all necessary or reasonably desirable actions to effect the foregoing provisions. The provisions of this Section 6.7 shall survive the Effective Time and remain in effect forever.

6.8 Production of Witnesses; Records; Cooperation.

(a) Subject to Section 6.7, after the Effective Time, except in the case of an adversarial Action by one Party against another Party, each Party shall use its commercially reasonable efforts to make available to the other Party, upon written request, the former, current and future directors, officers, employees, other personnel and agents of the members of its respective Group as witnesses within its control or which it otherwise has the ability to make available, to the extent that any such person (giving consideration to business demands of such directors, officers, employees, other personnel and agents) may reasonably be required in connection with any Action in which the requesting Party may from time to time be involved, regardless of whether such Action is a matter with respect to which indemnification may be sought hereunder. The requesting Party shall bear all costs and expenses in connection therewith.

(b) If an Indemnifying Party chooses to defend or to seek to compromise or settle any Third Party Claim, the other Party shall make available to such Indemnifying Party, upon written request, the former, current and future directors, officers, employees, other personnel and agents of the members of its respective Group as witnesses within its control or which it otherwise has the ability to make available, to the extent that any such person (giving consideration to business demands of such directors, officers, employees, other personnel and agents) may reasonably be required in connection with such defense, settlement or compromise, or such prosecution, evaluation or pursuit, as the case may be, and shall otherwise cooperate in such defense, settlement or compromise, or such prosecution, evaluation or pursuit, as the case may be.

(c) Without limiting the foregoing, the Parties shall cooperate and consult to the extent reasonably necessary with respect to any Actions.

 

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(d) Without limiting any provision of this Section 6.8, each of the Parties agrees to cooperate, and to cause each member of its respective Group to cooperate, with each other in the defense of any infringement or similar claim with respect to any Intellectual Property and shall not claim to acknowledge, or permit any member of its respective Group to claim to acknowledge, the validity or infringing use of any Intellectual Property of a third Person in a manner that would hamper or undermine the defense of such infringement or similar claim.

(e) The obligation of the Parties to provide witnesses pursuant to this Section 6.8 is intended to be interpreted in a manner so as to facilitate cooperation and shall include the obligation to provide as witnesses inventors and other officers without regard to whether the witness or the employer of the witness could assert a possible business conflict (subject to the exception set forth in the first sentence of Section 6.8(a)).

(f) In connection with any matter contemplated by this Section 6.8, except in the case of an adversarial Action by one Party against the other Party, the Parties will enter into a mutually acceptable joint defense agreement so as to maintain to the extent practicable any applicable attorney-client privilege or work product immunity of any member of either Group.

6.9 Confidentiality.

(a) Subject to Section 6.10, until the seven-year anniversary of the Effective Time, each of SLM BankCo and NewCo, on behalf of itself and each member of its respective Group, agrees to hold, and to cause its respective Representatives to hold, in strict confidence, with at least the same degree of care that applied to Existing SLM’s confidential and proprietary information pursuant to policies in effect immediately prior to the Distribution Date, all Information concerning each such other Group or its customers (“Group Information”) that is either in its possession (including Information in its possession prior to the date hereof) or furnished by any such other Group or its respective Representatives at any time pursuant to this Agreement, any Ancillary Agreement or otherwise, and shall not use any such Group Information other than for such purposes as shall be expressly permitted hereunder or thereunder, except, in each case, to the extent that such Group Information has been (i) in the public domain through no fault of such Party or any member of such Group or any of their respective Representatives, (ii) later lawfully acquired from other sources by such Party (or any member of such Party’s Group) which sources are not themselves bound by a confidentiality obligation or (iii) independently generated without reference to any proprietary or confidential Information of the other Party; provided, however, that with respect to Group Information that relates to a Group’s customers, the obligations of each Party under this Section 6.9 shall continue for so long as such information is in the possession of such Party or any of its Subsidiaries, Affiliates or Representatives.

 

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(b) Each Party agrees not to release or disclose, or permit to be released or disclosed, any Group Information to any other Person, except its Representatives who need to know such Information (who shall be advised of their obligations hereunder with respect to such Information), except in compliance with Section 6.10 or with the written consent of the other Party. Without limiting the foregoing, when any Group Information is no longer needed for the purposes contemplated by this Agreement or any Ancillary Agreement, each Party will promptly after request of the other Party either return to the other party all Group Information in a tangible form (including all copies thereof and all notes, extracts or summaries based thereon) or certify to the other Party that it has destroyed such Group Information (and such copies thereof and such notes, extracts or summaries based thereon).

6.10 Protective Arrangements. In the event that any Party or any member of its Group either determines on the advice of its counsel that it is required to disclose any Group Information pursuant to applicable Law or receives any demand under lawful process or from any Governmental Authority to disclose or provide Group Information of any other Party (or any member of another Party’s Group) that is subject to the confidentiality provisions hereof, such Party shall, promptly upon receipt of a request for disclosure of any Information, notify the other Party (to the extent legally permitted) prior to disclosing or providing such Group Information and shall cooperate at the expense of the requesting Party in seeking any reasonable protective arrangements requested by the requesting Party. Subject to the foregoing, the Person that received such request may thereafter disclose or provide only that portion of Group Information that is legally required by such Law (as so advised by counsel) or by lawful process or such Governmental Authority.

ARTICLE VII

GOVERNANCE AND DISPUTE RESOLUTION

7.1 Program Managers; Separation Oversight Committee.

(a) Program Managers.

(i) NewCo shall appoint an individual to act as its program manager (the “NewCo Program Manager”), who will have overall responsibility for implementing, coordinating, tracking and managing all activities (including billing and payment activities) under this Agreement and each Ancillary Agreement and have authority to act on behalf of NewCo with respect to such matters, for a period of [—] years following the Effective Time. NewCo hereby appoints and designates the individual set forth on Schedule 7.1(a) to act as the initial NewCo Program Manager. NewCo shall promptly notify SLM BankCo in writing of its removal and replacement of the NewCo Program Manager. During the Preferred Stock Period, NewCo will consult with the SMI Board before removing and/or replacing the NewCo Program Manager.

(ii) SLM BankCo shall appoint an individual to act as its program manager (the “SLM BankCo Program Manager,” and together with the NewCo Program

 

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Manager, the “Program Managers”), who will have overall responsibility for implementing, coordinating, tracking and managing all activities (including billing and payment activities) under this Agreement and each Ancillary Agreement and have authority to act on behalf of SLM BankCo with respect to such matters, for a period of [—] years following the Effective Time. SLM BankCo hereby appoints and designates the individual set forth on Schedule 7.1(a) to act as the initial SLM BankCo Program Manager. SLM BankCo shall promptly notify NewCo in writing of the removal and replacement of the SLM BankCo Program Manager. SLM BankCo may remove and/or replace the SLM BankCo Program Manager in its sole discretion.

(iii) During the period from the Effective Time until the two-year anniversary of the Effective Time (the “Separation Oversight Period”), each of the NewCo Program Manager and the SLM BankCo Program Manager shall deliver to the Separation Oversight Committee, no less frequently than monthly. such reports regarding the activities under this Agreement and the Ancillary Agreements as the NewCo Program Manager or the SLM BankCo Program Manager shall deem appropriate or as may otherwise be requested from time to time by the Separation Oversight Committee.

(iv) Following the expiration of the Separation Oversight Period, (A) the NewCo Program Manager will periodically report to and update the NewCo Board (or a committee of the NewCo Board appointed for such purpose) with respect to matters relating to this Agreement and the Ancillary Agreements and (B) the SLM BankCo Program Manager will periodically report to and update the SLM BankCo Board (or a committee of the SLM BankCo Board appointed for such purpose) with respect to matters relating to this Agreement and the Ancillary Agreements.

(b) Separation Oversight Committee.

(i) The Parties have established a [—] member separation oversight committee (the “Separation Oversight Committee”), which shall consist of an equal number of members designated by each of SLM BankCo and NewCo. The initial members of the Separation Oversight Committee are set forth on Schedule 7.1(b). SLM BankCo may remove and/or replace any SLM BankCo designee to the Separation Oversight Committee, in its sole discretion, and shall promptly notify NewCo of any such removal and/or replacement. NewCo may remove and/or replace any NewCo designee to the Separation Oversight Committee, in its sole discretion, and shall promptly notify SLM BankCo of any such removal and/or replacement. The Separation Oversight Committee shall be responsible, during the Separation Oversight Period, for monitoring and managing, at a strategic level, progress on all matters related to transactions and activities that are to occur after the Effective Time as contemplated by this Agreement and the Ancillary Agreements.

 

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(ii) The Separation Oversight Committee shall meet (in person or telephonically) no less frequently than monthly. The Separation Oversight Committee shall have the authority to (a) establish one or more subcommittees from time to time as it deems appropriate or as may be contemplated pursuant to any Ancillary Agreement, with each such subcommittee comprised of one or more members of the Separation Oversight Committee or one or more employees of either Party or any member of its respective Group, and each such subcommittee having such scope of responsibility as may be determined by the Separation Oversight Committee from time to time; (b) delegate to any such committee any of the responsibilities of the Separation Oversight Committee; (c) combine, modify the scope of responsibility of, and disband any such subcommittees and (d) modify or reverse any such delegations. The Separation Oversight Committee may establish general procedures for managing the responsibilities assigned to it under this Section 7.1 and may modify such procedures from time to time.

(iii) All decisions by the Separation Oversight Committee or any subcommittee thereof shall be effective only if agreed to by a majority of the members designated by each of SLM BankCo and NewCo.

(iv) The NewCo members of the of the Separation Oversight Committee shall (i) during the Separation Oversight Period, periodically report to and update the Newco Board (or a committee of such board appointed for such purpose) on the progress of the separation and with respect to other matters relating to this Agreement and the Ancillary Agreements and (ii) during the Preferred Stock Period, periodically report to and update the SMI Board on the progress of the IT Transition. During the Separation Oversight Period, the SLM BankCo members of the Separation Oversight Committee will periodically report to and update the SLM BankCo Board (or a committee of such board appointed for such purpose) on the progress of the separation and with respect to other matters relating to this Agreement and the Ancillary Agreements.

7.2 Escalation Process; Good Faith Negotiation.

(a) Escalation Process During the Separation Oversight Period.

(i) The NewCo Program Manager and the SLM BankCo Program Manager shall attempt in good faith to negotiate a resolution to any issues, disputes, controversies or claims arising out of or relating to this Agreement or any Ancillary Agreement (including matters relating to each Party’s rights or the performance of obligations under this Agreement or any Ancillary Agreement or regarding whether any Assets are NewCo Assets or SLM BankCo Assets, any Liabilities are NewCo Liabilities or SLM BankCo Liabilities) (each, a “Dispute”) within [—] days of written notice of any such Dispute (a “Dispute Notice”) being delivered by one Program Manager to the other Program Manager.

 

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(ii) During the Separation Oversight Period, the NewCo Program Manager and the SLM BankCo Program Manager shall escalate to the Separation Oversight Committee any Dispute that cannot be resolved by the Program Managers within [—] days following delivery of a Dispute Notice. The Separation Oversight Committee shall attempt in good faith to negotiate a resolution of each Dispute escalated by the Program Managers.

(iii) If any Dispute is not resolved by the Separation Oversight Committee within [—] days following escalation of such Dispute to the Separation Oversight Committee, (A) the NewCo members of the Separation Oversight Committee shall consult with (x) as matters relating to the IT Transition, the SMI Board and (x) as to all other matters, the NewCo Board (or a committee thereof appointed for such purpose), which may direct the NewCo members of the Separation Oversight Committee how to proceed with respect to such Dispute, and (B) the SLM BankCo members of the Separation Oversight Committee shall consult with the SLM BankCo Board (or a committee thereof appointed for such purpose), which may direct the SLM BankCo members of the Separation Oversight Committee how to proceed with respect to such Dispute.

(iv) If any Dispute remains unresolved for any reason for a period of [—] days following escalation of such Dispute to the Separation Oversight Committee or if a Party reasonably concludes that the other Party is not willing to negotiate as contemplated by this Section 7.2, the Dispute may be submitted to the dispute resolution procedures in accordance with Section 7.3.

(b) Escalation Process Following the Separation Oversight Period.

(i) The NewCo Program Manager and the SLM BankCo Program Manager shall attempt in good faith to negotiate a resolution to each Dispute within [—] days of a Dispute Notice being delivered by one Program Manager to the other Program Manager.

(ii) If any Dispute is not resolved by the Program Managers within [—] days following delivery of a Dispute Notice, (A) the NewCo Program Manager shall consult with the NewCo Board (or a committee thereof appointed for such purpose), which may direct the NewCo Program Manager how to proceed with respect to such Dispute and (B) the SLM BankCo Program Manager shall consult with the SLM BankCo Board (or a committee thereof appointed for such purpose), which may direct the SLM BankCo Program Manager how to proceed with respect to such Dispute.

(iii) If any Dispute remains unresolved for any reason for a period of [—] days following delivery of a Dispute Notice or if a Party reasonably concludes that the other Party is not willing to negotiate as contemplated by this Section 7.2, the Dispute may be submitted to the dispute resolution procedures in accordance with Section 7.3.

(c) Status of Discussions. All negotiations contemplated by this Section 7.2 shall be confidential and shall be treated by the Parties as compromise and settlement negotiations for purposes of applicable rules of evidence.

 

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7.3 Dispute Resolution.

(a) Dispute Resolution. Except as otherwise specifically provided in Section 7.2 or in any Ancillary Agreement, the procedures for nonbinding mediation and binding arbitration set forth in this Section 7.3 and Schedule 7.3 shall apply to all Disputes (whether sounding in contract, tort or otherwise) that may arise out of or relate to, or arise under or in connection with this Agreement or any Ancillary Agreement or the transactions contemplated hereby or thereby, between or among any members of the NewCo Group and the SLM BankCo Group. Each Party agrees on behalf of itself and the members of its Group that the procedures set forth in this Section 7.3 shall be the sole and exclusive remedy in connection with any such Dispute and irrevocably waives any right to commence any Action in or before any Governmental Authority, except as expressly provided in Section 7.3(d) and except to the extent provided under the Arbitration Act in the case of judicial review of arbitration results or awards. EACH PARTY ON BEHALF OF ITSELF AND EACH MEMBER OF ITS GROUP IRREVOCABLY WAIVES ANY RIGHT TO ANY TRIAL IN A COURT THAT WOULD OTHERWISE HAVE JURISDICTION OVER ANY CLAIM, CONTROVERSY OR DISPUTE SET FORTH IN THE FIRST SENTENCE OF THIS SECTION 7.3(A). All dispute resolution pursuant to this clause shall be confidential and shall be treated as compromise and settlement negotiations for purposes of applicable rules of evidence.

(b) Mediation. Any Dispute not resolved pursuant to Section 7.2 shall, at the written request of any Party (a “Mediation Request”), which Mediation Request shall be given to the other Party in the manner set forth in Section 10.5, be submitted to nonbinding mediation in accordance with the then current International Institute for Conflict Prevention and Resolution (“CPR”) Mediation Procedure (the “Procedure”), except as modified in Schedule 7.3. The mediation shall be held in [—] or such other places as the Parties may mutually agree. If the Dispute has not been resolved within [—] days of the appointment of a mediator, or within [—] days after receipt by a Party of a Mediation Request (whichever occurs sooner), or within such longer period as the Parties may agree to in writing, then any Party may submit an Arbitration Demand Notice in accordance with Section 7.3(c).

(c) Binding Arbitration. If any Dispute is not resolved within the time period set forth in Section 7.3(b), either NewCo or SLM BankCo may, unless the Applicable Deadline (as hereinafter defined) has occurred, make a written demand (the “Arbitration Demand Notice”) that the Dispute be resolved by binding arbitration, which Arbitration Demand Notice shall be given to the other Party in the manner set forth in Section 10.5. If either Party shall deliver an Arbitration Demand Notice, the other Party may itself deliver an Arbitration Demand Notice to

 

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such first Party with respect to any related Dispute with respect to which the Applicable Deadline has not passed without the requirement of first delivering a Dispute Notice as contemplated by Section 7.2. If either Party delivers an Arbitration Demand Notice with respect to any Dispute that is the subject of any then pending arbitration proceeding or of a previously delivered Arbitration Demand Notice, all such Disputes shall be resolved in the arbitration proceeding for which an Arbitration Demand Notice was first delivered unless the arbitrator in his or her sole discretion determines that it is impracticable or otherwise inadvisable to do so.

(i) Except as may be expressly provided in any Ancillary Agreement, any Arbitration Demand Notice may be given until two years after the later of (i) the occurrence of the act or event giving rise to the underlying claim (it being understood that in the case of a Third Party Claim, such date shall be the date of assertion of the Third Party Claim rather than the act or event underlying the Third Party Claim) and (ii) the date on which such act or event was, or should have been, in the exercise of reasonable due diligence, discovered by the Party asserting the claim (as applicable and as it may in a particular case be specifically extended by the Parties in writing, the “Applicable Deadline”). Any discussions, negotiations or mediation between the Parties pursuant to this Agreement or otherwise will not toll the Applicable Deadline unless expressly agreed in writing by the Parties. Each Party agrees, on behalf of itself and the members of its respective Group, that, if an Arbitration Demand Notice with respect to a Dispute is not given prior to the expiration of the Applicable Deadline, such Dispute will be barred. Subject to Section 7.3(d), upon delivery of an Arbitration Demand Notice pursuant to Section 7.3(c) prior to the Applicable Deadline, the Dispute shall be decided by one or more arbitrators in accordance with the rules set forth in this Section 7.3 and Schedule 7.3.

(ii) Except as otherwise set forth in this Section 7.3 and Schedule 7.3, any arbitration hereunder will be conducted in accordance with the American Arbitration Association (the “AAA”) Comprehensive Arbitration Rules and Procedures then prevailing; provided, however, that to the extent that the provisions of this Agreement and the prevailing rules of the AAA conflict, the provisions of this Agreement (including this Section 7.3 and Schedule 7.3) shall govern. Unless the Parties otherwise agree, any such arbitration shall be conducted by and before a single arbitrator. Any arbitrator selected pursuant to this Section 7.3(d) shall be neutral and disinterested with respect to each of the Parties and the matter and shall be reasonably competent in the applicable subject matter.

(iii) If a Party fails or refuses to appear at and participate in an arbitration hearing after due notice, the arbitrator may hear and determine the controversy upon evidence produced by the appearing Party. Any decision rendered under such circumstances shall be as valid and enforceable as if the Parties had appeared and participated fully at all stages.

 

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(iv) The fees of the arbitrator and all other arbitration costs shall be borne equally by each Party involved in the matter, except that each Party shall be responsible for its own attorney’s fees and other costs and expenses, including the costs of witnesses selected by such Party.

(v) Any arbitration award shall be an award with a holding in favor of or against a Party and shall include findings as to facts, issues or conclusions of law (including with respect to any matters relating to the validity or infringement of patents or patent applications) and shall include a statement of the reasoning on which the award rests. The award must also be in adequate form so that a judgment of a court may be entered thereupon. Judgment upon any arbitration award hereunder may be entered in any court having jurisdiction thereof. Any award shall not be vacated or appealed except on the bases of (i) the award being procured by fraud or corruption, (ii) the arbitrator being partial or corrupt, (iii) the arbitrator wrongfully refusing to postpone a hearing or hear evidence, or (iv) the arbitrator exceeding the scope of the power granted to the arbitrator in this Agreement.

(vi) Any arbitration proceedings hereunder shall take place in [—], unless another location is otherwise agreed to in writing by the Parties.

(d) Regardless of whether a Dispute Notice, Mediation Request or Arbitration Demand Notice has been delivered, prior to the time at which the mediator or arbitrator is appointed pursuant to this Section 7.3, either Party may seek one or more temporary restraining orders in a court of competent jurisdiction if necessary in order to preserve and protect the status quo. Neither the request for, nor the grant or denial of, any such temporary restraining order shall be deemed a waiver of the obligation to arbitrate as set forth herein, and the arbitrator may order the Parties to petition the court to dissolve, continue or modify any such order. Any such temporary restraining order shall remain in effect until the first to occur of the expiration of the order in accordance with its terms or the dissolution thereof.

(e) Except as required by Law, the Parties shall hold, and shall cause their respective Subsidiaries, officers, directors, employees, agents and other representatives to hold, the existence, content and result of and mediation or arbitration in confidence in accordance with the provisions of this Article VII and except as may be required in order to enforce any agreement or award. Each of the Parties shall request that the mediator or arbitrator, as applicable, comply with such confidentiality requirement.

(f) The interpretation of the provisions of this Article VII, only insofar as they relate to the agreement to arbitrate and any procedures pursuant thereto, shall be governed by the Arbitration Act and other applicable U.S. federal law. In all other respects, the interpretation of this Agreement shall be governed as set forth in Section 11.2.

7.4 Continuation of Services and Commitments. Unless otherwise agreed in writing, the Parties shall, and shall cause their Subsidiaries to, continue to honor all commitments under this Agreement and each Ancillary Agreement to the extent required by such Agreements during the course of dispute resolution pursuant to the provisions of this Article VII.

 

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ARTICLE VIII

FURTHER ASSURANCES AND ADDITIONAL COVENANTS

8.1 Further Assurances.

(a) In addition to the actions specifically provided for elsewhere in this Agreement, each of the Parties hereto shall use its reasonable best efforts, prior to, on and after the Effective Time, to take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable Laws, regulations and agreements to consummate and make effective the transactions contemplated by this Agreement and the Ancillary Agreements.

(b) Without limiting the foregoing, prior to, on and after the Effective Time, each Party hereto shall cooperate with the other Party, and without any further consideration, but at the expense of the requesting Party, execute and deliver, or use its reasonable best efforts to cause to be executed and delivered, all instruments, including instruments of conveyance, assignment and transfer, and to make all filings with, and to obtain all Approvals or Notifications of, any Governmental Authority or any other Person under any permit, license, agreement, indenture or other instrument (including any consents or Governmental Approvals), and to take all such other actions as such Party may reasonably be requested to take by the other Party from time to time, consistent with the terms of this Agreement and the Ancillary Agreements, in order to effectuate the provisions and purposes of this Agreement and the Ancillary Agreements and the transfers of the NewCo Assets and the SLM BankCo Assets and the assignment and assumption of the NewCo Liabilities and the SLM BankCo Liabilities and the other transactions contemplated hereby and thereby. Without limiting the foregoing, each Party will, at the reasonable request, cost and expense of the other Party, take such other actions as may be reasonably necessary to vest in such other Party good and marketable title to the Assets allocated to such Party under this Agreement or any of the Ancillary Agreements, free and clear of any Security Interest, if and to the extent it is practicable to do so.

(c) On or prior to the Effective Time, Existing SLM, SLM BankCo and NewCo in their respective capacities as direct and indirect shareholders of their respective Subsidiaries, shall each ratify any actions which are reasonably necessary or desirable to be taken by Existing SLM, SLM BankCo, NewCo or any of their respective Subsidiaries, as the case may be, to effectuate the transactions contemplated by this Agreement and the Ancillary Agreements.

(d) Prior to the first anniversary of the Effective Time, if one or more of the Parties identifies any commercial or other service that is needed to assure a smooth and orderly transition of the businesses in connection with the consummation of

 

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the transactions contemplated hereby, and that is not otherwise governed by the provisions of this Agreement or any Ancillary Agreement, subject to applicable Law (including, in the case of the SLM BankCo Group, banking regulations and the advice of the SLM BankCo Group’s counsel in respect thereof), the Parties will cooperate in determining whether there is a mutually acceptable arm’s-length basis on which the other Party will provide such service.

ARTICLE IX

TERMINATION

9.1 Termination. This Agreement may be terminated by the Sallie Mae Board at any time, in its sole and absolute discretion, prior to the Effective Time. After the Effective Time, this Agreement may not be terminated except by an agreement in writing signed by each of the Parties.

9.2 Effect of Termination. In the event of any termination of this Agreement prior to the Effective Time, no Party (or any of its directors or officers) shall have any liability or further obligation to any other Party.

ARTICLE X

MISCELLANEOUS

10.1 Counterparts; Entire Agreement; Corporate Power.

(a) This Agreement and each Ancillary Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the Parties and delivered to the other Parties.

(b) This Agreement, the Ancillary Agreements and the Exhibits, Schedules and appendices hereto and thereto contain the entire agreement among the Parties with respect to the subject matter hereof and supersede all previous agreements, negotiations, discussions, writings, understandings, commitments and conversations with respect to such subject matter, and there are no agreements or understandings among the Parties other than those set forth or referred to herein or therein.

(c) SLM BankCo represents on behalf of itself and each other member of the SLM BankCo Group, and NewCo represents on behalf of itself and each other member of the NewCo Group, as follows:

(i) each such Person has the requisite corporate or other power and authority and has taken all corporate or other action necessary in order to execute, deliver and perform this Agreement and each Ancillary Agreement to which it is a party and to consummate the transactions contemplated hereby and thereby; and

(ii) this Agreement and each Ancillary Agreement to which it is a party has been duly executed and delivered by it and constitutes a valid and binding agreement of it enforceable in accordance with the terms thereof.

 

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(d) Each Party acknowledges that it and each other Party may execute certain of the Ancillary Agreements by facsimile, stamp or mechanical signature. Each Party expressly adopts and confirms each such facsimile, stamp or mechanical signature made in its respective name as if it were a manual signature, agrees that it will not assert that any such signature is not adequate to bind such Party to the same extent as if it were signed manually and agrees that at the reasonable request of any other Party at any time it will as promptly as reasonably practicable cause each such Ancillary Agreement to be manually executed (any such execution to be as of the date of the initial date thereof).

(e) Notwithstanding any provision of this Agreement or any Ancillary Agreement, none of Existing SLM, SLM BankCo nor NewCo shall be required to take or omit to take any act that would violate its fiduciary duties to any minority shareholders of any non-wholly owned Subsidiary of Existing SLM, SLM BankCo or NewCo, as the case may be (it being understood that directors’ qualifying shares or similar interests will be disregarded for purposes of determining whether a Subsidiary is wholly owned).

10.2 Governing Law. This Agreement and, unless expressly provided therein, each Ancillary Agreement (and any claims or disputes arising out of or related hereto or thereto or to the transactions contemplated hereby and thereby or to the inducement of any party to enter herein and therein, whether for breach of contract, tortious conduct or otherwise and whether predicated on common law, statute or otherwise) shall be governed by and construed and interpreted in accordance with the Laws of the State of Delaware irrespective of the choice of laws principles of the State of Delaware including all matters of validity, construction, effect, enforceability, performance and remedies.

10.3 Assignability. Except as set forth in any Ancillary Agreement, this Agreement and each Ancillary Agreement shall be binding upon and inure to the benefit of the parties hereto and thereto, respectively, and their respective successors and permitted assigns; provided, however, that no party hereto or thereto may assign its respective rights or delegate its respective obligations under this Agreement or any Ancillary Agreement without the express prior written consent of the other parties hereto or thereto. Notwithstanding the foregoing, no such consent shall be required for the assignment of a party’s rights and obligations under this Agreement or the Ancillary Agreements (except as may be otherwise provided in any such Ancillary Agreement) in whole in connection with a Change of Control of a Party so long as the resulting, surviving or transferee Person assumes all the obligations of the relevant party thereto by operation of Law or pursuant to an agreement in form and substance reasonably satisfactory to the other Party. Nothing herein is intended to, or shall be construed to, prohibit either Party or any of its Subsidiaries from being party to or undertaking a Change of Control.

 

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10.4 Third Party Beneficiaries. Except for the indemnification rights under this Agreement of any SLM BankCo Indemnitee or NewCo Indemnitee in their respective capacities as such, (a) the provisions of this Agreement and each Ancillary Agreement are solely for the benefit of the Parties and are not intended to confer upon any Person except the Parties thereto any rights or remedies hereunder, and (b) there are no Third Party beneficiaries of this Agreement or any Ancillary Agreement and neither this Agreement nor any Ancillary Agreement shall provide any third person with any remedy, claim, liability, reimbursement, claim of action or other right in excess of those existing without reference to this Agreement or any Ancillary Agreement.

10.5 Notices. All notices, requests, claims, demands or other communications under this Agreement and, to the extent applicable and unless otherwise provided therein, under each of the Ancillary Agreements shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by overnight courier service, by facsimile or electronic transmission with receipt confirmed or by registered or certified mail (postage prepaid, return receipt requested) to the respective Parties at the following addresses (or at such other address for a Party as shall be specified in a notice given in accordance with this Section 10.5):

If to SLM BankCo, to:

SLM Corporation

[—]

[—]

Attn: General Counsel

Facsimile: [—]

with a copy to:

If to NewCo, to:

New Corporation

[—]

[—]

Attn: General Counsel

Facsimile: [—]

with a copy to:

Any Party may, by notice to the other Party, change the address to which such notices are to be given.

 

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10.6 Severability. If any provision of this Agreement or any Ancillary Agreement or the application thereof to any Person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof or thereof, or the application of such provision to Persons or circumstances or in jurisdictions other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby. Upon such determination, the Parties shall negotiate in good faith in an effort to agree upon such a suitable and equitable provision to effect the original intent of the Parties.

10.7 Force Majeure. No Party shall be deemed in default of this Agreement or any Ancillary Agreement to the extent that any delay or failure in the performance of its obligations under this Agreement or any Ancillary Agreement results from any Force Majeure. In the event of any such excused delay, the time for performance shall be extended for a period equal to the time lost by reason of the delay.

10.8 Publicity. Prior to the Effective Time, each of NewCo and SLM BankCo shall consult with each other prior to issuing any press releases or otherwise making public statements with respect to the Separation, the Distribution or any of the other transactions contemplated hereby or under any Ancillary Agreement and prior to making any filings with any Governmental Authority with respect thereto.

10.9 Expenses. Except as expressly set forth in this Agreement (including Sections 5.1, 6.3, 6.8(a), 6.10, 7.3 and 8.1(b) and Article IV) or in any Ancillary Agreement, all fees, costs and expenses incurred prior to the Effective Time in connection with the preparation, execution and delivery of this Agreement and any Ancillary Agreement, and with the consummation of the transactions contemplated hereby and thereby, will be borne by NewCo.

10.10 Headings. The article, section and paragraph headings contained in this Agreement and in the Ancillary Agreements are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement or any Ancillary Agreement.

10.11 Survival of Covenants. Except as expressly set forth in this Agreement or any Ancillary Agreement, the covenants, representations and warranties contained in this Agreement and each Ancillary Agreement, and liability for the breach of any obligations contained herein, shall survive the Separation and the Distribution and shall remain in full force and effect.

10.12 Waivers of Default. Waiver by any Party of any default by the other Party of any provision of this Agreement or any Ancillary Agreement shall not be deemed a waiver by the waiving Party of any subsequent or other default, nor shall it prejudice the rights of the other Party. No failure or delay by any Party in exercising any right, power or privilege under this Agreement or any Ancillary Agreement shall operate as a waiver thereof, nor shall a single or partial exercise thereof prejudice any other or further exercise thereof or the exercise of any other right, power or privilege.

 

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10.13 Specific Performance. Subject to the provisions of Article VII, in the event of any actual or threatened default in, or breach of, any of the terms, conditions and provisions of this Agreement or any Ancillary Agreement, the Party or Parties who are, or are to be, thereby aggrieved shall have the right to specific performance and injunctive or other equitable relief, or the right to interplead a Party into an Action relating to a Third Party Claim, in respect of its or their rights under this Agreement or such Ancillary Agreement, in addition to any and all other rights and remedies at law or in equity, and all such rights and remedies shall be cumulative. The Parties agree that the remedies at law for any breach or threatened breach, including monetary damages, are inadequate compensation for any loss and that any defense in any action for specific performance that a remedy at law would be adequate is waived. Any requirements for the securing or posting of any bond with such remedy are waived by each of the Parties.

10.14 Amendments. No provisions of this Agreement or any Ancillary Agreement shall be deemed waived, amended, supplemented or modified by any Party, unless such waiver, amendment, supplement or modification is in writing and signed by the authorized representative of the Party against whom it is sought to enforce such waiver, amendment, supplement or modification.

10.15 Interpretation. In this Agreement and any Ancillary Agreement, (a) words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires; (b) the terms “hereof,” “herein,” and “herewith” and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement (or the applicable Ancillary Agreement) as a whole (including all of the Schedules, Exhibits and Appendices hereto and thereto) and not to any particular provision of this Agreement (or such Ancillary Agreement); (c) Article, Section, Schedule, Exhibit and Appendix references are to the Articles, Sections, Schedules, Exhibits and Appendices to this Agreement (or the applicable Ancillary Agreement) unless otherwise specified; (d) the word “including” and words of similar import when used in this Agreement (or the applicable Ancillary Agreement) shall mean “including, without limitation,”; (e) the word “or” shall not be exclusive; (f) unless expressly stated to the contrary in this Agreement or in any Ancillary Agreement, all references to “the date hereof,” “the date of this Agreement,” “hereby” and “hereupon” and words of similar import shall all be references to [—], 2014, regardless of any amendment or restatement hereof and (g) references to any agreement, instrument or other document shall mean such agreement, instrument or other document as amended, supplemented or modified from time to time to the extent permitted by the provisions thereof and not prohibited by this Agreement.

10.16 Limitations of Liability. Notwithstanding anything in this Agreement to the contrary, and except with respect to any breach of any covenant or agreement contained in Sections 5.4, 5.5, 5.7 or 6.9 or as expressly set forth in any Ancillary Agreement, neither NewCo or its Affiliates, on the one hand, nor SLM BankCo or its Affiliates, on the other hand, shall be liable under this Agreement to the other for any special, indirect, punitive, exemplary, remote, speculative or similar damages in excess of compensatory damages of the other arising in connection with the transactions contemplated hereby (other than any such liability with respect to a Third Party Claim).

 

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10.17 Performance. SLM BankCo will cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth in this Agreement or in any Ancillary Agreement to be performed by any member of the SLM BankCo Group. NewCo will cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth in this Agreement or in any Ancillary Agreement to be performed by any member of the NewCo Group. Each Party (including its permitted successors and assigns) further agrees that it will (a) give timely notice of the terms, conditions and continuing obligations contained in this Agreement and any applicable Ancillary Agreement to all of the other members of its Group and (b) cause all of the other members of its Group not to take any action or fail to take any such action inconsistent with such Party’s obligations under this Agreement, any Ancillary Agreement or the transactions contemplated hereby or thereby.

[Remainder of page intentionally left blank]

 

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IN WITNESS WHEREOF, the parties have caused this Separation and Distribution Agreement to be executed by their duly authorized representatives.

 

SLM CORPORATION
By:  

 

  Name:
  Title:
NEW BLC CORPORATION
By:  

 

  Name:
  Title:
NEW CORPORATION
By:  

 

  Name:
  Title:

[Signature page to Separation and Distribution Agreement]

Exhibit 10.1

DRAFT

Exhibit 10.1

TRANSITION SERVICES AGREEMENT

BY AND BETWEEN

NEW CORPORATION

AND

SLM CORPORATION

DATED AS OF [—], 2014

TABLE OF CONTENTS

 

          Page  
ARTICLE I   
DEFINITIONS   
ARTICLE II   
SERVICES, DURATION AND SERVICES MANAGERS   

Section 2.01.

   

Services; Scope

      7  

Section 2.02.

   

Duration of Services

      7  

Section 2.03.

   

Pricing for Services

      7  

Section 2.04.

   

Changes to Services

      7  

Section 2.05.

   

Excluded Services

      8  

Section 2.06.

   

Transition Operating Committee; Services Managers

      8  

Section 2.08.

   

Personnel

      9  
ARTICLE III   
ADDITIONAL ARRANGEMENTS   

Section 3.01.

   

Software and Software Licenses

      10  

Section 3.02.

   

Computer-Based and Other Resources

      11  

Section 3.03.

   

Access to Facilities

      11  

Section 3.04.

   

Cooperation

      12  

Section 3.05.

   

Security and Privacy

      12  

Section 3.06.

   

IT Transition Completion Requirements; IT Transition Changes

      16  
ARTICLE IV   
COSTS AND DISBURSEMENTS   

Section 4.01.

   

Costs and Disbursements

      17  

Section 4.02.

   

Tax Matters

      18  

Section 4.03.

   

No Right to Set-Off

      19  
ARTICLE V   
STANDARD FOR SERVICE   

Section 5.01.

   

Standard for Service

      19  

Section 5.02.

   

Disclaimer of Warranties

      20  

Section 5.03.

   

Compliance with Laws and Regulations

      20  
ARTICLE VI   
LIMITED LIABILITY AND INDEMNIFICATION   

Section 6.01.

   

Consequential and Other Damages

      20  

Section 6.02.

   

Limitation of Liability

      21  

Section 6.03.

   

Obligation To Re-perform; Liabilities

      21  

Section 6.04.

   

Release and Recipient Indemnity

      21  

 

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Section 6.05.

   

Provider Indemnity

      22  

Section 6.06.

   

Indemnification Procedures

      22  

Section 6.07.

   

Liability for Payment Obligations

      22  

Section 6.08.

   

Exclusion of Other Remedies

      22  
ARTICLE VII   
TERM AND TERMINATION   

Section 7.01.

   

Term and Termination

      22  

Section 7.02.

   

Effect of Termination

      24  

Section 7.03.

   

Force Majeure

      24  
ARTICLE VIII   
GENERAL PROVISIONS   

Section 8.01.

   

No Agency

      24  

Section 8.02.

   

Subcontractors

      25  

Section 8.03.

   

Treatment of Confidential Information

      25  

Section 8.04.

   

Further Assurances

      26  

Section 8.05.

   

Dispute Resolution

      26  

Section 8.06.

   

Notices

      26  

Section 8.07.

   

Severability

      27  

Section 8.08.

   

Entire Agreement

      27  

Section 8.09.

   

No Third-Party Beneficiaries

      27  

Section 8.10.

   

Governing Law

      27  

Section 8.11.

   

Amendment; Waiver

      28  

Section 8.12.

   

Rules of Construction

      28  

Section 8.13.

   

Counterparts

      28  

Section 8.14.

   

Assignability

      28  

Section 8.15.

   

Public Announcements

      29  

Section 8.16.

   

Non-Recourse

      29  

Section 8.17.

   

Audit Rights

      29  

Section 8.18.

   

Title to Intellectual Property

      30  

Section 8.19.

   

Order of Precedence

      30  

EXHIBIT I:    Services Managers

EXHIBIT II:    Disclosing Party Security Requirements

EXHIBIT III:    Key Employees

SCHEDULE 1:    Comprehensive Information Technology Services

SCHEDULE 2:    Short-Term Shared Private Credit Loan Servicing Services

SCHEDULE 3:    Customer Communication Services

SCHEDULE 4:    Trust Administration Services

SCHEDULE 5:    Facilities Services

SCHEDULE 6:    Third Party TSA Support Services

SCHEDULE 7:    Government Relations

SCHEDULE 8:    Web Services Support

 

-ii-

Exhibit 10.1

TRANSITION SERVICES AGREEMENT

This TRANSITION SERVICES AGREEMENT, dated as of [—], 2014 (this “Agreement”), is by and between New Corporation, a Delaware corporation (“NewCo”), and SLM Corporation, a Delaware corporation (“SLM BankCo”). Unless otherwise defined in this Agreement, all capitalized terms used in this Agreement shall have the meaning set forth in the Separation and Distribution Agreement, dated as of the date hereof, by and among Existing SLM, SLM BankCo and NewCo (as amended, modified or supplemented from time to time in accordance with its terms, the “Separation and Distribution Agreement”).

RECITALS

WHEREAS, the board of directors of Existing SLM Corporation has determined that it is in the best interests of Existing SLM and its stockholders to separate Existing SLM’s NewCo Business and SLM BankCo Business;

WHEREAS, Existing SLM, SLM BankCo and NewCo have entered into the Separation and Distribution Agreement;

WHEREAS, in order to facilitate and provide for an orderly separation and transition under the Separation and Distribution Agreement, the Parties (as defined herein) desire to enter into this Agreement to set forth the terms and conditions pursuant to which each of the Parties and their affiliates shall provide to the other the Services (as defined herein) for a transitional period; and

WHEREAS, the Separation and Distribution Agreement requires execution and delivery of this Agreement by NewCo and SLM BankCo on or prior to the Distribution Date.

NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, hereby agree as follows:

ARTICLE I

DEFINITIONS

The following capitalized terms used in this Agreement shall have the meanings set forth below:

“Additional Services” shall have the meaning set forth in Section 2.04(a).

“Agreement” shall have the meaning set forth in the Preamble.

“Banking Agency Regulation P” shall have the meaning set forth in Section 3.05(c).

“Cause” shall mean (a) embezzlement, fraud, conviction of a felony crime, pleading guilty or nolo contendere to a felony crime or breach of fiduciary duty or deliberate disregard of NewCo’s Code of Business Code or other material policies of NewCo; (b) personal dishonesty of the individual that is materially injurious to the Corporation; (c) an unauthorized disclosure of any trade secret or confidential or proprietary information; or (d) competing with NewCo.

 

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“CFPB Regulation P” shall have the meaning set forth in Section 3.05(c).

“Confidential Information” shall have the meaning set forth in Section 8.03.

“cost,” as used in any Schedule to this Agreement, shall mean the Provider’s fully loaded cost inclusive of all standard overhead allocations, unless otherwise expressly provided in any such Schedule.

“Disaster Recovery/Business Continuity Plan” shall have the meaning set forth in Section 3.05(h).

“Disclosing Party” shall have the meaning set forth in Section 3.05(a).

“Disclosing Party Customer Information” shall have the meaning set forth in Section 3.05(c).

“Disclosing Party Security Requirements” shall have the meaning set forth in Section 3.05(b).

“DSS” shall have the meaning set forth in Section 3.05(g).

“Force Majeure” shall have the meaning set forth in the Separation and Distribution Agreement.

“FTC Final Rule” shall have the meaning set forth in Section 3.05(c).

“GLB Requirements” shall have the meaning set forth in Section 3.05(c).

“Group” shall have the meaning set forth in the Separation and Distribution Agreement.

“Information Security Program Requirements” shall have the meaning set forth in Section 3.05(c).

“Interest Payment” shall have the meaning set forth in Section 4.01(d).

“IT Transition” shall have the meaning set forth in Section 3.06(a).

“IT Transition Completion Requirements” shall have the meaning set forth in Section 3.06(a).

“Key Employees” shall mean the individuals set forth on Exhibit III hereto.

“NewCo” shall have the meaning set forth in the Preamble.

 

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“NewCo Business Plan” shall mean the business plan of the NewCo Group for the two-year period following the date of this Agreement, in the form and on the terms approved by the Board of Directors of SLM Corporation in October 2013.

“NewCo Program Manager” shall have the meaning set forth in the Separation and Distribution Agreement.

“NewCo Services” shall have the meaning set forth in Section 2.01.

“NewCo Services Manager” shall have the meaning set forth in Section 2.07(a).

“Non-assignable Contract” shall have the meaning set forth in the Separation and Distribution Agreement.

“Party” shall mean NewCo and SLM BankCo individually, and “Parties” shall mean NewCo and SLM BankCo collectively, and, in each case, their permitted successors and assigns.

“PCI” shall have the meaning set forth in Section 3.05(g).

“Preferred Stock Period” shall have the meaning set forth in the SMI Amended and Restated Charter.

“Provider” shall mean the Party or its Subsidiary or Affiliate providing a Service under this Agreement.

“Provider Indemnified Party” shall have the meaning set forth in Section 6.04.

“Receiving Party” shall have the meaning set forth in Section 3.05(a).

“Receiving Party Personnel” shall have the meaning set forth in Section 3.05(b).

“Recipient” shall mean the Party or its Subsidiary or Affiliate to whom a Service under this Agreement is being provided.

“Recipient Indemnified Party” shall have the meaning set forth in Section 6.05.

“Reimbursement Charge(s)” shall have the meaning set forth in Section 4.01(b).

“Representatives” shall have the meaning set forth in the Separation and Distribution Agreement.

“Schedule(s)” shall have the meaning set forth in Section 2.01.

“Security Incident” shall have the meaning set forth in Section 3.05(d).

“Security Audit” shall have the meaning set forth in Section 3.05(e).

“Separation and Distribution Agreement” shall have the meaning set forth in the Preamble.

 

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“Service Charge(s)” shall have the meaning set forth in Section 4.01(a).

“Service Decrease” shall have the meaning set forth in Section 2.04(b).

“Service Extension” shall have the meaning set forth in Section 7.01(c).

“Service Increase” shall have the meaning set forth in Section 2.04(a).

“Service Locations” shall have the meaning set forth in Section 3.05(h).

“Services” shall have the meaning set forth in Section 2.01.

“Shared Contract” shall have the meaning set forth in the Separation and Distribution Agreement.

“SLM BankCo” shall have the meaning set forth in the Preamble.

“SLM BankCo Business Plan” shall mean the business plan of the SLM BankCo Group for the two-year period following the date of this Agreement, in the form and on the terms approved by the Board of Directors of SLM Corporation in October 2013.

“SLM BankCo Program Manager” shall have the meaning set forth in the Separation and Distribution Agreement.

“SLM BankCo Services” shall have the meaning set forth in Section 2.01.

“SLM BankCo Services Manager” shall have the meaning set forth in Section 2.07(b).

“SMI” shall mean Sallie Mae, Inc., a Delaware corporation and Subsidiary of NewCo.

“SMI Amended and Restated Charter” shall mean the Amended and Restated Certificate of Incorporation of SMI filed with the Secretary of State of the State of Delaware on [—], 2014.

“Special Preferred Director” shall have the meaning set forth in the SMI Amended and Restated Charter.

“Subcontractors” shall have the meaning set forth in Section 3.05(c).

“Taxes” shall have the meaning set forth in the Tax Matters Agreement.

“Termination Charges” shall have the meaning set forth in Section 7.01(b)(i)(A).

“Transfer Taxes” shall have the meaning set forth in Section 4.02.

“Transition Operating Committee” shall have the meaning set forth in Section 2.07(c).

 

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ARTICLE II

SERVICES, DURATION AND SERVICES MANAGERS

Section 2.01. Services; Scope. Subject to the terms and conditions of this Agreement, (a) NewCo shall provide, or cause one or more of its Subsidiaries to provide, to the SLM BankCo Group the services for which NewCo is designated as the responsible party as set forth in Schedules 1, 2, 3, 4, 5, 6, 7 and 8 to this Agreement (the “NewCo Services”) and (b) SLM BankCo shall provide, or cause one or more of its Subsidiaries to provide, to the NewCo Group the services for which SLM BankCo is designated as the responsible party as set forth in Schedules 1, 2, 3, 4, 5, 6, 7 and 8 to this Agreement (the “SLM BankCo Services,” and, collectively with the NewCo Services, any Additional Services, any Service Increases, any Service Decreases and any New Services, the “Services”). The description and scope of the Services shall be as set forth on Schedules 1, 2, 3, 4, 5, 6, 7 and 8 (each a “Schedule”, and collectively, the “Schedules”). All of the Services shall be for the sole use and benefit of the Recipient and its respective Affiliates.

Section 2.02. Duration of Services. Subject to the terms of this Agreement, each of NewCo and SLM BankCo shall provide or cause to be provided to the respective Recipient(s) each Service until the earlier to occur of, with respect to each such Service, (a) the expiration of the duration of the term for such Service (or, subject to the terms of Section 7.01(c), the expiration of any Service Extension) as set forth on the applicable Schedule or (b) the date on which such Service is terminated under Section 7.01(b); provided, however, that the duration of the Services shall not extend beyond the two-year anniversary of the date of this Agreement.

Section 2.03. Pricing for Services. Subject to the terms of this Agreement, the Service Charge for each Service to be provided by a Provider shall be as reflected on the Schedules. With respect to each Service or category of Services, the applicable Schedule shall set forth (i) the Recipient that will be invoiced the Service Charge for such Service or category of Services and (ii) the Provider that will be paid such Service Charge. Service Charges and any applicable Reimbursement Charges shall be invoiced and paid in accordance with Article IV.

Section 2.04. Changes to Services.

(a) Service Increases; Additional Services. After the date of this Agreement, if a Recipient requests that a Provider (i) increase the volume, amount or frequency, as applicable, of any Service provided by a Provider (any such increase, a “Service Increase”) by up to 50% of the volume, amount or frequency contemplated by the SLM BankCo Business Plan or the NewCo Business Plan, as applicable, or (ii) provide a service that is materially different from and in addition to the Services then included on the Schedules hereto (each, an “Additional Service”) but was provided, immediately prior to the Effective Time, by a member of the NewCo Group to the Pre-Separation Consumer Banking Business, in the case of a request by SLM BankCo, or by a member of the SLM BankCo Group to the Pre-Separation Education Loan Business, in the case of a request by NewCo (other than because the Parties agreed such service would not be provided), then in each case such Provider shall be obligated to perform such Service Increase or Additional Service. If the Recipient requests that the Provider (x) perform a Service Increase that exceeds 150% of the Services to be performed in the manner contemplated by the SLM BankCo Business Plan or NewCo Business Plan, as applicable, or (y) provide an

 

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Additional Service not contemplated by the SLM BankCo Business Plan or the NewCo Business Plan, as applicable, then the Provider shall use commercially reasonable efforts to cooperate with the Recipient to provide such Service Increase or Additional Service.

(b) Service Decreases. After the date of this Agreement, a Recipient may request the Provider to decrease the volume, amount, level or frequency, as applicable, of any Service provided by a Provider (any such decrease, a “Service Decrease”) by providing a written notice to Provider; provided, however, that, after delivery of a notice of Service Decrease, the Provider shall have no obligation to agree to a subsequent request of the Recipient for a Service Increase with respect to such decreased Services.

(c) Mutual Agreement; Supplements to Schedules. In connection with any request for Additional Services, Service Increases or Service Decreases in accordance with this Section 2.04, the NewCo Services Manager and the SLM BankCo Services Manager shall in good faith negotiate the terms of a supplement to the applicable Schedule, which terms shall be consistent with the terms of, and the pricing methodology used for, similar Services provided under this Agreement. Upon the mutual written agreement of the Parties, the supplement to the applicable Schedule shall describe in reasonable detail the nature, description, scope, expiration and duration, Service Charges and other terms applicable to such Additional Services, Service Increases or Service Decrease in a manner similar to that in which the Services are described in the existing Schedules. Each supplement to the applicable Schedule, as agreed to in writing by the Parties, shall be deemed part of this Agreement as of the date of such supplement and the Additional Services or Service Increases set forth therein shall be deemed “Services” provided under this Agreement, in each case subject to the terms and conditions of this Agreement.

Section 2.05. Excluded Services. It is not the intent of the Provider to render, nor of the Recipient to receive from the Provider, professional advice or opinions, whether with regard to Tax, legal, treasury, finance, employment or other business and financial matters, technical advice, including environmental matters. The Recipient shall not rely on, or construe, any Service rendered by or on behalf of the Provider as such professional advice or opinions or technical advice, and the Recipient shall seek all third-party professional advice and opinions or technical advice as it may desire or need. In addition, no provision of this Agreement shall require any Provider to render services that are prohibited from being provided by the Provider or to the Recipient by any applicable Law or if the provision of such services by the Provider or to the Recipient would violate any applicable Law.

Section 2.06. Transition Operating Committee; Services Managers. (a) NewCo hereby appoints and designates the individual holding the NewCo position set forth on Exhibit I to act as its initial services manager (the “NewCo Services Manager”), who will be directly responsible for coordinating and managing the delivery of the NewCo Services and have authority to act on NewCo’s behalf with respect to matters relating to the provision of Services under this Agreement. The NewCo Services Manager will report to the NewCo Program Manager and will work with the personnel of the NewCo Group to periodically address issues and matters raised by SLM BankCo relating to the provision of Services under this Agreement. NewCo shall notify SLM BankCo of the appointment of a different NewCo Services Manager, if necessary, in accordance with Section 8.06.

 

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(b) SLM BankCo hereby appoints and designates the individual holding the SLM BankCo position set forth on Exhibit I to act as its initial services manager (the “SLM BankCo Services Manager”), who will be directly responsible for coordinating and managing the delivery of the SLM BankCo Services and have authority to act on SLM BankCo’s behalf with respect to matters relating to the provision of Services under this Agreement. The SLM BankCo Services Manager will report to the SLM BankCo Program Manager and will work with the personnel of the SLM BankCo Group to periodically address issues and matters raised by NewCo relating to the provision of Services under this Agreement. SLM BankCo shall notify NewCo of the appointment of a different SLM BankCo Services Manager, if necessary, in accordance with Section 8.06.

(c) During the Preferred Stock Period, the Separation Oversight Committee may appoint a committee (the “Transition Operating Committee”) to oversee the day-to-day operations of the NewCo Group and the SLM BankCo Group under this Agreement. The Transition Operating Committee shall be comprised of the NewCo Services Manager, the SLM BankCo Services Manager, and one representative from each of NewCo and SLM BankCo with responsibility for operations under this Agreement relating to the following functional areas: [—]. The Transition Operating Committee shall meet (in person or telephonically) on a monthly basis during the term of this Agreement.

Section 2.08. Personnel. (a) The Provider of any Service will make available to the Recipient of such Service such personnel as may be necessary to provide such Service on the understanding that such personnel shall remain employed and/or engaged by the Provider. The Provider will have the right, in its reasonable discretion, to (i) designate which personnel it will assign to perform such Service, and (ii) remove and replace such personnel at any time; provided, however, that any such removal or replacement shall not be the basis for any increase in any Service Charge or Reimbursement Charge payable hereunder or relieve the Provider of its obligation to provide any Service hereunder; provided, further, that the Provider will use its commercially reasonable efforts to limit the disruption to the Recipient in the transition of the Services to different personnel. If the Recipient, in its reasonable discretion and following discussions with the Provider, requests the Provider to remove and/or replace any such personnel from their roles in respect of the Services being provided to the Recipient, the Provider shall use commercially reasonable efforts to comply with such request.

(b) In the event that the provision of any Service by the Provider requires the cooperation and services of the personnel of the Recipient, the Recipient will make available to the Provider such personnel (who shall be appropriately qualified for purposes of so supporting the provision of such Service by the Provider) as may be necessary for the Provider to provide such Service on the understanding that such personnel shall remain employed and/or engaged by the Recipient. The Recipient will have the right, in its reasonable discretion, to (i) designate which personnel it will make available to the Provider in connection with the provision of such Service, and (ii) remove and replace such personnel at any time; provided, however, that any resulting increase in costs to the Provider shall be borne by the Recipient and any resulting adverse effect to the provision of such Service by the Provider will not be deemed a breach of this Agreement by the Provider; provided, further, that the Recipient will use its commercially reasonable efforts to limit the disruption to the Provider in the transition of such personnel. If the Provider, in its reasonable discretion and following discussions with the Recipient, requests the Recipient to remove and/or replace any such personnel from their roles in respect of the Services being provided by the Provider, the Recipient shall comply with such request.

 

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(c) No Provider shall be liable under this Agreement for any Liabilities incurred by the Recipient Indemnified Parties that are primarily attributable to, or that are a consequence of, any actions or inactions of the personnel of the Recipient, except for any such actions or inactions undertaken pursuant to the direction of the Provider.

(d) Nothing in this Agreement shall grant the Provider, or its employees, agents and third-party providers that are performing the Services, the right directly or indirectly to control or direct the operations of the Recipient or any member of its Group. Such employees, agents and third-party providers shall not be required to report to the management of the Recipient nor be deemed to be under the management or direction of the Recipient. The Recipient acknowledges and agrees that, except as may be expressly set forth herein as a Service or otherwise expressly set forth in the Separation and Distribution Agreement, another Ancillary Agreement or any other applicable agreement, no Provider or any member of its Group shall be obligated to provide, or cause to be provided, any service or goods to any Recipient or any member of its Group.

ARTICLE III

ADDITIONAL ARRANGEMENTS

Section 3.01. Software and Software Licenses. (a) If and to the extent requested by SLM BankCo, NewCo shall use commercially reasonable efforts to assist SLM BankCo in its efforts to obtain licenses (or other appropriate rights) to use, duplicate and distribute, as necessary and applicable, certain computer software necessary for NewCo to provide, and SLM BankCo to receive, NewCo Services or for NewCo to transition such NewCo Services to SLM BankCo; provided, however, that NewCo shall not be required to pay any fees or other payments or incur any obligations or liabilities to enable SLM BankCo to obtain any such license or rights (except and to the extent that SLM BankCo advances such fees or payments to NewCo); provided, further, that NewCo shall not be required to seek broader rights or more favorable terms for SLM BankCo than those applicable to Effective Time Sallie Mae or as may be applicable to NewCo from time to time hereafter; provided, further, that SLM BankCo shall bear only those costs that relate solely and directly to obtaining such licenses (or other appropriate rights) in the ordinary course. The Parties acknowledge and agree that there can be no assurance that NewCo’s efforts will be successful or that SLM BankCo will be able to obtain such licenses or rights on acceptable terms or at all and, where NewCo enjoys rights under any enterprise or site license or similar license, the Parties acknowledge that such license typically precludes partial transfers or assignments or operation of a service bureau on behalf of unaffiliated entities. In the event that SLM BankCo is unable to obtain such software licenses, the Parties shall work together using commercially reasonable efforts to obtain an alternative software license to allow NewCo to provide, and SLM BankCo to receive, such NewCo Services (or allow NewCo to transition such NewCo Services to SLM BankCo), and the Parties shall negotiate in good faith an amendment to the applicable Schedule to reflect any such new arrangement, which amended Schedule shall not require SLM BankCo to pay for any fees, Taxes, expenses or costs relating to the software license that SLM BankCo was unable to obtain pursuant to the provisions of this Section 3.01(a).

 

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(b) If and to the extent requested by NewCo, SLM BankCo shall use commercially reasonable efforts to assist NewCo in its efforts to obtain licenses (or other appropriate rights) to use, duplicate and distribute, as necessary and applicable, certain computer software necessary for SLM BankCo to provide, and NewCo to receive, SLM BankCo Services or for SLM BankCo to transition such SLM BankCo Services to NewCo; provided, however, that SLM BankCo shall not be required to pay any fees or other payments or incur any obligations or liabilities to enable NewCo to obtain any such license or rights (except and to the extent that NewCo advances such fees or payments to SLM BankCo); provided, further, that SLM BankCo shall not be required to seek broader rights or more favorable terms for NewCo than those applicable to Effective Time Sallie Mae or as may be applicable to SLM BankCo from time to time hereafter; provided, further, that NewCo shall bear only those costs that relate solely and directly to obtaining such licenses (or other appropriate rights) in the ordinary course. The Parties acknowledge and agree that there can be no assurance that SLM BankCo’s efforts will be successful or that NewCo will be able to obtain such licenses or rights on acceptable terms or at all and, where SLM BankCo enjoys rights under any enterprise or site license or similar license, the Parties acknowledge that such license typically precludes partial transfers or assignments or operation of a service bureau on behalf of unaffiliated entities. In the event that NewCo is unable to obtain such software licenses, the Parties shall work together using commercially reasonable efforts to obtain an alternative software license to allow SLM BankCo to provide, and NewCo to receive, such SLM BankCo Services (or allow SLM BankCo to transition such SLM BankCo Services to NewCo), and the Parties shall negotiate in good faith an amendment to the applicable Schedule to reflect any such new arrangement, which amended Schedule shall not require NewCo to pay for any fees, Taxes, expenses or costs relating to the software license that NewCo was unable to obtain pursuant to the provisions of this Section 3.01(b).

(c) In the event that there are any costs associated with obtaining software licenses in accordance with this Section 3.01 that (i) would not be payable in the ordinary course, including in the form of a “transfer fee” or other similar fees or expenses payable by the Recipient or the Provider, and (ii) would not have been payable by the Recipient or the Provider absent the need for a consent or waiver in connection with the license that the Recipient is seeking to obtain, such costs shall be paid by the Recipient.

Section 3.02. Computer-Based and Other Resources. From and after the date of this Agreement, each Party and its Affiliates shall cause all of their personnel having access to the computer software, networks, hardware, technology or computer-based resources of the other Party and its Affiliates pursuant to the Separation and Distribution Agreement, or any Ancillary Agreement, or in connection with the performance, receipt or delivery of any Service, to comply with all security guidelines (including physical security, network access, internet security, confidentiality and personal data security guidelines) of such other Party and its Affiliates of which written notice is provided by such other Party. Each Party shall ensure that the access contemplated by this Section 3.02 shall be used by its personnel only for the purposes contemplated by, and subject to the terms of, this Agreement.

Section 3.03. Access to Facilities. (a) SLM BankCo shall, and shall cause its Subsidiaries to, allow NewCo and its Representatives reasonable access to the facilities of SLM BankCo necessary for NewCo to fulfill its obligations under this Agreement.

 

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(b) NewCo shall, and shall cause its Subsidiaries to, allow SLM BankCo and its Representatives reasonable access to the facilities of NewCo necessary for SLM BankCo to fulfill its obligations under this Agreement.

(c) Notwithstanding the other rights of access of the Parties under this Agreement, each Party shall, and shall cause its Subsidiaries to, afford the other Party, its Subsidiaries and Representatives, following not less than five business days’ prior written notice from the other Party, reasonable access during normal business hours to the facilities, information, systems, infrastructure and personnel of the relevant Providers as reasonably necessary for the other Party to verify the adequacy of internal controls over information technology, reporting of financial data and related processes employed in connection with the Services, including in connection with verifying compliance with Section 404 of the Sarbanes-Oxley Act of 2002; provided, however, such access shall not unreasonably interfere with any of the business or operations of such Party or its Subsidiaries.

(d) Except as otherwise permitted by the other Party in writing, each Party shall permit only its authorized Representatives, contractors, invitees or licensees to access the other Party’s facilities.

Section 3.04. Cooperation. It is understood that it will require the significant efforts of both Parties to implement this Agreement and to ensure performance of this Agreement by the Parties at the agreed-upon levels in accordance with all of the terms and conditions of this Agreement. The Parties will cooperate, acting in good faith and using commercially reasonable efforts, to effect a smooth and orderly transition and performance of the Services provided under this Agreement from the Provider to the Recipient (including the assignment or transfer of the rights and obligations under any third-party contracts relating to the Services); provided, however, that this Section 3.04 shall not require either Party to incur any out-of-pocket costs or expenses unless and except as expressly provided in this Agreement or otherwise agreed to in writing by the Parties. Any Non-assignable Contract or Shared Contract shall be treated in the manner provided in Section 2.5 of the Separation and Distribution Agreement.

Section 3.05. Security and Privacy.

(a) Receiving Party; Disclosing Party. For purposes of this Section 3.05, “Receiving Party” means a party that obtains, maintains, processes, receives or otherwise is permitted access to Confidential Information of the other party (“Disclosing Party”).

(b) Disclosing Party Security Requirements; Security Questionnaire. Receiving Party shall comply, and shall cause its employees (“Receiving Party Personnel”) to comply (to the extent applicable to individuals), with the provisions set forth in Exhibit II (the “Disclosing Party Security Requirements”). As periodically requested by Disclosing Party, but no more frequently than annually, Receiving Party shall promptly, fully and accurately complete Disclosing Party’s Information Security Questionnaire and other documents or requests for information regarding Receiving Party’s information security practices relating to Disclosing Party’s Confidential Information (e.g., summaries of security audits, summaries of test results or other equivalent evaluations of Receiving Party’s information security practices).

 

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(c) Customer Information Handling Requirements. Receiving Party hereby agrees that (i) it shall comply, (ii) it shall cause all Receiving Party Personnel to comply and (iii) it shall cause all agents, contractors, subcontractors, and vendors that perform services that are used by Receiving Party to provide the Services (collectively, “Subcontractors”) to comply, to the extent they have access to Disclosing Party Customer Information (as defined below), with all reuse, redisclosure and other customer information handling, processing, security and protection requirements that are specifically required of a non-affiliated third-party processor or servicer (or subcontractor) under the Federal Trade Commission’s Privacy of Consumer Financial Information; Final Rule (16 CFR 313) (the “FTC Final Rule”), the Joint Banking Agencies’ Privacy of Consumer Financial Information; Final Rule (12 CFR Parts 40, 216, 332 and 573) (the “Banking Agency Regulation P”), or the Bureau of Consumer Financial Protection’s Privacy of Consumer Financial Information (Regulation P) (12 CFR 1016) (the “CFPB Regulation P”), as applicable, each implementing Title V of the Gramm-Leach-Bliley Act, Public Law 106-102 (the “GLB Requirements”) and other applicable federal and state consumer privacy Laws. Without limiting the foregoing, Receiving Party agrees that:

 

  (i) it is prohibited from disclosing or using any “nonpublic personal information” (as defined in the GLB Requirements) that it may obtain, maintain, process or otherwise receive from, through or on behalf of Disclosing Party in connection with this Agreement (the “Disclosing Party Customer Information”), except solely to carry out the purposes for which it was disclosed, including use under an applicable exception contained in Section 313.14 or 313.15 of the FTC Final Rule, Section 332.14 or 332.15 of the Banking Agency Regulation P, or Section 1016.14 or 1016.15 of the CFPB Regulation P, as applicable, in the ordinary course of business to carry out those purposes; and

 

  (ii) it has implemented and will maintain a written information security program that complies with applicable state laws and regulations pertaining to the protection of personal information (e.g., MA 201 CMR 17.00) and that is designed to meet the following objectives as set forth in the Interagency Guidelines Establishing Information Security Standards; Final Rule (12 CFR Part 30, et al.) (the “Information Security Program Requirements”):

 

  (1) Ensure the security and confidentiality of the Disclosing Party Customer Information;

 

  (2) Protect against any anticipated threats or hazards to the security or integrity of such information;

 

  (3) Protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer; and

 

  (4) Ensure the proper disposal of Disclosing Party Customer Information and “consumer information” (as that term is defined in the Interagency Guidelines Establishing Information Security Standards; Final Rule (12 CFR Part 30, et al.)).

 

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(d) Security Incidents. Unless specifically requested by law enforcement not to communicate with Disclosing Party, Receiving Party shall report to Disclosing Party all known Security Incidents. “Security Incident” means any unauthorized action by a known or unknown person or automated program (e.g., worm, virus, web crawler, malware, etc.) that leads to one of the following: unintended disclosure of confidential, customer, employee or other sensitive information, denial of service, misuse of system access, or unauthorized access or intrusion, all to the extent they affect the security, confidentiality or integrity of the Disclosing Party’s Confidential Information received, stored, processed, or maintained by Receiving Party. “Security Incident” shall also include any contact by a law enforcement agency with Receiving Party regarding any of Disclosing Party’s Confidential Information, unless specifically mandated by law enforcement not to communicate with Disclosing Party. To the extent Receiving Party becomes aware of any Security Incidents occurring with respect to its Subcontractors that have access (either authorized or unauthorized) to Disclosing Party’s Confidential Information, Receiving Party shall be required to report such Security Incidents in accordance with the provisions of this Section. If a Security Incident occurs, Receiving Party shall notify Disclosing Party within 24 hours in accordance with the procedure and contact information set forth on Exhibit II and provide the following information, to the extent known at such time: nature and impact of the Security Incident; actions already taken by Receiving Party; Receiving Party’s assessment of immediate risk; and corrective measures to be taken, evaluation of alternatives and next steps. Receiving Party shall continue providing (i) appropriate status reports to Disclosing Party regarding the resolution of the Security Incident and prevention of future such Security Incidents, and (ii) cooperation, as reasonably requested by Disclosing Party, in order to further investigate and resolve the Security Incident. Disclosing Party may require that the Services provided by Receiving Party to Disclosing Party be suspended, connectivity with Receiving Party be terminated or that other appropriate action be taken pending such resolution. Receiving Party shall preserve evidence of all Security Incidents and allow external forensic analysis either onsite or through shipment of components.

(e) Security Audits. During the Term and thereafter for as long as Receiving Party retains Disclosing Party Confidential Information, Disclosing Party, its representatives and agents will be entitled to conduct audits of Receiving Party’s relevant operations, facilities, and systems to confirm that Receiving Party has complied with the Disclosing Party Security Requirements and the Information Security Program Requirements (each, a “Security Audit”). Any Security Audit shall be scheduled with reasonable prior notice and conducted during normal business hours and shall not unreasonably interfere with Receiving Party’s business activities. Receiving Party may require any such auditor to sign a customary confidentiality agreement. In the event that any Security Audit results in the discovery of material security risks to Disclosing Party Confidential Information, Receiving Party shall respond to Disclosing Party in writing with Receiving Party’s plan to promptly take reasonable measures and corrective actions necessary to effectively eliminate the risk, at no cost to Disclosing Party. Receiving Party shall have 15 business days to cure such security risk, unless the parties mutually agree in writing to a longer period of time for such cure. Disclosing Party’s right, and the right of its representatives and agents, to conduct Security Audits, and any exercise of such right, shall not in any way diminish or affect Receiving Party’s duties and liabilities under this Agreement.

 

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(f) Subcontractors. Receiving Party shall be responsible for the acts and omissions of its Subcontractors as if they were the acts and omissions of its employees. Without limiting the foregoing, Receiving Party (a) shall oversee any such Subcontractors that obtain, maintain, process, receive, or otherwise are permitted access to Disclosing Party’s Confidential Information (including, without limitation, all Disclosing Party Customer Information) by taking reasonable steps to select and retain Subcontractors that are capable of maintaining appropriate safeguards to protect the security and confidentiality of the Disclosing Party’s Confidential Information, (b) shall require Subcontractors to comply with (i) confidentiality provisions substantially similar to those set forth in this Agreement, (ii) to the extent the Subcontractor has access to Disclosing Party Customer Information, privacy and security provisions substantially similar to those set forth in the Customer Information Handling Requirements paragraphs of this Agreement, and (iii) to the extent the Subcontractor has access to, stores, or processes the Disclosing Party’s customers’ cardholder information, the PCI DSS (defined immediately below) in effect from time to time, and (c) shall take commercially reasonable steps to require Subcontractors to adhere to the Disclosing Party Security Requirements set forth in Exhibit II.

(g) PCI Requirements. If Receiving Party has access to, stores, or processes the Disclosing Party’s customers’ cardholder information, Receiving Party hereby confirms that it has on file a current Report on Compliance, evidencing that it is in compliance with the payment card industry (“PCI”) data security standard (“DSS”). Receiving Party shall provide Disclosing Party with a copy of the PCI DSS Attestation of Compliance Letter upon request. In addition to the foregoing, to the extent applicable to the Services being provided to Disclosing Party hereunder, Receiving Party will comply with and adhere to the PCI DSS in effect from time to time. Each party shall be responsible for the implementation, testing, and compliance with respect to PCI data security controls within their respective PCI DSS boundaries. These requirements are applicable to all infrastructure and systems processing or storing any cardholder information as defined by the PCI DSS. Any change in Receiving Party’s PCI compliance and/or certification status shall be promptly communicated to Disclosing Party.

(h) Disaster Recovery; Business Continuity.

(i) Disaster Recovery and Business Continuity. Receiving Party will be responsible for disaster recovery and business continuity planning, testing, implementation, and execution related to all locations from which services are provided under this Agreement (including locations of Receiving Party’s Subcontractors, “Service Locations”). Receiving Party shall provide the services described in subparagraphs (i) through (iv) below without extra charge to the Disclosing Party:

(A) maintaining and testing the Disaster Recovery/Business Continuity Plan (as defined below);

(B) implementing the Disaster Recovery/Business Continuity Plan in the event of a disaster affecting Service Locations within the specified timeframes;

 

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(C) carrying out disaster recovery, business continuity or redundancy procedures related to the services in accordance with such Disaster Recovery/Business Continuity Plan; and

(D) designing and implementing a Disaster Recovery/Business Continuity plan to minimize disruption to the business of Disclosing Party.

(ii) Disaster Recovery/Business Continuity Plan. Receiving Party shall maintain a Disaster Recovery/Business Continuity plan (the “Disaster Recovery/Business Continuity Plan”) that covers services that are provided to Disclosing Party and each of the proposed Service Locations. The Receiving Party will provide a target RTO and RPO of 48 hours and 2 hours, respectively, unless a lower minimum is provided in the Disaster Recovery/Business Continuity Plan in respect of any particular application.

(iii) Testing. Receiving Party will test the Disaster Recovery/Business Continuity Plan on at least an annual basis or more often as required by any regulatory authority having authority over Receiving Party.

(iv) Priority. If a disaster or major site impact occurs involving the need to recover operations at a Service Location or to operate from a fallback site and, as a result, it is necessary for Receiving Party or its Subcontractors to allocate limited resources between or among several organizations, Receiving Party shall not treat Disclosing Party less favorably than any other customer for purposes of allocation of such resources.

Section 3.06. IT Transition Completion Requirements; IT Transition Changes.

(a) Upon mutual agreement between SLM BankCo and NewCo that the Services and other milestones identified as “IT Transition Completion Requirements” in Schedule 1 (the “IT Transition Completion Requirements”) have been successfully completed to the satisfaction of the Parties, the migration of SLM BankCo’s customer data and service functions to an independent SLM BankCo platform (the “IT Transition”) shall be deemed to be complete.

(b) Any proposed changes to the operations of SMI that would reasonably be expected to adversely affect, in any material respect, the ability of the NewCo Group to timely satisfy the IT Transition Completion Requirements shall be promptly submitted to the Board of Directors of SMI for approval by a majority of the members of the Board of Directors of SMI, which approval shall include the approval of the Special Preferred Director, in accordance with the terms of the SMI Amended and Restated Charter.

(c) Prior to any termination (other than a termination for Cause) or replacement of a Key Employee of SMI during the Preferred Stock Period, NewCo shall provide prompt written notice to the Special Preferred Director and the SLM BankCo members of the Separation Oversight Committee of NewCo’s intention to terminate or replace such Key Employee. The SLM BankCo members of the Separation Oversight Committee shall determine whether to consent to such termination or replacement within three business days following receipt of such notice. If NewCo does not receive the

 

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consent of the SLM BankCo members of the Separation Oversight Committee within such three business day period, the proposed termination or replacement shall be submitted to the Board of Directors of SMI for approval by a majority of the members of the Board of Directors of SMI, which approval shall include the approval of the Special Preferred Director, in accordance with the terms of the SMI Amended and Restated Charter; provided, however, that nothing herein shall prevent the Board of Directors of SMI (including the Special Preferred Director) from approving such termination or replacement prior to the expiration of such three business day period. Notwithstanding anything to the contrary herein, SMI may terminate a Key Employee for Cause (without the approval of, or provision of prior notice to, SLM BankCo, the Special Preferred Director or any SLM BankCo member of the Separation Oversight Committee) to the extent it reasonably determines, in consultation with counsel, that Cause for termination of such Key Employee exists.

(d) [Reserved]

(e) SLM BankCo shall not make any changes to the operations of the SLM BankCo Group that would reasonably be expected to adversely affect, in any material respect, the ability of the NewCo Group to timely satisfy the IT Transition Completion Requirements without the prior written consent of NewCo.

ARTICLE IV

COSTS AND DISBURSEMENTS

Section 4.01. Costs and Disbursements. (a) Except as otherwise provided in this Agreement, a Recipient of Services shall pay to the Provider of such Services a fee for the Services (or category of Services, as applicable) (each fee constituting a “Service Charge” and, collectively, “Service Charges”) as listed on the Schedules. During the term of this Agreement, the amount of a Service Charge for any Services (or category of Services, as applicable) may increase or decrease to the extent of: (i) any increases or decreases mutually agreed to by the Parties, (ii) any Service Charges applicable to any Additional Services, Service Increases, Service Decreases or New Services, and (iii) any increase or decrease in the rates or charges imposed by any unaffiliated third-party provider that is providing Services.

(b) Except as otherwise provided in this Agreement or the Schedules, the Recipient shall reimburse the Provider for reasonable out-of-pocket costs and expenses incurred by the Provider or its Affiliates in connection with providing the Services (including necessary travel-related expenses) to the extent that such costs and expenses are not reflected in the Service Charge for such Services (each such cost or expense, a “Reimbursement Charge” and, collectively, “Reimbursement Charges”); provided, however, that any such cost or expense that is materially inconsistent with historical practice between the Parties for any Service (including business travel-related expenses) shall require advance approval of the Recipient. Any authorized travel-related expenses incurred in performing the Services shall be incurred and charged to the Recipient in accordance with the Provider’s then-applicable business travel policies.

 

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(c) Unless otherwise provided on a Schedule, each Provider shall prepare a monthly invoice that reflects all Service Charges and Reimbursement Charges with respect to the Services provided to each Recipient during the prior calendar month. Such invoice shall be submitted to the Recipient within 30 calendar days following the end of the prior calendar month and shall provide the Recipient with documentation reasonably necessary to support the calculation of such Service Charges and any Reimbursement Charges.

(d) The Recipient shall pay the amount of each monthly invoice of Service Charges and Reimbursement Charges by wire transfer (or such other method of payment as may be agreed between the Parties) to the Provider within 40 calendar days of the receipt of each such invoice, including appropriate documentation as described herein, as instructed by the Provider. In the absence of a timely notice of a billing dispute in accordance with the provisions of Article VII of the Separation and Distribution Agreement, if the Recipient fails to pay such undisputed amount by the due date, the Recipient shall be obligated to pay to the Provider, in addition to the amount due, interest at an annual default interest rate of ten percent (10%) per annum, or the maximum legal rate, whichever is lower (the “Interest Payment”), accruing from the date the payment was due through the date of actual payment. In the event of any billing dispute, the Recipient shall promptly pay any undisputed amount. All amounts due and payable hereunder shall be invoiced and paid in U.S. dollars.

(e) Subject to the confidentiality provisions set forth in Section 8.03, each Party shall, and shall cause their respective Affiliates to, provide, upon 10 days’ prior written notice from the other Party, any information within such Party’s or its Affiliates’ possession that the requesting Party reasonably requests in connection with any Services being provided to such requesting Party by an unaffiliated third-party provider, including any applicable invoices, agreements documenting the arrangements between such third-party provider and the Provider and other supporting documentation; provided, however, that each Party shall make no more than one such request during any fiscal quarter.

Section 4.02. Tax Matters.

(a) Without limiting any provisions of this Agreement, the Recipient shall be responsible for (i) all excise, sales, use, transfer, stamp, documentary, filing, recordation and other similar Taxes, (ii) all value added, goods and services or similar recoverable indirect Taxes, if any, and (iii) any related interest and penalties incurred solely as a result of the Recipient’s failure to timely pay such Taxes to Provider (collectively, “Transfer Taxes”), in each case imposed or assessed as a result of the provision of Services by the Provider. The Party required to account for Transfer Tax shall provide to the other Party evidence of the remittance of the amount of such Transfer Tax to the relevant Governmental Authority. The Provider agrees that it shall take commercially reasonable actions to cooperate with the Recipient in obtaining any refund, return, rebate, exemption, or the like of any Transfer Tax, including by filing any necessary exemption or other similar forms, certificates, or other similar documents. The Recipient shall promptly reimburse the Provider for any costs incurred by the Provider or its Affiliates in connection with the Recipient obtaining a refund or overpayment of refund, return, rebate, exemption, or the like of any Transfer Tax. For the avoidance of doubt, any applicable gross receipts-based or net income-based Taxes shall be borne by the Provider.

 

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(b) The Recipient shall be entitled to deduct and withhold Taxes required by any Governmental Requirements to be withheld on payments made pursuant to this Agreement. To the extent any amounts are so withheld, the Recipient shall (i) pay, in addition to the amount otherwise due to the Provider under this Agreement, such additional amount as is necessary to ensure that the net amount actually received by the Provider will equal the full amount the Provider would have received had no such deduction or withholding been required, (ii) pay such deducted and withheld amount to the proper Governmental Authority, and (iii) promptly provide to the Provider evidence of such payment to such Governmental Authority. The Provider shall, prior to the date of any payment to be made pursuant to this Agreement, at the request of the Recipient, make commercially reasonable efforts to provide the Recipient any certificate or other documentary evidence (x) required by Governmental Requirements or (y) which the Provider is entitled by Governmental Requirements to provide in order to reduce the amount of any Taxes that may be deducted or withheld from such payment and the Recipient agrees to accept and act in reliance on any such duly and properly executed certificate or other applicable documentary evidence.

(c) If the Provider (i) receives any refund (whether by payment, offset, credit or otherwise) or (ii) utilizes any overpayment of Taxes that are borne by Recipient pursuant to this Agreement, then the Provider shall promptly pay, or cause to be paid, to the Recipient an amount equal to the deficiency or excess, as the case may be, with respect to the amount that the Recipient has borne if the amount of such refund or overpayment (including, for the avoidance of doubt, any interest or other amounts received with respect to such refund or overpayment) had been included originally in the determination of the amounts to be borne by Recipient pursuant to this Agreement, net of any additional Taxes and costs the Provider incurs or will incur as a result of the receipt of or in obtaining such refund or such overpayment.

Section 4.03. No Right to Set-Off. The Recipient shall timely pay the full amount of Service Charges and Reimbursement Charges and shall not set-off, counterclaim or otherwise withhold any amount owed to the Provider under this Agreement on account of any obligation owed by the Provider to the Recipient.

ARTICLE V

STANDARD FOR SERVICE

Section 5.01. Standard for Service. (a) The Provider agrees (i) to perform the Services with substantially the same nature, quality, standard of care and service levels at which the same or similar services were performed by or on behalf of the Provider during the 12 months prior to the Distribution Date or as otherwise provided in the Schedules or; and (ii) upon receipt of written notice from the Recipient identifying any outage, interruption or other failure of any Service, except as otherwise provided in the Schedules, to respond to such outage, interruption or other failure of such Service in a manner that is substantially similar to the manner in which such Provider or its Affiliates responded to any outage, interruption or other failure of the same or similar services prior to the Distribution Date. The Parties acknowledge that an outage, interruption or other failure of any Service shall not be deemed to be a breach of the provisions of this Section 5.01 so long as the applicable Provider complies with the foregoing clause (ii).

 

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(b) Nothing in this Agreement shall require the Provider to perform or cause to be performed any Service to the extent the manner of such performance would be prohibited by or constitute a violation of applicable Law or any existing contract or agreement with a third party. If the Provider is or becomes aware of any potential violation on the part of the Provider, the Provider shall promptly send a written notice to the Recipient of any such potential violation. The Parties each agree to cooperate and use commercially reasonable efforts to obtain any necessary third-party consents required under any existing contract or agreement with a third party to allow the Provider to perform or cause to be performed any Service in accordance with the standards set forth in Section 5.01(a) and/or the applicable Schedule. Any costs and expenses incurred by either Party in connection with obtaining any such third-party consent that is required to allow the Provider to perform or cause to be performed any Service shall be solely the responsibility of the Recipient. If, with respect to a Service, the Parties, despite the use of such commercially reasonable efforts, are unable to obtain a required third-party consent or the performance of such Service by the Provider would continue to constitute a violation of applicable Laws, the Provider shall use commercially reasonable efforts in good faith to provide such Services in a manner as closely as possible to the standards described in Section 5.01(a) and in the applicable Schedules that would apply absent the exception provided for in the first sentence of this Section 5.01(b).

Section 5.02. Disclaimer of Warranties. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT (INCLUDING THE SCHEDULES AND EXHIBITS HERETO), THE PARTIES ACKNOWLEDGE AND AGREE THAT THE SERVICES ARE PROVIDED AS-IS, THAT EACH RECIPIENT ASSUMES ALL RISKS AND LIABILITY ARISING FROM OR RELATING TO ITS USE OF AND RELIANCE UPON THE SERVICES AND EACH PROVIDER, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, MAKES NO REPRESENTATION OR WARRANTY WITH RESPECT THERETO. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT (INCLUDING THE SCHEDULES AND EXHIBITS HERETO), TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, EACH PROVIDER HEREBY EXPRESSLY DISCLAIMS ALL REPRESENTATIONS AND WARRANTIES REGARDING THE SERVICES, WHETHER EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, BY STATUTE OR OTHERWISE, INCLUDING ANY REPRESENTATION OR WARRANTY IN REGARD TO QUALITY, PERFORMANCE, NONINFRINGEMENT, COMMERCIAL UTILITY, MERCHANTABILITY OR FITNESS OF ANY SERVICE FOR A PARTICULAR PURPOSE.

Section 5.03. Compliance with Laws and Regulations. Each Party shall be responsible for its own compliance and its Subcontractors’ compliance with any and all Laws applicable to its performance under this Agreement, including, without limitation, Laws applicable to a Receiving Party’s obligations under Section 3.05. No Party shall knowingly take any action in violation of any such applicable Law that results in liability being imposed on the other Party.

ARTICLE VI

LIMITED LIABILITY AND INDEMNIFICATION

Section 6.01. Consequential and Other Damages. Notwithstanding anything to the contrary contained in the Separation and Distribution Agreement or this Agreement, except for breaches of confidentiality obligations (including, without limitation, breach of confidentiality

 

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obligations relating to customer information or a Receiving Party’s breach of Section 3.05), in the case of bad faith, gross negligence or willful misconduct or as otherwise provided in a Schedule, no Party shall be liable to the other Party or any of its Affiliates or Representatives, whether in contract, tort (including negligence and strict liability) or otherwise, at law or equity, for any special, indirect, incidental, punitive or consequential damages whatsoever (including lost profits or damages calculated on multiples of earnings approaches), which in any way arise out of, relate to or are a consequence of, the performance or nonperformance by such Party (including any Affiliates and Representatives and any unaffiliated third-party providers, in each case, providing any applicable Services) under this Agreement or the provision of, or failure to provide, any Services under this Agreement, including with respect to loss of profits, business interruptions or claims of customers, even if such Party has been advised of the possibility of such damages.

Section 6.02. Limitation of Liability. Except as otherwise provided on a Schedule, the Liabilities of each Provider and its Affiliates and Representatives, collectively, under this Agreement for any act or failure to act in connection herewith (including the performance or breach of this Agreement), or from the sale, delivery, provision or use of any Services provided under or contemplated by this Agreement, whether in contract, tort (including negligence and strict liability) or otherwise, at law or equity, except for breaches of confidentiality obligations (including, without limitation, breach of confidentiality obligations relating to customer information or a Receiving Party’s breach of Section 3.05) or in the case of bad faith, gross negligence or willful misconduct, shall not exceed the total aggregate Service Charges (excluding for the avoidance of doubt any Reimbursement Charges) actually paid to such Provider pursuant to this Agreement.

Section 6.03. Obligation To Re-perform; Liabilities. In the event of any breach of this Agreement by any Provider with respect to the provision of any Services (with respect to which the Provider can reasonably be expected to re-perform in a commercially reasonable manner), the Provider shall (a) promptly correct in all material respects such error, defect or breach or re-perform in all material respects such Services at the request of the Recipient and at the sole cost and expense of the Provider and (b) subject to the limitations set forth in Sections 6.01 and 6.02, reimburse the Recipient and its Affiliates and Representatives for Liabilities attributable to such breach by the Provider. Except as provided on a Schedule, the remedy set forth in this Section 6.03 shall be the sole and exclusive remedy of the Recipient for any such breach of this Agreement. Any request for re-performance in accordance with this Section 6.03 by the Recipient must be in writing and specify in reasonable detail the particular error, defect or breach, and such request must be made no more than one month from the date such error, defect or breach becomes apparent or should have reasonably become apparent to the Recipient.

Section 6.04. Release and Recipient Indemnity. Subject to Section 6.01, each Recipient hereby releases the applicable Provider and its Affiliates and Representatives (each, a “Provider Indemnified Party”), and each Recipient hereby agrees to indemnify, defend and hold harmless each such Provider Indemnified Party from and against any and all Liabilities arising from, relating to or in connection with: (a) the use of any Services by such Recipient or any of its Affiliates, Representatives or other Persons using such Services; or (b) the sale, delivery, provision or use of any Services provided under or contemplated by this Agreement, in the case of each of clause (a) and (b), except to the extent that such Liabilities arise out of, relate to or are a consequence of the applicable Provider Indemnified Party’s bad faith, gross negligence or willful misconduct.

 

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Section 6.05. Provider Indemnity. Subject to Section 6.01, each Provider hereby agrees to indemnify, defend and hold harmless the applicable Recipient and its Affiliates and Representatives (each a “Recipient Indemnified Party”), from and against any and all Liabilities arising from, relating to or in connection with: (a) the use of any Services by such Recipient or any of its Affiliates, Representatives or other Persons using such Services; or (b) the sale, delivery, provision or use of any Services provided under or contemplated by this Agreement, in the case of each of clause (a) and (b), to the extent that such Liabilities arise out of, relate to or are a consequence of the applicable Provider’s bad faith, gross negligence or willful misconduct.

Section 6.06. Indemnification Procedures. The provisions of Sections 4.5 and 4.6 of the Separation and Distribution Agreement shall govern claims for indemnification under this Agreement.

Section 6.07. Liability for Payment Obligations. Nothing in this Article VI shall be deemed to eliminate or limit, in any respect, NewCo’s or SLM BankCo’s express obligation in this Agreement to pay Service Charges and Reimbursement Charges for Services rendered in accordance with this Agreement.

Section 6.08. Exclusion of Other Remedies. The provisions of Sections 6.03, 6.04 and 6.05 of this Agreement shall, to the maximum extent permitted by applicable Law, be the sole and exclusive remedies of the Provider Indemnified Parties and the Recipient Indemnified Parties, as applicable, for any claim, loss, damage, expense or liability, whether arising from statute, principle of common or civil law, principles of strict liability, tort, contract or otherwise under this Agreement.

ARTICLE VII

TERM AND TERMINATION

Section 7.01. Term and Termination. (a) This Agreement shall commence immediately upon the Distribution Date and shall terminate upon the earlier to occur of: (i) the last date on which either Party is obligated to provide any Service to the other Party in accordance with the terms of this Agreement (not to extend beyond the two-year anniversary of this Agreement) or (ii) the mutual written agreement of the Parties to terminate this Agreement in its entirety.

(b) (i) Without prejudice to a Recipient’s rights with respect to a Force Majeure set forth in Section 7.03, a Recipient may from time to time terminate this Agreement with respect to the entirety of any individual Service but not a portion thereof:

(A) for any reason or no reason, upon providing at least 30 days’ prior written notice to the Provider; provided, however, that the Recipient shall pay to the Provider the necessary and reasonable documented out-of-pocket costs incurred in connection with the wind down of such Service other than any employee severance and relocation expenses, but including unamortized license fees and costs for equipment used to provide such Service, contractual obligations under agreements used to provide such

 

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Service, any breakage or termination fees and any other termination costs payable by the Provider with respect to any resources or pursuant to any other third-party agreements that were used by the Provider to provide such Service (or an equitably allocated portion thereof, in the case of any such equipment, resources or agreements that also were used for purposes other than providing Services) (“Termination Charges”); or

(B) if the Provider of such Service has failed to perform any of its material obligations under this Agreement with respect to such Service, and such failure shall continue to exist 30 days after receipt by the Provider of written notice of such failure from the Recipient.

(ii) A Provider may terminate this Agreement with respect to one or more Services, in whole but not in part, at any time upon prior written notice to the Recipient if the Recipient has failed to perform any of its material obligations under this Agreement relating to such Services, including making payment of Service Charges and Reimbursement Charges when due, and such failure shall continue uncured for a period of 30 days after receipt by the Recipient of a written notice of such failure from the Provider. The relevant Schedule shall be updated to reflect any terminated Service.

(iii) In the event that any Service is terminated other than at the end of a month, the Service Charge associated with such Service shall be pro-rated appropriately. The Parties acknowledge that there may be interdependencies among the Services being provided under this Agreement that may not be identified on the applicable Schedules and agree that, if the Provider’s ability to provide a particular Service in accordance with this Agreement is materially and adversely affected by the termination of another Service in accordance with this Section 7.01(b), then the Parties shall negotiate in good faith to amend the Schedule relating to such affected continuing Service, which amendment shall be consistent with the terms of, and the pricing methodology used for, comparable Services.

(c) In connection with the termination of any Service identified on the Schedules as being subject to the provisions of this Section 7.01(c), if the Recipient reasonably determines that it will require such Service to continue beyond the date on which such Service is scheduled to terminate in the applicable Schedule, the Recipient may request the Provider to extend such Service for up to six months (unless otherwise provided in the Schedule applicable to such Service) (each, a “Service Extension”) by written notice to the Provider no less than 90 days prior to the date of such scheduled termination, and the Parties shall use commercially reasonable efforts to comply with such Service Extension; provided, however, that (i) there shall be no more than one Service Extension with respect to each Service, (ii) the Provider shall not be obligated to provide such Service Extension if a third-party consent is required and cannot be obtained by the Provider and (iii) each Service Extension shall be permissible under applicable Law, including bank and bank holding company regulations. Unless otherwise agreed, Service Charges relating to any Service Extension shall be increased by 5% of the Service Charge reflected on the Schedules with respect to such Service. Within five days following either Party’s receipt of a written notice requesting a Service Extension, the NewCo Services Manager and the SLM BankCo Services Manager shall in good faith (x) negotiate the terms of an

 

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amendment to the applicable Schedule, which amendment shall be consistent with the terms of, and the pricing methodology used for, the applicable Service (subject to the 5% increase of the applicable Service Charges, as described above); and (y) determine the costs and expenses (which shall not include any Service Charges payable under this Agreement), if any, that would be incurred by the Provider or the Recipient, as the case may be, in connection with the provision of such Service Extension, which costs and expenses shall be borne solely by the Recipient. Each such amended Schedule, as agreed to in writing by the Parties, shall be deemed part of this Agreement as of the date of such agreement and any Services provided pursuant to such Service Extensions shall be deemed “Services” provided under this Agreement, in each case subject to the terms and conditions of this Agreement. If a Recipient requests any subsequent extension of Services, such extension shall be subject to mutual agreement of the Parties and shall be provided at a mutually agreed market rate.

Section 7.02. Effect of Termination. Upon termination of any Service pursuant to this Agreement, the Provider of the terminated Service will have no further obligation to provide the terminated Service, and the relevant Recipient will have no obligation to pay any future Service Charges relating to any such Service; provided, however, that the Recipient shall remain obligated to the relevant Provider for (a) the Service Charges, Reimbursement Charges, and Transfer Taxes owed and payable in respect of Services provided prior to the effective date of termination and (b) any applicable Termination Charges payable in the event that the Recipient terminates such Service pursuant to Section 7.01(b)(i)(A) In connection with the termination of any Service, the provisions of this Agreement not relating solely to such terminated Service shall survive any such termination, and in connection with a termination of this Agreement, Article I, Article VI (including liability in respect of any indemnifiable Liabilities under this Agreement arising or occurring on or prior to the date of termination), Article VII, Article VIII, all confidentiality obligations under this Agreement and liability for all due and unpaid Service Charges, Reimbursement Charges, Termination Charges and Transfer Taxes, shall continue to survive indefinitely.

Section 7.03. Force Majeure. Notwithstanding anything to the contrary herein, if either party is rendered unable, in whole or in part, by a Force Majeure to satisfy its obligations under this Agreement, such party shall not be deemed to have breached any such obligation upon delivery of written notice of such event to the other Party hereto, for so long as such party remains unable to perform such obligation as a result of such event. The following events shall not constitute force majeure events: (a) acts or omissions of subcontractors; and (b) delays or failures to the extent they could have been avoided or their impact mitigated through the use of commercially reasonable business continuity measures. If either Party is unable to materially perform its obligations under this Agreement and its performance is excused pursuant to this Section 7.03 for a period of 30 consecutive days, the other Party may terminate this Agreement upon at least three business days’ written notice and shall not be required to pay any Termination Charges pursuant to Section 7.01(b).

ARTICLE VIII

GENERAL PROVISIONS

Section 8.01. No Agency. Nothing in this Agreement shall be deemed in any way or for any purpose to constitute any Party an agent of an unaffiliated party in the conduct of such other

 

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Party’s business. A Provider of any Service under this Agreement shall act as an independent contractor and not as the agent of the Recipient in performing such Service, maintaining control over its employees, its subcontractors and their employees and complying with all withholding of income at source requirements, whether federal, national, state, local or foreign.

Section 8.02. Subcontractors. A Provider may hire or engage one or more subcontractors to perform any or all of its obligations under this Agreement; provided, however, that (a) such Provider shall use the same degree of care in selecting any such subcontractor as it would if such contractor was being retained to provide similar services to the Provider and (b) such Provider shall in all cases remain primarily responsible for all of its obligations under this Agreement with respect to the scope of the Services, the standard for services as set forth in Article V and the content of the Services provided to the Recipient.

Section 8.03. Treatment of Confidential Information. (a) The Parties shall not, and shall cause all other persons providing Services or having access to information of the other Party that is confidential or proprietary (including, without limitation, Disclosing Party Customer Information, (“Confidential Information”) not to, disclose to any other person or use, except for purposes of this Agreement, any Confidential Information of the other Party; provided, however, that the Confidential Information may be used by such Party to the extent that such Confidential Information has been (i) in the public domain through no fault of such Party or any member of such Group or any of their respective Representatives, (ii) later lawfully acquired from other sources by such Party (or any member of such Party’s Group) which sources are not themselves bound by a confidentiality obligation or (iii) independently generated without reference to any Confidential Information of the other Party; provided, further, that each Party may disclose Confidential Information of the other Party, to the extent not prohibited by applicable Law: (i) to its Representatives on a need-to-know basis in connection with the performance of such Party’s obligations under this Agreement; (ii) in any report, statement, testimony or other submission required to be made to any Governmental Authority having jurisdiction over the disclosing Party; or (iii) in order to comply with applicable Law, or in response to any summons, subpoena or other legal process or formal or informal investigative demand issued to the disclosing Party in the course of any litigation, investigation or administrative proceeding. In the event that a Party becomes legally compelled (based on advice of counsel) by deposition, interrogatory, request for documents subpoena, civil investigative demand or similar judicial or administrative process to disclose any Confidential Information of the other Party, such disclosing Party shall provide the other Party with prompt prior written notice of such requirement, and, to the extent reasonably practicable, cooperate with the other Party (at such other Party’s expense) to obtain a protective order or similar remedy to cause such Confidential Information not to be disclosed, including interposing all available objections thereto, such as objections based on settlement privilege. In the event that such protective order or other similar remedy is not obtained, the disclosing Party shall furnish only that portion of the Confidential Information that has been legally compelled, and shall exercise its commercially reasonable efforts (at such other Party’s expense) to obtain assurance that confidential treatment will be accorded such Confidential Information.

(b) Upon the termination of this Agreement, either Party may request, in such Party’s sole discretion, that all Confidential Information belonging to such Party either be promptly returned to such Party or promptly destroyed by the other Party, and in either case not retained by such other Party or its Affiliates or their respective Subcontractors in any form.

 

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Notwithstanding anything to the contrary contained herein, each Party’s legal department may retain an archival copy of all or any portion of such Confidential Information to the extent required by applicable Law. The rights and obligations of the Parties regarding the non-disclosure and use of Confidential Information exchanged under this Agreement shall survive any return, retention or destruction of any Confidential Information.

(c) All Confidential Information shall remain the property of the Disclosing Party.

(d) Each Party shall, and shall cause its Representatives to, protect the Confidential Information of the other Party by using the same degree of care to prevent the unauthorized disclosure of such as the Party uses to protect its own confidential information of a like nature, but in any event no less than a reasonable degree of care.

(e) Each Party shall be liable for any failure by its respective Representatives to comply with the restrictions on use and disclosure of Confidential Information contained in this Agreement.

(f) Each Party shall comply with all applicable local, state, national, federal and foreign privacy and data protection Laws that are or that may in the future be applicable to the provision of Services under this Agreement.

Section 8.04. Further Assurances. Each Party covenants and agrees that, without any additional consideration, it shall execute and deliver any further legal instruments and perform any acts that are or may become necessary to effectuate this Agreement.

Section 8.05. Dispute Resolution. Any Dispute shall be resolved in accordance with the procedures set forth in Article VII of the Separation and Distribution Agreement, which shall be the sole and exclusive procedures for the resolution of any such Dispute unless otherwise specified herein or in Article VII of the Separation and Distribution Agreement.

Section 8.06. Notices. Except with respect to routine communications by the NewCo Services Manager and the SLM BankCo Services Manager under Section 2.07, all notices, requests, claims, demands and other communications under this Agreement shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by overnight courier service, by facsimile or electronic transmission with receipt confirmed (followed by delivery of an original via overnight courier service) or by registered or certified mail (postage prepaid, return receipt requested) to the respective Parties at the following addresses (or at such other address for a Party as shall be specified in a notice given in accordance with this Section 8.06):

(i) if to NewCo:

New Corporation

[—]

 

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with copies to:

(ii) if to SLM BankCo:

SLM Corporation

[—]

with copies to:

Section 8.07. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced under any Law or as a matter of public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated by this Agreement is not affected in any manner materially adverse to any Party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated by this Agreement be consummated as originally contemplated to the greatest extent possible.

Section 8.08. Entire Agreement. This Agreement, together with the documents referenced herein (including the Schedules, the Separation and Distribution Agreement and any other Ancillary Agreements) constitutes the entire agreement between the Parties and their respective Affiliates with respect to the subject matter hereof and supersedes all prior written and oral and all contemporaneous oral agreements, negotiations, discussions, writings, understandings, commitments and conversations with respect to such subject matter, and there are no agreements or understandings between the Parties other than those set forth or referred to herein or therein.

Section 8.09. No Third-Party Beneficiaries. Except as provided in Article VI with respect to Provider Indemnified Parties and Recipient Indemnified Parties, this Agreement is for the sole benefit of the Parties and their permitted successors and assigns and nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person, including any union or any employee or former employee of NewCo or SLM BankCo, any legal or equitable right, benefit or remedy of any nature whatsoever, including any rights of employment for any specified period, under or by reason of this Agreement.

Section 8.10. Governing Law. This Agreement (and any claims or disputes arising out of or related to this Agreement or to the transactions contemplated by this Agreement or to the inducement of any Party to enter into this Agreement or the transactions contemplated by this Agreement, whether for breach of contract, tortious conduct or otherwise and whether predicated on common law, statute or otherwise) shall in all respects be governed by, and construed in accordance with, the Laws of the State of Delaware, including all matters of construction, validity and performance, in each case without reference to any conflict of Law rules that might lead to the application of the Laws of any other jurisdiction.

 

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Section 8.11. Amendment; Waiver. No provision of this Agreement, including any Schedules to this Agreement, may be amended, supplemented or modified except by a written instrument making specific reference to this Agreement or any such Schedules to this Agreement, as applicable, signed by each of the Parties. Waiver by a Party of any default by the other Party of any provision of this Agreement shall not be deemed a waiver by the waiving Party of any subsequent or other default, nor shall it prejudice the rights of the waiving Party.

Section 8.12. Rules of Construction. Interpretation of this Agreement shall be governed by the following rules of construction: (a) words in the singular shall be held to include the plural and vice versa, and words of one gender shall be held to include the other gender as the context requires; (b) references to the terms Article, Section, paragraph, Exhibit and Schedule are references to the Articles, Sections, paragraphs, Exhibits and Schedules of this Agreement unless otherwise specified; (c) references to “$” shall mean U.S. dollars; (d) the word “including” and words of similar import when used in this Agreement shall mean “including without limitation,” unless otherwise specified; (e) the word “or” shall not be exclusive; (f) references to “written” or “in writing” include in electronic form; (g) provisions shall apply, when appropriate, to successive events and transactions; (h) the headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement; (i) NewCo and SLM BankCo have each participated in the negotiation and drafting of this Agreement and if an ambiguity or question of interpretation should arise, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or burdening either Party by virtue of the authorship of any of the provisions in this Agreement or any interim drafts of this Agreement; (j) a reference to any Person includes such Person’s successors and permitted assigns; (k) any reference to “days” means calendar days unless Business Days are expressly specified; and (l) when calculating the period of time before which, within which or following which any act is to be done or step taken pursuant to this Agreement, the date that is the reference date in calculating such period shall be excluded, and if the last day of such period is not a Business Day, the period shall end on the next succeeding Business Day.

Section 8.13. Counterparts. This Agreement may be executed in one or more counterparts, and by each Party in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by facsimile or portable document format (PDF) shall be as effective as delivery of a manually executed counterpart of this Agreement.

Section 8.14. Assignability. This Agreement shall not be assigned or transferred by operation of Law or otherwise without the prior written consent of NewCo and SLM BankCo, except that each Party may:

(a) assign all of its rights and obligations under this Agreement to any of its Subsidiaries; provided, that no such assignment shall release NewCo or SLM BankCo, as the case may be, from any liability or obligation under this Agreement;

(b) in connection with the divestiture of any Subsidiary or business of such Party that is a Recipient to an acquiror that is not a competitor of the Provider, assign to the acquiror of

 

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such Subsidiary or business its rights and obligations as a Recipient with respect to the Services provided to such divested Subsidiary or business under this Agreement; provided, however, that (i) no such assignment shall release NewCo or SLM BankCo, as the case may be, from any liability or obligation under this Agreement; (ii) any and all costs and expenses incurred by either Party in connection with such assignment (including in connection with clause (iii) of this proviso) shall be borne solely by the assigning Party; and (iii) the Parties shall in good faith negotiate any amendments to this Agreement, including the Schedules and Exhibits hereto, that may be necessary or appropriate in order to assign such Services; and

(c) in connection with the divestiture of any Subsidiary or business of such Party that is a Recipient to an acquiror that is a competitor of the Provider, assign to the acquiror of such Subsidiary or business its rights and obligations as a Recipient with respect to the Services provided to such divested Subsidiary or business under this Agreement; provided, however, that (i) no such assignment shall release NewCo or SLM BankCo, as the case may be, from any liability or obligation under this Agreement; (ii) any and all costs and expenses incurred by either Party in connection with such assignment (including in connection with clause (iii) of this proviso) shall be borne solely by the assigning Party; (iii) the Parties shall in good faith negotiate any amendments to this Agreement, including the Schedules and Exhibits hereto, that may be necessary or appropriate in order to ensure that such assignment will not (x) materially and adversely affect the businesses and operations of each of the Parties and their respective Affiliates or (y) create a competitive disadvantage for the Provider with respect to an acquiror that is a competitor; and (iv) no Party shall be obligated to provide any such assigned Services to an acquiror that is a competitor if the provision of such assigned Services to such acquiror would disrupt the operation of such Party’s businesses or create a competitive disadvantage for such Party with respect to such acquiror.

Section 8.15. Public Announcements. From and after the Distribution Date, the Parties shall consult with each other before issuing, and give each other the opportunity to review and comment upon, that portion of any press release or other public statement that relates to the transactions contemplated by this Agreement, and shall not issue any such press release or make any such public statement prior to such consultation, except (a) as may be required by applicable Law, court process or by obligations pursuant to any listing agreement with any national securities exchange or national securities quotation system; or (b) as otherwise set forth in the Separation and Distribution Agreement.

Section 8.16. Non-Recourse. No past, present or future director, officer, employee, incorporator, member, partner, shareholder, Affiliate, agent, attorney or representative of either NewCo or SLM BankCo or their Affiliates shall have any liability for any obligations or liabilities of NewCo or SLM BankCo, respectively, under this Agreement or for any claims based on, in respect of, or by reason of, the transactions contemplated by this Agreement.

Section 8.17. Audit Rights. Each Party may, at such Party’s sole cost and expense, from time to time (but no more frequently than [—]) audit the books and records of the other Party reasonably relating to the Services that the other Party is obligated to provide under this Agreement and to otherwise verify such Party’s compliance with the terms and conditions of this Agreement. Each Party shall reasonably cooperate with any audit conducted by the other Party pursuant to this Section 8.17, provided that the Party conducting the audit shall give the other

 

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Party reasonable written notice of any audit, but in no event less than [—] days’ notice, prior to such audit. Any audit pursuant to this Section 7(c) shall be conducted during normal business hours for the applicable location in a manner that does not materially disrupt the operations of the other Party.

Section 8.18. Title to Intellectual Property. Except as expressly provided for under the terms of this Agreement (including the Schedules and Exhibits hereto), the Recipient acknowledges that it shall acquire no right, title or interest (including any license rights or rights of use) in any Intellectual Property which is owned or licensed by the Provider, by reason of the provision of the Services provided hereunder. The Recipient shall not remove or alter any copyright, trademark, confidentiality or other proprietary notices that appear on any Intellectual Property owned or licensed by the Provider. The Recipient shall not attempt to decompile, translate, reverse engineer or make excessive copies of any Intellectual Property owned or licensed by the Provider, and the Recipient shall promptly notify the Provider of any such attempt, regardless of whether by the Recipient or any third party, of which the Recipient becomes aware.

Section 8.19. Order of Precedence. The following shall apply to the extent of any conflict among the terms in the various documents within this Agreement (including Schedules and Exhibits):

(a) to the extent the conflicting provisions can reasonably be interpreted so that such provisions are consistent with each other, such consistent interpretations will prevail; and

(b) to the extent paragraph (a) above does not resolve such conflict, then this Agreement (exclusive of its Schedules and Exhibits) will prevail over a conflicting term in its Schedules and Exhibits unless such Schedule or Exhibit expressly identifies and supersedes the conflicting term in the Agreement.

[The remainder of this page is intentionally left blank.]

 

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IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed on the date first written above by their respective duly authorized officers.

 

NEW CORPORATION
By:  

 

  Name:
  Title:
SLM CORPORATION
By:  

 

  Name:
  Title:

 

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Exhibit 10.2

DRAFT

Exhibit 10.2

TAX SHARING AGREEMENT

BETWEEN

NEW CORPORATION

AND

NEW BLC CORPORATION

DATED AS OF [—], 2014

TABLE OF CONTENTS

 

Article I Definition of Terms.

      1   

Article II Allocation of Tax Liabilities and Tax Benefits.

      9   

Section 2.1

   

Liability for and the Payment of Taxes.

      9   

(a)

   

NewCo Liabilities and Payments.

      9   

(b)

   

SLM BankCo Liabilities and Payments.

      9   

(c)

   

Rules for Tax Benefits.

      9   

Section 2.2

   

Allocation Rules.

      10   

(a)

   

Rule for Tax Benefits.

      10   

(b)

   

General Rule for Consolidated Taxes.

      10   

(c)

   

Spin-Off Taxes.

      11   

(d)

   

Bank Loan Sales.

      12   

(e)

   

Section 108(i) Income.

      12   

Article III Preparation and Filing of Tax Returns.

      12   

Section 3.1

   

Joint Returns.

      12   

(a)

   

Preparation and Filing.

      12   

(b)

   

Draft Joint Returns.

      12   

(c)

   

Provision of Information.

      13   

(d)

   

Information with Respect to Estimated Payments and Extension Payments.

      13   

(e)

   

Provision of Assistance with Respect to Joint Returns.

      13   

(f)

   

Engagement Letter for Certain 2014 Tax Returns.

      14   

(g)

   

Allocation of Third-Party Preparer Expenses.

      14   

Section 3.2

   

Separate Returns.

      14   

(a)

   

Separate Returns to be Prepared by SLM BankCo.

      14   

(b)

   

Separate Returns to be Prepared by NewCo.

      14   

(c)

   

Provision of Information and Assistance.

      15   

Section 3.3

   

Additional Rules Relating to the Preparation of Tax Returns.

      15   

(a)

   

General Rule.

      15   

(b)

   

NewCo Separate Returns.

      15   

(c)

   

SLM BankCo Separate Returns.

      16   

(d)

   

Election to File Consolidated, Combined or Unitary Tax Returns.

      16   

(e)

   

Withholding and Reporting.

      16   

(f)

   

Standard of Performance.

      16   

Section 3.4

   

Reliance on Exchanged Information.

      16   

Section 3.5

   

Allocation of Tax Items.

      17   

Article IV Tax Payments.

      17   

Section 4.1

   

Payment of Taxes to Tax Authority.

      17   

Section 4.2

   

Indemnification Payments.

      17   

(a)

   

Tax Payments Made for Joint Returns.

      17   

(b)

   

Tax Payments Made for Other Taxes.

      17   

(c)

   

Credit for Prior Tax Payments.

      18   

(d)

   

Payments for Tax Benefits.

      18   

Section 4.3

   

Initial Determinations and Subsequent Adjustments.

      18   

 

i

Section 4.4

   

Interest on Late Payments.

      18   

Section 4.5

   

Payments by or to Other Group Members.

      19   

Section 4.6

   

Procedural Matters.

      19   

Section 4.7

   

Tax Consequences of Payments; Tax Gross-Up.

      19   

Article V Assistance and Cooperation.

      19   

Section 5.1

   

Cooperation.

      19   

Section 5.2

   

Supplemental Rulings and Supplemental Tax Opinions.

      20   

Article VI Tax Records.

      20   

Section 6.1

   

Retention of Tax Records.

      20   

Section 6.2

   

Access to Tax Records.

      20   

Section 6.3

   

Confidentiality.

      21   

Article VII Tax Contests.

      21   

Section 7.1

   

Notices.

      21   

Section 7.2

   

Control of Tax Contests.

      21   

(a)

   

General Rule.

      21   

(b)

   

Non-Controlling Party’s Participation Rights.

      22   

Section 7.3

   

Cooperation.

      22   

Article VIII Restriction on Certain Actions of SLM BankCo and NewCo.

      23   

Section 8.1

   

General Restrictions.

      23   

Section 8.2

   

Certain NewCo Actions Following the Effective Time.

      23   

Section 8.3

   

Certain SLM BankCo Actions Following the Effective Time.

      24   

Article IX General Provisions.

      24   

Section 9.1

   

Limitation of Liability.

      24   

Section 9.2

   

Counterparts; Entire Agreement; Corporate Power.

      25   

Section 9.3

   

Governing Law; Submission to Jurisdiction; Waiver of Jury Trial.

      25   

Section 9.4

   

Binding Effect; Assignment.

      26   

Section 9.5

   

Termination.

      26   

Section 9.6

   

No Third-Party Beneficiaries.

      26   

Section 9.7

   

Notices.

      26   

Section 9.8

   

Severability.

      26   

Section 9.9

   

Expenses.

      27   

Section 9.10

   

Headings.

      27   

Section 9.11

   

Waivers of Default; Remedies Cumulative.

      27   

Section 9.12

   

Amendments; Waivers.

      27   

Section 9.13

   

Construction.

      27   

Section 9.14

   

Interpretation.

      28   

Section 9.15

   

Predecessors or Successors.

      28   

Section 9.16

   

Effective Time.

      28   

Section 9.17

   

Change in Law.

      28   

Section 9.18

   

Disputes.

      28   

APPENDIX A

      30   

 

ii

TAX SHARING AGREEMENT

This TAX SHARING AGREEMENT, dated as of [—], 2014 (this “Agreement”), is by and between New Corporation, a Delaware corporation (“NewCo”) and New BLC Corporation, a Delaware corporation (“SLM BankCo”). Unless otherwise defined in this Agreement, all capitalized terms used in this Agreement have the meanings set forth in the Separation and Distribution Agreement, dated as of the date hereof, by and among SLM Corporation, a Delaware corporation (“SLM”), SLM BankCo and NewCo (as amended, modified or supplemented from time to time in accordance with its terms, the “Separation Agreement”).

RECITALS

WHEREAS, the SLM Board has determined that it is in the best interests of SLM and its shareholders to separate into two separate publicly-traded entities;

WHEREAS, in furtherance of the foregoing, the SLM Board has determined that it is appropriate and desirable to undergo the Separation and Distribution;

WHEREAS, SLM, SLM BankCo and NewCo have entered into the Separation Agreement; and

WHEREAS, the parties desire to provide for and agree upon the allocation between the parties of Taxes and Tax Benefits arising prior to, as a result of, and subsequent to the External Spin-Off, and provide for and agree upon other matters relating to Taxes.

NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth below, the parties hereto agree as follows:

Article I

Definition of Terms

For purposes of this Agreement (including the recitals hereof), the following terms have the following meanings:

“2013 Engagement Letter” means the engagement letter between KPMG LLP and SLM (to be assigned by SLM to SLM BankCo in connection with the External Spin-Off), expected to be executed in the first quarter of 2014, pursuant to which SLM engages KPMG LLP to assist in preparing certain U.S. federal, state and local income, franchise and similar Tax Returns for taxable periods ending during 2013.

“2014 Accountant” has the meaning set forth in Section 3.1(f).

“2014 Engagement Letter” has the meaning set forth in Section 3.1(f).

“Affiliate” means, with respect to any Person, any other Person that directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common Control with, such first Person.

 

1

“Agreement” has the meaning set forth in the preamble hereof.

“Ancillary Agreements” has the meaning set forth in the Separation Agreement.

“Bank Loan Sales” means any sales or transfers on or prior to the Spin-Off Date of student loans by Sallie Mae Bank to (or treated as being made to, for U.S. federal income tax purposes) a Person that is a member of the NewCo Group as of the Spin-Off Date (or any predecessor of such entity) with respect to which Sallie Mae Bank paid to SLM prior to the Spin-Off Date an amount to pay the federal and state income taxes that would ultimately result from any net gain realized on such sales or transfers.

“Business Day” means any day other than a Saturday, a Sunday or a day on which commercial banking institutions in Delaware are authorized or obligated by law or executive order to be closed.

“Change of Control” has the meaning set forth in the Separation Agreement.

“Code” means the U.S. Internal Revenue Code of 1986, as amended from time to time, or any successor law.

“Consolidated Tax” means (i) any Tax, for any Tax Year, which is based on or determined by reference to Tax Items, operations, activities or assets of both the NewCo Operations and the SLM BankCo Operations, without regard to Tax Items carried forward to such year, and (ii) any Spin-Off Taxes.

“Consumer Banking Business” has the meaning set forth in the Ruling Request.

“Controlling Party” means, with respect to a Tax Contest, the party that controls such Tax Contest (or whose Group member controls such Tax Contest) pursuant to Section 7.2(a).

“Control” means, with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through ownership of securities or partnership, membership, limited liability company, or other ownership interests, by contract or otherwise, and the terms “Controlling” and “Controlled” have meanings correlative to the foregoing.

“Dispute” has the meaning set forth in the Separation Agreement.

“Due Date” has the meaning set forth in Section 4.4.

“Education Loan Management Business” has the meaning set forth in the Ruling Request.

“Effective Time” means the time at which the External Spin-Off is effected on the Spin-Off Date.

“External Contribution” has the meaning set forth in the Ruling Request.

 

2

“External Spin-Off” has the meaning set forth in the Ruling Request.

“Governmental Entity” means any national, supranational, federal, state, provincial, local or similar government; any instrumentality or subdivision thereof; any court, administrative agency, department, board, bureau or commission thereof or other governmental authority or instrumentality; or any quasi-governmental or private body authorized to exercise any tax, governmental or quasi-governmental authority.

“Group” means the SLM BankCo Group or the NewCo Group, as the context requires.

“Information” has the meaning set forth in the Separation Agreement.

“Internal Contribution” has the meaning set forth in the Ruling Request.

“Internal Controlled” has the meaning set forth in the Ruling Request.

“Internal Controlled Business” means the “Bank Private Education Loan Servicing Business” as defined in the Ruling Request.

“Internal Distributing” has the meaning set forth in the Ruling Request.

“Internal Distributing Business” means the “Loan Servicing Business” as defined in the Ruling Request.

“Internal Spin-Off” has the meaning set forth in the Ruling Request.

“IRS” means the Internal Revenue Service.

“Joint Return” means any Tax Return, for any Tax Year, that includes Tax Items, operations, activities or assets of both the SLM BankCo Operations and the NewCo Operations, determined without regard to Tax Items carried forward to such Tax Year.

“Law” means any national, supranational, federal, state, provincial, local or similar law (including common law), statute, code, order, ordinance, rule, regulation, treaty (including any income tax treaty), license, permit, authorization, approval, consent, decree, injunction, binding judicial or administrative interpretation or other requirement, in each case, enacted, promulgated, issued or entered by a Governmental Entity.

“NewCo” has the meaning set forth in the preamble hereof.

“NewCo Business” means the “Pre-Separation Education Loan Management Business” as defined in the Separation Agreement.

“NewCo Joint Returns” has the meaning set forth in Section 3.1(a).

“NewCo Group” has the meaning set forth in the Separation Agreement.

 

3

“NewCo Operations” means (i) with respect to any Tax Year (or portion thereof) that ends on or before the Spin-Off Date, the assets, business, operations and activities of the NewCo Business, and (ii) with respect to any Tax Year (or portion thereof) that begins after the Spin-Off Date, the assets, business, operations and activities of the NewCo Group.

“NewCo Separate Return” has the meaning set forth in Section 3.2(b).

“NewCo Separate Tax” means any Tax (other than any Spin-Off Tax), for any Tax Year, which (i) is based on or determined by reference to Tax Items, operations, activities or assets of the NewCo Operations, and (ii) is not based on or determined by reference to any Tax Items, operations, activities or assets of the SLM BankCo Operations, without regard to Tax Items carried forward to such Tax Year. The amount of NewCo Separate Tax for any Tax Year shall be the actual amount of Tax liability due and owing to the applicable Tax Authority for such Tax Year (determined after taking into account any Tax Benefits that are properly deductible or creditable in determining such actual Tax liability).

“NewCo Tax Benefits” means any Tax Benefits allocated to NewCo pursuant to Section 2.2(a).

“NOL” means net operating loss.

“Non-Controlling Party” means, with respect to a Tax Contest, the party that is not the Controlling Party with respect to such Tax Contest.

“Non-Preparer” means, with respect to a Tax Return, the party that is not responsible for the preparation of such Tax Return under Section 3.1 or Section 3.2.

“Non-Preparer Item” has the meaning set forth in Section 7.2(b).

“Payment Date” means (i) with respect to any U.S. federal income tax return, the due date for any required installment of estimated taxes determined under Code Section 6655, the due date (determined without regard to extensions) for filing the return determined under Code Section 6072, and the date the return is filed, and (ii) with respect to any other Tax Return, the corresponding dates determined under applicable Tax Law.

“Permitted Supplemental Ruling” means, with respect to a specified action, a Supplemental Ruling to the effect that such action will not preclude (i) the Reorganization from qualifying as a reorganization within the meaning of Section 368(a)(1)(F) of the Code, (ii) the Internal Contribution and the Internal Spin-Off from qualifying as tax-free transactions described under Sections 368(a)(1)(D) and 355 of the Code and (iii) the External Contribution and the External Spin-Off from qualifying as tax-free transactions described under Sections 368(a)(1)(D) and 355 of the Code (except, in the case of holders of SLM stock, with respect to cash received in lieu of fractional shares).

“Person” means any individual, corporation, company, partnership, trust, incorporated or unincorporated association, joint venture or other entity of any kind.

 

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“Preparer” means, with respect to a Tax Return, the party that is responsible for the preparation of such Tax Return pursuant to Section 3.1 or Section 3.2.

“Prime Rate” means the fluctuating commercial loan rate announced by JPMorgan Chase Bank, National Association from time to time at its New York, NY office as its prime rate or base rate for U.S. Dollar loans in the United States of America in effect on the date of determination (or, if such rate is no longer available, the prime rate or base rate for U.S. Dollar loans in the United States of America announced by such other national or international bank mutually agreed to by the parties).

“Reorganization” has the meaning set forth in the Ruling Request.

“Requesting Party” has the meaning set forth in Section 5.2.

“Return Signer” has the meaning set forth in Section 3.1(a).

“Ruling” means the private letter ruling in connection with the Separation in response to the Ruling Request anticipated to be received by SLM from the IRS on or before the Spin-Off Date.

“Ruling Request” means (1) the request for ruling, dated August 21, 2013, filed on behalf of SLM with the IRS in connection with the Separation, (2) the supplement to ruling request, dated November 27, 2013, filed on behalf of SLM with the IRS in connection with the Separation and (3) any other correspondence or supplemental materials submitted to the IRS in connection with obtaining the Ruling.

“Sallie Mae Bank” means Sallie Mae Bank, a Utah industrial bank and insured depository institution.

“Section 108(i) Income” means any income that both (i) arose in connection with the reacquisition after December 31, 2008, and before January 1, 2011, of a debt instrument or a swap unwind related to such a reacquisition, and (ii) was deferred by the SLM consolidated group or any member thereof under Section 108(i) of the Code.

“Separation Agreement” has the meaning set forth in the preamble hereof.

“SLM” has the meaning set forth in the preamble hereof.

“SLM BankCo” has the meaning set forth in the preamble hereof.

“SLM Bankco Joint Return” has the meaning set forth in Section 3.1(a).

“SLM BankCo Business” means the “Pre-Separation Consumer Banking Business” as defined in the Separation Agreement.

“SLM BankCo Group” has the meaning set forth in the Separation Agreement.

 

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“SLM BankCo Operations” means (i) with respect to any Tax Year (or portion thereof) that ends on or before the Spin-Off Date, the assets, business, operations and activities of the SLM BankCo Business, and (ii) with respect to any Tax Year (or portion thereof) that begins after the Spin-Off Date, the assets, business, operations and activities of the SLM BankCo Group.

“SLM BankCo Separate Return” has the meaning set forth in Section 3.2(a).

“SLM BankCo Separate Tax” means any Tax (other than any Spin-Off Tax), for any Tax Year, which (i) is based on or determined by reference to Tax Items, operations, activities or assets of the SLM BankCo Operations, and (ii) is not based on or determined by reference to any Tax Items, operations, activities or assets of the NewCo Operations, without regard to Tax Items carried forward to such Tax Year. The amount of SLM BankCo Separate Tax for any Tax Year shall be the actual amount of Tax liability due and owing to the applicable Tax Authority for such Tax Year (determined after taking into account any Tax Benefits that are properly deductible or creditable in determining such actual Tax liability).

“SLM BankCo Tax Benefits” means any Tax Benefits allocated to SLM BankCo pursuant to Section 2.2(a).

“Spin-Off Date” means the date on which the External Spin-Off occurs.

“Spin-Off Tax Payment” means any payment (or portion thereof) required to be made by one party to the other party under this Agreement (including any indirect payment made under this Agreement by means of the first party satisfying a Tax liability imposed by applicable Tax Law on such other party without reimbursement by such other party) to the extent such payment arises as a result of an allocation of Spin-Off Taxes pursuant to Section 2.2(c)(i) or Section 2.2(c)(ii); provided that any additional amounts payable pursuant to Section 4.7 shall not be treated as Spin-Off Tax Payments.

“Spin-Off Taxes” means any Taxes and Tax Items resulting from the Reorganization, Internal Contribution, External Contribution, Internal Spin-Off or External Spin-Off, or the contribution of all of the outstanding capital stock of Private ServiceCo to Sallie Mae Bank (pursuant to Section 2.1(q) of the Separation Agreement), excluding any gain, income or other Tax Item from any Bank Loan Sale (and any Tax resulting therefrom).

“Separate Return” means any Tax Return that is not a Joint Return.

“Subsidiary” has the meaning set forth in the Separation Agreement.

“Supplemental IRS Submissions” means any request for a Supplemental Ruling and each supplemental submission and other correspondence and supplemental materials submitted to the IRS in connection with obtaining any Supplemental Ruling.

“Supplemental Ruling” means any private letter ruling obtained by SLM, SLM BankCo or NewCo from the IRS which supplements or otherwise modifies the Ruling.

 

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“Supplemental Tax Opinion” means, with respect to a specified action, an opinion (other than the Tax Opinion) from Tax Counsel to the effect that such action will not preclude (i) the Reorganization from qualifying as a reorganization within the meaning of Section 368(a)(1)(F) of the Code, (ii) the Internal Contribution and the Internal Spin-Off from qualifying as tax-free transactions described under Sections 368(a)(1)(D) and 355 of the Code and (iii) the External Contribution and the External Spin-Off from qualifying as tax-free transactions described under Sections 368(a)(1)(D) and 355 of the Code (except, in the case of holders of SLM stock, with respect to cash received in lieu of fractional shares). No opinion relied upon by NewCo or SLM BankCo to satisfy the requirements of Section 8.2 or Section 8.3, respectively, shall be considered a “Supplemental Tax Opinion” unless such opinion is, in addition to the requirements above, reasonably satisfactory to SLM BankCo (in the case of an opinion provided under Section 8.2) or NewCo (in the case of an opinion provided under Section 8.3), which opinion may rely upon a Supplemental Ruling and may rely upon, and may assume the accuracy of, any representations given in any Supplemental IRS Submission and any customary representations contained in an officer’s certificate delivered by an officer of SLM BankCo or NewCo to Tax Counsel.

“Tax” or “Taxes” means all forms of taxation imposed by a Governmental Entity, whenever created or imposed, and whether of the United States or elsewhere, and whether imposed by a local, municipal, state, national, federal, or other body, and without limiting the generality of the foregoing, shall include income, sales, use, ad valorem, gross receipts, value added, franchise, transfer, recording, withholding, payroll, employment, excise, occupation, premium, and property taxes, together with any related interest, penalties, additions to tax or additional amounts imposed (in any case) by any Governmental Entity.

“Tax Authority” means, with respect to any Tax, the Governmental Entity or political subdivision, agency, commission or authority thereof that imposes such Tax or that is charged with the assessment, determination or collection of such Tax.

“Tax Benefit” means a Tax Item that generally decreases taxable income or Taxes payable of a taxpayer, including a credit, deductible loss or other deduction, but not including deductions (other than carryforwards or carrybacks) attributable to or arising from the SLM Operations or the NewCo Operations, as applicable, to the extent that the aggregate of such deductions in a Tax Year does not exceed the income attributable to or arising from the SLM Operations or the NewCo Operations, respectively, in such Tax Year. By way of example, a Tax Benefit would include NOLs and Tax credits generated by the NewCo Operations or the SLM BankCo Operations, as the case may be, during a particular Tax Year, as well as NOL and Tax credit carryforwards (or carrybacks) of the NewCo Operations or the SLM BankCo Operations, as the case may be, to a particular Tax Year which were generated in prior (or subsequent) Tax Years.

“Tax Contest” means an audit, review or examination by a Governmental Entity or Tax Authority, or any other administrative or judicial proceeding, with the purpose or effect of examining, determining or redetermining Taxes (including any administrative or judicial review of any claim for Tax refund).

 

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“Tax Counsel” means (i) with respect to the Tax Opinion, Baker Botts L.L.P., and (ii) with respect to a Supplemental Tax Opinion obtained by SLM BankCo or NewCo, a nationally recognized law firm or accounting firm designated by the party that obtains such opinion.

“Tax Item” means any item of income, gain, loss, deduction, credit or other attribute that may have the effect of increasing or decreasing taxable income or Taxes payable.

“Tax Law” means the Law, including any controlling judicial or administrative interpretations of such Law, relating to any Tax.

“Tax Materials” means (i) the Ruling, (ii) the Ruling Request and any other submission to the IRS in connection with the Ruling, (iii) the representation letter delivered to Tax Counsel in connection with the delivery of the Tax Opinion, (iv) any other materials delivered or deliverable by SLM, SLM BankCo, NewCo or others in connection with the rendering by Tax Counsel of the Tax Opinion or the issuance by the IRS of the Ruling, and (v) with respect to a party that requests or receives a Supplemental Ruling, or delivers a representation letter or other materials in connection with a Supplemental Ruling or Supplemental Tax Opinion, such Supplemental Ruling, representation letter or other materials, as the case may be.

“Tax Opinion” means the opinion to be delivered by Tax Counsel on or prior to the Spin-Off Date to the effect that (i) the Internal Contribution and the Internal Spin-Off will qualify as tax-free transactions described under Sections 368(a)(1)(D) and 355 of the Code and (ii) the External Contribution and the External Spin-Off will qualify as tax-free transactions described under Sections 368(a)(1)(D) and 355 of the Code (except, in the case of the holders of SLM stock, with respect to cash received in lieu of fractional shares).

“Tax Records” means Tax Returns, Tax Return work papers, documentation relating to any Tax Contests, and any other books of account or records required to be maintained under applicable Tax Laws (including but not limited to Section 6001 of the Code) or under any record retention agreement with any Tax Authority.

“Tax Return” means any return, information return, report, declaration, election, questionnaire, notice, form, claim for refund or other document filed or required to be filed with any Governmental Entity or Tax Authority with respect to Taxes (whether or not a payment is required to be made with respect to such filing), and any supplement, amendment, appendix, exhibit, schedule or attachment thereto.

“Tax Year” means with respect to any Tax, the year, or other period, if applicable, for which the Tax is reported as provided under applicable Tax Law.

“Treasury Regulations” means the regulations promulgated from time to time under the Code as in effect for the relevant Tax Year.

 

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Article II

Allocation of Tax Liabilities and Tax Benefits

Section 2.1 Liability for and the Payment of Taxes. Except as otherwise provided in this Agreement, and in accordance with Article IV:

(a) NewCo Liabilities and Payments. For any Tax Year (or portion thereof), NewCo shall, subject to the rules for Tax Benefits in Section 2.1(c):

(i) be liable for and pay (x) all NewCo Separate Taxes and (y) that portion of Consolidated Taxes allocated to NewCo pursuant to Section 2.2, either to the applicable Tax Authority or to SLM BankCo as required by Article IV, and

(ii) pay SLM BankCo for any SLM BankCo Tax Benefits that NewCo is deemed to use pursuant to Section 2.1(c).

(b) SLM BankCo Liabilities and Payments. For any Tax Year (or portion thereof), SLM BankCo shall, subject to the rules for Tax Benefits in Section 2.1(c):

(i) be liable for and pay (x) all SLM BankCo Separate Taxes and (y) that portion of Consolidated Taxes allocated to SLM BankCo pursuant to Section 2.2, either to the applicable Tax Authority or to NewCo as required by Article IV, and

(ii) pay NewCo for any NewCo Tax Benefits that SLM BankCo is deemed to use pursuant to Section 2.1(c).

(c) Rules for Tax Benefits. For purpose of this Agreement (including, without limitation, Section 4.2(d)):

(i) NewCo shall be deemed to use an SLM BankCo Tax Benefit in a particular Tax Year if and only if such SLM BankCo Tax Benefit is utilized to reduce the amount of any actual NewCo Separate Tax for such Tax Year, or:

(A) in the case of an SLM BankCo Tax Benefit other than a Tax credit or Tax credit carryforward or carryback, such SLM BankCo Tax Benefit is actually utilized in the calculation of Consolidated Tax for such Tax Year to offset taxable income or other applicable Tax Items that are attributable to or arise from the NewCo Operations, or

(B) in the case of an SLM BankCo Tax Benefit that is a Tax credit or Tax credit carryforward or carryback, such SLM BankCo Tax Benefit is taken into account under Section 2.2(b)(v)(C) to reduce the amount of Consolidated Tax allocable to NewCo.

 

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(ii) SLM BankCo shall be deemed to use a NewCo Tax Benefit in a particular Tax Year if and only if such NewCo Tax Benefit is utilized to reduce the amount of any actual SLM BankCo Separate Tax for such Tax Year, or:

(A) in the case of a NewCo Tax Benefit other than a Tax credit or Tax credit carryforward or carryback, such NewCo Tax Benefit is actually utilized in the calculation of Consolidated Tax for such Tax Year to offset taxable income or other applicable Tax Items that are attributable to or arise from the SLM BankCo Operations, or

(B) in the case of a NewCo Tax Benefit that is a Tax credit or Tax credit carryforward or carryback, such NewCo Tax Benefit is taken into account under Section 2.2(b)(v)(D) to reduce the amount of Consolidated Tax allocable to SLM BankCo.

(iii) For any Tax Year that begins after the Spin-Off Date in which a party (or any member of a party’s Group) has available for use both Tax Benefits allocated to it and Tax Benefits allocated to the other party, Tax Benefits will be treated as used in the order specified under applicable Tax Law, and, to the extent applicable Tax Law does not specify the order of use, the Tax Benefits allocated to each party shall be deemed to be used pro rata (based on the amount of each Tax Benefit available for use).

(iv) A Tax Benefit that generates a refund will be considered used at the time such Tax Refund is received. In all other cases, a Tax Benefit will be considered used at the earlier of (i) the time at which the Tax Return that utilizes such Tax Benefit is filed, and (ii) the time at which the applicable Tax would have been due in the absence of such Tax Benefit.

(v) The value of any Tax Benefit used by a party or its Affiliates shall be the amount by which the liability of such party for such Tax Year under Section 2.1(a)(i) or Section 2.1(b)(i), as applicable, is reduced by such Tax Benefit, which shall be equal to the excess (if any) of (x) such party’s liability for such Tax Year pursuant to Section 2.1(a)(i) or Section 2.1(b)(i), as applicable, calculated without regard to such Tax Benefit, minus (y) such party’s liability for such Tax Year pursuant to Section 2.1(a)(i) or Section 2.1(b)(i), as applicable, taking into account such Tax Benefit.

Section 2.2 Allocation Rules. For purposes of Section 2.1:

(a) Rule for Tax Benefits. Tax Benefits for any Tax Year (or portion thereof) shall be allocated between NewCo and SLM BankCo in proportion to the losses, credits, costs, expenditures, revenues, receipts, or other applicable items attributable to or arising from the NewCo Operations and SLM BankCo Operations, respectively, that contribute to such Tax Benefits.

(b) General Rule for Consolidated Taxes. Consolidated Taxes for any Tax Year (or portion thereof) shall be allocated between NewCo and SLM BankCo as follows:

(i) First, the actual amount of each Consolidated Tax for such Tax Year (or portion thereof) shall be determined without regard to Tax credits and Tax credit carryforwards and carrybacks.

 

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(ii) Second, subject to Section 2.2(c), the Tax amount determined under subsection (i) for a particular Consolidated Tax shall be allocated between NewCo and SLM BankCo in proportion to the net taxable income or other applicable Tax Items (other than Tax credits and Tax credit carryforwards and carrybacks), activities, operations or assets actually utilized in the calculation of such Consolidated Tax for such Tax Year (or portion thereof) under subsection (i) (taking into account any NOLs or similar Tax Benefits actually carried back or carried forward to such Tax Year (or portion thereof)) that are attributable to or arising from the NewCo Operations and SLM BankCo Operations, respectively; provided that the Tax amount allocated to any party with respect to a particular Consolidated Tax pursuant to this subsection (ii) shall not exceed the amount of such Consolidated Tax as determined pursuant to subsection (i) and shall not be less than zero.

(iii) Third, the amount of each type of Tax credit utilized in the actual Tax Return for such Consolidated Tax (or utilized in the determination of the actual Consolidated Tax, if there is no such Tax Return) as a credit against Consolidated Tax for such Tax Year (or portion thereof) shall be determined (taking into account applicable Tax credit carryforwards and carrybacks).

(iv) Fourth, the amount of each Tax credit determined under subsection (iii) shall be allocated between NewCo and SLM BankCo in the manner specified in Section 2.2(a).

(v) Finally, the Tax amount allocated to NewCo and SLM BankCo under subsection (ii) shall be reduced as follows:

(A) The Tax amount allocated to NewCo under subsection (ii) shall be reduced (but not below zero) by the Tax credits allocated to NewCo under subsection (iv);

(B) The Tax amount allocated to SLM BankCo under subsection (ii) shall be reduced (but not below zero) by the Tax credits allocated to SLM BankCo under subsection (iv);

(C) If the amount of Tax credit allocated to SLM BankCo under subsection (iv) exceeds the amount of Tax credit actually applied under paragraph (B) to reduce the Tax amount allocated to SLM BankCo, such excess shall be applied to further reduce the Tax amount allocable to NewCo (but not below zero); and

(D) If the amount of Tax credit allocated to NewCo under subsection (iv) exceeds the amount of Tax credit actually applied under paragraph (A) to reduce the Tax amount allocated to NewCo, such excess shall be applied to further reduce the Tax amount allocable to SLM BankCo (but not below zero).

(c) Spin-Off Taxes. Spin-Off Taxes will be allocated as follows:

(i) Spin-Off Taxes Allocable to SLM BankCo. Spin-Off Taxes shall be allocated to SLM BankCo to the extent that the recognition of such Spin-Off Taxes is directly attributable to SLM BankCo’s breach of any covenant or negative covenant in Article VIII.

 

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(ii) Spin-Off Taxes Allocable to NewCo. Spin-Off Taxes shall be allocated to NewCo to the extent that the recognition of such Spin-Off Taxes is directly attributable to NewCo’s breach of any covenant or negative covenant in Article VIII.

(iii) Joint Responsibility for Spin-Off Taxes. Any Spin-Off Taxes not allocated under Section 2.2(c)(i) or Section 2.2(c)(ii) shall be allocated fifty percent (50%) to SLM BankCo and fifty percent (50%) to NewCo.

(d) Bank Loan Sales. For all purposes of this Agreement (including, without limitation, Section 2.2(b)(ii)), any gain, income or other Tax Items from a Bank Loan Sale shall be deemed to be attributable to the SLM BankCo Operations (and shall not be attributable to the NewCo Operations).

(e) Section 108(i) Income. Reserved

Article III

Preparation and Filing of Tax Returns.

Section 3.1 Joint Returns.

(a) Preparation and Filing. NewCo shall be responsible for preparing (or causing to be prepared) any Joint Return for a taxable year (or other applicable taxable period) ending on or before December 31, 2013 (“NewCo Joint Returns”). SLM BankCo shall be responsible for (i) preparing (or causing to be prepared) any Joint Return for a taxable year (or other applicable taxable period) ending after December 31, 2013 (an “SLM Bankco Joint Return”), and (ii) calculating the amount of U.S. federal estimated income taxes that are Consolidated Taxes for any quarter after the first quarter of 2014. The party responsible for signing any such Joint Return (or whose Group member is responsible for signing such Joint Return) under applicable law (the “Return Signer”) shall sign (or cause to be signed) such Joint Return and file (or cause to be filed) such Joint Return with the applicable Tax Authority. For the avoidance of doubt, SLM BankCo shall be responsible for signing and filing the U.S. federal income tax return for the SLM consolidated group for the taxable year ending December 31, 2013 and the U.S. federal income tax return for the SLM/SLM BankCo consolidated group for the taxable year ending December 31, 2014.

(b) Draft Joint Returns. The Preparer of a Joint Return shall provide the Non-Preparer of such Joint Return with a substantially final draft of such Joint Return (other than a Joint Return filed prior to the Spin-Off Date) at least 10 Business Days prior to the due date for such Joint Return (or, if there is no due date for such Joint Return, as soon as reasonably practical). Such Non-Preparer shall promptly notify such Preparer of any objections that it may have to any items or elections set forth in any such draft Joint Return. Notwithstanding anything to the contrary in Section 3.3(a), (i) NewCo and SLM BankCo shall work together to resolve in good faith any such objection and to mutually consent to the filing of such Joint Return, and (ii) after the filing of any original Joint Return, NewCo and SLM BankCo shall work together, at the request of the other party, to determine whether to file any amended Joint Return. If the Preparer fails to provide such draft Joint Return within the time period provided in this Section 3.1(b)

 

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or fails to properly file such Joint Return within two Business Days following the resolution of all such objections, then notwithstanding any other provision of this Agreement, such Preparer shall be liable for, and shall indemnify and hold harmless each member of the Non-Preparer’s Group from and against, any penalties, interest, or other payment obligation imposed by reason of any resulting delay in filing such return.

(c) Provision of Information. At the request of the Preparer of a Joint Return, the Non-Preparer of such Joint Return shall provide the Preparer with any information in its possession (or in the possession of any member of the Non-Preparer’s Group) reasonably necessary for the Preparer to properly and timely prepare such Joint Return (including, without limitation, to the extent required, (i) the amount of taxable income of such Non-Preparer’s Group for the period ending on the Spin-Off Date based on the closing of the books method, and (ii) the amount of taxable income recognized by such Non-Preparer’s Group as a result of the External Spin-Off). Such Non-Preparer shall provide such information at least thirty days prior to the extended due date of such Joint Return or, if later, within 15 Business Days of its receipt of such request. If such Non-Preparer (or any member of its Group) is in possession of information and fails to provide such information within the time period provided in this Section 3.1(c) or in the form reasonably requested by the Preparer to permit the timely filing of such Joint Return, then notwithstanding any other provision of this Agreement, such Non-Preparer shall be liable for, and shall indemnify and hold harmless each member of the Preparer’s Group from and against, any penalties, interest, or other payment obligation imposed by reason of any resulting delay in filing such return.

(d) Information with Respect to Estimated Payments and Extension Payments. At the request of the Preparer of a Joint Return, the Non-Preparer of such Joint Return shall provide the Preparer with all information in its possession (or in the possession of any member of its Group) that the Preparer needs to determine the amount of Taxes due on any Payment Date with respect such Joint Return. Such Non-Preparer shall provide such information at least thirty days prior to such Payment Date or, if later, within 15 Business Days of its receipt of such request. In the event that such Non-Preparer fails to provide information within the time period provided in this Section 3.1(d) or in the form reasonably requested by the Preparer to permit the timely payment of such Taxes, the indemnification principles of Section 3.1(c) shall apply with respect to any penalties, interest, or other payments imposed by reason of any resulting delay in paying such Taxes.

(e) Provision of Assistance with Respect to Joint Returns. At the request of the Preparer of a Joint Return, the Non-Preparer of such Joint Return shall take (at its own cost and expense), and shall cause the members of its Group to take (at their own cost and expense), any reasonable action (e.g., filing a ruling request with the relevant Tax Authority or executing a power of attorney) that is reasonably necessary in order for such Preparer or any other member of the Preparer’s Group to prepare, file, amend or take any other action with respect to such Joint Return. In the event that such Non-Preparer fails to take, or cause to be taken, any such requested action, the indemnification principles of Section 3.1(c) shall apply with respect to any penalties, interest, or other payments imposed by reason of a failure to timely take any such requested action.

 

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(f) Engagement Letter for Certain 2014 Tax Returns. SLM Bankco shall enter into an engagement letter (the “2014 Engagement Letter”) with a third-party accounting firm (the “2014 Accountant”) pursuant to which such accounting firm shall agree to (i) assist in preparing certain U.S. federal, state and local income, franchise and similar Tax Returns for taxable periods ending during 2014 and (ii) calculating U.S. federal estimated income taxes for the second, third and fourth quarters of 2014 and the 2014 extension payments. SLM Bankco shall provide a draft of the 2014 Engagement Letter to NewCo before the execution thereof and NewCo shall notify SLM Bankco of any objections that it may have thereto within 10 Business Days after the receipt thereof. Failure of NewCo to so object shall be deemed to constitute NewCo’s written consent to execute such 2014 Engagement Letter. SLM Bankco and NewCo shall work together in good faith to resolve any such objections, and the 2014 Engagement Letter shall not be executed without the prior written consent of NewCo, such consent not to be unreasonably withheld or delayed.

(g) Allocation of Third-Party Preparer Expenses. Any fees, costs or expenses payable to KPMG LLP (or its affiliates) under the 2013 Engagement Letter that have not been paid prior to the Spin-Off Date shall be allocated between NewCo and SLM BankCo in proportion to the number of entities for which KPMG LLP (or its affiliates) prepares a pro forma separate company return pursuant to the 2013 Engagement Letter that are in the NewCo Group and the SLM BankCo Group, respectively. Any fees, costs or expenses payable to the 2014 Accountant (or its affiliates) under the 2014 Engagement Letter shall be allocated between NewCo and SLM BankCo in proportion to the number of entities for which the 2014 Accountant (or its affiliates) prepares a pro forma separate company return pursuant to the 2014 Engagement Letter that are in the NewCo Group and the SLM BankCo Group, respectively. SLM BankCo shall be responsible for remitting such fees, costs and expenses to KPMG LLP or the 2014 Accountant, as the case may be. NewCo shall remit to SLM BankCo the portion of any such fees, costs or expenses that are allocated to NewCo pursuant to this Section 3.1(g) by the date that is the later of (i) five Business Days after the date that SLM BankCo remits such fees, costs or expenses to KPMG LLP or the 2014 Accountant, as applicable, and (ii) seven Business Days after SLM BankCo gives NewCo notice requesting such amount.

Section 3.2 Separate Returns.

(a) Separate Returns to be Prepared by SLM BankCo. SLM BankCo shall be responsible for preparing and filing (or causing to be prepared and filed) any Separate Return that includes Tax Items, operations, activities or assets of the SLM BankCo Operations, determined without regard to Tax Items carried forward to such Tax Year (an “SLM BankCo Separate Return”).

(b) Separate Returns to be Prepared by NewCo. NewCo shall be responsible for preparing and filing (or causing to be prepared and filed) any Separate Return that includes Tax Items, operations, activities or assets of the NewCo Operations, determined without regard to Tax Items carried forward to such Tax Year (a “NewCo Separate Return”).

 

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(c) Provision of Information and Assistance.

(i) Provision of Information. SLM BankCo shall provide to NewCo, and NewCo shall provide to SLM BankCo, any information in its possession (or in the possession of a member of its Group) requested by the other party that such party requesting such information reasonably needs to properly and timely file any Separate Returns pursuant to Section 3.2(a) or (b). Such information shall be provided within the time prescribed by Section 3.1(c) for the provision of information for Joint Returns. In the event that SLM BankCo or NewCo fails to provide information within such time period or in the form reasonably requested by the other party to permit the timely filing of a Separate Return, the indemnification principles of Section 3.1(c) shall apply with respect to any penalties, interest, or other payments imposed against any member of the SLM BankCo Group or the NewCo Group by reason of any resulting delay in filing such return.

(ii) Assistance. At the request of NewCo, SLM BankCo shall take (at its own cost and expense), and shall cause the members of the SLM BankCo Group to take (at their own cost and expense), any reasonable action (e.g., executing a power of attorney) that is reasonably necessary in order for NewCo or any other member of the NewCo Group to prepare, file, amend or take any other action with respect to a NewCo Separate Return. At the request of SLM BankCo, NewCo shall take (at its own cost and expense), and shall cause the members of the NewCo Group to take (at their own cost and expense), any reasonable action (e.g., executing a power of attorney) that is reasonably necessary in order for SLM BankCo or any other member of the SLM BankCo Group to prepare, file, amend or take any other action with respect to an SLM BankCo Separate Return. In the event that SLM BankCo or NewCo, as the case may be, fails to take, or cause to be taken, any such requested action, the indemnification principles of Section 3.1(c) shall apply with respect to any penalties, interest, or other payments imposed against any member of either Group by reason of a failure to timely take any such requested action.

Section 3.3 Additional Rules Relating to the Preparation of Tax Returns.

(a) General Rule. Except as otherwise provided in this Agreement (including, without limitation, under Section 3.3(b) and Section 3.3(c)), the party responsible for filing (or causing to be filed) a Tax Return pursuant to Section 3.2 shall have the exclusive right, in its sole discretion, with respect to such Tax Return to determine (i) the manner in which such Tax Return shall be prepared and filed, including the elections, methods of accounting, positions, conventions and principles of taxation to be used and the manner in which any Tax Item shall be reported, (ii) whether any extensions may be requested, (iii) whether an amended Tax Return shall be filed, (iv) whether any claims for refund shall be made, (v) whether any refunds shall be paid by way of refund or credited against any liability for the related Tax and (vi) whether to retain outside firms to prepare or review such Tax Return.

(b) NewCo Separate Returns. With respect to any NewCo Separate Return:

(i) NewCo may not take (and shall cause the members of the NewCo Group not to take) any positions that it knows, or reasonably should know, would adversely affect any member of the SLM BankCo Group, without the prior written consent of SLM BankCo, except to the extent taking such position is consistent with the past practice of the SLM group or is required by applicable law; and

(ii) NewCo and other members of the NewCo Group must allocate Tax Items between such NewCo Separate Return and any related Joint Return in a manner that is consistent with the reporting of such Tax Items on the related Joint Return.

 

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(c) SLM BankCo Separate Returns. With respect to any SLM BankCo Separate Return, SLM BankCo may not take (and shall cause the members of the SLM BankCo Group not to take) any positions that it knows, or reasonably should know, would adversely affect any member of the NewCo Group, without the prior written consent of NewCo, except to the extent taking such position is consistent with the past practice of the SLM group or is required by applicable law.

(d) Election to File Consolidated, Combined or Unitary Tax Returns. NewCo and SLM BankCo shall cooperate to determine whether to file (or cause to be filed) any Tax Return on a consolidated, combined or unitary basis if such Tax Return would include at least one member of each Group and the filing of such Tax Return on such basis is elective under the relevant Tax Law.

(e) Withholding and Reporting. With respect to stock of SLM BankCo delivered to any Person, SLM BankCo and NewCo shall cooperate (and shall cause members of their respective Groups to cooperate) so as to permit SLM BankCo to discharge any applicable Tax withholding and Tax reporting obligations, including the appointment of NewCo or one or more of its Affiliates as the withholding and reporting agent if SLM BankCo or one or more of its Affiliates is not otherwise required or permitted to withhold and report under applicable Tax Law. With respect to stock of NewCo delivered to any Person, SLM BankCo and NewCo shall cooperate (and shall cause members of their respective Groups to cooperate) so as to permit NewCo to discharge any applicable Tax withholding and Tax reporting obligations, including the appointment of SLM BankCo or one or more of its Affiliates as the withholding and reporting agent if NewCo or one or more of its Affiliates is not otherwise required or permitted to withhold and report under applicable Tax Law.

(f) Standard of Performance. NewCo and SLM BankCo shall prepare NewCo Joint Returns and SLM BankCo Joint Returns, respectively, with the same general degree of care as it uses in preparing Separate Returns. Notwithstanding the preceding sentence, neither NewCo nor SLM BankCo shall be liable for any additional Taxes for which the other is otherwise liable under Article II that result from a redetermination in a Tax Contest, regardless of whether such Taxes arise as a result of NewCo’s or SLM BankCo’s failure to exercise such degree of care.

Section 3.4 Reliance on Exchanged Information. If a member of the NewCo Group supplies information to a member of the SLM BankCo Group, or a member of the SLM BankCo Group supplies information to a member of the NewCo Group, in connection with the preparation of a Tax Return and an officer of the requesting member intends to sign a statement or other document under penalties of perjury in reliance upon the accuracy of such information, then a duly authorized officer of the member supplying such information shall certify (upon the request of such other member), to such officer’s knowledge and belief, the accuracy and completeness of the information so supplied.

 

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Section 3.5 Allocation of Tax Items. NewCo and SLM BankCo shall cooperate to determine the allocation of any applicable Tax Items and Tax attributes (e.g., NOLs, Tax credits and earnings and profits) as of the Effective Time, in accordance with applicable Tax Laws, among SLM BankCo, each other SLM BankCo Group member, NewCo, and each other NewCo Group member. SLM BankCo and NewCo hereby agree that each such Tax Item shall be allocated in a manner consistent with Section 2.2 to the extent permitted under applicable Law.

Article IV

Tax Payments

Section 4.1 Payment of Taxes to Tax Authority. SLM BankCo shall be responsible for remitting to the proper Tax Authority the Tax shown on any Joint Return for which a member of the SLM BankCo Group is the Return Signer or any SLM BankCo Separate Return (including Taxes for which NewCo is wholly or partially liable pursuant to Article II), and NewCo shall be responsible for remitting to the proper Tax Authority the Tax shown on any Joint Return for which a member of the NewCo Group is the Return Signer or any NewCo Separate Return (including Taxes for which SLM BankCo is wholly or partially liable pursuant to Article II). SLM BankCo shall be responsible for remitting to the U.S. government U.S. federal estimated income Taxes for the SLM consolidated group and the SLM BankCo consolidated group, as applicable, for each quarter in 2014 (to the extent such amounts have not been remitted prior to the Spin-Off Date).

Section 4.2 Indemnification Payments.

(a) Tax Payments Made for Joint Returns. If NewCo is required pursuant to Section 4.1 to remit a payment to a Tax Authority for Taxes reflected on a Joint Return for which SLM BankCo is wholly or partially liable under this Agreement, SLM BankCo shall remit to NewCo the portion of such payment for which SLM BankCo is liable by the date that is the later of (i) three Business Days prior to the date that NewCo files (or causes to be filed) such Tax Return, and (ii) seven Business Days after NewCo gives SLM BankCo notice requesting such amount. If SLM BankCo is required pursuant to Section 4.1 to remit a payment to a Tax Authority for Taxes reflected on a Joint Return or estimated Taxes for which NewCo is wholly or partially liable under this Agreement, NewCo shall remit to SLM BankCo the portion of such payment for which NewCo is liable by the date that is the later of (i) three Business Days prior to the date that SLM BankCo files (or causes to be filed) such Tax Return or pays such Taxes, as applicable, and (ii) seven Business Days after SLM BankCo gives NewCo notice requesting such amount.

(b) Tax Payments Made for Other Taxes. If any member of the NewCo Group remits a payment to a Tax Authority for Taxes (other than Taxes described in Section 4.2(a)) for which SLM BankCo is wholly or partially liable under this Agreement, SLM BankCo shall remit to NewCo the portion of such payment for which SLM BankCo is liable within thirty days after NewCo gives notice to SLM BankCo requesting such amount. If any member of the SLM BankCo Group remits a payment to a Tax Authority for Taxes (other than Taxes described in Section 4.2(a)) for which NewCo is wholly or partially liable under this Agreement, NewCo shall remit to SLM BankCo the portion of such payment for which NewCo is liable within thirty days after SLM BankCo gives notice to NewCo requesting such amount.

 

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(c) Credit for Prior Tax Payments. Reserved

(d) Payments for Tax Benefits.

(i) If NewCo is entitled to payment for a NewCo Tax Benefit pursuant to Section 2.1(b)(ii), SLM BankCo shall pay to NewCo, within fifteen Business Days following the use of such Tax Benefit, the value of such Tax Benefit (as determined in accordance with Section 2.1(c)(v)).

(ii) If SLM BankCo is entitled to payment for an SLM BankCo Tax Benefit pursuant to Section 2.1(a)(ii), NewCo shall pay to SLM BankCo, within fifteen Business Days following the use of such Tax Benefit, the value of such Tax Benefit (as determined in accordance with Section 2.1(c)(v)).

Section 4.3 Initial Determinations and Subsequent Adjustments. The initial determination of the amount of any payment that one party is required to make to another under this Agreement shall be made on the basis of the Tax Return as filed or, if the Tax to which the payment relates is not reported on a Tax Return, on the basis of the amount of Tax initially paid to the Tax Authority. The amounts paid under this Agreement will be redetermined, and additional payments relating to such redetermination will be made, as appropriate, if as a result of an audit by a Tax Authority or an amended Tax Return or for any other reason (w) additional Taxes are subsequently paid, (x) a refund of such Taxes is received, (y) the party using a Tax Benefit changes, or (z) the amount or character of any Tax Item is adjusted or redetermined. Each payment required by the immediately preceding sentence (i) as a result of a payment of additional Taxes will be due thirty days after the date on which the additional Taxes were paid or, if later, fifteen days after the party that made such payment of additional Taxes gives notice to the other party requesting reimbursement, (ii) as a result of the receipt of a refund will be due thirty days after the refund was received, (iii) as a result of a change in use of a Tax Benefit (to which clauses (i) and (ii) do not apply) will be due thirty days after the date on which the final action resulting in such change is taken by a Tax Authority or either party or any of their Subsidiaries, or (iv) as a result of an adjustment or redetermination of the amount or character of a Tax Item (to which clauses (i) and (ii) do not apply) will be due thirty days after the date on which the final action resulting in such adjustment or redetermination is taken by a Tax Authority or either party or any of their Subsidiaries. If a payment is made as a result of an audit by a Tax Authority which does not conclude the matter, further adjusting payments will be made, as appropriate, to reflect the outcome of subsequent administrative or judicial proceedings.

Section 4.4 Interest on Late Payments. Payments pursuant to this Agreement that are not made by the date prescribed in this Agreement or, if no such date is prescribed, within fifteen days after written demand for payment is made (the “Due Date”) shall bear interest for the period from and including the date immediately following the Due Date through and including the date of payment at a per annum rate equal to the Prime Rate on the Due Date (or, if the Due Date is not a Business Day, as of 11:00 a.m. New York, NY time on the first Business Day following the Due Date) plus 2%, subject to any maximum amount permitted by applicable Law. Such rate

 

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shall be redetermined at the beginning of each calendar quarter following such Due Date. Such interest will be payable at the same time as the payment to which it relates and shall be calculated on the basis of a year of 365 days and the actual number of days for which due.

Section 4.5 Payments by or to Other Group Members. When appropriate under the circumstances to reflect the underlying liability for a Tax or entitlement to a Tax refund or Tax Benefit, a payment which is required to be made by or to SLM BankCo or NewCo may be made by or to another member of the SLM BankCo Group or the NewCo Group, as appropriate, but nothing in this Section 4.5 shall relieve SLM BankCo or NewCo of its obligations under this Agreement.

Section 4.6 Procedural Matters. Any notice requesting payment delivered to the indemnifying party in accordance with Section 9.7 shall show the amount due and owing together with a schedule calculating in reasonable detail such amount (and shall include any relevant Tax Return, statement, bill or invoice related to such Taxes, costs, expenses or other amounts due and owing). All payments required to be made by one party to the other party pursuant to this Article IV shall be made by electronic, same day wire transfer. Payments shall be deemed made when received. If the indemnifying party fails to make a payment to the indemnified party within the time period set forth in this Article IV, the indemnifying party shall pay to the indemnified party, in addition to interest that accrues pursuant to Section 4.4, any costs or expenses incurred by the indemnified party to secure such payment or to satisfy the indemnifying party’s portion of the obligation giving rise to the indemnification payment.

Section 4.7 Tax Consequences of Payments; Tax Gross-Up. To the extent permitted by applicable Law, the parties will treat any payment made pursuant to this Agreement as a capital contribution made by SLM BankCo to NewCo or as a distribution made by NewCo to SLM BankCo, as the case may be, on the date recited above on which the parties entered into the Agreement. If any Spin-Off Tax Payment (or portion thereof) directly or indirectly causes an increase in Taxes for which the payee would otherwise be liable under Article II, the payer of such Spin-Off Tax Payment shall be required to pay the payee (either by means of direct payment or by means of offset against amounts otherwise due under this Agreement from such payee to such payer) an additional amount, such that the amount of any Taxes for which the payee is liable under Article II that result from either such Spin-Off Tax Payment or from the payment of such additional amount is equal to such additional amount. Except to the extent described in the preceding sentence of this Section 4.7, under no circumstances shall any payment (or portion thereof) made pursuant to this Agreement be grossed up to take into account any additional Taxes that may be owed by the payee (or any of the members of its Group) as a result of such payment. In the event that a Tax Authority asserts that the treatment of a payment pursuant to this Agreement should be other than as determined pursuant to this Section 4.7, SLM BankCo or NewCo, as appropriate, shall use its reasonable best efforts to contest such assertion.

Article V

Assistance and Cooperation

Section 5.1 Cooperation. In addition to the obligations enumerated in Section 3.1(c), Section 3.1(e), Section 3.2(c) and Section 7.3, SLM BankCo and NewCo will cooperate (and

 

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will cause their respective Groups to cooperate) with each other and with each other’s agents, including accounting firms and legal counsel, in connection with Tax matters upon the reasonable request of the other party. Such cooperation will include NewCo or SLM BankCo, as the case may be, (x) providing documents and information in its possession (or in the possession of another member of its Group) as reasonably requested, and (y) making available to the other, as reasonably requested and available, personnel (including officers, directors, employees and agents of either Group) responsible for preparing, maintaining, and interpreting information and documents relevant to Taxes and personnel reasonably required as witnesses or for purposes of providing information or documents in connection with any administrative or judicial proceedings relating to Taxes.

Section 5.2 Supplemental Rulings and Supplemental Tax Opinions. Each of the parties agrees that, at the reasonable request of the other party (the “Requesting Party”), such party shall (and shall cause each member of its Group to) (i) cooperate and use reasonable efforts to seek to obtain, as expeditiously as reasonably practicable, a Supplemental Ruling from the IRS or (ii) cooperate and use reasonable efforts to assist the Requesting Party in obtaining, as expeditiously as reasonably practicable, a Supplemental Tax Opinion from Tax Counsel. Within thirty days after receiving an invoice from the other party therefor, the Requesting Party shall reimburse such other party for all reasonable costs and expenses incurred by such other party and the members of such other party’s Group in connection with obtaining or requesting a Supplemental Ruling or in connection with assisting the Requesting Party in obtaining a Supplemental Tax Opinion. Notwithstanding the foregoing, a party shall not be required to file any Supplemental IRS Submission at the request of the Requesting Party unless the Requesting Party represents to such other party that (x) the Requesting Party has reviewed the Supplemental IRS Submission and (y) all information and representations, if any, relating to any member of the Requesting Party’s Group contained in the Supplemental IRS Submissions are true, correct and complete in all material respects.

Article VI

Tax Records

Section 6.1 Retention of Tax Records. Each of SLM BankCo and NewCo shall preserve, and shall cause the members of their respective Groups to preserve, all Tax Records that are in their possession and that could reasonably be expected to affect the liability of any member of the other Group for Taxes, for as long as the contents thereof may become material in the administration of any matter under applicable Tax Law, but in any event until the later of (x) the expiration of any applicable statutes of limitation, as extended, and (y) seven years after the Spin-Off Date.

Section 6.2 Access to Tax Records. NewCo shall make available, and cause the members of the NewCo Group to make available, to SLM BankCo for inspection and copying (x) all Tax Records in their possession at the time of any written request therefor that relate to Tax Years (or portions thereof) that end on or before the Spin-Off Date, and (y) the portion of any Tax Record in their possession at the time of any written request therefor that relates to Tax Years (or portions thereof) that end after the Spin-Off Date and that is reasonably necessary to have for the preparation of a Joint Return or an SLM BankCo Separate Return or in connection

 

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with a Tax Contest relating to such return. SLM BankCo shall make available, and cause the members of the SLM BankCo Group to make available, to NewCo for inspection and copying (x) all Tax Records in their possession at the time of any written request therefor that relate to Tax Years (or portions thereof) that end on or before the Spin-Off Date, and (y) the portion of any Tax Record in their possession at the time of any written request therefor that relates to Tax Years (or portions thereof) that end after the Spin-Off Date and that is reasonably necessary to have for the preparation of a Joint Return or a NewCo Separate Return or in connection with a Tax Contest relating to such return.

Section 6.3 Confidentiality. The provisions of Sections 6.9 and 6.10 of the Separation Agreement shall apply with respect to any Information provided pursuant to this Agreement; provided that either party may disclose, or may permit disclosure of, Information to the extent necessary in connection with the filing of Tax Returns or any administrative or judicial proceedings relating to Taxes.

Article VII

Tax Contests

Section 7.1 Notices. Each party shall provide prompt notice to the other party of any pending or threatened Tax audit, assessment or proceeding or other Tax Contest of which it becomes aware relating to (i) Taxes for which it is or may be indemnified by the other party hereunder, (ii) the qualification of the Reorganization as a tax-free transaction described under Section 368(a)(1)(F) of the Code, (iii) the qualification of the Internal Contribution and the Internal Spin-Off as tax-free transactions described under Sections 368(a)(1)(D) and 355 of the Code or (iii) the qualification of the External Contribution and the External Spin-Off as tax-free transactions described under Sections 368(a)(1)(D) and 355 of the Code. Such notice shall contain factual information (to the extent known) describing any asserted Tax liability in reasonable detail and shall be accompanied by copies of any notice and other documents received from any Tax Authority in respect of any such matters. If (i) an indemnified party has knowledge of an asserted Tax liability with respect to a matter for which it is to be indemnified hereunder, (ii) such party fails to give the indemnifying party prompt notice of such asserted Tax liability and (iii) the indemnifying party has the right, pursuant to Section 7.2(a), to control the Tax Contest relating to such Tax liability, then (x) if the indemnifying party is precluded from contesting the asserted Tax liability as a result of such failure to give prompt notice, the indemnifying party shall have no obligation to indemnify the indemnified party for any Taxes arising out of such asserted Tax liability and (y) if the indemnifying party is not precluded from contesting the asserted Tax liability, but such failure to give prompt notice results in a monetary detriment to the indemnifying party, then any amount which the indemnifying party is otherwise required to pay the indemnified party pursuant to this Agreement shall be reduced by the amount of such detriment.

Section 7.2 Control of Tax Contests.

(a) General Rule. Except as provided in Section 7.2(b), (i) SLM BankCo shall have full responsibility, control and discretion in handling, settling or contesting any Tax Contest involving a Tax reported on a Joint Return (or which a Tax Authority asserts should

 

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have been reported on a Joint Return), and (ii) each party (or the appropriate member of its Group) shall have full responsibility, control and discretion in handling, settling or contesting any Tax Contest involving a Tax reported on a Separate Return of such party (or which a Tax Authority asserts should have been reported on a Separate Return).

(b) Non-Controlling Party’s Participation Rights. With respect to a Tax Contest which involves a Tax liability for which the Non-Controlling Party may be liable, or a Tax Benefit to which the Non-Controlling Party may be entitled, in whole or in part under this Agreement (in any case, a “Non-Preparer Item,” which, to the extent NewCo is the Non-Controlling Party, shall be deemed to include any Spin-Off Taxes and any issues related to the tax-free treatment of the Reorganization, Internal Contribution, External Contribution, Internal Spin-Off or External Spin-Off), (i) the Non-Controlling Party shall be entitled to participate, at its own cost and expense, in such Tax Contest to the extent it relates to a Non-Preparer Item, (ii) the Controlling Party shall keep the Non-Controlling Party reasonably informed and consult seriously and in good faith with the Non-Controlling Party and its Tax advisors with respect to any issue in such Tax Contest relating to a Non-Preparer Item, (iii) the Controlling Party shall provide the Non-Controlling Party with copies of all correspondence, notices, and other written materials received from any Tax Authority and shall otherwise keep the Non-Controlling Party and its Tax advisors advised of significant developments in the Tax Contest and of significant communications involving representatives of the Tax Authority, to the extent (in any case) related to a Non-Preparer Item, (iv) the Non-Controlling Party may request that the Controlling Party take a position related to a Non-Preparer Item in respect of such Tax Contest, and the Controlling Party shall do so provided that (A) there exists substantial authority for such position (within the meaning of the accuracy-related penalty provisions of Section 6662 of the Code) and (B) the adoption of such position could not reasonably be expected to increase the Taxes or reduce the Tax Benefits allocated to the Controlling Party pursuant to Article II of this Agreement (unless the Non-Controlling Party agrees to indemnify and hold harmless the Controlling Party from such increase in Taxes or reduction in Tax Benefits), (v) the Controlling Party shall provide the Non-Controlling Party with a copy of any written submission to be sent to a Tax Authority to the extent related to a Non-Preparer Item prior to the submission thereof and shall give serious and good faith consideration to any comments or suggested revisions that the Non-Controlling Party or its Tax advisors may have with respect thereto, and (vi) there will be no settlement, resolution (within the control of the Controlling Party or any member of the Controlling Party’s Group), or closing or other agreement with respect to any issue related to a Non-Preparer Item without the consent of the Non-Controlling Party, which consent shall not be unreasonably withheld or delayed.

Section 7.3 Cooperation. The Non-Controlling Party shall promptly provide the Controlling Party with all documents and information in its possession (or in the possession of its Group) which the Controlling Party reasonably needs to handle, settle or contest the Tax Contest (including copies of all correspondence, notices, and other written materials with respect to such Tax Contest sent by a Tax Authority to the Non-Controlling Party (or a member of its Group) but not to any member of the Controlling Party’s Group). Subject to Section 7.2(b), at the reasonable request of the Controlling Party, the Non-Controlling Party shall take any action (e.g., executing a power of attorney) that is reasonably necessary in order for the Controlling Party to handle, settle or contest the Tax Contest. The Controlling Party shall reimburse the Non-Controlling Party for any reasonable out-of-pocket costs and expenses incurred in complying

 

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with the first two sentences of this Section 7.3. The Controlling Party shall have no obligation to indemnify the Non-Controlling Party for any additional Taxes resulting from the Tax Contest if such Non-Controlling Party fails to reasonably cooperate in accordance with the first two sentences of Section 7.3.

Article VIII

Restriction on Certain Actions of SLM BankCo and NewCo

Section 8.1 General Restrictions. NewCo and SLM BankCo shall not (and shall cause the members of their respective Groups to not) take any action or fail to take any action if such action or failure to take action, as the case may be, would (i) be inconsistent with the Reorganization qualifying, or preclude the Reorganization from qualifying, as a tax-free transaction described under Section 368(a)(1)(F) of the Code, (ii) be inconsistent with the Internal Contribution and Internal Spin-Off qualifying, or preclude the Internal Contribution and Internal Spin-Off from qualifying, as tax-free transactions described under Sections 368(a)(1)(D) and 355 of the Code, (iii) be inconsistent with the External Contribution and External Spin-Off qualifying, or preclude the External Contribution and External Spin-Off from qualifying, as tax-free transactions (except with respect to cash received in lieu of fractional shares) described under Sections 368(a)(1)(D) and 355 of the Code, or (iv) be reasonably likely to be inconsistent with, or cause any Person to be in breach of, any representation, covenant or material statement made in the Tax Materials.

Section 8.2 Certain NewCo Actions Following the Effective Time. Without limiting the other provisions of this Article VIII, during the two-year period following the Effective Time, NewCo shall not take (and shall cause the members of the NewCo Group to not take), and shall not negotiate or enter into (and shall cause the members of the NewCo Group to not negotiate or enter into) a binding agreement to take, any of the following actions: (i) liquidate, sell all or substantially all of its assets or sell or transfer fifty percent (50%) or more of (1) the assets that constitute the Education Loan Management Business as of the Effective Time to any Person other than NewCo or an entity which is and will be wholly-owned, directly or indirectly, by NewCo or (2) the assets that constitute the Internal Distributing Business as of the Effective Time to any Person other than Internal Distributing or an entity which is and will be wholly-owned, directly or indirectly, by Internal Distributing, (ii) issue stock of NewCo or any NewCo Affiliate (or any instrument that is convertible or exchangeable into any such stock), other than an issuance to which Treasury Regulations Section 1.355-7(d)(8) or (9) applies, equal to or exceeding twenty-five percent (25%) (by vote or value) of the stock of NewCo or of such NewCo Affiliate that was issued and outstanding immediately following the Effective Time, (iii) facilitate or otherwise participate in any acquisition (or deemed acquisition) or other transfer of stock of NewCo or Internal Distributing that would result in (1) any shareholder owning (or being deemed to own after applying the rules of Sections 355(e)(4)(C) and 355(e)(3)(B) of the Code) forty percent (40%) or more (by vote or value) of the outstanding stock of NewCo or (2) any shareholder other than NewCo owning (or being deemed to own after applying the rules of Sections 355(e)(4)(C) and 355(e)(3)(B) of the Code) forty percent (40%) or more (by vote or value) of the outstanding stock of Internal Distributing, (iv) redeem or otherwise repurchase any stock of NewCo other than pursuant to open market stock repurchase programs meeting the requirements of Section 4.05(1)(b) of Rev. Proc. 96-30, 1996-1 C.B. 696, or (v) terminate the

 

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active conduct by the NewCo Group of the Education Loan Management Business or the Internal Distributing Business, in each case, without first obtaining and delivering to SLM BankCo at NewCo’s own expense a Supplemental Tax Opinion or Permitted Supplemental Ruling reasonably satisfactory to SLM BankCo with respect to such action.

Section 8.3 Certain SLM BankCo Actions Following the Effective Time. Without limiting the other provisions of this Article VIII, during the two-year period following the Effective Time, SLM BankCo shall not take (and shall cause the members of the SLM BankCo Group to not take), and shall not negotiate or enter into (and shall cause the members of the SLM BankCo Group to not negotiate or enter into) a binding agreement to take, any of the following actions: (i) liquidate, sell all or substantially all of its assets or sell or transfer fifty percent (50%) or more of (1) the assets that constitute the Consumer Banking Business as of the Effective Time to any Person other than SLM BankCo or an entity which is and will be wholly-owned, directly or indirectly, by SLM BankCo or (2) the assets that constitute the Internal Controlled Business as of the Effective Time to any Person other than Internal Controlled or an entity which is and will be wholly-owned, directly or indirectly, by Internal Controlled, (ii) issue stock of SLM BankCo or any SLM BankCo Affiliate (or any instrument that is convertible or exchangeable into any such stock), other than an issuance to which Treasury Regulations Section 1.355-7(d)(8) or (9) applies, equal to or exceeding twenty-five percent (25%) (by vote or value) of the stock of SLM BankCo or of such SLM BankCo Affiliate that was issued and outstanding immediately following the Effective Time, (iii) facilitate or otherwise participate in any acquisition (or deemed acquisition) or other transfer of stock of SLM BankCo or Internal Controlled that would result in (1) any shareholder owning (or being deemed to own after applying the rules of Sections 355(e)(4)(C) and 355(e)(3)(B) of the Code) forty percent (40%) or more (by vote or value) of the outstanding stock of SLM BankCo or (2) any shareholder other than SLM BankCo owning (or being deemed to own after applying the rules of Sections 355(e)(4)(C) and 355(e)(3)(B) of the Code) forty percent (40%) or more (by vote or value) of the outstanding stock of Internal Controlled, (iv) redeem or otherwise repurchase any stock of SLM BankCo other than pursuant to open market stock repurchase programs meeting the requirements of Section 4.05(1)(b) of Rev. Proc. 96-30, 1996-1 C.B. 696, or (v) terminate the active conduct by the SLM BankCo Group of the Consumer Banking Business or the Internal Controlled Business, in each case, without first obtaining and delivering to NewCo at SLM BankCo’s own expense a Supplemental Tax Opinion or Permitted Supplemental Ruling reasonably satisfactory to NewCo with respect to such action.

Article IX

General Provisions.

Section 9.1 Limitation of Liability. IN NO EVENT SHALL ANY MEMBER OF THE SLM BANKCO GROUP OR THE NEWCO GROUP OR THEIR RESPECTIVE DIRECTORS, OFFICERS AND EMPLOYEES BE LIABLE TO ANY MEMBER OF THE SLM BANKCO GROUP OR THE NEWCO GROUP FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT, INCIDENTAL OR PUNITIVE DAMAGES (OTHER THAN SUCH DAMAGES THAT ARE INCLUDED IN THE DEFINITION OF TAXES) OR LOST PROFITS, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE), ARISING IN ANY WAY OUT OF THIS AGREEMENT, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

 

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Section 9.2 Counterparts; Entire Agreement; Corporate Power.

(a) This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party.

(b) This Agreement, the Separation Agreement and the Ancillary Agreements, and the exhibits, schedules and appendices thereto, contain the entire agreement among the parties with respect to the subject matter hereof and supersede all previous agreements, negotiations, discussions, writings, understandings, commitments and conversations with respect to such subject matter, and there are no agreements or understandings among the parties other than those set forth or referred to herein or therein.

(c) SLM BankCo and NewCo each represent as follows:

(i) it has the requisite corporate or other power and authority and has taken all corporate or other action necessary in order to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby; and

(ii) this Agreement has been duly executed and delivered by it and constitutes a valid and binding agreement of it enforceable in accordance with the terms thereof.

(d) Notwithstanding any provision of this Agreement, neither SLM BankCo nor NewCo shall be required to take or omit to take any act that would violate its fiduciary duties to any minority shareholders of any non-wholly owned Subsidiary of SLM BankCo or NewCo, as the case may be (it being understood that directors’ qualifying shares or similar interests will be disregarded for purposes of determining whether a Subsidiary is wholly owned).

Section 9.3 Governing Law; Submission to Jurisdiction; Waiver of Jury Trial.

(a) This Agreement (and any claims or disputes arising out of or related hereto or to the inducement of any party to enter herein, whether for breach of contract, tortious conduct or otherwise and whether predicated on common law, statute or otherwise) shall be governed by and construed and interpreted in accordance with the laws of the State of Delaware irrespective of the choice of laws principles of the State of Delaware including all matters of validity, construction, effect, enforceability, performance and remedies.

(b) Each of SLM BankCo and NewCo, on behalf of itself and the members of its Group, hereby irrevocably (i) agrees that any Dispute shall be subject to the exclusive jurisdiction of the state and/or federal courts located in Delaware, (ii) waives any claims of forum non conveniens, and agrees to submit to the jurisdiction of such courts, (iii) agrees that service of any process, summons, notice or document by U.S. registered mail to its respective address set forth in Section 10.5 of the Separation Agreement shall be effective service of process for any litigation brought against it in any such court or for the taking of any other acts as may be necessary or appropriate in order to effectuate any judgment of said courts and (iv) UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY IN CONNECTION WITH ANY DISPUTE.

 

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Section 9.4 Binding Effect; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns; provided, however, that no party hereto may assign its respective rights or delegate its respective obligations under this Agreement without the express prior written consent of the other parties hereto. Notwithstanding the foregoing, no such consent shall be required for the assignment of a party’s rights and obligations under this Agreement in whole in connection with a Change of Control of a party so long as the resulting, surviving or transferee Person assumes all the obligations of the relevant party thereto by operation of Law or pursuant to an agreement in form and substance reasonably satisfactory to the other party. Nothing in this Section 9.4 is intended to, or shall be construed to, prohibit NewCo or SLM BankCo or any of their Subsidiaries from being party to or undertaking a Change of Control.

Section 9.5 Termination.

(a) This Agreement may be terminated at any time prior to the Spin-Off Date by and in the sole discretion of SLM or SLM BankCo without the approval of NewCo. In the event of termination pursuant to this Section 9.5, neither party shall have any liability of any kind to the other party by reason of this Agreement.

(b) This Agreement shall otherwise terminate at such time as all obligations and liabilities of the parties hereto have been satisfied. The obligations and liabilities of the parties arising under this Agreement shall continue in full force and effect until all such obligations have been satisfied and such liabilities have been paid in full, whether by expiration of time, operation of Law, or otherwise.

Section 9.6 No Third-Party Beneficiaries. This Agreement is solely for the benefit of SLM BankCo, NewCo and their respective Groups and is not intended to confer upon any other Person any rights or remedies hereunder.

Section 9.7 Notices. Unless expressly provided herein, all notices, claims, certificates, requests, demands and other communications hereunder shall be in writing and shall be deemed to be duly given (i) when personally delivered, (ii) if mailed by registered or certified mail, postage prepaid, return receipt requested, on the date the return receipt is executed or the letter is refused by the addressee or its agent, (iii) if sent by overnight courier which delivers only upon the signed receipt of the addressee, on the date the receipt acknowledgment is executed or refused by the addressee or its agent or (iv) if sent by facsimile or other generally accepted means of electronic transmission, on the date confirmation of transmission is received (provided that a copy of any notice delivered pursuant to this clause (iv) shall also be sent pursuant to clause (ii) or (iii)). Any such notices, claims, certificates, requests, demands and other communications shall be addressed in accordance with Section 10.5 of the Separation Agreement.

Section 9.8 Severability. If any provision of this Agreement or the application hereof to any Person or circumstance is determined by a court of competent jurisdiction to be invalid,

 

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void or unenforceable, the remaining provisions hereof, or the application of such provision to Persons or circumstances or in jurisdictions other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby. Upon such determination, the parties shall negotiate in good faith in an effort to agree upon such a suitable and equitable provision to effect the original intent of the parties.

Section 9.9 Expenses. Except as expressly set forth in this Agreement, all fees, costs and expenses incurred in connection with the preparation, execution, delivery and implementation of this Agreement, and with the consummation of the transactions contemplated hereby, will be borne by the party incurring such fees, costs or expenses.

Section 9.10 Headings. The article, section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

Section 9.11 Waivers of Default; Remedies Cumulative. Waiver by any party of any default by the other party of any provision of this Agreement shall not be deemed a waiver by the waiving party of any subsequent or other default, nor shall it prejudice the rights of the other party. No failure or delay by any party in exercising any right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall a single or partial exercise thereof prejudice any other or further exercise thereof or the exercise of any other right, power or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available.

Section 9.12 Amendments; Waivers. Any provision of this Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each party to this Agreement, or in the case of a waiver, by the party against whom the waiver is to be effective. Any consent provided under this Agreement must be in writing, signed by the party against whom enforcement of such consent is sought.

Section 9.13 Construction. This Agreement shall be construed as if jointly drafted by NewCo and SLM BankCo and no rule of construction or strict interpretation shall be applied against either party. The parties represent that this Agreement is entered into with full consideration of any and all rights which the parties may have. The parties have relied upon their own knowledge and judgment and upon the advice of the attorneys of their choosing. The parties have received independent legal advice, have conducted such investigations they and their counsel thought appropriate, and have consulted with such other independent advisors as they and their counsel deemed appropriate regarding this Agreement and their rights and asserted rights in connection therewith. The parties are not relying upon any representations or statements made by any other party, or such other party’s employees, agents, representatives or attorneys, regarding this Agreement, except to the extent such representations are expressly incorporated in this Agreement. The parties are not relying upon a legal duty, if one exists, on the part of any other party (or such other party’s employees, agents, representatives or attorneys) to disclose any information in connection with the execution of this Agreement or its preparation, it being expressly understood that no party shall ever assert any failure to disclose information on the part of the other party as a ground for challenging this Agreement.

 

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Section 9.14 Interpretation. In this Agreement, (i) the word “including” and words of similar import will mean “including, without limitation,” unless otherwise specified, (ii) words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires, (iii) the terms “hereof,” “herein,” and “herewith” and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the schedules, exhibits and appendices hereto) and not to any particular provision of this Agreement, (iv) the word “or” shall not be exclusive, and (v) Article, Section, Schedule, Exhibit and Appendix references are to the Articles, Sections, Schedules, Exhibits and Appendices to this Agreement unless otherwise specified. The operation of various provisions of this Agreement is illustrated by examples in Appendix A hereto, and this Agreement shall be interpreted in accordance with such examples.

Section 9.15 Predecessors or Successors. Any reference to SLM BankCo, NewCo, a Person, or a Subsidiary in this Agreement shall include any predecessors or successors (e.g., by merger or other reorganization, liquidation, conversion, or election under Treasury Regulations Section 301.7701-3) of SLM BankCo, NewCo, such Person, or such Subsidiary, respectively.

Section 9.16 Effective Time. This Agreement shall become effective on the date recited above on which the parties entered into this Agreement.

Section 9.17 Change in Law. Any reference to a provision of the Code or any other Tax Law shall include a reference to any applicable successor provision or Law.

Section 9.18 Disputes. The procedures for negotiation, mediation and litigation set forth in Article VII of the Separation Agreement shall apply to all Disputes (whether sounding in contract, tort or otherwise) arising out of or related to this Agreement.

 

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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by the respective officers as of the date set forth above.

 

NEW CORPORATION
  By:  

 

  Name:  
  Title:  
NEW BLC CORPORATION
  By:  

 

  Name:  
  Title:  

 

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APPENDIX A

The following examples illustrate the operation of various provisions of this Agreement. However, the examples are not intended to illustrate every provision of this Agreement that may be relevant thereto.

Except as otherwise stated, each example assumes the following: (i) a U.S. federal income Tax rate of 35%, (ii) the Spin-Off Date is March 31, 2014 and both the Internal Spin-Off and the External Spin-Off occur thereon, (iii) NewCo files a Separate Return with respect to all Taxes for 2015 and later years, (iv) the Internal Contribution and Internal Spin-Off qualify as tax-free transactions under Sections 368(a)(1)(D) and 355 of the Code, (v) the External Contribution and External Spin-Off qualify as tax-free transactions under Sections 368(a)(1)(D) and 355 of the Code, (vi) the affiliated group of which SLM was the common parent and the taxable year of such affiliated group that includes the Spin-Off Date does not terminate as a result of the Reorganization, such affiliated group continues with SLM BankCo as the common parent, and such taxable year is the calendar year, and (vii) no estimated Taxes have been paid or are required to be paid.

Example 1. General Tax Allocation on Joint Return.

On its consolidated U.S. federal income Tax Return for the Tax Year that begins January 1, 2014, and ends December 31, 2014, the SLM BankCo consolidated group reports $200x of consolidated net taxable income, no credits, and a Tax liability of $70x (viz., (35%)($200x)). Of the $200x of consolidated net taxable income reported on such Tax Return, $150x is attributable to and arises from the SLM BankCo Operations. The remaining $50x of consolidated net taxable income is attributable to and arises from the NewCo Operations during the period in which NewCo joins in the filing of such Tax Return (viz., the period beginning January 1, 2014, and ending on the Spin-Off Date).

The $150x of taxable income attributable to the SLM BankCo Operations and the $50x of taxable income attributable to the NewCo Operations in each case includes deductions. However, in neither case are these deductions a Tax Benefit, because the aggregate of such deductions in the Tax Year does not exceed the income attributable to or arising from the relevant business in such Tax Year.

Because SLM BankCo’s 2014 U.S. federal consolidated income Tax Return includes Tax Items of each of the SLM BankCo Operations and the NewCo Operations (determined without regard to Tax Items carried forward to such Tax Year), it is a Joint Return. Pursuant to Section 2.1, each of SLM BankCo and NewCo is liable for its allocable portion of the $70x of Tax shown on such Joint Return. Because $150x of the consolidated net taxable income contributing to the Tax is attributable to the SLM BankCo Operations and $50x of the consolidated net taxable income contributing to the Tax is attributable to the NewCo Operations, pursuant to Section 2.2(b), $52.5x of Tax is allocable to SLM BankCo (viz., ($150x/$200x)($70x)) and $17.5x of Tax is allocable to NewCo (viz., ($50x/$200x)($70x)).

Pursuant to Section 3.1(a), SLM BankCo is responsible for preparing and filing the Joint Return. Pursuant to Section 4.1, SLM BankCo must pay the $70x of Tax to the Tax

 

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Authority. Pursuant to Section 4.2(a), NewCo must remit the amount for which it is liable (viz., $17.5x) to SLM BankCo by the date that is the later of (i) three Business Days prior to the date that SLM BankCo files such Joint Return and (ii) seven Business Days after SLM BankCo gives NewCo notice requesting such amount. If payment is not made by such date, NewCo must pay interest thereafter on the amount past due as determined under Section 4.4.

Example 2. Separate Return filed by NewCo.

On its consolidated U.S. federal income Tax Return for the Tax Year that begins on January 1, 2014 and ends December 31, 2014, the SLM BankCo consolidated group reports $200x of consolidated net taxable income, no credits, and a Tax liability of $70x (viz., (35%)($200x)). Of the $200x of consolidated net taxable income reported on such Tax Return, $150x is attributable to and arises from the SLM BankCo Operations. The remaining $50x of consolidated net taxable income is attributable to and arises from the NewCo Operations during the period in which NewCo joins in the filing of such Tax Return (viz., the period beginning January 1, 2014, and ending on the Spin-Off Date) applying the closing of the books method.

Pursuant to Section 3.2(b), NewCo is responsible for preparing and filing a Separate Return for the NewCo consolidated group for the period beginning on April 1, 2014, and ending on December 31, 2014. As a result, NewCo will have the right to make those determinations described in Section 3.3(a) with respect to the Separate Return, subject to the limitations in Section 3.3(b). Because SLM BankCo and NewCo used the closing of the books method to calculate the income of NewCo and its consolidated subsidiaries for the period beginning on January 1, 2014, and ending on the Spin-Off Date, NewCo must, pursuant to Section 3.3(b)(ii), calculate income for its Separate Return in a manner consistent with this method.

Example 3. Payments Made Prior to the Spin-Off Date and Redetermination of Tax.

On its consolidated U.S. federal income Tax Return for the Tax Year that begins on January 1, 2013, and ends December 31, 2013, the SLM consolidated group reports $200x of consolidated net taxable income and a Tax liability of $70x (viz., (35%)($200x)). Of the $200x of consolidated net taxable income reported on such Tax Return, $150x is attributable to the NewCo Operations and $50x is attributable to SLM BankCo Operations. Prior to the Spin-Off Date, SLM made estimated Tax payments with respect to such Tax liability to the IRS of $55x, of which $41.25x was allocable to NewCo and $13.75x was allocable to SLM BankCo pursuant to Section 2.2(b) and Section 4.2(c). SLM BankCo timely pays the remaining $15x of Tax to the IRS on a date subsequent to the Spin-Off Date.

Pursuant to Section 2.2(b), the Tax liability of $70x is allocated $52.5x to NewCo (viz., ($150x/$200x)($70x)) and $17.5x to SLM BankCo (viz., ($50x/$200x)($70x)). NewCo is required to pay SLM BankCo for $11.25x of the additional Consolidated Tax payment (viz., $52.5x - $41.25x) on or prior to the date described under Section 4.2(a). Assume that NewCo does, in fact, timely pay this $11.25x to SLM BankCo.

 

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On December 1, 2014, NewCo and SLM BankCo file an amended 2013 consolidated U.S. federal income Tax Return that reports $190x of consolidated net taxable income and claims a Tax refund of $3.5x (viz., $70x - (35%)($190x)). Of the $190x of consolidated net taxable income reported on the amended Tax Return, $140x is attributable to the NewCo Operations and $50x is attributable to the SLM BankCo Operations. On February 1, 2015, SLM BankCo receives from the IRS the refund of $3.5x reflected on such amended Tax Return. Pursuant to Section 4.3, SLM BankCo is obligated to pay the $3.5x refund to NewCo within thirty days after February 1, 2015.

 

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Exhibit 10.3

DRAFT

Exhibit 10.3

EMPLOYEE MATTERS AGREEMENT

BETWEEN

SLM CORPORATION,

NEW BLC CORPORATION

AND

NEW CORPORATION

DATED AS OF

[—], 2014

TABLE OF CONTENTS

 

         PAGE  
ARTICLE I DEFINITIONS      2   

Section 1.1

   Definitions      2   

Section 1.2

   Interpretation      8   
ARTICLE II ASSIGNMENT OF EMPLOYEES      10   

Section 2.1

   Active Employees      10   

Section 2.2

   Former Employees      10   

Section 2.3

   Employment Law Obligations      11   

Section 2.4

   Employee Records      11   
ARTICLE III EQUITY AND INCENTIVE COMPENSATION PLANS      13   

Section 3.1

   General Principles      13   

Section 3.2

   Restricted Stock      14   

Section 3.3

   Restricted Stock Units      15   

Section 3.4

   Stock Options      16   

Section 3.5

   Performance Stock Units      16   

Section 3.6

   Section 16(b) of the Exchange Act; Code Sections 162(m) and 409A      17   

Section 3.7

   Certain Bonus Payments      18   

Section 3.8

   ESPP      18   

Section 3.9

   Registration Statements; Blackouts      18   
ARTICLE IV GENERAL PRINCIPLES FOR ALLOCATION OF LIABILITIES      19   

Section 4.1

   General Principles      19   

Section 4.2

   Sponsorship and/or Establishment of NewCo Plans      21   

Section 4.3

   Service Credit      21   

Section 4.4

   Plan Administration      22   
ARTICLE V COLI POLICIES      23   

Section 5.1

   COLI      23   
ARTICLE VI THRIFT PLANS      23   

Section 6.1

   General Principles      23   

Section 6.2

   Treatment of SLM BankCo Common Stock and NewCo Common Stock      24   

Section 6.3

   Transfer of Accounts      24   

Section 6.4

   Supplemental 401(k) Plan      25   

Section 6.5

   Deferred Compensation Plans      25   
ARTICLE VII WELFARE PLANS      25   

Section 7.1

   Establishment of NewCo Welfare Plans      25   

 

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Section 7.2

   Transitional Matters Under NewCo Welfare Plans      26   

Section 7.3

   Continuity of Benefits, Benefit Elections and Beneficiary Designations      27   

Section 7.4

   Insurance Contracts      28   

Section 7.5

   Third-Party Vendors      28   

Section 7.6

   Claims Experience      28   
ARTICLE VIII BENEFIT ARRANGEMENTS      29   
ARTICLE IX WORKERS’ COMPENSATION AND UNEMPLOYMENT COMPENSATION      29   

Section 9.1

   Workers’ Compensation      29   

Section 9.2

   Unemployment Compensation      29   
ARTICLE X RETENTION, SEVERANCE AND OTHER MATTERS      29   

Section 10.1

   Retention Agreements      29   

Section 10.2

   Severance      30   

Section 10.3

   Accrued Time Off      30   

Section 10.4

   Leaves of Absence      30   

Section 10.5

   Director Programs      30   

Section 10.6

   Restrictive Covenants in Employment and Other Agreements      30   
ARTICLE XI LEGACY LIABILITY      31   

Section 11.1

   Legacy Pension Plan      31   

Section 11.2

   Scholarships      31   
ARTICLE XII GENERAL PROVISIONS      32   

Section 12.1

   Preservation of Rights to Amend      32   

Section 12.2

   Confidentiality      32   

Section 12.3

   Administrative Complaints/Litigation      32   

Section 12.4

   Reimbursement and Indemnification      32   

Section 12.5

   Costs of Compliance with Agreement      33   

Section 12.6

   Fiduciary Matters      33   

Section 12.7

   Entire Agreement      33   

Section 12.8

   Binding Effect; No Third-Party Beneficiaries; Assignment      33   

Section 12.9

   Amendment; Waivers      33   

Section 12.10

   Remedies Cumulative      34   

Section 12.11

   Notices      34   

Section 12.12

   Counterparts      34   

Section 12.13

   Severability      34   

Section 12.14

   Governing Law      34   

Section 12.15

   Performance      34   

Section 12.16

   Construction      35   

Section 12.17

   Effect if Distribution Does Not Occur           35   

 

ii

EMPLOYEE MATTERS AGREEMENT

THIS EMPLOYEE MATTERS AGREEMENT dated as of                     , 2014, among SLM Corporation, a Delaware Corporation (“Existing SLM”) New BLC Corporation, a Delaware corporation (“SLM BankCo”), and New Corporation, a Delaware corporation (“NewCo”). SLM BankCo and NewCo are sometimes referred to herein, individually, as a “Party,” and, collectively, as the “Parties.” Capitalized terms used herein and not otherwise defined shall have the respective meanings ascribed to such terms in Article I hereof.

RECITALS

WHEREAS, the Board of Directors of Existing SLM, has determined that it would be in the best interests of its stockholders that its education loan management business be separated from its consumer banking business (the “Separation”);

WHEREAS, the Separation will involve an internal corporate reorganization of Existing SLM and its subsidiaries, pursuant to which all of the assets and liabilities associated with Existing SLM’s loan management, services and asset recovery business will be transferred to NewCo and its subsidiaries, and those assets and liabilities (to the extent not assumed by NewCo) associated with its consumer banking business will remain with or be transferred to SLM BankCo and its subsidiaries;

WHEREAS, as part of the internal corporation reorganization, (x) SLM BankCo, which is a newly formed holding company, will become the publicly traded successor to Existing SLM by means of a holding company merger effected pursuant to Section 251(g) of the Delaware General Corporation Law (the “DGCL”), and (y) 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 to be retained by or transferred to SLM BankCo and its subsidiaries;

WHEREAS, 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 SLM BankCo stockholders, on a pro rata basis, as of a record date previously determined by the Existing SLM Board of Directors (the “Distribution”), thereby completing the Separation;

WHEREAS, the Parties are entering into the Separation Agreement, which sets forth the agreement of the Parties regarding the internal corporate reorganization and other transactions necessary to effect the Separation, including the Distribution;

WHEREAS, the Separation Agreement provides, among other things, subject to the terms and conditions thereof, for the execution and delivery of various agreements, including this Agreement, in order to facilitate and provide for the Separation, provide a framework for the relationship of SLM BankCo and NewCo after the Separation and provide for the allocation between SLM BankCo and NewCo of all of the assets, liabilities, and obligations of Existing SLM and its subsidiaries attributable to periods prior to and after the Separation; and

 

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WHEREAS, this Agreement is being entered into in order to allocate between SLM BankCo and NewCo certain assets, liabilities and obligations, and related responsibilities, with respect to employees, employee compensation, benefit plans and programs, and to set forth the agreement of SLM BankCo and NewCo with respect to the matters set forth herein.

NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the Parties, intending to be legally bound, agree as follows:

ARTICLE I

DEFINITIONS

Section 1.1 Definitions. As used in this Agreement, the following terms shall have the meanings set forth in this Section 1.1:

(a) “2014 Pre-Spin Bonus” has the meaning set forth in Section 3.8.

(b) “Adjusted SLM BankCo RSA” has the meaning set forth in Section 3.2(a).

(c) “Adjusted SLM BankCo RSU” has the meaning set forth in Section 3.3(b).

(d) “Adjusted NewCo RSU” has the meaning set forth in Section 3.3(b).

(e) “Affiliate” shall mean, when used with respect to a specified Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with such specified Person. For the purpose of this definition, “control” (including with correlative meanings, “controlled by” and “under common control with”), when used with respect to any specified Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or other interests, by contract, agreement, obligation, indenture, instrument, lease, promise, arrangement, release, warranty, commitment, undertaking or otherwise. It is expressly agreed that, from and after the Effective Time, for purposes of this Agreement and the Ancillary Agreements, (a) no member of the NewCo Group shall be deemed an Affiliate of any member of the SLM BankCo Group and (b) no member of the SLM BankCo Group shall be deemed to be an Affiliate of any member of the NewCo Group; except that the foregoing shall not affect the treatment of SLM BankCo and SMI as “affiliates” for purposes of federal customer data privacy laws, including the Gramm-Leach-Bliley Act during the Preferred Stock Period (as defined in the Separation Agreement).

(f) “Agreement” means this Employee Matters Agreement together with all Schedules hereto and all amendments, changes and supplements hereto and thereto entered into in accordance with Section 12.9.

(g) “Ancillary Agreements” has the meaning set forth in the Separation Agreement.

(h) “Benefit Arrangement” means any contract, agreement, policy, practice, program, plan, trust or arrangement (other than any deferred compensation, profit sharing, bonus, stock-based compensation or other form of incentive compensation) providing for benefits,

 

2

perquisites or compensation of any nature to any Employee, or to any family member, dependent or beneficiary of any such Employee, including travel and accident insurance, tuition reimbursement, vacation, sick, personal or bereavement days, and holidays.

(i) “COBRA” means the U.S. Consolidated Omnibus Budget Reconciliation Act of 1985, as codified at Part 6 of Subtitle B of Title I of ERISA and at Code Section 4980B.

(j) “Code” means the Internal Revenue Code of 1986.

(k) “Code Sections” means a section of the Code.

(l) “Confidential Information” has the meaning set forth in the Separation Agreement.

(m) “Distribution” has the meaning set forth in the preamble to this Agreement.

(n) “Distribution Date” has the meaning set forth in the Separation Agreement.

(o) “Effective Time” means                     , Eastern Standard Time, on the Distribution Date.

(p) “Employee” means any SLM BankCo Employee, Former SLM BankCo Employee, NewCo Employee or Former NewCo Employee.

(q) “Employee Records” has the meaning set forth in Section 2.4(a).

(r) “ERISA” means the U.S. Employee Retirement Income Security Act of 1974.

(s) “ESPP” means the Amended and Restated Sallie Mae Employee Stock Purchase Plan.

(t) “Exchange Act” means the Securities Exchange Act of 1934.

(u) “FMLA” means the U.S. Family and Medical Leave Act.

(v) “Former NewCo Employee” has the meaning set forth in Section 2.2(a).

(w) “Former SLM BankCo Employee” has the meaning set forth in Section 2.2(a).

(x) “Group” means collectively the Sallie Mae Group, NewCo Group and the SLM BankCo Group.

(y) “Initial Employment Date” means, for any person, the first date such person was employed by any member of the Sallie Mae Group.

(z) “IRS” means the U.S. Internal Revenue Service.

(aa) “Legacy SLM BankCo Option” has the meaning set forth in Section 3.4(a).

(bb) “Merger” has the meaning set forth in the Separation Agreement.

 

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(cc) “Merger Date” means the date on which the Merger becomes effective in accordance with Section 251 and Section 103 under the DGCL.

(dd) “NASDAQ” means the NASDAQ Global Select Market.

(ee) “NewCo” has the meaning set forth in the preamble to this Agreement.

(ff) “NewCo Benefit Arrangement” means any Benefit Arrangement sponsored by a member of the NewCo Group.

(gg) “NewCo Common Stock” means the common stock of NewCo, par value $0.01 per share.

(hh) “NewCo Director” means an individual who is a non-employee director of NewCo following the Distribution.

(ii) “NewCo Employee” means any individual who is employed by a member of the NewCo Group on the Distribution Date.

(jj) “NewCo Entity” means any (x) member of the NewCo Group (together with each current and former, direct or indirect, Subsidiary of any such member (and of any such former Subsidiary)) and (y) any former Subsidiary of Existing SLM, or line of business of a Subsidiary of Existing SLM, that was sold or otherwise disposed of prior to the Distribution Date. For purposes of this definition, all lines of business that are treated as “discontinued operations” in the consolidated financial statements of NewCo shall be deemed to have been part of a NewCo Entity. For purposes of this definition, no SLM BankCo Entity shall be considered a NewCo Entity. The Parties acknowledge that this term is defined differently in the Separation Agreement.

(kk) “NewCo Equity Awards” means NewCo RSAs, NewCo RSUs or Post-Distribution NewCo Options.

(ll) “NewCo ESPP” means an employee stock purchase plan sponsored by NewCo with terms substantially similar to those of the ESPP as of the Distribution Date.

(mm) “NewCo FSA” has the meaning set forth in Section 7.4(b).

(nn) “NewCo Group” means, collectively, NewCo and each NewCo Subsidiary.

(oo) “NewCo New Equity Plan” means the plan adopted by NewCo and approved prior to the Distribution by NewCo’s sole stockholder as of the date of such approval prior to the Distribution, identified on Schedule                     , under which the NewCo equity-based awards described in Article III shall be issued.

(pp) “NewCo RSU” has the meaning set forth in Section 3.3(a).

(qq) “NewCo Subsidiary” means any direct or indirect Subsidiary of NewCo, as of the Distribution Date.

 

4

(rr) “NewCo Thrift Plan” has the meaning set forth in Section 6.1 and on Schedule                     .

(ss) “NewCo Thrift Plan Beneficiaries” has the meaning set forth in Section 6.1.

(tt) “NewCo Welfare Plan” means any Welfare Plan sponsored or maintained by any one or more members of the NewCo Group on the Distribution Date, including each of those set forth on Schedule                     .

(uu) “NewCo Welfare Plan Participants” has the meaning set forth in Section 7.1.

(vv) “Participating NewCo Employers” has the meaning set forth in Section 7.1.

(ww) “Participation Period” has the meaning set forth in Section 7.3(b).

(xx) “Party” or “Parties” has the meaning set forth in the preamble to this Agreement.

(yy) “Person” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, a union, an unincorporated organization or a governmental entity or any department, agency or political subdivision thereof.

(zz) “Post-Distribution NewCo Share Price” means the volume-weighted average of the “when issued” trading price on NASDAQ of a share of NewCo Common Stock on the five trading days ending on the day prior to the Distribution Date, as reported on NASDAQ’s website (www.nasdaq.com).

(aaa) “Post-Distribution NewCo Option” has the meaning set forth in Section                     .

(bbb) “Post-Distribution SLM BankCo Option” has the meaning set forth in Section 3.4(b).

(ccc) “Post-Distribution SLM BankCo Option Price Target” means, as to a particular Post-Distribution SLM BankCo Option that is to include a Price Target, the number determined by multiplying the Price Target of the Legacy SLM BankCo Option in respect of which such Post-Distribution SLM BankCo Option is to be granted by a fraction, the numerator of which is the Post-Distribution SLM BankCo Share Price and the denominator of which is the Pre-Distribution SLM BankCo Share Price.

(ddd) “Post-Distribution SLM BankCo Share Price” means the volume-weighted average of the “ex-dividend” trading price of a share of SLM BankCo Common Stock on the five trading days ending on the day prior to the Distribution Date as reported on NASDAQ’s website (www.nasdaq.com).

(eee) “Pre-Distribution SLM BankCo Share Price” means the sum of the Post-Distribution SLM BankCo Share Price and the Post-Distribution NewCo Share Price.

(fff) “Price Target” means any SLM BankCo Stock Price (or Prices) that is (or are) specified as an exercisability trigger in a SLM BankCo Option.

 

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(ggg) “Privacy Contract” means any contract entered into in connection with applicable privacy protection laws or regulations.

(hhh) “Registration Statement Effectiveness Date” means the first date on which the applicable registration statement on Form S-8 (or other appropriate form) contemplated by Section 3.9 shall be effective under the Securities Act.

(iii) “Post-Distribution NewCo Option” has the meaning set forth in Section 3.4(a).

(jjj) “Post-Distribution NewCo Option Price Target” means, as to a particular Post-Distribution NewCo Option that is to include a Price Target, the number determined by multiplying the Price Target of the Legacy SLM BankCo Option in respect of which such Post-Distribution NewCo Option is to be granted multiplied by (ii) a fraction, the numerator of which is the Post-Distribution NewCo Share Price and the denominator of which is the Pre-Distribution SLM BankCo Share Price.

(kkk) “Sallie Mae Group” means Existing SLM and its predecessors and every Subsidiary of Existing SLM and such predecessors in existence at any time prior to the Merger Date.

(lll) “SEC” means the Securities and Exchange Commission.

(mmm) “Securities Act” means the Securities Act of 1933.

(nnn) “Separation Agreement” means the Separation and Distribution Agreement, dated as of                     , 2014, among the Parties, together with all Schedules and all amendments and supplements thereto.

(ooo) “SLM BankCo” has the meaning set forth in the preamble to this Agreement.

(ppp) “SLM BankCo Benefit Arrangement” means any Benefit Arrangement sponsored or maintained by a member of the SLM BankCo Group on the day before the Distribution Date. For purposes of this definition, a Benefit Arrangement sponsored or maintained by any one or more members of the SLM BankCo Group includes any former Benefit Arrangement of Existing SLM that has been assumed by one or more members of the SLM BankCo Group (expressly or by the terms of the applicable Benefit Arrangement).

(qqq) “SLM BankCo Common Stock” means (i) for any period prior to the Merger Date, the common stock of Existing SLM, par value $0.20 per share, and (ii) for any period from and following the Merger Date, the common stock of SLM BankCo, par value $0.20 per share.

(rrr) “SLM BankCo Director” means an individual who is a non-employee director of SLM BankCo following the Distribution Date.

(sss) “SLM BankCo Employee” means any individual who is employed by a member of the SLM BankCo Group on the Distribution Date.

 

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(ttt) “SLM BankCo Entity” means any member of the SLM BankCo Group. For purposes of this definition, no NewCo Entity shall be considered a SLM BankCo Entity. The Parties acknowledge that this term is defined differently in the Separation Agreement.

(uuu) “SLM BankCo Equity Awards” means Legacy SLM BankCo Options, SLM BankCo Options, SLM BankCo RSAs, SLM BankCo RSUs or Post-Distribution SLM BankCo Options.

(vvv) “SLM BankCo Group” means, collectively, SLM BankCo and each SLM BankCo Subsidiary. For purposes of this definition, no member of the NewCo Group shall be deemed a member of the SLM BankCo Group.

(www) “SLM BankCo Legacy Equity Plan” means any equity plan sponsored or maintained by the SLM BankCo Group immediately prior to the Distribution Date, including each of those set forth on Schedule                     . For purposes of this definition, an equity plan sponsored or maintained by SLM BankCo includes a former equity plan of Existing SLM that has been assumed by SLM BankCo (expressly or by the terms of the applicable equity plan).

(xxx) “SLM BankCo Options” means options to purchase shares of SLM BankCo Common Stock granted pursuant to any of the SLM BankCo Legacy Equity Plans, including options granted prior to the Merger Date by Existing SLM and assumed by SLM BankCo.

(yyy) “SLM BankCo RSAs” means unvested restricted stock awards issued under any of the SLM BankCo Legacy Equity Plans, including awards issued by Existing SLM prior to the Merger Date and assumed by SLM BankCo.

(zzz) “SLM BankCo RSUs” means restricted stock units or deferred stock units issued under any of the SLM BankCo Legacy Equity Plans that are not subject to performance conditions, including units issued by Existing SLM prior to the Merger Date and assumed by SLM BankCo.

(aaaa) “SLM BankCo Subsidiary” means any Subsidiary of SLM BankCo as of the Distribution Date. For purposes of this definition, no NewCo Subsidiary shall be considered a SLM BankCo Subsidiary.

(bbbb) “SLM BankCo Thrift Plan” means the Sallie Mae 401(k) Savings Plan.

(cccc) “SLM BankCo Thrift Plan Beneficiaries” has the meaning set forth in Section 6.1.

(dddd) “SLM BankCo Welfare Plan” means any Welfare Plan sponsored or maintained by any one or more members of the SLM BankCo Group on the day before the Distribution Date, including each of those set forth on Schedule                     . For purposes of this definition, a Welfare Plan sponsored or maintained by any one or more members of the SLM BankCo Group includes former Welfare Plans of Existing SLM that have been assumed by a member of the SLM BankCo Group (expressly or by the terms of the applicable Welfare Plan).

 

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(eeee) “Subsidiary” means, with respect to any specified Person, any corporation, partnership, limited liability company, joint venture or other organization, whether incorporated or unincorporated, of which at least a majority of the securities or interests having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such specified Person or by any one or more of its Subsidiaries, or by such specified Person and one or more of its Subsidiaries.

(ffff) “U.S.” means the United States of America.

(gggg) “WARN” means the U.S. Worker Adjustment and Retraining Notification Act, and any applicable state or local law equivalent.

(hhhh) “Welfare Plan” means a “welfare plan” as defined in ERISA Section 3(1) and also means a cafeteria plan under Code Section 125 and any benefits offered thereunder, including pre-tax premium conversion benefits, a dependent care assistance program, contribution funding toward a health savings account and flex or cashable credits.

Section 1.2 Interpretation. In this Agreement, unless the context clearly indicates otherwise:

(a) words used in the singular include the plural and words used in the plural include the singular;

(b) if a word or phrase is defined in this Agreement, its other grammatical forms, as used in this Agreement, shall have a corresponding meaning;

(c) reference to any gender includes the other gender and the neuter;

(d) the words “include,” “includes” and “including” shall be deemed to be followed by the words “without limitation”;

(e) the words “shall” and “will” are used interchangeably and have the same meaning;

(f) the word “or” shall have the inclusive meaning represented by the phrase “and/or”;

(g) relative to the determination of any period of time, “from” means “from and including,” “to” means “to but excluding” and “through” means “through and including”;

(h) all references to a specific time of day in this Agreement shall be based upon Eastern Standard Time or Eastern Daylight Savings Time, as applicable, on the date in question;

(i) whenever this Agreement refers to a number of days, such number shall refer to calendar days unless business days are specified;

(j) accounting terms used herein shall have the meanings historically ascribed to them by SLM BankCo (and its predecessor Existing SLM for periods prior to the Merger Date) and its Subsidiaries, including NewCo for this purpose, in its and their internal accounting and financial policies and procedures in effect immediately prior to the date of this Agreement;

 

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(k) reference to any Article, Section or Schedule means such Article or Section of, or such Schedule to, this Agreement, as the case may be, and references in any Section or definition to any clause means such clause of such Section or definition;

(l) the words “this Agreement,” “herein,” “hereunder,” “hereof,” “hereto” and words of similar import shall be deemed references to this Agreement as a whole and not to any particular Section or other provision of this Agreement;

(m) reference to any agreement, instrument or other document means such agreement, instrument or other document as amended, supplemented and modified from time to time to the extent permitted by the provisions thereof and not prohibited by this Agreement;

(n) reference to any Law (including statutes and ordinances) means such Law (including any and all rules and regulations promulgated thereunder) as amended, modified, codified or reenacted, in whole or in part, and in effect at the time of determining compliance or applicability;

(o) references to any Person include such Person’s successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement; and any reference to a third party shall be deemed to mean a Person who is not a Party or an Affiliate of a Party;

(p) if there is any conflict between the provisions of the main body of this Agreement and the Schedules hereto, the provisions of the main body of this Agreement shall control unless explicitly stated otherwise in such Schedule;

(q) unless otherwise specified in this Agreement, all references to dollar amounts herein shall be in respect of lawful currency of the U.S.;

(r) the titles to Articles and headings of Sections contained in this Agreement, in any Schedule and in the table of contents to this Agreement have been inserted for convenience of reference only and shall not be deemed to be a part of or to affect the meaning or interpretation of this Agreement; and

(s) any portion of this Agreement obligating a Party to take any action or refrain from taking any action, as the case may be, shall mean that such Party shall also be obligated to cause its relevant Subsidiaries to take such action or refrain from taking such action, as the case may be.

 

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ARTICLE II

ASSIGNMENT OF EMPLOYEES

Section 2.1 Active Employees.

(a) NewCo Employees. Except as otherwise set forth in this Agreement, effective as of the Distribution Date, the employment of the NewCo Employees will be continued by a member of the NewCo Group. Prior to such date, NewCo Employees will be transferred and assigned to the applicable member of the NewCo Group. Each of the Parties agrees to execute, and to seek to have the applicable employees execute, such documentation as may be necessary to reflect such assignments and transfers.

(b) SLM BankCo Employees. Except as otherwise set forth in this Agreement, effective as of the Distribution Date, the employment of the SLM BankCo Employees will be continued by a member of the SLM BankCo Group. Prior to such date, BankCo Employees will be transferred and assigned to the applicable member of the BankCo Group. Each of the Parties agrees to execute, and to seek to have the applicable employees execute, such documentation as may be necessary to reflect such assignments and transfers.

(c) At-Will Status. Notwithstanding the above or any other provision of this Agreement, nothing in this Agreement shall create any obligation on the part of any member of the SLM BankCo Group or any member of the NewCo Group to continue the employment of any employee for any period following the date of this Agreement or the Distribution or to change the employment status of any employee from “at will,” to the extent such employee is an “at will” employee under applicable law.

(d) Severance. The Distribution and the assignment, transfer or continuation of the employment of employees as contemplated by this Section 2.1 shall not be deemed a severance of employment of any employee for purposes of this Agreement and any plan, policy, practice or arrangement of any member of the Group.

(e) Change of Control/Change in Control. Neither the completion of the Distribution nor any transaction in connection with the Distribution (including the Merger) shall be deemed a “change of control” or “change in control” for purposes of any plan, policy, practice or arrangement relating to directors, former directors, employees, former employees or consultants of any member of the Group.

Section 2.2 Former Employees.

(a) Any individual who has previously worked as an employee for a member (or former member) of the Sallie Mae Group but who is not employed by the Sallie Mae Group as of the time immediately prior to the Distribution Date shall be referred to as a “Legacy Sallie Mae Employee”. For purposes of this Agreement, any Legacy Sallie Mae Employee other than an individual identified as a “Former SLM BankCo Employee” on Schedule 2.2(a) shall be deemed to be a “Former NewCo Employee.”

 

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Section 2.3 Employment Law Obligations.

(a) WARN Act. After the Distribution Date, (i) SLM BankCo shall be responsible for providing any necessary WARN notice (and meeting any similar state law notice requirements) with respect to any termination of any SLM BankCo Employee and (ii) NewCo shall be responsible for providing any necessary WARN notice (and meeting any similar state law notice requirements) with respect to any termination of any NewCo Employee.

(b) Compliance With Employment Laws. On and after the Distribution Date, (i) each member of the SLM BankCo Group shall be responsible for adopting and maintaining any policies or practices, and for all other actions and inactions, necessary to comply with employment-related laws and requirements relating to the employment of SLM BankCo Employees and the treatment of any applicable Former SLM BankCo Employees in respect of their former employment, and (ii) each member of the NewCo Group shall be responsible for adopting and maintaining any policies or practices, and for all other actions and inactions, necessary to comply with employment-related laws and requirements relating to the employment of NewCo Employees and the treatment of any applicable Former NewCo Employees in respect of their former employment. Any liabilities with respect to Legacy Sallie Mae Employees that are not specifically allocated within this Agreement shall be assumed and satisfied by NewCo.

Section 2.4 Employee Records.

(a) Records Relating to SLM BankCo Employees and Former SLM BankCo Employees. All records, data and other employee-related information in any form (collectively, “Employee Records”) relating to SLM BankCo Employees or Former SLM BankCo Employees shall be the property of the SLM BankCo Group, except that Employee Records pertaining to such an employee and relating to any period that such employee was (i) employed by NewCo or (ii) covered under any employee benefit plan sponsored by any member of the NewCo Group (to the extent that such records or data relate to such coverage) prior to the Distribution Date shall be jointly owned by those members of the NewCo Group and the SLM BankCo Group.

(b) Records Relating to NewCo Employees and Former NewCo Employees. All Employee Records relating to NewCo Employees or Former NewCo Employees shall be the property of the NewCo Group, except that Employee Records pertaining to such an employee and relating to any period that such employee was (i) employed by any member of the SLM BankCo Group or (ii) covered under any employee benefit plan sponsored by any member of the SLM BankCo Group (to the extent that such records or data relate to such coverage) prior to the Distribution Date shall be jointly owned by those members of the SLM BankCo Group and the NewCo Group.

(c) Sharing of Records. Notwithstanding Sections 2.4(a) and (b), each of NewCo and SLM BankCo shall allow the other to retain a copy of the Employee Records owned by each of them, and use their respective commercially reasonable efforts to provide the other such Employee Records as may be necessary or appropriate to carry out their respective obligations under applicable law (subject to any relevant privacy protection laws or regulations in any applicable jurisdictions or Privacy Contract), this Agreement, any other Ancillary Agreement or the Separation Agreement, and for the purposes of administering their respective employee benefit plans and policies. All information and records regarding employment, personnel and

 

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employee benefit matters, including Employee Records, of SLM BankCo Employees and Former SLM BankCo Employees shall be accessed, retained, held, used, copied and transmitted after the Distribution Date by members of the SLM BankCo Group in accordance with all applicable laws, policies and Privacy Contracts relating to the collection, storage, retention, use, transmittal, disclosure and destruction of such records. All information and records regarding employment, personnel and employee benefit matters, including Employee Records, of NewCo Employees and Former NewCo Employees shall be accessed, retained, held, used, copied and transmitted after the Distribution Date by members of the NewCo Group in accordance with all applicable laws, policies and Privacy Contracts relating to the collection, storage, retention, use, transmittal, disclosure and destruction of such records.

(d) Access to Records. To the extent not inconsistent with this Agreement and any applicable privacy protection laws or regulations or Privacy Contracts, access to all employment, personnel and employee benefit matters, including Employee Records, after the Distribution Date will be provided to members of the SLM BankCo Group and members of the NewCo Group in accordance with the Separation Agreement. In addition, notwithstanding anything to the contrary, SLM BankCo shall be provided reasonable access to those records that are the property of the NewCo Group necessary for the administration of any plans or programs on behalf of SLM BankCo Employees and Former SLM BankCo Employees after the Distribution Date to the extent permissible under applicable privacy protection laws or regulations or Privacy Contracts. SLM BankCo shall also be permitted to retain copies of all restrictive covenant agreements with any NewCo Employee or Former NewCo Employee in which any member of the SLM BankCo Group has a valid business interest. In addition, notwithstanding anything to the contrary, NewCo shall be provided reasonable access to those records that are the property of the SLM BankCo Group necessary for the administration of any plans or programs on behalf of NewCo Employees and Former NewCo Employees after the Distribution Date to the extent permissible under applicable privacy protection laws or regulations or Privacy Contracts. NewCo shall also be permitted to retain copies of all restrictive covenant agreements with any SLM BankCo Employee or Former SLM BankCo Employee in which any member of the NewCo Group has a valid business interest.

(e) Maintenance of Records. With respect to retaining, destroying, transferring, sharing, copying and permitting access to information and records regarding employment, personnel and employee benefit matters, including Employee Records, SLM BankCo and NewCo shall (and shall cause their respective Subsidiaries to) comply with all applicable laws, regulations, Privacy Contracts and internal policies, and shall indemnify and hold harmless each other from and against any and all liability, claims, actions, and damages that arise from a failure (by the indemnifying party or its affiliates or their respective agents) to so comply with all applicable laws, regulations, Privacy Contracts and internal policies applicable to such information and records.

(f) No Access to Computer Systems or Files. No provision of this Agreement shall give (i) any member of the SLM BankCo Group direct access to the computer systems or other files, records or databases of any member of the NewCo Group to access Employee Records or (ii) any member of the NewCo Group direct access to the computer systems or other files, records or databases of any member of the SLM BankCo Group to access Employee Records, unless expressly and specifically permitted by the owner of such systems, files, records or databases.

 

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(g) Relation to Separation Agreement. The provisions of this Section 2.4 shall be in addition to, and not in derogation of, the provisions of the Separation Agreement governing Confidential Information, including Section 6.9 of the Separation Agreement. To the extent of any inconsistency between the provisions of this Section 2.4 of this Agreement and Section 6.9 of the Separation Agreement, the provisions of this Section 2.4 shall control.

(h) Confidentiality. Except to the extent otherwise set forth in this Agreement, all Employee Records shall, in each case, be subject to the confidentiality provisions of the Separation Agreement and any Privacy Contract or other applicable agreement and applicable law.

(i) Cooperation. Each Party shall use commercially reasonable efforts to cooperate to share, retain and maintain data and records that are necessary or appropriate to further the purposes of this Section 2.4 and for each Party to administer its respective benefit plans to the extent consistent with this Agreement and applicable law, and each Party agrees to cooperate as long as is reasonably necessary to further the purposes of this Section 2.4. Except as provided under any Ancillary Agreement, no Party shall charge another Party a fee for such cooperation.

(j) HIPAA Business Associate Agreement. NewCo and SLM BankCo shall enter into a Business Associate agreement under the Health Insurance Portability and Accountability Act of 1996, as amended, with respect to the group health plan of the other Party, in such form as NewCo and SLM BankCo shall mutually agree.

ARTICLE III

EQUITY AND INCENTIVE COMPENSATION PLANS

Section 3.1 General Principles.

(a) For the avoidance of doubt, the provisions of this Article III shall not apply unless the Distribution takes place. Each of SLM BankCo and NewCo shall take any and all reasonable action as shall be necessary and appropriate to further the provisions of this Article III.

(b) Where an award granted under one of the SLM BankCo Legacy Equity Plans is adjusted or replaced in whole or in part by an award under either a SLM BankCo Legacy Equity Plan or the NewCo New Equity Plan in accordance with the provisions of this Article III, such award generally shall be on terms which are in all material respects identical to the terms of the award which it replaces (including any requirements of continued employment) but subject to any necessary changes to take into account that (i) an award may relate to NewCo Common Stock, (ii) the NewCo New Equity Plan is administered by NewCo and the compensation committee of its board of directors, (iii) if applicable, the grantee under the award is employed or affiliated with a new employer or plan sponsor, and (iv) except for Price Targets under a Post-Distribution NewCo Option or a Post-Distribution SLM BankCo Option, the award is not subject to any performance conditions. Where an award granted under one of the SLM BankCo Legacy Equity Plans is adjusted in accordance with the provisions of this Article III, such award shall otherwise continue to retain the same terms and conditions of the original award, subject to any necessary changes to take into account the adjustments required by this Article III.

 

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(c) Following the Distribution Date, a grantee who has outstanding awards under one or more of the SLM BankCo Legacy Equity Plans and/or replacement awards under the NewCo New Equity Plan shall be considered to have been employed continuously by the applicable plan sponsor before the Distribution for purposes of (1) vesting and (2) determining the date of termination of employment as it applies to any such award. SLM BankCo will take such action as is necessary such that NewCo Employees that hold SLM BankCo Equity Awards as of or following the Distribution Date will not incur a termination of employment as a result of the Distribution for purposes of such awards. NewCo will take such action as is necessary such that SLM BankCo Employees that hold NewCo Equity Awards as of or following the Distribution Date will not incur a termination of employment as a result of the Distribution for purposes of such awards. Following the Distribution Date, a grantee who has outstanding awards under one or more of the SLM BankCo Legacy Equity Plans and/or replacement awards under the NewCo New Equity Plan shall be considered to be employed by the applicable plan sponsor only for service with the applicable of SLM BankCo or NewCo whichever is the employer of the individual as of a time immediately after the Distribution Date. For the avoidance of doubt, (1) a NewCo Employee or NewCo Director who has a SLM BankCo Equity Award will continue to vest in such award by reason of service with NewCo but upon termination of service with NewCo will be treated for purposes of the SLM BankCo Equity Award as having then terminated service, and (2) a SLM BankCo Employee or SLM BankCo Director who has a NewCo Equity Award will continue to vest in such award by reason of service with SLM BankCo but upon termination of service with SLM BankCo will be treated for purposes of the NewCo Equity Award as having then terminated service.

(d) No award described in this Article III, whether outstanding or to be issued, adjusted, substituted or cancelled by reason of or in connection with the Distribution, shall be adjusted, settled or cancelled or become exercisable if in the judgment of the administrator of the applicable plan or program such action would be inconsistent with applicable law, including federal securities laws. Any period of exercisability will not be extended on account of a period during which such an award is not exercisable in accordance with the preceding sentence.

Section 3.2 Restricted Stock.

(a) Each grantee under the SLM BankCo Legacy Equity Plans who holds one or more SLM BankCo RSAs shall receive in lieu of such award an adjusted award of SLM BankCo Restricted Stock (an “Adjusted SLM BankCo RSA”) with respect to a number of shares of SLM BankCo Common Stock equal to a fraction, the numerator of which is the product of the Pre-Distribution SLM BankCo Share Price and the number of shares subject to the SLM BankCo RSA and the denominator of which is the Post-Distribution SLM BankCo Share Price, rounded down to the nearest whole share. SLM BankCo (or one or more of the SLM BankCo Subsidiaries, as designated by SLM BankCo) shall be responsible for (i) the satisfaction of all tax reporting and withholding requirements in respect of the Adjusted SLM BankCo RSAs and (ii) remitting the appropriate tax or withholding amounts to the appropriate taxing authorities. Except as provided in the foregoing provisions of this Section 3.2(a), the Adjusted SLM BankCo RSAs shall be granted on terms which are in all material respects identical (including with respect to vesting) to the terms of the SLM BankCo RSAs with respect to which they are granted.

 

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Section 3.3 Restricted Stock Units.

(a) Each grantee under the SLM BankCo Legacy Equity Plans who holds one or more SLM BankCo RSUs granted prior to February 4, 2014, or granted in connection with awards under the 2013 Management Incentive Plan shall retain each such SLM BankCo RSU and shall receive a number of additional restricted stock units with respect to NewCo Common Stock (the “NewCo RSUs”) equal to the number of shares received by a stockholder of SLM BankCo Common Stock in connection with the Distribution with respect to the number of shares of SLM BankCo Common Stock subject to such grantee’s SLM BankCo RSUs. Except as provided in this Agreement, NewCo RSUs shall be granted on terms which are in all material respects identical (including with respect to vesting) to the terms of the SLM BankCo RSUs with respect to which they are granted.

(b) Each grantee under the SLM BankCo Legacy Equity Plans who holds one or more SLM BankCo RSUs granted on or after February 4, 2014, (other than SLM BankCo RSUs granted in connection with awards under the 2013 Management Incentive Plan) and who will be an SLM BankCo Employee, as well as each grantee of awards set forth on Schedule 3.3(b), shall receive in substitution for such SLM BankCo RSU (which shall be cancelled) an adjusted award of restricted stock units with respect to solely SLM BankCo Common Stock (an “Adjusted SLM BankCo RSU”), with the number of shares of SLM BankCo Common Stock subject to such Adjusted SLM BankCo RSU equal to a fraction, the numerator of which is the product of the Pre-Distribution SLM BankCo Share Price and the number of shares subject to the SLM BankCo RSU and the denominator of which is the Post-Distribution SLM BankCo Share Price, rounded to the nearest whole share. Each grantee under the SLM BankCo Legacy Equity Plans who holds one or more SLM BankCo RSUs granted on or after February 4, 2014, (other than SLM BankCo RSUs granted in connection with awards under the 2013 Management Incentive Plan) and who will not be an SLM BankCo Employee shall receive in substitution for each such SLM BankCo RSU (which shall be cancelled) an adjusted award of restricted stock units with respect to solely NewCo Common Stock (an “Adjusted NewCo RSU”), with the number of shares of NewCo Common Stock subject to such Adjusted NewCo RSU equal to a fraction, the numerator of which is the product of the Pre-Distribution SLM BankCo Share Price and the number of shares subject to the SLM BankCo RSU and the denominator of which is the Post-Distribution NewCo Share Price, rounded to the nearest whole share.

(c) SLM BankCo (or one or more of the SLM BankCo Subsidiaries, as designated by SLM BankCo) shall be responsible for (i) the satisfaction of all tax reporting and withholding requirements in respect of the SLM BankCo RSUs and NewCo RSUs issued to SLM BankCo Employees and (ii) remitting the appropriate tax or withholding amounts to the appropriate taxing authorities in the case of SLM BankCo Employees and Former SLM BankCo Employees or ensuring the remittance of the appropriate tax or withholding amounts to NewCo in the case of NewCo Employees and Former NewCo Employees that hold SLM BankCo RSUs. NewCo shall be responsible for (i) the satisfaction of all tax reporting and withholding requirements in respect of the NewCo RSUs and SLM BankCo RSUs issued to NewCo Employees and (ii) remitting the appropriate tax or withholding amounts to the appropriate taxing authorities in the case of NewCo Employees and Former NewCo Employees or ensuring the remittance of the appropriate tax or withholding amounts to SLM BankCo in the case of SLM BankCo Employees that hold NewCo RSUs.

 

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Section 3.4 Stock Options.

(a) Each grantee under any of the SLM BankCo Legacy Equity Plans who, as of the Distribution Date, holds one or more SLM BankCo Options (each, a “Legacy SLM BankCo Option”), shall receive, in substitution for each such Legacy SLM BankCo Option (which shall be cancelled), both a NewCo Option (a “Post-Distribution NewCo Option”) with respect to shares of NewCo Common Stock and a SLM BankCo Option (a “Post-Distribution SLM BankCo Option”) with respect to shares of SLM BankCo Common Stock. The shares of NewCo Common Stock and SLM BankCo Common Stock subject to the Post-Distribution NewCo Option and Post-Distribution SLM BankCo Option, respectively, shall be equal to the number of shares of SLM BankCo Common Stock subject to the Legacy SLM BankCo Option. The exercise price of each Post-Distribution SLM BankCo Option and Post-Distribution NewCo Option shall bear the same ratio to the Post-Distribution SLM BankCo Share Price and the Post-Distribution NewCo Share Price, respectively, as the exercise price of the Legacy SLM BankCo Option being replaced bears to the Pre-Distribution SLM BankCo Share Price. In the case of a Legacy SLM BankCo Option that includes a Price Target, the Price Targets for the Post-Distribution SLM BankCo Option and Post-Distribution NewCo Option that are substituted therefor shall be, respectively, the applicable Post-Distribution SLM BankCo Option Price Target and Post-Distribution NewCo Option Price Target.

(b) SLM BankCo (or one or more of the SLM BankCo Subsidiaries, as designated by SLM BankCo) shall be responsible for (i) the satisfaction of all tax reporting and withholding requirements in respect of the exercise of Post-Distribution SLM BankCo Options and (ii) remitting the appropriate tax or withholding amounts to the appropriate taxing authorities in the case of SLM BankCo Employees and Former SLM BankCo Employees or ensuring the remittance of the appropriate tax or withholding amounts to NewCo in the case of NewCo Employees and Former NewCo Employees that receive Post-Distribution SLM BankCo Options. NewCo shall be responsible for (i) the satisfaction of all tax reporting and withholding requirements in respect of the exercise of Post-Distribution NewCo Options and (ii) remitting the appropriate tax or withholding amounts to the appropriate taxing authorities in the case of NewCo Employees and Former NewCo Employees or ensuring the remittance of the appropriate tax or withholding amounts to SLM BankCo in the case of SLM BankCo Employees that receive Post-Distribution NewCo Options.

(c) Post-Distribution NewCo Options and Post-Distribution SLM BankCo Options shall not be exercisable until the applicable Registration Statement Effectiveness Date. Except as provided in this Section 3.4, Post-Distribution NewCo Options and Post-Distribution SLM BankCo Options shall be granted on terms which are in all material respects identical (including with respect to vesting) to the terms of the Legacy SLM BankCo Options which they replace.

Section 3.5 Performance Stock Units.

(a) Each grantee under any of the SLM BankCo Legacy Equity Plans who, but for this Section 3.5, would hold, as of the Distribution Date, one or more performance stock unit awards (each, a “Legacy Performance Stock Unit”) shall receive, immediately prior to the

 

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Distribution Date and as a replacement award in substitution for each Legacy Performance Stock Unit (which shall be cancelled), a number of SLM BankCo RSUs equal to the number of shares of SLM BankCo Common Stock that would vest under the legacy performance-based award based on the actual performance to the Distribution Date and the lesser of (i) the target performance specified for such Legacy Performance Stock Unit, prorated for that portion of the performance period which will occur after the Distribution Date and (ii) projected performance for that portion of the performance period which will occur after the Distribution Date (as determined by the compensation committee of the Board of Directors of SLM BankCo). SLM BankCo RSUs issued in substitution for Legacy Performance Stock Unit pursuant to this Section 3.5 shall then be adjusted pursuant to Section 3.3(b).

Section 3.6 Section 16(b) of the Exchange Act; Code Sections 162(m) and 409A.

(a) By approving the adoption of this Agreement and in accordance with the provisions of Rule 16b-3 under the Exchange Act, the board of directors of SLM BankCo intends to exempt from the short-swing profit recovery provisions of Section 16(b) of the Exchange Act all acquisitions from and dispositions to SLM BankCo of SLM BankCo Equity Awards by directors and executive officers of SLM BankCo contemplated by this Article III. The board of directors of SLM BankCo also intends to expressly approve, in respect of all SLM BankCo Equity Awards granted or issued to directors and executive officers of SLM BankCo in accordance with this Article III, the use of any method for the payment of an exercise price and the satisfaction of any applicable tax withholding (specifically including the actual or constructive tendering of shares of SLM BankCo Common Stock in payment of an exercise price and the withholding of such shares from delivery under options in satisfaction of applicable tax withholding requirements) to the extent such method is permitted under the applicable equity incentive plan and award agreement.

(b) By approving the adoption of this Agreement and in accordance with the provisions of Rule 16b-3 under the Exchange Act, the board of directors of NewCo intends to exempt from the short-swing profit recovery provisions of Section 16(b) of the Exchange Act all acquisitions from and dispositions to NewCo of NewCo Equity Awards by directors and executive officers of NewCo contemplated by this Article III. The board of directors of NewCo also intends to expressly approve, in respect of all NewCo Equity Awards granted or issued to directors and executive officers of NewCo in accordance with this Article III, the use of any method for the payment of an exercise price and the satisfaction of any applicable tax withholding (specifically including the actual or constructive tendering of shares of NewCo Common Stock in payment of an exercise price and the withholding of such shares from delivery under options in satisfaction of applicable tax withholding requirements) to the extent such method is permitted under the applicable equity incentive plan and award agreement.

(c) Notwithstanding anything in this Agreement to the contrary (including the treatment of supplemental and deferred compensation plans, outstanding long-term incentive awards and annual incentive awards as described herein), SLM BankCo and NewCo agree to negotiate in good faith regarding the need for any treatment different from that otherwise provided herein to ensure that (i) a federal income tax deduction for the payment of such supplemental or deferred compensation or long-term incentive award, annual incentive award or other compensation is not limited by reason of Code Section 162(m), and (ii) the treatment of such supplemental or deferred compensation or long-term incentive award, annual incentive award or other compensation does not cause the imposition of a tax under Code Section 409A.

 

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Section 3.7 Certain Bonus Payments.

(a) Annual incentive bonuses in respect of calendar year 2014, prorated for the period commencing on January 1, 2014 and ending on the Distribution Date, shall be paid to SLM BankCo Employees and NewCo Employees by SLM BankCo and NewCo, respectively, at the time such bonuses are normally paid in accordance with the bonus metrics determined by the compensation committee of the board of directors of SLM BankCo (the “2014 Pre-Spin Bonus”). Each employee’s 2014 Pre-Spin Bonus shall be based on actual performance results based on the bonus metrics set by the compensation committee of the board of directors of SLM BankCo, as such performance is certified by the board of directors of SLM BankCo, for the period commencing on January 1, 2014 and ending on the last day of the full calendar quarter preceding the Distribution Date.

(b) SLM BankCo shall assume responsibility and liability for payment of 2014 Pre-Spin Bonuses to the individuals listed on Schedule 3.7(b). NewCo shall assume responsibility and liability for payment of 2014 Pre-Spin Bonuses to individuals other than those listed on Schedule 3.7(b).

(c) Any other cash bonuses accrued or earned as of the Distribution Date but not yet paid shall be paid following the Distribution Date by SLM BankCo in the case of SLM BankCo Employees and Former SLM BankCo Employees or by NewCo in the case of NewCo Employees and Former NewCo Employees at such time and in such amount as is prescribed by the terms of the applicable bonus arrangement.

Section 3.8 ESPP.

(a) The administrator of the ESPP has taken all actions necessary and appropriate to suspend payroll deductions for and operation of the ESPP prior to the Distribution Date. SLM BankCo shall assume the ESPP effective as of the Distribution Date.

(b) Effective no later than immediately prior to the Distribution Date, NewCo shall establish the NewCo ESPP, which plan shall be approved by SLM BankCo in its capacity as the sole stockholder of NewCo prior to the Distribution Date.

Section 3.9 Registration Statements; Blackouts

(a) Before the Distribution Date or as soon as reasonably practicable thereafter and subject to compliance with applicable law, NewCo shall prepare and file with the SEC a registration statement on Form S-8 (or, if NewCo is not eligible to use Form S-8, another appropriate form for which NewCo is eligible) registering under the Securities Act the offer and sale of a number of shares of NewCo Common Stock equal to not less than the aggregate number of shares subject to all NewCo Equity Awards to be issued to the NewCo Employees and Former NewCo Employees in accordance with this Article III. NewCo shall use commercially reasonable efforts to cause such registration statement to be kept effective (and the prospectus or prospectuses forming a part thereof to be kept current to the extent required by the Securities Act) for so long as any of such NewCo Equity Awards remain outstanding.

 

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(b) Before the Distribution Date or as soon as reasonably practicable thereafter and subject to compliance with applicable law, SLM BankCo shall prepare and file with the SEC a registration statement on Form S-8 (or, if SLM BankCo is not eligible to use Form S-8, another appropriate form for which SLM BankCo is eligible) registering under the Securities Act the offer and sale of a number of shares of SLM BankCo Common Stock equal to not less than the aggregate number of shares subject to all SLM BankCo Equity Awards to be issued to SLM BankCo Employees and Former SLM BankCo Employees in accordance with this Article III. NewCo shall use commercially reasonable efforts to cause such registration statement to be kept effective (and the prospectus or prospectuses forming a part thereof to be kept current to the extent required by the Securities Act) for so long as any of such SLM BankCo Equity Awards remain outstanding.

(c) Each of NewCo and SLM BankCo covenants and agrees to use its commercially reasonable efforts to timely effect the adjustments and issuances of equity awards contemplated by this Article III, but acknowledges that such adjustments and issuances are subject to possible delays due to administrative issues and in order to comply with the requirements of applicable law and NASDAQ listing rules.

ARTICLE IV

GENERAL PRINCIPLES FOR ALLOCATION OF LIABILITIES

Section 4.1 General Principles.

(a) Each member of the SLM BankCo Group and each member of the NewCo Group shall take any and all reasonable action as shall be necessary or appropriate so that active participation in the SLM BankCo Thrift Plan, SLM BankCo Welfare Plans and SLM BankCo Benefit Arrangements by all NewCo Employees and Former NewCo Employees shall terminate in connection with the Distribution as and when provided under this Agreement (or if not specifically provided under this Agreement, as of the Effective Time), and each member of the NewCo Group shall cease to be a participating employer under the terms of the SLM BankCo Thrift Plan, SLM BankCo Welfare Plans and SLM BankCo Benefit Arrangements as of such time.

(b) Each member of the NewCo Group and each member of the SLM BankCo Group shall take any and all reasonable action as shall be necessary or appropriate so that active participation in the NewCo Thrift Plan, NewCo Welfare Plans and NewCo Benefit Arrangements by all SLM BankCo Employees and Former SLM BankCo Employees shall terminate in connection with the Distribution as and when provided under this Agreement (or if not specifically provided under this Agreement, as of the Effective Time), and each member of the SLM BankCo Group shall cease to be a participating employer under the terms of the NewCo Thrift Plan, NewCo Welfare Plans and NewCo Benefit Arrangements as of such time.

(c) Except as otherwise provided in this Agreement, (i) one or more members of the NewCo Group (as designated by NewCo) shall continue to be responsible for or assume,

 

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effective as of the Distribution Date, all employee benefits liabilities for NewCo Employees and Former NewCo Employees, and the assets relating to such employee benefits for NewCo Employees and Former NewCo Employees shall be transferred to or continue to be held by one or more members of the NewCo Group (as designated by NewCo) and (ii) and one or more members of the SLM BankCo Group (as designated by SLM BankCo) shall continue to be responsible for or assume all employee benefits liabilities for SLM BankCo Employees and Former SLM BankCo Employees and the assets relating to such employee benefits for SLM BankCo Employees and Former SLM BankCo Employees shall be transferred to or continue to be held by one or more members of the SLM BankCo Group (as designated by SLM BankCo).

(d) Except as otherwise provided in this Agreement, effective as of the day after the Distribution Date, one or more members of the NewCo Group (as determined by NewCo) shall assume or continue the sponsorship of, and no member of the SLM BankCo Group shall have any further liability for or under, the following agreements, obligations and liabilities, and NewCo shall indemnify each member of the SLM BankCo Group, and the officers, directors, and employees of each member of the SLM BankCo Group, and hold them harmless with respect to such agreements, obligations or liabilities:

(i) any and all individual employment agreements entered into between any member of the SLM BankCo Group and any NewCo Employee or Former NewCo Employee;

(ii) any and all service agreements entered into between any member of the SLM BankCo Group and any individual who is an independent contractor providing services primarily for the business activities of the NewCo Group;

(iii) any and all wages, salaries, incentive compensation (as the same may be modified by this Agreement), commissions and bonuses payable to any NewCo Employees or Former NewCo Employees after the Distribution Date, without regard to when such wages, salaries, incentive compensation, commissions and bonuses are or may have been earned;

(iv) any and all moving expenses and obligations related to relocation, repatriation, transfers or similar items incurred by or owed to any NewCo Employees or Former NewCo Employees, whether or not accrued as of the Distribution Date (other than such expenses and obligations incurred by SLM BankCo on or prior to the Distribution Date as a result of which there is an existing liability as of the Distribution Date and items set forth on Schedule 4.1(b)(iv), all of which shall remain SLM BankCo’s obligation);

(v) any and all immigration-related, visa, work application or similar rights, obligations and liabilities related to any NewCo Employees or Former NewCo Employees; and

(vi) any and all liabilities and obligations whatsoever with respect to claims made by or with respect to any NewCo Employees or Former NewCo Employees in connection with any employee benefit plan, program or policy not otherwise retained or assumed by any member of the SLM BankCo Group pursuant to this Agreement,

 

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including such liabilities relating to actions or omissions of or by any member of the NewCo Group or any officer, director, employee or agent thereof on or prior to the Distribution Date.

(e) Except as otherwise provided in this Agreement, effective as of the Effective Time, no member of the NewCo Group shall have any further liability for, and SLM BankCo shall indemnify each member of the NewCo Group, and the officers, directors, and employees of each member of the NewCo Group, and hold them harmless with respect to any and all liabilities and obligations whatsoever with respect to, claims made by or with respect to any SLM BankCo Employees or Former SLM BankCo Employees in connection with any employee benefit plan, program or policy not otherwise retained or assumed by any member of the NewCo Group pursuant to this Agreement, including such liabilities relating to actions or omissions of or by any member of the SLM BankCo Group or any officer, director, employee or agent thereof on or prior to the Distribution Date.

Section 4.2 Sponsorship and/or Establishment of NewCo Plans. Except as otherwise provided in this Agreement, sponsorship of benefit plans that cover solely NewCo Employees and Former NewCo Employees shall be deemed to have become effective not later than as of the Effective Time by the member of the NewCo Group specified on Schedule 4.2, and to the extent necessary to achieve such sponsorship, each member of the SLM BankCo Group and each member of the NewCo Group shall take appropriate action, including transfer of sponsorship of each such plan. SLM BankCo Welfare Plans in which both (i) SLM BankCo Employees or Former SLM BankCo Employees and (ii) NewCo Employees or Former NewCo Employees participate shall be divided into two separate plans, with one covering SLM BankCo Employees and Former SLM BankCo Employees sponsored by a member of the SLM BankCo Group, and the other covering NewCo Employees and Former NewCo Employees sponsored by a member of the NewCo Group.

Section 4.3 Service Credit.

(a) Service for Eligibility and Vesting Purposes. Except as otherwise provided in this Agreement, for purposes of eligibility and vesting under the NewCo Thrift Plan, NewCo Welfare Plans and NewCo Benefit Arrangements, NewCo shall, and shall cause each member of the NewCo Group to, credit each NewCo Employee and Former NewCo Employee with service for any period of employment with any member of the SLM BankCo Group on or prior to the Distribution Date to the same extent such service would be credited if it had been performed for a member of the NewCo Group. Except as otherwise provided in this Agreement, for purposes of eligibility and vesting under the SLM BankCo Thrift Plan, SLM BankCo Welfare Plans and SLM BankCo Benefit Arrangements, SLM BankCo shall, and shall cause each member of the SLM BankCo Group to, credit each SLM BankCo Employee and Former SLM BankCo Employee with service for any period of employment with any member of the NewCo Group on or prior to the Distribution Date to the same extent such service would be credited if it had been performed for a member of the SLM BankCo Group.

(b) Service for Benefit Purposes. Except as otherwise provided in this Agreement, (i) for purposes of benefit levels and accruals and benefit commencement entitlements under the NewCo Thrift Plan, NewCo Welfare Plans and NewCo Benefit Arrangements, NewCo shall, and shall cause each member of the NewCo Group to, credit each NewCo Employee and Former

 

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NewCo Employee with service for any period of employment with any member of the SLM BankCo Group on or prior to the Distribution Date to the same extent that such service is taken into account pursuant to the terms of the SLM BankCo Thrift Plan and SLM BankCo Welfare Plans, and (ii) for purposes of benefit commencement entitlements under the SLM BankCo Thrift Plan, SLM BankCo Welfare Plans and SLM BankCo Benefit Arrangements, SLM BankCo shall, and shall cause each member of the SLM BankCo Group to, credit each SLM BankCo Employee and Former SLM BankCo Employee with service for any period of employment with any member of the NewCo Group on or prior to the Distribution Date to the same extent such service would be credited if it had been performed for a member of the SLM BankCo Group.

(c) Evidence of Prior Service. Notwithstanding anything to the contrary, but subject to applicable law, upon reasonable request by SLM BankCo or NewCo to the other, the first Party will provide to the other Party copies of any records available to the first Party to document the service, plan participation and membership of an Employee and cooperate with the first Party to resolve any discrepancies or obtain any missing data for purposes of determining benefit eligibility, participation, vesting and calculation of benefits with respect to such Employee.

(d) Post-Distribution Transfers. In the event, following the Distribution Date, a NewCo Employee leaves the employ of the NewCo Group to become an employee of the SLM BankCo Group, such NewCo Employee will experience a separation from service, severance from employment and termination of employment, as applicable, for purposes of the NewCo Thrift Plan, NewCo Welfare Plans and any other compensatory plan or arrangement maintained by the NewCo Group. In the event, following the Distribution Date, a SLM BankCo Employee leaves the employ of the SLM BankCo Group to become an employee of the NewCo Group, such BankCo Employee will experience a separation from service, severance from employment and termination of employment, as applicable, for purposes of the SLM BankCo Thrift Plan, SLM BankCo Welfare Plans and any other compensatory plan or arrangement maintained by the SLM BankCo Group.

Section 4.4 Plan Administration.

(a) Transition Services. The Parties acknowledge that the SLM BankCo Group or the NewCo Group may provide administrative services for certain of the other Party’s benefit programs for a transitional period under the terms of an applicable transition services agreement. The Parties agree to enter into a business associate agreement (if required by applicable health information privacy laws) in connection with such transition services agreement.

(b) Administration. NewCo shall use its reasonable best efforts to, and shall cause each member of the NewCo Group to use its reasonable best efforts to, administer its benefit plans in a manner that does not jeopardize the tax-favored status of the tax-favored benefit plans maintained by any member of the SLM BankCo Group. SLM BankCo shall use its reasonable best efforts to, and shall cause each member of the SLM BankCo Group to use its reasonable best efforts to, administer its benefit plans in a manner that does not jeopardize the tax-favored status of the tax-favored benefit plans maintained by any member of the NewCo Group.

(c) Participant Elections and Beneficiary Designations. All participant elections and beneficiary designations made under any plan sponsored by a member of the SLM BankCo

 

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Group prior to the effective date as of which assets or liabilities relating to that plan are transferred or allocated to a member of the NewCo Group shall continue in effect under any plan maintained by any member of the NewCo Group to which liabilities are transferred or allocated pursuant to this Agreement until such time as any applicable participant changes his elections or beneficiary designations in accordance with the procedures of the relevant plan, as the case may be, including deferral, investment, and payment form elections, dividend elections, coverage options and levels, beneficiary designations and the rights of alternate payees under qualified domestic relations orders.

ARTICLE V

COLI POLICIES

Section 5.1 COLI. On or prior to the Distribution Date, a member of the NewCo Group shall assume sponsorship and responsibility for that certain trust established in connection with the Sallie Mae Deferred Compensation Plan for Key Employees (the “SLM BankCo Rabbi Trust”), and SLM BankCo shall cause the company-owned life insurance policies specified on Schedule                     , which were adopted in connection with a deferred compensation arrangement but not held in the SLM BankCo Rabbi Trust to be transferred to a member of the NewCo Group.

ARTICLE VI

THRIFT PLANS

Section 6.1 General Principles. Effective as of a date prior to the Distribution Date, NewCo will establish and adopt a qualified employee cash or deferred arrangement under Code Section 401(k) (the “NewCo Thrift Plan”) intended to be qualified under Code Section 401(a) and containing provisions that provide, among other things, (i) benefits for each NewCo Employee and Former NewCo Employee who was a participant (or former participant with a remaining account balance) in the SLM BankCo Thrift Plan as of the date immediately prior to the establishment of the NewCo Thrift Plan (and each beneficiary and alternate payee of such person) (the “NewCo Thrift Plan Beneficiaries”) identical (except as provided in this Article VI) to those in effect for the NewCo Thrift Plan Beneficiaries under the SLM BankCo Thrift Plan as of the date of transfer of assets and liabilities with respect to such plan (as described below), and (ii) SLM BankCo Employees or Former SLM BankCo Employees (and each beneficiary or alternate payee of such person) (the “SLM BankCo Thrift Plan Beneficiaries”) with participant account balances reflecting shares of NewCo Common Stock received in the Distribution. Each NewCo Employee who was an active participant in the SLM BankCo Thrift Plan as of the date immediately prior to the establishment of the NewCo Thrift Plan shall participate in the NewCo Thrift Plan effective from and after its establishment. NewCo Employees and Former NewCo Employees shall not make or receive additional contributions under the SLM BankCo Thrift Plan after the effective date of the NewCo Thrift Plan, unless any such NewCo Employee or Former NewCo Employee shall become employed by any member of the SLM BankCo Group after such date and such member participates in the SLM BankCo Thrift Plan. A SLM BankCo Employee or Former SLM BankCo Employee shall not participate in the NewCo Thrift Plan unless any such SLM BankCo Employee or Former SLM BankCo Employee shall become employed by any member of the NewCo Group after the effective date of the NewCo Thrift Plan and such member participates in the NewCo Thrift Plan. The interest

 

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of each NewCo Thrift Plan Beneficiary in the SLM BankCo Thrift Plan attributable to employer matching contributions and employer core contributions as of the Distribution Date shall be 100% vested on the Distribution Date. The interest of each SLM BankCo Thrift Plan Beneficiary in the NewCo Thrift Plan attributable to employer matching contributions and employer core contributions as of the Distribution Date shall be 100% vested on the Distribution Date.

Section 6.2 Treatment of SLM BankCo Common Stock and NewCo Common Stock.

(a) NewCo Common Stock Fund. The NewCo Thrift Plan will provide as of the Distribution Date: (i) for the establishment of a NewCo Common Stock fund; (ii) that such NewCo Common Stock fund shall receive and hold all shares of NewCo Common Stock to be distributed in the Distribution on behalf of NewCo Thrift Plan Beneficiaries and SLM BankCo Thrift Plan Beneficiaries; (iii) that, following the Distribution Date, contributions made by or on behalf of NewCo Thrift Plan Beneficiaries may be allocated to the NewCo Common Stock fund; (iv) that the SLM BankCo Thrift Plan Beneficiaries will be prohibited from increasing their holdings in the NewCo Common Stock fund; (v) that the SLM BankCo Thrift Plan Beneficiaries may elect to liquidate their holdings in the NewCo Common Stock fund and invest those monies in any other investment fund offered under the NewCo Thrift Plan; and (vi) that the SLM BankCo Thrift Plan Beneficiaries may elect to receive their holdings in the NewCo Thrift Plan in accordance with the distribution options provided under such plan to terminated employees. Additionally, NewCo shall cause the NewCo Thrift Plan to provide that the SLM BankCo Thrift Plan Beneficiaries shall participate in the NewCo Thrift Plan in respect of their accounts thereunder; provided, however, NewCo may in its discretion provide that the NewCo Common Stock fund shall no longer be offered as an investment alternative under the NewCo Thrift Plan.

(b) SLM BankCo Common Stock Fund. SLM BankCo shall amend the SLM BankCo Thrift Plan, on or prior to the Distribution Date, to provide that, following the Distribution: (i) the SLM BankCo Common Stock fund will hold the assets of the accounts of the NewCo Thrift Plan Beneficiaries invested in the SLM BankCo Common Stock fund; (ii) the NewCo Thrift Plan Beneficiaries will be prohibited from increasing their holdings in the SLM BankCo Common Stock fund; (iii) the NewCo Thrift Plan Beneficiaries may elect to liquidate their holdings in the SLM BankCo Common Stock fund and invest those monies in any other investment fund offered under the SLM BankCo Thrift Plan; and (iv) the NewCo Thrift Plan Beneficiaries may elect to receive their holdings in the SLM BankCo Thrift Plan in accordance with the distribution options available under such plan to terminated employees. SLM BankCo shall cause the SLM BankCo Thrift Plan to provide that NewCo Thrift Plan Beneficiaries shall participate in the SLM BankCo Thrift Plan in respect of their accounts thereunder; provided, however, SLM BankCo may in its discretion provide that the SLM BankCo Common Stock fund shall no longer be offered as an investment alternative under the SLM BankCo Thrift Plan.

Section 6.3 Transfer of Accounts. Effective as soon as practicable following the Distribution Date, SLM BankCo shall cause to be transferred from the trust under the SLM BankCo Thrift Plan to the trust under the NewCo Thrift Plan the aggregate amount that is credited to the accounts of the NewCo Thrift Plan Beneficiaries as of such date. The transfer shall, to the extent reasonably possible, be an in-kind transfer, subject to the reasonable consent of the trustee of the NewCo Thrift Plan trust and shall include the transfer of the aggregate assets held in the accounts relating to each NewCo Thrift Plan Beneficiary under the SLM BankCo

 

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Thrift Plan and any participant loan notes held under such plans. SLM BankCo shall cause the SLM BankCo Thrift Plan to allocate to the NewCo Thrift Plan a proportionate share of any forfeiture account under the SLM BankCo Thrift Plan.

Section 6.4 Supplemental 401(k) Plan. Effective prior to the Distribution Date, a member of the SLM BankCo Group shall assume responsibility for the Sallie Mae Supplemental 401(k) Savings Plan (the “Supplemental 401(k) Plan”), and a mirror plan (the “NewCo Supplemental 401(k) Plan”) will be established by a member of the NewCo Group. As of the Effective Time, the NewCo Supplemental 401(k) Plan will assume all liability under the Supplemental 401(k) Plan for benefits to NewCo Employees and Former NewCo Employees, including any notional investment accounts deemed invested in NewCo Common Stock or SLM BankCo Common Stock. The NewCo Supplemental 401(k) Plan will continue to honor any deferral elections and payment timing provisions in effect under the Supplemental 401(k) Plan for NewCo Employees and Former NewCo Employees.

Section 6.5 Deferred Compensation Plans. Effective prior to the Distribution Date, a member of the NewCo Group shall assume responsibility for the Sallie Mae Deferred Compensation Plan for Key Employees and the SLM Corporation Deferred Compensation Plan for Directors (collectively, the “Deferred Compensation Plans”), and mirror plans (the “SLM BankCo Deferred Compensation Plans”) will be established by a member of the SLM BankCo Group. As of the Effective Time, the SLM BankCo Deferred Compensation Plans will assume all liability under the Deferred Compensation Plans for benefits to SLM BankCo Employees, Former SLM BankCo Employees and SLM BankCo Directors, including any notional investment accounts deemed invested in SLM BankCo Common Stock or NewCo Common Stock. The SLM BankCo Deferred Compensation Plan will continue to honor any deferral elections and payment timing provisions in effect under the Deferred Compensation Plan for BankCo Employees, Former BankCo Employees and SLM BankCo Directors.

ARTICLE VII

WELFARE PLANS

Section 7.1 Establishment of NewCo Welfare Plans. Except as provided below, the members of the NewCo Group who had previously adopted a SLM BankCo Welfare Plan and were participating employers therein (“Participating NewCo Employers”) will, as of not later than the Effective Time, withdraw from such participation, and, effective as of the Effective Time, one or more of the Participating NewCo Employers will assume sponsorship, under newly established welfare plans, of the coverage and benefits which were offered under such plans to the NewCo Employees and the Former NewCo Employees (and their eligible spouses and dependents as the case may be) of the Participating NewCo Employers (collectively, the “NewCo Welfare Plan Participants”). Such coverage and benefits shall then be provided to the NewCo Welfare Plan Participants on an uninterrupted basis under the newly established NewCo Welfare Plans which shall contain substantially the same benefit provisions as in effect under the corresponding SLM BankCo Welfare Plan immediately prior to the Effective Time. Except as provided below, effective as of the Effective Time, liabilities relating to the NewCo Welfare Plan Participants shall be spun off from each SLM BankCo Welfare Plan and allocated to the corresponding new NewCo Welfare Plan.

 

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As a result of withdrawal from participation in the SLM BankCo Welfare Plans by the Participating NewCo Employers, the NewCo Welfare Plan Participants ceased to be eligible for coverage under the SLM BankCo Welfare Plans as of the Effective Time. NewCo Welfare Plan Participants shall not participate in any SLM BankCo Welfare Plans after the day prior to the Distribution Date, unless they shall become employed after such date by any member of the SLM BankCo Group that participates in such plans and meet the terms and conditions of participation thereunder. SLM BankCo Employees and Former SLM BankCo Employees shall not participate in any NewCo Welfare Plans, unless they shall become employed after the day prior to the Distribution Date by any member of the NewCo Group that participates in such plans and meet the terms and conditions of participation thereunder.

Section 7.2 Transitional Matters Under NewCo Welfare Plans.

(a) Treatment of Claims Incurred.

(i) Self-Insured Benefits. NewCo will assume and be responsible for the funding of payment for any unpaid covered claim and eligible expense:

(A) incurred by any NewCo Welfare Plan Participant prior to the Effective Time under a SLM BankCo Welfare Plan that is not described in section 7.2(a)(ii) below, to the extent such participant has coverage under such plan as, or through, an employee or former employee of a Participating NewCo Employer on the date such claim or expense is incurred; or

(B) incurred by any NewCo Employee or Former NewCo Employee prior to the Effective Time under a SLM BankCo Benefit Arrangement that is not described in section 7.2(a)(ii) below.

No member of the SLM BankCo Group shall be responsible for any liability with respect to any such claims or expenses.

(ii) Insured Benefits. With respect to benefits that, on or prior to the day before the Distribution Date, were provided for under the SLM BankCo Welfare Plans through the purchase of insurance, SLM BankCo shall cause the SLM BankCo Welfare Plans to fully perform, pay and discharge all claims of NewCo Welfare Plan Participants that were incurred prior to the Distribution Date.

(iii) Claims Incurred. For purposes of this Section 7.2(a), a claim or liability is deemed to be incurred (A) with respect to medical, dental, vision and/or prescription drug benefits, upon the rendering of health services giving rise to such claim or liability; (B) with respect to life insurance, accidental death and dismemberment and business travel accident insurance, upon the occurrence of the event giving rise to such claim or liability; (C) with respect to long-term disability benefits, upon the date of an individual’s disability, as determined by the disability benefit insurance carrier or claim administrator, giving rise to such claim or liability; and (D) with respect to a period of continuous

 

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hospitalization, upon the date of admission to the hospital, unless otherwise provided under the terms of the applicable SLM BankCo Welfare Plan or SLM BankCo Benefit Arrangement.

(b) Credit for Deductibles and Other Limits. With respect to each NewCo Welfare Plan Participant, the NewCo Welfare Plans will give credit in plan year 2014 for any amount paid, number of services obtained or visits provided under the comparable type SLM BankCo Welfare Plan by such NewCo Welfare Plan Participant in plan year 2014 toward deductibles, out-of-pocket maximums, limits on number of services or visits, or other similar limitations to the extent such amounts are taken into account under the comparable type SLM BankCo Welfare Plan. For purposes of any life-time maximum benefit limit payable to a NewCo Welfare Plan Participant under any NewCo Welfare Plan, the NewCo Welfare Plans will recognize any expenses paid or reimbursed by a SLM BankCo Welfare Plan with respect to such participant on or prior to the day before the Distribution Date to the same extent such expense payments or reimbursements would be recognized in respect of an active plan participant under that SLM BankCo Welfare Plan.

(c) COBRA. Effective as of the Effective Time, NewCo has assumed and will satisfy all requirements under COBRA with respect to all NewCo Employees and Former NewCo Employees and their qualified beneficiaries, including for individuals who are already receiving benefits as of such date under COBRA.

(d) Long-Term Care Insurance. Effective as of the Effective Time, any long-term care arrangements provided under a SLM BankCo Benefits Arrangement will be terminated, and NewCo shall assume responsibility for any employer obligations associated with long-term care coverage provided under a SLM BankCo Benefits Arrangement.

Section 7.3 Continuity of Benefits, Benefit Elections and Beneficiary Designations.

(a) Benefit Elections and Designations. As of the Distribution Date (or such other date provided for under subsection 7.3(b)), NewCo has caused the NewCo Welfare Plans to recognize and give effect to all elections and designations (including all coverage and contribution elections and beneficiary designations) made by each NewCo Welfare Plan Participant under, or with respect to, the corresponding SLM BankCo Welfare Plan for plan year 2014.

(b) Additional Details Regarding Flexible Spending Accounts. To the extent any NewCo Welfare Plan provides or constitutes a health care flexible spending account or dependent care flexible spending account (each a “NewCo FSA”), such NewCo Welfare Plan shall be deemed effective as of January 1, 2014 rather than the Effective Time. It is the intention of the Parties that all activity under a NewCo Welfare Plan Participant’s flexible spending account with SLM BankCo for plan year 2014 be treated instead as activity under the corresponding NewCo FSA. Accordingly, (i) any period of participation by a NewCo Welfare Plan Participant in a SLM BankCo flexible spending account during plan year 2014 (the “Participation Period”) will be deemed a period when the NewCo Welfare Plan Participant participated in the corresponding NewCo FSA; (ii) all expenses incurred during a Participation Period will be deemed incurred while the participant’s coverage was in effect under the corresponding NewCo FSA; and (iii) all elections and reimbursements made with respect to a

 

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Participation Period under a SLM BankCo flexible spending account will be deemed to have been made with respect to the corresponding NewCo FSA. As soon as practicable following the Effective Time, BankCo will transfer to NewCo the amount of employee contributions to healthcare flexible spending accounts and dependent care flexible spending accounts collected on behalf of NewCo Welfare Plan Participants as of the Effective Time, less the amount of flexible spending account benefits paid on behalf of NewCo Welfare Plan Participants as of the Effective Time (and if the amount of flexible spending account benefits paid on behalf of NewCo Welfare Plan Participants as of the Effective Time exceeds the amount of contributions collected from NewCo Welfare Plan Participants, NewCo shall make a payment to BankCo in amount equal to such deficit).

(c) Employer Non-elective Contributions. As of the Distribution Date, NewCo has caused any NewCo Welfare Plan that constitutes a cafeteria plan under Section 125 of the Code to recognize and give effect to all non-elective employer contributions payable and paid toward coverage of a NewCo Welfare Plan Participant under the corresponding SLM BankCo Welfare Plan that is a cafeteria plan under Section 125 of the Code for the applicable cafeteria plan year.

Section 7.4 Insurance Contracts. To the extent any SLM BankCo Welfare Plan is funded through the purchase of an insurance contract or is subject to any stop loss contract, SLM BankCo and NewCo will cooperate and use their commercially reasonable efforts to replicate such insurance contracts (except to the extent changes are required under applicable state insurance laws) and to maintain any pricing discounts or other preferential terms for both SLM BankCo and NewCo for a reasonable term. Neither Party shall be liable for failure to obtain such pricing discounts or other preferential terms for the other Party. Each Party shall be responsible for any additional premiums, charges or administrative fees that such Party may incur pursuant to this Section 7.5.

Section 7.5 Third-Party Vendors. Except as provided below, to the extent any SLM BankCo Welfare Plan is administered by a third-party vendor, SLM BankCo and NewCo will cooperate and use their commercially reasonable efforts to replicate any contract with such third-party vendor and to maintain any pricing discounts or other preferential terms for both SLM BankCo and NewCo for a reasonable term. Neither Party shall be liable for failure to obtain such pricing discounts or other preferential terms for the other Party. Each Party shall be responsible for any additional premiums, charges or administrative fees that such Party may incur pursuant to this Section 7.6.

Section 7.6 Claims Experience. Notwithstanding the foregoing, SLM BankCo and NewCo shall use commercially reasonable efforts to ensure that any claims experience under the SLM BankCo Welfare Plans attributable to NewCo Welfare Beneficiaries shall be available to the NewCo Welfare Plans, to the extent permitted by any applicable privacy protection laws or regulations or Privacy Contracts.

 

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ARTICLE VIII

BENEFIT ARRANGEMENTS

Except as otherwise provided under this Agreement, effective as of the Distribution Date, NewCo Employees and Former NewCo Employees are no longer eligible to participate in any SLM BankCo Benefit Arrangement.

ARTICLE IX

WORKERS’ COMPENSATION AND UNEMPLOYMENT COMPENSATION

Section 9.1 Workers’ Compensation. Effective as of the Distribution Date, NewCo shall have (and, to the extent it has not previously had such obligations, assume) the obligations for all claims and liabilities relating to workers’ compensation benefits for all NewCo Employees and Former NewCo Employees. Effective as of the Distribution Date, SLM BankCo shall have (and, to the extent it has not previously had such obligations, assume) the obligations for all claims and liabilities relating to workers’ compensation benefits for all SLM BankCo Employees and Former SLM BankCo Employees. NewCo and SLM BankCo shall use commercially reasonable efforts to provide that workers’ compensation insurance costs are not adversely affected for either of them by reason of the Distribution.

Section 9.2 Unemployment Compensation. Effective as of the Distribution Date, NewCo shall have (and, to the extent it has not previously had such obligations, assume) the obligations for all claims and liabilities relating to unemployment compensation benefits for all NewCo Employees, Former NewCo Employees, and Former SLM BankCo Employees. NewCo shall use commercially reasonable efforts to provide that unemployment insurance costs are not adversely affected by reason of the Distribution.

ARTICLE X

RETENTION, SEVERANCE AND OTHER MATTERS

Section 10.1 Retention Agreements.

(a) NewCo Obligations. Effective as of the Distribution Date, NewCo hereby assumes Existing SLM’s rights and obligations arising under the retention agreements described in Schedule 10.1(a) and agrees to honor the terms and conditions of those agreements applicable to NewCo as a successor under the terms of such agreements. Except for NewCo’s assumption of the retention agreements as described above, the terms of the retention agreements shall in all other respects be unaffected.

(b) SLM BankCo Obligations. SLM BankCo shall continue to be responsible for and remain obligated under the retention agreements described in Schedule 10.1(b) and agrees to honor the terms and conditions of those agreements.

(c) Additional Obligations. NewCo and SLM BankCo shall each be solely responsible for any other retention arrangements entered into by any member of the NewCo

 

29

Group or any member of the SLM BankCo Group, respectively, and that are not otherwise allocated by this Agreement to a member of either the SLM BankCo Group or the NewCo Group.

Section 10.2 Severance.

(a) Except as otherwise provided in this Agreement, immediately following the Distribution, SLM BankCo shall have no liability or obligation under any SLM BankCo severance plan or policy with respect to NewCo Employees or Former NewCo Employees. NewCo shall be responsible for paying severance benefits, in accordance with a severance plan or policy that it may establish in its discretion, to individuals who transfer from employment with a member of the SLM BankCo Group to employment with a member of the NewCo Group in connection with the Distribution and who are involuntarily terminated following the Distribution Date.

(b) Except as otherwise provided in this Agreement, effective after the Distribution Date, NewCo shall assume and shall be responsible for administering all payments and benefits under the applicable SLM BankCo severance policies or any termination agreements with Former NewCo Employees whose employment terminated prior to the Distribution Date for an eligible reason under such policies or in accordance with such agreements.

Section 10.3 Accrued Time Off. NewCo shall recognize and assume all liability for all vacation, holiday, sick leave, flex days, personal days and paid-time off with respect to NewCo Employees accrued prior to the Distribution Date, and NewCo shall credit each NewCo Employee with such accrual.

Section 10.4 Leaves of Absence. Employees of the Group on approved leave of absence as of the time immediately prior to the Distribution Date will be allocated to and assigned to be an employee of either the NewCo Group or the BankCo Group as of the Effective Time. NewCo will continue to apply the appropriate leave of absence policies applicable to inactive NewCo Employees who are on an approved leave of absence as of the Distribution Date and the terms of any such leave policy for such employees shall be honored by NewCo. Leaves of absence taken by NewCo Employees prior to the Distribution Date shall be deemed to have been taken as employees of a member of the NewCo Group.

Section 10.5 Director Programs. SLM BankCo shall retain responsibility for the payment of any fees payable in respect of service on the SLM BankCo board of directors that are payable but not yet paid as of the Distribution Date, and NewCo shall not have any responsibility for any such payments.

Section 10.6 Restrictive Covenants in Employment and Other Agreements.

(a) To the fullest extent permitted by the agreements described in this Section 10.7(a) and applicable law, SLM BankCo shall assign, or cause any member of the SLM BankCo Group to assign, to NewCo or a member of the NewCo Group, as designated by NewCo, all agreements containing restrictive covenants (including confidentiality and non-competition provisions) between a member of the SLM BankCo Group and a NewCo Employee or Former NewCo Employee, with such assignment effective as of the Effective Time. To the extent that

 

30

assignment of such agreements is not permitted, effective as of the Effective Time, each member of the NewCo Group shall be considered to be a successor to each member of the SLM BankCo Group for purposes of, and a third-party beneficiary with respect to, all agreements containing restrictive covenants (including confidentiality and non-competition provisions) between a member of the SLM BankCo Group and a NewCo Employee or Former NewCo Employee whom NewCo reasonably determines has substantial knowledge of the business activities of the NewCo Group, such that each member of the NewCo Group shall enjoy all the rights and benefits under such agreements (including rights and benefits as a third-party beneficiary), with respect to the business operations of the NewCo Group; provided, however, that in no event shall SLM BankCo be permitted to enforce such restrictive covenant agreements against NewCo Employees or Former NewCo Employees for action taken in their capacity as employees of a member of the NewCo Group.

(b) To the fullest extent permitted by the agreements described in this Section 10.7(b) and applicable law, NewCo shall assign, or cause any member of the NewCo Group to assign, to SLM BankCo or a member of the SLM BankCo Group, as designated by SLM BankCo, all agreements containing restrictive covenants (including confidentiality and non-competition provisions) between a member of the NewCo Group and a SLM BankCo Employee or Former SLM BankCo Employee, with such assignment effective as of the Effective Time. To the extent that assignment of such agreements is not permitted, effective as of the Effective Time, each member of the SLM BankCo Group shall be considered to be a successor to each member of the NewCo Group for purposes of, and a third-party beneficiary with respect to, all agreements containing restrictive covenants (including confidentiality and non-competition provisions) between a member of the NewCo Group and a SLM BankCo Employee or Former SLM BankCo Employee whom SLM BankCo reasonably determines has substantial knowledge of the business activities of the SLM BankCo Group, such that SLM BankCo and each member of the SLM BankCo Group shall enjoy all the rights and benefits under such agreements (including rights and benefits as a third-party beneficiary), with respect to the business operations of the SLM BankCo Group; provided, however, that in no event shall NewCo be permitted to enforce such restrictive covenant agreements against SLM BankCo Employees or Former SLM BankCo Employees for action taken in their capacity as employees of a member of the SLM BankCo Group.

ARTICLE XI

LEGACY LIABILITY

Section 11.1 Legacy Pension Plan. NewCo shall assume, and no member of the SLM BankCo Group shall have any further liability for or under, the Sallie Mae Cash Account Retirement Pension Plan liabilities (“Legacy Pension Liabilities”), and NewCo shall indemnify each member of the SLM BankCo Group, and the officers, directors, and employees of each member of the SLM BankCo Group, and hold them harmless as against the Legacy Pension Liabilities.

Section 11.2 Scholarships. SLM BankCo shall assume liability for providing previously awarded company-sponsored scholarship benefits to SLM BankCo Employees, Former BankCo Employees and their children, as applicable, and NewCo shall assume liability for providing previously awarded company-sponsored scholarship benefits to NewCo Employees, Former NewCo Employees and their children, as applicable.

 

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ARTICLE XII

GENERAL PROVISIONS

Section 12.1 Preservation of Rights to Amend. The rights of each member of the SLM BankCo Group and each member of the NewCo Group to amend, waive, or terminate any plan, arrangement, agreement, program, or policy referred to herein shall not be limited in any way by this Agreement.

Section 12.2 Confidentiality. Each Party agrees that any information conveyed or otherwise received by or on behalf of a Party in conjunction herewith that is not otherwise public through no fault of such Party is confidential and is subject to the terms of the confidentiality provisions set forth in the Separation Agreement.

Section 12.3 Administrative Complaints/Litigation. Except as otherwise provided in this Agreement, on and after the Distribution Date, NewCo shall assume, and be solely liable for, the handling, administration, investigation and defense of actions, including ERISA, occupational safety and health, employment standards, union grievances, wrongful dismissal, discrimination or human rights and unemployment compensation claims asserted at any time against SLM BankCo or any member of the SLM BankCo Group by any NewCo Employee or Former NewCo Employee (including any dependent or beneficiary of any such Employee) or any other person, to the extent such actions or claims arise out of or relate to employment or the provision of services (whether as an employee, contractor, consultant or otherwise) to or with respect to the business activities of any member of the NewCo Group, whether or not such employment or services were performed before or after the Distribution. To the extent that any legal action relates to a putative or certified class of plaintiffs, which includes both SLM BankCo Employees (or Former SLM BankCo Employees) and NewCo Employees (or Former NewCo Employees) and such action involves employment or benefit plan related claims, reasonable costs and expenses incurred by the Parties in responding to such legal action shall be allocated among the Parties equitably in proportion to a reasonable assessment of the relative proportion of employees included in or represented by the putative or certified plaintiff class. The procedures contained in the indemnification and related litigation cooperation provisions of the Separation Agreement shall apply with respect to each Party’s indemnification obligations under this Section 11.3.

Section 12.4 Reimbursement and Indemnification. SLM BankCo and NewCo hereto agrees to reimburse the other Party, within 60 days of receipt from the other Party of reasonable verification, for all costs and expenses which the other Party may incur on its behalf as a result of any of the respective SLM BankCo and NewCo Welfare Plans, Thrift Plan and Benefit Arrangements and, as contemplated by Section 10.2, any termination or severance payments or benefits. All liabilities retained, assumed or indemnified against by NewCo pursuant to this Agreement, and all liabilities retained, assumed or indemnified against by SLM BankCo pursuant to this Agreement, shall in each case be subject to the indemnification provisions of the Separation Agreement. Notwithstanding anything to the contrary, (i) no provision of this Agreement shall require any member of the NewCo Group to pay or reimburse to any member of

 

32

the SLM BankCo Group any benefit-related cost item that a member of the NewCo Group has previously paid or reimbursed to any member of the SLM BankCo Group; and (ii) no provision of this Agreement shall require any member of the SLM BankCo Group to pay or reimburse to any member of the NewCo Group any benefit-related cost item that a member of the SLM BankCo Group has previously paid or reimbursed to any member of the NewCo Group.

Section 12.5 Costs of Compliance with Agreement. Except as otherwise provided in this Agreement or any other Ancillary Agreement, each Party shall pay its own expenses in fulfilling its obligations under this Agreement.

Section 12.6 Fiduciary Matters. SLM BankCo and NewCo each acknowledge that actions required to be taken pursuant to this Agreement may be subject to fiduciary duties or standards of conduct under ERISA or other applicable law, and no Party shall be deemed to be in violation of this Agreement if it fails to comply with any provisions hereof based upon its good faith determination (as supported by advice from counsel experienced in such matters) that to do so would violate such a fiduciary duty or standard. Each Party shall be responsible for taking such actions as are deemed necessary and appropriate to comply with its own fiduciary responsibilities and shall fully release and indemnify the other Party for any liabilities caused by the failure to satisfy any such responsibility.

Section 12.7 Entire Agreement. This Agreement, together with the documents referenced herein (including the Separation Agreement, the Ancillary Agreements and the plans and agreements referenced herein), constitutes the entire agreement and understanding among the Parties with respect to the subject matter hereof and supersedes all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof. To the extent any provision of this Agreement conflicts with the provisions of the Separation Agreement, the provisions of this Agreement shall be deemed to control with respect to the subject matter hereof.

Section 12.8 Binding Effect; No Third-Party Beneficiaries; Assignment. This Agreement shall inure to the benefit of and be binding upon the Parties and their respective successors and permitted assigns. This Agreement is solely for the benefit of the Parties and should not be deemed to confer upon any third parties any remedy, claim, liability, reimbursement, cause of action or other right in excess of those existing without reference to this Agreement. Nothing in this Agreement is intended to amend any employee benefit plan or affect the applicable plan sponsor’s right to amend or terminate any employee benefit plan pursuant to the terms of such plan. Except as otherwise provided in Section 10.1(a), the provisions of this Agreement are solely for the benefit of the Parties, and no current or former Employee, officer, director or independent contractor or any other individual associated therewith shall be regarded for any purpose as a third-party beneficiary of this Agreement. This Agreement may not be assigned by any Party, except with the prior written consent of the other Parties.

Section 12.9 Amendment; Waivers. No change or amendment may be made to this Agreement except by an instrument in writing signed on behalf of each of the Parties. Any Party may, at any time, (i) extend the time for the performance of any of the obligations or other acts of another Party, (ii) waive any inaccuracies in the representations and warranties of another Party contained herein or in any document delivered pursuant hereto, and (iii) waive compliance by another Party with any of the agreements, covenants or conditions contained herein. Any

 

33

such extension or waiver shall be valid only if set forth in an instrument in writing signed by the Party to be bound thereby. No failure or delay on the part of any Party in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty, covenant or agreement contained herein, nor shall any single or partial exercise of any such right preclude other or further exercises thereof or of any other right.

Section 12.10 Remedies Cumulative. All rights and remedies existing under this Agreement or the Schedules attached hereto are cumulative to, and not exclusive of, any rights or remedies otherwise available.

Section 12.11 Notices. Unless otherwise expressly provided herein, all notices, claims, certificates, requests, demands and other communications hereunder shall be in writing and shall be deemed to be duly given: (i) when personally delivered, (ii) if mailed by registered or certified mail, postage prepaid, return receipt requested, on the date the return receipt is executed or the letter is refused by the addressee or its agent, (iii) if sent by overnight courier which delivers only upon the executed receipt of the addressee, on the date the receipt acknowledgment is executed or refused by the addressee or its agent, or (iv) if sent by facsimile or electronic mail, on the date confirmation of transmission is received (provided that a copy of any notice delivered pursuant to this clause (iv) shall also be sent pursuant to clause (i), (ii) or (iii)), addressed to the attention of the addressee’s General Counsel at the address of its principal executive office or to such other address or facsimile number for a Party as it shall have specified by like notice.

Section 12.12 Counterparts. This Agreement may be executed in multiple counterparts, each of which when executed shall be deemed to be an original but all of which together shall constitute one and the same agreement.

Section 12.13 Severability. If any term or other provision of this Agreement or the Schedules attached hereto is determined by a nonappealable decision by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any Party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the court, administrative agency or arbitrator shall interpret this Agreement so as to affect the original intent of the Parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible. If any sentence in this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable.

Section 12.14 Governing Law. To the extent not preempted by applicable federal law, this Agreement shall be governed by, and construed and enforced in accordance with, the substantive laws of the State of Delaware, without regard to any conflicts of law provisions thereof that would result in the application of the laws of any other jurisdiction.

Section 12.15 Performance. Each of SLM BankCo and NewCo shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by any member of the SLM BankCo Group and any member of the

 

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NewCo Group, respectively. The Parties each agree to take such further actions and to execute, acknowledge and deliver, or to cause to be executed, acknowledged and delivered, all such further documents as are reasonably requested by the other for carrying out the purposes of this Agreement or of any document delivered pursuant to this Agreement.

Section 12.16 Construction. This Agreement shall be construed as if jointly drafted by the Parties and no rule of construction or strict interpretation shall be applied against any Party.

Section 12.17 Effect if Distribution Does Not Occur. Notwithstanding anything in this Agreement to the contrary, if the Separation Agreement is terminated prior to the Distribution Date, this Agreement shall be of no further force and effect.

IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed in their names by a duly authorized officer as of the date first written above.

 

SLM CORPORATION
By:  

 

  Name:  
  Title:  
NEW BLC CORPORATION
By:  

 

  Name:  
  Title:  
NEW CORPORATION
By:  

 

  Name:  
  Title:  

 

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Exhibit 21.1

Exhibit 21.1

SUBSIDIARIES OF

NEW CORPORATION

 

 

Entity

    Jurisdiction

Navient LLC

    Delaware

Sallie Mae, Inc.

    Delaware

SLM Investment Corporation

    Delaware

Southwest Student Services Corporation

    Delaware

HICA Holding, Inc.

    South Dakota

SLM Education Credit Finance Corporation

    Delaware

SLM Education Credit Funding LLC

    Delaware

SLM National Funding LLC

    Delaware
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 by its brand name Navient, and a related internal corporate reorganization. Navient is the company we formed to hold the assets and liabilities of our education loan management business.

As a result of the separation, Navient 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 Navient 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 Navient 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 December 31, 2013, aggregated $18.3 billion.

As a result of the foregoing, you will become a stockholder of two publicly-traded companies: SLM BankCo and Navient. 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 Navient common stock. You do not need to take any action to receive the shares of SLM BankCo or Navient 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 Navient.

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

Table of Contents

LOGO

                    , 2014

Dear Future Navient Stockholder:

It is a great pleasure to welcome you as a future stockholder of New Corporation, which we refer to by its brand name “Navient”. Navient will soon begin independent operation as the largest education loan management company. Navient 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.

Navient’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 Navient. Navient has applied to have its common stock authorized for listing on the NASDAQ Global Select Market under the symbol “NAVI.”

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

I encourage you to learn more about Navient 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 Navient.

 

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 FEBRUARY 28, 2014

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 we refer to herein by its brand name Navient. Navient 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 Navient 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 Navient 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 common stock and (ii) Existing SLM will become a subsidiary of Navient 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 December 31, 2013, aggregated $18.3 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 Navient common stock. We expect the shares of Navient common stock to be distributed to you on                     , 2014. We refer to the date of the distribution of the Navient common stock as the “distribution date.” Navient has applied to have its common stock authorized for listing on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “NAVI.”

You do not need to take any action to receive your shares of SLM BankCo common stock and Navient 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 Navient 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

      48   

Capitalization

      49   

Unaudited Pro Forma Condensed Consolidated Financial Statements

      50   

Selected Historical Consolidated Financial Data

      58   

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

      60   

Business

      122   

Management

      137   

Compensation Discussion and Analysis

      152   

Executive Compensation

      169   

Certain Relationships and Related Party Transactions

      180   

Material U.S. Federal Income Tax Consequences

      189   

Description of Material Indebtedness

      192   

Ownership of Common Stock By Certain Beneficial Owners and Management

      195   

Description of Navient’s Capital Stock

      197   

Where You Can Find More Information

      201   

Index to Financial Statements

      F-1   

Appendix A Glossary

      A-1   

Appendix B Description of Federal Family Education Loan Program

      B-1   

 

i

Table of Contents

Presentation of Information

Except as otherwise indicated or unless the context otherwise requires, the information included in this information statement about Navient 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:

 

  •  

“Navient” 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 Navient and change its name to “Navient LLC.”

 

  •  

Navient’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 Navient in connection with the internal corporate reorganization.

 

  •  

Navient historical information on a “pro forma basis” refers to Navient’s businesses, net income, assets and liabilities, as adjusted to give 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. Following 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

Navient 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 Navient 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. Navient’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 Navient’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 Navient’s business and financial position, you should carefully review this entire information statement.

Explanatory Note

Due to the relative significance of Navient to Existing SLM, among other factors, for financial reporting purposes Navient 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 Navient.

When we refer in this information statement to Navient’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 Navient in connection with the separation and the distribution.

Navient

Navient 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 December 31, 2013, approximately 85 percent of the FFELP Loans and 60 percent of the Private Education Loans held by Navient were funded to term with non-recourse, long-term securitization debt through the use of securitization trusts.

Navient 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. Navient will also be one of four large servicers to ED under its Direct Student Loan Program, and will provide collection services to ED. Navient 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 Navient’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 December 31, 2013, on a pro forma basis, Navient’s principal assets consisted of:

 

  •  

$103.2 billion in FFELP Loans, which yield an average of 2.05 percent annually on a “Core Earnings” basis and have a weighted average life of 7.6 years;

 

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$31 billion in Private Education Loans, which yield an average of 6.31 percent annually on a “Core Earnings” basis and have a weighted average life of 7.1 years;

 

  •  

$6.9 billion of other interest-earning assets, including securitization trust restricted cash;

 

  •  

a leading student loan servicing platform that services loans for more than 12 million FFELP Loan, DSLP loan and Private Education Loan customers (including cosigners), including 5.7 million customer accounts serviced under Navient’s contract with ED; and

 

  •  

a leading student loan contingent collection platform with an outstanding inventory of contingent collections receivables of approximately $16.2 billion, of which approximately $13.5 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 Navient and retain all of its liabilities and obligations, including as obligor on its $18.3 billion of unsecured public debt outstanding as of December 31, 2013. Existing SLM also is party to derivative contracts on which it had a net liability of $794 million as of December 31, 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 Navient common stock.

In 2013, Navient’s business generated, on a pro forma basis, net income and “Core Earnings” of $1,369 million and $1,238 million, respectively. See “Unaudited Pro Forma Condensed Consolidated Financial Statements.” Navient provides “Core Earnings” because its management evaluates the performance of each of Navient’s operating segments based on “Core Earnings” performance measures. For Navient’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 15—Segment Reporting” to the audited consolidated financial statements included elsewhere in this information statement.

Navient’s Strengths

Navient 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. Navient 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. Navient’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.

Navient 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 Navient will continue as the largest participant in this market. Navient 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. Navient 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. Navient will also own the largest portfolio of Private Education Loans, which bear the full credit risk of the borrower and cosigner. Navient expects that cash flows from its FFELP Loan and Private Education Loan portfolios will significantly exceed future debt service obligations. Navient 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 Navient. Navient will service and collect on DSLP loans for ED, on FFELP Loans for guarantor and other clients and on its own $103.2 billion portfolio of FFELP Loans and $31.0 billion portfolio of Private Education Loans (on a pro forma basis, as of December 31, 2013). These platforms are robust and scalable and will enable Navient to add additional accounts at low cost.

Strong management team with extensive industry experience. Navient’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.”

Navient’s Strategies

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

Expanding its leading education loan portfolio manager, servicer and collection business. Navient 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 Navient 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. Navient 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. Navient 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. Navient 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 $18.3 billion of unsecured public debt outstanding as of December 31, 2013.

Efficiently managing expense base. Navient 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, Navient will be a publicly-traded company listed on NASDAQ. Navient expects that its significant loan portfolio, supplemented by its servicing business, will afford it the opportunity to access the debt markets when appropriate. Navient 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 Navient’s Business and the Separation and Distribution

An investment in Navient 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 Navient’s Business

 

  •  

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

 

  •  

Navient 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.

 

  •  

Navient’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 Navient’s business, financial condition or results of operations.

 

  •  

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

 

  •  

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

 

  •  

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

 

  •  

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

 

  •  

Navient’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 Navient’s Floor Income to decline.

 

  •  

Failure by Navient’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 Navient’s business, financial condition or results of operations.

 

  •  

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

 

  •  

Adverse market conditions or an inability to effectively manage liquidity risk could negatively impact Navient’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 Navient could disrupt its business, produce significant losses, result in regulatory action or damage its reputation.

 

  •  

Navient 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 Navient’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 Navient provides to the government, which could materially and adversely affect Navient’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 Navient’s profitability, results of operations, financial condition, cash flows or future business prospects.

 

  •  

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

Risks Relating to the Separation and Distribution

 

  •  

Navient’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.

 

  •  

Navient 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, Navient and SLM BankCo will undertake the division of a shared information technology platform, which may be disruptive to Navient’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 Navient common stock on the basis of one share of Navient 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 has formed or will form the following three new companies:

 

  •  

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

 

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

 

  •  

a limited liability company wholly owned by SLM BankCo, which 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 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 become a limited liability company wholly owned by SLM BankCo named “    , 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 Navient to SLM BankCo. In addition, SLM BankCo will retain an additional $578 million in cash, on a pro forma basis as of December 31, 2013, 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 Navient. Existing SLM’s liabilities included, as of December 31, 2013, its outstanding unsecured public debt of $18.3 billion and derivative contracts with a net liability of $794 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 Navient common stock, on the basis of one share of Navient 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.”

Navient’s Post-Separation Relationship with SLM BankCo

Navient 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, Navient 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 sublease agreement. These agreements will provide for the allocation between Navient 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 Navient 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 Navient 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,

 

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including the 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, Navient 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 until December 31, 2018. 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 Navient 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.

 

  •  

Navient expects that its future cash flows will significantly exceed future debt service obligations, allowing Navient 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 Navient 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.

 

  •  

Navient 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.

 

  •  

Navient will continue to be subject to CFPB enforcement, supervisory and examination authority. As a FFELP loan servicer, Navient 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, Navient will also continue to be subject to examination by the FFIEC. Although Navient will not be subject to direct regulatory oversight by the FDIC, certain subsidiaries of Navient 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 Navient 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 Navient 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 Navient 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 Navient 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 Navient, which will be completed immediately prior to the distribution, Navient will have no operations. The address of Navient’s principal executive offices is 300 Continental Drive, Newark, Delaware 19713. Navient’s telephone number is (302) 283-8000.

Since February 25, 2014, Navient has maintained an Internet site at www.navient.com. Navient’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 Navient 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 Navient’s securities. The information contained in this information statement is believed by Navient 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 Navient 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 Navient and why is Sallie Mae separating Navient’s business and distributing Navient’s stock?   

Navient 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 Navient and the distribution of shares of Navient common stock are intended to provide you with equity investments in two distinct companies—SLM BankCo and Navient—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 Navient 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 Navient.
How will the separation of Navient from Sallie Mae work?   

The separation will be preceded by an internal corporate reorganization, which is a necessary first step to separate 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 Navient, 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 Navient 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 Navient 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 Navient common stock in the distribution. The separation and distribution are subject to the conditions described in this information statement.

 

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Apart from the separation and distribution of Navient, 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) of the DGCL, 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 Navient 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?    Holders of Existing SLM common stock as of the record date will not be required to take any action to receive shares of Navient 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 Navient 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 Navient common stock be issued?    You will receive shares of Navient 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 Navient 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 Navient 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 Navient 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 Navient common stock you receive will be distributed to a new Navient 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 Navient 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 Navient 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 Navient common stock you receive in the distribution will be automatically enrolled in the Navient dividend reinvestment plan sponsored by Computershare Trust Company, N.A. (Navient’s transfer agent and registrar), unless you notify Computershare Trust Company, N.A. that you do not want to reinvest any Navient cash dividends in additional shares of Navient common stock. For contact information for Computershare Trust Company, N.A., see “Description of Navient’s Capital Stock—Transfer Agent and Registrar.”
How many shares of Navient common stock will I receive in the distribution?    You will receive one share of Navient 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 Navient 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 Navient 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 Navient 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 and distribution will be met.

 

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Can Existing SLM decide to cancel the distribution of Navient 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 Navient 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 Navient. Existing SLM’s liabilities included, as of December 31, 2013, its outstanding unsecured public debt of approximately $18.3 billion in the form of senior unsecured notes and medium-term notes and derivative contracts on which it had a net liability of $794 million. Existing SLM is also the guarantor of its subsidiaries under a secured borrowing facility.

 

Approximately 85 percent of Navient’s FFELP Loan portfolio and 60 percent of Navient’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 Navient. Nevertheless, Navient currently consolidates the financing trusts that have issued these asset-backed securities. As of December 31, 2013, Navient had approximately $91 billion of FFELP Loan securitization debt and $19 billion of Private Education Loan securitization debt.

 

In addition, Navient has various secured borrowing facilities that it uses to finance its FFELP Loans, as well as a facility that was used to fund the call and redemption of a Private Education Loan trust in August 2013. As of December 31, 2013, Navient had $10.0 billion and $843 million outstanding under these facilities, respectively. For a more detailed discussion of Navient’s indebtedness, see “Description of Material Indebtedness.”

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 Navient common stock distributed pursuant to the distribution. Shares that trade in the “ex-distribution” market will trade without an entitlement to shares of Navient 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 Navient common stock pursuant to the distribution.

 

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Where will I be able to trade shares of Navient common stock?    Navient has applied to list its common stock on the NASDAQ Global Select Market under the symbol “NAVI.” Navient 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 Navient 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 Navient common stock up to and through the distribution date, but your transaction will not settle until after the distribution date. Navient 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 Navient 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 Navient 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, Navient 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 Navient 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 Navient 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 Navient 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 Navient plan to pay dividends?    Navient 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 Navient 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 Navient common stock?   

The distribution agent, transfer agent and registrar for the Navient 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 Navient?    Before the distribution, if you have any questions relating to Navient 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, Navient stockholders who have any questions relating to Navient should contact Navient at:
  

New Corporation

Investor Relations

 

 

Tel:                         

www.                         .com

   The Navient investor website is operational as of February 25, 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 Navient 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, Navient.

 

  •  

“SLM BankCo” refers to New BLC Corporation, a newly-formed Delaware corporation that (a) is currently a subsidiary of Existing SLM and (b) as part of 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 Navient common stock in the distribution.

 

  •  

“Navient” is the brand name for 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 common stockholders pursuant to the distribution. Navient 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 internal 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 Navient.

 

  •  

“Private ServiceCo” refers to SMB Servicing Company, Inc., a Delaware corporation formed to hold the private education loan servicing 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 Navient.

 

  •  

“Unsecured Debt” refers to Existing SLM’s unsecured public indebtedness of $18.3 billion outstanding as of December 31, 2013, consisting of the senior notes and medium term notes described in the section entitled “Description of Material Indebtedness.” After the internal corporate reorganization, the Unsecured Debt will remain the obligation of Existing SLM, which will be a subsidiary of Navient.

 

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  •  

“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 substantially identical 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 Navient and Navient’s common stock. Any of the following risks could materially and adversely affect Navient’s results of operations or financial condition. The risk factors generally have been separated into three groups: risks related to Navient’s business, risks related to the separation, and risks related to Navient’s common stock.

Risks Related to Navient’s Business

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

Navient’s business will be influenced by economic conditions. Economic growth in the United States remains slow and uneven. Navient’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 Navient’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 7.4 percent in 2013. 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. If the type and amount of federal funds available to refinance existing education loans increases, the repayment rates of our existing loans could be materially and adversely effected.

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 Navient’s business, financial condition and results of operations and limit funding options, including Navient’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. Navient 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 Navient’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 year ended December 31, 2013, Navient’s FFELP Loan portfolio declined by approximately $21.0 billion, or 17 percent, $12 billion of which was attributed to the sale of Residual Interests in securitization trusts, and Navient’s intercompany FFELP Loan servicing revenue declined by $140 million, or 21 percent, compared to the prior year. If Navient 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, Navient’s consolidated revenue and operating income will continue to decrease which could materially and adversely impact Navient’s earnings.

Navient’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

 

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could make financing more expensive or unavailable to Navient include, but are not limited to, financial losses, events that have an adverse impact on Navient’s reputation, changes in the activities of Navient’s business partners, events that have an adverse impact on the financial services industry generally, counterparty availability, changes affecting Navient’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, Navient’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 or limit our access to the capital markets.

Following the internal corporate reorganization and the separation and distribution, Existing SLM will be a wholly owned subsidiary of Navient. Existing SLM has unsecured debt that totaled, as of December 31, 2013, approximately $18.3 billion. In connection with Existing SLM’s announcement in May 2013 of the proposed separation and distribution of Navient, three credit rating agencies took negative actions with regard to Existing SLM’s long-term unsecured debt ratings. Fitch Ratings, Inc. (“Fitch”) lowered its senior unsecured long-term debt rating one notch to BB+, one notch below its investment grade, and placed that rating on negative watch. Moody’s Investors Services, Inc. (“Moody’s”) and Standard & Poor’s Ratings Services LLC (“S&P”) placed their ratings on review and watch, respectively, for possible downgrade. Moody’s current rating is Ba1, one notch below its investment grade, and S&P’s rating is BBB-, its lowest investment grade. Fitch and S&P indicated that if the separation and distribution occurs as planned, they expect to further lower their ratings by one notch and up to two notches, respectively. As a result of Fitch’s action, two of the three credit rating agencies now rate Existing SLM’s long term unsecured debt at below investment grade such that Existing SLM is no longer considered an investment grade issuer. Whereas Existing SLM had previously been included in the Investment Grade Index, it is now included in the High Yield Index. This has resulted in a higher cost of funds for Existing SLM, and its senior unsecured debt to trade with greater volatility.

The negative actions taken by the credit rating agencies were based on concerns that the separation and distribution will have a negative impact on the holders of Existing SLM senior unsecured debt. According to their ratings reports, these concerns primarily focus on Navient’s lack of future Private Student Loan originations and related servicing income, the loss of access to the earnings, cash flow, equity and potential market value of Sallie Mae Bank, the run-off of the FFELP Loan portfolio and strategic uncertainty as to the source of incremental earnings and cash flow to replace that in run-off, and an expected increase in Existing SLM’s cost of accessing the unsecured debt markets, including for refinancing purposes.

We utilize the unsecured debt markets to help fund our business and refinance outstanding debt. The amount, type and cost of our funding directly affects the cost of operating our business and growing our assets and is dependent upon outside factors, including our credit rating from ratings agencies. There can be no assurance that Existing SLM’s credit ratings will not be reduced further, and Fitch and Moody’s have indicated that upon completion of the separation and distribution they presently intend to reduce their ratings. A further reduction in the credit ratings of Existing SLM’s senior unsecured debt could adversely affect Navient’s liquidity, increase its borrowing costs, limit its access to the capital markets and place incremental pressure on its net interest income. We may also face additional challenges in the future, including more limited capital resources to invest in or expand our businesses.

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

Net interest income will be the primary source of cash flow generated by Navient’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,

 

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but Navient’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 Navient’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 Navient’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 Navient’s control. In these circumstances, Navient’s earnings could be materially adversely affected.

Higher than expected prepayments of loans could reduce servicing revenues or reduce or delay payments Navient 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 Navient’s control, including repayment through loan consolidation programs. When education loans contained within a securitization trust are prepaid, the fees Navient earns as servicer decrease and the value of any residual interest Navient 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 Navient’s cash flows from servicing and interest income as well as its net interest margin, which could materially adversely affect Navient’s liquidity and income.

Navient’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.

Navient 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, Navient’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, Navient’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 Navient entered into the related derivative contracts. As a result, there can be no assurance that hedging activities using derivatives will effectively manage Navient’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.

Navient’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. Navient’s Floor Income contracts and some of the basis swaps it uses to manage earnings variability caused by having

 

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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 Navient’s statement of income. A decline in the fair value of these derivatives could have a material adverse effect on Navient’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 or clearinghouse owes Navient and therefore exists for derivatives with a positive fair value. At December 31, 2013, Existing SLM had a net positive exposure (derivative gain positions less collateral posted by counterparties) related to derivatives of $83 million, excluding securitization trusts discussed below. If a counterparty or clearinghouse fails to perform its obligations, Navient could, depending on the type of counterparty arrangement, experience a loss of liquidity or an economic loss. In addition, Navient might not be able to cost effectively replace the derivative position depending on the type of derivative and the current economic environment.

Navient’s securitization trusts, which it is required to consolidate on its balance sheet, had $10.7 billion of Euro and British Pound Sterling denominated bonds outstanding as of December 31, 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 $12.8 billion of interest rate swaps which are primarily used to convert Prime rate payments received on securitized loans to LIBOR paid on the bonds. At December 31, 2013, the net positive exposure on swaps in securitization trusts was $968 million. A failure by a swap counterparty to perform its obligations could, if the swap has a positive fair value to Navient, materially and adversely affect Navient’s earnings.

High or increasing interest rate environments may cause Navient’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. Navient 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, Navient will continue to earn interest on the loan at the fixed borrower rate while the floating rate interest on Navient 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, Navient may earn Floor Income for an extended period of time; for those loans where the borrower interest rate is reset annually on July 1, Navient 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 December 31, 2013, approximately $56.8 billion of Navient’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. Navient 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 December 31, 2013, approximately $31.7 billion (56 percent) of Navient’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 $25.1 billion of FFELP Loans not hedged with Floor Income contracts, which will compress Navient’s interest margins and depress its earnings.

 

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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 Navient’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 Navient, particularly Private Education Loans, could adversely affect Navient’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 for loans disbursed and, in limited circumstances, 100 percent of the loan’s principal and accrued interest. Nevertheless, Navient 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 Navient to comply with HEA and related regulations.

Navient bears the full credit exposure on Private Education Loans. For the year ended December 31, 2013, on a pro forma basis, the annualized charge-off rate for Navient’s Private Education Loans (as a percentage of loans in repayment) was 3.1 percent. Delinquencies are an important indicator of the potential future credit performance for Private Education Loans. Navient’s delinquencies on a pro forma basis, as a percentage of Private Education Loans in repayment, were 9.4 percent at December 31, 2013.

The evaluation of Navient’s allowance for loan losses is inherently subjective, as it requires material estimates that may be subject to significant changes. As of December 31, 2013, Navient’s allowance for FFELP Loan and Private Education Loan losses, on a pro forma basis, was approximately $113 million and $2.0 billion, respectively. During the year ended December 31, 2013, Navient recognized provisions for FFELP Loan and Private Education Loan losses, on a pro forma basis, of $48 million and $722 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 Navient’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 Navient’s estimate of the allowance for loan losses and the related provision for loan losses in Navient’s statements of income and as a result adversely affect Navient’s results of operations.

 

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

Navient must effectively manage the liquidity risk to which it is exposed. Navient 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. Navient’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 Navient undertakes and, potentially, offerings of debt and equity securities. Navient 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 Navient could disrupt its business, cause significant losses, result in regulatory action or damage its reputation.

A failure of Navient’s operating systems or infrastructure could disrupt its business. Navient’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 Navient’s processing demands and loan portfolios change, both in volume and in terms and conditions, Navient’s ability to develop and maintain its operating systems and infrastructure will become increasingly challenging. There is no assurance that Navient will adequately or efficiently develop, maintain or acquire access to such systems and infrastructure.

The servicing, financial, accounting, data processing and other operating systems and facilities that support Navient’s business may fail to operate properly or become disabled as a result of events that are beyond Navient’s control, adversely affecting its ability to timely process transactions. Any such failure could adversely affect Navient’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 Navient 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 Navient or third parties with which it conducts business. Notwithstanding efforts to maintain business continuity, a disruptive event impacting Navient’s processing locations could adversely affect its business, financial condition and results of operations.

Navient 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 Navient’s business.

Navient’s operations rely on the secure processing, storage and transmission of personal, confidential and other information in its computer systems and networks. Although Navient 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 Navient’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 Navient’s or its customers’ confidential, proprietary and other information, or otherwise disrupt Navient’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 Navient 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.

 

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If one or more of such events occur, personal, confidential and other information processed and stored in, and transmitted through, Navient’s computer systems and networks could be jeopardized or could cause interruptions or malfunctions in Navient’s operations that could result in significant losses or reputational damage. Navient routinely transmits and receives personal, confidential and proprietary information, some of it through third parties. Navient 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, Navient 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, Navient’s business, financial condition or results of operations could be significantly and adversely affected.

Navient 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 Navient’s business or provide its competitors with an opportunity to enhance their position at Navient’s expense.

Navient will depend on third parties for a wide array of services, systems and information technology applications. Third-party vendors are significantly involved in aspects of Navient’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 Navient’s payment services businesses. Navient will also utilize third-party debt collectors in the collection of defaulted Private Education Loans. 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 impact Navient’s business by adversely affecting its ability to process customers’ transactions in a timely and accurate manner, otherwise hampering Navient’s ability to serve its customers, or subjecting Navient 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 Navient’s networks and services and the quality of its brands, which could materially adversely affect Navient’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 Navient provides to the government, which could materially and adversely affect Navient’s business strategy or future business prospects.

Navient 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:

 

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The Bipartisan Budget Act enacted on December 26, 2013, includes several provisions that will have or could have an effect on our business. First, the Act reduced the amount paid to guaranty agencies for defaulted FFELP Loans rehabilitated under Section 428F of the HEA, beginning on July 1, 2014. In addition, the Budget Act eliminated funding for the direct loan servicing performed by not-for-profit servicers. The Budget Act requires that all servicing funding be provided through the annual appropriations process which is subject to certain limitations. Although the payments for our DSLP servicing contract is already funded from annual appropriations, the requirement to fund all servicing from the limited appropriated funding could have an effect on our future business in ways we cannot predict at this time.

 

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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 Navient’s cash flows from servicing and interest income as well as its net interest margin.

It is possible that the Administration and Congress in the future 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 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 Navient provides. Navient 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 Navient 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 Navient’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 Navient does not effectively align its cost structure with its business operations, its results of operations and financial condition could be materially adversely affected.

Navient 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 Navient’s FFELP Loan portfolio over the next approximately 20 years. Navient 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. Navient’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 Navient 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, Navient may fail to implement, or be unable to achieve, necessary cost savings commensurate with its business and prospects. In either case, Navient’s business, results of operations and financial condition could be adversely affected.

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

The preparation of Navient’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 Navient’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 Navient 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.

 

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

Navient’s strategy includes making opportunistic acquisitions of, or material investments in, complementary businesses, products and portfolios of loans. Navient may not be able to identify suitable opportunities and, if not, this strategy could fail. Navient may not be able to obtain financing necessary to allow Navient 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 Navient’s financial condition; if the purchase price is paid with Navient stock, it could be dilutive to stockholders. Navient 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 Navient’s financial condition.

Navient may not be able to successfully integrate personnel, operations, businesses, products, or technologies of an acquisition. There may be additional risks if Navient 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. Navient may not have or be able to maintain the expertise needed to manage the new business. The expected benefits of acquisitions and investments also may not be realized for various reasons, including the loss of key personnel, customers or vendors. If Navient 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.

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

Navient competes in the student loan servicing business with for-profit and non-profit servicing institutions, many with strong records of performance. Navient competes based on capability and customer service metrics. To the extent competitors compete aggressively or more effectively than Navient, Navient could lose market share to them or Navient’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 December 31, 2013, and Navient will continue as the service provider under this contract. Navient 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 Navient 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 gave notice to Existing SLM of its intent to exercise its five-year renewal option to extend the DSLP servicing contract. No assurance can be given that the terms of the renewal will be as favorable to Navient as the current contract terms.

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

Unexpected changes in the overall economic environment, including unemployment, may result in the credit performance of Navient’s loan portfolio being materially different from expectations. Navient’s earnings are dependent on the expected future creditworthiness of its student loan customers, especially with respect to its

 

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Private Education Loan portfolio. Navient 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 Navient’s customer base materially decreases, if a market risk changes significantly, or if Navient’s reserves for credit losses are not adequate, Navient’s business, financial condition and results of operations could suffer.

Navient is also subject to the creditworthiness of other third parties, including counterparties and clearinghouses to derivative transactions. For example, Navient has exposure to the financial conditions of various lending, investment and derivative counterparties and any clearinghouse for its derivative transactions. If a counterparty or clearinghouse fails to perform its obligations, Navient could, depending on the type of arrangement, experience a loss of liquidity or an economic loss. In addition, Navient 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. Navient’s counterparty and clearinghouse exposure is more fully discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Counterparty Exposure.” If counterparties or clearinghouses are unable to perform their obligations, Navient’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 Navient’s profitability, results of operations, financial condition, cash flows or future business prospects.

Navient’s businesses are subject to numerous state and federal laws and regulations and changes to such laws and regulations could adversely impact Navient’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 Navient’s results of operations, financial condition, cash flows and business prospects as Navient’s business will be more concentrated in FFELP Loans than Existing SLM’s business has been.

Navient’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. The CFPB’s 2013 Report recommended Congress consider making reforms to the disclosures and guidelines that apply to payment application, records retention and other aspects of student loan servicing to mirror changes previously made for the credit card and mortgage businesses. 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. Additionally, even in the absence of Congress or the Administration pursing the CFPB’s recommendations, the CFPB may use its regulatory authority and enforcement actions to make substantial changes on its own to the Private Education Loan market and we believe that the CFPB has shown through its actions that it is willing to do so. The taking of any such actions may adversely impact the profitability and growth of Navient’s business and/or significantly alter the costs and manner in which Navient conducts 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 Navient’s business. Many of the Dodd-Frank Act’s provisions

 

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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, Navient is not able to estimate the ultimate impact of changes in law on its financial results, business operations or strategies. Navient 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. Navient’s profitability, results of operations, financial condition, cash flows or future business prospects could be materially and adversely affected as a result.

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. Most states also have statures that prohibit unfair and deceptive 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 under the Dodd-Frank Act, or states increase their examination, supervision and enforcement activities, Navient’s compliance costs could increase and reduce its ability to offer the same products and services to consumers nationwide and it may be subject to a higher risk of state enforcement actions.

Navient’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 Navient’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 Navient 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, including Navient. In December 2013, the CFPB issued a final rule, effective March 14, 2014, 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 Navient’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.

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

 

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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.

Loans serviced under the FFELP are subject to the HEA and related regulations. Navient’s servicing operations are designed and monitored to comply with the HEA, related regulations and program guidance; however, ED could determine that Navient is not in compliance for a variety of reasons, including that Navient 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 Navient’s 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 Navient’s 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.

Navient’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.

Navient’s debt collection business is subject to regulation and oversight by various state and federal agencies, particularly in the area of consumer protection, and is subject to numerous state and federal laws and regulations. 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 Navient’s business and results of operations if it is not able to adequately mitigate the impact of such changes. Existing SLM has been subject, and Navient may be subject in the future, to inquiries and audits from state and federal regulators as well as litigation from private plaintiffs.

Navient’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.

Navient 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 Navient 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, Navient’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 Navient’s business could be negatively affected.

The Financial Stability Oversight Council (“FSOC”) could designate Navient 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 Navient from Sallie Mae Bank will reduce the complexity of both organizations and may reduce the risk of Navient’s designation as a SIFI under the SIFI Rules, no assurance can be given that such a designation will not occur.

 

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

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

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

Navient is subject to evolving and complex federal and state tax laws. Significant judgment is required for determining Navient’s tax liabilities, and Existing SLM’s tax returns have been, and Navient’s tax returns will continue to be, periodically examined by various tax authorities. Navient 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, Navient 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

Navient’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 Navient to Existing SLM, among other factors, Navient 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, Navient’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 Navient included in this information statement does not necessarily reflect the financial condition, results of operations or cash flows that Navient would have achieved as a separate, publicly-traded company during the periods presented or those that Navient will achieve in the future primarily as a result of the factors described below:

 

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Prior to the separation, Navient’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 Navient after the separation and distribution. Navient’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 Navient would have incurred had it operated as a separate company from Existing SLM. After the separation and distribution, Navient may not be able to operate its business efficiently or at comparable costs, and its profitability may decline.

 

  •  

Prior to the separation, Navient’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.

 

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  •  

Navient’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 Navient’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 Navient’s business and the basis of presentation of the historical consolidated financial statements and the unaudited pro forma condensed consolidated financial statements of Navient’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.

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

Sallie Mae, Inc. (“SMI”), a wholly owned subsidiary of Existing SLM, currently services substantially all of the education loans held by Existing SLM, including those held by Sallie Mae Bank. In connection with the internal corporate reorganization and separation, SMI will become a subsidiary of Navient and will service and collect the education loans owned by Navient, 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 Navient, will continue to host and provide Private ServiceCo, as a subsidiary of SLM BankCo, with access to Navient’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 Navient. Disruptions to Navient’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 Navient’s or SLM BankCo’s ability to service their customers may damage Navient’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 may increase the costs incurred by Navient to provide transition assistance to SLM BankCo and may increase the chance of a disruption to Navient’s information technology systems and its businesses.

Navient 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. These obligations could be materially disruptive to Navient’s business or subject it to substantial liabilities, including contingent liabilities and liabilities that are presently unknown.

In connection with the separation and distribution, Navient, Existing SLM and SLM BankCo will enter into a separation and distribution agreement and Navient 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, a joint marketing agreement, a key systems agreement, a data sharing agreement and a sublease 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 Navient will host and provide SLM BankCo with access to Navient’s information technology systems and services, and Navient will assist SLM BankCo as it seeks to migrate its customer data and service functions to a separate environment. The performance by Navient of its obligations to SLM BankCo under these agreements may require the diversion of a significant amount of Navient management’s time from Navient’s operations and could be disruptive to its business operations.

 

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The separation and distribution agreement will provide for, among other things, indemnification obligations designed to make Navient 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. This includes Navient being financially responsible for all servicing and collections activities that it performed or directed on behalf of Sallie Mae Bank. If Navient is required to indemnify SLM BankCo under the circumstances set forth in the separation and distribution agreement, Navient may be subject to substantial liabilities including liabilities that are accrued, contingent or otherwise and regardless of whether the liabilities are known or unknown at the time of the separation and distribution. Existing SLM is party to various claims, litigation and legal, regulatory and other proceedings resulting from ordinary business activities relating to its current and former operations. Previous business activities of Existing SLM, including originations and acquisitions of various classes of consumer loans outside of Sallie Mae Bank, may also result in liability due to future laws, rules, interpretations or court decisions which purport to have retroactive effect, and such liability could be significant. Existing SLM may also be subject to liabilities related to past activities of acquired businesses. It is inherently difficult, and in some cases impossible, to estimate the probable losses associated with contingent and unknown liabilities of this nature, but future losses may be substantial and will be borne by Navient in accordance with the terms of the separation and distribution agreement.

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

The separation and distribution is conditioned 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 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 Navient 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 Navient 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 Navient could incur significant liabilities related thereto. For a description of the sharing of such liabilities between SLM BankCo and Navient, see “Certain Relationships and Related Party Transactions—Tax Sharing Agreement.”

Navient’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, Navient and SLM BankCo will enter into a tax sharing agreement that will restrict Navient from engaging in certain transactions that could prevent the distribution and related transactions from being tax-free to SLM BankCo and its

 

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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”), Navient will be prohibited from:

 

  •  

issuing shares of Navient stock equal to or exceeding 25 percent of the shares of Navient 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 selling 50 percent or more of the assets of the education loan management business or engaging in mergers or other strategic transactions that may result in a change of control of Navient (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 20 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, Navient 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 Navient’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 increase the value of its business. In addition, under the tax sharing agreement, Navient 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 Navient during the Restricted Period (as determined under U.S. federal income tax law).

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

Navient 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 Navient separately from SLM BankCo; (ii) cash flows significantly in excess of debt service obligations; (iii) more efficient allocation of capital for both Navient and SLM BankCo; (iv) a reduced likelihood that Navient is designated a SIFI; and (v) a separate equity structure that allows direct access by Navient to the capital markets and the use of Navient equity for acquisitions and equity compensation.

Navient 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 Navient’s business; (b) following the separation, Navient 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, Navient’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, Navient’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 Navient’s respective businesses could disrupt Navient’s operations. If Navient 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 Navient could be adversely affected and the value of its stock could be impacted.

 

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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 Navient. The separation is expected to ameliorate this condition due to the separation of Navient and SLM BankCo (which will include Sallie Mae Bank) into two, independent publicly-traded companies.

As of the date of this information statement, Sallie Mae Bank remains subject to the cease and desist order originally issued in August 2008 by the FDIC and the UDFI. In July 2013, the FDIC notified Existing SLM that it plans to replace the existing cease and desist order on Sallie Mae Bank with a new formal enforcement action against Sallie Mae Bank that would more specifically address certain cited violations of Section 5 of the Federal Trade Commission Act (“FTCA”), including practices relating to payment allocation practices and the disclosures and assessments of certain late fees, as well as alleged violations under the Servicemember Civil Relief Act (“SCRA”). In November 2013, the FDIC notified Existing SLM that the new formal enforcement action would be against Sallie Mae Bank and an additional enforcement action would be against SMI, in its capacity as a servicer of education loans for other financial institutions, and would include civil money penalties and restitution. For additional information regarding these and related regulatory matters, see “ Business – Legal Proceedings – Regulatory Matters.”

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 Navient’s business and results of operations.

Navient’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 Navient’s business, financial condition and results of operations.

 

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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 Navient 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 Navient 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 Navient’s Common Stock

Navient 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, Navient’s stock price may fluctuate significantly.

A public market for Navient’s common stock does not currently exist. Navient 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, Navient cannot guarantee that an active trading market will develop or be sustained for its common stock after the separation and distribution. Nor can Navient predict the prices at which shares of its common stock may trade after the separation and distribution. Similarly, Navient 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 Navient 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.

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

 

  •  

actual or anticipated fluctuations in Navient’s operating results;

 

  •  

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

 

  •  

the operating and stock price performance of comparable companies;

 

  •  

changes to the regulatory and legal environment under which Navient 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 Navient 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 Navient’s business, financing condition and results of operations.

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

Any sales of substantial amounts of Navient’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 Navient 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, Navient 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 Navient’s “affiliates,” as that term is defined in Rule 405 under the Securities Act.

 

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Navient 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 Navient and SLM BankCo begins to diverge, or the impact any such trading might have on the market price of shares of Navient common stock.

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

Although Navient 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 Navient’s board of directors. The board’s decisions regarding the payment of dividends will depend on many factors, such as Navient’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.” Navient’s ability to pay dividends will also depend on its ongoing ability to generate cash from its operations and loan portfolio. Navient cannot guarantee that, after the distribution, it will follow the dividend practices of Existing SLM prior to the distribution.

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

In the future, your percentage ownership in Navient may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including equity awards that Navient may grant to Navient’s directors, officers and employees. Navient’s and SLM BankCo’s employees will have options to purchase shares of Navient common stock after the distribution as a result of conversion of a portion of their Existing SLM stock options to Navient stock options. Navient 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 Navient’s earnings per share, which could adversely affect the market price of shares of Navient common stock. From time to time, Navient will issue additional stock options or other equity-based awards to its employees under Navient’s employee benefits plans.

In addition, Navient’s amended and restated certificate of incorporation will authorize Navient to issue, without the approval of Navient’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 Navient’s common stock with respect to dividends and distributions, as Navient’s board of directors generally may determine. If Navient’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 Navient’s common stock. For example, Navient could grant the holders of preferred stock the right to elect some number of Navient’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 Navient could assign to holders of preferred stock could affect the residual value of the common stock. See “Description of Navient’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 Navient 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.” These factors include, among others: increases in financing costs; limits on liquidity; increases in costs associated with compliance with laws and regulations; changes in accounting standards and the impact of related changes in significant accounting estimates; any adverse outcomes in any significant litigation to which we are a party; credit risk associated with our exposure to third parties, including counterparties to our derivative transactions; and changes in the terms of student loans and the education loan marketplace (including changes resulting from new laws and the implementation of existing laws). We could also be affected by, among other things: changes in our funding costs and availability; reductions to our credit ratings or the credit ratings of the United States of America; failures of our operating systems or infrastructure, including those of third-party vendors; damage to our reputation; failures to align our cost structure with our business operations; changes in the general interest rate environment, including the rate relationships among relevant money-market instruments and those of our earning assets versus our funding arrangements; changes in general economic conditions; our ability to successfully effectuate any acquisitions and other strategic initiatives; and changes in the demand for debt management services. The preparation of our consolidated financial statements also requires management to make certain estimates and assumptions, including estimates and assumptions about future events. These estimates or assumptions may prove to be incorrect.

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 primarily 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 Navient, 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 Navient common stock on the basis of one share of Navient 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.

 

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

 

  •  

The consummation of the SLM Merger, pursuant to which:

 

  •  

all of the outstanding shares of Existing SLM common stock and preferred stock will be converted, on a 1-to-1 basis, into the same class and series of SLM BankCo common stock and preferred stock;

 

  •  

Existing SLM will merge with and into a limited liability company and subsidiary of SLM BankCo, which will result in SLM BankCo holding, directly and indirectly, all of the capital stock of Existing SLM and its subsidiaries, including Navient; and

 

  •  

SLM BankCo will replace Existing SLM as the publicly traded parent company;

 

  •  

SLM BankCo will change its name to “SLM Corporation”;

 

  •  

SLM BankCo will retain an additional $578 million in cash, on a pro forma basis as of December 31, 2013, 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;

 

  •  

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 being contributed to and becoming a wholly owned subsidiary of Navient and continuing to own, 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 Navient common stock. On                 , 2014, the distribution date, holders of record of Existing SLM common stock as of the close of business on the record date will receive one share of Navient 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 Navient 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

 

  •  

Navient 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.

 

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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 Navient’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, Navient 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 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 Navient 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. Navient 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.

 

  •  

Navient will continue to be subject to CFPB enforcement, supervisory and examination authority. As a FFELP Loan servicer, Navient 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, Navient will also continue to be subject to examination by the FFIEC. Although Navient will not be subject to direct regulatory oversight by the FDIC, certain subsidiaries of Navient that will continue to be third-party vendors of services to, and “institution

 

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affiliated parties” of, Sallie Mae Bank will continue to be subject to the FDIC’s examination and enforcement authority. In addition, to facilitate compliance with certain consumer information privacy laws during an information technology transition period post-separation in which both Navient 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 Navient 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 Navient 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 Navient 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 Navient and SLM BankCo to effect future alliances and 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 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 to replace those that will be retained by Navient.

 

  •  

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

 

  •  

One-time costs of the separation. Navient 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 Navient.

 

  •  

Navient may not realize anticipated benefits of the separation. Navient 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 Navient’s business; (b) following the separation, Navient 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, Navient’s business will be less diversified than Existing SLM’s business prior to the separation; and (d) Navient may be unable to replace or supplement the revenue and servicing fees from its FFELP Loan portfolio, which has a weighted average life of 7.6 years and will amortize over the next 20 years.

 

  •  

SLM BankCo may not realize anticipated benefits of the separation. SLM BankCo also may not achieve the anticipated benefits of the separation for a variety of reasons, including, among others: (a) the separation will also require significant amounts of its management’s time and effort, which may

 

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divert management’s attention from operating SLM BankCo’s business; (b) following the separation, SLM BankCo will be a significantly smaller company and may be more susceptible to market fluctuations and other adverse events; (c) following the separation, SLM BankCo’s business will be largely focused on originating Private Education Loans, making it less diversified and with a higher risk profile than Existing SLM’s businesses prior to the separation; and (d) other actions required to separate SLM BankCo’s and Navient’s respective businesses could disrupt SLM BankCo’s operations.

 

  •  

Limitations placed upon Navient 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 Navient will enter into with SLM BankCo, Navient 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 Navient’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—Navient’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 Navient

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 Navient, which will be completed immediately prior to the distribution, Navient 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.

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 become a limited liability company wholly owned by SLM BankCo named “    , LLC”.

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.

 

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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 Navient common stock. In addition, an additional $578 million in cash, on a pro forma basis as of December 31, 2013, will be retained by SLM BankCo, primarily to 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. See Note (h) of Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements under “Unaudited Pro Forma Condensed Consolidated Financial Statements.” SLM BankCo will then contribute to Navient, 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 Navient common stock to the Existing SLM common stockholders, on the basis of one share of Navient 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 Navient 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 Navient 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 Navient 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 Navient common stock.

If you own shares of Existing SLM common stock as of the close of business on the record date, the shares of Navient 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 Navient 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 Navient common stock. If you own Existing SLM common stock through the Existing SLM dividend reinvestment plan, the shares of Navient common stock you receive will be distributed to a new Navient 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 Navient’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 Navient 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 Navient 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 Navient. Persons who may be deemed to be affiliates of Navient after the distribution generally include individuals or entities that control, are controlled by or are under common control with Navient, which may include Navient’s executive officers, directors or principal stockholders. Securities held by Navient affiliates will be subject to resale restrictions under the Securities Act. Navient affiliates will be permitted to sell shares of Navient 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 Navient 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 Navient common stock on the distribution date.

Preferred stock: No shares of Navient 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

In connection with the separation and distribution, SLM BankCo will assume the equity incentive plans of Existing SLM and, to the extent they will relate to shares of SLM BankCo common stock after the distribution, outstanding awards granted thereunder. Navient will also establish an equity incentive plan with respect to its common stock. In order to maintain the intrinsic value of the Existing SLM equity awards just prior to the separation and distribution, as a general rule those awards will be handled as follows: (i) awards granted prior to February 4, 2014 will be divided into both SLM BankCo and Navient equity awards; and (ii) awards granted on or after February 4, 2014 will become solely equity awards of the holder’s post-distribution employer. The exercise prices of the SLM BankCo options and Navient options will be set so as to maintain the intrinsic value of the original Existing SLM award immediately prior to the distribution. The SLM BankCo awards and Navient awards will be subject to substantially the same terms, vesting conditions, and other restrictions that applied to the original Existing SLM awards they replace.

For more detailed discussion of the treatment of outstanding equity compensation awards, see “Compensation Discussion and Analysis—Changes to Long Term Incentive Awards due to the Separation and Distribution.”

Results of the Distribution

After its separation from SLM BankCo, Navient will be an independent, publicly-traded company. The actual number shares of Navient 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. Navient 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 Navient common stock in the distribution.

Existing SLM, Navient and SLM BankCo will enter into a separation and distribution agreement, and Navient and SLM BankCo will enter into various other agreements before the distribution to effect the separation and provide a framework for Navient’s relationship with SLM BankCo after the separation. These agreements will provide for the allocation between SLM BankCo and Navient 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 Navient’s separation from SLM BankCo and will govern the relationship between SLM BankCo and Navient after the separation. For a more detailed description of these agreements, see “Certain Relationships and Related Party Transactions.”

Market for Shares of Navient Common Stock

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

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

 

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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 Navient common stock distributed pursuant to the separation. Existing SLM common stock that trades on the “ex-distribution” market will trade without an entitlement to Navient 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 Navient 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 Navient common stock that you are entitled to receive pursuant to your ownership as of the record date of Existing SLM common stock.

Furthermore, beginning on or shortly before the record date and continuing up to and including the distribution date, Navient 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 Navient 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 Navient common stock distributed pursuant to the distribution. You may trade this entitlement to shares of Navient 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 Navient 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, Navient 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 Navient 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;

 

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  •  

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 Navient common stock to be distributed;

 

  •  

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

Navient 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 Navient common stock will be within the discretion of the Navient board and will depend upon many factors, including Navient’s financial condition, earnings, capital requirements of its operating subsidiaries, covenants associated with Navient’s debt service obligations, legal requirements, regulatory constraints, industry practice, and other factors deemed relevant by its board of directors. Moreover, if Navient 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.

Navient’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 20 percent of its common stock outstanding immediately following the distribution date. This limitation may only be exceeded by Navient 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—Navient’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 December 31, 2013, of Existing SLM on a historical basis and of Navient on a pro forma basis to give effect to the pro forma adjustments included in Navient’s unaudited pro forma condensed consolidated financial information. Due to the relative significance of Navient to Existing SLM, among other factors, for financial reporting purposes Navient 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 Navient. The information below is not necessarily indicative of what Navient’s capitalization would have been had the separation and distribution been completed as of December 31, 2013. In addition, it is not indicative of Navient’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 December 31, 2013
(unaudited)		  

(dollars in millions)

    Existing
SLM
Actual		     Navient
As  Adjusted(1)		  

Borrowed funds:

     

Short-term borrowings

    $ 13,795      $ 7,650   

Long-term borrowings

      136,648        133,841   
  

 

 

    

 

 

  

Total borrowed funds

      150,443        141,491   

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 545 million shares issued and outstanding, actual, and 545 million shares issued and outstanding, as adjusted

      109        109   

Additional paid in capital

      4,399        3,693   

Accumulated other comprehensive income (loss)

      13        16   

Retained earnings

      2,584        2,109   
  

 

 

    

 

 

  

Total stockholders’ equity before treasury stock

      7,670        5,927   

Less: Common stock held in treasury at cost: 116 million shares, actual, and 116 million shares, as adjusted

      (2,033 )      (2,033 ) 
  

 

 

    

 

 

  

Total stockholders’ equity

      5,637        3,894   

Noncontrolling interest

      5        —   
  

 

 

    

 

 

  

Total equity

      5,642        3,894   
  

 

 

    

 

 

  

Total capitalization

    $ 156,085      $ 145,385   
  

 

 

    

 

 

  

 

(1) 

This column sets forth pro forma adjustments reflected in Navient’s unaudited pro forma consolidated balance sheet as of December 31, 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 Navient presented below consist of an unaudited pro forma consolidated statement of income for the year ended December 31, 2013, and an unaudited pro forma consolidated balance sheet as of December 31, 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 Navient’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 period indicated. In addition, they are provided for illustrative and informational purposes only and are not necessarily indicative of Navient’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 Navient. 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 year ended December 31, 2013 reflects Navient’s results as if the separation and distribution and related transactions described in this information statement had occurred as of January 1, 2013. The unaudited pro forma consolidated balance sheet as of December 31, 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 Navient. However, due to the relative significance of Navient to Existing SLM, among other factors, for financial reporting purposes Navient 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 Navient’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 Navient that will be contributed to Existing SLM’s post-separation successor SLM BankCo, Navient’s anticipated post-separation capital structure and the impact of, and transactions contemplated by, the separation and distribution agreement, tax sharing agreement, employee matters agreement, a transition services agreement and other commercial agreements between Navient and SLM BankCo summarized under “Certain Relationships and Related Party Transactions.”

Navient 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 Navient 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 Navient 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 statement of income for the year ended December 31, 2013 includes approximately $72 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 Navient 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 statement 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 Navient 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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Navient

Unaudited Pro Forma Consolidated Balance Sheet

As of December 31, 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		           Navient
Pro
forma		  

Assets

              

FFELP loans (net of allowance for losses)

   $ 104,588      $ 1,425      $ —       $ —       $ 103,163   

Private Education loans (net of allowance for losses)

     37,512        6,506        —         —         31,006   

Investments

              

Available-for-sale

     109        —        —          —         109   

Other

     783        103        —         —         680   
 

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  

Total investments

     892        103        —             789   

Cash and cash equivalents

     5,190        2,183        —         (578 )      (h )2      2,429   

Restricted cash and investments

     3,650        4        —         —         3,646   

Goodwill and acquired intangible assets, net

     424        6        —         —         418   

Other assets

     7,287        480        (162 )      (c )4      (3 )      (g )      6,966   
 

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  

Total assets

   $ 159,543      $ 10,707      $ (162 )     $ (581 )     $ 148,417   
 

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  

Liabilities

              

Short-term borrowings

   $ 13,795      $ 6,145      $ —       $ —       $ 7,650   

Long-term borrowings

     136,648        2,807        —         —          133,841   

Other liabilities

     3,458        588        (162 )      (c )4      —          3,032   
 

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  

Total liabilities

     153,901        9,540        (162 )       —         144,523   
 

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  

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 )1      —   

Common stock, par value $.20 per share; 1.125 billion shares authorized and 545 million shares issued and outstanding, actual, and 545 million shares issued and outstanding, as adjusted

     109        —        —         —         109   

Additional paid in capital

     4,399        690        —         (16 )        3,693   

Accumulated other comprehensive income

     13        (3 )      —         —         16   

Retained earnings

     2,584        475        —         —         2,109   
 

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  

Total stockholders’ equity before treasury stock

     7,670        1,162        —         (581 )       5,927   

Less: Common stock held in treasury at cost: 116 million shares, actual and 116 million shares, as adjusted

     (2,033 )      —        —         —         (2,033 ) 
 

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  

Total stockholders’ equity

     5,637        1,162        —         (581 )       3,894   

Noncontrolling interest

     5        5        —         —         —   
 

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  

Total equity

     5,642        1,167        —         (581 )       3,894   
 

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  

Total liabilities and equity

   $ 159,543      $ 10,707      $ (162 )     $ (581 )     $ 148,417   
 

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  

 

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Navient

Unaudited Pro Forma Consolidated Statement of Income

Year Ended December 31, 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		           Navient
Pro
forma		  

Total interest income

    $ 5,377      $ 551      $ (18 )      (c )3      —        (h )2    $ 4,844   

Total interest expense

      2,210        89        (1 )       19        (h )3      2,141   
  

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  

Net interest income

      3,167        462        (17 )       (19 )       2,703   

Less: provisions for loan losses

      839        69        —         —         770   
  

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  

Net interest income after provisions for loan losses

      2,328        393        (17 )       (19 )       1,933   
  

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  

Other income (loss):

               

Gains on sales of loans and investments

      302        260        (260 )      (c )1      —         302   

Losses on derivative and hedging activities, net

      (268 )      1        —         —         (269 ) 

Servicing revenue

      290        5        (3 )      (c )2      4        (e )      292   

Contingency revenue

      420        —        —         —         420   

Gains on debt repurchases

      42        —        —         —         42   

Other

      100        32        —         32        (e )      100   
  

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  

Total other income (loss)

      886        298        (263 )       36         887   

Expenses:

               

Total operating expenses

      1,042        268        (26 )      (c )2      8        (e )      808   

Goodwill and intangible expenses

      13        3        —         —         10   

Restructuring and other reorganization expenses

      72        2        —         (70 )     (d )      —   
  

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  

Total expenses

      1,127        273        (26 )       (62 )       818   
  

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  

Income from continuing operations, before income tax expense

      2,087        418        (254 )       79         2,002   

Income tax expense

      776        159        (93 )      (c )5      29        (f )      739   
  

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  

Net income from continuing operations

    $ 1,311      $ 259      $ (161 )     $ 50       $ 1,263   
  

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  
                                                          

Earnings per common share calculation:

               

Net income from continuing operations

    $ 1,311      $ 259      $ (161 )     $ 50       $ 1,263   

Less: net loss attributable to non-controlling interests

      (1 )      (1 )      —         —         —   

Less: Preferred stock dividends

      20        —        —         (20 )      (h )1      —   
  

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  

Net income from continuing operations attributable to common stock

    $ 1,292      $ 260      $ (161 )     $ 70       $ 1,263   
  

 

 

    

 

 

    

 

 

      

 

 

      

 

 

  

Basic earnings (loss) per common share:

               

Continuing operations

    $ 2.94                $ 2.87  (i) 

Average common shares outstanding

      440                  440  (i) 
  

 

 

              

 

 

  

Diluted earnings (loss) per common share:

               

Continued operations

    $ 2.89                $ 2.82  (i) 

Average common and common equivalent shares outstanding

      449                  449  (i) 
  

 

 

              

 

 

  

 

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Navient

Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

 

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

 

(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 also certain general corporate overhead expenses related to SLM BankCo. General corporate overhead of $77 million for the year ended December 31, 2013, consisted of costs primarily associated with accounting, finance, legal, human resources, certain information technology costs, stock compensation, and executive management and the board of directors. These costs were generally allocated to SLM BankCo based on the proportionate level of effort provided to SLM BankCo relative to Existing SLM using a relevant allocation driver (e.g., in proportion to the number of employees by function that were being transferred to BankCo as opposed to remaining at Navient).

 

(c) Represents intercompany transactions between SLM BankCo and Navient that were eliminated in consolidation of the historical Existing SLM financial statements in accordance with GAAP, but not eliminated from the historical financial statements of SLM BankCo. Examples of historical intercompany revenues, expenses, 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 and investment sales of $260 million for the year ended December 31, 2013, presented on SLM BankCo’s historical statement of income. Existing SLM historically has used Sallie Mae Bank to initially fund originated private education loans through their bank deposits with the intent for Existing SLM to purchase and securitize such loans at a future date. Sallie Mae Bank sells Private Education Loans to Existing SLM on a regular basis in order for Existing SLM to securitize the loans along with other Private Education Loans Existing SLM owns. This purchase activity by Existing SLM of Sallie Mae Bank loans resulted in $196 million of gains on intercompany loan sales. The remaining $64 million of gains on intercompany loan and investment sales relates to asset-backed security investments sold by SLM BankCo as further discussed in footnote (c)(3) below;

 

  2. FFELP and Private Education Loan servicing fees paid by SLM BankCo to Navient of $26 million for the year ended December 31, 2013, that were presented on SLM BankCo’s historical statement of income as operating expense. Sallie Mae Bank historically has not maintained servicing and collections functions. As a result, Sallie Mae Bank remits to Existing SLM a market rate to service and collect on their student loan portfolios. Conversely, SLM BankCo recognized $3 million of other revenue in connection with providing banking services to one of Existing SLM’s business units for the year ended December 31, 2013;

 

  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 and consolidated by Existing SLM, were recorded at Sallie Mae Bank as available for sale investments until they were sold by Sallie Mae Bank during the fourth quarter of 2013. Sallie Mae Bank recorded $18 million of interest income and recognized a $64 million gain from the sale of the investments for the year ended December 31, 2013. 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 and gain on sale were eliminated in consolidation. Refer to footnote (h) for further discussion. Existing SLM contributed the $629 million (par value) of asset-backed securities as part of maintaining Sallie Mae Bank’s required regulatory capital levels;

 

  4. The other assets adjustment of $162 million consists of an intercompany receivable at Navient due from SLM BankCo. The $162 million other liabilities adjustment consists of the corresponding $162 million intercompany payable from BankCo to Navient;

 

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  5. The income tax expense adjustment of $93 million for the year ended December 31, 2013, reflects the income tax effect of the pro forma adjustments at the statutory rate in effect in the respective tax jurisdiction during the period presented. The statutory tax rate for the year ended December 31, 2013, was 36.6 percent.

 

(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.

 

(e) Represents the anticipated impact of (i) a tax sharing 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. Please see “Certain Relationships and Related Party Transactions” elsewhere in this information statement for a general description of these agreements. The impacts of these agreements were determined based on the anticipated contractual provisions of the agreements in comparison with our historical operations on an as managed basis. No amounts have been included for a tax sharing 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:

 

     Year Ended December 31, 2013  
     Agreements              

(Dollars in millions)

    Tax
Sharing
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

    $ —      $ —      $ —      $ —      $ —      $ (19 )    $ (19 ) 

Total other income

      —        —        18        18        36        —        36   

Total expenses

      —        —        18        10        28        (90 )      (62 ) 

Income tax expense

      —        —        —        3        3        26        29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income from continuing operations

    $ —      $ —      $ —      $ 5      $ 5      $ 45      $ 50   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

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

 

(f) The income tax expense adjustment of $29 million for the year ended December 31, 2013 reflects the income tax effects of the separation adjustments at the statutory rate in effect in the respective tax jurisdiction during the period presented. The statutory rate for the year ended December 31, 2013 was 36.6 percent.

 

(g) Reflects a $3 million valuation allowance against deferred tax assets that will be required as a result of the separation. There will be certain indemnifications extended between SLM BankCo and Navient in accordance with the terms of the tax sharing agreement. At the time of separation, Navient will record a liability necessary to recognize the fair value of such indemnifications. Navient 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 Navient 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 the balance sheet to reflect the transfer of the $565 million of Existing SLM preferred stock to SLM BankCo for the periods presented. As a result Navient will not pay the dividends associated with this preferred stock. Preferred stock dividends were $20 million for the year ended December 31, 2013.

 

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  2. In connection with the separation and distribution, it is anticipated that $578 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 and $13 million is being contributed as additional common stock paid-in-capital. An adjustment has been made to reflect the cash contribution at December 31, 2013. An adjustment to interest income of $0.4 million for the year ended December 31, 2013, reflects the removal of interest income historically earned on the cash contributed. The adjustment to interest income reflects an interest rate of approximately 0.07 percent for the year ended December 31, 2013, estimated using rates earned on comparable investments during the period.

 

  3. During 2008, Existing SLM contributed $629 million (par value) of asset-backed securities to Sallie Mae Bank as additional capital. 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. See footnote (c)3 for further discussion of this intercompany transaction. As noted in (c)3, the asset-backed securities were sold by Sallie Mae Bank during the fourth quarter of 2013. However, as a result of the separation, these asset-backed securities are considered outstanding to a third party for the entire year ended December 31, 2013 as Navient consolidates the related securitization trust. Adjustment reflects the recognition by Navient of the related interest expense of $19 million for the year ended December 31, 2013.

 

(i) Common stock and pro forma weighted average basic and diluted shares outstanding reflect the issuance of Navient 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 during each period, 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 Navient equity plans in which employees participate based on the distribution ratio.

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

 

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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 Navient’s “Core Earnings” results to Navient’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 Navient 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.

 

     Year
ended
December  31,
2013		  

“Core Earnings” adjustments to GAAP:

   

Pro forma Navient GAAP net income from continuing operations

    $ 1,263   

Pro forma Navient income from discontinued operations, net of tax

      106   
  

 

 

  

Pro forma Navient GAAP net income

      1,369   
  

 

 

  

Net impact of derivative accounting

      (243 ) 

Net impact of goodwill and acquired intangible assets

      10   

Net income tax effect

      96   

Net effect from discontinued operations

      6   
  

 

 

  

Pro forma Navient “Core Earnings” net income

    $ 1,238   
  

 

 

  

Pro forma Navient Diluted “Core Earnings” EPS

    $ 2.76   
  

 

 

  

 

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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 Navient to Existing SLM, among other factors, for financial reporting purposes Navient 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 Navient.

The historical financial statement information set forth below for the years ended December 31, 2013, 2012, 2011, 2010 and 2009 has been derived from Existing SLM’s audited consolidated financial statements. Existing SLM’s audited financial statements for the years ended December 31, 2013, 2012 and 2011 are included elsewhere in this information statement.

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 Navient’s future performance and does not necessarily reflect what Navient’s financial position and results of operations would have been had Navient 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.

 

    Years Ended December 31,  

(Dollars in millions)

   2013     2012     2011     2010     2009  

Operating Data:

          

Net interest income

   $ 3,167      $ 3,208      $ 3,529      $ 3,479      $ 1,723   

Net income (loss) attributable to SLM Corporation:

          

Continuing operations, net of tax

   $ 1,312      $ 941      $ 598      $ 729      $ 531   

Discontinued operations, net of tax

     106        (2 )      35        (199 )      (207 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss) attributable to SLM Corporation

   $ 1,418      $ 939      $ 633      $ 530      $ 324   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

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

          

Continuing operations

   $ 2.94      $ 1.93      $ 1.12      $ 1.35      $ 0.82   

Discontinued operations

     0.24        —        0.07        (0.41 )      (0.44 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

   $ 3.18      $ 1.93      $ 1.19      $ 0.94      $ 0.38   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

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

          

Continuing operations

   $ 2.89      $ 1.90      $ 1.11      $ 1.35      $ 0.82   

Discontinued operations

     0.23        —        .07        (0.41 )      (0.44 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

   $ 3.12      $ 1.90      $ 1.18      $ 0.94      $ 0.38   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

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Table of Contents
    Years Ended December 31,  

(Dollars in millions)

   2013     2012     2011     2010     2009  

Dividends per common share attributable to SLM Corporation common shareholders

   $ 0.60      $ 0.50      $ 0.30      $ —      $ —   

Return on common stockholders’ equity

     29 %      21 %      14 %      13 %      5 % 

Net interest margin

     1.98        1.78        1.85        1.82        1.05   

Return on assets

     0.89        0.52        0.33        0.28        0.20   

Dividend payout ratio

     19        26        25        —        —   

Average equity/average assets

     3.28        2.69        2.54        2.47        2.96   

 

    December 31,  

(Dollars in millions)

   2013     2012     2011     2010     2009  

Balance Sheet Data:

          

Student loans, net

   $ 142,100      $ 162,546      $ 174,420      $ 184,305      $ 143,807   

Total assets

     159,543        181,260        193,345        205,307        169,985   

Total borrowings

     150,443        172,257        183,966        197,159        161,443   

Total SLM Corporation stockholders’ equity

     5,637        5,060        5,243        5,012        5,279   

Book value per common share

     11.82        9.92        9.20        8.44        8.05   

Other Data:

          

Off-balance sheet securitized student loans, net

   $ —      $ —      $ —      $ —      $ 32,638   

 

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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 Navient’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 Navient common stock to Existing SLM common stockholders after completion of the internal corporate reorganization described in this information statement, for financial reporting purposes Navient will be treated as the “accounting spinnor” and therefore it will be Navient, 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 Navient. 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 Navient common stock 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 Navient common stock to Existing SLM common 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 an additional $578 million in cash, on a pro forma basis as of December 31, 2013, will be retained by SLM BankCo, primarily to offset the $565 million 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 Navient, 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

 

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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 Navient common stock in the distribution to holders of Existing SLM common stock as of the record date for the distribution. For additional 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, Navient and SLM BankCo will operate independently and neither will have any equity ownership in the other. In connection with the separation, however, Navient 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

The following discussion and analysis presents a review of our business and operations as of and for the year ended December 31, 2013.

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 December 31, 2013, approximately $6.7 billion of Existing SLM’s Private Education Loans was held at Sallie Mae Bank. In connection with the separation and distribution, Sallie Mae Bank, and its portfolio of Private Education Loans, will remain with SLM BankCo. Navient will service and collect on SLM BankCo’s Private Education Loans during a transition period, with Private Education Loans whose individual borrowers also have an education loan owned by Navient continuing to be serviced by Navient after the transition period. See “Certain Relationship and Related Party Transactions.”

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, Upromise.

After the separation and distribution, we will perform substantially all of the activities of the Business Services Segment, other than the activities of Upromise and the Insurance Business, which will be carried on by SLM BankCo.

 

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FFELP Loans Segment

Our FFELP Loans segment consists of our 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 as the FFELP Loan portfolio amortizes.

As of December 31, 2013, approximately $1.4 billion of FFELP Loans was held at Sallie Mae Bank, which will remain with SLM BankCo following the separation and distribution. Navient will continue to service the FFELP Loans held by Sallie Mae Bank 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 certain 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 subsidiary sales, 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 and Private Education Loan asset yields less our cost of funds. The asset yield is 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. As of December 31, 2013, we had $37.5 billion of Private Education Loans outstanding. In 2013, we originated $3.8 billion of Private Education Loans, up 14 percent from $3.3 billion in the prior year. The majority of our Private Education Loans earn variable rate interest and are funded primarily with variable rate liabilities. The Consumer Lending segment’s “Core Earnings” net interest margin was 4.16 percent in 2013 compared with 4.13 percent in 2012. 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 December 31, 2013, 49 percent 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

 

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cost of funds is primarily indexed to three-month LIBOR, creating the possibility of basis and repricing risk related to these assets. As of December 31, 2013, we had $104.6 billion of FFELP Loans outstanding. The FFELP Loans segment’s “Core Earnings” net interest margin was 0.88 percent in 2013 compared with 0.84 percent in 2012.

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.

At December 31, 2013, 84 percent 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. We bear the full credit exposure on our Private Education Loans. Our provision for losses in our FFELP Loans segment was $52 million in 2013 compared with $72 million in 2012. 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 $787 million in 2013 compared with $1.0 billion in 2012.

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 2.8 percent of loans in repayment in 2013 compared with 3.4 percent of loans in repayment in 2012. Delinquencies are a very important indicator of potential future credit performance. Private Education Loan delinquencies as a percentage of Private Education Loans in repayment decreased from 9.3 percent at December 31, 2012 to 8.3 percent at December 31, 2013.

Servicing and Contingency Revenues

We earn servicing revenues from servicing student loans. We earn contingency revenue related to default aversion and contingency collection 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.

 

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We also sold our Campus Solution business and our 529 college-savings plan administration business in 2013 in connection with better aligning our core business. The results of both of these businesses are reported in discontinued operations for all periods presented.

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 15 — Segment Reporting”). For a full explanation of the contents and limitations of “Core Earnings,” see the section titled “‘Core Earnings’ — Definition and Limitations.”

2013 Summary of Results

Our 2013 accomplishments are discussed below.

GAAP 2013 net income was $1.42 billion ($3.12 diluted earnings per share), versus net income of $939 million ($1.90 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 2013 and 2012, GAAP results included gains of $243 million and losses of $194 million, respectively, resulting from derivative accounting treatment which is excluded from “Core Earnings” results.

“Core Earnings” for 2013 were $1.29 billion compared with $1.06 billion in 2012. “Core Earnings” increased due to a $302 million increase in gains on sales of loans and investments, a $241 million lower provision for loan loss, a $109 million after-tax increase in gains from the sale of subsidiaries and a $75 million increase in servicing and contingency revenue. This was partially offset by a $106 million decrease in net interest income, a $145 million increase in operating expenses, a $97 million decrease in debt repurchase gains and a $61 million increase in restructuring and other reorganization expenses.

During 2013, we issued $3.75 billion of unsecured debt, and issued $6.5 billion of FFELP ABS and $3.1 billion of Private Education Loan ABS. We also repurchased $1.3 billion of debt and realized “Core Earnings” gains of $48 million in 2013, compared with repurchases of $711 million and gains of $145 million in 2012. In addition, we repurchased $600 million of common stock in 2013 compared with $900 million repurchased in 2012.

2013 Management Objectives

In 2013 we set out five major goals to create shareholder value. They were: (1) prudently grow Consumer Lending segment assets and revenues; (2) maximize cash flows from FFELP Loans; (3) reduce operating

 

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expenses while improving efficiency and customer experience; (4) maintain our financial strength; and (5) expand the capabilities of Sallie Mae Bank.

The following describes our performance relative to each of our 2013 goals.

Prudently Grow Consumer Lending Segment Assets and Revenues

We continued to pursue managed growth in our Private Education Loan portfolio in 2013, with $3.8 billion in new originations for the year compared with $3.3 billion in 2012, a 14 percent increase. The average FICO score of our 2013 originations was 745 and approximately 90 percent of the originated loans were cosigned. We continued to help our customers manage their borrowings and succeed in its payoff, which resulted in lower charge-offs and provision for loan losses. The charge-off rate was 2.8 percent in 2013, the lowest rate since 2007, and down from 3.4 percent in 2012, an 18 percent decrease. The provision for Private Education Loan losses decreased $221 million from 2012, a 22 percent decrease.

Maximize Cash Flows from FFELP Loans

In 2013, management set out to explore alternative transactions and structures that could increase our ability to maximize the value of our ownership interests in FFELP securitization trusts and allow us to diversify our holdings while maintaining servicing fee income. In 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) which generated a $312 million gain on sale. During 2013 we also purchased $736 million of FFELP Loans.

Reduce Operating Expenses While Improving Efficiency and Customer Experience

For 2013, we set out to reduce unit costs, and balance our Private Education Loan growth and the challenge of increased regulatory oversight. We also planned and accomplished improving 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). In the fourth quarter of 2013, we reserved $70 million for expected compliance remediation efforts relating to pending regulatory inquiries. Excluding this compliance remediation expense, full-year 2013 operating expenses were $972 million compared with $897 million for 2012. The $75 million increase was primarily the result of increases in third-party servicing and collection activities (which resulted in $108 million of additional revenue), continued investments in technology and increased Private Education Loan marketing activities (which resulted in a 14 percent increase in originations volume).

Although total operating expenses, excluding the $70 million compliance remediation expense, were $75 million higher from the prior year, the majority of the increase related to generating higher fee income and loan originations as discussed above. 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 31 percent and 38 percent in the years ended December 31, 2013 and 2012, respectively.

Maintain Our Financial Strength

It was management’s objective for 2013 to continue paying dividends and repurchasing common shares through our share repurchase program while ending 2013 with capital and reserve positions as strong as those with which we ended 2012. In February 2013, Existing SLM announced an increase in its quarterly common stock dividend to $0.15 per share, resulting in full-year common stock dividends paid of $264 million or $0.60 per share. In 2013, we authorized a total of $800 million for common stock repurchases. We repurchased an aggregate of 27 million shares for $600 million in 2013. At December 31, 2013, there was $200 million remaining authorization for additional common stock repurchases under our current stock repurchase program.

 

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We did this while achieving diluted “Core Earnings” per share of $2.83 and maintaining our strong balance sheet and capital positions.

In addition, 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.

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 continued to fund our Private Education Loan originations in 2013. We continued to evolve the operational and enterprise risk oversight program at Sallie Mae Bank in preparation for expected growth and designation as a “large bank,” which will entail enhanced regulatory scrutiny. In addition, we voluntarily made similar changes at the holding company level. Following the separation and distribution, Sallie Mae Bank will be a wholly-owned subsidiary of SLM BankCo and Navient will not originate Private Education Loans.

Results of Operations

We present the results of operations for 2013 and 2012 below on a consolidated basis in accordance with GAAP. As discussed above, we have four business segments: 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 Consolidated Statement of Income

 

           Increase (Decrease)  
     Years Ended December 31,     2013 vs. 2012     2012 vs. 2011  

(Dollars in millions, except per share amounts)

    2013     2012     2011     $     %     $     %  

Interest income

               

FFELP Loans

    $ 2,822      $ 3,251      $ 3,461      $ (429 )      (13 )%    $ (210 )      (6 )% 

Private Education Loans

      2,527        2,481        2,429        46        2        52        2   

Other loans

      11        16        21        (5 )      (31 )      (5 )      (24 ) 

Cash and investments

      17        21        19        (4 )      (19 )      2        11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total interest income

      5,377        5,769        5,930        (392 )      (7 )      (161 )      (3 ) 

Total interest expense

      2,210        2,561        2,401        (351 )      (14 )      160        7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income

      3,167        3,208        3,529        (41 )      (1 )      (321 )      (9 ) 

Less: provisions for loan losses

      839        1,080        1,295        (241 )      (22 )      (215 )      (17 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income after provisions for loan losses

      2,328        2,128        2,234        200        9        (106 )      (5 ) 

Other income (loss):

               

Gains (losses) on sales of loans and investments

      302        —         (35 )      302        100        35        (100 ) 

Losses on derivative and hedging activities, net

      (268 )      (628 )      (959 )      360        (57 )      331        (35 ) 

Servicing revenue

      290        279        283        11        4        (4 )      (1 ) 

Contingency revenue

      420        356        333        64        18        23        7   

Gains on debt repurchases

      42        145        38        (103 )      (71 )      107        282   

Other income

      100        92        69        8        9        23        33   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total other income (loss)

      886        244        (271 )      642        263        515        190   

Expenses:

               

Operating expenses

      1,042        897        1,005        145        16        (108 )      (11 ) 

Goodwill and acquired intangible assets impairment and amortization expense

      13        27        21        (14 )      (52 )      6        29   

Restructuring and other reorganization expenses

      72        11        12        61        555        (1 )      (8 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total expenses

      1,127        935        1,038        192        21        (103 )      (10 ) 

Income from continuing operations, before income tax expense

      2,087        1,437        925        650        45        512        55   

Income tax expense

      776        498        328        278        56        170        52   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income from continuing operations

      1,311        939        597        372        40        342        57   

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

      106        (2 )      35        108        5,400        (37 )      (106 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income

      1,417        937        632        480        51        305        48   

Less: net loss attributable to noncontrolling interest

      (1 )      (2 )      (1 )      1        (50 )      (1 )      100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income attributable to SLM Corporation

      1,418        939        633        479        51        306        48   

Preferred stock dividends

      20        20        18        —          —          2        11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income attributable to SLM Corporation common stock

    $ 1,398      $ 919      $ 615      $ 479        52 %    $ 304        49 % 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Basic earnings per common share attributable to SLM Corporation:

               

Continuing operations

    $ 2.94      $ 1.93      $ 1.12      $ 1.01        52 %    $ .81        72 % 

Discontinued operations

      .24        —         .07        .24        100        (.07 )      (100 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

    $ 3.18      $ 1.93      $ 1.19      $ 1.25        65 %    $ .74        62 % 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Diluted earnings per common share attributable to SLM Corporation:

               

Continuing operations

    $ 2.89      $ 1.90      $ 1.11      $ .99        52 %    $ .79        71 % 

Discontinued operations

      .23        —         .07        .23        100        (.07 )      (100 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

    $ 3.12      $ 1.90      $ 1.18      $ 1.22        64 %    $ .72        61 % 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Dividends per common share

    $ .60      $ .50      $ .30      $ .10        20 %    $ .20        67 % 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

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Consolidated Earnings Summary — GAAP-basis

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

For the years ended December 31, 2013 and 2012, net income was $1.4 billion, or $3.12 diluted earnings per common share, and $939 million, or $1.90 diluted earnings per common share, respectively. The increase in net income was primarily due to a $360 million decrease in net losses on derivative and hedging activities, a $302 million increase in gains on sales of loans and investments, a $241 million decrease in provisions for loan losses, and a $108 million after-tax increase in income from discontinued operations which were partially offset by $103 million of lower gains on debt repurchases, higher operating expenses of $145 million and higher restructuring and other reorganization expenses of $61 million.

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

 

  •  

Net interest income decreased by $41 million in the current year compared with the previous year primarily due to a reduction in FFELP net interest income from a $20 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 decreased by $241 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 $302 million as a result of $312 million in gains on the sales of the Residual Interests in FFELP Loan securitization trusts in 2013. See the section titled “Business Segment Earnings Summary — ‘Core Earnings’ Basis — FFELP Loans Segment” for further discussion.

 

  •  

Losses on derivative and hedging activities, net, resulted in a net loss of $268 million in 2013 compared with a net loss of $628 million in 2012. 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 $75 million from 2012 primarily from an increase in the number of accounts serviced and collection volumes in 2013.

 

  •  

Gains on debt repurchases decreased $103 million. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.

 

  •  

Operating expenses increased $145 million primarily as a result of increases in our third-party servicing and collection activities, increased Private Education Loan marketing activities, continued investments in technology, and an increase in compliance remediation expense. In the fourth quarter of 2013, we reserved $70 million for estimated compliance remediation efforts relating to pending regulatory inquiries.

 

  •  

Restructuring and other reorganization expenses were $72 million compared with $11 million in 2012. In 2013, these consisted of $43 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 $29 million related to severance costs. The $11 million of expenses in 2012 related to restructuring expenses.

 

  •  

The effective tax rates for 2013 and 2012 were 37 percent and 35 percent, respectively. The movement in effective tax rates was primarily driven by the impact of state law changes recorded in the year-ago period.

 

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  •  

Income costs from discontinued operations increased $108 million primarily as a result of the sale of our Campus Solutions business in the second quarter of 2013 and of our 529 college-savings plan administration business in the fourth quarter of 2013, which resulted in after-tax gains of $38 million and $65 million, respectively.

We repurchased 27 million and 58 million shares of our common stock during 2013 and 2012, respectively, as part of our common share repurchase program. Primarily as a result of these repurchases, our average outstanding diluted shares decreased by 34 million common shares in 2013.

Consolidated Earnings Summary — GAAP-basis

Year Ended December 31, 2012 Compared with Year Ended December 31, 2011

For the years ended December 31, 2012 and 2011, net income was $939 million, or $1.90 diluted earnings per common share, and $633 million, or $1.18 diluted earnings per common share, respectively. The increase in net income was primarily due to a $331 million decrease in net losses on derivative and hedging activities, a $215 million decrease in provisions for loan losses, a $108 million decrease in operating expenses and a $107 million increase in gains on debt repurchases, which more than offset the $321 million decline in net interest income.

The primary contributors to each of the identified drivers of changes in net income for 2012 compared with 2011 are as follows:

 

  •  

Net interest income declined by $321 million primarily due to an $11 billion reduction in average FFELP Loans outstanding and higher cost of funds, which were partly due to refinancing debt into longer term liabilities, as well as the impact from the acceleration of $50 million of non-cash loan premium amortization in the second quarter of 2012 related to SDCL. The decline in FFELP Loans outstanding was driven by normal loan amortization as well as loans that were consolidated under SDCL.

 

  •  

Provisions for loan losses decreased by $215 million primarily as a result of overall improvements in the credit quality and delinquency trends of the Private Education Loan portfolio. In second quarter 2012, we increased our focus on encouraging our customers to enter repayment plans in lieu of additional forbearance usage to better help customers manage their overall payment obligations. As expected, this change resulted in an increase in charge-offs in fourth-quarter 2012, followed by a decline in 2013 charge-offs.

 

  •  

We did not incur any losses on loans and investments in 2012. In 2011, we recorded $26 million of impairment on certain investments in aircraft leveraged leases and a $9 million mark-to-market loss related to classifying our entire $12 million portfolio of non-U.S. dollar-denominated student loans as held-for-sale.

 

  •  

Net losses on derivative and hedging activities decreased by $331 million. 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.

 

  •  

Gains on debt repurchases increased $107 million. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.

 

  •  

Operating expenses decreased $108 million primarily due to the 2012 benefit of cost-cutting efforts we implemented throughout 2011.

 

  •  

Net income from discontinued operations decreased $37 million due to the sale of our Purchased Paper — Non-Mortgage portfolio in 2011.

 

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In addition, we repurchased 58 million shares and 19 million shares of our common stock during 2012 and 2011, respectively, as part of our common share repurchase program. Primarily as a result of these repurchases, our average outstanding diluted shares decreased by 40 million common shares in 2012.

“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. For additional information, see “Note 15 — Segment Reporting” to the audited consolidated financial statements included elsewhere in this information statement.

“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” or similarly titled measures. “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.

Specific adjustments that management makes to GAAP results to derive our “Core Earnings” basis of presentation are described in detail in the section titled “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP.”

 

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The following tables show “Core Earnings” for each business segment and our business as a whole along with the adjustments made to the income/expense items to reconcile the amounts to our reported GAAP results as required by GAAP and reported in “Note 15 — Segment Reporting.”

 

    Year Ended December 31, 2013  

(Dollars in millions)

   Consumer
Lending		     Business
Services		     FFELP
Loans		     Other     Eliminations(1)     Total
“Core
Earnings”		     Adjustments     Total
GAAP		  
              Reclassifications     Additions/
(Subtractions)		     Total
Adjustments(2) 		   

Interest income:

                    

Student loans

   $ 2,527      $ —        $ 2,313      $ —        $ —        $ 4,840      $ 816      $ (307 )    $ 509      $ 5,349   

Other loans

     —          —          —          11        —          11        —          —          —          11   

Cash and investments

     7        5        6        4        (5 )      17        —          —          —          17   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total interest income

     2,534        5        2,319        15        (5 )      4,868        816        (307 )      509        5,377   

Total interest expense

     825        —          1,285        51        (5 )      2,156        55        (1 )(4)      54        2,210   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income (loss)

     1,709        5        1,034        (36 )      —          2,712        761        (306 )      455        3,167   

Less: provisions for loan losses

     787        —          52        —          —          839        —          —          —          839   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income (loss) after provisions for loan losses

     922        5        982        (36 )      —          1,873        761        (306 )      455        2,328   

Other income (loss):

                    

Gains (losses) on sales of loans and investments

     —          —          312        (10 )      —          302        —          —          —          302   

Servicing revenue

     34        710        76        —          (530 )      290        —          —          —          290   

Contingency revenue

     —          420        —          —          —          420        —          —          —          420   

Gains on debt repurchases

     —          —          —          48        —          48        (6 )      —          (6 )      42   

Other income (loss)

     —          34        —          4        —          38        (755 )      549 (5)      (206 )      (168 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total other income (loss)

     34        1,164        388        42        (530 )      1,098        (761 )      549        (212 )      886   

Expenses:

                    

Direct operating expenses

     299        400        557        80        (530 )      806        —          —          —          806   

Overhead expenses

     (1 )      —          —          237        —          236        —          —          —          236   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Operating expenses

     298        400        557        317        (530 )      1,042        —          —          —          1,042   

Goodwill and acquired intangible asset impairment and amortization expense

     —          —          —          —          —          —          —          13        13        13   

Restructuring and other reorganization expenses

     6        2        —          64        —          72        —          —          —          72   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total expenses

     304        402        557        381        (530 )      1,114        —          13        13        1,127   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Income (loss) from continuing operations, before income tax expense (benefit)

     652        767        813        (375 )      —          1,857        —          230        230        2,087   

Income tax expense (benefit)(3)

     239        281        298        (138 )      —          680        —          96        96        776   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss) from continuing operations

     413        486        515        (237 )      —          1,177        —          134        134        1,311   

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

     (1 )      112        —          1        —          112        —          (6 )      (6 )      106   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss)

     412        598        515        (236 )      —          1,289        —          128        128        1,417   

Less: net loss attributable to noncontrolling interest

     —          (1 )      —          —          —          (1 )      —          —          —          (1 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss) attributable to SLM Corporation

   $ 412      $ 599      $ 515      $ (236 )    $ —        $ 1,290      $ —        $ 128      $ 128      $ 1,418   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(1) 

The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

 

(2) 

“Core Earnings” adjustments to GAAP:

 

     Year Ended December 31, 2013  

(Dollars in millions)

    Net Impact of
Derivative
Accounting		      Net Impact of
Goodwill and
Acquired
Intangibles		      Total  

Net interest income after provisions for loan losses

    $ 455       $ —         $ 455   

Total other loss

      (212 )       —           (212 ) 

Goodwill and acquired intangible asset impairment and amortization expense

      —           13         13   
  

 

 

     

 

 

     

 

 

  

Total “Core Earnings” adjustments to GAAP

    $ 243       $ (13 )       230   
  

 

 

     

 

 

     

Income tax expense

            96   

Loss from discontinued operations, net of tax benefit

            (6 ) 
        

 

 

  

Net income

          $ 128   
        

 

 

  

 

(3) 

Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

(4) 

Represents a portion of the $63 million of “other derivative accounting adjustments.”

 

(5) 

Represents the $487 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $63 million of “other derivative accounting adjustments.”

 

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    Year Ended December 31, 2012  

(Dollars in millions)

   Consumer
Lending		     Business
Services		     FFELP
Loans		     Other     Eliminations(1)     Total
“Core
Earnings”		     Adjustments     Total
GAAP		  
              Reclassifications     Additions/
(Subtractions)		     Total
Adjustments(2) 		   

Interest income:

                    

Student loans

   $ 2,481      $ —     $ 2,744      $ —     $ —     $ 5,225      $ 858      $ (351 )    $ 507      $ 5,732   

Other loans

     —       —       —       16        —       16        —       —        —       16   

Cash and investments

     7        7        11        2        (6 )      21        —       —        —       21   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total interest income

     2,488        7        2,755        18        (6 )      5,262        858        (351 )      507        5,769   

Total interest expense

     822        —       1,591        37        (6 )      2,444        115        2 (4)     117        2,561   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income (loss)

     1,666        7        1,164        (19 )      —       2,818        743        (353 )      390        3,208   

Less: provisions for loan losses

     1,008        —       72        —       —       1,080        —       —        —       1,080   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income (loss) after provisions for loan losses

     658        7        1,092        (19 )      —       1,738        743        (353 )      390        2,128   

Other income (loss):

                    

Gains (losses) on the sales of loans and investments

     —        —        —        —        —        —        —        —        —        —   

Servicing revenue

     46        813        90        —       (670 )      279        —       —        —       279   

Contingency revenue

     —       356        —       —       —       356        —       —        —       356   

Gains on debt repurchases

     —       —       —       145        —       145        —       —        —       145   

Other income (loss)

     —       33        —       15        —       48        (743 )      159 (5)     (584 )      (536 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total other income (loss)

     46        1,202        90        160        (670 )      828        (743 )      159        (584 )      244   

Expenses:

                    

Direct operating expenses

     265        364        702        12        (670 )      673        —       —        —       673   

Overhead expenses

     —       —       —       224        —       224        —       —        —       224   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Operating expenses

     265        364        702        236        (670 )      897        —       —        —       897   

Goodwill and acquired intangible assets impairment and amortization

     —       —       —       —       —       —       —       27        27        27   

Restructuring expenses

     3        3        —       5        —       11        —       —        —       11   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total expenses

     268        367        702        241        (670 )      908        —       27        27        935   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Income (loss) from continuing operations, before income tax expense (benefit)

     436        842        480        (100 )      —       1,658        —       (221 )      (221 )      1,437   

Income tax expense (benefit)(3)

     157        303        173        (36 )      —       597        —       (99 )      (99 )      498   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss) from continuing operations

     279        539        307        (64 )      —       1,061        —       (122 )      (122 )      939   

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

     (2 )     —       —       1        —       (1 )      —       (1 )      (1 )     (2 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss)

     277        539        307        (63 )      —       1,060        —       (123 )      (123 )      937   

Less: net loss attributable to noncontrolling interest

     —       (2 )      —       —       —       (2 )      —       —        —       (2 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss) attributable to SLM Corporation

   $ 277      $ 541      $ 307      $ (63 )    $ —     $ 1,062      $ —     $ (123 )    $ (123 )    $ 939   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(1) 

The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

 

(2) 

“Core Earnings” adjustments to GAAP:

 

     Year Ended December 31, 2012  

(Dollars in millions)

    Net Impact of
Derivative
Accounting		     Net Impact of
Goodwill and
Acquired Intangibles		     Total  

Net interest income after provisions for loan losses

    $ 390      $   —     $ 390   

Total other loss

      (584 )      —       (584 ) 

Goodwill and acquired intangible assets impairment and amortization

      —       27        27   
  

 

 

    

 

 

    

 

 

  

Total “Core Earnings” adjustments to GAAP

    $ (194 )    $ (27 )      (221 ) 
  

 

 

    

 

 

    

Income tax benefit

          (99 ) 

Loss from discontinued operations, net of tax benefit

          (1 )
      

 

 

  

Net loss

        $ (123 ) 
      

 

 

  

 

(3) 

Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

(4) 

Represents a portion of the $42 million of “other derivative accounting adjustments.”

 

(5) 

Represents the $115 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $42 million of “other derivative accounting adjustments.”

 

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    Year Ended December 31, 2011  

(Dollars in millions)

   Consumer
Lending		     Business
Services		     FFELP
Loans		     Other     Eliminations(1)     Total
“Core
Earnings”		     Adjustments     Total
GAAP		  
              Reclassifications     Additions/
(Subtractions)		     Total
Adjustments(2) 		   

Interest income:

                    

Student loans

   $ 2,429      $ —        $ 2,914      $ —        $ —        $ 5,343      $ 902      $ (355 )    $ 547      $ 5,890   

Other loans

     —          —          —          21        —          21        —          —          —          21   

Cash and investments

     9        8        5        5        (8 )      19        —          —          —          19   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total interest income

     2,438        8        2,919        26        (8 )      5,383        902        (355 )      547        5,930   

Total interest expense

     801        —          1,472        54        (8 )      2,319        71        11 (4)      82        2,401   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income (loss)

     1,637        8        1,447        (28 )      —          3,064        831        (366 )      465        3,529   

Less: provisions for loan losses

     1,179        —          86        30        —          1,295        —          —          —          1,295   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income (loss) after provisions for loan losses

     458        8        1,361        (58 )      —          1,769        831        (366 )      465        2,234   

Other income (loss):

                    

Gains (losses) on sales of loans and investments

     (9 )      —          —          (26 )      —          (35 )      —          —          —          (35 ) 

Servicing revenue

     64        872        86        —          (739 )      283        —          —          —          283   

Contingency revenue

     —          333        —          —          —          333        —          —          —          333   

Gains on debt repurchases

     —          —          —          64        —          64        (26 )      —          (26 )      38   

Other income (loss)

     —          69        —          20        —          89        (805 )      (174 )(5)      (979 )      (890 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total other income (loss)

     55        1,274        86        58        (739 )      734        (831 )      (174 )      (1,005 )      (271 ) 

Expenses:

                    

Direct operating expenses

     291        393        772        19        (739 )      736        —          —          —          736   

Overhead expenses

     —          —          —          269        —          269        —          —          —          269   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Operating expenses

     291        393        772        288        (739 )      1,005        —          —          —          1,005   

Goodwill and acquired intangible asset impairment and amortization expense

     —          —          —          —          —          —          —          21        21        21   

Restructuring expenses

     3        5        1        3        —          12        —          —          —          12   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total expenses

     294        398        773        291        (739 )      1,017        —          21        21        1,038   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Income (loss) from continuing operations, before income tax expense (benefit)

     219        884        674        (291 )      —          1,486        —          (561 )      (561 )      925   

Income tax expense (benefit)(3)

     81        325        248        (107 )      —          547        —          (219 )      (219 )      328   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss) from continuing operations

     138        559        426        (184 )      —          939        —          (342 )      (342 )      597   

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

     (2 )      5        —          34        —          37        —          (2 )      (2 )      35   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss)

     136        564        426        (150 )      —          976        —          (344 )      (344 )      632   

Less: net loss attributable to noncontrolling interest

     —          (1 )      —          —          —          (1 )      —          —          —          (1 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss) attributable to SLM Corporation

   $ 136      $ 565      $ 426      $ (150 )    $ —        $ 977      $ —        $ (344 )    $ (344 )    $ 633   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(1) 

The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

 

(2) 

“Core Earnings” adjustments to GAAP:

 

     Year Ended December 31, 2011  

(Dollars in millions)

    Net Impact of
Derivative
Accounting		     Net Impact of
Goodwill and
Acquired
Intangibles		     Total  

Net interest income after provisions for loan losses

    $ 465      $   —     $ 465   

Total other loss

      (1,005 )      —       (1,005 ) 

Goodwill and acquired intangible assets impairment and amortization

      —       21        21   
  

 

 

    

 

 

    

 

 

  

Total “Core Earnings” adjustments to GAAP

    $ (540 )    $ (21 )      (561 ) 
  

 

 

    

 

 

    

Income tax benefit

          (219 ) 

Loss from discontinued operations, net of tax benefit

          (2 ) 
      

 

 

  

Net loss

        $ (344 ) 
      

 

 

  

 

(3) 

Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

(4) 

Represents a portion of the $(32) million of “other derivative accounting adjustments.”

 

(5) 

Represents the $(153) million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $(32) million of “other derivative accounting adjustments.”

 

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Differences between “Core Earnings” and GAAP

The two adjustments required to reconcile our “Core Earnings” results to our 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. The following table reflects aggregate adjustments associated with these areas.

 

     Years Ended
December 31, 		 

(Dollars in millions)

        2013             2012             2011      

“Core Earnings” adjustments to GAAP:

       

Net impact of derivative accounting

    $ 243      $ (194 )    $ (540 ) 

Net impact of goodwill and acquired intangible assets

      (13 )      (27 )      (21 ) 

Net income tax effect

      (96 )      99        219   

Net effect from discontinued operations

      (6 )      (1 )      (2 ) 
  

 

 

    

 

 

    

 

 

  

Total “Core Earnings” adjustments to GAAP

    $ 128      $ (123 )    $ (344 ) 
  

 

 

    

 

 

    

 

 

  

1) Derivative Accounting: “Core Earnings” exclude periodic unrealized gains and losses that are caused by the mark-to-market valuations on derivatives that do not qualify for hedge accounting treatment under GAAP as well as the periodic unrealized gains and losses that are a result of ineffectiveness recognized related to effective hedges under GAAP. These unrealized gains and losses occur in our Consumer Lending, FFELP Loans and Other business segments. Under GAAP, for our derivatives that are held to maturity, the cumulative net unrealized gain or loss over the life of the contract will equal $0 except for Floor Income Contracts where the cumulative unrealized gain will equal the amount for which we sold the contract. In our “Core Earnings” presentation, we recognize the economic effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest expense or revenue over the hedged item’s life.

The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria are met. We believe that our derivatives are effective economic hedges, and as such, are a critical element of our interest rate and foreign currency risk management strategy. However, some of our derivatives, primarily Floor Income Contracts and certain basis swaps, do not qualify for hedge accounting treatment and the stand-alone derivative must be marked-to-market in the income statement with no consideration for the corresponding change in fair value of the hedged item. These gains and losses recorded in “Gains (losses) on derivative and hedging activities, net” are primarily caused by interest rate and foreign currency exchange rate volatility and changing credit spreads during the period as well as the volume and term of derivatives not receiving hedge accounting treatment.

Our Floor Income Contracts are written options that must meet more stringent requirements than other hedging relationships to achieve hedge effectiveness. Specifically, our Floor Income Contracts do not qualify for hedge accounting treatment because the pay down of principal of the student loans underlying the Floor Income embedded in those student loans does not exactly match the change in the notional amount of our written Floor Income Contracts. Additionally, the term, the interest rate index, and the interest rate index reset frequency of the Floor Income Contract can be different than that of the student loans. Under derivative accounting treatment, the upfront payment is deemed a liability and changes in fair value are recorded through income throughout the life of the contract. The change in the value of Floor Income Contracts is primarily caused by changing interest rates that cause the amount of Floor Income earned on the underlying student loans and paid to the counterparties to vary. This is economically offset by the change in value of the student loan portfolio earning Floor Income but that offsetting change in value is not recognized. We believe the Floor Income Contracts are economic hedges because they effectively fix the amount of Floor Income earned over the contract period, thus eliminating the timing and uncertainty that changes in interest rates can have on Floor Income for that period. Therefore, for

 

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purposes of “Core Earnings,” we have removed the unrealized gains and losses related to these contracts and added back the amortization of the net premiums received on the Floor Income Contracts. The amortization of the net premiums received on the Floor Income Contracts for “Core Earnings” is reflected in student loan interest income. Under GAAP accounting, the premiums received on the Floor Income Contracts are recorded as revenue in the “gains (losses) on derivative and hedging activities, net” line item by the end of the contracts’ lives.

Basis swaps are used to convert floating rate debt from one floating interest rate index to another to better match the interest rate characteristics of the assets financed by that debt. We primarily use basis swaps to hedge our student loan assets that are primarily indexed to LIBOR or Prime (for $128 billion of our FFELP assets as of April 1, 2012, we elected to change the index from commercial paper to LIBOR; see “FFELP Loans Segment — FFELP Loans Net Interest Margin” for further discussion). The accounting for derivatives requires that when using basis swaps, the change in the cash flows of the hedge effectively offset both the change in the cash flows of the asset and the change in the cash flows of the liability. Our basis swaps hedge variable interest rate risk; however, they generally do not meet this effectiveness test because the index of the swap does not exactly match the index of the hedged assets as required for hedge accounting treatment. Additionally, some of our FFELP Loans can earn at either a variable or a fixed interest rate depending on market interest rates and therefore swaps economically hedging these FFELP Loans do not meet the criteria for hedge accounting treatment. As a result, under GAAP, these swaps are recorded at fair value with changes in fair value reflected currently in the income statement.

The table below quantifies the adjustments for the effects of derivative accounting on our net income.

 

     Years Ended
December 31, 		 

(Dollars in millions)

    2013     2012     2011  

“Core Earnings” derivative adjustments:

       

Losses on derivative and hedging activities, net, included in other income(1)

    $ (268 )    $ (628 )    $ (959 ) 

Plus: Realized losses on derivative and hedging activities, net(1)

      755        743        806   
  

 

 

    

 

 

    

 

 

  

Unrealized gains (losses) on derivative and hedging activities, net(2)

      487        115        (153 ) 

Amortization of net premiums on Floor Income Contracts in net interest income for “Core Earnings”

      (307 )      (351 )      (355 ) 

Other derivative accounting adjustments(3)

      63        42        (32 ) 
  

 

 

    

 

 

    

 

 

  

Total net impact of derivative accounting(4)

    $ 243      $ (194 )    $ (540 ) 
  

 

 

    

 

 

    

 

 

  

 

(1)

See the section titled “Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” below for a detailed breakdown of the components of realized losses on derivative and hedging activities.

 

(2) 

“Unrealized gains (losses) on derivative and hedging activities, net” comprises the following unrealized mark-to-market gains (losses):

 

     Years Ended
December 31, 		 

(Dollars in millions)

        2013             2012             2011      

Floor Income Contracts

    $ 785      $ 412      $ (267 ) 

Basis swaps

      (14 )      (66 )      104   

Foreign currency hedges

      (248 )      (199 )      (32 ) 

Other

      (36 )      (32 )      42   
  

 

 

    

 

 

    

 

 

  

Total unrealized gains (losses) on derivative and hedging activities, net

    $ 487      $ 115      $ (153 ) 
  

 

 

    

 

 

    

 

 

  

 

(3) 

Other derivative accounting adjustments consist of adjustments related to: (1) foreign currency denominated debt that is adjusted to spot foreign exchange rates for GAAP where such adjustment are reversed for “Core Earnings”; and (2) certain terminated derivatives that did not receive hedge accounting treatment under GAAP but were economic hedges under “Core Earnings” and, as a result, such gains or losses amortized into “Core Earnings” over the life of the hedged item.

 

(4) 

Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income and positive amounts are added to “Core Earnings” to arrive at GAAP net income.

 

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Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities

Derivative accounting requires net settlement income/expense on derivatives and realized gains/losses related to derivative dispositions (collectively referred to as “realized gains (losses) on derivative and hedging activities”) that do not qualify as hedges to be recorded in a separate income statement line item below net interest income. Under our “Core Earnings” presentation, these gains and losses are reclassified to the income statement line item of the economically hedged item. For our “Core Earnings” net interest margin, this would primarily include: (a) reclassifying the net settlement amounts related to our Floor Income Contracts to student loan interest income and (b) reclassifying the net settlement amounts related to certain of our basis swaps to debt interest expense. The table below summarizes the realized losses on derivative and hedging activities and the associated reclassification on a “Core Earnings” basis.

 

     Years Ended
December 31, 		 

(Dollars in millions)

        2013             2012             2011      

Reclassification of realized gains (losses) on derivative and hedging activities:

       

Net settlement expense on Floor Income Contracts reclassified to net interest income

    $ (816 )    $ (858 )    $ (902 ) 

Net settlement income on interest rate swaps reclassified to net interest income

      55        115        71   

Foreign exchange derivatives gains (losses) reclassified to other income

        —        —   

Net realized gains on terminated derivative contracts reclassified to other income

      6        —        25   
  

 

 

    

 

 

    

 

 

  

Total reclassifications of realized losses on derivative and hedging activities

    $ (755 )    $ (743 )    $ (806 ) 
  

 

 

    

 

 

    

 

 

  

Cumulative Impact of Derivative Accounting under GAAP compared to “Core Earnings”

As of December 31, 2013, derivative accounting has reduced GAAP equity by approximately $926 million as a result of cumulative unrealized net losses (after tax) recognized under GAAP, but not in “Core Earnings.” The following table rolls forward the cumulative impact to GAAP equity due to these unrealized net losses related to derivative accounting.

 

     Years Ended
December 31,		  

(Dollars in millions)

        2013             2012             2011      

Beginning impact of derivative accounting on GAAP equity

    $ (1,080 )    $ (977 )    $ (676 ) 

Net impact of net unrealized gains (losses) under derivative accounting(1)

      154        (103 )      (301 ) 
  

 

 

    

 

 

    

 

 

  

Ending impact of derivative accounting on GAAP equity

    $ (926 )    $ (1,080 )    $ (977 ) 
  

 

 

    

 

 

    

 

 

  

 

(1) 

Net impact of net unrealized gains (losses) under derivative accounting is composed of the following:

 

     Years Ended
December 31,		  

(Dollars in millions)

        2013             2012             2011      

Total pre-tax net impact of derivative accounting recognized in net income(a)

    $ 243      $ (194 )    $ (540 ) 

Tax impact of derivative accounting adjustment recognized in net income

      (111 )      82        208   

Change in unrealized gain on derivatives, net of tax recognized in Other Comprehensive Income

      22        9        31   
  

 

 

    

 

 

    

 

 

  

Net impact of net unrealized gains (losses) under derivative accounting

    $ 154      $ (103 )    $ (301 ) 
  

 

 

    

 

 

    

 

 

  

 

(a) 

See “‘Core Earnings’ derivative adjustments” table above.

 

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Net Floor premiums received on Floor Income Contracts that have not been amortized into “Core Earnings” as of the respective year-ends are presented in the table below. These net premiums will be recognized in “Core Earnings” in future periods and are presented net of tax. As of December 31, 2013, the remaining amortization term of the net floor premiums was approximately 2.5 years for existing contracts. Historically, we have sold Floor Income Contracts on a periodic basis and depending upon market conditions and pricing, we may enter into additional Floor Income Contracts in the future. The balance of unamortized Floor Income Contracts will increase as we sell new contracts and decline due to the amortization of existing contracts.

 

     December 31,  

(Dollars in millions)

    2013     2012     2011  

Unamortized net Floor premiums (net of tax)

    $ (354 )    $ (551 )    $ (772 ) 

2) Goodwill and Acquired Intangible Assets: Our “Core Earnings” exclude goodwill and intangible asset impairment and the amortization of acquired intangible assets. The following table summarizes the goodwill and acquired intangible asset adjustments.

 

     Years Ended
December 31,		  

(Dollars in millions)

        2013             2012             2011      

“Core Earnings” goodwill and acquired intangible asset adjustments(1):

       

Goodwill and intangible impairment of acquired intangible assets

    $ —      $ (9 )    $ —   

Amortization of acquired intangible assets

      (13 )      (18 )      (21 ) 
  

 

 

    

 

 

    

 

 

  

Total “Core Earnings” goodwill and acquired intangible asset adjustments(1)

      (13 )    $ (27 )    $ (21 ) 
  

 

 

    

 

 

    

 

 

  

 

(1) 

Negative amounts are subtracted from “Core Earnings” to arrive at GAAP net income and positive amounts are added to “Core Earnings” to arrive at GAAP net income.

 

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Business Segment Earnings Summary — “Core Earnings” Basis

Consumer Lending Segment

The following table includes “Core Earnings” results for our Consumer Lending segment.

 

     Years Ended December 31,     % Increase (Decrease)  

(Dollars in millions)

    2013     2012     2011     2013 vs. 2012     2012 vs. 2011  

“Core Earnings” interest income:

           

Private Education Loans

    $ 2,527      $ 2,481      $ 2,429        2 %      2 % 

Cash and investments

      7        7        9        —          (22 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total “Core Earnings” interest income

      2,534        2,488        2,438        2        2   

Total “Core Earnings” interest expense

      825        822        801        —          3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net “Core Earnings” interest income

      1,709        1,666        1,637        3        2   

Less: provision for loan losses

      787        1,008        1,179        (22 )      (15 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net “Core Earnings” interest income after provision for loan losses

      922        658        458        40        44   

Losses on sales of loans and investments

      —          —          (9 )      —          (100 ) 

Servicing revenue

      34        46        64        (26 )      (28 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total other income

      34        46        55        (26 )      (16 ) 

Direct operating expenses

      298        265        291        12        (9 ) 

Restructuring and other reorganization expenses

      6        3        3        100        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total expenses

      304        268        294        13        (9 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Income before income tax expense

      652        436        219        50        99   

Income tax expense

      239        157        81        52        94   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income from continuing operations

      413        279        138        48        102   

Loss from discontinued operations, net of tax benefit

      (1 )      (2 )      (2 )      (50 )      —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

“Core Earnings”

    $ 412      $ 277      $ 136        49 %      104 % 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

“Core Earnings” were $412 million in 2013, compared with $277 million in 2012 and $136 million in 2011. This increase across all years was primarily the result of lower provision for loan losses as well as an increase in net interest income.

2013 highlights compared with 2012 included:

 

  •  

Loan originations increased to $3.8 billion, up 14 percent from $3.3 billion.

 

  •  

The portfolio, net of loan loss allowance, totaled $37.5 billion at December 31, 2013, compared with $36.9 billion at December 31, 2012.

 

  •  

Net interest margin, before loan loss provision, improved to 4.16 percent, up from 4.13 percent.

 

  •  

Provision for Private Education Loan losses decreased to $787 million from $1.0 billion.

 

  •  

Delinquencies of 90 days or more (as a percentage of loans in repayment) improved to 4.1 percent, compared with 4.6 percent.

 

  •  

Loans in forbearance decreased to 3.4 percent of loans in repayment and forbearance, down from 3.5 percent.

 

  •  

The annual charge-off rate (as a percentage of loans in repayment) improved to 2.8 percent, compared with 3.4 percent.

 

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Consumer Lending Net Interest Margin

The following table shows the Consumer Lending “Core Earnings” net interest margin along with reconciliation to the GAAP-basis Consumer Lending net interest margin before provision for loan losses.

 

     Years Ended December 31,  
     2013     2012     2011  

“Core Earnings” basis Private Education Loan yield

      6.39 %      6.36 %      6.34 % 

Discount amortization

      .21        .22        .23   
  

 

 

    

 

 

    

 

 

  

“Core Earnings” basis Private Education Loan net yield

      6.60        6.58        6.57   

“Core Earnings” basis Private Education Loan cost of funds

      (2.03 )      (2.04 )      (1.99 ) 
  

 

 

    

 

 

    

 

 

  

“Core Earnings” basis Private Education Loan spread

      4.57        4.54        4.58   

“Core Earnings” basis other asset spread impact

      (.41 )      (.41 )      (.49 ) 
  

 

 

    

 

 

    

 

 

  

“Core Earnings” basis Consumer Lending net interest margin(1)

      4.16 %      4.13 %      4.09 % 
  

 

 

    

 

 

    

 

 

  
                          

“Core Earnings” basis Consumer Lending net interest margin(1)

      4.16 %      4.13 %      4.09 % 

Adjustment for GAAP accounting treatment(2)

      (.03 )      (.10 )      (.08 ) 
  

 

 

    

 

 

    

 

 

  

GAAP-basis Consumer Lending net interest margin(1)

      4.13 %      4.03 %      4.01 % 
  

 

 

    

 

 

    

 

 

  

 

  (1) 

The average balances of our Consumer Lending “Core Earnings” basis interest-earning assets for the respective periods are:

 

     Years Ended December 31,  

(Dollars in millions)

    2013      2012      2011  

Private Education Loans

    $ 38,292       $ 37,691       $ 36,955   

Other interest-earning assets

      2,727         2,572         3,015   
  

 

 

     

 

 

     

 

 

  

Total Consumer Lending “Core Earnings” basis interest-earning assets

    $ 41,019       $ 40,263       $ 39,970   
  

 

 

     

 

 

     

 

 

  

 

  (2) 

Represents the reclassification of periodic interest accruals on derivative contracts from net interest income to other income and other derivative accounting adjustments. For further discussion of these adjustments, see the section titled “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP.”

Private Education Loans Provision for Loan Losses and Charge-Offs

The following table summarizes the total Private Education Loans provision for loan losses and charge-offs.

 

     Years Ended December 31,  

(Dollars in millions)

    2013      2012      2011  

Private Education Loan provision for loan losses

    $ 787       $ 1,008       $ 1,179   

Private Education Loan charge-offs

    $ 878       $ 1,037       $ 1,072   

In establishing the allowance for Private Education Loan losses as of December 31, 2013, we considered several factors with respect to our Private Education Loan portfolio. In particular, we continue to see improvement in credit quality and continuing positive delinquency, forbearance and charge-off trends in connection with this portfolio. Improving credit quality is seen in higher FICO scores and cosigner rates as well as a more seasoned portfolio. Total loans delinquent (as a percentage of loans in repayment) have decreased to 8.3 percent from 9.3 percent in the year-ago period. Loans greater than 90 days delinquent (as a percentage of loans in repayment) have decreased to 4.1 percent from 4.6 percent in the prior year. The charge-off rate decreased to 2.8 percent from 3.4 percent in the prior year. Loans in forbearance (as a percentage of loans in repayment and forbearance) decreased to 3.4 percent from 3.5 percent in the prior year.

 

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Apart from the overall improvements discussed above that had the effect of reducing the provision for loan losses in 2013 compared to prior years, Private Education Loans that have defaulted between 2008 and 2013 for which we have previously charged off estimated losses have, to varying degrees, not met our post-default recovery expectations to date and may continue to not do so. Our allowance for loan losses takes into account these potential recovery uncertainties. In the third quarter of 2013, we increased our allowance related to these potential recovery shortfalls by approximately $112 million. See the section titled “Financial Condition — Consumer Lending Portfolio Performance — Receivable for Partially Charged-Off Private Education Loans” for further discussion.

The Private Education Loan provision for loan losses was $787 million for 2013, down $221 million from the year-ago period and down $392 million from two years ago. This decline over the prior two years was a result of the overall improvement in credit quality and performance trends discussed above, leading to decreases in expected future charge-offs. This overall decrease in expected future charge-offs is the net effect of a decrease in expected future defaults less a smaller decrease in what we expect to recover on such defaults.

For a more detailed discussion of our policy for determining the collectability of Private Education Loans and maintaining our allowance for Private Education Loan losses, see the section titled “Critical Accounting Policies and Estimates — Allowance for Loan Losses.”

Other Income — Consumer Lending Segment

Servicing revenue for our Consumer Lending segment primarily includes late fees. For the years ended December 31, 2013, 2012 and 2011, servicing revenue for our Consumer Lending segment totaled $34 million, $46 million and $64 million, respectively. Included in other income for 2011 was a $9 million mark-to-market loss related to classifying our entire $12 million portfolio of non-U.S. dollar-denominated student loans as held-for-sale.

Operating Expenses — Consumer Lending Segment

Operating expenses for our Consumer Lending segment include costs incurred to originate Private Education Loans and to service and collect on our Private Education Loan portfolio. The increase in operating expenses of $33 million for 2013 compared with 2012 was primarily the result of increased loan marketing and collection activities as well as continued investments in technology. The $26 million decline from 2011 to 2012 was primarily the result of cost-cutting initiatives. Direct operating expenses as a percentage of revenues (revenues calculated as net interest income after provision plus total other income) were 31 percent, 38 percent and 57 percent in 2013, 2012 and 2011, respectively.

 

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Business Services Segment

The following tables include “Core Earnings” results for our Business Services segment.

 

    Years Ended December 31,     % Increase (Decrease)  

(Dollars in millions)

   2013     2012     2011     2013 vs. 2012     2012 vs. 2011  

Net interest income after provision

   $ 5      $ 7      $ 8        (29 )%      (13 )% 

Servicing revenue:

          

Intercompany loan servicing

     530        670        739        (21 )      (9 ) 

Third-party loan servicing

     142        98        82        45        20   

Guarantor servicing

     38        44        52        (14 )      (15 ) 

Other servicing

     —          1        (1 )      (100 )      200   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total servicing revenue

     710        813        872        (13 )      (7 ) 

Contingency revenue

     420        356        333        18        7   

Other Business Services revenue

     34        33        69        3        (52 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total other income

     1,164        1,202        1,274        (3 )      (6 ) 

Direct operating expenses

     400        364        393        10        (7 ) 

Restructuring and other reorganization expenses

     2        3        5        (33 )      (40 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total expenses

     402        367        398        10        (8 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Income from continuing operations, before income tax expense

     767        842        884        (9 )      (5 ) 

Income tax expense

     281        303        325        (7 )      (7 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income from continuing operations

     486        539        559        (10 )      (3 ) 

Income from discontinued operations, net of tax expense

     112        —          5        100        (100 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income

     598        539        564        11        (4 ) 

Less: net loss attributable to noncontrolling interest

     (1 )      (2 )      (1 )      (50 )      100   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

“Core Earnings” attributable to SLM Corporation

   $ 599      $ 541      $ 565        11 %      (4 )% 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

“Core Earnings” were $599 million for 2013, compared with $541 million and $565 million in 2012 and 2011, respectively. The increase in 2013 compared to 2012 was primarily the result of $109 million of after-tax gains from the sale of two subsidiaries in 2013 and an increase in contingency revenue which was partially offset by a decline in intercompany loan servicing fees due to a lower balance of FFELP Loans serviced. The decrease in 2012 compared to 2011 was primarily due to a $25 million gain recognized in 2011 related to the termination and replacement of a credit card affiliation contract and the lower balance of FFELP Loans serviced.

Our Business Services segment earns intercompany loan servicing fees from servicing the FFELP Loans in our FFELP Loans segment. The average balance of this portfolio was $112 billion, $134 billion and $141 billion for 2013, 2012 and 2011, respectively. The decline in the average balance of FFELP Loans outstanding along with the related intercompany loan servicing revenue from prior years is primarily the result of normal amortization of the portfolio, as well as the sale of our Residual Interests in $12 billion of securitized FFELP loans in the first half of 2013 which impacted the 2013 decline.

Third-party loan servicing income for 2013 compared with 2012 increased $44 million, primarily due to the increase in ED servicing revenue (discussed below) as well as a result of the sale of Residual Interests in FFELP Loan securitization trusts in 2013. (See the section titled “FFELP Loans Segment” for further discussion.) When we sold the Residual Interests, we retained the right to service the loans in the trusts. As such, servicing income that had previously been recorded as intercompany loan servicing income is now recognized as third-party loan servicing income. The increase from 2011 to 2012 was primarily due to the increase in ED servicing revenue.

 

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We serviced approximately 5.7 million accounts under the ED Servicing Contract as of December 31, 2013, compared with 4.3 million accounts and 3.6 million accounts serviced at December 31, 2012 and 2011, respectively. Third-party loan servicing fees in the years ended December 31, 2013, 2012 and 2011 included $109 million, $84 million and $63 million, respectively, of servicing revenue related to the ED Servicing Contract.

At December 31, 2013, we serviced over $300 billion principal balance of student loans compared with approximately $250 billion serviced at December 31, 2012. The increase in the principal balance serviced in 2013 was primarily due to the growth in the ED serviced accounts discussed above.

Our contingency revenue consists of fees we receive for the collections of delinquent debt on behalf of third-party clients performed on a contingent basis. Contingency revenue increased $64 million in 2013 compared with 2012 and increased $23 million in 2012 compared to 2011 as a result of the higher volume of collections.

The following table presents the outstanding inventory of contingent collection receivables that our Business Services segment will collect on behalf of others. We expect the inventory of contingent collection receivables to decline over time as a result of the elimination of the FFELP.

 

     December 31,  

(Dollars in millions)

    2013      2012      2011  

Contingent collection receivables:

         

Student loans

    $ 13,481       $ 13,189       $ 11,553   

Other

      2,693         2,139         2,017   
  

 

 

     

 

 

     

 

 

  

Total

    $ 16,174       $ 15,328       $ 13,570   
  

 

 

     

 

 

     

 

 

  

Other Business Services revenue is primarily transaction fees that are earned in conjunction with our rewards program from participating companies based on member purchase activity, either online or in stores, depending on the contractual arrangement with the participating company. In 2011, we terminated our credit card affiliation program with a third-party bank and concurrently entered into an affiliation program with a new bank. In terminating the old program, we recognized a $25 million gain which primarily represented prior cash advances we received that were previously recorded as deferred revenue.

In 2013, we sold our Campus Solutions business and recorded an after-tax gain of $38 million. In 2013, we sold our 529 college-savings plan administration business and recorded an after-tax gain of $71 million. The results related to these two businesses for all periods presented have been reclassified as discontinued operations and are shown on an after-tax basis.

Revenues related to services performed on FFELP Loans accounted for 77 percent, 82 percent and 82 percent of total segment revenues for the years ended December 31, 2013, 2012 and 2011, respectively.

Operating Expenses — Business Services Segment

Operating expenses for our Business Services segment primarily include costs incurred to service our FFELP Loan portfolio, third-party servicing and collection costs, and other operating costs. The increase in operating expenses of $36 million in 2013 compared with the prior year was primarily the result of an increase in our third-party servicing and collection activities as well as continued investments in technology. The decrease in operating expenses from 2011 to 2012 was primarily the result of our cost-cutting initiatives.

 

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FFELP Loans Segment

The following table includes “Core Earnings” results for our FFELP Loans segment.

 

     Years Ended December 31,      % Increase (Decrease)  

(Dollars in millions)

    2013      2012      2011      2013 vs. 2012     2012 vs. 2011  

“Core Earnings” interest income:

              

FFELP Loans

    $ 2,313       $ 2,744       $ 2,914         (16 )%      (6 )% 

Cash and investments

      6         11         5         (45 )      120   
  

 

 

     

 

 

     

 

 

     

 

 

    

 

 

  

Total “Core Earnings” interest income

      2,319         2,755         2,919         (16 )      (6 ) 

Total “Core Earnings” interest expense

      1,285         1,591         1,472         (19 )      8   
  

 

 

     

 

 

     

 

 

     

 

 

    

 

 

  

Net “Core Earnings” interest income

      1,034         1,164         1,447         (11 )      (20 ) 

Less: provision for loan losses

      52         72         86         (28 )      (16 ) 
  

 

 

     

 

 

     

 

 

     

 

 

    

 

 

  

Net “Core Earnings” interest income after provision for loan losses

      982         1,092         1,361         (10 )      (20 ) 

Gains on sales of loans and investments

      312         —           —           100        —     

Servicing revenue

      76        90        86         (16 )      5   
  

 

 

     

 

 

     

 

 

     

 

 

    

 

 

  

Total other income

      388         90         86         331        5   

Direct operating expenses

      557         702         772         (21 )      (9 ) 

Restructuring and other reorganization expenses

      —          —          1         —          (100 ) 
  

 

 

     

 

 

     

 

 

     

 

 

    

 

 

  

Total expenses

      557         702         773         (21 )      (9 ) 
  

 

 

     

 

 

     

 

 

     

 

 

    

 

 

  

Income from continuing operations, before income tax expense

      813         480         674         69        (29 ) 

Income tax expense

      298         173         248         72        (30 ) 
  

 

 

     

 

 

     

 

 

     

 

 

    

 

 

  

“Core Earnings”

    $ 515       $ 307       $ 426         68 %      (28 )% 
  

 

 

     

 

 

     

 

 

     

 

 

    

 

 

  

“Core Earnings” from the FFELP Loans segment were $515 million in 2013, compared with $307 million and $426 million in 2012 and 2011, respectively. The increase in 2013 compared with 2012 was primarily due to $312 million of gains from the sale of Residual Interests in FFELP Loan securitization trusts in 2013. The decrease in 2012 compared with 2011 was primarily due to the declining balance of FFELP Loans and a lower net interest margin as a result of an increase in the cost of funds. Key financial measures include:

 

  •  

Net interest margin of .88 percent in 2013 compared with .84 percent and .98 percent for 2012 and 2011, respectively. (See the section titled “FFELP Loans Net Interest Margin” for further discussion.)

 

  •  

The provision for loan losses continued to decline over the past two years as a result of improved credit performance.

 

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FFELP Loans Net Interest Margin

The following table shows the FFELP Loans “Core Earnings” net interest margin along with reconciliation to the GAAP-basis FFELP Loans net interest margin.

 

     Years Ended December 31,  
       2013         2012         2011    

“Core Earnings” basis FFELP Loan yield

      2.59 %      2.66 %      2.59 % 

Hedged Floor Income

      .27        .26        .25   

Unhedged Floor Income

      .09        .11        .12   

Consolidation Loan Rebate Fees

      (.65 )      (.67 )      (.65 ) 

Repayment Borrower Benefits

      (.11 )      (.13 )      (.12 ) 

Premium amortization

      (.13 )      (.15 )      (.15 ) 
  

 

 

    

 

 

    

 

 

  

“Core Earnings” basis FFELP Loan net yield

      2.06        2.08        2.04   

“Core Earnings” basis FFELP Loan cost of funds

      (1.07 )      (1.13 )      (.98 ) 
  

 

 

    

 

 

    

 

 

  

“Core Earnings” basis FFELP Loan spread

      .99        .95        1.06   

“Core Earnings” basis FFELP other asset spread impact

      (.11 )      (.11 )      (.08 ) 
  

 

 

    

 

 

    

 

 

  

“Core Earnings” basis FFELP Loans net interest margin(1)

      .88 %      .84 %      .98 % 
  

 

 

    

 

 

    

 

 

  
                          

“Core Earnings” basis FFELP Loans net interest margin(1)

      .88 %      .84 %      .98 % 

Adjustment for GAAP accounting treatment(2)

      .41        .31        .34   
  

 

 

    

 

 

    

 

 

  

GAAP-basis FFELP Loans net interest margin

      1.29 %      1.15 %      1.32 % 
  

 

 

    

 

 

    

 

 

  

 

  (1) 

The average balances of our FFELP “Core Earnings” basis interest-earning assets for the respective periods are:

 

     Years Ended December 31,  
     2013      2012      2011  

(Dollars in millions)

                     

FFELP Loans

    $ 112,152       $ 132,124       $ 143,109   

Other interest-earning assets

      5,013         6,619         5,194   
  

 

 

     

 

 

     

 

 

  

Total FFELP “Core Earnings” basis interest-earning assets

    $ 117,165       $ 138,743       $ 148,303   
  

 

 

     

 

 

     

 

 

  

 

  (2) 

Represents the reclassification of periodic interest accruals on derivative contracts from net interest income to other income and other derivative accounting adjustments. For further discussion of these adjustments, see section titled “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP” above.

The decrease in the “Core Earnings” basis FFELP Loans net interest margin of 14 basis points for 2012 compared with 2011 was primarily the result of funding costs related to new unsecured and ABS debt issuances over the period being higher than the funding costs of the debt that has matured or has been repurchased during that same period. In addition, there were increased spread impacts from increases in the average balance of our other interest-earning assets. These assets are primarily securitization trust restricted cash. Our other interest-earning asset portfolio yields a negative net interest margin and as a result, when its relative weighting increases, the overall net interest margin declines.

During the fourth-quarter 2011, the Administration announced the SDCL initiative. The SDCL 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 Direct Loan Program by providing a 0.25 percentage point interest rate reduction on the FFELP Loans that are 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 our FFELP Loans to ED. The consolidation of these loans resulted in the acceleration of $42 million of non-cash loan premium amortization and $8 million of non-cash debt discount

 

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amortization during 2012. This combined $50 million acceleration of non-cash amortization related to this activity reduced the FFELP Loans net interest margin by 4 basis points in 2012.

On December 23, 2011, the President signed the Consolidated Appropriations Act of 2012 into law. This law includes changes that permit FFELP lenders or beneficial holders to change the index on which the Special Allowance Payments (“SAP”) are calculated for FFELP Loans first disbursed on or after January 1, 2000. We elected to use the one-month LIBOR rate rather than the CP rate commencing on April 1, 2012 in connection with our entire $128 billion of CP indexed loans. This change will help us to better match loan yields with our financing costs. This election did not materially affect our results for 2012.

As of December 31, 2013, our FFELP Loan portfolio totaled approximately $105 billion, comprised of $40 billion of FFELP Stafford and $65 billion of FFELP Consolidation Loans. The weighted-average life of these portfolios is 4.9 years and 9.3 years, respectively, assuming a Constant Prepayment Rate (“CPR”) of 4 percent and 3 percent, respectively.

Floor Income

The following table analyzes the ability of the FFELP Loans in our portfolio to earn Floor Income after December 31, 2013 and 2012, based on interest rates as of those dates.

 

     December 31, 2013     December 31, 2012  

(Dollars in billions)

    Fixed
Borrower
Rate		     Variable
Borrower
Rate		     Total     Fixed
Borrower
Rate		     Variable
Borrower
Rate		     Total  

Student loans eligible to earn Floor Income

    $ 89.9      $ 13.3      $ 103.2      $ 108.6      $ 15.1      $ 123.7   

Less: post-March 31, 2006 disbursed loans required to rebate Floor Income

      (45.5 )      (.9 )      (46.4 )      (57.3 )      (1.0 )      (58.3 ) 

Less: economically hedged Floor Income Contracts

      (31.7 )      —         (31.7 )      (35.2 )      —         (35.2 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Student loans eligible to earn Floor Income

    $ 12.7      $ 12.4      $ 25.1      $ 16.1      $ 14.1      $ 30.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Student loans earning Floor Income

    $ 12.7      $ .6      $ 13.3      $ 16.0      $ 2.0      $ 18.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

We have sold Floor Income Contracts to hedge the potential Floor Income from specifically identified pools of FFELP Consolidation Loans that are eligible to earn Floor Income.

The following table presents a projection of the average balance of FFELP Consolidation Loans for which Fixed Rate Floor Income has been economically hedged through Floor Income Contracts for the period January 1, 2014 to June 30, 2016. The hedges related to these loans do not qualify as effective hedges.

 

     Years Ended December 31,  

(Dollars in billions)

      2014          2015          2016    

Average balance of FFELP Consolidation Loans whose Floor Income is economically hedged

    $ 28.3       $ 27.2       $ 10.4   
  

 

 

     

 

 

     

 

 

  

FFELP Loans Provision for Loan Losses and Charge-Offs

The following table summarizes the total FFELP Loan provision for loan losses and charge-offs.

 

     Years Ended December 31,  

(Dollars in millions)

      2013           2012          2011    

FFELP Loan provision for loan losses

    $ 52       $ 72       $ 86   

FFELP Loan charge-offs

    $ 78       $ 92       $ 78   

 

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Other Income — FFELP Loans Segment

The following table summarizes the components of “Core Earnings” other income for our FFELP Loans segment.

 

     Years Ended December 31,  

(Dollars in millions)

      2013          2012          2011    

Gains on loans and investments

    $ 312       $ —        $ —    

Servicing revenue

      76         90         86   
  

 

 

     

 

 

     

 

 

  

Total other income, net

    $ 388       $ 90       $ 86   
  

 

 

     

 

 

     

 

 

  

Servicing revenue for our FFELP Loans segment primarily consists of customer late fees. The increase in gains on sales of loans and investments in 2013 compared to the prior years was the result of $312 million in gains from the sale of Residual Interests in FFELP Loan securitization trusts in 2013. We will continue to service the student loans in the trusts that were sold under existing agreements. The sales removed securitization trust assets of $12.5 billion and related liabilities of $12.1 billion from the balance sheet.

Operating Expenses — FFELP Loans Segment

Operating expenses for our FFELP Loans segment primarily include the contractual rates we pay to service loans in term asset-backed securitization trusts or a similar rate if a loan is not in a term financing facility (which is presented as an intercompany charge from the Business Services segment who services the loans), the fees we pay for third-party loan servicing and costs incurred to acquire loans. The intercompany revenue charged from the Business Services segment and included in those amounts was $530 million, $670 million and $739 million for the years ended December 31, 2013, 2012 and 2011, respectively. These amounts exceed the actual cost of servicing the loans.

The decrease in operating expenses of $145 million from 2013 to 2012, and $70 million from 2012 to 2011, was primarily the result of the reduction in the average outstanding balance of our FFELP Loans portfolio. Operating expenses, excluding restructuring-related asset impairments, were 50 basis points, 53 basis points and 54 basis points of average FFELP Loans for 2013, 2012 and 2011, respectively.

Other Segment

The Other segment primarily consists of the financial results related to the repurchase of debt, the corporate liquidity portfolio and all overhead. We also include results from certain, smaller wind-down and discontinued operations within this segment. These are the Purchased Paper businesses and mortgage and other loan businesses. The Other segment includes our remaining businesses that do not pertain directly to the primary segments identified above. Overhead expenses include costs related to executive management, the board of directors, accounting, finance, legal, human resources, stock-based compensation expense and certain information technology costs related to infrastructure and operations.

 

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The following table includes “Core Earnings” results for our Other segment.

 

     Years Ended
December 31,		     % Increase (Decrease)  

(Dollars in millions)

    2013     2012     2011     2013 vs. 2012     2012 vs. 2011  

Net interest loss after provision

    $ (36 )    $ (19 )    $ (58 )      89 %      (67 )% 

Losses on sales of loans and investments

      (10 )      —          (26 )      100        (100 ) 

Gains on debt repurchases

      48        145        64        (67 )      127   

Other income

      4        15        20        (73 )      (25 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total other income

      42        160        58        (74 )      176   

Direct operating expenses

      80        12        19        567        (37 ) 

Overhead expenses:

           

Corporate overhead

      116        116        161        —          (28 ) 

Unallocated information technology costs

      121        108        108        12        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total overhead expenses

      237        224        269        6        (17 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total operating expenses

      317        236        288        34        (18 ) 

Restructuring and other reorganization expenses

      64        5        3        1,180        67   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total expenses

      381        241        291        58        (17 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Loss from continuing operations, before income tax benefit

      (375 )      (100 )      (291 )      275        (66 ) 

Income tax benefit

      (138 )      (36 )      (107 )      283        (66 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net loss from continuing operations

      (237 )      (64 )      (184 )      270        (65 ) 

Income from discontinued operations, net of tax expense

      1        1        34        —          (97 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

“Core Earnings” net loss

    $ (236 )    $ (63 )    $ (150 )      275 %      (58 )% 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net Interest Loss after Provision for Loan Losses

Net interest loss after provision for loan losses includes net interest income related to our corporate liquidity portfolio as well as net interest income and provision expense related to our other loan portfolios.

Gains on Debt Repurchases

We repurchased $1.3 billion, $711 million and $894 million face amount of our debt in 2013, 2012 and 2011, respectively. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.

Direct Operating Expenses — Other Segment

In the fourth quarter of 2013, we reserved $70 million for expected compliance remediation efforts relating to pending regulatory inquiries. This is the primary reason for the increase in direct operating expenses of $68 million for 2013 over the prior year.

Overhead — Other Segment

Corporate overhead is comprised of costs related to executive management, the board of directors, accounting, finance, legal, human resources and stock-based compensation expense. Unallocated information technology costs are related to infrastructure and operations. The decrease from 2011 to 2012 was primarily the result of cost-cutting initiatives.

 

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Restructuring and Other Reorganization Expenses — Other Segment

For 2013, restructuring and other reorganization expenses were $64 million compared with $5 million and $3 million in 2012 and 2011, respectively. For 2013, these consisted of $43 million of expenses related to third-party costs incurred in connection with our previously announced plan to separate our existing organization into two, separate publicly-traded companies and $21 million related to severance costs. The $5 million and $3 million of expenses in 2012 and 2011, respectively, were related to restructuring expenses.

Financial Condition

This section provides additional information regarding the changes related to our loan portfolio assets and related liabilities as well as credit performance indicators related to our loan portfolio. Certain of these disclosures will show both GAAP-basis as well as “Core Earnings” basis disclosures. Because certain trusts were not consolidated prior to the adoption of the new consolidation accounting guidance on January 1, 2010, these trusts were treated as off-balance sheet for GAAP purposes but we considered them on-balance sheet for “Core Earnings” purposes. Subsequent to the adoption of the new consolidation accounting guidance on January 1, 2010, this difference no longer exists because all of our trusts are treated as on-balance sheet for GAAP purposes. Below and elsewhere in the document, “Core Earnings” basis disclosures include all historically (pre-January 1, 2010) off-balance sheet trusts as though they were on-balance sheet. We believe that providing “Core Earnings” basis disclosures is meaningful because when we evaluate the performance and risk characteristics of the Company we have always considered the effect of any off-balance sheet trusts as though they were on-balance sheet.

Average Balance Sheets — GAAP

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

 

     Years Ended December 31,  
     2013     2012     2011  

(Dollars in millions)

    Balance      Rate     Balance      Rate     Balance      Rate  

Average Assets

                

FFELP Loans

    $ 112,152         2.52 %    $ 132,124         2.46 %    $ 143,109         2.42 % 

Private Education Loans

      38,292         6.60        37,691         6.58        36,955         6.57   

Other loans

      118         9.75        172         9.41        233         9.16   

Cash and investments

      9,305         .19        10,331         .20        10,636         .18   
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  

Total interest-earning assets

      159,867         3.36 %      180,318         3.20 %      190,933         3.11 % 
     

 

 

       

 

 

       

 

 

  

Non-interest-earning assets

      4,316           4,732           5,308      
  

 

 

       

 

 

       

 

 

     

Total assets

    $ 164,183         $ 185,050         $ 196,241      
  

 

 

       

 

 

       

 

 

     

Average Liabilities and Equity

                

Short-term borrowings

    $ 16,730         .99 %    $ 24,831         .88 %    $ 31,413         .89 % 

Long-term borrowings

      138,682         1.47        151,397         1.55        156,151         1.36   
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  

Total interest-bearing liabilities

      155,412         1.42 %      176,228         1.45 %      187,564         1.28 % 
     

 

 

       

 

 

       

 

 

  

Non-interest-bearing liabilities

      3,385           3,837           3,679      

Equity

      5,386           4,985           4,998      
  

 

 

       

 

 

       

 

 

     

Total liabilities and equity

    $ 164,183         $ 185,050         $ 196,241      
  

 

 

       

 

 

       

 

 

     

Net interest margin

         1.98 %         1.78 %         1.85 % 
     

 

 

       

 

 

       

 

 

  

 

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Table of Contents

Rate/Volume Analysis — GAAP

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

 

     Increase
(Decrease)		     Change Due To(1)  

(Dollars in millions)

      Rate     Volume  

2013 vs. 2012

       

Interest income

    $ (392 )    $ 286      $ (678 ) 

Interest expense

      (351 )      (54 )      (297 ) 
  

 

 

    

 

 

    

 

 

  

Net interest income

    $ (41 )    $ 344      $ (385 ) 
  

 

 

    

 

 

    

 

 

  

2012 vs. 2011

       

Interest income

    $ (161 )    $ 175      $ (336 ) 

Interest expense

      160        312        (152 ) 
  

 

 

    

 

 

    

 

 

  

Net interest income

    $ (321 )    $ (130 )    $ (191 ) 
  

 

 

    

 

 

    

 

 

  

 

  (1) 

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

Summary of our Student Loan Portfolio

Ending Student Loan Balances, net

 

     December 31, 2013  

(Dollars in millions)

    FFELP
Stafford and
Other		     FFELP
Consolidation
Loans		     Total
FFELP
Loans		     Private
Education
Loans		     Total
Portfolio		  

Total student loan portfolio:

           

In-school(1)

    $ 742      $ —        $ 742      $ 2,629      $ 3,371   

Grace, repayment and other(2)

      38,752        64,178        102,930        36,371        139,301   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total, gross

      39,494        64,178        103,672        39,000        142,672   

Unamortized premium/(discount)

      602        433        1,035        (704 )      331   

Receivable for partially charged-off loans

      —          —          —          1,313        1,313   

Allowance for loan losses

      (75 )      (44 )      (119 )      (2,097 )      (2,216 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total student loan portfolio

    $ 40,021      $ 64,567      $ 104,588      $ 37,512      $ 142,100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

% of total FFELP

      38 %      62 %      100 %     

% of total

      28 %      46 %      74 %      26 %      100 % 

 

     December 31, 2012  

(Dollars in millions)

    FFELP
Stafford and
Other		     FFELP
Consolidation
Loans		     Total
FFELP
Loans		     Private
Education
Loans		     Total
Portfolio		  

Total student loan portfolio:

           

In-school(1)

    $ 1,506      $ —       $ 1,506      $ 2,194      $ 3,700   

Grace, repayment and other(2)

      42,189        80,640        122,829        36,360        159,189   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total, gross

      43,695        80,640        124,335        38,554        162,889   

Unamortized premium/(discount)

      691        745        1,436        (796 )      640   

Receivable for partially charged-off loans

      —         —         —         1,347        1,347   

Allowance for loan losses

      (97 )      (62 )      (159 )      (2,171 )      (2,330 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total student loan portfolio

    $ 44,289      $ 81,323      $ 125,612      $ 36,934      $ 162,546   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

% of total FFELP

      35 %      65 %      100 %     

% of total

      27 %      50 %      77 %      23 %      100 % 

 

(1) 

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

 

(2) 

Includes loans in deferment or forbearance.

 

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Table of Contents
     December 31, 2011  

(Dollars in millions)

    FFELP
Stafford and
Other		      FFELP
Consolidation
Loans		      Total
FFELP
Loans		      Private
Education
Loans		      Total
Portfolio		  

Total student loan portfolio

    $ 50,440       $ 87,690       $ 138,130       $ 36,290       $ 174,420   

 

     December 31, 2010  

(Dollars in millions)

    FFELP
Stafford and
Other		      FFELP
Consolidation
Loans		      Total
FFELP
Loans		      Private
Education
Loans		      Total
Portfolio		  

Total student loan portfolio

    $ 56,252       $ 92,397       $ 148,649       $ 35,656       $ 184,305   

 

     December 31, 2009  

(Dollars in millions)

    FFELP
Stafford and
Other		      FFELP
Consolidation
Loans		      Total
FFELP
Loans		      Private
Education
Loans		      Total
Portfolio		  

Total GAAP basis, net

    $ 52,675       $ 68,379       $ 121,054       $ 22,753       $ 143,807   

Total off-balance sheet, net

      5,499         14,797         20,296         12,342         32,638   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total “Core Earnings” basis

    $ 58,174       $ 83,176       $ 141,350       $ 35,095       $ 176,445   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

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

 

     Year Ended December 31, 2013  

(Dollars in millions)

    FFELP
Stafford and
Other		     FFELP
Consolidation
Loans		     Total
FFELP
Loans		     Private
Education
Loans		     Total
Portfolio		  

Total

    $ 42,039      $ 70,113      $ 112,152      $ 38,292      $ 150,444   

% of FFELP

      37 %      63 %      100 %     

% of total

      28 %      47 %      75 %      25 %      100 % 

 

     Year Ended December 31, 2012  

(Dollars in millions)

    FFELP
Stafford and
Other		     FFELP
Consolidation
Loans		     Total
FFELP
Loans		     Private
Education
Loans		     Total
Portfolio		  

Total

    $ 47,629      $ 84,495      $ 132,124      $ 37,691      $ 169,815   

% of FFELP

      36 %      64 %      100 %     

% of total

      28 %      50 %      78 %      22 %      100 % 

 

     Year Ended December 31, 2011  

(Dollars in millions)

    FFELP
Stafford and
Other		     FFELP
Consolidation
Loans		     Total
FFELP
Loans		     Private
Education
Loans		     Total
Portfolio		  

Total

    $ 53,163      $ 89,946      $ 143,109      $ 36,955      $ 180,064   

% of FFELP

      37 %      63 %      100 %     

% of total

      29 %      50 %      79 %      21 %      100 % 

 

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Table of Contents

Student Loan Activity

 

     Year Ended December 31, 2013  

(Dollars in millions)

    FFELP
Stafford and
Other		     FFELP
Consolidation
Loans		     Total
FFELP
Loans		     Private
Education
Loans		     Total
Portfolio		  

Beginning balance

    $ 44,289      $ 81,323      $ 125,612      $ 36,934      $ 162,546   

Acquisitions and originations

      413        323        736        3,819        4,555   

Capitalized interest and premium/discount amortization

      1,203        1,120        2,323        756        3,079   

Consolidations to third parties

      (1,525 )      (1,001 )      (2,526 )      (94 )      (2,620 ) 

Sales(1)

     (102 )      (12,147 )      (12,249 )      (61 )      (12,310 ) 

Repayments and other

      (4,257 )      (5,051 )      (9,308 )      (3,842 )      (13,150 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Ending balance

    $ 40,021      $ 64,567      $ 104,588      $ 37,512      $ 142,100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

     Year Ended December 31, 2012  

(Dollars in millions)

    FFELP
Stafford and
Other		     FFELP
Consolidation
Loans		     Total
FFELP
Loans		     Private
Education
Loans		     Total
Portfolio		  

Beginning balance

    $ 50,440      $ 87,690      $ 138,130      $ 36,290      $ 174,420   

Acquisitions and originations

      2,764        903        3,667        3,386        7,053   

Capitalized interest and premium/discount amortization

      1,373        1,443        2,816        1,029        3,845   

Consolidations to third parties

      (5,049 )      (2,803 )      (7,852 )      (73 )      (7,925 ) 

Sales

      (530 )      —         (530 )      —         (530 ) 

Repayments and other

      (4,709 )      (5,910 )      (10,619 )      (3,698 )      (14,317 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Ending balance

    $ 44,289      $ 81,323      $ 125,612      $ 36,934      $ 162,546   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

     Year Ended December 31, 2011  

(Dollars in millions)

    FFELP
Stafford and
Other		     FFELP
Consolidation
Loans		     Total
FFELP
Loans		     Private
Education
Loans		     Total
Portfolio		  

Beginning balance

    $ 56,252      $ 92,397      $ 148,649      $ 35,656      $ 184,305   

Acquisitions and originations

      814        802        1,616        2,942        4,558   

Capitalized interest and premium/discount amortization

      1,506        1,535        3,041        1,269        4,310   

Consolidations to third parties

      (2,741 )      (1,058 )      (3,799 )      (69 )      (3,868 ) 

Sales

      (754 )      —         (754 )      —         (754 ) 

Repayments and other

      (4,637 )      (5,986 )      (10,623 )      (3,508 )      (14,131 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Ending balance

    $ 50,440      $ 87,690      $ 138,130      $ 36,290      $ 174,420   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(1) 

Includes $12.0 billion of student loans in connection with the sale of Residual Interests in FFELP Loan securitization trusts.

 

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Table of Contents

Student Loan Allowance for Loan Losses Activity

 

    GAAP and “Core Earnings” Basis  
    December 31, 2013     December 31, 2012     December 31, 2011  

(Dollars in millions)

   FFELP
Loans		     Private
Education
Loans		     Total
Portfolio		     FFELP
Loans		     Private
Education
Loans		     Total
Portfolio		     FFELP
Loans		     Private
Education
Loans		     Total
Portfolio		  

GAAP Basis:

                  

Beginning balance

   $ 159      $ 2,171      $ 2,330      $ 187      $ 2,171      $ 2,358      $ 189      $ 2,022      $ 2,211   

Less:

                  

Charge-offs(1)

     (78 )      (878 )      (956 )      (92 )      (1,037 )      (1,129 )      (78 )      (1,072 )      (1,150 ) 

Student loan sales

     (14 )      —         (14 )      (8 )      —         (8 )      (10 )      —         (10 ) 

Plus:

                  

Provision for loan losses

     52        787        839        72        1,008        1,080        86        1,179        1,265   

Reclassification of interest reserve(2)

     —         17        17        —         29        29        —         42        42   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Ending balance

   $ 119      $ 2,097      $ 2,216      $ 159      $ 2,171      $ 2,330      $ 187      $ 2,171      $ 2,358   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Percent of total

     5 %      95 %      100 %      7 %      93 %      100 %      8 %      92 %      100 % 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Troubled debt restructuring(3)

     —         8,949        8,949        —         7,294        7,294        —         5,249        5,249   

 

(1)

Charge-offs are reported net of expected recoveries. For Private Education Loans, the expected recovery amount is transferred to the receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the difference between what was expected to be collected and any shortfalls in what was actually collected in the period. See “Receivable for Partially Charged-Off Private Education Loans” for further discussion.

 

(2)

Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

 

(3)

Represents the recorded investment of loans classified as troubled debt restructuring.

 

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     GAAP Basis  
     December 31, 2010     December 31, 2009  

(Dollars in millions)

    FFELP
Loans		     Private
Education
Loans		     Total
Portfolio		     FFELP
Loans		     Private
Education
Loans		     Total
Portfolio		  

GAAP Basis:

             

Beginning balance

    $ 161      $ 1,443      $ 1,604      $ 138      $ 1,308      $ 1,446   

Less:

             

Charge-offs(1)

      (87 )      (1,291 )      (1,378 )      (79 )      (876 )      (955 ) 

Student loan sales

      (8 )      —         (8 )      (4 )      —         (4 ) 

Plus:

             

Provision for loan losses

      98        1,298        1,396        106        967        1,073   

Reclassification of interest reserve(2)

      —         48        48        —         44        44   

Consolidation of securitization trusts(3)

      25        524        549        —         —         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Ending balance

    $ 189      $ 2,022      $ 2,211      $ 161      $ 1,443      $ 1,604   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

     Off-Balance Sheet  
     December 31, 2010     December 31, 2009  

(Dollars in millions)

    FFELP
Loans		     Private
Education
Loans		     Total
Portfolio		     FFELP
Loans		     Private
Education
Loans		     Total
Portfolio		  

Off-Balance Sheet:

             

Beginning balance

    $ 25      $ 524      $ 549      $ 27      $ 505      $ 532   

Less:

             

Charge-offs(1)

      —         —         —         (15 )      (423 )      (438 ) 

Student loan sales

      —         —         —         —          —         —     

Plus:

             

Provision for loan losses

      —         —         —         13        432        445   

Reclassification of interest reserve(2)

      —         —         —         —         10        10   

Consolidation of securitization trusts(3)

      (25 )      (524 )      (549 )      —         —         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Ending balance

    $ —        $ —        $ —        $ 25      $ 524      $ 549   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

     “Core Earnings” Basis  
     December 31, 2010     December 31, 2009  

(Dollars in millions)

    FFELP
Loans		     Private
Education
Loans		     Total
Portfolio		     FFELP
Loans		     Private
Education
Loans		     Total
Portfolio		  

“Core Earnings” Basis:

             

Balance at beginning of period

    $ 186      $ 1,967      $ 2,153      $ 165      $ 1,813      $ 1,978   

Less:

             

Charge-offs(1)

      (87 )      (1,291 )      (1,378 )      (94 )      (1,299 )      (1,393 ) 

Student loan sales

      (8 )      —         (8 )      (4 )      —         (4 ) 

Plus:

             

Provision for loan losses

      98        1,298        1,396        119        1,399        1,518   

Reclassification of interest reserve(2)

      —         48        48        —         54        54   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total “Core Earnings” basis

    $ 189      $ 2,022      $ 2,211      $ 186      $ 1,967      $ 2,153   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Percent of total

      9 %      91 %      100 %      9 %      91 %      100 % 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Troubled debt restructuring(3)

    $  —       $ 439      $ 439      $  —       $ 223     $ 223  

 

(1) 

Charge-offs are reported net of expected recoveries. For Private Education Loans, the expected recovery amount is transferred to the receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the difference between what was expected to be collected and any shortfalls in what was actually collected in the period. See the section titled “Receivable for Partially Charged-Off Private Education Loans” for further discussion.

 

(2) 

Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

 

(3) 

Represents the recorded investment of loans identified as troubled debt restructuring.

 

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Private Education Loan Originations

The following table summarizes our Private Education Loan originations.

 

     Years Ended December 31,  

(Dollars in millions)

    2013      2012      2011  

Smart Option — interest only(1)

    $ 937       $ 941       $ 881   

Smart Option — fixed pay(1)

      1,191         1,005         1,118   

Smart Option — deferred(1)

      1,599         1,319         579   

Other

      74         80         159   
  

 

 

     

 

 

     

 

 

  

Total Private Education Loan originations

    $ 3,801       $ 3,345       $ 2,737   
  

 

 

     

 

 

     

 

 

  

 

  (1) 

Interest only, fixed pay and deferred describe the payment option while in school or in grace period. See the section titled “Consumer Lending Portfolio Performance — Private Education Loan Repayment Options” for further discussion.

Consumer Lending Portfolio Performance

Private Education Loan Delinquencies and Forbearance

The tables below present our Private Education Loan delinquency trends.

 

     Private Education Loan Delinquencies  
     December 31,  
     2013     2012     2011  

(Dollars in millions)

    Balance     %     Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

    $ 6,528        $ 5,904        $ 6,522     

Loans in forbearance(2)

      1,102          1,136          1,386     

Loans in repayment and percentage of each status:

             

Loans current

      28,768        91.7 %      28,575        90.7 %      27,122        89.9 % 

Loans delinquent 31-60 days(3)

      802        2.6        1,012        3.2        1,076        3.6   

Loans delinquent 61-90 days(3)

      513        1.6        481        1.5        520        1.6   

Loans delinquent greater than 90 days(3)

      1,287        4.1        1,446        4.6        1,467        4.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total Private Education Loans in repayment

      31,370        100 %      31,514        100 %      30,185        100 % 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total Private Education Loans, gross

      39,000          38,554          38,093     

Private Education Loan unamortized discount

      (704 )        (796 )        (873 )   
  

 

 

      

 

 

      

 

 

    

Total Private Education Loans

      38,296          37,758          37,220     

Private Education Loan receivable for partially charged-off loans

      1,313          1,347          1,241     

Private Education Loan allowance for losses

      (2,097 )        (2,171 )        (2,171 )   
  

 

 

      

 

 

      

 

 

    

Private Education Loans, net

    $ 37,512        $ 36,934        $ 36,290     
  

 

 

      

 

 

      

 

 

    

Percentage of Private Education Loans in repayment

        80.4 %        81.7 %        79.2 % 
    

 

 

      

 

 

      

 

 

  

Delinquencies as a percentage of Private Education Loans in repayment

        8.3 %        9.3 %        10.1 % 
    

 

 

      

 

 

      

 

 

  

Loans in forbearance as a percentage of loans in repayment and forbearance

        3.4 %        3.5 %        4.4 % 
    

 

 

      

 

 

      

 

 

  

Loans in repayment greater than 12 months as a percentage of loans in repayment(4)

        85.1 %        78.5 %        72.4 % 
    

 

 

      

 

 

      

 

 

  

 

(1) 

Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

 

(2) 

Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with established loan program servicing policies and procedures.

 

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(3) 

The period of delinquency is based on the number of days scheduled payments are contractually past due.

 

(4) 

Based on number of months in an active repayment status for which a scheduled monthly payment was due.

Allowance for Private Education Loan Losses

The following table summarizes changes in the allowance for Private Education Loan losses.

 

     Years Ended December 31,  

(Dollars in millions)

    2013     2012     2011  

Allowance at beginning of period

    $ 2,171      $ 2,171      $ 2,022   

Provision for Private Education Loan losses

      787        1,008        1,179   

Charge-offs(1)

      (878 )      (1,037 )      (1,072 ) 

Reclassification of interest reserve(2)

      17        29        42   
  

 

 

    

 

 

    

 

 

  

Allowance at end of period

    $ 2,097      $ 2,171      $ 2,171   
  

 

 

    

 

 

    

 

 

  

Charge-offs as a percentage of average loans in repayment

      2.8 %      3.4 %      3.7 % 

Charge-offs as a percentage of average loans in repayment and forbearance

      2.7 %      3.2 %      3.6 % 

Allowance as a percentage of the ending total loans

      5.2 %      5.4 %      5.5 % 

Allowance as a percentage of ending loans in repayment

      6.7 %      6.9 %      7.2 % 

Average coverage of charge-offs

      2.4        2.1        2.0   

Ending total loans(3)

    $ 40,313      $ 39,901      $ 39,334   

Average loans in repayment

    $ 31,556      $ 30,750      $ 28,790   

Ending loans in repayment

    $ 31,370      $ 31,514      $ 30,185   

 

(1) 

Charge-offs are reported net of expected recoveries. The expected recovery amount is transferred to the receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the difference between what was expected to be collected and any shortfalls in what was actually collected in the period. See the section titled “Receivable for Partially Charged-Off Private Education Loans” for further discussion.

 

(2) 

Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

 

(3) 

Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans.

 

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The following tables provide the detail for our traditional and non-traditional “Core Earnings” basis Private Education Loans for the respective years ended.

 

    December 31, 2013     December 31, 2012     December 31, 2011  

(Dollars in millions)

   Traditional     Non-
Traditional		     Total     Traditional     Non-
Traditional		     Total     Traditional     Non-
Traditional		     Total  

Ending total loans(1)

   $ 36,940      $ 3,373      $ 40,313      $ 36,144      $ 3,757      $ 39,901      $ 35,233      $ 4,101      $ 39,334   

Ending loans in repayment

     29,083        2,287        31,370        28,930        2,584        31,514        27,467        2,718        30,185   

Private Education Loan allowance for loan losses

     1,592        505        2,097        1,637        534        2,171        1,542        629        2,171   

Charge-offs as a percentage of average loans in repayment

     2.3 %      9.1 %      2.8 %      2.7 %      10.9 %      3.4 %      2.8 %      12.3 %      3.7 % 

Allowance as a percentage of ending total loans

     4.3 %      15.0 %      5.2 %      4.5 %      14.2 %      5.4 %      4.4 %      15.3 %      5.5 % 

Allowance as a percentage of ending loans in repayment

     5.5 %      22.1 %      6.7 %      5.7 %      20.7 %      6.9 %      5.6 %      23.1 %      7.2 % 

Average coverage of charge-offs

     2.4        2.3        2.4        2.2        1.9        2.1        2.1        1.9        2.0   

Delinquencies as a percentage of Private Education Loans in repayment

     7.2 %      21.7 %      8.3 %      8.1 %      23.4 %      9.3 %      8.6 %      26.0 %      10.1 % 

Delinquencies greater than 90 days as a percentage of Private Education Loans in repayment

     3.5 %      12.0 %      4.1 %      3.9 %      12.6 %      4.6 %      4.0 %      13.6 %      4.9 % 

Loans in forbearance as a percentage of loans in repayment and forbearance

     3.2 %      5.5 %      3.4 %      3.3 %      5.1 %      3.5 %      4.2 %      6.6 %      4.4 % 

Loans that entered repayment during the period(2)

   $ 2,906      $ 81      $ 2,987      $ 3,336      $ 194      $ 3,530      $ 4,886      $ 345      $ 5,231   

Percentage of Private Education Loans with a cosigner

     70 %      31 %      67 %      68 %      30 %      65 %      65 %      29 %      62 % 

Average FICO at origination

     729        625        722        728        624        720        726        624        717   

 

(1) 

Ending total loans represent gross Private Education Loans, plus the receivable for partially charged-off loans.

 

(2) 

Includes loans that are required to make a payment for the first time.

 

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     December 31, 2010     December 31, 2009  

(Dollars in millions)

    Traditional     Non-
Traditional		     Total     Traditional     Non-
Traditional		     Total  

Ending total loans(1)

    $ 34,177      $ 4,395      $ 38,572      $ 33,223      $ 4,747      $ 37,970   

Ending loans in repayment

      25,043        2,809        27,852        21,453        2,913        24,366   

Private Education Loan allowance for loan losses

      1,231        791        2,022        1,056        911        1,967   

Charge-offs as a percentage of average loans in repayment

      3.6 %      16.8 %      5.0 %      3.6 %      21.4 %      6.0 % 

Allowance as a percentage of ending total loans

      3.6 %      18.0 %      5.2 %      3.2 %      19.2 %      5.2 % 

Allowance as a percentage of ending loans in repayment

      4.9 %      28.2 %      7.3 %      4.9 %      31.3 %      8.1 % 

Allowance coverage of charge-offs

      1.5        1.7        1.6        1.6        1.5        1.5   

Delinquencies as a percentage of Private Education Loans in repayment

      8.8 %      27.4 %      10.6 %      9.5 %      31.4 %      12.1 % 

Delinquencies greater than 90 days as a percentage of Private Education Loans in repayment

      4.2 %      15.0 %      5.3 %      4.6 %      17.5 %      6.1 % 

Loans in forbearance as a percentage of loans in repayment and forbearance

      4.4 %      6.1 %      4.6 %      5.3 %      7.1 %      5.5 % 

Loans that entered repayment during the period(2)

    $ 6,451      $ 553      $ 7,004      $ 6,430      $ 851      $ 7,281   

Percentage of Private Education Loans with a cosigner

      63 %      28 %      59 %      61 %      28 %      57 % 

Average FICO at origination

      725        623        715        725        623        713   

 

(1) 

Ending total loans represent gross Private Education Loans, plus the receivable for partially charged-off loans.

 

(2) 

Includes loans that are required to make a payment for the first time.

As part of concluding on the adequacy of the allowance for loan losses, we review key allowance and loan metrics. The most significant of these metrics considered are the allowance coverage of charge-offs ratio; the allowance as a percentage of total loans and of loans in repayment; and delinquency and forbearance percentages.

Receivable for Partially Charged-Off Private Education Loans

At the end of each month, for loans that are 212 days past due, we charge off the estimated loss of a defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as the “receivable for partially charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately charged off through the allowance for loan losses with an offsetting reduction in the receivable for partially charged-off Private Education Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. Private Education Loans which defaulted between 2008 and 2013 for which we have previously charged off estimated losses have, to varying degrees, not met our post-default recovery expectations to date and may continue not to do so. According to our policy, we have been charging off these periodic shortfalls in expected recoveries against our allowance for Private Education Loan losses and the related receivable for partially charged-off Private Education Loans and we will continue to do so. There was $336 million and $198 million in the allowance for Private Education Loan losses at December 31, 2013 and 2012, respectively, providing for possible additional future charge-offs related to the receivable for partially charged-off Private Education Loans (see the section titled “Consumer Lending Segment — Private Education Loan Provision for Loan Losses and Charge-Offs” for a further discussion).

 

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The following table summarizes the activity in the receivable for partially charged-off loans.

 

     Years Ended
December 31,		  

(Dollars in millions)

    2013     2012     2011  

Receivable at beginning of period

    $ 1,347      $ 1,241      $ 1,040   

Expected future recoveries of current period defaults(1)

      290        351        391   

Recoveries(2)

      (230 )      (189 )      (155 ) 

Charge-offs(3)

      (94 )      (56 )      (35 ) 
  

 

 

    

 

 

    

 

 

  

Receivable at end of period

      1,313        1,347        1,241   

Allowance for estimated recovery shortfalls(4)

      (336 )      (198 )      (148 ) 
  

 

 

    

 

 

    

 

 

  

Net receivable at end of period

    $ 977      $ 1,149      $ 1,093   
  

 

 

    

 

 

    

 

 

  

 

  (1) 

Represents the difference between the defaulted loan balance and our estimate of the amount to be collected in the future.

 

  (2) 

Current period cash collections.

 

  (3) 

Represents the current period recovery shortfall — the difference between what was expected to be collected and what was actually collected. These amounts are included in total charge-offs as reported in the “Allowance for Private Education Loan Losses” table.

 

  (4) 

The allowance for estimated recovery shortfalls of the receivable for partially charged-off Private Education Loans is a component of the $2.1 billion overall allowance for Private Education Loan losses as of December 31, 2013 and $2.2 billion overall allowance for Private Education Loan losses as of December 31, 2012 and 2011, respectively.

Use of Forbearance as a Private Education Loan Collection Tool

Forbearance involves granting the customer a temporary cessation of payments (or temporary acceptance of smaller than scheduled payments) for a specified period of time. Using forbearance extends the original term of the loan. Forbearance does not grant any reduction in the total repayment obligation (principal or interest). While in forbearance status, interest continues to accrue and is capitalized to principal when the loan re-enters repayment status. Our forbearance policies include limits on the number of forbearance months granted consecutively and the total number of forbearance months granted over the life of the loan. In some instances, we require good-faith payments before granting forbearance. Exceptions to forbearance policies are permitted when such exceptions are judged to increase the likelihood of collection of the loan. Forbearance as a collection tool is used most effectively when applied based on a customer’s unique situation, including historical information and judgments. We leverage updated customer information and other decision support tools to best determine who will be granted forbearance based on our expectations as to a customer’s ability and willingness to repay their obligation. This strategy is aimed at mitigating the overall risk of the portfolio as well as encouraging cash resolution of delinquent loans.

Forbearance may be granted to customers who are exiting their grace period to provide additional time to obtain employment and income to support their obligations, or to current customers who are faced with a hardship and request forbearance time to provide temporary payment relief. In these circumstances, a customer’s loan is placed into a forbearance status in limited monthly increments and is reflected in the forbearance status at month-end during this time. At the end of their granted forbearance period, the customer will enter repayment status as current and is expected to begin making their scheduled monthly payments on a go-forward basis.

Forbearance may also be granted to customers who are delinquent in their payments. In these circumstances, the forbearance cures the delinquency and the customer is returned to a current repayment status. In more limited instances, delinquent customers will also be granted additional forbearance time.

The table below reflects the historical effectiveness of using forbearance. Our experience has shown that three years after being granted forbearance for the first time, 66 percent of the loans are current, paid in full, or receiving an in-school grace or deferment, and 20 percent have defaulted. The default experience associated with loans which utilize forbearance is considered in our allowance for loan losses. The number of loans in a forbearance status as a percentage of loans in repayment and forbearance decreased to 3.4 percent in 2013 compared with 3.5 percent in

 

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2012. As of December 31, 2013, 1 percent of loans in current status were delinquent as of the end of the prior month, but were granted a forbearance that made them current as of December 31, 2013 (customers made payments on approximately 28 percent of these loans as a prerequisite to being granted forbearance).

 

Tracking by First Time in Forbearance Compared to All Loans Entering Repayment —

Portfolio data through December 31, 2013

  
     Status distribution
36 months after
being granted
forbearance
for the first time		     Status distribution
36 months after
entering repayment
(all loans)		     Status distribution
36 months after
entering repayment for
loans never entering
forbearance		  

In-school/grace/deferment

      9.7 %      9.1 %      5.6 % 

Current

      51.2        59.8        67.6   

Delinquent 31-60 days

      3.1        2.0        .4   

Delinquent 61-90 days

      1.9        1.1        .1   

Delinquent greater than 90 days

      4.7        2.7        .3   

Forbearance

      3.9        3.0        —     

Defaulted

      20.1        11.4        7.5   

Paid

      5.4        10.9        18.5   
  

 

 

    

 

 

    

 

 

  

Total

      100 %      100 %      100 % 
  

 

 

    

 

 

    

 

 

  

The tables below show the composition and status of the Private Education Loan portfolio aged by number of months in active repayment status (months for which a scheduled monthly payment was due). As indicated in the tables, the percentage of loans that are delinquent greater than 90 days or that are in forbearance status decreases the longer the loans have been in active repayment status.

At December 31, 2013, loans in forbearance status as a percentage of loans in repayment and forbearance were 6.5 percent for loans that have been in active repayment status for less than 25 months. The percentage drops to 1.2 percent for loans that have been in active repayment status for more than 48 months. Approximately 63 percent of our Private Education Loans in forbearance status has been in active repayment status less than 25 months.

At December 31, 2013, loans in repayment that are delinquent greater than 90 days as a percentage of loans in repayment were 6.4 percent for loans that have been in active repayment status for less than 25 months. The percentage drops to 2.2 percent for loans that have been in active repayment status for more than 48 months. Approximately 49 percent of our Private Education Loans in repayment that are delinquent greater than 90 days status has been in active repayment status less than 25 months.

 

(Dollars in millions)

   Monthly Scheduled Payments Due     Not Yet in
Repayment		        

December 31, 2013

   0 to 12     13 to 24     25 to 36     37 to 48     More than 48       Total  

Loans in-school/grace/deferment

   $ —        $ —        $ —        $ —        $ —        $ 6,528      $ 6,528   

Loans in forbearance

     502        189        166        106        139        —          1,102   

Loans in repayment — current

     4,056        4,735        4,856        4,633        10,488        —          28,768   

Loans in repayment — delinquent 31-60 days

     166        167        152        121        196        —          802   

Loans in repayment — delinquent 61-90 days

     117        115        94        72        115        —          513   

Loans in repayment — delinquent greater than 90 days

     330        305        238        171        243        —          1,287   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

   $ 5,171      $ 5,511      $ 5,506      $ 5,103      $ 11,181      $ 6,528        39,000   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Unamortized discount

                 (704 ) 

Receivable for partially charged-off loans

                 1,313   

Allowance for loan losses

                 (2,097 ) 
             

 

 

  

Total Private Education Loans, net

               $ 37,512   
             

 

 

  

Loans in forbearance as a percentage of loans in repayment and forbearance

     9.7 %      3.4 %      3.0 %      2.1 %      1.2 %      —   %      3.4 % 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Loans in repayment — delinquent greater than 90 days as a percentage of loans in repayment

     7.1 %      5.7 %      4.5 %      3.4 %      2.2 %      —   %      4.1 % 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

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(Dollars in millions)

   Monthly Scheduled Payments Due     Not Yet in
Repayment		        

December 31, 2012

   0 to 12     13 to 24     25 to 36     37 to 48     More than 48       Total  

Loans in-school/grace/deferment

   $ —       $ —       $ —       $ —       $ —       $ 5,904      $ 5,904   

Loans in forbearance

     602        195        149        83        107        —         1,136   

Loans in repayment — current

     5,591        5,366        5,405        4,403        7,810        —         28,575   

Loans in repayment — delinquent 31-60 days

     353        189        175        116        179        —         1,012   

Loans in repayment — delinquent 61-90 days

     185        95        81        49        71        —         481   

Loans in repayment — delinquent greater than 90 days

     640        292        227        129        158        —         1,446   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

   $ 7,371      $ 6,137      $ 6,037      $ 4,780      $ 8,325      $ 5,904        38,554   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Unamortized discount

                 (796 ) 

Receivable for partially charged-off loans

                 1,347   

Allowance for loan losses

                 (2,171 ) 
             

 

 

  

Total Private Education Loans, net

               $ 36,934   
             

 

 

  

Loans in forbearance as a percentage of loans in repayment and forbearance

     8.2 %      3.2 %      2.5 %      1.7 %      1.3 %      —   %      3.5 % 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Loans in repayment — delinquent greater than 90 days as a percentage of loans in repayment

     9.5 %      4.9 %      3.9 %      2.7 %      1.9 %      —   %      4.6 % 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(Dollars in millions)

   Monthly Scheduled Payments Due     Not Yet in
Repayment		        

December 31, 2011

   0 to 12     13 to 24     25 to 36     37 to 48     More than 48       Total  

Loans in-school/grace/deferment

   $ —       $ —       $ —       $ —       $ —       $ 6,522      $ 6,522   

Loans in forbearance

     920        194        126        66        80        —         1,386   

Loans in repayment — current

     6,866        6,014        5,110        3,486        5,646        —         27,122   

Loans in repayment — delinquent 31-60 days

     506        212        158        83        117        —         1,076   

Loans in repayment — delinquent 61-90 days

     245        100        78        41        56        —         520   

Loans in repayment — delinquent greater than 90 days

     709        317        205        102        134        —         1,467   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

   $ 9,246      $ 6,837      $ 5,677      $ 3,778      $ 6,033      $ 6,522        38,093   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Unamortized discount

                 (873 ) 

Receivable for partially charged-off loans

                 1,241   

Allowance for loan losses

                 (2,171 ) 
             

 

 

  

Total Private Education Loans, net

               $ 36,290   
             

 

 

  

Loans in forbearance as a percentage of loans in repayment and forbearance

     10.0 %      2.8 %      2.2 %      1.8 %      1.3 %      —   %      4.4 % 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Loans in repayment — delinquent greater than 90 days as a percentage of loans in repayment

     8.5 %      4.8 %      3.7 %      2.7 %      2.3 %      —   %      4.9 % 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

The table below stratifies the portfolio of Private Education Loans in forbearance by the cumulative number of months the customer has used forbearance as of the dates indicated. As detailed in the table below, there has been a continuing decline in the average months of forbearance used in our portfolio.

 

     December 31,  
     2013     2012     2011  

(Dollars in millions)

    Forbearance
Balance		      % of
Total		     Forbearance
Balance		      % of
Total		     Forbearance
Balance		      % of
Total		  

Cumulative number of months customer has used forbearance:

                

Up to 12 months

    $ 841         76 %    $ 883         78 %    $ 887         64 % 

13 to 24 months

      168         15        186         16        446         32   

More than 24 months

      93         9        67         6        53         4   
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  

Total

    $ 1,102         100 %    $ 1,136         100 %    $ 1,386         100 % 
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  

 

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Private Education Loan Repayment Options

Certain loan programs allow customers to select from a variety of repayment options depending on their loan type and their enrollment/loan status, which include the ability to extend their repayment term or change their monthly payment. The chart below provides the optional repayment offerings in addition to the standard level principal and interest payments as of December 31, 2013.

 

   

Loan Program

  

(Dollars in millions)

  

Signature and Other

  

Smart Option

  

Career Training

   Total  

$ in repayment

   $22,417   $7,728   $1,225   $ 31,370   

$ in total

   $27,228   $10,500   $1,272   $ 39,000   

Payment method by enrollment status:

        

In-school/grace

   Deferred(1)   Deferred(1), interest-only or fixed $25/month  

Interest-only or fixed

$25/month

  

Repayment

   Level principal and interest or graduated   Level principal and interest   Level principal and interest  

 

(1) 

“Deferred” includes loans for which no payments are required and interest charges are capitalized into the loan balance.

The graduated repayment program that is part of Signature and Other Loans includes an interest-only payment feature that may be selected at the option of the customer. Customers elect to participate in this program at the time they enter repayment following their grace period. This program is available to customers in repayment, after their grace period, who would like a temporary lower payment from the required principal and interest payment amount. Customers participating in this program pay monthly interest with no amortization of their principal balance for up to 48 payments after entering repayment (dependent on the loan product type). The maturity date of the loan is not extended when a customer participates in this program. As of December 31, 2013 and 2012, customers in repayment owing approximately $4.5 billion (14 percent of loans in repayment) and $6.6 billion (21 percent of loans in repayment), respectively, were enrolled in the interest-only program. Of these amounts, 9 percent and 10 percent were non-traditional loans as of December 31, 2013 and 2012, respectively.

Accrued Interest Receivable

The following table provides information regarding accrued interest receivable on our Private Education Loans. The table also discloses the amount of accrued interest on loans greater than 90 days past due as compared to our allowance for uncollectible interest. The allowance for uncollectible interest exceeds the amount of accrued interest on our 90 days past due portfolio for all periods presented.

 

     Accrued Interest Receivable
As of December 31,		  

(Dollars in millions)

    Total      Greater than
90 days
Past Due		      Allowance for
Uncollectible
Interest		  

2013

    $ 1,023       $ 48       $ 66   

2012

    $ 904       $ 55       $ 67   

2011

    $ 1,018       $ 54       $ 72   

2010

    $ 1,271       $ 55       $ 94   

2009

    $ 1,165       $ 41       $ 96   

 

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FFELP Loan Portfolio Performance

FFELP Loan Delinquencies and Forbearance

The tables below present our FFELP Loan delinquency trends.

 

    FFELP Loan Delinquencies  
    December 31,  
    2013     2012     2011  

(Dollars in millions)

   Balance     %     Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 13,678        $ 17,702        $ 22,887     

Loans in forbearance(2)

     13,490          15,902          19,575     

Loans in repayment and percentage of each status:

            

Loans current

     63,330        82.8 %      75,499        83.2 %      77,093        81.9 % 

Loans delinquent 31-60 days(3)

     3,746        4.9        4,710        5.2        5,419        5.8   

Loans delinquent 61-90 days(3)

     2,207        2.9        2,788        3.1        3,438        3.7   

Loans delinquent greater than 90 days(3)

     7,221        9.4        7,734        8.5        8,231        8.6   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total FFELP Loans in repayment

     76,504        100 %      90,731        100 %      94,181        100 % 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total FFELP Loans, gross

     103,672          124,335          136,643     

FFELP Loan unamortized premium

     1,035          1,436          1,674     
 

 

 

      

 

 

      

 

 

    

Total FFELP Loans

     104,707          125,771          138,317     

FFELP Loan allowance for losses

     (119 )        (159 )        (187 )   
 

 

 

      

 

 

      

 

 

    

FFELP Loans, net

   $ 104,588        $ 125,612        $ 138,130     
 

 

 

      

 

 

      

 

 

    

Percentage of FFELP Loans in repayment

       73.8 %        73.0 %        68.9 % 
   

 

 

      

 

 

      

 

 

  

Delinquencies as a percentage of FFELP Loans in repayment

       17.2 %        16.8 %        18.1 % 
   

 

 

      

 

 

      

 

 

  

FFELP Loans in forbearance as a percentage of loans in repayment and forbearance

       15.0 %        14.9 %        17.2 % 
   

 

 

      

 

 

      

 

 

  

 

(1) 

Loans for customers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for customers who have requested and qualify for other permitted program deferments such as military, unemployment, or economic hardship.

 

(2) 

Loans for customers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors.

 

(3) 

The period of delinquency is based on the number of days scheduled payments are contractually past due.

 

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Allowance for FFELP Loan Losses

The following table summarizes changes in the allowance for FFELP Loan losses.

 

     Years Ended December 31,  

(Dollars in millions)

    2013     2012     2011  

Allowance at beginning of period

    $ 159      $ 187      $ 189   

Provision for FFELP Loan losses

      52        72        86   

Charge-offs

      (78 )      (92 )      (78 ) 

Student loan sales

      (14 )      (8 )      (10 ) 
  

 

 

    

 

 

    

 

 

  

Allowance at end of period

    $ 119      $ 159      $ 187   
  

 

 

    

 

 

    

 

 

  

Charge-offs as a percentage of average loans in repayment

      .10 %      .10 %      .08 % 

Charge-offs as a percentage of average loans in repayment and forbearance

      .08 %      .08 %      .07 % 

Allowance as a percentage of the ending total loans, gross

      .12 %      .13 %      .14 % 

Allowance as a percentage of ending loans in repayment

      .16 %      .18 %      .20 % 

Allowance coverage of charge-offs

      1.5        1.7        2.4   

Ending total loans, gross

    $ 103,672      $ 124,335      $ 136,643   

Average loans in repayment

    $ 80,822      $ 91,653      $ 94,359   

Ending loans in repayment

    $ 76,504      $ 90,731      $ 94,181   

Liquidity and Capital Resources

Funding and Liquidity Risk Management

The following “Liquidity and Capital Resources” discussion concentrates on our Consumer Lending and FFELP Loans segments. Our Business Services and Other segments require minimal capital and funding. While the following discussion is based on our historical liquidity and capital resources and practices, it should be noted that following the separation and distribution Sallie Mae Bank will become part of SLM BankCo and Navient will neither originate Private Education Loans nor have bank deposits.

We define liquidity risk as the potential inability to meet our obligations when they become due without incurring unacceptable losses, such as the ability to fund liability maturities and deposit withdrawals, or invest in future asset growth and business operations at reasonable market rates, as well as the potential inability to fund Private Education Loan originations. Our three primary liquidity needs include our ongoing ability to meet our funding needs for our businesses throughout market cycles, including during periods of financial stress and to avoid any mismatch between the maturity of assets and liabilities, our ongoing ability to fund originations of Private Education Loans and servicing our indebtedness and bank deposits. To achieve these objectives we analyze and monitor our liquidity needs, maintain excess liquidity and access diverse funding sources including the issuance of unsecured debt, the issuance of secured debt primarily through asset-backed securitizations and/or other financing facilities and through deposits at Sallie Mae Bank.

We define liquidity as cash and high-quality liquid securities that we can use to meet our funding requirements. Our primary liquidity risk relates to our ability to fund new originations and raise replacement funding at a reasonable cost as our unsecured debt and bank deposits mature. In addition, we must continue to obtain funding at reasonable rates to meet our other business obligations and to continue to grow our business. Key risks associated with our liquidity relate to our ability to access the capital markets and bank deposits and access them at reasonable rates. This ability may be affected by our credit ratings, as well as the overall availability of funding sources in the marketplace. In addition, credit ratings may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions, including over-the-counter derivatives.

 

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Credit ratings and outlooks are opinions subject to ongoing review by the ratings agencies and may change from time to time based on our financial performance, industry dynamics and other factors. Other factors that influence our credit ratings include the ratings agencies’ assessment of the general operating environment, our relative positions in the markets in which we compete, reputation, liquidity position, the level and volatility of earnings, corporate governance and risk management policies, capital position and capital management practices. A negative change in our credit rating could have a negative effect on our liquidity because it would raise the cost and availability of funding and potentially require additional cash collateral or restrict cash currently held as collateral on existing borrowings or derivative collateral arrangements. It is our objective to improve our credit ratings so that we can continue to efficiently access the capital markets even in difficult economic and market conditions.

We have unsecured debt that totaled, as of December 31, 2013, approximately $18.3 billion. In connection with the May 28, 2013 announcement of the proposed separation and distribution, three rating agencies took negative ratings actions with regard to our long-term unsecured debt ratings. Fitch lowered its senior unsecured long-term debt rating one notch to BB+, one notch below its investment grade, and also placed its rating on negative watch. Moody’s and S&P placed their ratings on our senior unsecured long-term debt on review and watch, respectively, for possible downgrade. Moody’s current rating is Ba1, one notch below its investment grade, and S&P’s rating is BBB-, its lowest investment grade. Fitch and S&P indicated that if the separation and distribution occurs as planned, they expect to further lower their ratings by one notch and up to two notches, respectively. As a result of Fitch’s action, two of the three credit rating agencies now rate our long-term unsecured debt at below investment grade such that we are no longer considered an investment grade issuer. Whereas we had previously been included in the Investment Grade Index, we are now included in the High Yield Index. This has resulted in a higher cost of funds for us, and our senior unsecured debt to trade with greater volatility.

The negative actions taken by the credit rating agencies were based on concerns that the separation and distribution will have a negative impact on the holders of our senior unsecured debt. According to their ratings reports, these concerns primarily focus on Navient’s lack of future Private Education originations and related servicing income, the loss of access to the earnings, cash flow, equity and potential market value of Sallie Mae Bank, the run-off of the FFELP Loan portfolio and strategic uncertainty as to the source of incremental earnings and cash flow to replace that in run-off, and an expected increase in our cost of accessing the unsecured debt markets, including for refinancing purposes.

We expect to fund our ongoing liquidity needs, including the origination of new Private Education Loans and the repayment of $2.2 billion of senior unsecured notes that mature in the next twelve months, primarily through our current cash and investment portfolio, the issuance of additional bank deposits and unsecured debt, the predictable operating cash flows provided by earnings, the repayment of principal on unencumbered student loan assets and the distributions from our securitization trusts (including servicing fees which are priority payments within the trusts). We may also draw down on our secured FFELP facilities; we may also issue term ABS.

Currently, new Private Education Loan originations are initially funded through deposits and subsequently securitized to term. We have $2.3 billion of cash at Sallie Mae Bank as of December 31, 2013 available to fund future originations. We no longer originate FFELP Loans and therefore no longer have liquidity requirements for new FFELP Loan originations, but will continue to opportunistically purchase FFELP Loan portfolios from others. Following the separation and distribution of Navient, Sallie Mae Bank will be a subsidiary of SLM BankCo and Navient will no longer originate Private Education Loans or engage in banking services, including deposit taking. Our primary liquidity needs at that time will continue to be to fund our business activities, which are expected to include opportunistic acquisitions of portfolios of FFELP Loans and, subject to our non-competition arrangements with SLM BankCo, Private Education Loans, and to service our indebtedness. We will continue to seek to maintain excess liquidity and access diverse funding sources, including by the issuance of unsecured debt, the issuance of secured debt primarily through asset backed securitizations and possible draw

 

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downs on our secured FFELP facilities. We also held, at December 31, 2013, $3.0 billion in cash and liquid investments outside of Sallie Mae Bank that may be used to fund our businesses.

Sources of Liquidity and Available Capacity

Ending Balances

 

     December 31,  

(Dollars in millions)

    2013      2012  

Sources of primary liquidity:

      

Unrestricted cash and liquid investments:

      

Holding Company and other non-bank subsidiaries

    $ 3,015       $ 2,376   

Sallie Mae Bank(1)

      2,284         1,598   
  

 

 

     

 

 

  

Total unrestricted cash and liquid investments

    $ 5,299       $ 3,974   
  

 

 

     

 

 

  

Unencumbered FFELP Loans:

      

Holding Company and other non-bank subsidiaries

    $ 1,259       $ 612   

Sallie Mae Bank

      1,425         1,044   
  

 

 

     

 

 

  

Total unencumbered FFELP Loans

    $ 2,684       $ 1,656   
  

 

 

     

 

 

  

 

(1) 

This amount will be used primarily to originate or acquire student loans at Sallie Mae Bank. See discussion below on restrictions on Sallie Mae Bank to pay dividends.

Average Balances

 

     Years Ended
December 31,		  

(Dollars in millions)

    2013      2012      2011  

Sources of primary liquidity:

         

Unrestricted cash and liquid investments:

         

Holding Company and other non-bank subsidiaries

    $ 2,475       $ 2,386       $ 2,474   

Sallie Mae Bank(1)

    $ 1,582         913         1,244   
  

 

 

     

 

 

     

 

 

  

Total unrestricted cash and liquid investments

    $ 4,057         3,299       $ 3,718   
  

 

 

     

 

 

     

 

 

  

Unencumbered FFELP Loans:

         

Holding Company and other non-bank subsidiaries

    $ 837       $ 691       $ 1,201   

Sallie Mae Bank

      1,141         527         198   
  

 

 

     

 

 

     

 

 

  

Total unencumbered FFELP Loans

    $ 1,978       $ 1,218       $ 1,399   
  

 

 

     

 

 

     

 

 

  

 

(1) 

This amount will be used primarily to originate or acquire student loans at Sallie Mae Bank. See discussion below on restrictions on Sallie Mae Bank to pay dividends.

Liquidity may also be available under secured credit facilities to the extent we have eligible collateral and capacity available. Maximum borrowing capacity under the FFELP Loan — other facilities will vary and be subject to each agreement’s borrowing conditions, including, among others, facility size, current usage and availability of qualifying collateral from unencumbered FFELP Loans. As of December 31, 2013 and 2012, the maximum additional capacity under these facilities was $10.6 billion and $11.8 billion, respectively. For the year ended December 31, 2013 and 2012, the average maximum additional capacity under these facilities was $11.1 billion and $11.3 billion, respectively.

We also hold a number of other unencumbered assets, consisting primarily of Private Education Loans and other assets. Total unencumbered student loans, net, comprised $13.9 billion of our unencumbered assets of

 

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which $11.2 billion and $2.7 billion related to Private Education Loans, net and FFELP Loans, net, respectively. At December 31, 2013, we had a total of $23.8 billion of unencumbered assets inclusive of those described above as sources of primary liquidity and exclusive of goodwill and acquired intangible assets.

Sallie Mae Bank’s ability to pay dividends is subject to the laws of Utah and the regulations of the FDIC. Generally, under Utah’s industrial bank laws and regulations as well as FDIC regulations, Sallie Mae Bank may pay dividends from its net profits without regulatory approval if, following the payment of the dividend, Sallie Mae Bank’s capital and surplus would not be impaired. While applicable Utah and FDIC regulations differ in approach as to determinations of impairment of capital and surplus, neither method of determination has historically required Sallie Mae Bank to obtain consent to the payment of dividends. For the years ended December 31, 2013 and 2012, Sallie Mae Bank paid dividends of $120 million and $420 million, respectively. In connection with the separation and distribution of Navient, Sallie Mae Bank will be a subsidiary of SLM BankCo and hence will no longer pay dividends to Navient.

In addition to the foregoing, Sallie Mae Bank’s annual business plans are periodically reviewed by the FDIC. Recently the FDIC expressed its objection to the payment of dividends from Sallie Mae Bank to us prior to the completion of the separation and distribution. The bases for the objection are unrelated to the current capitalization of Sallie Mae Bank or the results of its operations. The FDIC has stated its preference that Sallie Mae Bank refrain from making periodic dividends to us for any reason other than the payment of the normal quarterly cash dividend to holders of Existing SLM’s two series of preferred stock until all terms of the pending formal enforcement action with the FDIC are resolved and the separation and distribution have been completed. Sallie Mae Bank does not expect to declare such a dividend prior to the occurrence of the separation and distribution and not doing so will not materially or adversely affect the financial condition, operations or liquidity of our company and its subsidiaries taken as a whole.

The following table reconciles encumbered and unencumbered assets and their net impact on total tangible equity.

 

(Dollars in billions)

    December 31,  
   2013     2012  

Net assets of consolidated variable interest entities (encumbered assets) — FFELP Loans

    $ 4.6      $ 6.6   

Net assets of consolidated variable interest entities (encumbered assets) — Private Education Loans

      6.7        6.6   

Tangible unencumbered assets — Holding Company and other non-bank subsidiaries(1)

      13.1        12.6   

Tangible unencumbered assets — Sallie Mae Bank(1)

      10.7        8.6   

Unsecured debt

      (27.9 )      (26.7 ) 

Mark-to-market on unsecured hedged debt(2)

      (.8 )      (1.7 ) 

Other liabilities, net

      (1.2 )      (1.4 ) 
  

 

 

    

 

 

  

Total tangible equity

    $ 5.2      $ 4.6   
  

 

 

    

 

 

  

 

  (1) 

Excludes goodwill and acquired intangible assets.

 

  (2) 

At December 31, 2013 and December 31, 2012, there were $612 million and $1.4 billion, respectively, of net gains on derivatives hedging this debt in unencumbered assets, which partially offset these losses.

2013 Financing Transactions

During 2013, we issued $6.5 billion in FFELP ABS, $3.1 billion in Private Education Loan ABS and $3.75 billion in unsecured bonds.

 

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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.

Shareholder Distributions

On February 5, 2013, we increased our quarterly dividend on our common stock from $0.125 per common share to $0.15 per common share. We paid our quarterly dividend on March 15, 2013, June 21, 2013, September 20, 2013 and December 20, 2013. In 2013, the board of directors authorized a share repurchase program in total of $800 million for our outstanding common stock. The program does not have an expiration date. During 2013, we repurchased 27 million shares of common stock for an aggregate purchase price of $600 million. In 2012, we repurchased 58 million shares at an aggregate price of $900 million.

2013 Sales of FFELP Loan Securitization Trust Residual Interests

On February 13, 2013, we sold the Residual Interest in a FFELP Loan securitization trust to a third party. We will continue to service the student loans in the trust under existing agreements. The sale removed securitization trust assets of $3.82 billion and related liabilities of $3.68 billion from our balance sheet.

On April 11, 2013, we sold the Residual Interest in a FFELP Loan securitization trust to a third party. We will continue to service the student loans in the trust under existing agreements. The sale removed securitization trust assets of $2.03 billion and related liabilities of $1.99 billion from our balance sheet.

On June 13, 2013, we sold the three Residual Interests in FFELP Loan securitization trusts to a third party. We will continue to service the student loans in the trusts under existing agreements. The sale removed securitization trust assets of $6.60 billion and related liabilities of $6.42 billion from our balance sheet.

Recent First-Quarter 2014 Transactions

On January 10, 2014, we closed on a new $8 billion asset-backed commercial paper (“ABCP”) facility that matures in January 2016. This facility replaces an existing $5.5 billion FFELP ABCP facility which was retired in January 2014. The additional $2.5 billion will be available for FFELP acquisition or refinancing. The maximum amount that can be financed steps down to $7 billion in March 2015. The new facility’s maturity date is January 8, 2016.

Counterparty Exposure

Counterparty exposure related to financial instruments arises from the risk that a lending, investment or derivative counterparty will not be able to meet its obligations to us. Risks associated with our lending portfolio are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Consumer Lending Portfolio Performance” and “— FFELP Loan Portfolio Performance.”

Our investment portfolio is composed of very short-term securities issued by a diversified group of highly rated issuers, limiting our counterparty exposure. Additionally, our investing activity is governed by board of director approved limits on the amount that is allowed to be invested with any one issuer based on the credit rating of the issuer, further minimizing our counterparty exposure. Counterparty credit risk is considered when valuing investments and considering impairment.

 

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Related to derivative transactions, protection against counterparty risk is generally provided by International Swaps and Derivatives Association, Inc. (“ISDA”) Credit Support Annexes (“CSAs”). CSAs require a counterparty to post collateral if a potential default would expose the other party to a loss. All derivative contracts entered into by SLM Corporation and Sallie Mae Bank are covered under such agreements and require collateral to be exchanged based on the net fair value of derivatives with each counterparty. Our securitization trusts require collateral in all cases if the counterparty’s credit rating is withdrawn or downgraded below a certain level. Additionally, securitizations involving foreign currency notes issued after November 2005 also require the counterparty to post collateral to the trust based on the fair value of the derivative, regardless of credit rating. The trusts are not required to post collateral to the counterparties. In all cases, our exposure is limited to the value of the derivative contracts in a gain position net of any collateral we are holding. We consider counterparties’ credit risk when determining the fair value of derivative positions on our exposure net of collateral.

We have liquidity exposure related to collateral movements between us and our derivative counterparties. Movements in the value of the derivatives, which are primarily affected by changes in interest rate and foreign exchange rates, may require us to return cash collateral held or may require us to access primary liquidity to post collateral to counterparties. If our credit ratings are downgraded from current levels, we may be required to segregate additional unrestricted cash collateral into restricted accounts.

The table below highlights exposure related to our derivative counterparties at December 31, 2013.

 

(Dollars in millions)

   SLM Corporation
and Sallie Mae Bank
Contracts		     Securitization  Trust
Contracts		  

Exposure, net of collateral(1)

   $ 83      $ 968   

Percent of exposure to counterparties with credit ratings below S&P AA- or Moody’s Aa3

     94 %     40 %

Percent of exposure to counterparties with credit ratings below S&P A- or Moody’s A3

     0 %     0 %

 

  (1) 

Our securitization trusts had total net exposure of $772 million related to financial institutions located in France; of this amount, $577 million carries a guaranty from the French government. The total exposure relates to $5.1 billion notional amount of cross-currency interest rate swaps held in our securitization trusts, of which $3.4 billion notional amount carries a guaranty from the French government. Counterparties to the cross currency interest rate swaps are required to post collateral when their credit rating is withdrawn or downgraded below a certain level. As of December 31, 2013, no collateral was required to be posted and we are not holding any collateral related to these contracts. Adjustments are made to our derivative valuations for counterparty credit risk. The adjustments made at December 31, 2013 related to derivatives with French financial institutions (including those that carry a guaranty from the French government) decreased the derivative asset value by $63 million. Credit risks for all derivative counterparties are assessed internally on a continual basis.

 

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“Core Earnings” Basis Borrowings

The following tables present the ending balances of our “Core Earnings” basis borrowings at December 31, 2013, 2012 and 2011, and average balances and average interest rates of our “Core Earnings” basis borrowings for 2013, 2012 and 2011. The average interest rates include derivatives that are economically hedging the underlying debt but do not qualify for hedge accounting treatment. See “‘Core Earnings’ —Definition and Limitations —Differences between ‘Core Earnings’ and GAAP — Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities.”

Ending Balances

 

    December 31, 2013     December 31, 2012     December 31, 2011  

(Dollars in millions)

   Short
Term		     Long
Term		     Total     Short
Term		     Long
Term		     Total     Short
Term		     Long
Term		     Total  

Unsecured borrowings:

                  

Senior unsecured debt

   $ 2,213      $ 16,056      $ 18,269      $ 2,319      $ 15,446      $ 17,765      $ 1,801      $ 15,199      $ 17,000   

Bank deposits

     6,133        2,807        8,940        4,226        3,088        7,314        3,856        1,956        5,812   

Other(1)

     691        —         691        1,609        —         1,609        1,329        —         1,329   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total unsecured borrowings

     9,037        18,863        27,900        8,154        18,534        26,688        6,986        17,155        24,141   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Secured borrowings:

                  

FFELP Loan securitizations

     —         90,756        90,756        —         105,525        105,525        —         107,905        107,905   

Private Education Loan securitizations

     —         18,835        18,835        —         19,656        19,656        —         19,297        19,297   

FFELP Loan — other facilities

     4,715        5,311        10,026        11,651        4,827       16,478        22,523        5,361       27,884   

Private Education Loan — other facilities

     —          843        843        —          1,070       1,070        —          1,992       1,992   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total secured borrowings

     4,715        115,745        120,460        11,651        131,078        142,729        22,523        134,555        157,078   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total “Core Earnings” basis

     13,752        134,608        148,360        19,805        149,612        169,417        29,509        151,710        181,219   

Hedge accounting adjustments

     43        2,040        2,083        51        2,789        2,840        64        2,683        2,747   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total GAAP basis

   $     13,795      $     136,648      $     150,443      $     19,856      $     152,401      $     172,257      $     29,573      $     154,393      $     183,966   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(1) 

“Other” primarily consists of the obligation to return cash collateral held related to derivative exposure.

Secured borrowings comprised 81 percent and 84 percent of our “Core Earnings” basis debt outstanding at December 31, 2013 and December 31, 2012, respectively.

 

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Average balances and interest rate

 

     Years Ended December 31,  
     2013     2012     2011  

(Dollars in millions)

    Average
Balance		      Average
Rate		     Average
Balance		      Average
Rate		     Average
Balance		      Average
Rate		  

Unsecured borrowings:

                

Senior unsecured debt

    $ 17,893         3.27 %    $ 18,183         2.98 %    $ 19,562         2.34 % 

Bank deposits

      7,709         1.14        5,753         1.43        5,344         1.96   

Other(1)

     1,037         .15        1,474         .21        1,187         .17   
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  

Total unsecured borrowings

      26,639         2.53        25,410         2.47        26,093         2.16   
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  

Secured borrowings:

                

FFELP Loan securitizations

      95,486         .99        106,493         1.08        110,474         .93   

Private Education Loan securitizations

      19,770         2.03        19,322         2.10        20,976         2.17   

FFELP Loan — other facilities

      12,890         .98        23,123         .97        29,749         .92   

Private Education Loan — other facilities

      627         1.50        1,880         1.77        272         2.08   
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  

Total secured borrowings

      128,773         1.15        150,818         1.20        161,471         1.09   
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  

Total

    $ 155,412         1.39 %    $ 176,228         1.39 %    $ 187,564         1.24 % 
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  
   

“Core Earnings” average balance and rate

    $ 155,412         1.39 %    $ 176,228         1.39 %    $ 187,564         1.24 % 

Adjustment for GAAP accounting treatment

      —          .03        —          .06        —          .04   
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  

GAAP-basis average balance and rate

    $     155,412         1.42 %    $     176,228         1.45 %    $     187,564         1.28 % 
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  

 

(1) 

“Other” primarily consists of the obligation to return cash collateral held related to derivative exposure.

Contractual Cash Obligations

The following table provides a summary of our contractual principal obligations associated with long-term notes at December 31, 2013. For further discussion of these obligations, see “Note 6 — Borrowings” to the audited consolidated financial statements included elsewhere in this information statement.

 

(Dollars in millions)

    1 Year
or Less		      1 to 3
Years		      3 to 5
Years		      Over
5 Years		      Total  

Long-term notes:

               

Senior unsecured debt

    $ —        $ 3,790       $ 4,625       $ 7,641       $ 16,056   

Unsecured term bank deposits

      —          1,843         964         —          2,807   

Secured borrowings(1)

      14,408         21,170         18,754         61,413         115,745   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total contractual cash obligations(2)

    $ 14,408       $ 26,803       $ 24,343       $ 69,054       $ 134,608   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

 

(1) 

Includes long-term beneficial interests of $109.6 billion of notes issued by consolidated VIEs in conjunction with our securitization transactions and included in long-term notes in the consolidated balance sheet. Timing of obligations is estimated based on our current projection of prepayment speeds of the securitized assets.

 

(2) 

The aggregate principal amount of debt that matures in each period is $14.5 billion, $26.9 billion, $24.5 billion and $69.6 billion, respectively. Specifically excludes derivative market value adjustments of $2.0 billion for long-term notes. Interest obligations on notes are predominantly variable in nature, resetting monthly and quarterly based on LIBOR.

 

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Unrecognized tax benefits were $62 million and $33 million for the years ended December 31, 2013 and 2012, respectively.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). “Note 2 — Significant Accounting Policies” to the audited consolidated financial statements included elsewhere in this information statement includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. Actual results may differ from these estimates under varying assumptions or conditions. On a quarterly basis, management evaluates its estimates, particularly those that include the most difficult, subjective or complex judgments and are often about matters that are inherently uncertain. The most significant judgments, estimates and assumptions relate to the following critical accounting policies that are discussed in more detail below.

Allowance for Loan Losses

In determining the allowance for loan losses on our non-TDR portfolio, we estimate the principal amount of loans that will default over the next two years (two years being the expected period between a loss event and default) and how much we expect to recover over time related to the defaulted amount. Expected defaults less our expected recoveries equal the allowance related to this portfolio. Our historical experience indicates that, on average, the time between the date that a customer experiences a default causing event (i.e., the loss trigger event) and the date that we charge off the unrecoverable portion of that loan is two years. Separately, for our TDR portfolio, we estimate an allowance amount sufficient to cover life-of-loan expected losses through an impairment calculation based on the difference between the loan’s basis and the present value of expected future cash flows (which would include life-of-loan default and recovery assumptions) discounted at the loan’s original effective interest rate. See “Allowance for Private Education Loan Losses” in “Note 2 — Significant Accounting Policies” to the audited consolidated financial statements included elsewhere in this information statement. Our TDR portfolio is comprised mostly of loans with interest rate reductions and forbearance usage greater than three months. The separate allowance estimates for our TDR and non-TDR portfolios are combined into our total allowance for Private Education Loan losses.

In estimating both the non-TDR and TDR allowance amounts, we start with historical experience of customer default behavior. We make judgments about which historical period to start with and then make further judgments about whether that historical experience is representative of future expectations and whether additional adjustments may be needed to those historical default rates. We also take the economic environment into consideration when calculating the allowance for loan losses. We analyze key economic statistics and the effect we expect them to have on future defaults. Key economic statistics analyzed as part of the allowance for loan losses are unemployment rates and other asset type delinquency rates. More judgment has been required over the last several years, compared with years prior, in light of the recent downturn in the U.S. economy and high levels of unemployment and its effect on our customers’ ability to pay their obligations.

Our allowance for loan losses is estimated using an analysis of delinquent and current accounts. Our model is used to estimate the likelihood that a loan receivable may progress through the various delinquency stages and ultimately charge off. The evaluation of the allowance for loan losses is inherently subjective, as it requires material estimates that may be susceptible to significant changes. The estimate for the allowance for loan losses is subject to a number of assumptions. If actual future performance in delinquency, charge-offs and recoveries are significantly different than estimated, this could materially affect our estimate of the allowance for loan losses and the related provision for loan losses on our income statement.

 

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We determine the collectability of our Private Education Loan portfolio by evaluating certain risk characteristics. We consider school type, credit score (FICO), existence of a cosigner, loan status and loan seasoning as the key credit quality indicators because they have the most significant effect on our determination of the adequacy of our allowance for loan losses. The type of school customers attend can have an impact on their job prospects after graduation and therefore affects their ability to make payments. Credit scores are an indicator of the credit worthiness of a customer and the higher the credit score the more likely it is the customer will be able to make all of their contractual payments. Loan status affects the credit risk because a past due loan is more likely to result in a credit loss than an up-to-date loan. Additionally, loans in a deferred payment status have different credit risk profiles compared with those in current pay status. Loan seasoning affects credit risk because a loan with a history of making payments generally has a lower incidence of default than a loan with a history of making infrequent or no payments. The existence of a cosigner lowers the likelihood of default. We monitor and update these credit quality indicators in the analysis of the adequacy of our allowance for loan losses on a quarterly basis.

To estimate the probable credit losses incurred in the loan portfolio at the reporting date, we use historical experience of customer payment behavior in connection with the key credit quality indicators and incorporate management expectations regarding macroeconomic and collection procedure factors. Our model is based upon the most recent twelve months of actual collection experience, adjusted for seasonality, as the starting point and applies expected macroeconomic changes and collection procedure changes to estimate expected losses caused by loss events incurred as of the balance sheet date. Our model places a greater emphasis on the more recent default experience rather than the default experience for older historical periods, as we believe the recent default experience is more indicative of the probable losses incurred in the loan portfolio today. Similar to estimating defaults, we use historical customer payment behavior to estimate the timing and amount of future recoveries on charged-off loans. We use judgment in determining whether historical performance is representative of what we expect to collect in the future. We then apply the default and collection rate projections to each category of loans. Once the quantitative calculation is performed, we review the adequacy of the allowance for loan losses and determine if qualitative adjustments need to be considered. Additionally, we consider changes in laws and regulations that could potentially impact the allowance for loan losses. More judgment has been required over the last several years, compared with years prior, in light of the U.S. economy and its effect on our customers’ ability to pay their obligations. We believe that our model reflects recent customer behavior, loan performance, and collection performance, as well as expectations about economic factors.

Similar to the rules governing FFELP payment requirements, our collection policies allow for periods of nonpayment for customers requesting additional payment grace periods upon leaving school or experiencing temporary difficulty meeting payment obligations. This is referred to as forbearance status and is considered separately in our allowance for loan losses. The loss confirmation period is in alignment with our typical collection cycle and takes into account these periods of nonpayment.

Our allowance for Private Education Loan losses also provides for possible additional future charge-offs related to the receivable for partially charged-off Private Education Loans. At the end of each month, for loans that are 212 days past due, we charge off the estimated loss of a defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as the “receivable for partially charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately charged off through the allowance for loan losses with an offsetting reduction in the receivable for partially charged-off Private Education Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. Private Education Loans which defaulted between 2008 and 2013 for which we have previously charged off estimated losses have, to varying degrees, not met our post-default recovery expectations to date and may continue not to do so. According to our policy, we have been charging off these periodic shortfalls in expected recoveries against our allowance for Private Education Loan losses and the related receivable for partially charged-off Private Education Loans and we will continue to do so.

 

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On July 1, 2011, we adopted new guidance that clarified when a loan restructuring constitutes a TDR. In applying the new guidance we determined that certain Private Education Loans for which we grant forbearance of greater than three months should be classified as troubled debt restructurings. If a loan meets the criteria for troubled debt accounting then an allowance for loan losses is established which represents the present value of the losses that are expected to occur over the remaining life of the loan. This accounting results in a higher allowance for loan losses than our previously established allowance for these loans as our previous allowance for these loans represented an estimate of charge-offs expected to occur over the next two years (two years being our loss confirmation period). The new accounting guidance was effective as of July 1, 2011 but was required to be applied retrospectively to January 1, 2011. This resulted in $124 million of additional provision for loan losses in the third quarter of 2011 from approximately $3.8 billion of student loans being classified as troubled debt restructurings. This new accounting guidance is only applied to certain customers who use their fourth or greater month of forbearance during the time period this new guidance is effective. This new accounting guidance has the effect of accelerating the recognition of expected losses related to our Private Education Loan portfolio. The increase in the provision for losses as a result of this new accounting guidance does not reflect a decrease in credit expectations of the portfolio or an increase in the expected life-of-loan losses related to this portfolio. We believe forbearance is an accepted and effective collections and risk management tool for Private Education Loans. We plan to continue to use forbearance and as a result, we expect to have additional loans classified as troubled debt restructurings in the future. See “Note 4 — Allowance for Loan Losses” to the audited consolidated financial statements included elsewhere in the information statement for a further discussion on the use of forbearance as a collection tool.

FFELP Loans are insured as to their principal and accrued interest in the event of default subject to a Risk Sharing level based on the date of loan disbursement. These insurance obligations are supported by contractual rights against the United States. For loans disbursed after October 1, 1993, and before July 1, 2006, we receive 98 percent reimbursement on all qualifying default claims. For loans disbursed on or after July 1, 2006, we receive 97 percent reimbursement. For loans disbursed prior to October 1, 1993, we receive 100 percent reimbursement.

The allowance for FFELP Loan losses uses historical experience of customer default behavior and a two year loss confirmation period to estimate the credit losses incurred in the loan portfolio at the reporting date. We apply the default rate projections, net of applicable Risk Sharing, to each category for the current period to perform our quantitative calculation. Once the quantitative calculation is performed, we review the adequacy of the allowance for loan losses and determine if qualitative adjustments need to be considered.

Premium and Discount Amortization

The most judgmental estimate for premium and discount amortization on student loans is the Constant Prepayment Rate (“CPR”), which measures the rate at which loans in the portfolio pay down principal compared to their stated terms. Loan consolidation, default, term extension and other prepayment factors affecting our CPR estimates are affected by changes in our business strategy, changes in our competitor’s business strategies, legislative changes, interest rates and changes to the current economic and credit environment. When we determine the CPR we begin with historical prepayment rates due to consolidation activity, defaults, payoffs and term extensions from the utilization of forbearance. We make judgments about which historical period to start with and then make further judgments about whether that historical experience is representative of future expectations and whether additional adjustment may be needed to those historical prepayment rates.

In the past the consolidation of FFELP Loans and Private Education Loans significantly affected our CPRs and updating those assumptions often resulted in material adjustments to our amortization expense. As a result of the passage of HCERA in 2010, there is no longer the ability to consolidate under the FFELP. As a result, we do not expect to consolidate FFELP Loans in the future and do not currently expect others to actively consolidate our FFELP Loans. As a result, we expect CPRs related to our FFELP Loans to remain relatively stable over time. See “Business Segment Earnings Summary — ‘Core Earnings’ Basis — FFELP Loans Segment”, for discussion

 

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of the impact of the SDCL in 2012. We expect that in the future both we and our competitors will begin to consolidate Private Education Loans. This is built into the CPR assumption we use for Private Education Loans. However, it is difficult to accurately project the timing and level at which this consolidation activity will begin and our assumption may need to be updated by a material amount in the future based on changes in the economy and marketplace. The level of defaults is a significant component of our FFELP Loan and Private Education Loan CPR. This component of the FFELP Loan and Private Education Loan CPR is estimated in the same manner as discussed in “Critical Accounting Policies and Estimates — Allowance for Loan Losses” — the only difference is for premium and discount amortization purposes the estimate of defaults is a life-of-loan estimate whereas for allowance for loan losses it is a two-year estimate.

Fair Value Measurement

The most significant assumptions used in fair value measurements, including those related to credit and liquidity risk, are as follows:

 

1. Derivatives — When determining the fair value of derivatives, we take into account counterparty credit risk for positions where we are exposed to the counterparty on a net basis by assessing exposure net of collateral held. The net exposure for each counterparty is adjusted based on market information available for that specific counterparty, including spreads from credit default swaps. Additionally, when the counterparty has exposure to us related to our derivatives, we fully collateralize the exposure, minimizing the adjustment necessary to the derivative valuations for our own credit risk. Trusts that contain derivatives are not required to post collateral to counterparties as the credit quality and securitized nature of the trusts minimizes any adjustments for the counterparty’s exposure to the trusts. Adjustments related to credit risk reduced the overall value of our derivatives by $91 million as of December 31, 2013. We also take into account changes in liquidity when determining the fair value of derivative positions. We adjusted the fair value of certain less liquid positions downward by approximately $84 million, to take into account a significant reduction in liquidity as of December 31, 2013, related primarily to basis swaps indexed to interest rate indices with inactive markets. A major indicator of market inactivity is the widening of the bid/ask spread in these markets. In general, the widening of counterparty credit spreads and reduced liquidity for derivative instruments as indicated by wider bid/ask spreads will reduce the fair value of derivatives. In addition, certain cross-currency interest rate swaps hedging foreign currency denominated reset rate and amortizing notes in our trusts contain extension features that coincide with the remarketing dates of the notes. The valuation of the extension feature requires significant judgment based on internally developed inputs.

 

2. Student Loans — Our FFELP Loans and Private Education Loans are accounted for at cost or at the lower of cost or fair value if the loan is held-for-sale. The fair values of our student loans are disclosed in “Note 12 — Fair Value Measurements” to the audited consolidated financial statements included elsewhere in this information statement. For both FFELP Loans and Private Education Loans accounted for at cost, fair value is determined by modeling loan level cash flows using stated terms of the assets and internally-developed assumptions to determine aggregate portfolio yield, net present value and average life. The significant assumptions used to project cash flows are prepayment speeds, default rates, cost of funds, the amount funded by debt versus equity, and required return on equity. In addition, the Floor Income component of our FFELP Loan portfolio is valued through discounted cash flow and option models using both observable market inputs and internally developed inputs. Significant inputs into the models are not generally market observable. They are either derived internally through a combination of historical experience and management’s qualitative expectation of future performance (in the case of prepayment speeds, default rates, and capital assumptions) or are obtained through external broker quotes (as in the case of cost of funds). When possible, market transactions are used to validate the model. In most cases, these are either infrequent or not observable. For FFELP Loans classified as held-for-sale and accounted for at the lower of cost or market, the fair value is based on the committed sales price of the various loan purchase programs established by ED.

 

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For further information regarding the effect of our use of fair values on our results of operations, see “Note 12 — Fair Value Measurements” to the audited consolidated financial statements included elsewhere in this information statement.

Transfers of Financial Assets and the Variable Interest Entity (“VIE”) Consolidation Model

If we have a variable interest in a Variable Interest Entity (“VIE”) and we have determined that we are the primary beneficiary of the VIE then we will consolidate the VIE. We are considered the primary beneficiary if we have both: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses or receive benefits of the entity that could potentially be significant to the VIE. There can be considerable judgment that has to be used as it relates to determining the primary beneficiary of the VIEs with which we are associated. There are no “bright line” tests. Rather, the assessment of who has the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance and who has the obligation to absorb losses or receive benefits of the entity that could potentially be significant to the VIE can be very qualitative and judgmental in nature. However, based on our current relationship with our securitization trusts and other financing vehicles which are considered VIEs, we believe the assessment is more straightforward. As it relates to our securitized assets, we are the servicer of those securitized assets (which means we “have the power” to direct the activities of the trust) and we own the Residual Interest (which means we “have the loss and gain obligation that could potentially be significant to the VIE”) of the securitization trusts. As a result, we are the primary beneficiary of our securitization trusts and other financing vehicles. See “Note 2 — Significant Accounting Policies” to the audited consolidated financial statements included elsewhere in this information statement for further details.

In 2013, we 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. Prior to the sale of the Residual Interests, we had consolidated the trusts as VIEs because we had met the two criteria for consolidation. We had determined we were the primary beneficiary because (1) as servicer to the trust we had the power to direct the activities of the VIE that most significantly affected its economic performance and (2) as the residual holder of the trust, we had an obligation to absorb losses or receive benefits of the trust that could potentially be significant. Upon the sale of the Residual Interests we were no longer the residual holder, thus we determined we no longer met criterion (2) above and deconsolidated the trusts.

Derivative Accounting

The most significant judgments related to derivative accounting are: (1) concluding the derivative is an effective hedge and qualifies for hedge accounting; and (2) determining the fair value of certain derivatives and hedged items. To qualify for hedge accounting a derivative must be concluded to be a highly effective hedge upon designation and on an ongoing basis. There are no “bright line” tests on what is considered a highly effective hedge. We use a historical regression analysis to prove ongoing and prospective hedge effectiveness. Although some of our valuations are more judgmental than others, we compare the fair values of our derivatives that we calculate to those provided by our counterparties on a monthly basis. We view this as a critical control which helps validate these judgments. Any significant differences with our counterparties are identified and resolved appropriately.

Goodwill and Intangible Assets

In determining annually (or more frequently if required) whether goodwill is impaired, we first assess qualitative factors to determine whether it is “more-likely-than-not” that the fair value of a reporting unit, which is the same as or one level below a business segment, is less than its carrying amount as a basis for determining whether it is necessary to perform additional goodwill impairment testing. The “more-likely-than-not” threshold is defined as having a likelihood of more than 50 percent. If this “more-likely-than-not” threshold is met, then we will complete a quantitative goodwill impairment analysis which consists of a comparison of the fair value of the

 

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reporting unit to our carrying value, including goodwill. If the carrying value of the reporting unit exceeds the fair value, a goodwill impairment analysis will be performed to measure the amount of impairment loss, if any. If we determine that this event has occurred, we perform an analysis to determine the fair value of the business unit. There are significant judgments involved in determining the fair value of a business unit, including assumptions regarding estimates of future cash flows from existing and new business activities, customer relationships, the value of existing customer contracts, the value of other tangible and intangible assets, as well as assumptions regarding what we believe a third party would be willing to pay for all of the assets and liabilities of the business unit. This calculation requires us to estimate the appropriate discount and growth rates to apply to those projected cash flows and the appropriate control premium to apply to arrive at the final fair value. The business units for which we must estimate the fair value are not publicly-traded and often there is not comparable market data available for that individual business to aid in its valuation. We use a third-party appraisal firm to provide an opinion on the fair values we conclude upon.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity Analysis as of December 31, 2013 and 2012

Our interest rate risk management seeks to limit the impact of short-term movements in interest rates on our results of operations and financial position. The following tables summarize the potential effect on earnings over the next twelve months and the potential effect on fair values of balance sheet assets and liabilities at December 31, 2013 and 2012, based upon a sensitivity analysis performed by management assuming a hypothetical increase in market interest rates of 100 basis points and 300 basis points while funding spreads remain constant. Additionally, as it relates to the effect on earnings, a sensitivity analysis was performed assuming the funding index increases 25 basis points while holding the asset index constant, if the funding index is different than the asset index. The earnings sensitivity is applied only to financial assets and liabilities, including hedging instruments that existed at the balance sheet date and does not take into account new assets, liabilities or hedging instruments that may arise in 2014.

 

    As of December 31, 2013     As of December 31, 2012  
    Impact on Annual Earnings If:     Impact on Annual Earnings If:  
    Interest Rates     Funding Indices     Interest Rates     Funding Indices  

(Dollars in millions, except

per share amounts)

   Increase
100 Basis
Points		     Increase
300 Basis
Points		     Increase
25 Basis
Points(1)		     Increase
100 Basis
Points		     Increase
300 Basis
Points		     Increase
25 Basis
Points(1)		  

Effect on Earnings:

            

Change in pre-tax net income before unrealized gains (losses) on derivative and hedging activities

   $ 9      $ 93      $ (238 )    $ (20 )    $ 24      $ (307 ) 

Unrealized gains (losses) on derivative and hedging activities

     256        427        1        463        769        (3 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Increase in net income before taxes

   $ 265      $ 520      $ (237 )    $ 443      $ 793      $ (310 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Increase in diluted earnings per common share

   $ .59      $ 1.16      $ (.53 )    $ .92      $ 1.64      $ (.64 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(1) 

If an asset is not funded with the same index/frequency reset of the asset then it is assumed the funding index increases 25 basis points while holding the asset index constant.

 

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     At December 31, 2013  
     Fair Value      Interest Rates:  
        Change from
Increase of
100 Basis
Points		     Change from
Increase of
300 Basis
Points		  

(Dollars in millions)

               $                     %                     $                     %          

Effect on Fair Values

            

Assets

            

FFELP Loans

    $ 104,481       $ (566 )      (1 )%    $ (1,126 )      (1 )% 

Private Education Loans

      37,485         —         —         —         —    

Other earning assets

      9,732         —         —         (1 )      —    

Other assets

      7,711         (278 )      (4 )      (435 )      (6 ) 
  

 

 

     

 

 

    

 

 

    

 

 

    

 

 

  

Total assets gain/(loss)

    $ 159,409       $ (844 )      (1 )%    $ (1,562 )      (1 )% 
  

 

 

     

 

 

    

 

 

    

 

 

    

 

 

  

Liabilities

            

Interest-bearing liabilities

    $ 147,385       $ (859 )      (1 )%    $ (2,393 )      (2 )% 

Other liabilities

      3,458         58        2        805        23   
  

 

 

     

 

 

    

 

 

    

 

 

    

 

 

  

Total liabilities (gain)/loss

    $ 150,843       $ (801 )      (1 )%    $ (1,588 )      (1 )% 
  

 

 

     

 

 

    

 

 

    

 

 

    

 

 

  

 

     At December 31, 2012  
            Interest Rates:  
            Change from
Increase of
100 Basis
Points		     Change from
Increase of
300 Basis
Points		  

(Dollars in millions)

    Fair Value      $     %     $     %  

Effect on Fair Values:

            

Assets

            

FFELP Loans

    $ 125,042       $ (738 )      (1 )%    $ (1,438 )      (1 )% 

Private Education Loans

      36,081         —        —        —        —   

Other earning assets

      9,994         —        —        (1 )      —   

Other assets

      8,721         (560 )      (6 )      (1,187 )      (14 )% 
  

 

 

     

 

 

    

 

 

    

 

 

    

 

 

  

Total assets gain/(loss)

    $ 179,838       $ (1,298 )      (1 )%    $ (2,626 )      (1 )% 
  

 

 

     

 

 

    

 

 

    

 

 

    

 

 

  

Liabilities

            

Interest-bearing liabilities

    $ 166,071       $ (829 )      — %    $ (2,298 )      (1 )% 

Other liabilities

      3,937         (422 )      (11 )      (274 )      (7 ) 
  

 

 

     

 

 

    

 

 

    

 

 

    

 

 

  

Total liabilities (gain)/loss

    $ 170,008       $ (1,251 )      (1 )%    $ (2,572 )      (2 )% 
  

 

 

     

 

 

    

 

 

    

 

 

    

 

 

  

A primary objective in our funding is to minimize our sensitivity to changing interest rates by generally funding our floating rate student loan portfolio with floating rate debt. However, due to the ability of some FFELP loans to earn Floor Income, we can have a fixed versus floating mismatch in funding if the student loan earns at the fixed borrower rate and the funding remains floating. In addition, we can have a mismatch in the index (including the frequency of reset) of floating rate debt versus floating rate assets.

During 2013 and 2012, certain FFELP Loans were earning Floor Income and we locked in a portion of that Floor Income through the use of Floor Income contracts. The result of these hedging transactions was to convert a portion of the fixed rate nature of student loans to variable rate, and to fix the relative spread between the student loan asset rate and the variable rate liability.

In the preceding tables, under the scenario where interest rates increase 100 and 300 basis points, the change in pre-tax net income before the unrealized gains (losses) on derivative and hedging activities is primarily due to

 

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the impact of: (i) our unhedged loans being in a fixed-rate mode due to Floor Income, while being funded with variable debt in low interest rate environments; and (ii) a portion of our variable assets being funded with fixed rate liabilities and equity. Item (i) will generally cause income to decrease when interest rates increase from a low interest rate environment, whereas item (ii) will generally offset this decrease.

Under the scenario in the tables above labeled “Impact on Annual Earnings If: Funding Indices Increase 25 Basis Points,” the main driver of the decrease in pre-tax income before unrealized gains (losses) on derivative and hedging activities in both the December 31, 2013 and December 31, 2012 analyses is the result of one-month LIBOR-indexed FFELP Loans (loans formerly indexed to commercial paper) being funded with three-month LIBOR and other non-discrete indexed liabilities. See “—Asset and Liability Funding Gap” for a further discussion. Increasing the spread between indices will also impact the unrealized gains (losses) on derivative and hedging activities as it relates to basis swaps that hedge the mismatch between the asset and funding indices.

In addition to interest rate risk addressed in the preceding tables, we are also exposed to risks related to foreign currency exchange rates. Foreign currency exchange risk is primarily the result of foreign currency denominated debt issued by us. When we issue foreign denominated corporate unsecured and securitization debt, our policy is to use cross currency interest rate swaps to swap all foreign currency denominated debt payments (fixed and floating) to U.S. dollar LIBOR using a fixed exchange rate. In the tables above, there would be an immaterial impact on earnings if exchange rates were to decrease or increase, due to the terms of the hedging instrument and hedged items matching. The balance sheet interest bearing liabilities would be affected by a change in exchange rates; however, the change would be materially offset by the cross currency interest rate swaps in other assets or other liabilities. In the current economic environment, volatility in the spread between spot and forward foreign exchange rates has resulted in material mark-to-market impacts to current-period earnings which have not been factored into the above analysis. The earnings impact is noncash, and at maturity of the instruments the cumulative mark-to-market impact will be zero.

Asset and Liability Funding Gap

The tables below present our assets and liabilities (funding) arranged by underlying indices as of December 31, 2013. In the following GAAP presentation, the funding gap only includes derivatives that qualify as effective hedges (those derivatives which are reflected in net interest margin, as opposed to those reflected in the “gains (losses) on derivatives and hedging activities, net” line on the consolidated statements of income). The difference between the asset and the funding is the funding gap for the specified index. This represents our exposure to interest rate risk in the form of basis risk and repricing risk, which is the risk that the different indices may reset at different frequencies or may not move in the same direction or at the same magnitude.

Management analyzes interest rate risk and in doing so includes all derivatives that are economically hedging our debt whether they qualify as effective hedges or not (“Core Earnings” basis). Accordingly, we are also presenting the asset and liability funding gap on a “Core Earnings” basis in the table that follows the GAAP presentation.

 

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GAAP-Basis

 

Index

(Dollars in billions)

    Frequency of
Variable
Resets		    Assets(1)      Funding(2)      Funding
Gap		  

3-month Treasury bill

    weekly    $ 5.4       $ —        $ 5.4   

Prime

    annual      .6         —          .6   

Prime

    quarterly      4.0         —          4.0   

Prime

    monthly      18.9         —          18.9   

Prime

    daily      —          .1         (0.1 ) 

PLUS Index

    annual      .4         —          .4   

3-month LIBOR

    daily      —          —          —    

3-month LIBOR

    quarterly      —          85.1         (85.1 ) 

1-month LIBOR

    monthly      14.4         36.9         (22.5 ) 

1-month LIBOR daily

    daily      98.2         —          98.2   

CMT/CPI Index

    monthly/quarterly      —          1.1         (1.1 ) 

Non-Discrete reset(3)

    monthly      —          12.7         (12.7 ) 

Non-Discrete reset(4)

    daily/weekly      9.7         5.1         4.6   

Fixed Rate(5)

         7.9         18.5         (10.6 ) 
     

 

 

     

 

 

     

 

 

  

Total

       $ 159.5       $ 159.5       $ —    
     

 

 

     

 

 

     

 

 

  

 

  (1) 

FFELP Loans of $45.0 billion ($41.7 billion LIBOR index and $3.3 billion Treasury bill index) are currently earning a fixed rate of interest as a result of the low interest rate environment.

 

 

  (2) 

Funding (by index) includes all derivatives that qualify as hedges.

 

 

  (3) 

Funding consists of auction rate asset-backed securities and FFELP Loan-other facilities.

 

 

  (4) 

Assets include restricted and unrestricted cash equivalents and other overnight type instruments. Funding includes retail and other deposits and the obligation to return cash collateral held related to derivatives exposures.

 

 

  (5) 

Assets include receivables and other assets (including goodwill and acquired intangibles). Funding includes other liabilities and stockholders’ equity (excluding series B Preferred Stock).

 

The “Funding Gaps” in the above table are primarily interest rate mismatches in short-term indices between our assets and liabilities. We typically address this issue through the use of basis swaps that typically convert quarterly reset three-month LIBOR to other indices that are more correlated to our asset indices. These basis swaps do not qualify as effective hedges and as a result the effect on the funding index is not included in our interest margin and is therefore excluded from the GAAP presentation.

 

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“Core Earnings” Basis

 

Index

(Dollars in billions)

    Frequency of
Variable
Resets		    Assets(1)      Funding(2)      Funding
Gap		  

3-month Treasury bill

    weekly    $ 5.4       $ —         $ 5.4   

Prime

    annual      .6         —          .6   

Prime

    quarterly      4.0         —          4.0   

Prime

    monthly      18.9         1.5         17.4   

Prime

    daily      —          .1         (0.1 ) 

PLUS Index

    annual      .4         —          0.4   

3-month LIBOR

    quarterly      —          69.8         (69.8 ) 

1-month LIBOR

    monthly      14.4         48.8         (34.4 ) 

1-month LIBOR

    daily      98.2         5.0         93.2   

Non-Discrete reset(3)

    monthly      —          12.8         (12.8 ) 

Non-Discrete reset(4)

    daily/weekly      9.7         5.1         4.6   

Fixed Rate(5)

         5.8         14.3         (8.5 ) 
     

 

 

     

 

 

     

 

 

  

Total

       $ 157.4       $ 157.4       $ —    
     

 

 

     

 

 

     

 

 

  

 

  (1) 

FFELP Loans of $13.3 billion ($13.1 billion LIBOR index and $.2 billion Treasury bill index) are currently earning a fixed rate of interest as a result of the low interest rate environment.

 

 

  (2) 

Funding (by index) includes all derivatives that management considers economic hedges of interest rate risk and reflects how we internally manage our interest rate exposure.

 

 

  (3) 

Funding consists of auction rate asset-backed securities and FFELP-other facilities.

 

 

  (4) 

Assets include restricted and unrestricted cash equivalents and other overnight type instruments. Funding includes retail and other deposits and the obligation to return cash collateral held related to derivatives exposures.

 

 

  (5) 

Assets include receivables and other assets (including goodwill and acquired intangibles). Funding includes other liabilities and stockholders’ equity (excluding series B Preferred Stock).

 

We use interest rate swaps and other derivatives to achieve our risk management objectives. Our asset liability management strategy is to match assets with debt (in combination with derivatives) that have the same underlying index and reset frequency or, when economical, have interest rate characteristics that we believe are highly correlated. The use of funding with index types and reset frequencies that are different from our assets exposes us to interest rate risk in the form of basis and repricing risk. This could result in our cost of funds not moving in the same direction or with the same magnitude as the yield on our assets. While we believe this risk is low, as all of these indices are short-term with rate movements that are highly correlated over a long period of time, market disruptions (which have occurred in recent years) can lead to a temporary divergence between indices resulting in a negative impact to our earnings.

 

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Weighted Average Life

The following table reflects the weighted average life of our earning assets and liabilities at December 31, 2013.

 

(Averages in Years)

    Weighted  Average
Life		  

Earning assets

   

Student loans

      7.5   

Other loans

      7.3   

Cash and investments

      .1   
  

 

 

  

Total earning assets

      7.0   
  

 

 

  

Borrowings

   

Short-term borrowings

      .3   

Long-term borrowings

      6.3   
  

 

 

  

Total borrowings

      5.7   
  

 

 

  

 

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BUSINESS

This section assumes that all transactions in connection with the separation and distribution of Navient have been completed, and that Navient’s historical businesses activities have been operated in the same manner as they were conducted as part of Existing SLM.

Overview

Navient holds the largest portfolio of student loans issued under the FFELP. Navient is also the largest holder of Private Education Loans. Navient services and collects on these loans for its own account, as well as for loans owned by ED, numerous financial institutions, banks, credit unions and non-profit education lenders.

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.

Navient further provides 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. The services we provide include account maintenance, default aversion, post default collections and claim processing. In addition, Navient provides loan servicing and collection services to ED. Navient also generates revenue through collection of delinquent debt on behalf of clients on a contingent basis. These collections activities are related to education loans and other asset classes.

Navient will service and collect on SLM BankCo’s portfolio of FFELP Loans and, during a transition period, SLM BankCo’s portfolio of Private Education Loans. It is currently anticipated that Navient will continue to service Private Education Loans owned by SLM BankCo with respect to individual borrowers who also have Private Education Loans which are owned by Navient. See “Certain Relationship and Related Party Transactions.”

Navient’s goal is to maximize the cash flow generated by its education loan portfolio, including through the acquisition of additional education loans from third parties and the expansion of its loan servicing and collection businesses. The vast majority of Navient’s income will be derived, directly or indirectly, from its portfolios of education loans and the servicing and collection activities that it provides for these loans. Our FFELP Loans will amortize over the next 20 years, and the fee income we earn from providing servicing and contingent collections services on such loans will similarly decline over time.

As of December 31, 2013, on a pro forma basis, Navient’s principal assets consisted of approximately:

 

  •  

$103.2 billion in FFELP Loans, which yield an average of 2.05 percent annually on a “Core Earnings” basis and have a weighted average life of 7.6 years. Approximately 85 percent of these loans were funded to term with non-recourse, long-term securitization debt through the use of securitization trusts;

 

  •  

$31.0 billion in Private Education Loans, which yield an average of 6.31 percent annually on a “Core Earnings” basis and have a weighted average life of 7.1 years;

 

  •  

$6.9 billion of other interest-earning assets, including securitization trust restricted cash;

 

  •  

a leading student loan servicing platform that services loans for more than 12 million FFELP Loan, DSLP loan and Private Education Loan customers (including cosigners) including 5.7 million customer accounts serviced under Navient’s contract with ED; and

 

  •  

a leading student loan contingent collection platform with an outstanding inventory of contingent collection receivables of approximately $16.2 billion, of which approximately $13.5 billion was student loans and the remainder was other debt.

 

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In 2013, Navient sold Residual Interests in five of its FFELP Loan securitization trusts to third parties. The sales resulted in the recognition of $312 million in gains, and removed securitization trust assets of $12.5 billion and related liabilities of $12.1 billion from our balance sheet. Navient will consider additional monetization opportunities related to the Residual Interests it holds in securitization trusts. Navient will continue to service these student loans in the trusts pursuant to existing agreements.

Substantially all of Navient’s revenues are generated in the United States.

Navient was incorporated in Delaware on November 7, 2013 as New Corporation 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 herein. Prior to the contribution of this business to Navient, which will be completed immediately prior to the distribution, Navient will have no operations. The address of Navient’s principal executive offices is 300 Continental Drive, Newark, Delaware 19713. Navient’s telephone number is (302) 283-8000.

Navient’s Strengths

Navient possesses a number of competitive advantages that distinguishes it from its competitors, including:

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

Navient has substantial institutional knowledge and expertise in the securitization market. Sallie Mae was a pioneer in the student loan-backed securitization market and Navient continues as the largest market participant. Navient has established relationships with institutions that underwrite and invest in such securities, and has years of data to use in estimating loan default rates and expected cash flows.

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

Servicing platforms that offer substantial economies of scale. Navient has internally developed and purchased technology platforms, on which it services and collects on DSLP loans for ED, on FFELP Loans for guarantor and other clients and on its own $103.2 billion portfolio of FFELP Loans and $31.0 billion portfolio of Private Education Loans (on a pro forma basis, as of December 31, 2013). Navient’s platforms are robust and scalable and will enable Navient to add additional accounts at low cost.

Strong management team with extensive industry experience. Navient’s management team has 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, accounting, treasury, credit, collections, enterprise project management and risk management. See “Management—Executive Officers Following the Separation.”

 

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Navient’s Strategies

Navient seeks to create value for stockholders by, among other things:

Expanding its leading education loan portfolio manager, servicer, and collection business. Navient 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. Although by agreement Navient will not originate new Private Education Loans, prior to 2019 it will seek to purchase portfolios of Private Education Loans, subject to the limitations of its non-competition arrangement with SLM BankCo. Navient may also acquire pools 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. Navient intends to leverage its platform to expand its servicing and collections businesses to more third party owners of education loan portfolios and guarantors, including ED.

Maintaining stable dividend and actively managing capital structure. Navient expects to have sufficient liquidity to continue Existing SLM’s current policy of returning capital to stockholders through dividends and share repurchases, without impairing its ability to service its $18.3 billion of unsecured public debt, as of December 31, 2013. See “Capital Return Policies.”

Efficiently managing expense base. Navient will continue to 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 and distribution, Navient will be a publicly-traded company listed on the NASDAQ. Navient expects that its significant loan portfolio, supplemented by its servicing business, will afford it the opportunity to access the debt markets when appropriate. Navient 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.

Navient’s Approach to Assisting Students and Families in Repaying their Education Loans

Navient has a leading student loan servicing platform that services loans for more than 12 million FFELP Loan, DSLP loan and Private Education Loan customers (including cosigners), including 5.7 million customer accounts serviced under Navient’s contract with ED. Employee emphasis is placed on providing service with accuracy, courtesy, consistency and empathy. If we fall short, we make it a priority to correct our mistake, and we make it a priority to prevent it from happening again.

We understand managing repayment of education loans is critical for students to achieve their educational goals, recognize their full earning potential and develop a strong credit profile. A key indicator of future success in loan repayment is graduation. Navient encourages customers to plan for the full cost of their education to increase their likelihood of completing their course of study because we know that those who drop out or do not complete their course of study are more likely to default on their education loans.

When it comes to repaying education loans, customer success means making steady progress toward repayment, instead of falling behind on payments. Our experience has taught us that the transition from school to full repayment requires making and carrying out a financial plan. For many, this is their first borrowing experience. For new graduates, salaries grow over time, typically making payments easier to handle as their career progresses. It is also not uncommon for some to return to school, experience illness or encounter temporary interruptions in earnings.

 

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To help customers manage these realities, Navient makes customer success and default prevention top priorities. Contact and counseling keep customers on track, and we believe we go beyond what is required in our efforts to assist customers with past-due student loan payments. That outreach pays off: approximately 90 percent of federal loan customers we reach successfully leverage the options available to them to resolve their delinquency. As a result of our outreach, the federal education loans Navient services default at rates 30 percent better than the national average.

Business Segments

We have three primary operating business segments: Business Services, FFELP Loans, Consumer Lending. A fourth segment —Other— primarily consists of financial results of our holding company, including activities related to repurchases of debt, our corporate liquidity portfolio and all overhead.

Business Services Segment

FFELP-Related Revenues

Navient is currently the largest holder, servicer and collector of loans made under the previously existing FFELP, and the majority of our income has been derived, directly or indirectly, from our portfolio of FFELP Loans and servicing we have provided for FFELP Loans. In 2010, Congress passed legislation ending the origination of education loans under FFELP. The terms and conditions of existing FFELP Loans were not affected by this legislation. Our FFELP Loan portfolio will amortize over approximately 20 years. The fee income we have earned from providing servicing and contingent collection services on such loans will similarly decline over time. We also provide servicing, loan default aversion and defaulted loans collection services on behalf of Guarantors of FFELP Loans and other institutions, including ED. With the elimination of FFELP in July 2010, these FFELP-related revenue sources will continue to decline.

 

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Servicing revenues from the FFELP Loans we own and manage represent intercompany charges to the FFELP Loans segment at rates paid to us by the trusts which own the loans. These fees are legally the first payment priority of the trusts and exceed the actual cost of servicing the loans. Intercompany loan servicing revenues declined to $530 million in 2013 from $670 million in 2012. Intercompany loan servicing revenues will decline as the FFELP portfolio amortizes. Prepayments of FFELP Loans could further accelerate the rate of decline.

 

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In 2013, we earned account maintenance fees on FFELP Loans serviced for Guarantors of $38 million, down from $44 million in 2012. These fees will continue to decline as the portfolio amortizes. Prepayments of FFELP Loans could further accelerate the rate of decline.

 

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We provide default aversion, post default collections and claims processing to 15 of the 30 Guarantor 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. As of December 31, 2013, Navient had an outstanding inventory of contingent collection receivables of approximately $16.2 billion, of which $13.5 billion was student loans ($10.8 billion FFELP Loans and $2.7 billion DSLP Loans) and the remainder was other debt. In 2013, collection revenue from Guarantor clients totaled $303 million, compared to $264 million the prior year. As FFELP Loans are no longer originated, these revenues will generally decline over time unless we acquire additional work for Guarantor clients. The rate at which these revenues will decrease will also be affected by the Bipartisan Budget Act enacted on December 26, 2013 and effective on July 1, 2014, which reduces the amount to be paid to Guarantor agencies for defaulted FFELP Loans that are rehabilitated under Section 428F of the HEA. The precise effect of the Budget Act will depend on the decisions of our Guarantor agency clients about their continued participation in FFELP default collections, as well as by how the fee reduction is implemented by ED. We currently estimate the Budget Act will reduce fee income in 2014 by approximately $60 million.

 

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In 2013, FFELP-related revenues accounted for 77 percent of total Business Services segment revenues compared with 82 percent for each of the previous two years. Total Business Services segment revenues were $1.16 billion for the year ended December 31, 2013 and $1.20 billion for the year ended December 31, 2012. Over the next several years, Navient’s objective is to grow or acquire additional sources of services revenue. The total amounts of these combined FFELP-related revenues, as well as the margins Navient earns from them, are significant. Navient’s ability to offset these accelerating FFELP-related revenue declines is uncertain.

Navient anticipates that with the end of new originations under the FFELP, owners of FFELP Loan portfolios, as well as Guarantors of those loans, will likely seek to reduce their FFELP servicing costs or sell those portfolios. Given the volume of FFELP Loans Navient services for its own portfolio and third parties, Navient is uniquely situated to adapt to the increasing levels of education loan-specific disclosure, compliance, servicing and collection standards which other financial institutions and servicers may not find economical to continue to support. Acquiring additional FFELP servicing volume as others sell FFELP Loan portfolios, exit existing FFELP servicing businesses or seek to find lower cost providers for those services is a key component of the current Business Services segment growth strategy, notwithstanding the discontinuation of the FFELP.

Navient will also seek to pursue acquisitions of both complementary and diversified service businesses that can expand demand for services in and beyond the education loan markets. Navient considered several such opportunities in 2013 but chose not to pursue those based on relative valuations of the companies and questions regarding their near-term returns on investment as compared to other uses for Navient’s capital resources. Future acquisitions will continue to be analyzed in the context of their relative valuations and compared to other uses of Navient’s capital resources including returning capital to stockholders.

ED Collection and Servicing Contracts

Since 1997, Navient has provided collection services on defaulted student loans to ED. The current contract runs through April 21, 2015. There are 21 other collection providers; Navient competes with 16 providers for account allocation based on quarterly performance metrics. The remaining five providers are small businesses that are ensured a particular allocation of business. As a consistent top performer, Navient’s share of allocated accounts has ranged from six percent to eight percent for this contract period. Currently, we are participating in ED’s procurement process for a new debt collection contract and expect them to announce the recipients by April 30, 2014.

Since the second quarter of 2009, we have been one of four large servicers awarded a servicing contract by ED to service DSLP federal loans owned by ED. We serviced approximately 5.7 million accounts under this DSLP servicing contract as of December 31, 2013. The DSLP servicing contract spans five years with one five-year renewal at the option of ED. In November 2013, ED gave notice to Existing SLM of its intent to exercise its five-year renewal option to extend the DSLP servicing contract. As such, we will continue to compete for DSLP servicing volume from ED with the three other large servicing companies that also have similar contracts. New account allocations for the upcoming 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 any servicer could be awarded is 40 percent of net new borrowers in that contract year. Our share of new loans serviced for ED under the contract increased to 18 percent in 2013 from 15 percent in the prior contract year as a result of our relative standing, as compared to other servicing companies, on the ED Scorecard. We earned $109 million of revenue under the contract for the year ended December 31, 2013.

To date, the DSLP servicing contract with ED has not contributed meaningful net income to us; however, the opportunity to significantly and profitably expand the services we can provide under the DSLP directly to ED or otherwise, has been an important component of the Business Services segment’s growth strategy. In fiscal year

 

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2014, ED is projected to originate more than $112 billion in new federal education loans and spend more than $1.7 billion in contracted services. To expand the services we provide under the DSLP, we will seek to improve on the performance metrics that determine the allocation of new accounts under the servicing contract with ED.

We have generated significant volumes of work and consistently delivered high levels of objectively measurable performance under both the DSLP collection contract and the DSLP servicing contract. However, to date, the servicing contract structure has not permitted us to scale the work we are doing to achieve meaningful profitability.

Competition

Navient’s Business Services segment competes with other loan servicing companies to service and collect on existing FFELP Loans and DSLP loans disbursed under the DSLP and to provide services to guarantors. With the elimination of new loan originations under the FFELP, many competitors exited the FFELP Loan ownership and student education loan servicing market. And because Navient owns a sizable portfolio of FFELP Loans, the Business Services segment enjoys economies of scale compared to competitive providers.

In 2009, ED named four servicers, including Navient, as servicers of federally owned direct loans under the servicing contract described under “ED Collection and Servicing Contracts” above. The three other servicers under that contract with whom Navient competes for servicing volume from ED are Nelnet, Inc., Great Lakes Educational Loan Services Inc. and Pennsylvania Higher Education Assistance Agency.

FFELP Loans Segment

Navient’s FFELP Loans segment consists of its FFELP Loan portfolio and the underlying debt and capital funding the loans. We are currently the largest holder of FFELP 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 ED and these agencies. These guarantees generally cover at least 97 percent of a FFELP Loan’s principal and accrued interest for loans disbursed. In the case of death, disability or bankruptcy of the borrower, these guarantees cover 100 percent of the loan’s principal and accrued interest. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Segment Earnings Summary — ‘Core Earnings’ Basis — FFELP Loans Segment” for a full discussion of our FFELP Loans segment. Navient’s portfolio of FFELP Loans, on a pro forma basis as of December 31, 2013, aggregated $103.2 billion. This compares to $1.4 billion in FFELP Loans, as of December 31, 2013, that were held by Sallie Mae Bank and are to be retained by SLM BankCo.

As a result of the long-term funding used in the FFELP Loan portfolio and the insurance and guarantees provided on these loans, the net interest margin recorded in the FFELP Loans segment is relatively stable and the capital we choose to retain with respect to the segment is modest. For more discussion of the FFELP and related credit support mechanisms, see Appendix B “Description of Federal Family Education Loan Program.”

Navient’s FFELP Loan portfolio will amortize over approximately 20 years. Navient’s goal is to maximize the cash flow generated by its FFELP Loan portfolio. Navient will also seek to acquire other third-party FFELP Loan portfolios to add net interest income and servicing revenue.

The HEA continues to regulate every aspect of the FFELP, including ongoing communications with borrowers and default aversion requirements. Failure to service a FFELP Loan properly could jeopardize the insurance and guarantees and federal support on these loans. The insurance and guarantees on Navient’s existing loans were not affected by the July 2010 termination of the FFELP program.

 

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For loans disbursed before April 1, 2006, FFELP Loans 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 the SAP formula set by ED. Navient generally finances 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, Navient will continue to earn interest on the loan at the fixed borrower rate while the floating rate interest on Navient 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.

Floor Income can be volatile as rates on the underlying debt move up and down. Navient may hedge this risk by selling Floor Income contracts which lock in the value of the Floor Income over the term of the contract. As of December 31, 2013, approximately $31.7 billion (56 percent) of Navient’s FFELP Loans eligible to earn Floor Income was economically hedged with Floor Income Contracts for approximately the next 2.5 years.

Portfolio Purchases; Competition

Navient believes there will be opportunities to purchase FFELP Loan portfolios from current FFELP participants looking to adjust their FFELP businesses. Navient competes for the purchase of FFELP Loan portfolios with banks, hedge funds and other student loan finance companies.

Consumer Lending Segment

Navient’s Consumer Lending segment consists of its Private Education Loan portfolio and servicing and the underlying debt and capital funding those loans.

Private Education Loans bear the full credit risk of the customer and any cosigner. Private Education Loans are made primarily to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans or customers’ resources. Navient earns net interest income on its Private Education Loan portfolio (after provision for loan losses) as well as servicing fees, consisting primarily of late fees. Operating expenses for this segment include costs incurred to acquire and to service our loans.

The credit risk of the Private Education Loans owned by Navient have been managed by underwriting and pricing based upon customized credit scoring criteria and the addition of qualified cosigners, which Navient expects will reduce the risk of payment interruptions and defaults on its Private Education Loan portfolio.

 

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Navient’s portfolio of Private Education Loans has already been seasoned. The following table illustrates Navient’s loan seasoning, on a pro forma basis:

 

(Dollars in millions)

    Monthly Scheduled Payments Due     Not Yet in
Repayment		     Total  

December 31, 2013

Total Portfolio

    0 to 12     13 to 24     25 to 36     37 to 48     More than 48      

Loans in-school/grace/deferment

    $ —        $ —        $ —        $ —        $ —        $ 3,954      $ 3,954   

Loans in forbearance

      491        186        164        105        139        —          1,085   

Loans in repayment — current

      2,241        3,663        4,196        4,277        10,458        —          24,835   

Loans in repayment —delinquent 31-60 days

      155        160        145        117        196        —          773   

Loans in repayment —delinquent 61-90 days

      112        113        92        71        115        —          503   

Loans in repayment — delinquent greater than 90 days

      330        305        238        171        243        —          1,287   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

    $ 3,329      $ 4,427      $ 4,835      $ 4,741      $ 11,151      $ 3,954      $ 32,437   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Loans in forbearance as a percentage of loans in repayment and forbearance

      14.8 %      4.2 %      3.4 %      2.2 %      1.2 %      0.0 %      3.8 % 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Loans in repayment greater than 12 months as a percentage of loans in repayment

                  89.6 % 
              

 

 

  

Loan seasoning affects credit risk because a loan with a history of making payments generally has a lower incidence of default than a loan with a history of making infrequent or no payments. Based on Existing SLM’s experience, the probability of default substantially diminishes as the number of payments and years of seasoning increases.

As of December 31, 2013, on a pro forma basis, delinquencies of 90 days or more were 4.7 percent of loans in repayment; loans in forbearance were 3.8 percent of loans in repayment and forbearance; and the 2013 charge-off rate for Private Education Loans as a percentage of loans in repayment was 3.1 percent.

Purchases of Loan Pools; Competition

Although Navient will not originate new Private Education Loans following the separation and distribution, it believes there may be opportunities to continue to purchase pools of Private Education Loans from current originators looking for funding in the wholesale markets. Navient competes for the purchase of pools of student loans with large banks, hedge funds and other student loan finance companies.

Other Segment

The Other segment consists primarily of the financial results related to activities of the holding company, including the repurchase of debt, the corporate liquidity portfolio and all overhead. Navient also includes results from certain, smaller wind-down and discontinued operations within this segment. Overhead expenses include costs related to executive management, the board of directors, accounting, finance, legal, human resources, stock-based compensation expense and certain information technology costs related to infrastructure and operations.

 

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Intellectual Property

Navient owns numerous trademarks and service marks to identify its various products, services and financing programs. It also owns copyright protected works, including various computer system codes and displays, loan servicing websites, publications and marketing collateral. Navient also has trade secret rights to several of its processes and strategies and CLASS, its FFELP Loan, DSLP and servicing and collections platform. Navient seeks federal and state protection of intellectual property when appropriate, including patent, trademark or service mark and copyright protection. The decision whether to seek such protection may depend on the perceived value of the intellectual property, the likelihood of securing protection, the cost of securing and maintaining that protection and the potential for infringement.

Seasonal Aspects

There are no significant seasonal aspects to Navient’s business.

Supervision and Regulation

The Dodd-Frank Act

The Dodd-Frank Act was adopted to reform and strengthen regulation and supervision of the U.S. financial services industry. The Dodd-Frank Act contains comprehensive provisions to 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, additional requirements and oversight on almost every aspect of the U.S. financial services industry, including increased capital and liquidity requirements, limits on leverage and enhanced supervisory authority. Some of these provisions apply to Navient and its various businesses. Most of the Dodd-Frank Act’s provisions have become effective, but many remain subject to formal implementation by regulatory agencies through final rulemaking, leaving considerable uncertainty as to their ultimate scope and effect. Nonetheless, Navient’s operational expenses may increase as it addresses new or additional compliance requirements arising from the implementation of various provisions of the Dodd-Frank Act.

The Consumer Financial Protection Act, a part of the Dodd-Frank Act, established the CFPB, which has broad authority to write regulations under federal consumer financial protection laws and to directly or indirectly enforce those laws and examine financial institutions for compliance. The CFPB is authorized to impose fines and provide consumer restitution in the event of violations, engage in consumer financial education, track consumer complaints, request data and promote the availability of financial services to underserved consumers and communities. It has authority to prevent unfair, deceptive or abusive practices by issuing regulations that define the same or by using its enforcement authority without first issuing regulations. The CFPB has been active in its supervision, examination and enforcement of financial services companies, most notably bringing enforcement actions imposing fines and mandating large refunds to customers of several large banking institutions for practices relating to the sale of additional products associated with the extension of consumer credit.

The Dodd-Frank Act also authorizes state officials to enforce regulations issued by the CFPB and to enforce the Dodd-Frank Act’s general prohibition against unfair, deceptive and abusive practices.

Regulatory Outlook

The number and scope of regulatory and enforcement actions in 2013, as well as the amounts of fines and penalties levied against banking institutions, were significant. The types and numbers of class and stockholder derivative actions arising from allegations of violations of consumer protection and regulatory provisions also continued to increase. A number of prominent themes appear to be emerging from these actions:

 

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The number and configuration of regulators bringing actions often adds to the complexity, cost and unpredictability of timing for resolution of particular regulatory issues.

 

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The regulatory compliance and risk control structures of financial institutions subject to enforcement actions are frequently cited, regardless of whether past practices have been changed, and enforcement orders have often included detailed demands for increased compliance, audit and board supervision, as well as the use of third-party consultants to recommend further changes or monitor remediation efforts.

 

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Issues first identified with respect to one consumer product class or distribution channel are often applied to other product classes or channels, as has been most notably the case in the home mortgage industry.

As described in more detail below, in coming years Navient expects the regulators overseeing its businesses to increase in number or change, and that consumer protection regulations and standards will evolve to become more detailed in scope. This evolution may significantly add to Navient’s compliance, marketing, servicing and operating costs. While current operations and compliance processes may or may not satisfy heightened, evolving regulatory standards, they cannot provide assurance that past practices or products will not be the focus of examinations, inquiries or lawsuits. Prior to 2009, one or more of Navient’s current or then-existing subsidiaries were involved in the origination and sale of home mortgages, automobile loans, boat/RV/manufactured housing loans, construction loans and other personal loans.

As described in the section entitled “Management — Risk Management,” Navient intends to implement a coordinated, formal existing risk management system to reduce business and regulatory risks.

Listed below are some of the most significant recent and pending regulatory changes that have the potential to affect Navient in coming years.

Education Loans and Students’ Rights. The CFPB has now assumed regulatory oversight of the Private Education Loan industry. Throughout 2013, the CFPB continued to be active in the student loan industry and undertook a number of initiatives relative to the Private Education Loan market and student loan servicing, including:

 

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In February 2013, the CFPB published a notice soliciting information on potential options to offer more affordable repayment options to borrowers having difficulty repaying their private student loans. Based on the more than 28,000 comments received, on May 8, 2013, the CFPB published a report highlighting the ways in which private student loan debt can be a roadblock to financial soundness for consumers. The report analyzes the impact of private student loan burdens on the broader economy, assesses recent actions of policymakers in the student loan market and discusses policy options put forth by the public regarding private student loans. Reports such as these may continue to influence regulatory developments in the student lending market. The report proposes a number of considerations for policymakers and market participants, such as refinancing relief and monthly payments more closely correlated with a borrower’s debt-to-income ratio. Certain of these CFPB recommendations in the report could negatively affect our private education loan portfolio if implemented. For a discussion on Navient’s approach to helping its customers, see “— Navient’s Approach to Assisting Students and Families in Repaying their Education Loans” above.

 

 

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On October 16, 2013, the Private Education Loan Ombudsman within the CFPB submitted its second report based on Private Education Loan inquiries received through the CFPB portal from October 1, 2012 through September 30, 2013, including 1,327 inquiries transmitted to Sallie Mae during that period. The Dodd-Frank Act created the Private Education Loan Ombudsman within the CFPB to receive and attempt to informally resolve inquiries about Private Education Loans. The Private Education Loan Ombudsman reports to Congress annually on the trends and issues that it identifies through this process. The report offers analysis, commentary and recommendations to address issues reported by consumers. The report’s key observations included: (1) just under 50 percent of all private student loan inquiries received were related to consumers seeking a loan modification or other option to reduce their monthly payment; (2) payment processing problems continue to represent a significant amount of the inquiries received by the CFPB, such as confusion about payment application

 

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policies, the application of excess payments and underpayments, timing of payment processing, access to payment histories, lost payments, obtaining payoff information and servicing transfers; and (3) many of the private student loan inquiries mirror the problems heard from consumers in the mortgage market and that recent changes to mortgage servicing and credit card servicing practices might be applicable to the Private Education Loan market.

 

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On December 3, 2013, the CFPB issued a final rule defining larger participants of the student loan servicing market. The rule, which will become effective on March 1, 2014, will allow the CFPB to federally supervise certain nonbank student loan servicers for the first time. Under the final rule, the CFPB will have supervisory authority over any nonbank student loan servicer that services more than one million borrower accounts, including accounts for both Private Education Loans and federal student loans. Our student loan servicing subsidiaries will be subject to this new oversight. The CFPB’s supervision will include gathering reports, conducting examinations for compliance with federal consumer financial laws and taking enforcement actions as appropriate, similar to the CFPB’s current supervisory authority over large bank student loan servicers.

Debt Collection Supervision. Consistent with the authority granted to it under the Dodd-Frank Act, the CFPB also maintains supervisory authority over larger consumer debt collectors. On October 24, 2012, the CFPB issued its final debt collection larger participant rule and examination procedures that will allow the agency to federally supervise larger consumer debt collectors. The rule defines larger participants as third-party debt collectors, debt buyers and collection attorneys with more than $10 million in annual receipts resulting from consumer debt collection. Under the rule, Navient’s collection subsidiaries are considered larger participants and will be subject to supervision. The rule became effective January 2, 2013. The issuance of the CFPB’s rules does not preempt the various and varied levels of state consumer and collection regulations to which the activities of Navient’s subsidiaries are currently subject. Navient also utilizes third-party debt collectors to collect defaulted and charged-off education loans and will continue to be responsible for oversight of their procedures and controls.

Nonbank Student Loan Servicers. On December 3, 2013, the CFPB issued a final rule defining larger participants of the student loan servicing market. The rule, which will become effective on March 1, 2014, will allow the CFPB to federally supervise certain nonbank student loan servicers for the first time. Under the final rule, the CFPB will have supervisory authority over any nonbank student loan servicer that services more than one million borrower accounts, including accounts for both Private Education Loans and federal student loans. Navient will be subject to this new oversight. The CFPB’s supervision will include gathering reports, conducting examinations for compliance with federal consumer financial laws and taking enforcement actions as appropriate, similar to the CFPB’s current supervisory authority over large bank student loan servicers.

Regulation of Systemically Important Non-Bank Financial Companies As directed by the Dodd-Frank Act, on April 3, 2012, the Financial Stability Oversight Council (“FSOC”) approved the final rule and interpretive guidance it will use for designating non-bank financial companies as systemically important to the financial stability of the United States and subject to supervision by the Board of Governors of the Federal Reserve System (the “FRB”) under enhanced prudential supervision and regulatory standards. To be subject to FRB enhanced supervision, a non-bank financial company’s material financial distress, its nature, scope, size, scale, concentration, interconnectedness, or mix of activities, must pose a threat to the financial stability of the United States as a Systemically Important Financial Institution (“SIFI”).

While we have no way of knowing the qualitative judgments the FSOC will use in the future to determine if a non-bank financial company merits designation as a SIFI, and no assurances can be given, we believe it is unlikely the FSOC will determine that Navient will qualify for SIFI designation.

Oversight of Derivatives. The Dodd-Frank Act created a comprehensive new regulatory framework for derivatives transactions, to be implemented by the Commodity Futures Trading Commission and the SEC. This

 

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new framework, among other things, subjects certain swap participants to new capital and margin requirements, recordkeeping and business conduct standards and imposes registration and regulation of swap dealers and major swap participants. The scope of potential exemptions remains to be further defined through agency rulemakings. Even if Navient qualifies for an exemption, many of its derivatives counterparties are likely to be subject to the new capital, margin and business conduct requirements.

Other Significant Sources of Regulation

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

HEA. Navient is subject to the HEA and its student loan operations are periodically reviewed by ED and guarantors. As a servicer of federal student loans, Navient is subject to ED regulations regarding financial responsibility and administrative capability that govern all third-party servicers of insured student loans. In connection with its servicing operations, Navient must comply with, on behalf of guarantor clients, ED regulations that govern guarantor activities as well as agreements for reimbursement between ED and our guarantor clients.

Federal Financial Institutions Examination Council. As a third-party service provider to financial institutions, Navient is also subject to examination by the Federal Financial Institutions Examination Council (“FFIEC”). FFIEC is a formal interagency body of the U.S. government empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the FRB, the FDIC, the National Credit Union Administration, the Office of the Comptroller of the Currency and the CFPB and to make recommendations to promote uniformity in the supervision of financial institutions.

Consumer Protection and Privacy. Navient’s business servicing FFELP Loans, Private Education Loans and DSLP loans is subject to federal and state consumer protection, privacy and related laws and regulations. Some of the more significant federal laws and regulations include:

 

  •  

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

 

  •  

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

 

  •  

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

 

  •  

the Equal Credit Opportunity Act and Regulation B issued by the FRB, which prohibits discrimination on the basis of race, creed or other prohibited factors in extending credit;

 

  •  

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

 

  •  

the Telephone Consumer Protection Act which governs communication methods that may be used to contact customers.

Navient’s debt collection and receivables management activities are subject to federal and state consumer protection, privacy and related laws and regulations, including supervision by the CFPB of larger consumer debt collectors as discussed above. Some of the more significant federal statutes are the Fair Debt Collection Practices Act and additional provisions of the acts listed above, as well as the HEA and the various laws and regulations that govern government contractors. These activities are also subject to state laws and regulations similar to the federal laws and regulations listed above.

 

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Employees

Navient expects to employ approximately 6,000 persons as of the distribution date. None of these employees are covered by collective bargaining agreements. Navient believes that relations with its employees are good.

Properties

The following table lists Navient’s principal owned facilities:

 

Location    Function    Business Segment(s)    Approximate
Square Feet		  

Fishers, IN†

    Loan Servicing and Data Center    Business Services; FFELP Loans      450,000   

Wilkes-Barre, PA†

    Loan Servicing Center    Business Services; FFELP Loans      133,000   

Indianapolis, IN

    Loan Servicing Center    Business Services      100,000   

Big Flats, NY

    GRC — Collections Center    Business Services      60,000   

Arcade, NY(1)

    Pioneer Credit Recovery — Collections Center    Business Services      46,000   

Perry, NY

    Pioneer Credit Recovery — Collections Center    Business Services      45,000   

 

(1) 

In 2005, Navient entered into a ten-year lease with the Wyoming County Industrial Development Authority. This property reverts back to us in March 2015.

 

† 

Property will be shared with SLM BankCo.

The following table lists Navient’s principal leased facilities:

 

Location    Function    Business Segment(s)    Approximate
Square Feet		  

Reston, VA†

    Administrative Offices    Business Services; FFELP Loans; Other      90,000   

Newark, DE†

    Operations Center    Business Services; Other      86,000   

Cincinnati, OH

    GRC Headquarters and Collections Center    Business Services      59,000   

Muncie, IN

    Collections Center    Business Services      54,000   

Moorestown, NJ

    Pioneer Credit Recovery — Collections Center    Business Services      30,000   

 

† 

Property will be shared with SLM BankCo.

Legal Proceedings

Navient and its subsidiaries and affiliates are subject to various claims, lawsuits and other actions that arise in the normal course of business. We believe that these claims, lawsuits and other actions will not, individually or in the aggregate, have a material adverse effect on our business, financial condition or results of operations. Most of these matters are claims against our servicing and collections subsidiaries by borrowers and debtors alleging the violation of state or federal laws in connection with servicing or collection activities on their student loans and other debts. In addition, Navient’s collections subsidiaries are routinely named in individual plaintiff or class action lawsuits in which the plaintiffs allege that those subsidiaries have violated a federal or state law in the process of collecting their accounts. Finally, from time to time, Navient and its subsidiaries and affiliates receive information and document requests from state attorneys general, legislative committees and administrative agencies concerning certain business practices. These requests may be informational or regulatory in nature. Navient’s practice has been and continues to be to cooperate with these bodies and to be responsive to any such requests.

 

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Regulatory Matters

As of the date of this information statement, Sallie Mae Bank remains subject to the cease and desist order originally issued in August 2008 by the FDIC and the UDFI. In July 2013, the FDIC notified Existing SLM that it plans to replace the existing cease and desist order on Sallie Mae Bank with a new formal enforcement action against Sallie Mae Bank that would more specifically address certain cited violations of Section 5 of the FTCA, including practices relating to payment allocation practices and the disclosures and assessments of certain late fees, as well as alleged violations under the SCRA. In November 2013, the FDIC notified Existing SLM that the new formal enforcement action would be against Sallie Mae Bank and an additional enforcement action would be against SMI, in its capacity as a servicer of education loans for other financial institutions, and would include civil money penalties and restitution. For additional information regarding these and related regulatory matters, see “ Business — Legal Proceedings — Regulatory Matters.”

With respect to alleged civil violations of the SCRA, Sallie Mae Bank and SMI are also separately negotiating a comprehensive settlement, remediation and restitution plan with the DOJ, in its capacity as the agency having primary authority for enforcement of such matters.

Existing SLM has made and continues to make changes to Sallie Mae Bank’s oversight of significant activities performed outside Sallie Mae Bank by affiliates and to its business practices in order to comply with all applicable laws and regulations and the terms of any cease and desist orders, including in connection with the separation and distribution. Existing SLM and Sallie Mae Bank are cooperating fully with the FDIC, DOJ and CFPB in response to their investigations and requests for information and are in active discussions with each with respect to any potential actions to be taken against us. Existing SLM could be required to, or otherwise determine to, make further changes to its business practices and products of Sallie Mae Bank and its other affiliates to respond to regulatory concerns.

As of December 31, 2013, Existing SLM had reserved $70 million for estimated amounts and costs that are probable of being incurred for expected compliance remediation efforts with respect to the FDIC and DOJ matters described above.

OIG Investigation

The Office of the Inspector General (the “OIG”) of the ED commenced an audit regarding Special Allowance Payments on September 10, 2007. On September 25, 2013, Existing SLM received the final audit determination of Federal Student Aid (the “Final Audit Determination”) on the final audit report issued by the OIG on August 3, 2009 related to its billing practices for Special Allowance Payments. The Final Audit Determination concurred with the final audit report issued by the OIG and instructed Existing SLM to make adjustment to its government billing to reflect the policy determination. Existing SLM has the right to appeal the Final Audit Determination to the Administrative Actions and Appeals Service Group of the ED, and has until March 24, 2014 to do so. We continue to believe that Existing SLM’s practices were proper, considering then existing ED guidance and lack of applicable regulations on the method of billing Special Allowance Payments. It is not possible at this time to estimate a range of potential exposure, if any, for amounts that may be payable by us in connection therewith.

Investor Litigation

On January 28, 2014 and February 10, 2014, a stockholder of each of the Series B preferred stock and Series A preferred stock of Existing SLM, respectively, filed a putative class action complaint in the Court of Chancery of the State of Delaware against Existing SLM and its board of directors. The complaints are captioned William McCrady v. SLM Corporation et. al., C.A. No 9285-VCL and James L. Myers v. SLM Corporation et. al., C.A. No 9371-VCL, respectively. Each plaintiff purports to bring the complaint on behalf of a class consisting of the holders of the series of preferred stock he holds in connection with the separation and distribution. The complaints generally allege, among other things, that Existing SLM’s board of directors breached its fiduciary

 

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duties to the holders of such preferred stock and an implied covenant of good faith and fair dealing in structuring the proposed separation and distribution, given that such holders will not receive an interest in Navient and, according to the plaintiff, the separation and distribution will fundamentally and inequitably alter the original investment of the class. The complaints seek declaratory relief and unspecified compensatory and recissory damages, as well as costs and plaintiff’s attorneys fees. Navient has agreed to indemnify SLM BankCo for any costs or expenses, including legal fees, arising out of any litigation by common or preferred stockholders in connection with the separation and distribution. See “Certain Relationships and Related Party Transactions — The Separation and Distribution Agreement — Indemnification.” Both Existing SLM and we believe that the lawsuits are entirely without merit and intend to defend it vigorously.

 

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MANAGEMENT

Executive Officers Following the Separation

Navient’s executive officers and expected executive officers are currently officers and employees of Existing SLM. Upon the separation and distribution, these individuals will resign from the positions they currently hold at Existing SLM.

The following table sets forth information regarding Navient’s current executive officers.

 

Name and Age

   

Position and Business Experience

Jack Remondi

51

   

•   Chief Executive Officer, Navient

•   President, Chief Executive Officer and Director, Existing SLM — May 2013 to present

•   President and Chief Operating Officer, Existing SLM — January 2011 to May 2013; Vice Chairman and Chief Financial Officer — January 2008 to January 2011

•   Portfolio Manager, PAR Capital Management, Inc., a private equity firm — 2005 to December 2007; responsibilities included managing investments in public companies

•   Executive Vice President, Existing SLM — 2001 to 2005; Senior Vice President — 1999 to 2001

•   Chief Financial Officer and Senior Vice President, Nellie Mae Corporation — 1988 to 1999

Somsak Chivavibul

46

   

•   Chief Financial Officer, Navient

•   Senior Vice President — Financial Planning & Analysis, Existing SLM — May 2007 to present

•   Vice President — Financial Planning & Analysis, Existing SLM — 2003 to 2007

•   Treasurer, Student Loan Marketing Association — 1997 to 2003

•   Managing Director — Financial Planning & Analysis, Existing SLM — 1997 to 2003

John Kane

45

   

•   Chief Operating Officer, Navient

•   Senior Vice President — Enterprise Project Management, Existing SLM — March 2013 to present

•   Senior Vice President — Credit, Existing SLM — August 2011 to March 2013

•   Senior Vice President — Collection, Existing SLM — 2008 to 2011

•   Senior Vice President — Consumer Credit Operations, MBNA/Bank of America — 1990 to 2008

Tim Hynes

44

   

•   Chief Risk Officer, Navient

•   Senior Vice President — Collections, Existing SLM — October 2011 to present

•   Senior Vice President — Credit, Existing SLM — May 2008 to October 2011

•   Director of New Account and Existing Account Marketing, Bank of America Card Services — February 2007 to May 2008

The identities of any additional executive officers of Navient have not been finally determined and we will include information regarding these individuals in an amendment to this information statement.

 

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Navient Board of Directors Following the Separation

The following table sets forth information with respect to the members of Navient’s board of directors, all of whom also serve on the Existing SLM board of directors. At the time of the separation and distribution, the Navient directors will be required to resign from the Existing SLM board, and all committees thereof, so that the two companies will have no common directors.

 

Name and Age

Service as a Director

   

Position, Principal Occupation,

Business Experience and Directorships

Jack Remondi, 51

 

Director since

May 30, 2013

   

See Mr. Remondi’s position and business experience in the table above.

 

Other Professional and Leadership Experience:

Chairman, Reading is Fundamental

Trustee, Nellie Mae Education Foundation

 

Directorship of other public companies:

Cubesmart Real Estate Investment Trust — 2009 to present

 

Mr. Remondi’s 25-year history with Existing SLM and its predecessors, in a variety of leadership roles, including as chief executive officer, enables him to bring to the Navient board of directors a unique historical perspective of Navient, its operations and the evolution of the student loan industry. Mr. Remondi also brings valuable insights to the board of directors in the areas of finance, accounting, portfolio management, business operations and student/consumer lending.

Ann Torre Bates, 55

 

Director since

February 6, 2014

   

Strategic and Financial Consultant

 

Strategic and Financial Consultant — 1998 to 2012

 

Professional Highlights:

Vice President and Treasurer of US Airways — 1991 to 1995

Executive Vice President and Chief Financial Officer of NHP, Inc. —1995 to 1997

 

Directorships/trusteeships of other public companies:

Ares Capital Corporation — 1997 to present

United Natural Foods, Inc. — 2013 to present

Allied Capital Corporation — 2003 to 2010

17 investment companies in the Franklin Templeton Group of Mutual Funds

 

Ms. Bates’ experience as a chief financial officer, and her role as chair and a member of several public companies’ audit committees, enables her to bring valuable experience to the board of directors in the areas of finance, accounting, financial services and capital markets.

 

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Name and Age

Service as a Director

   

Position, Principal Occupation,

Business Experience and Directorships

William M. Diefenderfer III, 68

 

Director since

February 6, 2014

   

Partner

Diefenderfer, Hoover, Boyle & Wood

 

Partner, Diefenderfer, Hoover, Boyle & Wood, a law firm, Pittsburgh, PA — 1991 to present

 

Professional Highlights:

Chief Executive Officer and President, Enumerate Solutions, Inc., a privately owned technology company — 2000 to 2002

Deputy Director, U.S. Office of Management and Budget — 1989 to 1991

 

Other Professional and Leadership Experience:

Member, Public Company Accounting Oversight Board (PCAOB) Standing Advisory Group — 2004 to 2005

  

Directorships of other public companies:

Chairman of the Board, Cubesmart Real Estate Investment Trust — 2004 to present

 

Mr. Diefenderfer’s legal background, his involvement in the executive branch of government and his leadership roles in business and as chair of public companies’ audit committees bring valuable experience in the areas of finance, accounting, business operations, political/government and legal.

Diane Suitt Gilleland, 67

 

Director since

February 6, 2014

   

Adjunct Professor of Higher Education

University of Arkansas, Little Rock

 

Adjunct Professor of Higher Education, University of Arkansas, Little Rock — 2010 to present

 

Professional Highlights:

Associate Professor of Higher Education, University of Arkansas, Little Rock — 2003 to 2010

Deputy Director, Illinois Board of Higher Education — 1999 to 2003

Chief Executive Officer, Arkansas Department of Higher Education — 1990 to 1997

Chief Finance Officer, Arkansas Department of Higher Education — 1986 to 1990

 

Other Professional and Leadership Experience:

Member, University of Arkansas Foundation Board — 2005 to present

Member, University of Arkansas at Pine Bluff Foundation Fund Board — 2003 to present

 

Dr. Gilleland’s knowledge of higher education governance and finance, from a university and government perspective, enables her to bring valuable insights to the board of directors on a variety of matters, including in the areas of academia, student/consumer lending, finance and political/government.

 

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Name and Age

Service as a Director

   

Position, Principal Occupation,

Business Experience and Directorships

Barry A. Munitz, 72

 

Director since

February 6, 2014

   

Chancellor Emeritus

California State University, Los Angeles

 

Professional Highlights:

 

Trustee Professor, California State University, Los Angeles — 2006 to 2013

Former Chair, California P-16 Council, 2005 to 2011

President and Chief Executive Officer, The J. Paul Getty Trust — 1997 to 2006

Chancellor and Chief Executive Officer, California State University System — 1991 to 1997

 

Other Professional and Leadership Experience:

Fellow, The American Academy of Arts and Sciences

Member, Leeds Equity Partners Advisory Board

Governor, Broad Family Foundations

President, COTSEN Foundation

 

Directorship of other public companies:

Prospect Global Resources, Inc. — 2011 to present

  

Dr. Munitz’s experience in senior leadership roles, including chief executive officer positions in higher education and the non-profit sector, enables him to bring a valuable perspective to the Board in the areas of academia, business operations and student/consumer lending.

Steven L. Shapiro, 73

 

Director since

February 6, 2014

   

Certified Public Accountant and Personal Financial Specialist

 

Certified Public Accountant and Personal Financial Specialist, Alloy, Silverstein, Shapiro, Adams, Mulford, Cicalese, Wilson & Co., an accounting firm, Chairman — 1995 to present, various positions — 1960 to present

 

Other Professional and Leadership Experience:

Member, Rutgers University Executive Advisory Council

Member, American Institute of Certified Public Accountants

Member, New Jersey and Pennsylvania Societies of CPAs

Trustee, Virtua Health and Hospital Foundation Board

MetLife Bank, N.A.

 

Mr. Shapiro’s leadership role and experience in the accounting field, as well as his membership on the boards of other financial services companies, enables him to bring to the board of directors experience in the areas of finance, accounting, financial services and capital markets.

 

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Name and Age

Service as a Director

   

Position, Principal Occupation,

Business Experience and Directorships

Barry L. Williams, 69

 

Director since

February 6, 2014

   

President and Retired Managing General Partner, Williams Pacific Ventures, Inc.

 

President, Williams Pacific Ventures, Inc., a consulting and investment company — 1987 to present

 

Other Professional and Leadership Experience:

Trustee Emeritus, American Conservatory Theater

Director, Sutter Health

Trustee, Resources Legacy Foundation

Retired Trustee, Harvard Business School Alumni Association

Retired Trustee, African American Experience Fund

Trustee, Management Leadership for Tomorrow

 

Directorships of other public companies:

Ameron International, Inc. — 2010 to 2011

PG&E Corporation — 1996 to present

CH2M Hill Companies — 1995 to present

Northwestern Mutual Life Insurance Company — 1996 to present

Simpson Manufacturing Co., Inc. — 1996 to present

R.H. Donnelly & Company until January 2010 — 1998 to 2010

 

Mr. Williams’ experience leading an investment and consulting firm, combined with other leadership roles in business and service as a director of a number of public companies, including service on several audit committees, enables him to bring expertise in the areas of finance, financial services, business operations and capital markets.

We anticipate that up to an additional two persons with relevant industry experience will be appointed to the Navient board of directors at or before the time of the separation and distribution.

All of our directors will stand for election annually. At any meeting of stockholders for the election of directors at which a quorum is present, the election of a director will be determined by a majority of the votes cast by the stockholders entitled to vote in the election, with directors not receiving a majority of the votes cast for them required to tender their resignations for consideration by the board, except that in the case of a contested election, the election will be determined by a plurality of the votes cast by the stockholders entitled to vote in the election.

Director Independence

A majority of Navient’s board of directors at the time of the separation and distribution will be comprised of directors who are “independent” as defined by the rules of the NASDAQ and the Corporate Governance Guidelines to be adopted by the board. Navient will seek to have all of its non-management directors qualify as “independent” under these standards. Navient’s board of directors will establish categorical standards to assist it in making its determination of director independence. These standards will provide that no director qualifies as “independent” unless the board of directors affirmatively determines that the director has no material relationship with the company or its subsidiaries (either directly or as a partner, stockholder or officer of an organization that has a relationship with the company or any of its subsidiaries). In making this determination, the board of directors shall consider all relevant facts and circumstances, including the following standards:

 

  •  

No director who is currently an employee of Navient, or within the past three years has been an employee of Navient, may be considered independent.

 

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  •  

No director who has a personal services contract with Navient, in any amount, may be considered independent.

 

  •  

No director who is an employee or owner of a firm that is one of Navient’s paid advisors or consultants, regardless of the amount of such business relationship, may be considered independent.

 

  •  

No director who is employed by a business that directly competes against Navient may be considered independent.

 

  •  

No director who is a current partner or employee of a firm that is Navient’s independent accountant or internal auditor may be considered independent.

 

  •  

No director whose immediate family member is a current partner of a firm that is Navient’s independent accountant or internal auditor or is a current employee of such a firm and participates in the firm’s audit, assurance or tax compliance (but not tax planning) practice may be considered independent.

 

  •  

In addition to the standards above, a director will not be considered independent if any of the following NASDAQ criteria (to the extent more restrictive than the foregoing criteria established by the Board) apply:

 

  •  

a director who accepted or who has an immediate family member who accepted any compensation from Navient in excess of $100,000 during any period of 12 consecutive months within the three years preceding the determination of independence, other than the following: (a) compensation for Board or Board committee service; (b) compensation paid to a family member who is an employee (other than an executive officer) of Navient; or (c) benefits under a tax-qualified retirement plan, or non-discretionary compensation; provided, however, that Audit Committee and Compensation Committee members are subject to additional, more stringent requirements as set forth in the rules promulgated under the Exchange Act and the listing requirements of the NASDAQ;

 

  •  

a director who is an immediate family member of an individual who is, or at any time during the past three years was, employed by Navient as an executive officer;

 

  •  

a director who is, or has an immediate family member who is, a partner in, or a controlling stockholder or an executive officer of, any organization to which Navient made, or from which Navient received, payments for property or services in the current or any of the past three fiscal years that exceed 5 percent of the recipient’s consolidated gross revenues for that year, or $200,000, whichever is more, other than: (a) payments arising solely from investments in Navient’s securities; or (b) payments under non-discretionary charitable contribution matching programs;

 

  •  

a director of Navient who is, or has an immediate family member who is, employed as an executive officer of another entity where at any time during the past three years any of the executive officers of Navient served on the compensation committee of such other entity; or

 

  •  

a director who is, or has an immediate family member who is, a current partner of Navient’s outside auditor, or was a partner or employee of Navient’s outside auditor who worked on Navient’s audit at any time during any of the past three years.

 

  •  

Until             , 2018, a director will not be considered independent if the director was (1) both employed by Existing SLM within the past five years, and (2) such employment included a period of time on or prior to             , 2013.

Navient’s board of directors will assess on a regular basis, and at least annually, the independence of directors and, based on the recommendation of the Nominations and Governance Committee, will make a determination as to which members are independent. As used above “Navient” includes any subsidiary in a

 

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consolidated group with Navient. The term “immediate family member” means a director’s spouse, parents, children, siblings, whether by blood or marriage, mother- and father-in-law, son- or daughter-in-law, brother- or sister-in-law, or anyone who shares the director’s home. The term “executive officer” is expected to have the meaning specified in the NASDAQ listing rules.

Committees of the Navient Board of Directors

Effective upon completion of the separation, Navient’s board of directors will have the following standing committees: an Audit Committee, a Compensation and Personnel Committee, a Nominations and Governance Committee, an Executive Committee and a Finance and Operations Committee. The foregoing committees have not yet been constituted. We will include in an amendment to this information statement the names of committee members and related information once those members are appointed.

Audit Committee.      are expected to be the members of the board’s Audit Committee.      is expected to be the Audit Committee Chairman. The board of directors is expected to determine that             is an “audit committee financial expert” for purposes of the rules of the SEC. In addition, each of the members of the Audit Committee is expected to qualify as independent, as defined by the rules of the NASDAQ, Section 10A(m)(3) of the Exchange Act, and in accordance with the Corporate Governance Guidelines to be adopted by the Navient board. Audit Committee members may not accept, directly or indirectly, any consulting, advisory or other compensatory fee from Navient or any of its subsidiaries (other than director fees). The Audit Committee will meet at least four times a year and will assist the board of directors in fulfilling its oversight responsibilities by providing oversight relating to: (1) the integrity of financial statements; (2) Navient’s system of internal controls; (3) the qualifications, performance and independence of the independent registered accounting firm; (4) the performance of internal audit function; (5) compliance with legal and regulatory requirements; and (6) the review of Related Party’s transactions. In addition, the Audit Committee will prepare the report of the Audit Committee for Navient’s annual proxy statement.

Compensation and Personnel Committee.      are expected to be the members of the board’s Compensation and Personnel Committee.      is expected to be the Compensation and Personnel Committee Chairman. Each member of the Compensation and Personnel Committee is expected to qualify as independent, as defined by the rules of the NASDAQ and in accordance with Navient’s Corporate Governance Guidelines. In addition, Navient expects that the members of the Compensation and Personnel Committee will qualify as “non-employee directors” for purposes of Rule 16b-3 under the Exchange Act and as “outside directors” for purposes of Section 162(m) of the Code. The Compensation and Personnel Committee will assist the board of directors in carrying out the board’s responsibilities relating to the compensation of Navient’s executive officers and directors by: (1) approving or recommending as appropriate, compensation, benefits and employment arrangements for Navient’s Chief Executive Officer and executive officers with a title of Executive Vice President and higher (referred to as executive management), and independent members of the board; (2) reviewing and approving benefit plans, compensation plans and incentive plans applicable to executive management; (3) reviewing, approving and administering Navient’s equity-based plans; and (4) overseeing the administration of Navient’s employee benefit plans to the extent required by law or the plan terms or as appropriate. In addition, the Compensation and Personnel Committee will (a) receive periodic reports regarding Navient’s compensation programs as they relate to all employees; (b) review Navient’s management development and recommend to the board succession plans applicable to executive management; (c) review and consider current and developing compensation and personnel related topics as appropriate; and (d) prepare the report of the Compensation Committee for Navient’s annual proxy statement. The Compensation and Personnel Committee will also review the risks arising from Navient’s compensation policies and practices to determine whether such policies and practices are reasonably likely to have a material adverse effect on Navient.

The Compensation and Personnel Committee will consider executive officer and director compensation on an annual basis. Navient expects that in January or February of each year following the separation and distribution, after consultation with independent directors, the Compensation and Personnel Committee will set Chief Executive Officer and executive officer level compensation. At that time the Compensation and Personnel

 

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Committee will also make a recommendation to the board regarding director compensation. Throughout the year, the Compensation and Personnel Committee will consider executive compensation consistent with its responsibilities, as warranted by any personnel changes. The Compensation and Personnel Committee will also have the sole authority, under its charter, to select, retain, and/or terminate independent compensation advisors.

Nominations and Governance Committee.      are expected to be the members of the board’s Nominations and Governance Committee.      is expected to be the Nominations and Governance Committee Chairman. Each of the members of the Nominations and Governance Committee is expected to be independent, as defined by the rules of the NASDAQ and in accordance with Navient’s Corporate Governance Guidelines. The Nominations and Governance Committee will assist the board of directors in establishing appropriate standards for Navient’s governance, the operations of the board and the qualifications of directors. The Nominations and Governance Committee will also identify individuals qualified to become board members and recommend to the board the director nominees for election at each annual stockholder meeting. The Nominations and Governance Committee will also oversee the evaluation of the board and recommend governance guidelines to the board.

Executive Committee.      are expected to be the members of the board’s Executive Committee.      is expected to be the Executive Committee Chairman. The Executive Committee will have authority to act on behalf of the board when the board is not in session and assist the board in fulfilling its oversight responsibilities with regard to establishing risk tolerances and parameters for Navient and overseeing the allocation of risk oversight responsibilities among board committees.

Finance and Operations Committee.      are expected to be the members of the board’s Finance and Operations Committee.      is expected to be the Finance and Operations Committee Chairman. The Finance and Operations Committee will be responsible for assisting the board of directors in fulfilling its oversight responsibility with respect to: (1) material corporate finance matters, including investments, acquisitions, capital management, financing and funding strategy; (2) technology and operations; (3) marketing and product development; and (4) Navient’s lending programs.

The board of directors will adopt a written charter for each committee listed above. These charters will be posted on Navient’s website in connection with the separation.

Compensation Committee Interlocks and Insider Participation

Navient was formed on November 7, 2013, and as such was not an independent company and did not have a compensation committee or any other committee serving a similar function during the fiscal year ended December 31, 2013. Decisions as to the compensation of those who will serve as Navient’s executive officers were made by Existing SLM prior to the separation and distribution, as described in “Compensation Discussion and Analysis.”

Corporate Governance

Stockholder Recommendations for Director Nominees

Navient’s amended and restated bylaws will contain provisions that address the process by which a stockholder may nominate an individual to stand for election to the board of directors. Navient expects that the board of directors will adopt a policy concerning the evaluation of stockholder recommendations of director candidates by the Nominations and Governance Committee.

Corporate Governance Guidelines

The Navient board of directors is expected to adopt a set of Corporate Governance Guidelines in connection with the separation to assist it in guiding Navient’s governance practices. The Corporate Governance Guidelines will prohibit, for a period three years after the date of the separation and distribution, the consideration of any

 

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person for election or appointment to the board of directors of Navient if that person has also served, or is then serving, as a director of SLM BankCo or Sallie Mae Bank. These practices will be regularly re-evaluated by the Nominations and Governance Committee in light of changing circumstances to continue serving Navient’s best interests and the best interests of its stockholders.

Communicating with the Board of Directors

Navient will develop procedures by which stockholders and other interested parties may communicate with Navient’s board of directors by writing a letter to the chairman of the board, the lead independent director, to the non-management directors as a group, or any other individual member of the board by contacting the chairman of the board or the lead independent director at corporate secretary@    .com or Corporate Secretary, Navient,             . The general counsel and corporate secretary will regularly forward to the addressee all letters other than mass mailings, advertisements, and other materials not relevant to Navient’s business. In addition, directors will regularly receive a log of all correspondence received by the company that is addressed to a member of the board and may request any correspondence on that log.

Director Qualification Standards

Navient’s Corporate Governance Guidelines will provide that the Nominations and Governance Committee is responsible for reviewing with Navient’s board of directors the appropriate skills and characteristics required of directors in the context of the makeup of the board of directors and developing criteria for identifying and evaluating director candidates.

The process that this committee will use to identify a nominee to serve as a member of the board of directors will depend on the qualities being sought, given the then-current mix of board members. The board will seek representation that reflects gender, ethnic and geographic diversity as reflected in the company’s Corporate Governance Guidelines. The Nominations and Governance Committee, through its charter, will be charged with reviewing the composition and diversity of the board. As part of the process, the Nominations and Governance Committee will incorporate into the board’s annual evaluation process an opportunity for each director to provide input regarding the current and desired composition of the board and desired attributes of directors. When evaluating a candidate, it is expected that the Nominations and Governance Committee will not use any specified minimum qualifications and will instead evaluate each nominee’s particular experience and qualifications by considering numerous factors including the nominee’s:

 

  •  

relevant and recent skills and experience in large, complex institutions, particularly in the areas of accounting, finance, banking, higher education, marketing, information technology, human resources, operations and law;

 

  •  

knowledge of Navient’s business;

 

  •  

proven record of accomplishment;

 

  •  

willingness to commit the time necessary for board service;

 

  •  

integrity and sound judgment in areas relevant to Navient’s business;

 

  •  

impartiality in representing shareholders;

 

  •  

ability to challenge and stimulate management; and

 

  •  

independence.

The board will be responsible for selecting candidates for election as directors based on the recommendation of the Nominations and Governance Committee.

 

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Board Leadership Structure

Subject to the requirements under the company’s amended and restated by-laws, the board will be free to decide how to structure its leadership, for instance, by either joining or separating the roles of chairman and CEO, in the way that is best for Navient at a given point in time. It is expected that              will be named Navient’s chairman of the board. It will be the role of the chairman of the board, in consultation with the applicable committee chairmen and management, to determine the agenda for board meetings. The chairman will also preside over executive sessions of the board, have the authority to call meetings of the board of directors, and be responsible for leading the annual performance review of the CEO.

The board will also have a lead independent director to facilitate coordination of the activities of the independent directors. In the absence of the non-executive chairman, the lead independent director will lead the annual performance review of the CEO and preside over executive sessions of the board. The chairman and lead independent director will be elected annually, typically at the first board meeting following the annual meeting of stockholders. It is expected that              will be named Navient’s lead independent director.

Code of Business Conduct

In connection with the separation, Navient will adopt a Code of Business Conduct that requires all its business activities to be conducted in compliance with laws, regulations, and ethical principles and values. All directors, officers, and employees of Navient will be required to read, understand, and abide by the requirements of the Code of Business Conduct.

The Code of Business Conduct will be accessible on Navient’s website. Any waiver of the Code of Business Conduct for directors or executive officers may be made only by the Audit Committee. Navient will disclose any amendment to, or waiver from, a provision of the Code of Business Conduct for the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, on the company’s website within four business days following the date of the amendment or waiver. In addition, Navient will disclose any waiver from the Code of Business Conduct for the other executive officers and for directors on its website.

Procedures for Treatment of Complaints Regarding Accounting, Internal Accounting Controls, and Auditing Matters

In accordance with the Sarbanes-Oxley Act of 2002, Navient expects that its Audit Committee will adopt procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls and auditing matters and to allow for the confidential, anonymous submission by employees and others of concerns regarding questionable accounting or auditing matters.

Risk Management

Our Approach

The products and services that Navient provides, as well as the financial markets in which Navient participates, continue to undergo dramatic competitive, technological and regulatory changes. Identifying, understanding, and effectively managing the risks inherent in our business are critical to our continued success. Navient will seek to have risk oversight, management and assessment responsibilities clearly assigned and documented, reviewed and coordinated at various levels of its organization. We will maintain comprehensive risk management practices to identify, measure, monitor, evaluate, control, and report on our significant risks.

Risk Oversight

The Navient board of directors and its standing committees will oversee our overall strategic direction, including setting our risk management philosophy, tolerance and parameters; and establishing procedures for

 

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assessing the risks our businesses face as well as the risk management practices our management team develops and utilizes. We will escalate to our board of directors any significant departures from established tolerances and parameters and review new and emerging risks with them.

In 2012, Existing SLM’s board of directors and senior management took significant steps to further enhance, formalize and centralize Existing SLM’s existing enterprise risk management activities. These efforts continued into 2013 and we expect these efforts to continue to further evolve following the separation and distribution. The steps taken in 2012 and continued in 2013 included:

 

  •  

The addition of a new, extended meeting of the board of directors focused exclusively on Existing SLM’s strategic direction and priorities. This meeting is to occur annually and in advance of management’s development and presentation of its business plan for the following fiscal year.

 

  •  

The development and then adoption in early 2013 of a formal Risk Appetite Framework which reinforces the commitment to an organized enterprise risk management program that identifies, measures, monitors, reports and escalates risks to senior management and the board of directors in line with developed and agreed risk profiles, tolerances and escalation mechanisms.

 

  •  

The initial development and testing of a strategy and stress testing tool designed to overlay Existing SLM’s previously existing, well-developed financial, credit and operational models that can evolve to provide Existing SLM with the capability to more rapidly analyze key risks in light of actual or assumed changes in strategy, economic conditions, and asset, liability and portfolio performance.

 

  •  

Enhancement to existing incentive compensation plan risk oversight policies and procedures which included the following: the creation of a new committee, the Corporate Incentive Compensation Plan Committee, to oversee Existing SLM’s incentive compensation plans; enhancements to incentive compensation plan governance policy, which among other items, require appropriate risk mitigation elements in incentive compensation plans and annual review of the effectiveness of such plans; and increase in coverage of plans during the annual risk review.

It is expected that Navient will continue these practices. Navient will also appoint a chief risk officer upon completion of the separation and distribution.

Risk Management Philosophy

Navient’s risk management philosophy will be to do all we can to ensure all significant risk inherent in our business can be identified, measured, monitored, evaluated, controlled and reported. In furtherance of these goals, Navient will seek to: (i) maintain a comprehensive and uniform risk management framework; (ii) maintain accountability and ownership at the business segment level for risks to which they are exposed; (iii) provide appropriate reporting tools to management and our board of directors and its committees; and (iv) reinforce this philosophy to our employees.

Risk Management Roles and Responsibilities

Responsibility for risk management will be held at several different levels of our organization, including our board of directors and its committees. Each business area within our organization will be primarily responsible for managing its specific risks utilizing formalized processes and procedures developed in collaboration with our executive management team and internal risk management partners. Our compliance, credit, human resources, legal, information technology, finance and accounting, and information security groups will be responsible for providing our business segments with the training, systems and specialized expertise necessary to properly perform their risk management responsibilities.

Board of Directors. Our board of directors, directly and through its standing committees, will be responsible for overseeing our overall strategic direction and risk management approach. It will approve our annual business

 

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plan, periodically review our strategic approach and priorities and spend significant time considering our capital requirements and our dividend and share repurchase levels and activities. Standing committees of our board of directors are expected to include Executive, Audit, Compensation and Personnel, Nominations and Governance and Finance and Operations. Charters for each committee providing their specific responsibilities and areas of risk oversight will be published on our website after the separation and distribution.

Chief Executive Officer. Our Chief Executive Officer will be ultimately responsible for ensuring proper oversight, management and reporting to our board of directors regarding our risk management practices and the timely escalation of any significant issues. Our Chief Executive Officer will be responsible for establishing our risk management culture and ensuring business areas operate within directed risk parameters and in accordance with our annual business plan.

Internal Risk Oversight Committees. We expect to have a number of standing management committees dedicated to oversight of various risks relating to our business, including a Corporate Incentive Compensation Plan Committee and an additional senior-executive level committee, the Enterprise Risk Committee. Both committees will have broad risk oversight agendas and responsibilities. Below is a description of what we expect to be our key internal risk management committees.

Enterprise Risk Committee. The Enterprise Risk Committee is expected to more efficiently assist our Chief Executive Officer in the execution of his risk responsibilities. This committee will be an executive management-level committee that provides a forum for our senior management team to review and discuss our significant risks, receive periodic reports on adherence to agreed risk parameters and to supervise the continued evolution of our enterprise risk management program. Committee membership is expected to consist of our President and Chief Executive Officer, Executive Vice President and General Counsel, Executive Vice President — Banking and Finance, Executive Vice President and Chief Marketing Officer, Executive Vice President — Administration, Chief Credit Officer, Chief Compliance Officer and the Chief Audit Officer (in a non-voting capacity). The predominance of committee members will be direct reports to our Chief Executive Officer. The committee is expected to meet at least six times per year in advance of each regularly scheduled board of directors meeting and more frequently as may needed to address particular issues.

Corporate Incentive Compensation Plan Committee. The Corporate Incentive Compensation Plan Committee is expected to be comprised of a cross-functional team of senior officers from human resources, risk and legal who oversee our incentive compensation plans. The committee’s responsibilities will include ensuring that our incentive compensation plans do not incent our employees to take inappropriate risks which could impact our financial position and controls, reputation and operations; reviewing the annual risk assessment of our incentive compensation plans conducted by our Chief Compliance Officer and Chief Credit Officer; and developing policies and procedures for the development and approval of new incentive compensation plans in line with our business goals and within acceptable risk parameters. The committee is expected to periodically report to the Compensation and Personnel Committee (the “Compensation Committee”) of our board of directors on our controls and review our incentive compensation plans. Committee membership is expected to include our Executive Vice President Administration, Chief Compliance Officer, Chief Credit Officer, Deputy General Counsel responsible for human resources matters, and our Chief Audit Officer (in a non-voting capacity).

Disclosure Committee. A Disclosure Committee will review and approve content of periodic SEC reporting documents, earnings releases and related disclosure policies and procedures.

Loan Loss Reserve Committee. Our Loan Loss Reserve Committee will oversee the sufficiency of our loan loss reserves and will consider current or emerging issues affecting delinquency and default trends which may result in adjustments in our allowances for loan losses.

Critical Accounting Assumptions Committee. Our Critical Accounting Assumptions Committee will oversee critical accounting assumptions, as well as key judgments and estimates, utilized in preparation of our financial statements.

 

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Asset and Liability Committee. Our Asset and Liability Committee will oversee our investment portfolio and strategy and our compliance with our investment policy.

Corporate Credit Committee. Our Corporate Credit Committee will oversee the overall credit and portfolio management strategy, policy review and monitoring.

Corporate Compliance Committee. Our Corporate Compliance Committee will oversee regulatory compliance risk management activities.

ICE Steering Committee. Our ICE Steering Committee will oversee our Internal Controls Excellence (“ICE”) initiative and Sarbanes-Oxley compliance and will sponsor periodic forums in which the top internal control deficiencies are discussed and analyzed to ensure the control deficiencies are identified, understood by all relevant affected parties, and have established resolution plans supported by adequate resources.

Customer Products and Services Assessment Committee. Our Customer Products and Services Assessment Committee will consider matters relating to risks affecting us and our wholly- and majority-owned subsidiaries associated with new, expanded, or modified products or services and make recommendations regarding proposed products or service offerings based on their inherent risks and controls.

Internal Audit Risk Assessment

Navient is expected to form an Internal Audit Department that monitors our various risk management and compliance efforts, identifies areas that may require increased focus and resources, and reports significant control issues and recommendations to executive management and the Audit Committee of our board of directors. At least annually, our Internal Audit Department is expected to perform a risk assessment to evaluate the risk of all significant components of our company and use the results to develop an annual internal audit plan. The risk assessment process will build on enhancements devised by Existing SLM during 2013 to include more detailed measures of risk and more formalized identification of auditable components of our company. The risk assessment will focus on auditable areas relevant to us and our subsidiaries.

Risk Appetite Framework

Our risk appetite framework will establish the level of risk we are willing to accept within each risk category in pursuit of our business strategy. By having a uniform risk appetite framework, it will create linkages across our businesses to ensure business decisions, monitoring and reporting are made on a consistent basis. Management and our various corporate committees will monitor approved limits and escalation triggers to ensure that our businesses are operating within the approved risk limits. Risk limits will be monitored and reports will be provided to various corporate committees and our board of directors and its committees, as appropriate. Through ongoing monitoring of risk exposures, management will seek to identify potential risks and develop appropriate responses and mitigation strategies. Our board of directors will agree our Risk Appetite Framework with management, and our management is expected to continue its development and evolution with the Audit Committee of our board of directors.

Risk Categories

We expect to evaluate our significant risks using the following categories: (1) credit; (2) market; (3) funding and liquidity; (4) compliance; (5) legal; (6) operational; (7) reputational/political; (8) governance; and (9) strategy.

Credit Risk. Credit risk is the risk to earnings or capital resulting from an obligor’s failure to meet the terms of any contract with us or otherwise fail to perform as agreed. Credit risk is found in all activities where success depends on counterparty, issuer or borrower performance.

 

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We have credit or counterparty risk exposure with borrowers and cosigners of our Private Education Loans, the various counterparties with whom we have entered into derivative contracts and the various issuers with whom we make investments. Credit and counterparty risks will be overseen by our Chief Credit Officer, his staff and the internal Credit Committee he chairs. Our Chief Credit Officer will report regularly to our board of directors and the Finance and Operations and Audit Committees of the board.

The credit risk related to our Private Education Loans will be managed within a credit risk infrastructure which includes: (i) a well-defined underwriting, asset quality and collection policy framework; (ii) an ongoing monitoring and review process of portfolio concentration and trends; (iii) assignment and management of credit authorities and responsibilities; and (iv) establishment of an allowance for loan losses that covers estimated losses based upon portfolio and economic analysis.

Credit risk related to derivative contracts will be managed by reviewing counterparties for credit strength on an ongoing basis and through our credit policies, which will place limits on the amount of exposure we may take with any one counterparty and, in most cases, require collateral to secure the position. The credit and counterparty risk associated with derivatives is measured based on the replacement cost should the counterparties with contracts in a gain position to our company fail to perform under the terms of the contract.

Market Risk. Market risk is the risk to earnings or capital resulting from changes in market conditions, such as interest rates, credit spreads, commodity prices or volatilities. We will be exposed to various types of market risk, in particular the risk of loss resulting in a mismatch between the maturity/duration of assets and liabilities, interest rate risk and other risks that arise through the management of our investment, debt and student loan portfolios. Market risk exposures will be managed primarily through our internal Asset and Liability Committee. The responsibilities of this committee will include: maintaining oversight and responsibility for all risks associated with managing our assets and liabilities, and recommending limits to be included in our risk appetite and investment structure. These activities are to be closely tied to those related to the management of our funding and liquidity risks. The Finance and Operations Committee of our board of directors will periodically review and approve the investment and asset and liability management policies and contingency funding plan developed and administered by our internal Asset and Liability Committee. The Finance and Operations Committee of our board of directors as well as our Executive Vice President — Banking and Finance will report to the full board of directors on matters of market risk management.

Funding & Liquidity Risk. Funding and liquidity risk is the risk to earnings, capital or the conduct of our business arising from the inability to meet our obligations when they become due without incurring unacceptable losses, such as the ability to fund liability maturities and deposit withdrawals, or invest in future asset growth and business operations at reasonable market rates. Our primary liquidity needs will include our ongoing ability to meet our funding needs for our businesses throughout market cycles, including during periods of financial stress, to avoid any mismatch between the maturity of our assets and liabilities, and the servicing of our indebtedness. Key objectives associated with our funding liquidity needs will relate to our ability to access the capital markets at reasonable rates.

Our funding and liquidity risk management activities will be centralized within our Corporate Finance department, which will be responsible for planning and executing our funding activities and strategies. We will analyze and monitor our liquidity risk, maintain excess liquidity and seek to access diverse funding sources depending on current market conditions. Funding and liquidity risks will be overseen and recommendations approved primarily through our internal Asset and Liability Committee. The Finance and Operations Committee of our board of directors will be responsible for periodically reviewing and approving the funding and liquidity positions and contingency funding plan developed and administered by our internal Asset and Liability Committee. The Finance and Operations Committee of our board of directors will also receive regular reports on our performance against funding and liquidity plans at each of its meetings.

Operational Risk. Operational risk is the risk to earnings resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk is pervasive in that it exists in all

 

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business lines, functional units, legal entities and geographic locations, and it includes information technology risk, physical security risk on tangible assets, as well as legal/compliance risk and reputational risk.

Our board of directors will receive operations reports (which will include operating metrics and performance against annual plan) from our Chief Executive Officer at each regularly scheduled meeting. Additionally, the Finance & Operations Committee of our board of directors will receive business development updates regarding our various business initiatives that provide information and metrics about each key component of our business operations. The Audit Committee of our board of directors will receive periodic information security updates and review operational and systems-related matters to insure their implementation produces no significant internal control issues.

Operational risk exposures are to be managed through a combination of business line management and enterprise wide oversight. Our Chief Executive Officer will be responsible for all of our business operations (credit, servicing, collections and technology). Management committees, comprised of senior managers and subject matter experts, will focus on particular aspects of operational risk. Enterprise-wide oversight is to be conducted by a number of our internal risk management committees. Most importantly, the Customer Products and Services Assessment Committee will oversee the process, in connection with new, expanded or modified products or services it recommends for approval, for determining that significant risks are properly identified; confirming that adequate controls are in place to monitor risks to established, prudent limits; and monitor risk management activities, exposures, and issues.

Compliance, Legal and Governance Risk. Compliance risk is the current and prospective risk to earnings or capital arising from violations of, or non-conformance with, laws, rules, regulations, prescribed practices, internal policies and procedures, or ethical standards. Legal risk is the risk to earnings, capital or reputation that is manifested by claims made through the legal system and may arise from a product, a transaction, a business relationship, property (real, personal or intellectual), conduct of an employee or a change in law or regulation.

Governance risk is the risk of not establishing and maintaining a control environment that aligns with stakeholder and regulatory expectations, including tone at the top and board performance. These risks are inherent in all of our businesses. Compliance, legal and governance risk are sub-sets of operational risk but are recognized as a separate and complementary risk category given their importance in our business. We can be exposed to these risks in key areas such as our collections or loan servicing businesses if compliance with legal and regulatory requirements is not properly implemented, documented or tested, as well as when an oversight program does not include appropriate audit and control features.

The Audit Committee of our board of directors will have oversight over the establishment of standards related to our monitoring and control of legal and compliance risks and the qualification of employees overseeing these risk management functions. The Audit Committee will annually approve our Corporate Compliance Plan, will have responsibility for considering significant breaches of our Code of Business Conduct and will receive regular reports from executive management team members responsible for the regulatory and compliance risk management functions.

 

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COMPENSATION DISCUSSION AND ANALYSIS

Introduction

Navient is currently a wholly owned subsidiary of Existing SLM and not an independent company. Decisions as to the past compensation of those persons who will serve as executive officers of Navient after the separation have been made by Existing SLM. This Compensation Discussion and Analysis discusses Existing SLM’s historical compensation practices and policies. Initially, it is anticipated that Navient’s compensation practices and policies will be largely the same as those employed at Existing SLM. The compensation policies and practices described below remain subject to review and approval by the Navient compensation committee (the “Navient Compensation Committee”), which has yet to be formed, and any changes or adjustments to such policies and practices prior to the date the Registration Statement of which this information statement forms a part is declared effective will be described in an amendment to this information statement.

The individuals who will serve as Navient’s “named executive officers” or “NEOs” include Navient’s chief executive officer, chief financial officer and up to three of Navient’s most highly compensated executive officers (other than the chief executive officer and chief financial officer) based on 2013 compensation from Existing SLM. For purposes of the following Compensation Discussion and Analysis and executive compensation disclosures, the four individuals listed below are expected to serve as Navient’s named executive officers:

 

  •  

Jack Remondi, Navient Chief Executive Officer. Mr. Remondi currently serves as Existing SLM’s Chief Executive Officer.

 

  •  

Somsak Chivavibul, Navient Chief Financial Officer. Mr. Chivavibul currently serves as Existing SLM’s Senior Vice President — Financial Planning & Analysis.

 

  •  

John Kane, Navient Chief Operating Officer. Mr. Kane currently serves as Existing SLM’s Senior Vice President — Enterprise Project Management.

 

  •  

Tim Hynes, Navient Chief Risk Officer. Mr. Hynes currently serves as Existing SLM’s Senior Vice President — Collections.

Additional information about Navient’s current and expected senior executive team following the separation is set forth in “Management — Executive Officers Following the Separation.”

The following sections of this Compensation Discussion and Analysis describe Existing SLM’s compensation philosophy, policies and practices as they applied to Existing SLM’s named executive officers during 2013 and, by extension, to those expected named executive officers of Navient who were not also NEOs of Existing SLM in 2013. Jack Remondi served as the President and Chief Operating Officer of Existing SLM in 2013 until May of that year, when he became President and Chief Executive Officer. Somsak Chivavibul, John Kane and Tim Hynes were senior executives, but not NEOs, of Existing SLM in 2013. Certain compensation decisions with regard to 2014 are also described below.

Existing SLM’s Compensation Philosophy and Objectives

The philosophy underlying Existing SLM’s executive compensation program is to provide a competitive total compensation program tied to performance and aligned with the interests of its stockholders. Existing SLM’s objective is to recruit and retain high quality executives and staff necessary to deliver continuously high stockholder value.

Existing SLM’s Compensation Committee uses the following principles to implement its compensation philosophy and achieve its executive compensation program objectives:

 

  •  

Pay-for-performance. A substantial portion of the total compensation of Existing SLM’s named executive officers and other senior executives is earned based on achievement of enterprise-wide goals that impact stockholder value.

 

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  •  

Retention of top executives. Existing SLM’s named executive officers and other senior executives should have base salaries and benefits that are competitive and permit Existing SLM to attract, motivate and retain those executives who drive its success.

 

  •  

Reward long-term growth and focus management on sustained success and stockholder value creation. Compensation of the named executive officers and other senior executives is heavily weighted toward long term equity-based incentives. These awards link pay to sustained performance.

 

  •  

Align compensation with stockholder interests. The interests of the named executive officers and other senior executives should be linked with those of Existing SLM’s stockholders through the risks and rewards of the ownership of SLM Corporation common stock.

 

  •  

Standard benefits and limited perquisites. Existing SLM provides standard employee benefits and limited perquisites.

Elements of Compensation

The compensation program for Existing SLM’s named executive officers and other senior executives consists of seven elements. These elements, as well as the reasons why each was chosen and the ways in which each element achieves Existing SLM’s compensation objectives, are described below:

 

Compensation Element

   

Objective

   

Type of

Compensation

Base salary

    To provide a base level of cash compensation for senior executives based on level and responsibility.    Fixed cash compensation. Reviewed annually and adjusted as appropriate.

Annual incentive bonus

    To encourage and reward senior executives for achieving annual corporate performance goals.    Variable compensation. Primarily performance based. Payable in a combination of cash and Restricted Stock Units (“RSUs”). RSUs are subject to transfer restrictions and lapse in equal increments over two to three years.

Long-term equity-based incentives

    To motivate and retain senior executives by aligning their interests with that of stockholders through sustained performance and growth.    Multi-year variable compensation. Performance based. Generally granted annually. Payable in Performance Stock Units (“PSUs”) or RSUs, in addition to stock options. PSUs have three-year cliff vesting in amounts determined based on cumulative performance measures. RSUs vest ratably over a three-year period. Stock options vest over a three-year period. In recent years, two-thirds of these option grants are subject to additional vesting conditions based upon the achievement of pre-established stock price targets. All outstanding

 

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Compensation Element

   

Objective

   

Type of

Compensation

      long-term equity-based incentives of Existing SLM are subject to adjustment in connection with the separation and distribution. See “— Changes to Long-Term Incentive Awards due to the Separation and Distribution” for additional information.

Health, Welfare and Retirement benefits

    To promote employee health and protect financial security.    Fixed compensation.
Deferred Compensation Plan    To provide retirement planning opportunities.    The Deferred Compensation Plan offers a variety of investment choices, none of which represents an above-market return.
Severance benefits    To maintain continuity of management after a change of control and provide temporary income following involuntary terminations of employment other than for cause.    Fixed cash compensation. Generally, equity compensation continues to vest on their terms after changes of control or involuntary terminations other than for cause.
Perquisites    To provide business-related benefits to assist in attracting and retaining key executives.    Fixed compensation.

 

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Fixed vs. Variable Compensation

A substantial portion of Existing SLM’s senior executives’ total compensation for 2013 performance, including that of its named executive officers, was variable and dependent upon the attainment of performance objectives or the value of Existing SLM’s common stock. Set forth below are the fixed and variable percentages of the expected Navient NEO’s compensation for 2013.

 

LOGO

 

1 

Fixed compensation is the sum of 2013 “Salary” and “All Other Compensation” amounts set forth in the “Executive Compensation—Summary Compensation Table” of this information statement. Fixed compensation excludes the value of dividend equivalent units accrued on restricted stock, RSUs and PSUs in 2013.

 

2 

Variable compensation is the sum of bonus paid in February 2014 under the Sallie Mae Management Incentive Plan set forth under “Non-equity Incentive Plan Compensation” in the “Executive Compensation—Summary Compensation Table” of this information statement and the grant date fair values of RSUs granted in February 2014.

 

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Cash Incentives vs. Stock-Based Incentives

In 2013, the Compensation Committee of Existing SLM allocated more of its named executive officers’ and, by extension, its other senior executives’, variable compensation to stock-based incentives than it allocated to cash incentives. Set forth below are the cash and stock-based percentages of the expected Navient NEO’s variable compensation for 2013.

LOGO

 

1 

Cash compensation is comprised of 2013 salary, cash bonuses paid in February 2014 under the 2013 Management Incentive Plan and All Other Compensation as set forth in the “Executive Compensation—Summary Compensation Table” of this information statement. Cash compensation excludes the value of dividend equivalent units accrued on restricted stock, RSUs and PSUs in 2013.

 

2 

Stock-based compensation is the sum of the value of the bonus paid in RSUs in February 2014 under the 2013 Management Incentive Plan set forth under the “Stock Awards” column in the “Executive Compensation—Summary Compensation Table” of this information statement and the grant date fair values of RSUs granted in February 2014.

How Existing SLM Makes Its Compensation Decisions

Role of the Existing SLM Compensation Committee

On a yearly basis, Existing SLM’s Compensation Committee reviews and approves Existing SLM’s Management Incentive Plan (“MIP”), which establishes annual corporate goals and is applicable to all members of senior management. In establishing such goals, Existing SLM’s Compensation Committee reviews and considers Existing SLM’s annual business plan approved by the Board of Directors of Existing SLM, focusing on the objectives of the business plan and on aligning Existing SLM’s incentive-based compensation to achieve such objectives. The Existing SLM Compensation Committee also discusses the proposed MIP goals with the CEO of Existing SLM and Existing SLM’s compensation consultant. The Existing SLM Compensation Committee, in consultation with the Independent Chairman of Existing SLM and the other independent members of the Board of Existing SLM, reviews the annual performance of the CEO and approves his salary, bonus and long-term incentive award for the upcoming year and his bonus under the MIP for the prior year. Existing SLM’s Compensation Committee maintains discretion to decrease bonus amounts under the MIP.

Existing SLM’s CEO does not play a role with respect to any matter affecting his own compensation. See “Committees of the Navient Board of Directors — Compensation and Personnel Committee” for more

 

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information on Existing SLM’s Compensation Committee’s role with respect to NEO compensation. Jack Remondi became the CEO of Existing SLM in May 2013 and currently is serving in that position. He will resign his position as CEO of Existing SLM upon the completion of the separation and distribution.

Role of the Chief Executive Officer

Existing SLM’s CEO reviews with the Existing SLM Compensation Committee the performance of each named executive officer and recommends salary, bonus and long-term incentive awards for each NEO other than himself. The Existing SLM Compensation Committee considers these recommendations in consultation with Existing SLM’s compensation consultant and approves final awards for each named executive officer. Existing SLM’s CEO also reviews and approves the salaries of senior executives other than the NEOs, and serves on a subcommittee of the Existing SLM Compensation Committee that approves bonus and long-term incentive awards for these senior executives based on guidelines established by the Existing SLM Compensation Committee.

Role of the Compensation Consultant

The Existing SLM Compensation Committee retains and is advised by an independent compensation consultant to assist the committee in its review and oversight of Existing SLM’s executive compensation program. It is anticipated that the Navient Compensation Committee will interview and retain an independent compensation consultant in the period prior to the separation and distribution for advice and guidance regarding Navient’s executive compensation program.

Use of Peer Group

The Existing SLM Compensation Committee reviews the peer group annually with the compensation consultant to ensure that each member company in the peer group is still appropriate and to consider additions to or deletions from the peer group.

The Existing SLM Compensation Committee reviews compensation data relating to the financial and financial processing industries as those are the industries in which Existing SLM competes for talent. To ensure that the Existing SLM Compensation Committee has the information necessary to set appropriate compensation levels, Existing SLM conducts a market analysis of executive compensation programs that includes publicly available executive compensation data for its peer companies and third-party compensation surveys.

The Existing SLM Compensation Committee then utilizes the peer group data in two ways. First, it assesses the financial performance of the peer group during the preceding one and three year periods, to determine how Existing SLM compares to its peers in terms of financial performance. Second, it assesses the compensation paid to NEOs by the peer group to determine the competitiveness of Existing SLM’s executive compensation program. While Existing SLM’s market analysis informs its range of compensation components and decisions, Existing SLM does not tie its senior executives’ compensation levels to specific market percentiles. The Compensation Committee also uses a variety of other data points in determining compensation levels and incentive compensation design, including Existing SLM’s strategic plan, the budget for the year in question and experience of executives.

 

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The Existing SLM Compensation Committee, in consultation with the compensation consultant, determined that no changes were required to the peer group in 2013. For 2013, the peer group consisted of the following companies:

 

    Peer Group     
 

Alliance Data Systems Corp

BB&T Corp.

Capital One Financial Corp.

CIT Group Inc.

Discover Financial Services, Inc.

Fidelity National Information Services

   

Fifth Third Bancorp

Fiserv Inc.

Huntington Bancshares

KeyCorp

M&T Bank Corp

Total Systems Services Inc.

   

It is anticipated that the Navient Compensation Committee will consult with its compensation consultant as to the proper peer group for Navient, which may be a different peer group than the one above.

Changes to Executive Compensation for 2013

The Existing SLM Compensation Committee regularly reviews and considers changes to the elements of Existing SLM’s executive compensation program in light of industry best practices and the evolution of the company’s business strategy. The Existing SLM Compensation Committee also considers the results of the annual “say on pay” advisory vote of shareholders when considering changes to the program.

Weighing these factors, and based on the advice of its independent compensation consultant, the Existing SLM Compensation Committee determined that the executive compensation program for 2013 should be modified to reflect and reinforce Existing SLM’s major operating goals for 2013. These major operating goals were incorporated into the design of Existing SLM’s 2013 Management Incentive Plan, which is described below.

While the Existing SLM Compensation Committee determined that additional changes to the executive compensation program were not warranted for 2013, it did approve certain changes to the program in early 2014 in anticipation of the pending separation and distribution. See “— Changes to Executive Compensation for 2014” for more information.

Determination of Compensation for 2013

As part of Existing SLM’s annual strategic planning process, management developed an operating plan for Existing SLM’s 2013 fiscal year. The Existing SLM Compensation Committee and management then discussed and agreed on specific corporate performance goals set forth in the annual MIP established for the purpose of focusing executives around achievement of the operating plan. An executive’s annual bonus potential under the MIP generally is a function of each executive’s position and base salary. The Existing SLM Compensation Committee established a payout level for each named executive officer based on achievement of the corporate performance goals. As to the NEOs, the Existing SLM Compensation Committee was also actively involved in considering bonus potential and approving actual salary, bonuses and long-term incentive compensation for 2013.

2013 Management Objectives

In 2013, Existing SLM set out five major goals to create shareholder value. They were: (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 Existing SLM’s financial strength; and (5) expand the capabilities of Sallie Mae Bank.

 

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2013 Summary of Results

Existing SLM believes that management achieved several of its objectives for 2013. “Core Earnings”1 for 2013 were $1.29 billion compared with $1.06 billion in 2012. “Core Earnings” increased due to a $302 million increase in gains on sales of loans and investments, a $241 million lower provision for loan loss, a $109 million after-tax increase in gains from the sale of subsidiaries and a $75 million increase in servicing and contingency revenue. This was partially offset by a $106 million decrease in net interest income, a $145 million increase in operating expenses, a $97 million decrease in debt repurchase gains and a $61 million increase in restructuring and other reorganization expenses. During 2013, Existing SLM also issued $3.75 billion of unsecured debt and issued $6.5 billion of FFELP ABS and $3.1 billion of Private Education Loan ABS. Existing SLM also repurchased $1.3 billion of debt and realized “Core Earnings” gains of $48 million in 2013, compared with repurchases of $711 million and gains of $145 million in 2012. In addition, Existing SLM repurchased $600 million of common stock in 2013 compared to $900 million repurchased in 2012.

2013 Performance Relative to Management Objectives

Prudently Grow Consumer Lending Segment Assets and Revenues. Existing SLM continued to pursue managed growth in its Private Education Loan portfolio in 2013, with $3.8 billion in new originations for the year compared with $3.3 billion in 2012, a 14 percent increase. The average FICO score of 2013 originations was 745 and approximately 90 percent of the originated loans were cosigned. Existing SLM continued to help its customers manage their borrowings and succeed in its payoff, which resulted in lower charge-offs and provision for loan losses. The charge-off rate was 2.8 percent in 2013, the lowest rate since 2007, and down from 3.4 percent in 2012, an 18 percent decrease. Provision for Private Education Loan losses decreased $221 million from 2012, a 22 percent decrease.

Maximize Cash Flows from FFELP Loans. In 2013, management set out to explore alternative transactions and structures that could increase Existing SLM’s ability to maximize the value of Existing SLM’s ownership interests in FFELP securitization trusts and allow Existing SLM to diversify its holdings while maintaining servicing fee income. In 2013, Existing SLM sold its ownership interest in five of its FFELP Loan securitization trusts ($12.5 billion of securitization trust assets and $12.1 billion of related liabilities) which generated a $312 million gain on sale. During 2013, Existing SLM also purchased $736 million of FFELP Loans.

Reduce Operating Expenses While Improving Efficiency and Customer Experience. For 2013, Existing SLM set out to reduce unit costs, and balance its Private Education Loan growth and the challenge of increased regulatory oversight. Existing SLM also planned and accomplished improving efficiency and customer experience by replacing certain of its legacy systems and making enhancements to its 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). In the fourth quarter of 2013, Existing SLM reserved $70 million for expected compliance remediation efforts relating to pending regulatory inquiries. Excluding this compliance remediation expense, full-year 2013 operating expenses were $972 million compared with $897 million for 2012. The $75 million increase was primarily the result of increases in third-party servicing and collection activities (which resulted in $108 million of additional revenue), continued investments in technology, and increased Private Education Loan marketing activities (which resulted in a 14 percent increase in originations volume).

Maintain Our Financial Strength. For 2013 Existing SLM’s management sought to continue paying dividends and repurchasing common shares through its repurchase program while ending 2013 with capital and reserve positions as strong as those with which Existing SLM ended 2012. In February 2013, Existing SLM announced an increase in its quarterly common stock dividend to $0.15 per share, resulting in full-year common stock dividends paid of $264 million or $0.60 per share. In 2013, Existing SLM authorized a total of $800

 

1  For a description of how Existing SLM calculates “Core Earnings” and for a reconciliation of “Core Earnings” to the nearest comparable GAAP measure, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—‘Core Earnings’—Definition and Limitations.”

 

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million for common stock repurchases. Existing SLM repurchased an aggregate of 27 million shares for $600 million in 2013. At December 31, 2013, there was $200 million remaining authorization for additional common stock repurchases under its current stock repurchase program. Existing SLM did this while achieving diluted “Core Earnings” per common share of $2.83 and maintaining its strong balance sheet and capital positions. In addition, on June 10, 2013, Existing SLM 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. On July 17, 2013, Existing SLM 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 the SLM 2009-D Private Education Loan Trust ABS, which occurred on August 15, 2013.

Expand Bank Capabilities. Sallie Mae Bank continued to fund Existing SLM’s Private Education Loan originations in 2013. Existing SLM continued to evolve the operational and enterprise risk oversight program at Sallie Mae Bank in preparation for expected growth and designation as a “large bank,” which will entail enhanced regulatory scrutiny.

Management Incentive Plan for 2013

In late 2012 and early 2013, the Existing SLM Compensation Committee considered Existing SLM’s approved operating plan for 2013 and met with Existing SLM’s management to discuss the performance goals it would apply in establishing the 2013 Management Incentive Plan (the “2013 MIP”). For 2013, the Existing SLM Compensation Committee determined to establish five corporate performance goals for the 2013 MIP, as follows:

 

  •  

Earnings per share measured on a “Core Earnings” basis;

 

  •  

Increase in private credit loan originations;

 

  •  

Operating expense reductions for 2013;

 

  •  

Improvement of Private Education Loan delinquency rates; and

 

  •  

Improvement of net private education loan charge-offs.

For each corporate performance goal, the Existing SLM Compensation Committee approved minimum, target and maximum achievement levels. Achievement of the minimum level resulted in an “award factor” of 0 percent, achievement of the target level resulted in an award factor of 90 percent and achievement of the maximum level resulted in an award factor of 140 percent. Sliding scale award factor percentages attributable to interim levels of achievement were also included for each goal. The Existing SLM Compensation Committee also assigned a weight to each corporate performance goal based on its relative importance to Existing SLM’s overall operating plan.

2013 Operating Results

In January and February 2014, the Existing SLM Compensation Committee and the Independent Chairman reviewed Existing SLM’s relative achievement of each of the previously identified corporate performance goals based on discussions with the CEO and information provided by management. After these discussions, the Existing SLM Compensation Committee determined that the aggregate achievement of the corporate performance goals was attained at a level of 90.8 percent of the targets set under the 2013 MIP. Existing SLM’s total performance “score” of 90.8 percent was determined based on the level of achievement of each corporate performance goal multiplied by the applicable weighting for such goal.

 

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The chart below sets forth (i) each corporate performance goal, (ii) the target approved by the Compensation Committee for each goal, (iii) the actual achievement level of each goal for 2013, (iv) the award factor for 2013 based on the level of achievement of such goal, (v) the relative weighting of each corporate performance goal and (vi) the corporate performance score attributable to each goal, as well as the total corporate performance score.

 

Corporate Performance Goal

   Target     2013 Actual
Performance		     Award
Factor		     Weighting     Corporate
Performance
Score		  

Earnings per share on a “Core Earnings” Basis

   $ 2.25      $ 2.83        140.0 %      35 %      49.0 % 

Private Credit Loan Originations

   $ 4,200 million      $ 3,801 million        50.1 %      25 %      12.5 % 

Operating Expenses

   $ 975 million      $ 1,114 million        0.0 %      15 %      0.0 % 

Private Education Loan Delinquency Rates

     3.60 %      3.48 %      102.0 %      12.5 %      12.8 % 

Net Private Education Loan Charge-Offs

   $ 720 million      $ 656 million        132.4 %      12.5 %      16.6 % 
         

 

 

  

Total

             90.8 % 
         

 

 

  

The corporate performance score of 90.8 percent was applied to the bonus target set for the named executive officers of Existing SLM, including Mr. Remondi, and other senior executives, including Messrs. Chivavibul, Kane, and Hynes. The 2013 bonus amount for each of the expected Navient NEOs is set forth in the following table.

 

Expected Navient Named Executive Officer

    2013 Target Bonus
$ Amount		      % of
Base Salary		     2013 Bonus Payment
at 90.8% of
Target Bonus(1)		  

Mr. Remondi

    $ 1,425,000         150 %    $ 1,293,900   

Mr. Chivavibul

    $ 375,000         125 %    $ 340,000   

Mr. Kane

    $ 406,250         125 %    $ 410,000   

Mr. Hynes

    $ 375,000         125 %    $ 375,000   

 

  (1) 

Messrs. Kane and Hynes also received additional discretionary bonuses based on individual performance during 2013. These discretionary bonuses are included in the 2013 bonus payments listed in the table. The 2013 bonus amount for Mr. Chivavibul also reflects a minor adjustment.

Mr. Remondi’s 2013 bonus payment will be paid 50 percent in cash and 50 percent in RSUs with transfer restrictions that lapse in one-third increments on each of the one-year, two-year and three-year anniversaries of the date of grant of such RSUs. The 2013 bonus for Mr. Chivavibul was paid 70 percent in cash and 30 percent in vested RSUs, which are restricted for two years, with one-half of the RSUs becoming available each year. Messrs. Kane and Hynes were paid 60 percent in cash and 40 percent in vested RSUs, which are restricted for three years, with one-third of the RSUs becoming available each year. All of the RSUs accrue dividend equivalents prior to the lapse of restrictions, equal to the quarterly dividends on Existing SLM common stock. Such dividend equivalents are delivered based on the transfer restrictions of the underlying RSU award.

Long-Term Incentive Program

Annual long-term incentive compensation in 2013, consisting of PSUs (for Mr. Remondi) or RSUs (for Messrs. Chivavibul, Kane, and Hynes) and stock options, represents the largest portion of Existing SLM’s senior executive compensation. Mr. Remondi, who served as the President and Chief Operating Officer of Existing SLM until May 2013, received an annual grant of PSUs and stock options in February 2013. Messrs. Chivavibul, Kane, and Hynes also each received an annual grant of RSUs and stock options in February 2013. Finally, in recognition of the additional responsibilities Mr. Remondi assumed when he became President and CEO of Existing SLM in May 2013, Mr. Remondi received an award of RSUs in August 2013.

In early February 2014, the Existing SLM Compensation Committee approved 2014 long-term incentive awards for the expected Navient NEOs in the following amounts: Mr. Remondi ($3,500,000); Mr. Chivavibul ($450,000); Mr. Kane ($550,000); Mr. Hynes ($450,000). Anticipating the pending separation and distribution, the Existing SLM Compensation Committee determined that the senior executives should receive two-thirds of

 

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their 2014 award in the form of RSUs at the present time. Navient will grant the remaining one-third of the 2014 awards shortly after the separation and distribution, with the form and terms of the equity awards to be determined by the Navient Compensation Committee. Should the separation and distribution not occur as anticipated, Existing SLM will grant the remaining one-third of the 2014 awards, with the form and terms of the equity awards to be determined by the Existing SLM Compensation Committee later in 2014.

All of these annual long-term incentive awards are described in the tables below. The awards are subject to adjustment in connection with the separation and distribution. See “—Changes to Long-Term Incentive Awards due to the Separation and Distribution” for additional information.

Performance Stock Units and Restricted Stock Units

 

Expected Navient Named Executive Officer

    2013
Performance
Stock Units(1)		      2013
Restricted
Stock Units(2)		      2014
Restricted
Stock Units(3)		  

Mr. Remondi

      94,201         20,128         106,496   

Mr. Chivavibul

      —         14,890         13,692   

Mr. Kane

      —         18,612         16,735   

Mr. Hynes

      —         14,517         13,692   

 

(1) 

PSUs granted in 2013 to Mr. Remondi are disclosed in this column at the target level and are currently 100 percent unvested. PSUs vest based on achievement of Cumulative Net Income for a three-year performance period from January 1, 2013 through December 31, 2015. Pursuant to their original terms, these PSUs are scheduled to vest (i) 100 percent at the target level if Cumulative Net Income is $3.4 billion, (ii) 50 percent of the target level if Cumulative Net Income is greater than $2.7 billion, and (iii) 130 percent of the target level to the extent Cumulative Net Income is equal to or greater than $3.7 billion, with incremental vesting between such percentages of the target level. In connection with the separation and distribution, these PSUs will be converted to RSUs based on a combination of actual and projected performance, and the resulting RSUs will vest at the end of the original performance period. See “—Changes to Long-Term Incentive Awards due to the Separation and Distribution” for additional information.

 

(2) 

Pursuant to their original terms, the RSUs granted to Mr. Remondi in August 2013 are scheduled to vest in one-third increments on August 8, 2014, August 8, 2015, and August 8, 2016. Similarly, the RSUs granted in 2013 to Messrs. Chivavibul, Kane, and Hynes have vested or are scheduled to vest in one-third increments on February 7, 2014, February 7, 2015 and February 7, 2016. To the extent these Existing SLM RSUs remain outstanding on the distribution date, they will be converted to RSUs of Navient and SLM BankCo as described below. See “—Changes to Long-Term Incentive Awards due to the Separation and Distribution” for additional information.

 

(3) 

These RSUs represent two-thirds of the 2014 long-term incentive award amount approved by the Existing SLM Compensation Committee on February 4, 2013, for each of the expected Navient NEOs ($3,500,000 for Mr. Remondi; $450,000 for Mr. Chivavibul; $550,000 for Mr. Kane; and $450,000 for Mr. Hynes). The number of RSUs granted on February 4, 2013, to each of the expected Navient NEOs equals two-thirds of their 2014 award amount divided by the closing price of Existing SLM common stock on the grant date. These RSUs are scheduled to vest in one-third increments on February 4, 2015, February 4, 2016 and February 4, 2017. To the extent these Existing SLM RSUs remain outstanding on the distribution date, they will be converted to RSUs of Navient as described below. See “—Changes to Long-Term Incentive Awards due to the Separation and Distribution” for additional information.

Stock Options

 

Expected Navient Named Executive Officer

    2013 Stock  Options(1)  

Mr. Remondi

      256,107   

Mr. Chivavibul

      43,663   

Mr. Kane

      54,579   

Mr. Hynes

      42,572   

 

(1) 

Stock options granted in 2013 to the expected Navient NEOs vest based on the following terms: one-third of the options shall vest on each of the first, second and third anniversary of the grant date, subject in all respects to the following additional vesting provisions: (i) the first one-third of the options will have no additional vesting target other than the passage of the one-year period from the grant date; (ii) the second one-third of the options will vest if the closing price of Existing SLM’s common stock on the NASDAQ meets or exceeds $19 per share for any five consecutive days at any time after the grant date and (iii) the third one-third of the options will vest if the closing price of Existing SLM’s common stock on the NASDAQ meets or exceeds $21 per share for any five (5) consecutive days at any time after the Grant Date. One-third of these options vested on February 7, 2014.

 

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Other Compensation

Consistent with Existing SLM’s philosophy to emphasize pay for performance, named executive officers receive only the perquisites or supplemental benefits described below.

Benefits

In addition to generally available benefits, the NEOs are eligible to participate in Existing SLM’s Non-qualified Deferred Compensation Plan for key employees (the “Deferred Compensation Plan”). Existing SLM offers its senior executives, including its NEOs and the expected Navient NEOs, the opportunity to defer payment of a portion of their cash compensation into a non-qualified deferred compensation plan. Existing SLM provides this opportunity to be competitive with its peer group and to provide retirement planning opportunities for these executives. The Existing SLM Compensation Committee views the plan as providing senior executives with an optional strategy to engage in tax-deferred retirement planning rather than a provided benefit. Existing SLM does not make contributions to the Deferred Compensation Plan or pay above market rates of return on amounts contributed to the plan.

Perquisites

Existing SLM’s policy is to allow limited personal use of Existing SLM’s aircraft by its named executive officers. To the extent an NEO uses Existing SLM’s private aircraft for personal travel the NEO is charged the variable flight costs for such personal use. These reimbursements fully comply with the requirements of the Code. Existing SLM also provides automobiles and temporary housing to certain of the expected Navient NEOs as described in the footnotes to the “Summary Compensation Table.”

Existing SLM’s Compensation Committee has approved annual physicals for the Existing SLM NEOs. These physicals are also available to the expected Navient NEOs. Existing SLM believes that NEO physicals align with its wellness initiative as well as assist in mitigating risk. NEO physicals are intended to identify any health risks and medical conditions as early as possible in an effort to achieve more effective treatment and outcomes.

Employment Agreements and Post-Employment Payments and Benefits

Executive Severance Arrangements

The expected Navient NEOs are covered under an Existing SLM executive severance plan, except as otherwise indicated. The severance plan is described in greater detail under the heading “Arrangements with Named Executive Officers—Executive Severance Plan” below.

Change in Control Severance Plan

The expected Navient NEOs are covered under an Existing SLM change in control severance plan. The change in control severance plan is described in greater detail under the heading “Arrangements with Named Executive Officers — Change in Control Severance Plan” below.

Existing SLM generally utilizes plans (as opposed to individual agreements) to provide severance and change in control payments and benefits for several reasons. First, a “plan” approach provides Existing SLM with the flexibility to change the terms of severance benefits from time to time. In addition, this approach is more transparent, both internally and externally, which eliminates the need to negotiate severance or other employment separation benefits on a case-by-case basis and assures each of the executives that his or her severance benefits are comparable to those of other executives with similar levels of responsibility and tenure.

The expected Navient named executive officers are eligible for severance payments in the event of an involuntary termination of employment without “cause.” In addition, they are eligible for “double trigger”

 

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severance payments in the event of an involuntary termination of employment without “cause” or a termination of employment with “good reason” in connection with a change in control of Existing SLM. Navient’s expected named executive officers are also entitled to certain limited “single trigger” benefits upon a change in control, including equity acceleration when awards are not honored, assumed, or replaced by a successor employer of Existing SLM. Such equity acceleration not only provides the named executive officers with the benefit of these outstanding awards, it may also allow them to exercise the awards and possibly participate in the change in control transaction for the consideration received.

The internal corporate restructuring and separation and distribution described in this information statement will not result in a “change of control” or the payment of any severance to Navient’s expected NEOs under Existing SLM’s change in control severance plan.

Other Arrangements, Policies and Practices Related to Existing SLM’s Executive Compensation Programs

Share Ownership Guidelines

Existing SLM has maintained share ownership guidelines applicable to its senior executives for more than ten years, except for a four-month period beginning in April 2009, during which time the application of the guidelines was suspended due to the decreased price of Existing SLM’s common stock as a result of the global economic downturn. The ownership guidelines, which are expected to be achieved over a five-year period, are as follows:

 

  •  

Chief Executive Officer — lesser of 1 million shares or $5 million in value;

 

  •  

Chief Operating Officer — lesser of 500,000 shares or $2.5 million in value;

 

  •  

Executive Vice President — lesser of 200,000 shares or $1 million in value.

 

  •  

Senior Vice President — lesser of 70,000 shares or $350,000 in value.

The guidelines encourage continued ownership of a significant amount of Existing SLM’s common stock acquired through equity awards and help align the interests of senior executives with the interests of Existing SLM’s stockholders. Except as otherwise approved by the Existing SLM Compensation Committee, a senior executive must hold all Existing SLM common stock acquired through equity grants until the applicable thresholds are met, and a senior executive will not be eligible to receive further equity grants if he or she sells this stock (whether before or after such guidelines are met), if such sale would result in a decrease below the thresholds established by the guidelines.

The following shares and share units count towards the ownership guidelines: shares held in brokerage accounts; vested shares credited to deferred compensation accounts; shares credited to qualified retirement plan accounts; vested performance stock and performance stock units; on an after-tax basis, restricted stock and RSUs that vest solely upon the passage of time and vested stock options, to the extent that they are “in-the-money on an after-tax basis.”

All of Navient’s expected NEOs who are subject to Existing SLM’s ownership guidelines are in compliance with them as of the date of this information statement.

Hedging Prohibition

Existing SLM policy prohibits directors and senior management from selling common stock short or buying or selling call or put options or other derivatives in respect of their Existing SLM common stock. They are also prohibited from entering into other transactions that have the effect of hedging the economic value of any of their direct or indirect interest in Existing SLM common stock.

 

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Clawback

Awards made to senior officers, including the expected Navient NEOs, under the 2012 Plan are subject to clawback in the event of a material misstatement of Existing SLM’s financial results and other events.

Compensation Committee Process for Approving Long-Term Awards

The Existing SLM Compensation Committee approves long-term awards on an annual basis at a regularly scheduled Compensation Committee meeting. The Existing SLM Compensation Committee has delegated authority to a sub-committee consisting of the Compensation Committee Chair and the CEO (the “Sub Committee”) to approve long-term awards for new employees and promotions below the level of Executive Vice President. These awards are effective on the day on which the Sub Committee approves the awards. The Existing SLM Compensation Committee approves any awards to newly hired or promoted executive officers at the level of Executive Vice Presidents and above. The grant date for these awards is the applicable meeting date of the Compensation Committee at which the awards are approved. Under the terms of the 2012 Plan, stock options are required to be priced at the closing market price of Existing SLM’s common stock on the NASDAQ on the date of grant.

Tax Information: Section 162(m) of the Code: Tax Deductibility of Compensation over $1 million

Section 162(m) of the Code (Section 162(m)) can potentially disallow a federal income tax deduction for compensation over $1 million paid to the chief executive officer and three other highest paid NEOs (excluding the chief financial officer) who were serving as of the last day of Existing SLM’s fiscal year (“covered employees”). One exception to Section 162(m)’s disallowance of a U.S. federal income tax deduction for compensation over $1 million applies to “performance-based compensation” paid pursuant to stockholder-approved plans. Although much of the compensation opportunity in our executive compensation program has historically been performance-based and generally deductible for U.S. federal income tax purposes, the Existing SLM Compensation Committee retains the flexibility to award compensation to the NEOs that is not deductible for U.S. federal income tax purposes.

Changes to Executive Compensation for 2014

In anticipation of the separation and distribution, the Existing SLM Compensation Committee altered certain components of Existing SLM’s executive compensation program for 2014. The annual incentive bonus has been divided into two components—a pre-distribution component awarded by the Existing SLM Compensation Committee, and a post-distribution component that is expected to be awarded by the Navient Compensation Committee. The 2014 long-term incentive awards have been divided in a similar manner.

2014 Management Incentive Plan. The Existing SLM Compensation Committee approved a Management Incentive Plan (“2014 MIP”) that covers senior executives, including Navient’s expected named executive officers, and is based solely on performance through the distribution date. The design and operation of the 2014 MIP will in other respects align with the approach taken for 2013. It is anticipated that the Navient Compensation Committee will establish a similar incentive compensation program relating to performance between the distribution date and the end of 2014.

For the 2014 MIP, performance will be determined based on the most recently ended calendar quarter prior to or coincident with the date of the distribution by the Existing SLM Compensation Committee for all participants, including expected Navient named executive officers, and the Existing SLM Compensation Committee will determine the amounts to be awarded for this period pursuant to the 2014 MIP. Amounts awarded under this program to Navient’s expected named executive officers will be made by Navient after the separation and distribution and following the close of 2014.

In the same manner as is provided for other named executive officers of Existing SLM, one-half of the 2014 MIP awards for Mr. Remondi will be settled in cash with the remainder settled in RSUs of Navient, subject to

 

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transfer restrictions that lapse ratably over three years. With respect to other expected named executive officers of Navient who are not named executive officers of Existing SLM, the 2014 MIP will provide that 60 percent to 70 percent of the 2014 MIP awards will be settled in cash with the remainder settled in RSUs of Navient subject to transfer restrictions that lapse ratably over two to three years. The division between cash and deferred stock payouts are consistent with the approach taken by Existing SLM in prior years.

2014 Long Term Incentive Awards. The Existing SLM Compensation Committee also modified the Long-Term Incentive Program in early 2014. In early February 2014, the Existing SLM Compensation Committee approved 2014 long-term incentive awards for the expected Navient NEOs in the following amounts: Mr. Remondi ($3,500,000); Mr. Chivavibul ($450,000); Mr. Kane ($550,000); Mr. Hynes ($450,000). Anticipating the pending separation and distribution, the Existing SLM Compensation Committee determined that the senior executives should receive two-thirds of their 2014 award in the form of RSUs at the present time. These RSUs will vest ratably on the first, second, and third anniversaries of the grant date. Navient will grant the remaining one-third of the 2014 awards shortly after the separation and distribution, with the form and terms of the equity awards to be determined by the Navient Compensation Committee. Should the separation and distribution not occur as anticipated, Existing SLM will grant the remaining one-third of the 2014 awards, with the form and terms of the equity awards to be determined by the Existing SLM Compensation Committee later in 2014.

All outstanding long term incentive awards of Existing SLM—including the awards granted to the expected Navient NEOs in 2014—will be adjusted in connection with the separation and distribution. See “—Changes to Long-Term Incentive Awards due to the Separation and Distribution” for additional information.

Changes to Long-Term Incentive Awards due to the Separation and Distribution

In connection with the separation, SLM BankCo will assume the equity incentive plans of Existing SLM and, to the extent they will relate to shares of SLM BankCo common stock after the distribution, outstanding awards granted thereunder. Navient will establish its own equity incentive plan with respect to its common stock. In general, and in order to maintain the intrinsic value just prior to the separation and distribution of outstanding Existing SLM equity awards:

 

  •  

holders of awards granted prior to February 4, 2014, will receive both SLM BankCo and Navient equity awards; and

 

  •  

holders of awards granted on and after February 4, 2014, will receive solely equity awards of their post-distribution employer.

The implication of the separation and distribution, in general, on each type of equity award that has been granted under the Existing SLM equity incentive plans is described below.

Treatment of Stock Options. In general, each outstanding option to purchase shares of Existing SLM common stock will become an option of SLM BankCo and be exercisable for the same number of shares of SLM BankCo common stock. In connection with the distribution, each holder of an option will also receive a Navient option to purchase the same number of shares of Navient common stock. To maintain the intrinsic value of the original option, the exercise price of the SLM BankCo option will be adjusted to equal the amount determined by multiplying the volume-weighted average “ex-dividend” trading price of a share of SLM BankCo common stock for the five trading days ending on the distribution date (the “SLM BankCo ex-dividend VWAP”), by a fraction, the numerator of which is the original exercise price of the Existing SLM option, and the denominator of which is the “Pre-Spin Existing SLM VWAP”. The Pre-Spin Existing SLM VWAP will equal the sum of the SLM BankCo ex-dividend VWAP and the volume weighted average “when issued” trading price of a share of Navient common stock for the five trading days ending on the distribution date (the “Navient when-issued VWAP”). The exercise price of the Navient option will be determined by multiplying the Navient when-issued VWAP by a fraction, the numerator of which is the original exercise price of the Existing SLM option, and the denominator of which is the Pre-Spin SLM BankCo VWAP. Both options, when combined, are intended to preserve the

 

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intrinsic value of the original Existing SLM option by maintaining the ratio of the exercise price to the fair market value of the stock subject to each option. In general, for purposes of determining vesting and employment status under the terms of the adjusted SLM BankCo options and Navient options, the continuing service of a current or former employee, officer or director with any or all of Existing SLM, SLM BankCo and Navient (both before and in connection with the separation and distribution) will be taken into account. All other terms of the adjusted SLM BankCo options and Navient options will be substantially the same as the original Existing SLM stock options, except that any price targets associated with an assumed SLM BankCo stock option will be adjusted in a manner similar to the exercise price adjustment described above. As of January 31, 2014, there were outstanding stock options to purchase approximately 20 million shares of Existing SLM common stock that would be treated in this manner.

Treatment of Restricted Stock Units. Outstanding Existing SLM RSUs granted prior to February 4, 2014, and RSUs granted in connection with the 2013 MIP, generally will become the same number of RSUs of SLM BankCo, and holders of those units will also receive an equal number of RSUs of Navient. In general, for purposes of determining vesting and employment status, the continuous service of a current or former employee, officer or director with any or all of Existing SLM, SLM BankCo and Navient (both before and in connection with the separation and distribution) will be taken into account. The SLM BankCo and Navient RSUs will otherwise be subject to substantially the same terms and conditions as the original Existing SLM RSUs. As of January 31, 2014, there were approximately 3.6 million Existing SLM RSUs outstanding that will be treated in this manner.

Outstanding Existing SLM RSUs granted on or after February 4, 2014, other than RSUs granted in connection with the 2013 MIP, will be adjusted or replaced based upon the post-distribution employer of the holder. A holder of RSUs who will be employed by SLM BankCo following the distribution will receive exclusively RSUs of SLM BankCo, with the amount determined by multiplying the original number of such RSUs by a fraction, the numerator of which is the Pre-Spin Existing SLM VWAP, and the denominator of which is the SLM BankCo ex-dividend VWAP. A holder of post-February 3, 2014 RSUs who will be employed by Navient following the distribution, or who terminates employment prior to the distribution under circumstances entitling such holder to continue to vest in the award of RSUs, will have those units replaced entirely with RSUs of Navient, with the amount determined by multiplying the original number of such RSUs by a fraction, the numerator of which is the Pre-Spin Existing SLM VWAP, and the denominator of which is the Navient when issued VWAP.

Treatment of Restricted Stock. Outstanding shares of Existing SLM restricted stock will be adjusted or replaced based upon the post-distribution service recipient of the holder, using the conversion method described above in “—Treatment of Restricted Stock Units” for outstanding RSUs granted on or after February 4, 2014. As of January 31, 2014, there were approximately 5,000 shares of Existing SLM restricted stock outstanding.

Treatment of Performance Stock Units. Existing SLM currently has outstanding performance stock units granted in 2012 and 2013. Each grant has a three year performance period. At the time of the separation and distribution, each outstanding performance stock unit will be converted to RSUs of SLM BankCo and Navient by reference to the performance metrics previously established for that award. As of the distribution date, the Existing SLM Compensation Committee will evaluate actual and projected performance of Existing SLM (determined as if the separation and distribution did not occur) compared to the performance goals previously established by such committee for each set of awards for all participants, including the expected Navient named executive officers. Achievement of performance goals will be determined by reference to actual performance of Existing SLM over the performance period ending as of the distribution date and the lesser of (i) projected performance over the remaining performance period (based on the most current projections as of the distribution date) or (ii) the target level of achievement for the award over such period. Once the level of estimated achievement of the performance metrics is determined, each Existing SLM performance stock unit will be converted into an equivalent number of SLM BankCo and Navient RSUs. The restricted stock units will vest at the end of the original performance period for the performance stock units they replace, subject to continued employment by the holder as required under the original performance stock units. Settlement of the replacement restricted stock units will be made by SLM BankCo or Navient, whichever is the holder’s employer following the separation and distribution.

 

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Existing SLM does not intend to issue performance stock units in 2014, and instead intends to grant time-based restricted stock units, including to Navient’s named executive officers, which will be adjusted in connection with the separation and distribution as described under “—Treatment of Restricted Stock Units” above.

No Change in Control. The separation and distribution will not constitute a change in control for purposes of the Existing SLM equity plans. Therefore no vesting of awards will occur as a result of the separation and distribution.

Entitlement to Tax Deductions. We generally will be entitled to claim tax deductions for compensation arising from the exercise of adjusted SLM BankCo options and Navient options, the vesting of SLM BankCo and Navient restricted stock awards and the settlement of SLM BankCo or Navient restricted stock units, in each case held by our current or former employees, officers and directors after the separation and distribution. SLM BankCo generally will be entitled to claim tax deductions for compensation arising from the exercise, vesting and settlement of the same awards held by current or former officers, employees or directors of SLM BankCo after the separation and distribution.

 

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EXECUTIVE COMPENSATION

Historical Compensation of Executive Officers Prior to the Separation

Each of Navient’s expected named executive officers was employed by Existing SLM prior to the separation and distribution; therefore, the information provided for the years 2013, 2012 and 2011 reflects compensation earned at Existing SLM and the design and objectives of the Existing SLM executive compensation programs in place prior to the separation, as well as the position each NEO held during these prior years. Each of the individuals expected to be Navient’s named executive officers with respect to the 2013 fiscal year is currently, and was as of December 31, 2013, an officer of Existing SLM. Accordingly, the compensation decisions regarding Navient’s expected named executive officers were made by the Existing SLM Compensation Committee or its delegates. Executive compensation decisions for Navient’s NEOs following the separation will be made by the Navient Compensation Committee. All references in the following tables to stock options, restricted stock units, performance stock units and restricted stock relate to awards granted by Existing SLM in respect of Existing SLM common stock and all references to NEOs are to the individuals expected to be Navient NEOs.

The amounts and forms of compensation reported below are not necessarily indicative of the compensation that Navient NEOs will receive following the separation, which could be higher or lower, because historical compensation was determined by Existing SLM and future compensation levels at Navient will be determined based on the compensation policies, programs and procedures to be established by the Navient Compensation Committee for those individuals who will be employed by Navient following the separation. In addition, the equity-based compensation described in the tables below is subject to adjustment in connection with the separation and distribution. See “Compensation and Discussion Analysis — Changes to Long-Term Incentive Awards due to the Separation and Distribution” for additional information.

Summary Compensation Table

The table below summarizes compensation paid or awarded to or earned by each expected Navient NEO for the fiscal years ended December 31, 2013, December 31, 2012 and December 31, 2011.

 

Name and Principal Position

   Year     Salary
($)		     Bonus(5)
($)		     Stock
Awards(6)
($)		     Option
Awards(6)
($)		     Non-Equity
Incentive Plan
Compensation(5)
($)		     Change in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings(7)
($)		     All Other
Compensation(8)
($)		     Total
($)		  

Jack Remondi(1)

     2013      $ 906,922      $ —      $ 2,834,069      $ 843,445      $ 646,950      $ —      $ 231,390      $ 5,462,776   

Principal Executive Officer

     2012        850,000        —        2,064,814        749,999        564,825        —        236,562        4,466,200   
    2011        850,000        93,925        2,019,600        451,431        756,075        —        223,887        4,394,918   

Somsak Chivavibul(2)

     2013        299,999        —        368,679        133,317        238,000        —        54,234        1,094,229   

Principal Financial Officer

     2012        274,999        15,531        409,076        151,798        218,968        —        65,783        1,136,155   
    2011        274,999        12,118        302,940        202,595        285,381        8,380        43,704        1,130,117   

John Kane(3)

     2013        325,000        24,675        497,340        166,647        221,325        —        63,229        1,298,216   

Chief Operating Officer

     2012        325,000        18,187        494,990        164,999        221,812        —        56,838        1,281,826   
    2011        324,038        —        374,750        202,595        288,000        —        19,148        1,208,531   

Tim Hynes(4)

     2013        299,999        20,700        409,999        129,986        204,300        —        46,633        1,111,617   

Chief Risk Officer

     2012        299,999        —        133,600        —        200,400        —        39,821        673,820   
    2011        299,519        —        316,200        202,595        255,000        —        31,183        1,104,497   

 

1)

Mr. Remondi served as Vice Chairman and Chief Financial Officer of Existing SLM in 2010, and he served as President and Chief Operating Officer of Existing SLM in 2011 and 2012. He became the President and Chief Executive Officer of Existing SLM in May 2013.

 

2) 

Mr. Chivavibul served as Senior Vice President—Financial Planning & Analysis of Existing SLM during 2010-2013.

 

3) 

Mr. Kane has served as Senior Vice President—Enterprise Project Management since March 2013. From August 2011 to March 2013, he served as Senior Vice President—Credit, and from 2008 to August 2011 he served as Senior Vice President—Collections.

 

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4) 

Mr. Hynes has served as Senior Vice President—Collections since October 2011. From May 2008 to October 2011 he served as Senior Vice President—Credit.

 

5) 

Annual Incentive Awards for Mr. Remondi for 2013, 2012 and 2011 were paid under the MIP 50 percent in cash and 50 percent in vested restricted stock units (RSUs). These RSUs are restricted for three years, with one-third of the RSUs becoming available each year. Bonus amounts for Mr. Chivavibul in 2013, 2012 and 2011 were paid 70 percent in cash and 30 percent in vested RSUs. These RSUs are restricted for two years, with one-half of the RSUs becoming available each year. Bonus amounts for Messrs. Kane and Hynes in 2013, 2012 and 2011 were paid 60 percent in cash and 40 percent in vested RSUs. These RSUs are restricted for three years, with one-third of the RSUs becoming available each year. The amounts reflected in the “Non-Equity Incentive Plan Compensation” column for Mr. Remondi with respect to fiscal year 2011 includes a portion of the amount previously reflected in the “Bonus” column in the Summary Compensation Table in the 2012 proxy statement of Existing SLM.

 

6)

Amounts shown are the grant date fair values of the various awards granted during 2013, 2012 and 2011 computed in accordance with the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) Topic 718. Additional details on accounting for stock-based compensation can be found in “Note 2—Significant Accounting Policies” and “Note 11—Stock-Based Compensation Plans and Arrangements” to the audited consolidated financial statements included elsewhere in this information statement.

 

7)

Existing SLM terminated its tax-qualified pension plan and non-qualified supplemental pension plan in 2011 and no NEO held a balance in the employee non-qualified deferred compensation plan during 2013.

 

8)

For 2013, the components of “All Other Compensation” are as follows:

 

Name

   Employer
Contributions
to Defined
Contribution
Plans(A)
($)		     Transportation
Allowance(B)
($) 		    Annual
Physical
Examination(C)
($)		     Dividend
Equivalent
Units(D)
($)		     Total
($)		  

Mr. Remondi

   $ 37,749      $ 3,243      $ 4,450      $ 185,948      $ 231,390   

Mr. Chivavibul

     26,724        —        —        27,510        54,234   

Mr. Kane

     28,250        —        —        34,979        63,229   

Mr. Hynes

     25,019        —        —        21,614        46,633   

 

  A)

Amounts credited to Existing SLM’s tax-qualified and non-qualified defined contribution plans. The combination of both plans provides participants with an employer contribution of up to five percent of the sum of base salary plus annual performance bonus up to $750,000 of total eligible plan compensation.

 

  B) 

Automobile allowance benefit calculated based on the annual lease method.

 

  C) 

Employees at the level of Senior Vice President and above are provided an annual physical examination potentially worth up to $5,000. Messrs. Chivavibul, Kane and Hynes did not utilize this allowance in 2013.

 

  D) 

Value of unvested dividend equivalent units (DEUs) issued on shares/units of unvested PSUs and RSUs during 2013. DEUs vest based on the vesting terms of the underlying award on which they were issued.

 

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2013 GRANTS OF PLAN-BASED AWARDS TABLE

 

Name

   Grant Date   Estimated Possible Payouts
Under Non-Equity Incentive Plan
Awards(5)		     Estimated Future Payouts
Under Equity Incentive
Plan Awards(6)		     All Other
Stock
Awards:
Number of
Shares of
Stock or
Units(7)
(#)		     All Other
Option
Awards:
Number of
Securities
Underlying
Options(8)
(#)		     Exercise
or Base
Price of
Option
Awards
($/Share)		     Grant Date
Fair Value
of Stock
and
Option
Awards(9)
($)		  
    Threshold
($)		   Target
($)		     Maximum
($)		     Threshold
(#)		     Target
(#)		     Maximum
(#)		          

Mr. Remondi(1)

   Management
Incentive
Plan		     $ 1,425,000      $ 3,800,000                 
  2/7/2013           47,100        94,201        122,461            $ 1,687,139   
  2/7/2013                   256,107      $ 17.91        843,445   
  8/8/2013                 20,128            499,979   

Mr. Chivavibul(2)

   Management
Incentive
Plan		       375,000        750,000                 
  2/7/2013                 14,890            266,679   
  2/7/2013                   43,663        17.91        133,317   

Mr. Kane(3)

   Management
Incentive
Plan		       406,250        812,500                 
  2/7/2013                 18,612            333,340   
  2/7/2013                   54,579        17.91        166,647   

Mr. Hynes(4)

   Management
Incentive
Plan		       375,000        750,000                 
  2/7/2013                 14,517            259,999   
  2/7/2013                   42,572        17.91        129,986   

 

1) 

Mr. Remondi served as President and Chief Operating Officer of Existing SLM during 2012. With the exception of the August 2013 stock award, 2013 plan-based awards reflect this position and not Mr. Remondi’s current position as President and CEO of Existing SLM. In recognition of the extra responsibilities Mr. Remondi assumed when he became President and CEO of Existing SLM in May 2013, Mr. Remondi received an award of RSUs in August 2013.

 

2)

Mr. Chivavibul served as Senior Vice President—Financial Planning & Analysis of Existing SLM during 2012, and his 2013 plan-based awards reflect this position.

 

3)

Mr. Kane served as Senior Vice President—Credit from August 2011 to March 2013, and his 2013 plan-based awards reflect this position.

 

4) 

Mr. Hynes served as Senior Vice President—Collections during 2012, and his 2013 plan-based awards reflect this position.

 

5)

Represents the possible total payouts for each expected NEO under the 2013 MIP based on goals set in February 2013. Actual amounts earned in 2013 were paid in 2014. Mr. Remondi’s actual award was paid 50 percent in cash and 50 percent in vested RSUs, Mr. Chivavibul’s actual award was paid 70 percent in cash and 30 percent in vested RSUs and Mr. Kane’s and Hynes’ actual awards were paid 60 percent in cash and 40 percent in vested RSUs. The RSUs carry certain transfer restrictions. Details regarding the actual awards paid under the 2013 MIP are reported in the “Executive Compensation—Summary Compensation Table” of this information statement and are included in the “Compensation Discussion and Analysis” of this information statement.

 

6)

Represent the range of PSUs that were granted to Mr. Remondi in 2013 and may be released at the three-year performance period applicable to the PSU assuming achievement of threshold, target and maximum performance. See “Outstanding Equity Awards at 2013 Fiscal Year End Table” of this information statement for applicable metrics. These PSUs will be adjusted in connection with the separation and distribution. See “Compensation Discussion and Analysis—Changes to Long-Term Incentive Awards due to the Separation and Distribution” for additional information.

 

7)

RSUs granted in 2013 to Mr. Remondi vest and will convert into shares of common stock in one-third increments on August 8, 2014, August 8, 2015 and August 8, 2016. RSUs granted in 2013 to Messrs. Chivavibul, Kane and Hynes vest and have or will convert into shares of common stock, in one-third increments on February 7, 2014, February 7, 2015 and February 7, 2016. See “Compensation Discussion and Analysis—Changes to Long-Term Incentive Awards due to the Separation and Distribution” for additional information.

 

8)

Stock options granted in 2013 to senior executives vest based on the following terms: one-third of the options shall vest on each of the first, second and third anniversary of the grant date, subject in all respects to the following additional vesting provisions: (i) the first one-third of the options will have no additional vesting target other than the passage of the one-year period from the grant date; (ii) the second one-third of the options will vest if the closing price of Existing SLM’s common stock on the NASDAQ meets or exceeds $19 per share for any five consecutive days at any time after the grant date and (iii) the third one-third of the options will vest if the closing price of Existing SLM’s common stock on the NASDAQ meets or exceeds $21 per share for any five consecutive days at any time after the grant date. See “Compensation Discussion and Analysis—Changes to Long-Term Incentive Awards due to the Separation and Distribution” for additional information.

 

9) 

Amounts disclosed for awards granted in February 2013 represent the grant date fair value computed in accordance with FASB ASC Topic 718. Additional details on accounting for stock-based compensation can found in “Note 2—Significant Accounting Policies” and “Note 11—Stock-Based Compensation Plans and Arrangements” to the audited consolidated financial statements included elsewhere in this information statement.

 

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OUTSTANDING EQUITY AWARDS AT 2013 FISCAL YEAR END TABLE

The table below sets forth information regarding options and stock awards of the NEOs that were outstanding as of December 31, 2013. The awards described in the table below are subject to adjustment in connection with the separation and distribution. See “Compensation Discussion and Analysis — Changes to Long-Term Incentive Awards due to the Separation and Distribution” for additional information.

 

       Option Awards      Stock Awards  

Name

    Grant Date      Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)		      Number of
Securities
Underlying
Unexercised Options
Unexercisable(1)
(#)		      Option
Exercise
Price
($)		      Option
Expiration
Date		      Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested(2)
(#)		      Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units, or
Other
Rights
That Have
Not
Vested(3)
($)		  
                    
                    

Mr. Remondi

      1/8/2008         2,000,000         —       $ 17.30         1/8/2018         —         —   
     1/8/2009         1,000,000         —         10.17         1/8/2019         —         —   
     1/27/2011         53,333         26,667         14.62         1/27/2021         —         —   
     2/3/2012         57,736         115,474         15.99         2/3/2017         —         —   
     2/7/2013         —         256,107         17.91         2/7/2018         —         —   
     1/27/2011         —         —         —         —         28,826       $ 757,547   
     2/3/2012         —         —         —         —         99,297         2,609,525   
     2/7/2013         —         —         —         —         96,674         2,540,592   
     8/8/2013         —         —         —         —         20,365         535,192   

Mr. Chivavibul

      1/27/2011         26,667         13,333         14.62         1/27/2021         —         —   
     2/3/2012         12,545         25,091         15.99         2/3/2017         —         —   
     2/7/2013         —         43,663         17.91         2/7/2018         —         —   
     1/27/2011         —         —         —         —         4,321         113,555   
     2/3/2012         —         —         —         —         13,601         357,434   
     2/7/2013         —         —         —         —         15,280         401,558   

Mr. Kane

      5/12/2008         50,000         50,000         21.88         5/12/2018         —         —   
     1/27/2011         —         13,333         14.62         1/27/2021         —         —   
     2/3/2012         13,636         27,273         15.99         2/3/2017         —         —   
     2/7/2013         —         54,579         17.91         2/7/2018         —         —   
     1/27/2011         —         —         —         —         4,502         118,312   
     2/3/2012         —         —         —         —         14,782         388,470   
     2/7/2013         —         —         —         —         19,100         501,948   

Mr. Hynes

      5/13/2008         50,000         50,000         21.72         5/13/2018         —         —   
     1/28/2010         50,000         —         10.31         1/28/2020         —         —   
     1/27/2011         26,667         13,333         14.62         1/27/2021         —         —   
     2/7/2013         —         42,572         17.91         2/7/2018         —         —   
     1/27/2011         —         —         —         —         3,602         94,660   
     2/7/2013         —         —         —         —         14,898         391,519   

 

1) 

The options granted during 2008 to Messrs. Kane and Hynes vest fifty percent upon the earlier of Existing SLM’s common stock price reaching a closing price equal to or greater than 120 percent of the grant price for five days, but no sooner than one year from the grant date. Fifty percent of the options vest upon the earlier of Existing SLM’s common stock price reaching a closing price equal to or greater than 140 percent per share for five days, but no sooner than two years from the grant date. In any event, all the options vest eight years from the grant date. Options granted in 2011 to Messrs. Remondi, Chivavibul, Kane and Hynes vest one-third per year on the first, second and third anniversaries of the applicable date of grant. Options granted in 2012 to Messrs. Remondi, Chivavibul and Kane have or

 

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  will vest as follows: one-third of the options shall vest on each of the first, second and third anniversary of the grant date, subject in all respects to the following additional vesting provisions: (i) the first one-third of the options will have no additional vesting target other than the passage of the one-year period from the grant date; (ii) the second one-third of the options will vest if the closing price of Existing SLM common stock on the NASDAQ meets or exceeds $17 per share for any five consecutive days at any time after the grant date and (iii) the third one-third of the options will vest if the closing price of Existing SLM common stock on the NASDAQ meets or exceeds $19 per share for any five consecutive days at any time after the grant date. The remaining options reported in this column were granted in 2013 to Messrs. Remondi, Chivavibul, Kane and Hynes and have or will vest as follows: one-third of the options shall vest on each of the first, second and third anniversary of the grant date, subject in all respects to the following additional vesting provisions: (i) the first one-third of the options will have no additional vesting target other than the passage of the one-year period from the grant date; (ii) the second one-third of the options will vest if the closing price of Existing SLM common stock on the NASDAQ meets or exceeds $19 per share for any five consecutive days at any time after the grant date and (iii) the third one-third of the options will vest if the closing price of Existing SLM common stock on the NASDAQ meets or exceeds $21 per share for any five consecutive days at any time after the grant date.

 

2)

Awards granted in 2011 to Messrs. Remondi, Chivavibul, Kane and Hynes have or will vest one-third per year on the first, second and third anniversaries of the applicable date of grant. PSUs granted in 2012 to Mr. Remondi are disclosed in this column at the target level. PSUs vest after a three-year performance period from 2012 through 2014, with potential payout ranging from 0 percent to 130 percent of the target award based on Existing SLM’s cumulative net income for such performance period. The PSUs will vest on the second business day after Existing SLM files its annual report on Form 10-K for the year ending 2014 with the SEC, and in no event later than March 15, 2015. RSUs granted in 2012 to Messrs. Chivavibul and Kanes have or will vest one-third per year on February 3, 2013, February 3, 2014 and February 3, 2015. PSUs granted in 2013 to Mr. Remondi are disclosed in this column at the target level. PSUs vest after a three-year performance period from 2013 through 2015, with potential payout ranging from 0 percent to 130 percent of the target award based on Existing SLM’s cumulative net income for such performance period. The PSUs will vest on the second business day after Existing SLM files its annual report on Form 10-K for the year ending 2015 with the SEC, and in no event later than March 15, 2016. RSUs granted in 2013 to Messrs. Chivavibul, Kane and Hynes have or will vest one-third per year on the first, second and third anniversaries of the applicable grant date. RSUs granted to Mr. Remondi on August 8, 2013, vest in one-third increments on the first, second and third anniversary of the applicable grant date. Amounts include all accrued and unvested whole share DEUs that vest based on the underlying award on which they are issued.

 

3) 

Market value of shares or units is calculated based on the closing price of Existing SLM’s common stock on December 31, 2013 of $26.28.

OPTION EXERCISES AND STOCK VESTED IN 2013

 

     Option Awards      Stock Awards  

Name

    Number of
Shares Acquired
on Exercise(1)
(#)		      Value Realized
on Exercise(2)
($)		      Number of
Shares Acquired
on Vesting(3)
(#)		      Value Realized
on Vesting(4)
($)		  

Mr. Remondi

      —       $ —         83,953       $ 1,562,785   

Mr. Chivavibul

      65,310         2,980,769         17,245         315,625   

Mr. Kane

      24,790         1,056,495         20,827         390,437   

Mr. Hynes

      9,858         370,500         12,109         238,677   

 

(1) 

Mr. Chivavibul exercised 2,135 net-settled stock options on February 15, 2013, with an exercise price of $11.39 and a market price of $18.95; 523 net-settled stock options on February 15, 2013, with an exercise price of $11.39 and a market price of $18.96; 3,211 net-settled stock options on February 15, 2013, with an exercise price $11.39 and a market price of $18.97; 2,003 net-settled stock options on February 15, 2013, with an exercise price of $11.39 and a market price of $18.99; 5,447 net-settled stock options on February 20, 2013, with an exercise price of $11.39 and a market price of $19.20; 85,099 net-settled stock options on June 6, 2013, with an exercise price of $11.39 and a market price of $23.68; 45,000 net-settled stock options on November 12, 2013, with an exercise price of $11.21 and a market price of $25.72; 25,000 net-settled stock options on November 14, 2013, with an exercise price of $10.31 and a market price of $26.16; and 50,000 net-settled stock options on November 14, 2013, with an exercise price of $10.31 and a market price of $25.98. Mr. Kane exercised 12,500 net-settled stock options on June 6, 2013, with an exercise price of $11.21 and a market price of $23.60; 45,000 net-settled stock options on June 6, 2013, with an exercise price of $10.31 and a market price of $23.62 and 26,667 net-settled stock options on November 14, 2013, with an exercise price of $14.62 and a market price of $25.97. Mr. Hynes exercised 25,000 net-settled stock options on November 14, 2013, with an exercise price of $11.21 and a market price of $26.03.

 

(2) 

The value realized upon exercise is the number of net-settled stock options exercised multiplied by the difference between the market price of Existing SLM common stock at exercise and the exercise price of the net-settled stock options.

 

(3) 

Includes vested RSUs received as a portion of 2013 MIP payout in February 2014 for 2013 performance. These vested RSUs carry transfer restrictions detailed in the “Executive Compensation—Summary Compensation Table” footnotes of this information statement.

 

(4) 

The value realized on vesting is the number of shares vested multiplied by the closing market price of Existing SLM common stock on the vesting date.

 

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Equity Compensation Plan Information

The following plans and arrangements summarized below are those of Existing SLM and are not necessarily indicative of the equity compensation plans and arrangements that will be established by the Navient Compensation Committee for its employees following the separation and distribution. Any equity compensation plans and arrangements that are established by the Navient Compensation Committee prior to the effective date of the registration statement of which this information statement forms a part will be described in an amendment to this information statement.

The following table summarizes information as of December 31, 2013, relating to equity compensation plans or arrangements of Existing SLM pursuant to which grants of options, restricted stock, restricted stock units, stock units or other rights to acquire shares may be granted from time to time.

 

Plan Category

   Number of
securities to be
issued upon exercise
of outstanding
options and rights(1)		     Weighted average
exercise price
of outstanding
options and rights		     Average
remaining  life
(years) of
options
outstanding		     Number of
securities remaining
available for future
issuance under
equity compensation
plans		     Types of
awards
issuable(2)		  

Equity compensation plans approved by security holders:

          

SLM Corporation 2012

             NQ, ISO, PSU, SAR, RES, RSU   

Omnibus Incentive Plan

          

Traditional options

     —        —        —       

Net-settled options

     1,122,245      $ 17.90        4.1       

RSUs

     2,611,274        —        —       
 

 

 

    

 

 

    

 

 

    

 

 

    

Total

     3,733,519        17.90        4.1        13,394,640     

Employee Stock Purchase Plan(3)

             NQ, RES   

Total

     —        —        0.0        5,760,704     

Expired Plans(4)

             NQ, ISO, RES, RSU, SU   

Traditional options

     689,655        43.18        1.1       

Net-settled options

     6,054,129        20.35        4.3       

RSUs / PUs

     2,716,640        —        —       
 

 

 

    

 

 

    

 

 

    

 

 

    

Total

     9,460,424        21.34        4.1        —     
 

 

 

    

 

 

    

 

 

    

 

 

    

Total approved by security holders

     13,193,943        20.72        4.1        19,155,344     

Equity compensation plans not approved by security holders:

          

Compensation arrangements(5)

     341,704        17.30        4.0        —        NQ   
 

 

 

    

 

 

    

 

 

    

 

 

    

Total not approved by security holders

     341,704        17.30        4.0        —     
 

 

 

    

 

 

    

 

 

    

 

 

    

Total

     13,535,647        20.55        4.1        19,155,344     

 

(1) 

Upon exercise of a net-settled option, optionees are entitled to receive the spread shares only. The spread shares equal the gross number of options granted less shares for the option cost. Accordingly, this column reflects the net-settled option spread shares issuable at December 31, 2013, where provided. This column reflects the target amount of Performance Stock Units (PSUs) issuable at December 31, 2013.

 

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(2) 

NQ (Non-Qualified Stock Option), ISO (Incentive Stock Option), PSU (Performance Stock Units), SAR (Stock Appreciation Rights), RES (Restricted/Performance Stock), RSU (Restricted Stock Unit), ST (Stock Awards), SU (Stock Units).

 

(3)

Number of shares available for issuance under the Employee Stock Purchase Plan (ESPP) as of December 31, 2013. The ESPP was amended and approved by shareholders on May 24, 2012.

 

(4) 

Expired plans with outstanding equity awards are the Management Incentive Plan, Board of Directors Stock Option Plan, SLM Corporation Incentive Plan, SLM Corporation 2009-2012 Incentive Plan and SLM Corporation Directors Equity Plan.

 

(5) 

One million net-settled options were awarded on January 8, 2008, to Mr. Remondi as an “employment inducement award.” Upon exercise of a net-settled option, optionees are entitled to receive the spread shares only. The spread shares equal the gross number of options granted less shares for the option cost. Accordingly, this column reflects the net-settled option spread shares issuable at December 31, 2013.

Pension Benefits

Existing SLM terminated its tax-qualified pension plan and non-qualified supplemental pension plan in 2011.

Non-Qualified Deferred Compensation

No expected Navient NEO held a balance in Existing SLM’s Deferred Compensation Plan during 2013.

Arrangements with NEOs.

The severance arrangements summarized below are those of Existing SLM and are not necessarily indicative of severance arrangements, if any, that may be established by Navient’s Compensation Committee for Navient executive officers following the separation and distribution.

Executive Severance Plan

Under Existing SLM’s Executive Severance Plan for Senior Officers, eligible officers will receive a lump sum cash payment equal to (i) a multiple of base salary and an average of the last 24 months of bonus compensation, plus (ii) pro-rated target bonus for the year of termination, upon the following events: (a) resignation from employment for good reason (as defined in the plan); (b) Existing SLM’s decision to terminate an eligible officer’s employment for any reason other than for cause (as defined in the plan), death or disability or (c) upon mutual agreement of Existing SLM and the eligible officer. The multiplier for each eligible officer position is as follows: CEO-2; Higher than Executive Vice President-1.5; Executive or Senior Vice President-1.0. Under the plan, in no event will a severance payment exceed a multiple of three times an officer’s base and incentive bonus.

In addition to the cash severance payment, eligible officers will receive subsidized medical benefits and outplacement services for 18 months (24 months for the CEO). Treatment of equity upon severance is governed by the terms of the applicable equity agreement and not the severance plan.

Change in Control Severance Plan

Under Existing SLM’s Change In Control Plan for Senior Officers, if a termination of employment for reasons defined in the plan occurs within 24 months following a change in control of Existing SLM, the participant is entitled to receive a lump sum cash payment equal to two times the sum of his or her base salary and average annual performance bonus (based on the prior two years). A participant will also be entitled to receive a pro-rated portion of his or her target annual performance bonus for the year in which the termination occurs, as well as continuation of medical insurance benefits for a two-year period. Under the plan, equity awards made before January 1, 2009 vest upon a change in control pursuant to their terms, regardless of whether the participant’s employment terminates and, equity awards granted after January 1, 2009, become vested and non-forfeitable in connection with a change in control only if the participant’s employment is terminated or if the acquiring or surviving entity does not assume the awards. The plan does not allow for gross-ups.

 

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The Change in Control Plan will not be triggered by the resignation of officers of Existing SLM that become officers of Navient in connection with the separation and distribution.

Potential Payments upon Termination or Change in Control

The tables below reflect the amount of compensation that would have been payable to the expected Navient NEOs who were employed as officers of Existing SLM on December 31, 2013, if such individual’s employment had terminated and/or a change in control had occurred on December 31, 2013, given the individual’s compensation and service levels as of December 31, 2013, and based on Existing SLM’s closing stock price on that date of $26.28 per share. The amounts disclosed in the tables are in addition to: (i) compensation and benefits available prior to the occurrence of a termination of employment, such as vested stock options, and (ii) compensation and benefits available generally to all employees, such as distributions under Existing SLM’s defined contribution retirement program, disability plans and accrued vacation pay.

The following severance arrangements were effective for the individuals expected to be Navient NEOs who were employed as officers of Existing SLM on December 31, 2013: (i) the Executive Severance Plan, (ii) the Change in Control Severance Plan and (iii) the 2012 Plan and predecessor equity plans.

The tables below show certain potential payments that would have been made to each individual expected to be a Navient NEO if the individual’s employment had terminated on December 31, 2013 under various scenarios.

Change in Control without Termination

 

Name   

Equity

Vesting(1)

     

Cash

Severance

     

Medical

Insurance /

Outplacement

      Total  

Mr. Remondi

      —         —         —         —   

Mr. Chivavibul

      —         —         —         —   

Mr. Kane

      —         —         —         —   

Mr. Hynes

      —         —         —         —   

Change in Control with Termination without Cause or for Good Reason

 

Name    Equity
Vesting(2)		      Cash
Severance 		    

Medical

Insurance /
Outplacement(3)

      Total  
           
           

Mr. Remondi

    $ 10,085,637       $ 5,617,450       $ 21,337       $ 15,724,424   

Mr. Chivavibul

      1,651,657         1,615,500         21,337         3,288,494   

Mr. Kane

      2,121,659         1,828,875         23,989         3,974,523   

Mr. Hynes

      1,225,970         1,649,500         23,989         2,899,459   

Termination by the Corporation Without Cause or by the Executive for Good Reason

 

Name    Equity
Vesting(4)		      Cash
Severance		      Medical
Insurance /
Outplacement(5)		      Total  
           
           

Mr. Remondi

    $ —       $ 4,536,562       $ 36,337       $ 4,572,899   

Mr. Chivavibul

      —         977,500         31,002         1,008,502   

Mr. Kane

      —         1,140,000         32,991         1,172,991   

Mr. Hynes

      —         1,029,500         32,991         1,062,491   

 

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Termination by the Corporation with Cause

 

Name    Equity
Vesting(6)		      Cash
Severance		      Medical
Insurance /
Outplacement		      Total  
           
           

Mr. Remondi

      —         —         —         —   

Mr. Chivavibul

      —         —         —         —   

Mr. Kane

      —         —         —         —   

Mr. Hynes

      —         —         —         —   

Termination by the Executive upon Retirement

 

Name    Equity
Vesting(7)		      Cash
Severance		      Medical
Insurance /
Outplacement		      Total  
           
           

Mr. Remondi

    $ —         —         —       $ —   

Mr. Chivavibul

      —         —         —         —   

Mr. Kane

      —         —         —         —   

Mr. Hynes

      —         —         —         —   

Termination by Death or Disability

 

Name    Equity
Vesting(8)		      Cash
Severance		      Medical
Insurance /
Outplacement		      Total  
           
           

Mr. Remondi

    $ 10,085,637         —         —       $ 10,085,637   

Mr. Chivavibul

      1,651,657         —         —         1,651,657   

Mr. Kane

      2,121,659         —         —         2,121,659   

Mr. Hynes

      1,225,970         —         —         1,225,970   

 

 

1) 

Assumes all equity awards are assumed by the surviving/acquiring company in a change of control.

 

2) 

Amounts shown are the value of stock and stock unit awards (including dividend equivalents) plus the spread value of stock options that would vest for each individual on December 31, 2013, based on the closing market price of Existing SLM common stock on that date of $26.28. Assumes restricted stock, restricted stock units, performance stock units and stock options are not assumed in a change of control.

 

3) 

Includes Existing SLM’s estimated portion of the cost of health care benefits for 24 months.

 

4) 

Upon termination, these awards generally continue to vest based on their original vesting terms.

 

5) 

Mr. Remondi became Chief Executive Officer of Existing SLM in May 2013 and is entitled to Existing SLM’s estimated portion of the cost of health care benefits for a period of 24 months plus $15,000 of outplacement services. Amounts for Messrs. Chivavibul, Kane and Hynes include Existing SLM’s estimated portion of the cost of health care benefits for 18 months, plus $15,000 of outplacement services.

 

6) 

Vested and unvested equity awards forfeit upon Termination for Cause (as defined in the plan).

 

7) 

Retirement eligibility for equity treatment for awards granted prior to 2013 is age 60 or more, or age plus service with Existing SLM or its subsidiaries of 70 or more. Upon eligible retirement, these awards generally continue to vest based on their original vesting. On December 31, 2013, Messrs. Remondi and Chivavibul were retirement eligible. The remaining one-third of stock options and RSUs granted to Messrs. Remondi and Chivavibul in 2011 vested on January 27, 2014. Stock options granted to Messrs. Remondi and Chivavibul in 2012 vest as follows: one-third of the options shall vest on each of February 3, 2013, February 3, 2014, and February 3, 2015, subject in all respects to the following additional vesting provisions: (i) the first one-third of the options will have no additional vesting target other than the passage of the one-year period from the grant date; (ii) the second one-third of the options will vest if the closing price of Existing SLM common stock on the NASDAQ meets or exceeds $17 per share for any five consecutive days at any time after the Grant Date and (iii) the third one-third of the options will vest if the closing price of Existing SLM’s Common Stock on the NASDAQ meets or exceeds $19 per share for any five consecutive days at any time after the grant date. The second one-third of the options granted to Messrs. Remondi and Chivavibul in 2012 vested on February 3, 2014. PSUs granted to Mr. Remondi in 2012 vest after a three-year performance period from 2012 through 2014, with potential payout ranging from 0 percent to 130 percent of the target award based on Existing SLM’s Cumulative Net Income for such performance period. The PSUs will vest on the second business day after Existing SLM files its annual report on Form 10-K for the year ending

 

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  2014 with the SEC, and in no event later than March 15, 2015. RSUs granted to Mr. Chivavibul in 2012 vest and are converted into shares of common stock, in one-third increments on February 3, 2013, February 3, 2014 and February 3, 2015. One-third of the RSUs granted to Mr. Chivavibul in 2012 vested on February 3, 2014. PSUs granted to Mr. Remondi in 2013 vest after a three-year performance period from 2013 through 2015, with potential payout ranging from 0 percent to 130 percent of the target award based on Existing SLM’s Cumulative Net Income for such performance period. The PSUs will vest on the second business day after Existing SLM files its annual report on Form 10-K for the year ending 2015 with the SEC, and in no event later than March 15, 2016. RSUs granted to Mr. Chivavibul in 2013 vest and are converted into shares of common stock, in one-third increments on February 7, 2014, February 7, 2015 and February 7, 2016. One-third of the RSUs granted to Mr. Chivavibul in 2013 will vest on February 7, 2014. RSUs granted to Mr. Remondi in 2013 vest and are converted into shares of common stock, in one-third increments on August 8, 2014, August 8, 2105 and August 8, 2016. See “Compensation Discussion and Analysis—Changes to Long-Term Incentive Awards due to the Separation and Distribution” for additional information.

 

8) 

Unvested equity awards accelerate upon termination for death or disability (as defined in the plan). Amounts shown are the value of stock and stock unit awards plus the spread value of stock options that would vest for each individual on December 31, 2013, based on the closing market price of Existing SLM common stock on that date of $26.28.

DIRECTOR COMPENSATION

Prior to the separation and distribution, Navient will not pay its directors for their service on its board of directors. Initially, it is anticipated that Navient’s compensation program for its non-employee directors will include the elements of Existing SLM’s non-employee director compensation program summarized below. The compensation program for Navient’s non-employee directors is subject to approval by the Navient board of directors. The compensation program described below will be reviewed by our board, and any changes or additions to such program will be described in an amendment to this information statement. Navient employees that serve on the Navient board of directors will not receive additional compensation for serving as such.

Navient’s directors’ compensation program will be designed to reasonably compensate its non-employee directors for work required for a company of Navient’s size and to align the directors’ interests with those of Navient’s stockholders. The Navient Compensation Committee will review the compensation level of the non-employee directors on an annual basis and make recommendations to the full board.

Director Compensation Elements

The following table highlights the material elements of Navient’s anticipated director compensation program:

 

Compensation Element

   

Compensation Value

Annual Cash Retainer

   

Annual Audit Committee Chair Cash Retainer

   

Annual Compensation and Personnel Committee Chair Cash Retainer

   

Annual Nominations and Governance Committee Chair Cash Retainer

   

Annual Finance Committee Chair Cash Retainer

   

Annual Lead Director Cash Retainer

   

Annual Independent Chairman Cash Retainer

   

Annual Equity Award

   

Annual Independent Chairman Equity Award

   

Navient will reimburse directors for any out-of-pocket expenses incurred in connection with service as a director.

 

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Share Ownership Guidelines

Navient expects to maintain share ownership guidelines for its non-employee directors. Under the share ownership guidelines, it is anticipated that each director will be expected, within two years of initial election to the Navient board, to own Navient common stock with a value equivalent to four times his or her annual cash retainer.

Other Compensation

Navient expects to provide non-employee directors with company-paid group life insurance, accidental death and disability and business travel accident insurance.

Deferred Compensation Plan

Navient expects to adopt a deferred compensation plan for directors, pursuant to which non-employee directors may elect annually to defer any cash compensation paid to them.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Agreements with SLM BankCo

Following the separation and distribution, Navient and SLM BankCo will operate separately, each as an independent public company. Prior to the separation and distribution, Existing SLM, Navient and SLM BankCo will enter into a separation and distribution agreement and Navient and SLM BankCo will enter into various other ancillary agreements that will effect the separation, provide a framework for Navient’s relationship with SLM BankCo after the separation and provide for the allocation between Navient and SLM BankCo of all of Existing SLM’s assets, employees, liabilities and obligations (including investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after Navient’s separation from SLM BankCo. In addition to the separation and distribution agreement, these ancillary agreements will include a transition services agreement, a tax sharing agreement, an employee matters agreement, a loan servicing and administration agreement, a joint marketing agreement, a key systems agreement, a data sharing agreement and a sublease agreement, each of which is summarized below. When used in this section, “distribution date” refers to the date on which SLM BankCo distributes Navient’s common stock to the holders of Existing SLM common stock.

The Separation and Distribution Agreement

The following discussion summarizes the material provisions of the separation and distribution agreement that will be entered into among Existing SLM, Navient and SLM BankCo shortly before the distribution date. The separation and distribution agreement will, among other things, (i) set forth Navient’s agreements with SLM BankCo and Existing SLM regarding the internal corporate reorganization and other transactions necessary to separate Navient from SLM BankCo, (ii) provide for the rights and obligations of the parties relating to the distribution of shares of Navient’s common stock by SLM BankCo and (iii) set forth other agreements that will govern certain aspects of Navient’s relationship with SLM BankCo after the distribution date, as described below. The following summary is qualified in its entirety by reference to the full text of the separation and distribution agreement, the form of which has been filed as an exhibit to the registration statement on Form 10 of which this information statement is part.

The Separation

The agreement will set forth Navient’s agreements with SLM BankCo and Existing SLM regarding the internal corporate reorganization and other transactions necessary to separate Navient from SLM BankCo. For additional information regarding the internal corporate reorganization, see “The Separation and Distribution — Internal Corporate Reorganization of Existing SLM Prior to the Distribution.”

The agreement will also identify the assets (including contracts) to be assigned or transferred to, and the liabilities to be assumed by, each of Navient (or its subsidiaries) and SLM BankCo (or its subsidiaries) as part of their separation into two companies, and it will provide for when and how these assignments, transfers and assumptions will occur. The separation and distribution agreement will provide, among other things, that subject to the terms and conditions contained therein:

 

  •  

Substantially all assets related to the businesses and operations of Existing SLM’s consumer banking business, including the private education loans and FFELP loans held by Sallie Mae Bank, the new servicing and collections business to be operated by Private ServiceCo, Upromise Rewards and the insurance business (the “SLM BankCo Assets”) will be retained by or transferred to SLM BankCo or one of its subsidiaries;

 

  •  

Substantially all assets related to the businesses and operations of Existing SLM’s education loan servicing and collections businesses and portfolios of FFELP loans and Private Education Loans not held by Sallie Mae Bank (the “Navient Assets”), will be transferred to or retained by Navient or one of its subsidiaries;

 

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  •  

All liabilities (whether accrued, contingent or otherwise and whether known or unknown) arising out of or resulting from the conduct of Existing SLM’s and its subsidiaries’ businesses prior to the distribution (including, without limitation, liabilities relating to (i) Upromise Rewards and (ii) the discontinued or sold businesses of Existing SLM or any of its subsidiaries or affiliates (such as the Campus Solutions, Sallie Mae Home Loan and the Upromise 529 college savings plan administration businesses)), other that the SLM BankCo Liabilities described below (the “Navient Liabilities”), will be the responsibility of or be assumed by Navient or one of its subsidiaries, and Navient will indemnify and hold harmless SLM BankCo against any all claims, actions, damages or expenses arising therefrom;

 

  •  

Liabilities incurred prior to the distribution date in connection with the conduct of the consumer banking business and identified on a schedule to the separation and distribution agreement (collectively, the “SLM BankCo Liabilities”), will be the responsibility of or be assumed by SLM BankCo or one of its subsidiaries, and SLM BankCo will indemnify and hold harmless Navient against any and all claims, actions, damages or expenses arising therefrom;

 

  •  

Certain intellectual property owned by Existing SLM or its affiliates and needed by both SLM BankCo and Navient following the distribution will either be retained by Navient or one of its subsidiaries and licensed to SLM BankCo or one of its subsidiaries or jointly owned by Navient and SLM BankCo or their applicable subsidiaries; and

 

  •  

Certain contracts relating to the businesses of both Navient and SLM BankCo will be assigned in whole or in part to Navient, SLM BankCo or their applicable subsidiaries or be appropriately amended or duplicated.

Except as expressly set forth in the separation and distribution agreement or any ancillary agreement, neither Navient nor SLM BankCo will make any representation or warranty as to the assets, business or liabilities transferred or assumed as part of the separation, as to any approvals or notifications required in connection with the transfers, as to the value of or the freedom from any security interests of any of the assets transferred, as to the absence or presence of any defenses or right of setoff or freedom from counterclaim with respect to any claim or other asset of either Navient or SLM BankCo, or as to the legal sufficiency of any assignment, document or instrument delivered to convey title to any asset or thing of value to be transferred in connection with the separation. All assets will be transferred on an “as is,” “where is” basis and the respective transferees will bear the economic and legal risks that any conveyance will prove to be insufficient to vest in the transferee good and marketable title, free and clear of all security interests, and that any necessary consents or governmental approvals are not obtained or that any requirements of laws, agreements, security interests or judgments are not complied with.

Information in this information statement with respect to the assets and liabilities of the parties following the distribution is presented based on the allocation of such assets and liabilities pursuant to the separation and distribution agreement, unless the context otherwise requires. The separation and distribution agreement will provide that, to the extent the transfer or assignment of assets and liabilities to SLM BankCo or Navient, as applicable, does not occur prior to the distribution date, then until such assets or liabilities are able to be so transferred or assigned after the distribution date, SLM BankCo or Navient, or their respective subsidiaries, as applicable, will hold such assets on behalf of and for the benefit of the other party and will pay, perform and discharge such liabilities for the benefit of the other party, subject to reimbursement or advancement of funds to SLM BankCo or Navient, as applicable, with respect to such payments and liabilities.

The Distribution

The agreement will govern the rights and obligations of the parties regarding the distribution following the completion of the internal corporate reorganization and separation. On the distribution date, SLM BankCo will distribute to holders of Existing SLM common stock held as of the record date, on a 1-to-1 basis, all of the issued and outstanding shares of Navient’s common stock.

 

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Conditions to the Distribution

The agreement will provide that the distribution is subject to the satisfaction (or waiver by Existing SLM) of several conditions. These conditions are described under “The Separation and Distribution — Conditions to the Distribution.” Existing SLM’s board of directors has the sole and absolute discretion to determine (and change) the terms of, and to determine whether to proceed with, the distribution and, to the extent it determines to so proceed, to determine the record date and the distribution date.

Settlement of Accounts Between SLM BankCo and Navient

The agreement will provide that all intercompany receivables and payables that are between Navient or a Navient subsidiary, on the one hand, and SLM BankCo or a SLM BankCo subsidiary, on the other hand, will be settled, maintained or cancelled. The agreement will also provide that at or prior to the distribution date, all Navient bank and brokerage accounts will be delinked from SLM BankCo accounts.

Releases

The separation and distribution agreement will provide that Navient and its affiliates will release and discharge SLM BankCo and its subsidiaries from any and all liabilities except the SLM BankCo Liabilities. SLM BankCo and its affiliates will release and discharge Navient and its subsidiaries from all liabilities that are SLM BankCo Liabilities.

These releases will not extend to obligations or liabilities under any agreements between the parties that remain in effect following the separation, including the agreements described in this “Certain Relationships and Related Party Transactions” or to any obligations or liabilities which would result in the release of any other person.

Indemnification

Pursuant to the agreement, Navient will agree to indemnify, defend and hold harmless SLM BankCo, each of its subsidiaries and affiliates and each of their respective directors, officers and employees, from and against all liabilities relating to, arising out of or resulting from:

 

  •  

the Navient Liabilities;

 

  •  

the conduct of any business, operation or activity by Navient or any of its subsidiaries from and after the distribution date;

 

  •  

any breach by Navient or any of its subsidiaries of the separation and distribution agreement or any of the ancillary agreements;

 

  •  

certain guarantee, indemnification obligation, surety bond and other credit support agreements extended by SLM BankCo or any of its subsidiaries for the benefit of Navient or any of its subsidiaries that remains in effect after the distribution date;

 

  •  

any legal or administrative action, proceeding, claim or investigation that arises out of or primarily relates to the separation and distribution; and

 

  •  

any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained in the registration statement on Form 10, this information statement, or any other disclosure document that describes the separation or the distribution or Navient and its subsidiaries or primarily relates to the transactions contemplated by the separation and distribution agreement or any ancillary agreement.

 

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SLM BankCo will agree to indemnify, defend and hold harmless Navient, each of its affiliates and each of their respective directors, officers and employees, from and against all liabilities relating to, arising out of or resulting from:

 

  •  

the SLM BankCo Liabilities;

 

  •  

the conduct of any business, operation or activity by SLM BankCo or any of its subsidiaries from and after the distribution date; and

 

  •  

any breach by SLM BankCo or any of its subsidiaries, other than Navient and its subsidiaries, of the separation and distribution agreement or any of the ancillary agreements.

The separation and distribution agreement will also establish procedures with respect to claims subject to indemnification and related matters.

Insurance

The separation and distribution agreement will provide for the allocation between the parties of rights and obligations under existing insurance and “tail” policies with respect to occurrences prior to the distribution date and set forth procedures for the administration of insured claims.

Non-Competition and Non-Solicitation

Pursuant to the separation and distribution agreement, Navient and SLM BankCo will agree not to compete with the other in certain primary lines of business through December 31, 2018. Each party will also agree not to solicit the other party’s employees, individual contractors and consultants for a period of one to two years, depending on the location of the employee.

Cooperation

The separation and distribution agreement will also provide that Navient and SLM BankCo will use commercially reasonable efforts to assist and coordinate with respect to certain matters following the distribution date. Navient and SLM BankCo will each agree to provide the other party with certain rights of “first look” with respect to specified business opportunities, to cooperate with respect to any contracts to be transferred on a delayed basis and to cooperate with respect to obligations owed under third-party transition services agreements entered into in connection with the purchase and sale of education loans prior to the distribution date and related matters.

Further Assurances

In addition to the obligations expressly set forth in the separation and distribution agreement, except as otherwise provided therein or in any ancillary agreement, both Navient and SLM BankCo and their respective subsidiaries will agree to use reasonable best efforts prior to, on and after the distribution date, to take, or cause to be taken, all actions, and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws, regulations and agreements to consummate and make effective the transactions contemplated by the separation and distribution agreement and the ancillary agreements.

Separation Oversight Committee

The separation and distribution agreement will provide that, prior to the distribution, the parties will establish a separation oversight committee for a period of two years that will consist of an equal number of members designated by each of Navient and SLM BankCo. The separation oversight committee will be responsible for monitoring and managing, at a strategic level, progress on all matters related to the separation and other transactions contemplated by the separation and distribution agreement and the ancillary agreements. The separation oversight committee may establish various subcommittees from time to time as it deems appropriate

 

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or as may be contemplated in the ancillary agreements. Following the distribution, the Navient members of the separation oversight committee will periodically update and consult with (i) the Navient board of directors (or an authorized committee) on the progress of and any unresolved issues relating to the separation and transition of services contemplated by the separation agreement and the ancillary agreements and (ii) the SMI board of directors as to the matters described under “Preferred Stock Rights in SMI” below. As to issues that cannot be resolved at the operational level of the two companies, those issues will be escalated to the separation and oversight committee for resolution. If the separation oversight committee is unable to resolve an issue within a specified period, the issue may be submitted by either Navient or SLM BankCo to binding mediation.

Other Matters

Other matters governed by the agreement will include access to financial and other information, confidentiality, access to and provision of records (including legal materials), responsibilities of legal staff and dispute resolution.

Termination

The separation and distribution agreement will provide that it may be terminated and the separation and distribution may be abandoned at any time prior to the distribution date in the sole and absolute discretion of Existing SLM’s board of directors without the approval of any person, including the stockholders of any party. In the event of a termination of the agreement prior to the distribution date, no party, nor any of its directors, officers, or employees, will have any liability of any kind to the other party or any other person. After the distribution date, the agreement may not be terminated except by an agreement in writing signed by Navient and SLM BankCo.

Transition Services Agreement

Navient and SLM BankCo will enter into a transition services agreement shortly before the distribution date pursuant to which Navient and SLM BankCo and their respective subsidiaries will provide various services to each other, on an interim, transitional basis. The following summary is qualified in its entirety by reference to the full text of the transition services agreement, the form of which has been filed as an exhibit to the registration statement on Form 10 of which this information statement is part.

The services to be provided under the agreement include access to certain information technology development, hosting and related support services, provision of certain short-term loan servicing functions, customer communications services, access to shared facilities, support services related to third-party transition service obligations and certain student loan trust and other administrative support services. Except where the parties have agreed to bear their own respective costs, the agreed upon charges for such services are generally intended to allow the servicing party to recover all out-of-pocket costs and a predetermined profit based on a mark-up of such out-of-pocket costs.

The agreement will provide that the separation oversight committee established by the separation and distribution agreement, which will consist of an equal number of members designated by each of Navient and SLM BankCo, will be responsible for monitoring and managing all matters related to the transition and the provision of services by either party to the other under the transition services agreement, as described under “—The Separation and Distribution Agreement—Separation Oversight Committee” above.

The agreement will terminate on the expiration of the term of the last service provided under it, and in any event within 24 months after the distribution date. The recipient of a particular service generally may terminate that service prior to the scheduled expiration date, subject to a minimum notice period of 30 days. Due to interdependencies between some services, if the termination of a particular service materially and adversely affects the provision of another continuing service, the parties will agree to negotiate to amend the terms of any such continuing service consistent with the terms of, and pricing methodology used for, comparable services.

 

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The agreement generally will provide that the provider of a service will not be liable to the recipient of such service for amounts in excess of fees paid, except in the case of damages resulting from bad faith, gross negligence or willful misconduct, or for any special, indirect, incidental, punitive or consequential damages, except in the case of a breach of confidentiality obligations or with respect to other specified provisions.

Tax Sharing Agreement

Navient and SLM BankCo will enter into a tax sharing agreement shortly before the distribution date that will generally govern SLM BankCo’s and Navient’s respective rights, responsibilities and obligations after the distribution date with respect to taxes for any tax period ending on or before the distribution date, as well as tax periods beginning before and ending after the distribution date. Generally, Navient will be liable for all pre-distribution U.S. federal income taxes, foreign income taxes and certain non-income taxes attributable to Navient’s business. Navient also will generally be liable for all post-distribution taxes attributable to its business. In addition, the tax sharing agreement will address the allocation of any tax liabilities that are incurred as a result of restructuring activities undertaken to effectuate the separation and distribution. The tax sharing agreement will also provide that Navient is liable for taxes incurred by SLM BankCo that may arise if Navient takes, or fails to take, as the case may be, specified actions that may result in the distribution failing to meet the requirements of a tax-free distribution under Section 355 of the Code. In this regard, among other things, the tax sharing agreement will restrict Navient from engaging in certain transactions during the Restricted Period 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, including (i) issuing 25 percent or more of its stock, (ii) selling all or substantially all of its assets or selling 50 percent or more of the assets of the education loan management business or engaging in mergers or other strategic transactions that may result in a change of control of Navient (as determined under U.S. federal income tax law); (iii) repurchasing its common stock, other than in open market repurchases constituting less than 20 percent of such stock outstanding immediately following the distribution date; and (iv) ceasing to actively conduct its business or liquidating. Under the tax sharing agreement, Navient 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 to SLM BankCo and its stockholders for U.S. federal income tax purposes. The foregoing summary is qualified in its entirety by reference to the full text of the tax sharing agreement, the form of which has been filed as an exhibit to the registration statement on Form 10 of which this information statement is a part.

Employee Matters Agreement

In connection with the separation and the distribution, Navient and SLM BankCo will enter into an employee matters agreement that will govern Navient’s and SLM BankCo’s compensation and employee benefit obligations with respect to the current and former employees of each company, and generally will allocate liabilities and responsibilities relating to employee compensation and benefit plans and programs. The employee matters agreement will provide for the treatment of outstanding Existing SLM equity awards in the manner described under “Compensation Discussion and Analysis—Treatment of Long Term Incentive Awards following the Separation and Distribution.” The employee matters agreement is also expected to set forth the general principles relating to employee matters, including with respect to the assignment and transfer of employees between SLM BankCo and Navient, the assumption and retention of liabilities and related assets, expense reimbursements, workers’ compensation, leaves of absence and other matters with respect to such employees, the provision of comparable benefits and employee service credits, the sharing of employee information and the duplication or acceleration of benefits to certain employees. The foregoing summary is qualified in its entirety by reference to the full text of the employee matters agreement, the form of which has been filed as an exhibit to the registration statement on Form 10 of which this information statement is a part.

 

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Loan Servicing and Administration Agreement

Prior to the distribution date, Navient will enter into a loan servicing and administration agreement with Sallie Mae Bank pursuant to which Navient will provide servicing, administration and collection services for Sallie Mae Bank’s portfolio of FFELP Loans, as well as servicing history information with respect to Private Education Loans previously serviced by Navient and access to certain promissory notes in Navient’s possession. The loan servicing and administration agreement will have a fixed term with a renewal option in favor of Sallie Mae Bank. In general, Navient will not be able to resign as the servicer or administrator for these loans except where continued service as the servicer or administrator would violate applicable law, including any rule, regulation or order of the FRB; however, no such resignation shall be effective until a replacement servicer and administrator shall have been appointed. Fees charged by Navient under the loan servicing and administration agreement will be customary for agreements of this type between third parties and paid monthly.

Joint Marketing Agreement

Navient and SLM BankCo will enter into a joint marketing agreement shortly prior to the distribution date pursuant to which Navient will provide exclusive access for SLM BankCo to cross-market certain categories of SLM BankCo’s products (including private education loans, rewards and loyalty programs and certain insurance, credit card and retail banking products) to Navient customers as to which Navient has marketing rights. In addition, the joint marketing agreement will allow the parties to administer sweeps of Upromise Rewards funds to be used to pay down student loans serviced by Navient and apply certain in-school payment benefits on loans serviced by Navient through Upromise Rewards account credit. The joint marketing agreement will have a specified term. Fees charged by each of Navient and SLM BankCo under the joint marketing agreement will be customary for agreements of this type between third parties and paid quarterly.

Key Systems Agreement

Navient and SLM BankCo will enter into a key systems agreement shortly prior to the distribution date pursuant to which each of Navient and SLM BankCo will continue to support file transfer services between Navient and SLM BankCo, schools and other lenders in support of SLM BankCo’s loan origination process. The key systems agreement will have an initial term of five years. Fees charged by each of Navient and SLM BankCo under the key systems agreement will be customary for agreements of this type between third parties and paid monthly.

Data Sharing Agreement

Navient and SLM BankCo will enter into a data sharing agreement shortly prior to the distribution date pursuant to which Navient will provide certain private student loan data to SLM BankCo. The data sharing agreement will have an initial term of five years. Fees charged by Navient under this agreement will be consistent with industry practices and paid monthly.

Sublease Agreement

Navient and SLM BankCo will enter into a sublease agreement shortly prior to the distribution date pursuant to which Navient will sublease a portion of its office facilities located in Reston, Virginia to SLM BankCo. The term of the sublease is expected to continue through January 2020. SLM BankCo, as lessee, will pay market rent to Navient for the subleased facilities. Rent payments will generally be adjusted each year of the lease to reflect increases or decreases in operating and maintenance expenses and other factors. Navient may generally terminate the sublease in the event of a material uncured default by SLM BankCo.

 

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Preferred Stock Rights in SMI

SLM BankCo will acquire all of the issued and outstanding shares of a new class of preferred stock (the “Special Preferred”) to be issued by SMI. SMI is the principal operating subsidiary of Navient that provides its servicing and collections activities using servicing platforms and customer data repositories that will be accessible by SLM BankCo for an up to 18-month transition period pursuant to the transition services agreement discussed above. The Special Preferred will represent 20 percent of the total voting power of all of the issued and outstanding shares of capital stock of SMI, and will entitle SLM BankCo to nominate and elect one of the five directors to the SMI Board, who will be the Chairman of the Board of SMI (the “Special Preferred Director”). The person nominated by SLM BankCo as the Special Preferred Director will be subject to approval by Navient, such approval not to be unreasonably withheld, and will be required to meet all requirements and qualifications under applicable law.

The SMI Board will oversee on behalf of Navient the separation, transition and migration of information technology functions provided by SMI and the Private Education Loan customer data of SLM BankCo currently hosted by SMI. All separation, transition and migration issues that are unable to be resolved at the operational level will be elevated by the Navient members of the separation oversight committee to the SMI Board, which will have authority to direct those members as to how to proceed in efforts to resolve those issues within the full separation oversight committee.

To ensure a timely separation and migration of these customer data and information technology functions between SMI and SLM BankCo during the anticipated 18-month transition period, the Special Preferred includes certain approval rights in favor of SLM BankCo. Before SMI may take any of the following actions, it must first obtain the approval of a majority of the members of the SMI Board, which majority must include the Special Preferred Director:

 

  •  

a merger, consolidation or combination to which SMI is a constituent party (other than where SMI is the surviving entity);

 

  •  

the termination or replacement of any executive officer of SMI or of any key employee with oversight over functions that may reasonably be expected to affect the IT transition contemplated under the transition services agreement; and

 

  •  

any changes in the operations of SMI that would affect, in any material respect, the timely separation and migration of the customer data and servicing functions to SLM BankCo.

During the transition period, SLM BankCo and Navient loans will continue to be serviced by each company’s employees from shared information technology platforms until each company is able to service its own customers on a stand-alone basis. The Special Preferred will result in SLM BankCo and SMI being deemed “affiliates” for purposes of federal customer data privacy laws, including the Gramm-Leach-Bliley Act.

The Special Preferred will be redeemed by SMI for its liquidation value of $1,000 upon the earlier to occur of (x) SLM BankCo’s determination that the migration of the customer data and information technology functions is complete or (y)             , 2015. Upon such redemption, the Special Preferred Director will be required to resign from the SMI Board and SLM BankCo will have no further right to elect a director or exercise any approval rights at SMI.

Procedures for Approval of Related Person Transactions

Navient’s board of directors is expected to adopt a written Policy on Related Party Transactions. The policy is expected to cover transactions involving Navient in excess of $120,000 in any year in which any director, nominee, executive officer, or greater-than-five percent beneficial owner of Navient, or any of their respective immediate family members, has or had a direct or indirect interest, other than as a director or less-than-ten percent owner of an entity involved in the transaction. This policy will be available on the corporate governance section of Navient’s investor relations website (www.    .com), which website will be operational as of             , 2014.

 

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Under the policy, the corporate secretary will notify the chair of the Navient Audit Committee of any proposed related person transaction, and the chair of the Navient Audit Committee will determine if it is necessary for the transaction to be approved under the policy. If such approval is required, the Navient Audit Committee will review the proposed transaction and recommend to the Navient board of directors whether to approve or reject the transaction. In considering a transaction, the Navient Audit Committee will take into account whether a transaction would be on terms no less favorable to an unaffiliated third party under the same or similar circumstances.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

The following is a summary of material U.S. federal income tax consequences of (i) the merger involving Merger Sub and Existing SLM, together with the conversion of shares of Existing SLM common and preferred stock into shares of SLM Bank common and preferred stock (the SLM Merger), and (ii) the contribution by SLM BankCo of assets of the education loan management business, including the portfolio of FFELP Loans, portfolio of Private Education Loans not held by Sallie Mae Bank, and FFELP Loan, DSLP, and servicing and collections business to Navient and the distribution by SLM BankCo of all of the outstanding shares of Navient common stock to its stockholders. This summary is based on the Code, U.S. Treasury regulations promulgated thereunder and on judicial and administrative interpretations of the Code and the U.S. Treasury regulations, all as in effect on the date of this information statement, and is subject to changes in these or other governing authorities, any of which may have a retroactive effect. This summary assumes that the separation and distribution will be consummated in accordance with the separation and distribution agreement and as described in this information statement. This summary does not purport to be a complete description of all U.S. federal income tax consequences of the separation and the distribution nor does it address the effects of any state, local or foreign tax laws or U.S. federal tax laws other than those relating to income taxes on the separation and the distribution. The tax treatment of an Existing SLM stockholder may vary depending upon that stockholder’s particular situation, and certain stockholders (including, but not limited to, insurance companies, tax-exempt organizations, financial institutions, broker-dealers, partners in partnerships that hold common stock in Existing SLM, pass-through entities, traders in securities who elect to apply a mark-to-market method of accounting, stockholders who hold their Existing Corporation common stock as part of a “hedge,” “straddle,” “conversion,” “synthetic security,” “integrated investment” or “constructive sale transaction,” individuals who received Existing SLM common stock upon the exercise of employee stock options or otherwise as compensation, and stockholders who are subject to alternative minimum tax) may be subject to special rules not discussed below. In addition, this summary only addresses the U.S. federal income tax consequences to an Existing SLM stockholder who, for U.S. federal income tax purposes, is a U.S. holder, as defined below. Finally, this summary does not address the U.S. federal income tax consequences to those Existing SLM stockholders who do not hold their shares of Existing SLM common stock as capital assets within the meaning of Section 1221 of the Code.

For purposes of this discussion, the term “U.S. holder” means a beneficial owner of Existing SLM common stock that is, for U.S. federal income tax purposes (1) an individual citizen or resident of the United States, (2) a corporation (or any other entity treated as a corporation for U.S. federal income tax purposes) organized in or under the laws of the United States or any state thereof or the District of Columbia, (3) a trust if (a) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (b) such trust has made a valid election to be treated as a U.S. person for U.S. federal income tax purposes or (4) an estate, the income of which is includable in gross income for U.S. federal income tax purposes regardless of its source.

Each stockholder is urged to consult the stockholder’s tax advisor as to the specific tax consequences of the separation and distribution to that stockholder, including the effect of any U.S. federal, state or local or foreign tax laws and of changes in applicable tax laws.

Existing SLM expects to receive a private letter ruling from the IRS to the effect that, among other things, (i) 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 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. It is a condition to the distribution that the private letter ruling not be revoked or modified in any material respect. Such ruling will be based on, among other things, certain assumptions as well as on the accuracy, correctness and completeness of certain representations and statements that Existing SLM and Navient made to the IRS. Although a private letter ruling from the IRS is generally binding on the IRS, if any of the assumptions, representations or statements that Existing SLM made are, or become, inaccurate, incorrect or incomplete, the SLM Merger might not qualify as a reorganization within the meaning of Section 368(a)(1)(F)

 

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of the Code that will not be integrated with the rest of the separation and distribution and/or the separation and the distribution might not qualify as a reorganization for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. For these reasons, notwithstanding receipt by Existing SLM of the private letter ruling, the IRS could assert successfully that the distribution was taxable. In that event, the consequences described in the ruling would not apply and both Existing SLM and holders of Existing SLM common stock could be subject to significant U.S. federal income tax liability.

Furthermore, it is a condition to the completion of the distribution that Existing SLM receive an opinion from Baker Botts L.L.P, outside 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 (namely, that the distribution (a) is motivated, in whole or substantial part, by one or more corporate business purposes, (b) is not being used principally as a device for the distribution of earnings and profits of Existing SLM or Navient, and (c) is not part of a plan (or series of related transactions) pursuant to which one or more persons will acquire, directly or indirectly, stock representing a 50 percent or greater interest in Existing SLM or Navient under Section 355(e) of the Code), that such requirements will be satisfied. In rendering its opinion, Baker Botts L.L.P. will rely on certain assumptions, and the representations and statements made by Existing SLM to the IRS in connection with the private letter ruling, as well as certain covenants in agreements to be entered into by SLM BankCo and Navient prior to the distribution (including covenants requiring adherence to certain restrictions on future actions by SLM BankCo and Navient). If any such assumptions, representations or statements are found to be inaccurate, incorrect or incomplete, or if SLM BankCo or Navient breach any such covenants, the conclusions reached in the opinion of outside tax counsel, and the ability to rely on such conclusions, could be adversely affected.

Existing SLM expects that under the private letter ruling from the IRS, the SLM Merger will qualify as a reorganization for U.S. federal income tax purposes under Section and 368(a)(1)(F) of the Code and will not be integrated with the rest of the separation and distribution, and accordingly, the following will describe the material U.S. federal income tax consequences to Existing SLM, SLM BankCo and Existing SLM stockholders of the SLM Merger:

 

  •  

neither Existing SLM nor SLM BankCo will recognize any gain or loss upon the SLM Merger;

 

  •  

an Existing SLM stockholder will not recognize any gain or loss and no amount will be includable in income as a result of the conversion of Existing SLM stock to SLM BankCo stock pursuant to the SLM Merger;

 

  •  

an Existing SLM stockholder’s aggregate tax basis in such stockholder’s SLM BankCo stock following the SLM Merger will equal such stockholder’s tax basis in its Existing SLM stock immediately before the SLM Merger; and

 

  •  

an Existing SLM stockholder’s holding period for SLM BankCo stock following the SLM Merger will include the holding period for that stockholder’s Existing SLM stock.

Furthermore, Existing SLM expects that under the private letter ruling from the IRS, 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 accordingly, the following will describe the material U.S. federal income tax consequences to SLM BankCo, Navient and SLM BankCo stockholders of the separation and the distribution:

 

  •  

subject to the discussion below regarding Section 355(e) of the Code, neither Navient nor SLM BankCo will recognize any gain or loss upon the separation and distribution of shares of Navient common stock and no amount will be includable in the income of SLM BankCo or Navient as a result of the separation and the distribution other than taxable income or gain possibly arising out of internal reorganizations undertaken in connection with the separation and distribution and with respect to any items required to be taken into account under U.S. Treasury regulations relating to consolidated federal income tax returns;

 

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  •  

a SLM BankCo stockholder will not recognize any gain or loss and no amount will be includable in income as a result of the receipt of shares of Navient common stock pursuant to the distribution;

 

  •  

after the internal corporate reorganization (including the SLM Merger) and separation and distribution, an SLM BankCo stockholder’s aggregate tax basis in such stockholder’s shares of SLM BankCo common stock and in shares of Navient common stock will equal such stockholder’s tax basis in its SLM BankCo common stock immediately before the distribution (determined as described above), allocated between the SLM BankCo common stock and Navient common stock in proportion to their fair market values on the distribution date; and

 

  •  

a SLM BankCo stockholder’s holding period for Navient common stock received in the distribution will include the holding period for that stockholder’s SLM BankCo common stock (determined as described above).

U.S. Treasury regulations provide that if an Existing SLM stockholder holds different blocks of Existing SLM common stock (generally Existing SLM common stock purchased or acquired on different dates or at different prices), the aggregate basis for each block of Existing SLM common stock purchased or acquired on the same date and at the same price will be allocated, to the greatest extent possible, between the shares of Navient common stock received in the distribution and the shares of SLM BankCo common stock received in the SLM Merger in respect of such block of Existing SLM common stock, in proportion to their respective fair market values on the distribution date. The holding period of the shares of Navient common stock received in the distribution in respect of such block of Existing SLM common stock will include the holding period of such block of Existing SLM common stock. If an Existing SLM stockholder is not able to identify which particular shares of Navient common stock are received in the distribution with respect to a particular block of Existing SLM common stock, for purposes of applying the rules described above, the stockholder may designate which shares of Navient common stock are received in the distribution in respect of a particular block of Existing SLM common stock, provided that such designation is consistent with the terms of the distribution. Existing SLM stockholders are urged to consult their own tax advisors regarding the application of these rules to their particular circumstances.

U.S. Treasury regulations also require certain stockholders who receive Navient common stock in the distribution to attach to the stockholder’s U.S. federal income tax return for the year in which the stock is received a detailed statement setting forth certain information relating to the tax-free nature of the distribution.

Even if the distribution otherwise qualifies as tax-free for U.S. federal income tax purposes under Section 355 of the Code, it could be taxable to SLM BankCo (but not its stockholders) under Section 355(e) of the Code if the distribution were later deemed to be part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, stock representing a 50 percent or greater interest by vote or value, in SLM BankCo or Navient. For this purpose, any acquisitions of SLM common stock or Navient common stock within the period beginning two years before the distribution and ending two years after the distribution are presumed to be part of such a plan, although SLM BankCo or Navient may be able to rebut that presumption.

In connection with the distribution, Navient and SLM BankCo will enter into a tax sharing agreement pursuant to which Navient will agree to be responsible for certain tax liabilities and obligations following the distribution. For a description of the tax sharing agreement, see “Certain Relationships and Related Party Transactions — Tax Sharing Agreement.”

The foregoing is a summary of material U.S. federal income tax consequences of the separation and the distribution under current law and particular circumstances. The foregoing does not purport to address all U.S. federal income tax consequences or tax consequences that may arise under the tax laws of other jurisdictions or that may apply to particular categories of stockholders. Each Existing SLM stockholder should consult its own tax advisor as to the particular tax consequences of the distribution to such stockholder, including the application of U.S. federal, state or local and foreign tax laws, and the effect of possible changes in tax laws that may affect the tax consequences described above.

 

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DESCRIPTION OF MATERIAL INDEBTEDNESS

From and after the distribution date, Navient and SLM BankCo will, in general, each be responsible for the debts, liabilities, and obligations related to the business or businesses that it owns and operates following consummation of the separation and distribution. See “Certain Relationships and Related Party Transactions — Agreements with SLM BankCo.”

Existing SLM, which will become a subsidiary of Navient as part of the internal corporate reorganization, is the obligor under an indenture pursuant to which there is outstanding, as of December 31, 2013, $18.3 billion of unsecured public debt.

To match the interest and currency characteristics of borrowings with the interest rate and currency characteristics of assets, Existing SLM has entered into interest rate and foreign currency swaps with independent parties. Under these agreements, Existing SLM makes periodic payments, generally indexed to the related asset rates or rates that are highly correlated to the asset rates, in exchange for periodic payments that generally match Existing SLM’s interest obligations on fixed or variable notes. In addition, Existing SLM has entered into Floor Income Contracts to hedge against the volatility of the Floor Income in FFELP Loans. For a description of Floor Income and the Floor Income Contracts, see Appendix A to this information statement.

Immediately following the separation and distribution, Navient will not be the direct obligor on any of the debt described below. However, Existing SLM currently consolidates, and following the separation Navient will consolidate, the various debt instruments in its financial statements. Accordingly, except where otherwise specifically stated, references to Navient’s debt in this section generally refer to debt of Navient’s subsidiaries, including Existing SLM, that will be consolidated in Navient’s financial statements. As described under “Senior Unsecured Debt—Future Issuances” below, following the separation and distribution Navient is expected to be the future issuer of senior unsecured notes and other public indebtedness.

Navient expects to have future cash flows and liquidity that will significantly exceed the debt service obligations arising out of the debt and borrowing facilities described below.

Secured Facilities

Asset-Backed Securities

Approximately 85 percent of Navient’s FFELP Loan portfolio and 60 percent of Navient’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 Navient. Nevertheless, Navient currently consolidates the financing trusts that have issued these asset-backed securities, as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Transfers of Financial Assets and the Variable Interest Entity (‘VIE’) Consolidation Model.” As of December 31, 2013, Navient’s consolidated subsidiaries had approximately $91 billion of FFELP Loan securitization debt and $19 billion of Private Education Loan securitization debt. The interest rate on this debt is generally based on either one- or three-month LIBOR.

FFELP Loans — Other Secured Borrowing Facilities

We have various secured borrowing facilities that we use to finance our FFELP loans. Liquidity is available under these secured credit facilities to the extent we have eligible collateral and available capacity. The maximum borrowing capacity under these facilities will vary and is subject to each agreement’s borrowing conditions. These include but are not limited to the facility’s size, current usage and the availability and fair value of qualifying unencumbered FFELP Loan collateral. Our borrowings under these facilities are non-recourse. The maturity dates on these facilities range from June 2014 to January 2016. The interest rate on certain facilities can increase under certain circumstances. The facilities are subject to termination under certain circumstances. As of

 

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December 31, 2013 there was approximately $10.0 billion outstanding under these facilities with approximately $10.4 billion of assets securing these facilities. As of December 31, 2013, the maximum unused capacity under these facilities was $10.6 billion. As of December 31, 2013, we had $2.7 billion of unencumbered FFELP Loans.

Private Education Loans — Other Secured Borrowing Facilities

We have a facility that was used to fund the call and redemption of our SLM 2009-D Private Education Loan Trust ABS, which occurred on August 15, 2013. The maturity date of the new facility is August 15, 2015. Our borrowings under this facility are non-recourse. The interest rate can increase under certain circumstances. The facility is subject to termination under certain circumstances. As of December 31, 2013, there was $843 million outstanding under the facility. The book basis of the assets securing the facility as of December 31, 2013 was $1.6 billion. Additional borrowings are not available under this facility.

Senior Unsecured Debt

As of December 31, 2013, SLM, which will become a subsidiary of Navient following the separation, had $18.3 billion amount of senior unsecured debt outstanding at a weighted average interest rate of 5.76 percent. This debt included:

 

  •  

$300 million of 6 percent senior notes due 2043 (the “2043 Notes”);

 

  •  

$16.5 billion of medium term notes, Series A (the “Series A Notes”);

 

  •  

$738 million of medium term notes, Series B (the “EdNotes”); and

 

  •  

$727 million of Euro medium term notes (the “Euro Notes”).

Existing SLM issued the 2043 Notes, Series A Notes and EdNotes in offerings that were registered under the Securities Act. These notes are Existing SLM’s unsecured, unsubordinated obligations. The Senior Notes, Series A Notes, and EdNotes are governed by an indenture, dated as of October 1, 2000, between Existing SLM and The Bank of New York Mellon, as successor to J.P. Morgan Chase Bank, National Association, as trustee, as amended or supplemented from time to time. The Euro Notes are governed by an amended and restated indenture, dated as of April 25, 2006, between Existing SLM and Deutsche Trustee Company Limited. In connection with the separation, Existing SLM, which is obligated under the indentures governing the unsecured debt, will become a wholly owned subsidiary of Navient. Accordingly, the description of the terms of these notes refers to Existing SLM as the borrower and obligor.

Existing SLM may redeem certain series of Series A Notes, in whole or in part, at any time, at a redemption price equal to either (x) the greater of (i) the principal amount of the notes redeemed and (ii) the sum of the present values of the remaining scheduled payments of principal and interest (exclusive of accrued interest) on the notes redeemed, discounted to the redemption date on a semiannual basis (assuming a 360-day year consisting of 12 30-day months) at the semiannual equivalent yield to maturity of a U.S. Treasury security of comparable maturity as the notes redeemed plus 50 basis points, or (y) the principal amount of the notes redeemed, plus in each case accrued interest on the notes redeemed. Existing SLM may also redeem certain series of EdNotes, Euro Notes and the 2043 Notes at a redemption price equal to the principal amount of the notes redeemed plus accrued and unpaid interest.

The indentures permit Existing SLM to merge or consolidate with another entity, or sell all or substantially of its properties and assets, so long as (i) the resulting or acquiring person is a U.S. entity and assumes all of the obligations of Existing SLM under the indentures, (ii) immediately after the transaction, no event of default exists and (iii) Existing SLM delivers to the trustee an officers’ certificate and opinion of counsel stating that the transaction complies with the foregoing conditions.

The indentures also provide for specific events of default (subject, in specific cases, to receipt of notice of default and/or customary grace or cure periods), including, but not limited to: (i) failure to pay interest for 30

 

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days; (ii) failure to pay principal when due; (iii) failure to perform, or breach of, any other covenant in the indenture for 60 days after notice is given by the trustee or holders of 25 percent of the outstanding principal amount; and (iv) specified events of bankruptcy, insolvency or corporate reorganization of Existing SLM.

Change of Control

Each holder of certain series of Series A Notes will have the right to require Existing SLM to repurchase any and all of such holder’s Series A Notes at a purchase price in cash equal to 101 percent of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase (except to the extent Existing SLM has previously elected to redeem the Series A Notes), upon the occurrence of (i) a change of control, as defined below, and (ii) a downgrade of the specific series of Series A Notes below an investment grade rating by at least two of three specified credit rating agencies during the period beginning 60 days prior to the first public announcement of the change of control and ending 60 days after the consummation of such change of control. A change of control means the occurrence of:

 

  •  

the direct or indirect sale, transfer, conveyance or disposition, in one or a series of related transactions, of all or substantially all of Existing SLM’s properties or assets, to any “person,” as that term is used in Section 13(d)(3) of the Exchange Act, other than to Existing SLM or one of its subsidiaries;

 

  •  

the consummation of any transaction that results in a “person” becoming the beneficial owner, directly or indirectly, of more than 50 percent of Existing SLM’s voting stock;

 

  •  

a consolidation or merger between Existing SLM and a “person” in a transaction where the outstanding voting stock of Existing SLM or of such other “person,” is converted into or exchanged for cash, securities, or other property, other than a transaction where a majority of the voting stock of Existing SLM, as applicable, is converted into or exchanged for a majority of the voting stock of the surviving “person”;

 

  •  

a change in the majority of Existing SLM’s board of directors that was not approved by Existing SLM’s directors; or

 

  •  

the adoption of a plan of liquidation or dissolution relating to Existing SLM.

The internal corporate reorganization described under the section entitled “The Separation and Distribution — Internal Corporate Reorganization of Existing SLM Prior to the Distribution,” will not be deemed to involve a change of control under the Series A Notes and, accordingly, will not entitle holders of Series A Notes to require Existing SLM to repurchase such notes.

Future Issuances

Following the separation and distribution, Navient is expected to be the future issuer of senior unsecured notes and other public indebtedness. Subject to receipt of certain approvals and as promptly as practicable following the separation and distribution, it is anticipated that Existing SLM will be merged into Navient, with Navient surviving. Pending that merger and following the distribution, Navient is expected to fully and unconditionally guarantee Existing SLM’s outstanding senior unsecured debt.

 

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OWNERSHIP OF COMMON STOCK BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Immediately prior to the distribution, all of the outstanding shares of Navient’s common stock will be owned beneficially and of record by SLM BankCo. The following tables set forth the pro forma ownership of shares of Navient common stock by the persons named therein, based upon the distribution ratio of one share of Navient common stock for each outstanding share of Existing SLM common stock.

Ownership of Common Stock by Certain Beneficial Owners

The following table provides information about each stockholder known to us to beneficially own more than five percent of the outstanding shares of Existing SLM common stock, based solely on the information filed by each such stockholder in 2014 for the year ended December 31, 2013, on Schedule 13G under the Exchange Act.

 

Name and Address of Beneficial Owner

    Shares      Percent of Class  

Barrow, Hanley, Mewhinney &Strauss, LLC (1)

      41,301,537         9.47 % 

2200 Ross Avenue

      

31st Floor

      

Dallas, TX 75201-2761

      

FMR LLC (2)

      26,142,097         5.99 % 

82 Devonshire Street

      

Boston, MA 02109

      

BlackRock Inc. (3)

      23,473,810         5.40 % 

40 East 52nd Street

      

New York, NY 10022

      

 

(1) This information, including percent of class, is based on the Schedule 13G filed with the SEC by Barrow, Hanley, Mewhinney & Strauss, LLC on February 12, 2014. Barrow, Hanley, Mewhinney & Strauss, LLC reported sole power to vote or direct the vote for 15,454,858 shares, shared power to vote or to direct the vote for 25,846,679 shares and sole power to dispose or to direct the disposition of 41,301,537 shares.
(2) This information, including percent of class, is based on the Schedule 13G/A filed with the SEC by FMR LLC, a parent holding company, on February 14, 2014. FMR LLC and Edward C. Johnson 3d, through their control of the subsidiaries of FMR LLC, have the sole power to dispose of or direct the disposition of 26,142,097 shares and the sole power to vote or direct the voting of 2,047,904 of these shares. According to this Schedule 13G/A, Fidelity Management & Research Company, a wholly-owned subsidiary of FMR LLC, beneficially owns 22,422,310 of these shares; Fidelity SelectCo, LLC, a wholly-owned subsidiary of FMR LLC, beneficially owns 1,673,504 of these shares; Fidelity Management Trust Company, a wholly-owned subsidiary of FMR LLC, beneficially owns 137,743 of these shares; Strategic Advisers, Inc., a wholly-owned subsidiary of FMR LLC, beneficially owns 4,497 of these shares; and Pyramis Global Advisors Trust Company, a wholly-owned subsidiary of FMR LLC, beneficially owns 182,888 of these shares. Additionally, Crosby Advisors LLC, a wholly-owned subsidiary of Crosby Company of New Hampshire LLC (“CCNH”), is the beneficial owner of 1,721,155 of these shares. Members of the family of Edward C. Johnson 3d, directly or indirectly, own CCNH.
(3) This information, including percent of class, is based on the Schedule 13G filed with the SEC by BlackRock, Inc. on January 30, 2014. BlackRock, Inc. reported the sole power to vote or direct the voting for 19,162,835 shares and the sole power to dispose of or direct the disposition of for 23,473,810 shares.

 

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Security Ownership of Executive Officers and Directors

The following table provides information regarding beneficial ownership of Existing SLM common stock (i.e. owned or pursuant to SEC rules that may be acquired within 60 days) for each of Navient’s directors and the Navient NEOs, as well as all directors and Navient NEOs as a group. The ownership information is as of January 31, 2014. As of January 31, 2014, there were 428,698,212 shares of Existing SLM common stock issued and outstanding. Jack Remondi is currently both a director and executive officer of Navient, and his information is set forth opposite his name under the caption “Executive Officers” in the table.

 

     Shares (1)      Vested
Options  (2)		      Total Beneficial
Ownership (3) 		     Percent of
Class		  

Director Nominees

            

Ann Torre Bates (4)

      9,216         63,744         72,960         *   

William M. Diefenderfer III (5)

      98,649         91,695         190,344         *   

Diane Suitt Gilleland (6)

      112,397         91,393         203,790         *   

Barry A. Munitz

      34,345         71,985         106,330         *   

Steven L. Shapiro (7)

      160,498         99,063         259,561         *   

Barry Lawson Williams

      41,005         73,693         114,698         *   

Named Executive Officers

            

John F. Remondi (8)

      801,025         1,069,198         1,870,223         *   

Somsak Chivavibul (9)

      114,268         13,268         127,536         *   

John Kane (10)

      89,687         5,989         95,676         *   

Timothy Hynes (11)

      42,577         39,171         81,748         *   

Directors and Officers as a Group

      1,503,667         1,619,199         3,122,866         0.73 % 

 

* Less than one percent
(1) Shares held directly or indirectly with a spouse, including shares credited to Company-sponsored retirement plans. Total for NEOs includes (i) vested restricted stock units (“RSUs”) awarded as a portion of bonus paid in January 2011, February 2012 and February 2013, (ii) unvested RSUs granted in January 2011, February 2012, February 2013 and August 2013, (iii) unvested performance stock units (“PSUs”) granted in February 2012 and February 2013 and (iv) unvested dividend equivalent units (“DEUs”) granted on unvested RSUs and PSUs. The individuals holding such RSUs, PSUs and DEUs have no voting or investment power over these units.
(2) Shares that may be acquired within 60 days of January 31, 2014 through the exercise of stock options. Net settled options are shown on a “spread basis”, and if not in-the-money, they are shown as 0.
(3) Total of columns 1 and 2. Except as otherwise indicated and subject to community property laws, each owner has sole voting and sole investment power with respect to the shares listed.
(4) 9,216 shares are held in a margin account and are therefore considered “pledged as security”. No loan is outstanding.
(5) 4,340 shares are phantom stock units credited to a deferred compensation plan account.
(6) 13,879 shares are phantom stock units credited to a deferred compensation plan account.
(7) 27,208 shares are held in a margin account and are therefore considered “pledged as security”. No loan is outstanding. Mr. Shapiro’s share ownership includes 3,000 shares held in a Roth IRA and 108,000 shares held in an LLC owned by Mr. Shapiro and his spouse. 9,300 shares are phantom stock units credited to a deferred compensation plan account.
(8) 400,333 shares are held in a margin account and are therefore considered “pledged as security”. No loan is outstanding. 296,014 of the shares reported in this column are RSUs, PSUs or DEUs over which Mr. Remondi has no voting or dispositive control.
(9) Mr. Chivavibul’s share ownership includes 2,982 shares held by his spouse. 38,574 of the shares reported in this column are RSUs, PSUs or DEUs over which Mr. Chivavibul has no voting or dispositive control.
(10) 51,036 of the shares reported in this column are RSUs, PSUs or DEUs over which Mr. Kane has no voting or dispositive control.
(11) 29,641 of the shares reported in this column are RSUs, PSUs or DEUs over which Mr. Hynes has no voting or dispositive control.

 

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DESCRIPTION OF NAVIENT’S CAPITAL STOCK

Navient’s certificate of incorporation and by-laws will be amended and restated prior to the distribution. The following is a summary of the material terms of Navient’s capital stock that will be contained in the amended and restated certificate of incorporation and the amended and restated by-laws. The summaries and descriptions below do not purport to be complete statements of the relevant provisions of the amended and restated certificate of incorporation or of the amended and restated by-laws to be in effect at the time of the distribution. The summary is qualified in its entirety by reference to these documents, which you must read (along with the applicable provisions of Delaware law) for additional information on Navient’s capital stock as of the time of the distribution. The amended and restated certificate of incorporation and the amended and restated by-laws to be in effect at the time of the distribution will be included as exhibits to Navient’s registration statement on Form 10, of which this information statement forms a part.

General

Navient’s authorized capital stock will consist of              shares of common stock, par value $0.01 per share, and              million shares of preferred stock, par value $0.01 per share, all of which shares of preferred stock are undesignated. Navient’s board of directors may authorize the issuance of one or more series of preferred stock and establish, among other things, the rights, preferences and privileges of any such series of preferred stock from time to time without stockholder approval. Immediately following the distribution, Navient expects that approximately              million shares of its common stock will be issued and outstanding and that no shares of preferred stock will be issued and outstanding.

Common Stock

Each holder of Navient common stock will be entitled to one vote for each share on all matters to be voted upon by the common stockholders, and there will be no cumulative voting rights. Holders of Navient common stock will not be entitled to vote on any amendment to our amended and restated certificate of incorporation that relates solely to the terms of one or more outstanding series of preferred stock if the holders of such affected series of preferred stock are entitled, either separately or together as a class with the holders of one or more other series of preferred stock, to vote on such amendment pursuant to our amended and restated certificate of incorporation or the General Corporation Law of the State of Delaware (the “DGCL”).

Subject to any preferential rights of the holders of any outstanding preferred stock, holders of Navient common stock will be entitled to receive ratably the dividends, if any, as may be declared from time to time by its board of directors out of funds legally available for that purpose. If there is a liquidation, dissolution or winding up of Navient, holders of its common stock would be entitled to share ratably in its assets legally available for distribution after the payment or provision in full of all liabilities and any preferential rights of the holders of any then outstanding preferred stock.

Holders of Navient common stock will have no preemptive or conversion rights or other subscription rights, and there are no redemption or sinking fund provisions applicable to shares of Navient common stock. Upon the distribution, all outstanding shares of Navient common stock will be fully paid and non-assessable. The rights, preferences and privileges of the holders of Navient common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that Navient may authorize and issue in the future.

Preferred Stock

Under the terms of Navient’s amended and restated certificate of incorporation, its board of directors, or any duly authorized committee thereof, will be authorized to issue up to              million shares of preferred stock in one or more series without further action by the holders of its common stock. Subject to the limitations

 

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prescribed by the DGCL and by Navient’s amended and restated certificate of incorporation, Navient’s board of directors, or any duly authorized committee thereof, may establish the powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions thereof, of each such series of preferred stock including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences of each such series.

Anti-Takeover Effects of Various Provisions of Delaware Law and Navient’s Amended and Restated Certificate of Incorporation and Amended and Restated By-laws

Provisions of the DGCL and Navient’s amended and restated certificate of incorporation and amended and restated by-laws could make it more difficult to acquire Navient by means of a tender offer, a proxy contest or otherwise, or to remove incumbent officers and directors. These provisions, summarized below, are expected to discourage certain types of coercive takeover practices and takeover bids that its board of directors may consider inadequate and to encourage persons seeking to acquire control of the company to first negotiate with Navient’s board of directors. Navient believes that the benefits of increased protection of its ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure it outweigh the disadvantages of discouraging takeover or acquisition proposals because, among other things, negotiation of these proposals could result in an improvement of their terms.

Size of Board and Vacancies. Navient’s amended and restated certificate of incorporation and amended and restated by-laws will provide that the number of directors on its board of directors will be fixed exclusively by its board of directors, subject to the rights of the holders of any outstanding preferred stock to elect directors. Any newly created directorship or any vacancy in Navient’s board of directors resulting from any increase in the authorized number of directors or the death, disability, resignation, retirement, disqualification, removal from office or other cause will be filled solely by the affirmative vote of a majority of the board of directors then in office, even if less than a quorum, or by a sole remaining director. Any director appointed to fill a vacancy on Navient’s board of directors not resulting from an increase in the size of the board will be appointed for the remaining term of his or her predecessor, and until his or her successor has been elected and qualified, subject to his or her earlier death, disqualification, resignation or removal.

Requirements for Advance Notification of Stockholder Nominations and Proposals. Navient’s amended and restated by-laws will establish advance notice procedures with respect to stockholder proposals and nomination of candidates for election as directors other than nominations made by or at the direction of its board of directors or a committee of its board of directors.

No Cumulative Voting. The DGCL provides that stockholders are denied the right to cumulate votes in the election of directors unless the company’s certificate of incorporation provides otherwise. Navient’s amended and restated certificate of incorporation will not provide for cumulative voting in the election of directors.

Undesignated Preferred Stock. The authority that Navient’s board of directors will possess to issue preferred stock could potentially be used to discourage attempts by third parties to obtain control of Navient through a merger, tender offer, proxy contest or otherwise by making such attempts more difficult or more costly. Navient’s board of directors may be able to issue preferred stock with voting rights or conversion rights that, if exercised, could adversely affect the voting power of the holders of common stock.

Limitations on Liability, Indemnification of Officers and Directors, and Insurance

The DGCL authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary damages for breaches of directors’ fiduciary duties as directors, and Navient’s amended and restated certificate of incorporation will include such an exculpation provision. Navient’s amended and restated by-laws will include provisions that will require Navient to indemnify, to the fullest extent allowable under the DGCL, its directors and officers. Navient’s amended and restated by-laws will also require

 

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that Navient advance expenses to its directors and officers, upon its receipt of an undertaking to repay such amounts in the event that such director or officer is not entitled to indemnification. Navient’s amended and restated by-laws will expressly authorize Navient to carry directors’ and officers’ insurance to protect Navient, its directors, officers and certain employees for some liabilities.

The limitation of liability and indemnification provisions that will be in Navient’s amended and restated certificate of incorporation and amended and restated by-laws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. These provisions may also have the effect of reducing the likelihood of derivative litigation against Navient’s directors and officers, even though such an action, if successful, might otherwise benefit Navient and its stockholders. The limitation of liability for directors in Navient’s amended and restated certificate of incorporation will limit the ability to recover monetary damages against a director for breach of fiduciary duty as a director, including breaches resulting from grossly negligent behavior, however, such provision will not limit or eliminate Navient’s rights, or those of any stockholder, to seek non-monetary relief such as injunction or rescission in the event of a breach of a director’s duty of care. Additionally, this provision will not alter the liability of directors under the federal securities laws or under the DGCL for (i) breaches of a directors’ duty of loyalty to Navient and its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) the authorization of illegal dividends, repurchases, or redemptions, or (iv) any transaction in which the director derived an improper personal benefit. In addition, the indemnification provisions may adversely affect your investment to the extent that, in a class action or direct suit, Navient is required to pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. There is currently no pending material litigation or proceeding against any Navient directors, officers or employees for which indemnification is sought.

Exclusive Forum

Navient’s amended and restated certificate of incorporation will provide that unless the board of directors otherwise determines, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of Navient, any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of Navient to Navient or Navient’s stockholders, any action arising pursuant to any provision of the DGCL, or any action asserting a claim governed by the internal affairs doctrine.

Authorized but Unissued Shares

Navient’s authorized but unissued shares of common stock and preferred stock will be available for future issuance without your approval. Navient may use additional shares for a variety of purposes, including future public offerings to raise additional capital, to fund acquisitions and as employee compensation. The existence of authorized but unissued shares of common stock and preferred stock could render more difficult or discourage an attempt to obtain control of Navient by means of a proxy contest, tender offer, merger or otherwise.

Listing

Navient expects to apply to have its shares of common stock listed on the NASDAQ Global Select Market under the symbol “NAVI.”

Sale of Unregistered Securities

On November 7, 2013, Navient issued one share of its common stock to SLM Corporation pursuant to Section 4(2) of the Securities Act. Navient did not register the issuance of the issued share under the Securities Act because such issuance did not constitute a public offering.

 

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Transfer Agent and Registrar

After the distribution, the transfer agent and registrar for Navient’s common stock will be Computershare Trust Company, N.A.

Computershare, Inc.

250 Royall Street

Canton, MA 02021

www.computershare.com/investor

 

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WHERE YOU CAN FIND MORE INFORMATION

Navient has filed a registration statement on Form 10 with the SEC with respect to the shares of Navient common stock being distributed as contemplated by this information statement. This information statement is a part of, and does not contain all of the information set forth in, the registration statement and the exhibits and schedules to the registration statement. For further information with respect to Navient and its common stock, please refer to the registration statement, including its exhibits and schedules. Statements made in this information statement relating to any contract or other document are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract or document. You may review a copy of the registration statement, including its exhibits and schedules, at the SEC’s public reference room, located at 100 F Street, N.E., Washington, D.C. 20549, by calling the SEC at 1-800-SEC-0330 as well as on the Internet website maintained by the SEC at www.sec.gov. Information contained on any website referenced in this information statement is not incorporated by reference in this information statement.

As a result of the distribution, Navient will become subject to the information and reporting requirements of the Exchange Act and, in accordance with the Exchange Act, will file periodic reports, proxy statements and other information with the SEC.

Navient intends to furnish holders of its common stock with annual reports containing consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles and audited and reported on, with an opinion expressed, by an independent registered public accounting firm.

You should rely only on the information contained in this information statement or to which this information statement has referred you. Navient has not authorized any person to provide you with different information or to make any representation not contained in this information statement.

 

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CONSOLIDATED FINANCIAL STATEMENTS

INDEX

 

     Page  

Report of Independent Registered Public Accounting Firm

      F-2   

Report of Independent Registered Public Accounting Firm

      F-3   

Consolidated Balance Sheets

      F-4   

Consolidated Statements of Income

      F-5   

Consolidated Statements of Comprehensive Income

      F-6   

Consolidated Statements of Changes in Stockholders’ Equity

      F-7   

Consolidated Statements of Cash Flows

      F-10   

Notes to Consolidated Financial Statements

      F-11   

 

F-1

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

SLM Corporation:

We have audited the accompanying consolidated balance sheets of SLM Corporation and subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The accompanying consolidated financial statements of the Company for the year ended December 31, 2011, were audited by other auditors whose report thereon dated February 27, 2012, expressed an unqualified opinion on those consolidated financial statements, before the adjustments that were applied to the 2011 consolidated financial statements to reflect the operations of Campus Solutions and Upromise Investments, Inc. as discontinued operations for all comparative prior period information.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

We also have audited the adjustments that were applied to the 2011 consolidated financial statements to reflect the operations of Campus Solutions and Upromise Investments, Inc. as discontinued operations for all comparative prior period information. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2011 consolidated financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2011 consolidated financial statements taken as a whole.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 19, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

/S/ KPMG LLP

McLean, Virginia
February 19, 2014

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of SLM Corporation:

In our opinion, the consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the year ended December 31, 2011, before the effects of the adjustments to retrospectively reflect the discontinued operations described in Note 16, present fairly, in all material respects, the results of operations and cash flows of SLM Corporation and its subsidiaries for the year ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America (the 2011 financial statements before the effects of the adjustments discussed in Note 16 are not presented herein). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit, before the effects of the adjustments described above, of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively reflect the discontinued operations described in Note 16 and accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

McLean, VA

February 27, 2012

 

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SLM CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)

 

     December 31,
2013		     December 31,
2012		  

Assets

     

FFELP Loans (net of allowance for losses of $119 and $159, respectively)

    $ 104,588      $ 125,612   

Private Education Loans (net of allowance for losses of $2,097 and $2,171 respectively)

      37,512        36,934   

Investments

     

Available-for-sale

      109        72   

Other

      783        1,010   
  

 

 

    

 

 

  

Total investments

      892        1,082   

Cash and cash equivalents

      5,190        3,900   

Restricted cash and investments

      3,650        5,011   

Goodwill and acquired intangible assets, net

      424        448   

Other assets

      7,287        8,273   
  

 

 

    

 

 

  

Total assets

    $ 159,543      $ 181,260   
  

 

 

    

 

 

  

Liabilities

     

Short-term borrowings

    $ 13,795      $ 19,856   

Long-term borrowings

      136,648        152,401   

Other liabilities

      3,458        3,937   
  

 

 

    

 

 

  

Total liabilities

      153,901        176,194   
  

 

 

    

 

 

  

Commitments and contingencies

     

Equity

     

Preferred stock, par value $.20 per share, 20 million shares authorized

     

Series A: 3.3 million and 3.3 million shares issued, respectively, at stated value of $50 per share

      165        165   

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

      400        400   

Common stock, par value $.20 per share, 1.125 billion shares authorized: 545 million and 536 million shares issued, respectively

      109        107   

Additional paid-in capital

      4,399        4,237   

Accumulated other comprehensive income (loss) (net of tax (expense) benefit of $(7) and $3, respectively)

      13        (6 ) 

Retained earnings

      2,584        1,451   
  

 

 

    

 

 

  

Total SLM Corporation stockholders’ equity before treasury stock

      7,670        6,354   

Less: Common stock held in treasury at cost: 116 million and 83 million shares, respectively

      (2,033 )      (1,294 ) 
  

 

 

    

 

 

  

Total SLM Corporation stockholders’ equity

      5,637        5,060   

Noncontrolling interest

      5        6   
  

 

 

    

 

 

  

Total equity

      5,642        5,066   
  

 

 

    

 

 

  

Total liabilities and equity

    $ 159,543      $ 181,260   
  

 

 

    

 

 

  

Supplemental information — assets and liabilities of consolidated variable interest entities:

 

     December 31,
2013		      December 31,
2012		  

FFELP Loans

    $ 99,254       $ 121,059   

Private Education Loans

      25,530         26,072   

Restricted cash and investments

      3,395         4,826   

Other assets

      2,322         2,312   

Short-term borrowings

      3,655         9,551   

Long-term borrowings

      115,538         131,518   
  

 

 

     

 

 

  

Net assets of consolidated variable interest entities

    $ 11,308       $ 13,200   
  

 

 

     

 

 

  

See accompanying notes to consolidated financial statements.

 

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SLM CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share amounts)

 

     Years Ended December 31,  
     2013     2012     2011  

Interest income:

       

FFELP Loans

    $ 2,822      $ 3,251      $ 3,461   

Private Education Loans

      2,527        2,481        2,429   

Other loans

      11        16        21   

Cash and investments

      17        21        19   
  

 

 

    

 

 

    

 

 

  

Total interest income

      5,377        5,769        5,930   

Total interest expense

      2,210        2,561        2,401   
  

 

 

    

 

 

    

 

 

  

Net interest income

      3,167        3,208        3,529   

Less: provisions for loan losses

      839        1,080        1,295   
  

 

 

    

 

 

    

 

 

  

Net interest income after provisions for loan losses

      2,328        2,128        2,234   
  

 

 

    

 

 

    

 

 

  

Other income (loss):

       

Gains (losses) on sales of loans and investments

      302        —        (35 ) 

Losses on derivative and hedging activities, net

      (268 )      (628 )      (959 ) 

Servicing revenue

      290        279        283   

Contingency revenue

      420        356        333   

Gains on debt repurchases

      42        145        38   

Other

      100        92        69   
  

 

 

    

 

 

    

 

 

  

Total other income (loss)

      886        244        (271 ) 
  

 

 

    

 

 

    

 

 

  

Expenses:

       

Salaries and benefits

      504        457        493   

Other operating expenses

      538        440        512   
  

 

 

    

 

 

    

 

 

  

Total operating expenses

      1,042        897        1,005   

Goodwill and acquired intangible asset impairment and amortization expense

      13        27        21   

Restructuring and other reorganization expenses

      72        11        12   
  

 

 

    

 

 

    

 

 

  

Total expenses

      1,127        935        1,038   
  

 

 

    

 

 

    

 

 

  

Income from continuing operations, before income tax expense

      2,087        1,437        925   

Income tax expense

      776        498        328   
  

 

 

    

 

 

    

 

 

  

Net income from continuing operations

      1,311        939        597   

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

      106        (2 )      35   
  

 

 

    

 

 

    

 

 

  

Net income

      1,417        937        632   

Less: net loss attributable to noncontrolling interest

      (1 )      (2 )      (1 ) 
  

 

 

    

 

 

    

 

 

  

Net income attributable to SLM Corporation

      1,418        939        633   

Preferred stock dividends

      20        20        18   
  

 

 

    

 

 

    

 

 

  

Net income attributable to SLM Corporation common stock

    $ 1,398      $ 919      $ 615   
  

 

 

    

 

 

    

 

 

  

Basic earnings per common share attributable to SLM Corporation:

       

Continuing operations

    $ 2.94      $ 1.93      $ 1.12   

Discontinued operations

      .24        —        .07   
  

 

 

    

 

 

    

 

 

  

Total

    $ 3.18      $ 1.93      $ 1.19   
  

 

 

    

 

 

    

 

 

  

Average common shares outstanding

      440        476        517   
  

 

 

    

 

 

    

 

 

  

Diluted earnings per common share attributable to SLM Corporation:

       

Continuing operations

    $ 2.89      $ 1.90      $ 1.11   

Discontinued operations

      .23        —        .07   
  

 

 

    

 

 

    

 

 

  

Total

    $ 3.12      $ 1.90      $ 1.18   
  

 

 

    

 

 

    

 

 

  

Average common and common equivalent shares outstanding

      449        483        523   
  

 

 

    

 

 

    

 

 

  

Dividends per common share attributable to SLM Corporation

    $ .60      $ .50      $ .30   
  

 

 

    

 

 

    

 

 

  

See accompanying notes to consolidated financial statements.

 

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SLM CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

 

     Years Ended December 31,  
     2013       2012         2011    

Net income

    $ 1,417      $ 937      $ 632   

Other comprehensive income (loss):

       

Unrealized gains (losses) on derivatives:

       

Unrealized hedging gains (losses) on derivatives

      27        (11 )      (6 ) 

Reclassification adjustments for derivative losses included in net income (interest expense)

      9        25        55   
  

 

 

    

 

 

    

 

 

  

Total unrealized gains (losses) on derivatives

      36        14        49   

Unrealized gains (losses) on investments

      (6 )      (1 )      2   

Defined benefit pension plans adjustment

      —        —        (3 ) 

Income tax expense

     (11 )      (5 )      (17 ) 
  

 

 

    

 

 

    

 

 

  

Other comprehensive income, net of tax

      19        8        31   
  

 

 

    

 

 

    

 

 

  

Comprehensive income

      1,436        945        663   

Less: comprehensive loss attributable to noncontrolling interest

      (1 )      (2 )      (1 ) 
  

 

 

    

 

 

    

 

 

  

Total comprehensive income attributable to SLM Corporation

    $ 1,437      $ 947      $ 664   
  

 

 

    

 

 

    

 

 

  

See accompanying notes to consolidated financial statements.

 

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SLM CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In millions, except share and per share amounts)

 

    Preferred
Stock
Shares		     Common Stock Shares     Preferred
Stock		     Common
Stock		     Additional
Paid-In
Capital		     Accumulated
Other
Comprehensive
Income (Loss)		     Retained
Earnings		     Treasury
Stock		     Total
Stockholders’
Equity		     Noncontrolling
Interest		     Total
Equity		  
      Issued     Treasury     Outstanding                    

Balance at December 31, 2010

     7,300,000        595,263,474        (68,319,589 )      526,943,885      $ 565      $ 119      $ 5,940      $ (45 )    $ 309      $ (1,876 )    $ 5,012      $ —      $ 5,012   

Comprehensive income:

                          

Net income

     —        —        —        —        —        —        —        —        633        —        633        (1 )      632   

Other comprehensive income, net of tax

     —        —        —        —        —        —        —        31        —        —        31        —        31   
                     

 

 

    

 

 

    

 

 

  

Total comprehensive income

     —        —        —        —        —        —        —        —        —        —        664        (1 )      663   

Cash dividends:

                          

Common stock ($.30 per share)

     —        —        —        —        —        —        —        —        (154 )      —        (154 )      —        (154 ) 

Preferred stock, series A ($3.49 per share)

     —        —        —        —        —        —        —        —        (12 )      —        (12 )      —        (12 ) 

Preferred stock, series B ($1.59 per share)

     —        —        —        —        —        —        —        —        (6 )      —        (6 )      —        (6 ) 

Issuance of common shares

     —        3,886,217        —        3,886,217        —        1        40        —        —        —        41        —        41   

Retirement of common stock in treasury

     —        (70,074,369 )      70,074,369        —        —        (14 )      (1,890 )      —        —        1,904        —        —        —   

Tax benefit related to employee stock-based compensation plans

     —        —        —        —        —        —        (10 )      —        —        —        (10 )      —        (10 ) 

Stock-based compensation expense

     —        —        —        —        —        —        56        —        —        —        56        —        56   

Common stock repurchased

     —        —        (19,054,115 )      (19,054,115 )      —        —        —        —        —        (300 )      (300 )      —        (300 ) 

Shares repurchased related to employee stock-based compensation plans

     —        —        (3,024,662 )      (3,024,662 )      —        —        —        —        —        (48 )      (48 )      —        (48 ) 

Acquisition of noncontrolling interest

     —        —        —        —        —        —        —        —        —        —        —        9        9   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Balance at December 31, 2011

     7,300,000        529,075,322        (20,323,997 )      508,751,325      $ 565      $ 106      $ 4,136      $ (14 )    $ 770      $ (320 )    $ 5,243      $ 8      $ 5,251   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

See accompanying notes to consolidated financial statements.

 

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SLM CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In millions, except share and per share amounts)

 

    Preferred
Stock
Shares		     Common Stock Shares     Preferred
Stock		     Common
Stock		     Additional
Paid-In
Capital		     Accumulated
Other
Comprehensive
Income (Loss)		     Retained
Earnings		     Treasury
Stock		     Total
Stockholders’
Equity		     Noncontrolling
Interest		     Total
Equity		  
      Issued     Treasury     Outstanding                    

Balance at December 31, 2011

     7,300,000        529,075,322        (20,323,997 )      508,751,325      $ 565      $ 106      $ 4,136      $ (14 )    $ 770      $ (320 )    $ 5,243      $ 8      $ 5,251   

Comprehensive income:

                          

Net income

     —        —        —        —        —        —        —        —        939        —        939        (2 )      937   

Other comprehensive income, net of tax

     —        —        —        —        —        —        —        8        —        —        8        —        8   
                     

 

 

    

 

 

    

 

 

  

Total comprehensive income

     —        —        —        —        —        —        —        —        —        —        947        (2 )      945   

Cash dividends:

                          

Common stock ($.50 per share)

     —        —        —        —        —        —        —        —        (237 )      —        (237 )      —        (237 ) 

Preferred stock, series A ($3.49 per share)

     —        —        —        —        —        —        —        —        (11 )      —        (11 )      —        (11 ) 

Preferred stock, series B ($2.22 per share)

     —        —        —        —        —        —        —        —        (9 )      —        (9 )      —        (9 ) 

Dividend equivalent units related to employee stock-based compensation plans

     —        —        —        —        —        —        —        —        (1 )      —        (1 )      —        (1 ) 

Issuance of common shares

     —        6,432,643        —        6,432,643        —        1        60        —        —        —        61        —        61   

Tax benefit related to employee stock-based compensation plans

     —        —        —        —        —        —        (6 )      —        —        —        (6 )      —        (6 ) 

Stock-based compensation expense

     —        —        —        —        —        —        47        —        —        —        47        —        47   

Common stock repurchased

     —        —        (58,038,239 )      (58,038,239 )      —        —        —        —        —        (900 )      (900 )      —        (900 ) 

Shares repurchased related to employee stock-based compensation plans

     —        —        (4,547,785 )      (4,547,785 )      —        —        —        —        —        (74 )      (74 )      —        (74 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Balance at December 31, 2012

     7,300,000        535,507,965        (82,910,021 )      452,597,944      $ 565      $ 107      $ 4,237      $ (6 )    $ 1,451      $ (1,294 )    $ 5,060      $ 6      $ 5,066   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

See accompanying notes to consolidated financial statements.

 

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SLM CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In millions, except share and per share amounts)

 

    Preferred
Stock
Shares		     Common Stock Shares     Preferred
Stock		     Common
Stock		     Additional
Paid-In
Capital		     Accumulated
Other
Comprehensive
Income (Loss)		     Retained
Earnings		     Treasury
Stock		     Total
Stockholders’
Equity		     Noncontrolling
Interest		     Total
Equity		  
      Issued     Treasury     Outstanding                    

Balance at December 31, 2012

     7,300,000        535,507,965        (82,910,021 )      452,597,944      $ 565      $ 107      $ 4,237      $ (6 )    $ 1,451      $ (1,294 )    $ 5,060      $ 6      $ 5,066   

Comprehensive income:

                          

Net income

     —        —        —        —        —        —        —        —        1,418        —        1,418        (1 )      1,417   

Other comprehensive income, net of tax

     —        —        —        —        —        —        —        19        —        —        19        —        19   
                     

 

 

    

 

 

    

 

 

  

Total comprehensive income

     —        —        —        —        —        —        —        —        —        —        1,437        (1 )      1,436   

Cash dividends:

                          

Common stock ($.60 per share)

     —        —        —        —        —        —        —        —        (264 )      —        (264 )      —        (264 ) 

Preferred stock, series A ($3.49 per share)

     —        —        —        —        —        —        —        —        (12 )      —        (12 )      —        (12 ) 

Preferred stock, series B ($2.00 per share)

     —        —        —        —        —        —        —        —        (8 )      —        (8 )      —        (8 ) 

Dividend equivalent units related to employee stock-based compensation plans

     —        —        —        —        —        —        —        —        (1 )      —        (1 )      —        (1 ) 

Issuance of common shares

     —        9,702,976        —        9,702,976        —        2        105        —        —        —        107        —        107   

Tax benefit related to employee stock-based compensation plans

     —        —        —        —        —        —        10        —        —        —        10        —        10   

Stock-based compensation expense

     —        —        —        —        —        —        47        —        —        —        47        —        47   

Common stock repurchased

     —        —        (26,987,043 )      (26,987,043 )      —        —        —        —        —        (600 )      (600 )      —        (600 ) 

Shares repurchased related to employee stock-based compensation plans

     —        —        (6,365,002 )      (6,365,002 )      —        —        —        —        —        (139 )      (139 )      —        (139 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Balance at December 31, 2013

     7,300,000        545,210,941        (116,262,066 )      428,948,875      $ 565      $ 109      $ 4,399      $ 13      $ 2,584      $ (2,033 )    $ 5,637      $ 5      $ 5,642   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

See accompanying notes to consolidated financial statements.

 

F-9

Table of Contents

SLM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

     Years Ended December 31,  
     2013     2012     2011  

Operating activities

       

Net income

    $ 1,417      $ 937      $ 632   

Adjustments to reconcile net income to net cash provided by operating activities:

       

(Income) loss from discontinued operations, net of tax

      (106 )      2        (35 ) 

(Gains) losses on loans and investments, net

      (302 )      —        35   

Gains on debt repurchases

      (42 )      (145 )      (38 ) 

Goodwill and acquired intangible assets impairment and amortization expense

      13        27        21   

Stock-based compensation expense

      47        47        56   

Unrealized (gains) losses on derivative and hedging activities

      (444 )      (117 )      145   

Provisions for loan losses

      839        1,080        1,295   

(Increase) decrease in restricted cash — other

      (11 )      10        (3 ) 

(Increase) decrease in accrued interest receivable

      (68 )      361        463   

(Decrease) increase in accrued interest payable

      (23 )      (41 )      75   

Decrease in other assets

      625        437        423   

(Decrease) increase in other liabilities

      (87 )      38        12   
  

 

 

    

 

 

    

 

 

  

Cash provided by operating activities — continuing operations

      1,858        2,636        3,081   
  

 

 

    

 

 

    

 

 

  

Cash provided by operating activities — discontinued operations

      142        —        —   
  

 

 

    

 

 

    

 

 

  

Total net cash provided by operating activities

      2,000        2,636        3,081   
  

 

 

    

 

 

    

 

 

  

Investing activities

       

Student loans acquired and originated

      (4,555 )      (6,663 )      (3,888 ) 

Reduction of student loans:

       

Installment payments, claims and other

      11,763        17,198        12,290   

Proceeds from sales of student loans

      768        531        753   

Other investing activities, net

      144        41        (210 ) 

Purchases of available-for-sale securities

      (73 )      (63 )      (142 ) 

Proceeds from sales and maturities of available-for-sale securities

      38        71        193   

Purchases of held-to-maturity and other securities

      (375 )      (245 )      (277 ) 

Proceeds from sales and maturities of held-to-maturity securities and other securities

      381        206        265   

Decrease in restricted cash — variable interest entities

      1,119        769        376   
  

 

 

    

 

 

    

 

 

  

Cash provided by investing activities — continuing operations

      9,210        11,845        9,360   
  

 

 

    

 

 

    

 

 

  

Cash provided by investing activities — discontinued operations

      —        —        114   
  

 

 

    

 

 

    

 

 

  

Total net cash provided by investing activities

      9,210        11,845        9,474   
  

 

 

    

 

 

    

 

 

  

Financing activities

       

Borrowings collateralized by loans in trust — issued

      9,534        13,727        4,553   

Borrowings collateralized by loans in trust — repaid

      (13,468 )      (15,953 )      (13,408 ) 

Asset-backed commercial paper conduits, net

      3,242        (323 )      887   

ED Conduit Program Facility, net

      (9,551 )      (12,187 )      (3,172 ) 

Other short-term borrowings issued

      —        23        239   

Other short-term borrowings repaid

      —        (307 )      (38 ) 

Other long-term borrowings issued

      5,154        4,713        2,354   

Other long-term borrowings repaid

      (4,201 )      (3,307 )      (6,498 ) 

Other financing activities, net

      (895 )      272        698   

Retail and other deposits, net

      1,149        1,124        753   

Common stock repurchased

      (600 )      (900 )      (300 ) 

Common stock dividends paid

      (264 )      (237 )      (154 ) 

Preferred stock dividends paid

      (20 )      (20 )      (18 ) 
  

 

 

    

 

 

    

 

 

  

Net cash used in financing activities

      (9,920 )      (13,375 )      (14,104 ) 
  

 

 

    

 

 

    

 

 

  

Net increase (decrease) in cash and cash equivalents

      1,290        1,106        (1,549 ) 

Cash and cash equivalents at beginning of year

      3,900        2,794        4,343   
  

 

 

    

 

 

    

 

 

  

Cash and cash equivalents at end of year

    $ 5,190      $ 3,900      $ 2,794   
  

 

 

    

 

 

    

 

 

  

Cash disbursements made (refunds received) for:

       

Interest

    $ 2,163      $ 2,527      $ 2,413   
  

 

 

    

 

 

    

 

 

  

Income taxes paid

    $ 636      $ 569      $ 559   
  

 

 

    

 

 

    

 

 

  

Income taxes received

    $ (20 )    $ (12 )    $ (37 ) 
  

 

 

    

 

 

    

 

 

  

Noncash activity:

       

Investing activity — Student loans and other assets acquired

    $ —      $ 402      $ 783   
  

 

 

    

 

 

    

 

 

  

Student loans and other assets removed related to sale of Residual Interest in securitization

    $ (11,802 )    $ —      $ —   
  

 

 

    

 

 

    

 

 

  

Financing activity — Borrowings assumed in acquisition of student loans and other assets

    $ —      $ 425      $ 802   
  

 

 

    

 

 

    

 

 

  

Borrowings removed related to sale of Residual Interest in securitization

    $ (12,084 )    $ —      $ —   
  

 

 

    

 

 

    

 

 

  

See accompanying notes to consolidated financial statements.

 

F-10

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Organization and Business

SLM Corporation (“we,” “us,” “our,” or the “Company”) is a holding company that operates through a number of subsidiaries. We were formed in 1972 as the Student Loan Marketing Association, a federally chartered government-sponsored enterprise (the “GSE”), with the goal of furthering access to higher education by acting as a secondary market for federal student loans. In 2004, we completed our transformation to a private company through our wind-down of the GSE. The GSE’s outstanding obligations were placed into a Master Defeasance Trust Agreement as of December 29, 2004, which was fully collateralized by direct, noncallable obligations of the United States.

Currently, our primary business is to originate, service and collect loans we make to students and their families to finance the cost of their education. Since July 2010, we have originated only Private Education Loans. We use “Private Education Loans” to mean education loans to students or their families that are non-federal loans and loans not insured or guaranteed under the previously existing Federal Family Education Loan Program (“FFELP”). 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. Since the beginning of 2006, virtually all of our Private Education Loans have been originated and funded by Sallie Mae Bank, a Utah industrial bank subsidiary, which is regulated by the Utah Department of Financial Institutions (“UDFI”) and the Federal Deposit Insurance Corporation (“FDIC”). We also provide servicing, loan default aversion and defaulted loan collection services for loans owned by other institutions, including the U.S. Department of Education (“ED”). We also operate Upromise, Inc. (“Upromise”), a consumer savings network that provides financial rewards on everyday purchases to help families save for college, and provide insurance products through Sallie Mae Insurance Services to protect their college investment through tuition, rental and life insurance services.

In addition, we are currently the largest holder, servicer and collector of loans made under the previously existing FFELP, and the majority of our income has been derived, directly or indirectly, from our portfolio of FFELP Loans and servicing we have provided for FFELP Loans. In 2010, Congress passed legislation ending the origination of education loans under FFELP. The terms and conditions of existing FFELP Loans were not affected by this legislation. Our FFELP Loan portfolio will amortize over approximately 20 years. The fee income we have earned from providing servicing and contingent collection services on such loans will similarly decline over time.

On May 29, 2013, we announced our intent to separate into two distinct publicly-traded entities — an education loan management business (“NewCo”) and a consumer banking business (“SLM BankCo”). It is our intent to effect the separation through the distribution of the common stock of NewCo, which was formed to hold the assets and liabilities associated with our education loan management business. In order to effect the separation, we will first undergo an internal corporate reorganization, which is necessary for the contemplated separation of NewCo from our consumer banking business. This internal corporate reorganization will be then followed by a pro rata share distribution of all of the shares of NewCo common stock to our stockholders that will implement the actual separation of NewCo. Throughout our Annual Report on Form 10-K, we sometimes collectively refer to the proposed internal corporate reorganization and separation as the “Spin-Off.”

 

2. Significant Accounting Policies

Use of Estimates

Our financial reporting and accounting policies conform to generally accepted accounting principles in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of

 

F-11

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Significant Accounting Policies (Continued)

 

revenues and expenses during the reporting period. Current market conditions increase the risk and complexity of the judgments in these estimates and actual results could differ from estimates. Key accounting policies that include significant judgments and estimates include the allowance for loan losses, the effective interest rate method (amortization of student loan and debt premiums and discounts), fair value measurements, goodwill and acquired intangible asset impairment assessments, and derivative accounting.

Consolidation

The consolidated financial statements include the accounts of SLM Corporation and its majority-owned and controlled subsidiaries and those Variable Interest Entities (“VIEs”) for which we are the primary beneficiary, after eliminating the effects of intercompany accounts and transactions.

We consolidate any VIEs where we have determined we are the primary beneficiary. The primary beneficiary is the entity which has both: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses or receive benefits of the entity that could potentially be significant to the VIE, except as described in the next paragraph. As it relates to our securitized assets as of December 31, 2013, we are the servicer of the securitized assets and own the Residual Interest of the securitization trusts. As a result, we are the primary beneficiary of our securitization trusts and consolidate those trusts.

In 2013, we 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. Prior to the sale of the Residual Interests, we had consolidated the trusts as VIEs because we had met the two criteria for consolidation. We had determined we were the primary beneficiary because (1) as servicer to the trust we had the power to direct the activities of the VIE that most significantly affected its economic performance and (2) as the residual holder of the trust, we had an obligation to absorb losses or receive benefits of the trust that could potentially be significant. Upon the sale of the Residual Interests we were no longer the residual holder, thus we determined we no longer met criterion (2) above and deconsolidated the trusts. As a result of these transactions, we removed securitization trust assets of $12.5 billion and the related liabilities of $12.1 billion from the balance sheet and recorded a $312 million gain as part of “gains on sales of loans and investments” in 2013.

Fair Value Measurement

We use estimates of fair value in applying various accounting standards for our financial statements. Fair value measurements are used in one of four ways:

 

  •  

In the consolidated balance sheet with changes in fair value recorded in the consolidated statement of income;

 

  •  

In the consolidated balance sheet with changes in fair value recorded in the accumulated other comprehensive income section of the consolidated statement of changes in stockholders’ equity;

 

  •  

In the consolidated balance sheet for instruments carried at lower of cost or fair value with impairment charges recorded in the consolidated statement of income; and

 

  •  

In the notes to the financial statements.

Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. In general, our policy in estimating fair value is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available,

 

F-12

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Significant Accounting Policies (Continued)

 

other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads (including for our liabilities), relying first on observable data from active markets. Depending on current market conditions, additional adjustments to fair value may be based on factors such as liquidity, credit, and bid/offer spreads. Transaction costs are not included in the determination of fair value. When possible, we seek to validate the model’s output to market transactions. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable.

We categorize our fair value estimates based on a hierarchical framework associated with three levels of price transparency utilized in measuring financial instruments at fair value. Classification is based on the lowest level of input that is significant to the fair value of the instrument. The three levels are as follows:

 

  •  

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date. The types of financial instruments included in level 1 are highly liquid instruments with quoted prices.

 

  •  

Level 2 — Inputs from active markets, other than quoted prices for identical instruments, are used to determine fair value. Significant inputs are directly observable from active markets for substantially the full term of the asset or liability being valued.

 

  •  

Level 3 — Pricing inputs significant to the valuation are unobservable. Inputs are developed based on the best information available. However, significant judgment is required by us in developing the inputs.

Loans

Loans, consisting primarily of federally insured student loans and Private Education Loans, that we have the ability and intent to hold for the foreseeable future are classified as held-for-investment and are carried at amortized cost. Amortized cost includes the unamortized premiums, discounts, and capitalized origination costs and fees, all of which are amortized to interest income as further discussed below. Loans which are held-for-investment also have an allowance for loan loss as needed. Any loans we have not classified as held-for-investment are classified as held-for-sale, and carried at the lower of cost or fair value. Loans are classified as held-for-sale when we have the intent and ability to sell such loans. Loans which are held-for-sale do not have the associated premium, discount, and capitalized origination costs and fees amortized into interest income. In addition, once a loan is classified as held-for-sale, there is no further adjustment to the loan’s allowance for loan losses that existed immediately prior to the reclassification to held-for-sale.

As market conditions permit, we may securitize loans as a source of financing for those loans. If we elect to use a securitization program to finance loans, loans are selected based on the required characteristics to structure the desired transaction at the most favorable financing terms (e.g., type of loan, mix of interim vs. repayment status, credit rating and maturity dates). Due to some of the structuring terms, certain transactions may qualify for sale treatment while others do not qualify for sale treatment and are recorded as financings. All of our student loans are initially categorized as held-for-investment until there is certainty as to each specific loan’s ultimate financing because we do not securitize all loans and currently all of our securitizations do not qualify for sale treatment. It is only when we have selected the loans to securitize and that securitization transaction qualifies as a sale do we transfer the loans into the held-for-sale classification and carry them at the lower of cost or fair value. If we anticipate recognizing a gain related to the impending securitization, then the fair value of the loans is higher than their respective cost basis and no valuation allowance is recorded.

 

F-13

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Significant Accounting Policies (Continued)

 

Student Loan Income

For loans classified as held-for-investment, we recognize student loan interest income as earned, adjusted for the amortization of premiums and capitalized direct origination costs, accretion of discounts, and Repayment Borrower Benefits. These adjustments result in income being recognized based upon the expected yield of the loan over its life after giving effect to prepayments and extensions, and to estimates related to Repayment Borrower Benefits. The estimate of the prepayment speed includes the effect of consolidations, voluntary prepayments and student loan defaults, all of which shorten the life-of-loan. Prepayment speed estimates also consider the utilization of deferment, forbearance and extended repayment plans which lengthen the life-of-loan. For Repayment Borrower Benefits, the estimates of their effect on student loan yield are based on analyses of historical payment behavior of customers who are eligible for the incentives and its effect on the ultimate qualification rate for these incentives. We regularly evaluate the assumptions used to estimate the prepayment speeds and the qualification rates used for Repayment Borrower Benefits. In instances where there are changes to the assumptions, amortization is adjusted on a cumulative basis to reflect the change since the acquisition of the loan. We also pay an annual 105 basis point Consolidation Loan Rebate Fee on FFELP Consolidation Loans which is netted against student loan interest income. Additionally, interest earned on student loans reflects potential non-payment adjustments in accordance with our uncollectible interest recognition policy as discussed further in “Allowance for Loan Losses” of this Note 2. We do not amortize any premiums, discounts or other adjustments to the basis of student loans when they are classified as held-for-sale.

Allowance for Loan Losses

We consider a loan to be impaired when, based on current information, a loss has been incurred and it is probable that we will not receive all contractual amounts due. When making our assessment as to whether a loan is impaired, we also take into account more than insignificant delays in payment. We generally evaluate impaired loans on an aggregate basis by grouping similar loans. Impaired loans also include those loans which are individually assessed and measured for impairment at a loan level, such as in a troubled debt restructuring (“TDR”). We maintain an allowance for loan losses at an amount sufficient to absorb losses incurred in our portfolios at the reporting date based on a projection of estimated probable credit losses incurred in the portfolio.

In determining the allowance for loan losses on our non-TDR portfolio, we estimate the principal amount of loans that will default over the next two years (two years being the expected period between a loss event and default) and how much we expect to recover over time related to the defaulted amount. Expected defaults less our expected recoveries equal the allowance related to this portfolio. Our historical experience indicates that, on average, the time between the date that a customer experiences a default causing event (i.e., the loss trigger event) and the date that we charge off the unrecoverable portion of that loan is two years. Separately, for our TDR portfolio, we estimate an allowance amount sufficient to cover life-of-loan expected losses through an impairment calculation based on the difference between the loan’s basis and the present value of expected future cash flows (which would include life-of-loan default and recovery assumptions) discounted at the loan’s original effective interest rate (see “Allowance for Private Education Loan Losses” to this Note 2). The separate allowance estimates for our TDR and non-TDR portfolios, are combined into our total Allowance for Private Education Loan losses.

In estimating both the non-TDR and TDR allowance amounts, we start with historical experience of customer default behavior. We make judgments about which historical period to start with and then make further judgments about whether that historical experience is representative of future expectations and whether additional adjustments may be needed to those historical default rates. We also take the economic environment into consideration when calculating the allowance for loan losses. We analyze key economic statistics and the effect we expect it to have on future defaults. Key economic statistics analyzed as part of the allowance for loan

 

F-14

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Significant Accounting Policies (Continued)

 

losses are unemployment rates and other asset type delinquency rates. More judgment has been required over the last several years, compared with years prior, in light of the recent downturn in the U.S. economy and high levels of unemployment and its effect on our customer’s ability to pay their obligations.

Our allowance for loan losses is estimated using an analysis of delinquent and current accounts. Our model is used to estimate the likelihood that a loan receivable may progress through the various delinquency stages and ultimately charge off. The evaluation of the allowance for loan losses is inherently subjective, as it requires material estimates that may be susceptible to significant changes. The estimate for the allowance for loan losses is subject to a number of assumptions. If actual future performance in delinquency, charge-offs and recoveries are significantly different than estimated, this could materially affect our estimate of the allowance for loan losses and the related provision for loan losses on our income statement.

Below we describe in further detail our policies and procedures for the allowance for loan losses as they relate to our Private Education Loan and FFELP Loan portfolios.

Allowance for Private Education Loan Losses

We determine the collectability of our Private Education Loan portfolio by evaluating certain risk characteristics. We consider school type, credit score (FICO), existence of a cosigner, loan status and loan seasoning as the key credit quality indicators because they have the most significant effect on our determination of the adequacy of our allowance for loan losses. The type of school customers attend can have an impact on their job prospects after graduation and therefore affects their ability to make payments. Credit scores are an indicator of the creditworthiness of a customer and generally the higher the credit score the more likely it is the customer will be able to make all of their contractual payments. Loan status affects the credit risk because generally a past due loan is more likely to result in a credit loss than an up-to-date loan. Additionally, loans in a deferred payment status have different credit risk profiles compared with those in current pay status. Loan seasoning affects credit risk because a loan with a history of making payments generally has a lower incidence of default than a loan with a history of making infrequent or no payments. The existence of a cosigner lowers the likelihood of default. We monitor and update these credit quality indicators in the analysis of the adequacy of our allowance for loan losses on a quarterly basis.

To estimate the probable credit losses incurred in the loan portfolio at the reporting date, we use historical experience of customer payment behavior in connection with the key credit quality indicators and incorporate management expectation regarding macroeconomic and collection procedure factors. Our model is based upon the most recent 12 months of actual collection experience, seasonally adjusted, as the starting point and applies expected macroeconomic changes and collection procedure changes to estimate expected losses caused by loss events incurred as of the balance sheet date. Our model places a greater emphasis on the more recent default experience rather than the default experience for older historical periods, as we believe the recent default experience is more indicative of the probable losses incurred in the loan portfolio today. Similar to estimating defaults, we use historical customer payment behavior to estimate the timing and amount of future recoveries on charged-off loans. We use judgment in determining whether historical performance is representative of what we expect to collect in the future. We then apply the default and collection rate projections to each category of loans. Once the quantitative calculation is performed, we review the adequacy of the allowance for loan losses and determine if qualitative adjustments need to be considered. Additionally, we consider changes in laws and regulations that could potentially impact the allowance for loan losses. More judgment has been required over the last several years, compared with years prior, in light of the U.S. economy and its effect on our customer’s ability to pay their obligations. We believe that our model reflects recent customer behavior, loan performance, and collection performance, as well as expectations about economic factors.

 

F-15

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Significant Accounting Policies (Continued)

 

Similar to the rules governing FFELP payment requirements, our collection policies allow for periods of nonpayment for customers requesting additional payment grace periods upon leaving school or experiencing temporary difficulty meeting payment obligations. This is referred to as forbearance status and is considered separately in our allowance for loan losses. The loss confirmation period is in alignment with our typical collection cycle and takes into account these periods of nonpayment.

On July 1, 2011, we adopted new guidance that clarified when a loan restructuring constitutes a TDR. In applying the new guidance we determined that certain Private Education Loans for which we grant forbearance of greater than three months should be classified as TDRs. If a loan meets the criteria for troubled debt accounting then an allowance for loan losses is established which represents the present value of the losses that are expected to occur over the remaining life of the loan. This accounting results in a higher allowance for loan losses than our previously established allowance for these loans as our previous allowance for these loans represented an estimate of charge-offs expected to occur over the next two years (two years being our loss confirmation period). The new accounting guidance was effective as of July 1, 2011 but was required to be applied retrospectively to January 1, 2011. This resulted in $124 million of additional provision for loan losses in the third quarter of 2011 from approximately $3.8 billion of student loans being classified as TDRs. This new accounting guidance is only applied to certain customers who use their fourth or greater month of forbearance since the time period this new guidance is effective. This new accounting guidance has the effect of accelerating the recognition of expected losses related to our Private Education Loan portfolio. The increase in the provision for losses as a result of this new accounting guidance does not reflect a decrease in credit expectations of the portfolio or an increase in the expected life-of-loan losses related to this portfolio. We believe forbearance is an accepted and effective collection and risk management tool for Private Education Loans. We plan to continue to use forbearance and as a result, we expect to have additional loans classified as TDRs in the future (see “Note 4 — Allowance for Loan Losses” for a further discussion on the use of forbearance as a collection tool).

As part of concluding on the adequacy of the allowance for loan losses, we review key allowance and loan metrics. The most relevant of these metrics considered are the allowance coverage of charge-offs ratio; the allowance as a percentage of total loans and of loans in repayment; and delinquency and forbearance percentages.

Certain Private Education Loans do not require customers to begin repayment until six months after they have graduated or otherwise left school. Consequently, our loss estimates for these programs are generally low while the customer is in school. At December 31, 2013, 17 percent of the principal balance in the higher education Private Education Loan portfolio was related to customers who are in an in-school/grace/deferment status and not required to make payments. As this population of customers leaves school, they will be required to begin payments on their loans, and the allowance for loan losses may change accordingly.

We consider a loan to be delinquent 31 days after the last payment was contractually due. We use a model to estimate the amount of uncollectible accrued interest on Private Education Loans and reserve for that amount against current period interest income.

In general, Private Education Loan principal is charged off against the allowance when at the end of the month the loan exceeds 212 days past due. The charged-off amount equals the estimated loss of the defaulted loan balance. Actual recoveries, as they are received, are applied against the remaining loan balance that was not charged off. If periodic recoveries are less than originally expected, the difference results in immediate additional provision expense and charge-off of such amount.

Our allowance for Private Education Loan losses also provides for possible additional future charge-offs related to the receivable for partially charged-off Private Education Loans. At the end of each month, for loans that are 212 days past due, we charge off the estimated loss of a defaulted loan balance. Actual recoveries are

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Significant Accounting Policies (Continued)

 

applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as the “receivable for partially charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately charged off through the allowance for loan losses with an offsetting reduction in the receivable for partially charged-off Private Education Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. Private Education Loans which defaulted between 2008 and 2013 for which we have previously charged off estimated losses have, to varying degrees, not met our post-default recovery expectations to date and may continue not to do so. According to our policy, we have been charging off these periodic shortfalls in expected recoveries against our allowance for Private Education Loan losses and the related receivable for partially charged-off Private Education Loans and we will continue to do so.

Allowance for FFELP Loan Losses

FFELP Loans are insured as to their principal and accrued interest in the event of default subject to a Risk Sharing level based on the date of loan disbursement. These insurance obligations are supported by contractual rights against the United States. For loans disbursed after October 1, 1993, and before July 1, 2006, we receive 98 percent reimbursement on all qualifying default claims. For loans disbursed on or after July 1, 2006, we receive 97 percent reimbursement. For loans disbursed prior to October 1, 1993, we receive 100 percent reimbursement.

Similar to the allowance for Private Education Loan losses, the allowance for FFELP Loan losses uses historical experience of customer default behavior and a two-year loss confirmation period to estimate the credit losses incurred in the loan portfolio at the reporting date. We apply the default rate projections, net of applicable Risk Sharing, to each category for the current period to perform our quantitative calculation. Once the quantitative calculation is performed, we review the adequacy of the allowance for loan losses and determine if qualitative adjustments need to be considered.

Cash and Cash Equivalents

Cash and cash equivalents includes term federal funds, Eurodollar deposits, commercial paper, asset-backed commercial paper, treasuries, money market funds and bank deposits with original terms to maturity of less than three months.

Restricted Cash and Investments

Restricted cash primarily includes amounts held in student loan securitization trusts and other secured borrowings. This cash must be used to make payments related to trust obligations. Amounts on deposit in these accounts are primarily the result of timing differences between when principal and interest is collected on the trust assets and when principal and interest is paid on trust liabilities.

Securities pledged as collateral related to our derivative portfolio, where the counterparty has rights to replace the securities, are classified as restricted. When the counterparty does not have these rights, the security is recorded in investments and disclosed as pledged collateral in the notes. Additionally, certain counterparties require cash collateral pledged to us to be segregated and held in restricted cash accounts.

Investments

Our available-for-sale investment portfolio consists of investments that are AAA equivalent securities and are carried at fair value, with the temporary changes in fair value carried as a separate component of stockholders’

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Significant Accounting Policies (Continued)

 

equity, net of taxes. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts, which are amortized using the effective interest rate method. Other-than-temporary impairment is evaluated by considering several factors, including the length of time and extent to which the fair value has been less than the amortized cost basis, the financial condition and near-term prospects of the security (considering factors such as adverse conditions specific to the security and ratings agency actions), and the intent and ability to retain the investment to allow for an anticipated recovery in fair value. The entire fair value loss on a security that is other-than-temporary impairment is recorded in earnings if we intend to sell the security or if it is more likely than not that we will be required to sell the security before the expected recovery of the loss. However, if the impairment is other-than-temporary, and those two conditions do not exist, the portion of the impairment related to credit losses is recorded in earnings and the impairment related to other factors is recorded in other comprehensive income. Securities classified as trading are accounted for at fair value with unrealized gains and losses included in investment income. Securities that we have the intent and ability to hold to maturity are classified as held-to-maturity and are accounted for at amortized cost unless the security is determined to have an other-than-temporary impairment. In this case it is accounted for in the same manner described above.

We also have other investments, including a receivable for cash collateral posted to derivative counterparties. These investments are accounted for at amortized cost in other investments.

Interest Expense

Interest expense is based upon contractual interest rates adjusted for the amortization of debt issuance costs and premiums and the accretion of discounts. Our interest expense may also be adjusted for net payments/receipts related to interest rate and foreign currency swap agreements and interest rate futures contracts that qualify and are designated as hedges. Interest expense also includes the amortization of deferred gains and losses on closed hedge transactions that qualified as hedges. Amortization of debt issuance costs, premiums, discounts and terminated hedge-basis adjustments are recognized using the effective interest rate method.

Transfer of Financial Assets and Extinguishments of Liabilities

We account for loan sales and debt repurchases in accordance with the applicable accounting guidance. Our securitizations and other asset-backed secured financings are accounted for as on-balance sheet secured borrowings. See “Securitization Accounting” of this Note 2 for further discussion on the criteria assessed to determine whether a transfer of financial assets is a sale or a secured borrowing. If a transfer of loans qualifies as a sale we derecognize the loan and recognize a gain or loss as the difference between the carrying basis of the loan sold and liabilities retained and the compensation received.

We periodically repurchase our outstanding debt in the open market or through public tender offers. We record a gain or loss on the early extinguishment of debt based upon the difference between the carrying cost of the debt and the amount paid to the third party and is net of hedging gains and losses when the debt is in a qualifying hedge relationship.

We recognize the results of a transfer of loans and the extinguishment of debt based upon the settlement date of the transaction.

Securitization Accounting

Our securitizations use a two-step structure with a special purpose entity that legally isolates the transferred assets from us, even in the event of bankruptcy. Transactions receiving sale treatment are also structured to ensure that the holders of the beneficial interests issued are not constrained from pledging or exchanging their

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Significant Accounting Policies (Continued)

 

interests, and that we do not maintain effective control over the transferred assets. If these criteria are not met, then the transaction is accounted for as an on-balance sheet secured borrowing. In all cases, irrespective of whether they qualify as accounting sales our securitizations are legally structured to be sales of assets that isolate the transferred assets from us. If a securitization qualifies as a sale, we then assess whether we are the primary beneficiary of the securitization trust and are required to consolidate such trust. If we are the primary beneficiary then no gain or loss is recognized. See “Consolidation” of this Note 2 for additional information regarding the accounting rules for consolidation when we are the primary beneficiary of these trusts.

Irrespective of whether a securitization receives sale or on-balance sheet treatment, our continuing involvement with our securitization trusts is generally limited to:

 

  •  

Owning the equity certificates of certain trusts.

 

  •  

The servicing of the student loan assets within the securitization trusts, on both a pre- and post-default basis.

 

  •  

Our acting as administrator for the securitization transactions we sponsored, which includes remarketing certain bonds at future dates.

 

  •  

Our responsibilities relative to representation and warranty violations.

 

  •  

Temporarily advancing to the trust certain borrower benefits afforded the borrowers of student loans that have been securitized. These advances subsequently are returned to us in the next quarter.

 

  •  

Certain back-to-back derivatives entered into by us contemporaneously with the execution of derivatives by certain Private Education Loan securitization trusts.

 

  •  

The option held by us to buy certain delinquent loans from certain Private Education Loan securitization trusts.

 

  •  

The option to exercise the clean-up call and purchase the student loans from the trust when the asset balance is 10 percent or less of the original loan balance.

 

  •  

The option (in certain trusts) to call rate reset notes in instances where the remarketing process has failed.

The investors of the securitization trusts have no recourse to our other assets should there be a failure of the trusts to pay when due. Generally, the only arrangements under which we have to provide financial support to the trusts are representation and warranty violations requiring the buyback of loans.

Under the terms of the transaction documents of certain trusts, we have, from time to time, exercised our options to purchase delinquent loans from Private Education Loan trusts, to purchase the remaining loans from trusts once the loan balance falls below 10 percent of the original amount, or to call rate reset notes. Certain trusts maintain financial arrangements with third parties also typical of securitization transactions, such as derivative contracts (swaps) and bond insurance policies that, in the case of a counterparty failure, could adversely impact the value of any Residual Interest.

We do not record servicing assets or servicing liabilities when our securitization trusts are accounted for as on-balance sheet secured financings. As of December 31, 2013 and 2012, all of our securitization trusts are on-balance sheet, except as discussed in the next sentence, and as a result we do not have servicing assets or liabilities recorded on the consolidated balance sheet related to these securitization trusts. As of December 31, 2013, we have $58 million of servicing assets on our balance sheet related to Residual Interests in FFELP Loan securitization trusts we sold in 2013. See “Note 3 — Student Loans” for further details.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Significant Accounting Policies (Continued)

 

Derivative Accounting

The accounting guidance for our derivative instruments, which includes interest rate swaps, cross-currency interest rate swaps, interest rate futures contracts, interest rate cap contracts and Floor Income Contracts, requires that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded at fair value on the balance sheet as either an asset or liability. Derivative positions are recorded as net positions by counterparty based on master netting arrangements (see “Note 7 — Derivative Financial Instruments — Risk Management Strategy”) exclusive of accrued interest and cash collateral held or pledged.

Many of our derivatives, mainly interest rate swaps hedging the fair value of fixed-rate assets and liabilities, and cross-currency interest rate swaps, qualify as effective hedges. For these derivatives, the relationship between the hedging instrument and the hedged items (including the hedged risk and method for assessing effectiveness), as well as the risk management objective and strategy for undertaking various hedge transactions at the inception of the hedging relationship, is documented. Each derivative is designated to either a specific (or pool of) asset(s) or liability(ies) on the balance sheet or expected future cash flows, and designated as either a “fair value” or a “cash flow” hedge. Fair value hedges are designed to hedge our exposure to changes in fair value of a fixed rate or foreign denominated asset or liability, while cash flow hedges are designed to hedge our exposure to variability of either a floating rate asset’s or liability’s cash flows or an expected fixed rate debt issuance. For effective fair value hedges, both the derivative and the hedged item (for the risk being hedged) are marked-to-market with any difference reflecting ineffectiveness and recorded immediately in the statement of income. For effective cash flow hedges, the change in the fair value of the derivative is recorded in other comprehensive income, net of tax, and recognized in earnings in the same period as the earnings effects of the hedged item. The ineffective portion of a cash flow hedge is recorded immediately through earnings. The assessment of the hedge’s effectiveness is performed at inception and on an ongoing basis, generally using regression testing. For hedges of a pool of assets or liabilities, tests are performed to demonstrate the similarity of individual instruments of the pool. When it is determined that a derivative is not currently an effective hedge, ineffectiveness is recognized for the full change in value of the derivative with no offsetting mark-to-market of the hedged item for the current period. If it is also determined the hedge will not be effective in the future, we discontinue the hedge accounting prospectively, cease recording changes in the fair value of the hedged item, and begin amortization of any basis adjustments that exist related to the hedged item.

We also have derivatives, primarily Floor Income Contracts and certain basis swaps, that we believe are effective economic hedges but do not qualify for hedge accounting treatment. These derivatives are classified as “trading” and as a result they are marked-to-market through earnings with no consideration for the fair value fluctuation of the economically hedged item.

The “gains (losses) on derivative and hedging activities, net” line item in the consolidated statements of income includes the unrealized changes in the fair value of our derivatives (except effective cash flow hedges which are recorded in other comprehensive income), the unrealized changes in fair value of hedged items in qualifying fair value hedges, as well as the realized changes in fair value related to derivative net settlements and dispositions that do not qualify for hedge accounting. Net settlement income/expense on derivatives that qualify as hedges are included with the income or expense of the hedged item (mainly interest expense).

Servicing Revenue

Servicing revenue includes third-party loan servicing and Guarantor servicing revenue.

We perform loan servicing functions for third-parties in return for a servicing fee. Our compensation is typically based on a per-unit fee arrangement or a percentage of the loans outstanding. We recognize servicing revenues associated with these activities based upon the contractual arrangements as the services are rendered.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Significant Accounting Policies (Continued)

 

We recognize late fees on third-party serviced loans as well as on loans in our portfolio according to the contractual provisions of the promissory notes, as well as our expectation of collectability.

We provide a full complement of administrative services to FFELP Guarantors including account maintenance for Guarantor agencies. The fees associated with these services are recognized as the services are performed based on contractually determined rates.

Contingency Revenue

We receive fees for collections of delinquent debt on behalf of clients performed on a contingency basis. Revenue is earned and recognized upon receipt of the delinquent customer funds.

We also receive fees from Guarantor agencies for performing default aversion services on delinquent loans prior to default. The fee is received when the loan is initially placed with us and we are obligated to provide such services for the remaining life of the loan for no additional fee. In the event that the loan defaults, we are obligated to rebate a portion of the fee to the Guarantor agency in proportion to the principal and interest outstanding when the loan defaults. We recognize fees received, net of an estimate of future rebates owed due to subsequent defaults, over the service period which is estimated to be the life of the loan.

Other Income

Our Upromise subsidiary has a number of programs that encourage consumers to save for the cost of college education. We have established a consumer savings network which is designed to promote college savings by consumers who are members of this program who generate rewards when they purchase goods and services from the companies that participate in the program (“Participating Companies”). Participating Companies generally pay Upromise fees based on member purchase volume, either online or in stores depending on the contractual arrangement with the Participating Company. We recognize revenue as marketing and administrative services are rendered based upon contractually determined rates and member purchase volumes.

Goodwill and Acquired Intangible Assets

We account for goodwill and acquired intangible assets in accordance with the applicable accounting guidance. Under this guidance goodwill is not amortized but is tested periodically for impairment. We test goodwill for impairment annually as of October 1 at the reporting unit level, which is the same as or one level below a business segment. Goodwill is also tested at interim periods if an event occurs or circumstances change that would indicate the carrying amount may be impaired.

We assess qualitative factors to determine whether it is “more-likely-than-not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The “more-likely-than-not” threshold is defined as having a likelihood of more than 50 percent. If, after assessing relevant qualitative factors, we conclude that it is “more-likely-than-not” that the fair value of a reporting unit as of October 1 is less than its carrying amount, we will complete Step 1 of the goodwill impairment analysis. Step 1 consists of a comparison of the fair value of the reporting unit to the reporting unit’s carrying value, including goodwill. If the carrying value of the reporting unit exceeds the fair value, Step 2 in the goodwill impairment analysis is performed to measure the amount of impairment loss, if any. Step 2 of the goodwill impairment analysis compares the implied fair value of the reporting unit’s goodwill to the carrying value of the reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner consistent with determining goodwill in a business combination. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to that excess.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Significant Accounting Policies (Continued)

 

Other acquired intangible assets include but are not limited to tradenames, customer and other relationships, and non-compete agreements. Acquired intangible assets with finite lives are amortized over their estimated useful lives in proportion to their estimated economic benefit. Finite-lived acquired intangible assets are reviewed for impairment using an undiscounted cash flow analysis when an event occurs or circumstances change indicating the carrying amount of a finite-lived asset or asset group may not be recoverable. If the carrying amount of the asset or asset groups exceeds the undiscounted cash flows, the fair value of the asset or asset group is determined using an acceptable valuation technique. An impairment loss would be recognized if the carrying amount of the asset (or asset group) exceeds the fair value of the asset or asset group. The impairment loss recognized would be the difference between the carrying amount and fair value. Indefinite-life acquired intangible assets are not amortized. We test these indefinite life acquired intangible assets for impairment annually as of October 1 or at interim periods if an event occurs or circumstances change that would indicate the carrying value of these assets may be impaired. The annual or interim impairment test of indefinite-lived acquired intangible assets is based primarily on a discounted cash flow analysis.

Restructuring and Other Reorganization Expenses

From time to time we implement plans to restructure our business. In conjunction with these restructuring plans, involuntary benefit arrangements, disposal costs (including contract termination costs and other exit costs), as well as certain other costs that are incremental and incurred as a direct result of our restructuring plans, are classified as restructuring expenses in the accompanying consolidated statements of income.

We sponsor the SLM Corporation Employee Severance Plan (the “Severance Plan”) which provides severance benefits in the event of termination of our full-time employees (with the exception of certain specified levels of management) and part-time employees who work at least 24 hours per week. The Severance Plan establishes specified benefits based on base salary, job level immediately preceding termination and years of service upon termination of employment due to Involuntary Termination or a Job Abolishment, as defined in the Severance Plan. The benefits payable under the Severance Plan relate to past service and they accumulate and vest. Accordingly, we recognize severance costs to be paid pursuant to the Severance Plan when payment of such benefits is probable and reasonably estimable. Such benefits, including severance pay calculated based on the Severance Plan, medical and dental benefits, outplacement services and continuation pay, have been incurred during 2013, 2012 and 2011, as a direct result of our restructuring initiatives. Accordingly, such costs are classified as restructuring expenses in the accompanying consolidated statements of income.

Contract termination costs are expensed at the earlier of (1) the contract termination date or (2) the cease use date under the contract. Other exit costs are expensed as incurred and classified as restructuring expenses if (1) the cost is incremental to and incurred as a direct result of planned restructuring activities and (2) the cost is not associated with or incurred to generate revenues subsequent to our consummation of the related restructuring activities.

Other reorganization expenses include third-party costs and severance incurred in connection with our previously announced plan to separate our existing organization into two distinct publicly-traded entities.

Accounting for Stock-Based Compensation

We recognize stock-based compensation cost in our consolidated statements of income using the fair value based method. Under this method we determine the fair value of the stock-based compensation at the time of the grant and recognize the resulting compensation expense over the vesting period of the stock-based grant.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Significant Accounting Policies (Continued)

 

Income Taxes

We account for income taxes under the asset and liability approach which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of our assets and liabilities. To the extent tax laws change, deferred tax assets and liabilities are adjusted in the period that the tax change is enacted.

“Income tax expense/(benefit)” includes (i) deferred tax expense/(benefit), which represents the net change in the deferred tax asset or liability balance during the year plus any change in a valuation allowance, and (ii) current tax expense/(benefit), which represents the amount of tax currently payable to or receivable from a tax authority plus amounts accrued for unrecognized tax benefits. Income tax expense/(benefit) excludes the tax effects related to adjustments recorded in equity.

If we have an uncertain tax position, then that tax position is recognized only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The amount of tax benefit recognized in the financial statements is the largest amount of benefit that is more than fifty percent likely of being sustained upon ultimate settlement of the uncertain tax position. We recognize interest related to unrecognized tax benefits in income tax expense/(benefit), and penalties, if any, in operating expenses.

Earnings (Loss) per Common Share

We compute earnings (loss) per common share (“EPS”) by dividing net income allocated to common shareholders by the weighted average common shares outstanding. Net income allocated to common shareholders represents net income applicable to common shareholders (net income adjusted for preferred stock dividends including dividends declared, accretion of discounts on preferred stock including accelerated accretion when preferred stock is repaid early, and cumulative dividends related to the current dividend period that have not been declared as of period end). Diluted earnings per common share is computed by dividing income allocated to common shareholders by the weighted average common shares outstanding plus amounts representing the dilutive effect of stock options outstanding, restricted stock, restricted stock units, and the outstanding commitment to issue shares under the Employee Stock Purchase Plan. See “Note 10 — Earnings (Loss) per Common Share” for further discussion.

Discontinued Operations

A “Component” of a business comprises operations and cash flows that can be clearly distinguished operationally and for financial reporting purposes from the rest of the Company. When we determine that a Component of our business has been disposed of or has met the criteria to be classified as held-for-sale such Component is presented separately as discontinued operations if the operations of the Component have been or will be eliminated from our ongoing operations and we will have no continuing involvement with the Component after the disposal transaction is complete. If a Component is classified as held-for-sale, then it is carried at the lower of its cost basis or fair value. Included within discontinued operations are the accounting results related to our Campus Solutions and 529 college-savings plan administration business, which have been sold as of December 31, 2013. See “Note 16 — Discontinued Operations” for further discussion.

Statement of Cash Flows

Included in our financial statements is the consolidated statement of cash flows. It is our policy to include all derivative net settlements, irrespective of whether the derivative is a qualifying hedge, in the same section of the statement of cash flows that the derivative is economically hedging.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Significant Accounting Policies (Continued)

 

As discussed in “Restricted Cash and Investments” of this Note 2, our restricted cash balances primarily relate to on-balance sheet securitizations. This balance is primarily the result of timing differences between when principal and interest is collected on the trust assets and when principal and interest is paid on the trust liabilities. As such, changes in this balance are reflected in investing activities.

Reclassifications

Certain reclassifications have been made to the balances as of and for the years ended December 31, 2012 and 2011, to be consistent with classifications adopted for 2013, which had no effect on net income, total assets or total liabilities.

 

3. Student Loans

Student loans consist of FFELP and Private Education Loans.

There are three principal categories of FFELP Loans: Stafford, PLUS, and FFELP Consolidation Loans. Generally, Stafford and PLUS Loans have repayment periods of between five and ten years. FFELP Consolidation Loans have repayment periods of twelve to thirty years. FFELP Loans do not require repayment, or have modified repayment plans, while the customer is in-school and during the grace period immediately upon leaving school. The customer may also be granted a deferment or forbearance for a period of time based on need, during which time the customer is not considered to be in repayment. Interest continues to accrue on loans in the in-school, deferment and forbearance period. FFELP Loans obligate the customer to pay interest at a stated fixed rate or a variable rate reset annually (subject to a cap) on July 1 of each year depending on when the loan was originated and the loan type. FFELP Loans disbursed before April 1, 2006 earn interest at the greater of the borrower’s rate or a floating rate based on the SAP formula, with the interest earned on the floating rate that exceeds the interest earned from the customer being paid directly by ED. In low or certain declining interest rate environments when student loans are earning at the fixed borrower rate, and the interest on the funding for the loans is variable and declining, we can earn additional spread income that we refer to as Floor Income. For loans disbursed after April 1, 2006, FFELP Loans effectively only earn at the SAP rate, as the excess interest earned when the borrower rate exceeds the SAP rate (Floor Income) is required to be rebated to ED.

FFELP Loans are insured as to their principal and accrued interest in the event of default subject to a Risk Sharing level based on the date of loan disbursement. These insurance obligations are supported by contractual rights against the United States. For loans disbursed after October 1, 1993 and before July 1, 2006, we receive 98 percent reimbursement on all qualifying default claims. For loans disbursed on or after July 1, 2006, we receive 97 percent reimbursement.

On December 23, 2011, the President signed the Consolidated Appropriations Act of 2012 into law. This law includes changes that permit FFELP lenders or beneficial holders to change the index on which the Special Allowance Payments (“SAP”) are calculated for FFELP Loans first disbursed on or after January 1, 2000. The law allows holders to elect to move the index from the Commercial Paper (“CP”) Rate to the one-month LIBOR rate. We elected to use the one-month LIBOR rate rather than the CP rate commencing on April 1, 2012 in connection with our entire $128 billion of CP indexed loans. This change will help us to better match loan yields with our financing costs. This election did not materially affect our results for 2012.

Our Private Education Loans are made largely to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans or customers’ resources. Private Education Loans bear the full credit risk of the customer. We manage this additional risk through historical risk-performance underwriting strategies and the addition of qualified cosigners. Private Education Loans generally carry a variable rate indexed to LIBOR or Prime indices. We encourage customers to include a cosigner on the loan, and the majority of loans in our portfolio are cosigned. We also encourage customers to make payments while in school.

 

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Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. Student Loans (Continued)

 

Similar to FFELP loans, Private Education Loans are generally non-dischargeable in bankruptcy. Most loans have repayment terms of 15 years or more, and for loans made prior to 2009, payments are typically deferred until after graduation; however, since 2009 we began to encourage interest-only or fixed payment options while the customer is enrolled in school and today, the majority of new loans make payments while in school.

The estimated weighted average life of student loans in our portfolio was approximately 7.5 years and 8.0 years at December 31, 2013 and 2012, respectively. The following table reflects the distribution of our student loan portfolio by program.

 

     December 31,
2013		     Year Ended
December 31, 2013		  

(Dollars in millions)

    Ending
Balance		      % of
Balance		     Average
Balance		      Average
Effective
Interest
Rate		  

FFELP Stafford and Other Student Loans, net(1)

    $ 40,021         28 %    $ 42,039         2.01 % 

FFELP Consolidation Loans, net

      64,567         46        70,113         2.82   

Private Education Loans, net

      37,512         26        38,292         6.60   
  

 

 

     

 

 

    

 

 

     

 

 

  

Total student loans, net

    $ 142,100         100 %    $ 150,444         3.56 % 
  

 

 

     

 

 

    

 

 

     

 

 

  

 

     December 31,
2012		     Year Ended
December 31, 2012		  

(Dollars in millions)

    Ending
Balance		      % of
Balance		     Average
Balance		      Average
Effective
Interest
Rate		  

FFELP Stafford and Other Student Loans, net(1)

    $ 44,289         27 %    $ 47,629         1.98 % 

FFELP Consolidation Loans, net

      81,323         50        84,495         2.73   

Private Education Loans, net

      36,934         23        37,691         6.58   
  

 

 

     

 

 

    

 

 

     

 

 

  

Total student loans, net

    $ 162,546         100 %    $ 169,815         3.38 % 
  

 

 

     

 

 

    

 

 

     

 

 

  

 

(1) 

The FFELP category is primarily Stafford Loans, but also includes federally guaranteed PLUS and HEAL Loans.

As of December 31, 2013 and 2012, 76 percent and 75 percent, respectively, of our student loan portfolio was in repayment.

Loan Sales

In 2013, we 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. As a result of these transactions, we removed securitization trust assets of $12.5 billion and the related liabilities of $12.1 billion from the balance sheet and recorded a $312 million gain as part of “gains on sales of loans and investments” in 2013.

Certain Collection Tools — Private Education Loans

Forbearance involves granting the customer a temporary cessation of payments (or temporary acceptance of smaller than scheduled payments) for a specified period of time. Using forbearance extends the original term of

 

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Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. Student Loans (Continued)

 

the loan. Forbearance does not grant any reduction in the total repayment obligation (principal or interest). While in forbearance status, interest continues to accrue and is capitalized to principal when the loan re-enters repayment status. Our forbearance policies include limits on the number of forbearance months granted consecutively and the total number of forbearance months granted over the life of the loan. In some instances, we require good-faith payments before granting forbearance. Exceptions to forbearance policies are permitted when such exceptions are judged to increase the likelihood of collection of the loan. Forbearance as a collection tool is used most effectively when applied based on a customer’s unique situation, including historical information and judgments. We leverage updated customer information and other decision support tools to best determine who will be granted forbearance based on our expectations as to a customer’s ability and willingness to repay their obligation. This strategy is aimed at mitigating the overall risk of the portfolio as well as encouraging cash resolution of delinquent loans.

Forbearance may be granted to customers who are exiting their grace period to provide additional time to obtain employment and income to support their obligations, or to current customers who are faced with a hardship and request forbearance time to provide temporary payment relief. In these circumstances, a customer’s loan is placed into a forbearance status in limited monthly increments and is reflected in the forbearance status at month-end during this time. At the end of the granted forbearance period, the customer will enter repayment status as current and is expected to begin making scheduled monthly payments on a go-forward basis.

Forbearance may also be granted to customers who are delinquent in their payments. In these circumstances, the forbearance cures the delinquency and the customer is returned to a current repayment status. In more limited instances, delinquent customers will also be granted additional forbearance time.

During 2009, we instituted an interest rate reduction program to assist customers in repaying their Private Education Loans through reduced payments, while continuing to reduce their outstanding principal balance. This program is offered in situations where the potential for principal recovery, through a modification of the monthly payment amount, is better than other alternatives currently available. Along with demonstrating the ability and willingness to pay, the customer must make three consecutive monthly payments at the reduced rate to qualify for the program. Once the customer has made the initial three payments, the loan’s status is returned to current and the interest rate is reduced for the successive twelve month period.

 

4. Allowance for Loan Losses

Our provisions for loan losses represent the periodic expense of maintaining an allowance sufficient to absorb incurred probable losses, net of expected recoveries, in the held-for-investment loan portfolios. The evaluation of the provisions for loan losses is inherently subjective as it requires material estimates that may be susceptible to significant changes. We believe that the allowance for loan losses is appropriate to cover probable losses incurred in the loan portfolios. We segregate our Private Education Loan portfolio into two classes of loans — traditional and non-traditional. Non-traditional loans are loans to (i) customers attending for-profit schools with an original Fair Isaac and Company (“FICO”) score of less than 670 and (ii) customers attending not-for-profit schools with an original FICO score of less than 640. The FICO score used in determining whether a loan is non-traditional is the greater of the customer or cosigner FICO score at origination. Traditional loans are defined as all other Private Education Loans that are not classified as non-traditional.

 

F-26

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. Allowance for Loan Losses (Continued)

 

Allowance for Loan Losses Metrics

 

     Allowance for Loan Losses  
     Year Ended December 31, 2013  

(Dollars in millions)

    FFELP Loans     Private Education
Loans		     Other
Loans		     Total  

Allowance for Loan Losses

         

Beginning balance

    $ 159      $ 2,171      $ 47      $ 2,377   

Total provision

      52        787        —        839   

Charge-offs(1)

      (78 )      (878 )      (19 )      (975 ) 

Student loan sales

      (14 )      —        —        (14 ) 

Reclassification of interest reserve(2)

      —        17        —        17   
  

 

 

    

 

 

    

 

 

    

 

 

  

Ending Balance

    $ 119      $ 2,097      $ 28      $ 2,244   
  

 

 

    

 

 

    

 

 

    

 

 

  

Allowance:

         

Ending balance: individually evaluated for impairment

    $ —      $ 1,048      $ 20      $ 1,068   

Ending balance: collectively evaluated for impairment

    $ 119      $ 1,049      $ 8      $ 1,176   

Loans:

         

Ending balance: individually evaluated for impairment

    $ —      $ 9,262      $ 45      $ 9,307   

Ending balance: collectively evaluated for impairment

    $ 103,672      $ 31,051      $ 85      $ 134,808   

Charge-offs as a percentage of average loans in repayment

      .10 %      2.78 %      12.28 %   

Charge-offs as a percentage of average loans in repayment and forbearance

      .08 %      2.69 %      12.28 %   

Allowance as a percentage of the ending total loan balance

      .12 %      5.20 %      21.42 %   

Allowance as a percentage of the ending loans in repayment

      .16 %      6.68 %      21.42 %   

Allowance coverage of charge-offs

      1.5        2.4        1.5     

Ending total loans(3)

    $ 103,672      $ 40,313      $ 130     

Average loans in repayment

    $ 80,822      $ 31,556      $ 156     

Ending loans in repayment

    $ 76,504      $ 31,370      $ 130     

 

  (1) 

Charge-offs are reported net of expected recoveries. For Private Education Loans, the expected recovery amount is transferred to the receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the difference between what was expected to be collected and any shortfalls in what was actually collected in the period. See “Receivable for Partially Charged-Off Private Education Loans” for further discussion.

 

  (2) 

Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

 

  (3) 

Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.

 

F-27

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. Allowance for Loan Losses (Continued)

 

     Allowance for Loan Losses  
     Year Ended December 31, 2012  

(Dollars in millions)

    FFELP Loans     Private Education
Loans		     Other
Loans		     Total  

Allowance for Loan Losses

         

Beginning balance

    $ 187      $ 2,171      $ 69      $ 2,427   

Total provision

      72        1,008        —        1,080   

Charge-offs(1)

      (92 )      (1,037 )      (22 )      (1,151 ) 

Student loan sales

      (8 )      —        —        (8 ) 

Reclassification of interest reserve(2)

      —        29        —        29   
  

 

 

    

 

 

    

 

 

    

 

 

  

Ending Balance

    $ 159      $ 2,171      $ 47      $ 2,377   
  

 

 

    

 

 

    

 

 

    

 

 

  

Allowance:

         

Ending balance: individually evaluated for impairment

    $ —      $ 1,126      $ 35      $ 1,161   

Ending balance: collectively evaluated for impairment

    $ 159      $ 1,045      $ 12      $ 1,216   

Loans:

         

Ending balance: individually evaluated for impairment

    $ —      $ 7,560      $ 69      $ 7,629   

Ending balance: collectively evaluated for impairment

    $ 124,335      $ 32,341      $ 116      $ 156,792   

Charge-offs as a percentage of average loans in repayment

      .10 %      3.37 %      9.51 %   

Charge-offs as a percentage of average loans in repayment and forbearance

      .08 %      3.24 %      9.51 %   

Allowance as a percentage of the ending total loan balance

      .13 %      5.44 %      25.39 %   

Allowance as a percentage of the ending loans in repayment

      .18 %      6.89 %      25.39 %   

Allowance coverage of charge-offs

      1.7        2.1        2.1     

Ending total loans(3)

    $ 124,335      $ 39,901      $ 185     

Average loans in repayment

    $ 91,653      $ 30,750      $ 231     

Ending loans in repayment

    $ 90,731      $ 31,514      $ 185     

 

  (1) 

Charge-offs are reported net of expected recoveries. For Private Education Loans, the expected recovery amount is transferred to the receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the difference between what was expected to be collected and any shortfalls in what was actually collected in the period. See “Receivable for Partially Charged-Off Private Education Loans” for further discussion.

 

  (2) 

Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

 

  (3) 

Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.

 

F-28

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. Allowance for Loan Losses (Continued)

 

     Allowance for Loan Losses  
     Year Ended December 31, 2011  

(Dollars in millions)

    FFELP Loans     Private Education
Loans		     Other
Loans		     Total  

Allowance for Loan Losses

         

Beginning balance

    $ 189      $ 2,022      $ 72      $ 2,283   

Total provision

      86        1,179        30        1,295   

Charge-offs(1)

      (78 )      (1,072 )      (33 )      (1,183 ) 

Student loan sales

      (10 )      —        —        (10 ) 

Reclassification of interest reserve(2)

      —        42        —        42   
  

 

 

    

 

 

    

 

 

    

 

 

  

Ending Balance

    $ 187      $ 2,171      $ 69      $ 2,427   
  

 

 

    

 

 

    

 

 

    

 

 

  

Allowance:

         

Ending balance: individually evaluated for impairment

    $ —      $ 762      $ 51      $ 813   

Ending balance: collectively evaluated for impairment

    $ 187      $ 1,409      $ 18      $ 1,614   

Loans:

         

Ending balance: individually evaluated for impairment

    $ —      $ 5,313      $ 93      $ 5,406   

Ending balance: collectively evaluated for impairment

    $ 136,643      $ 34,021      $ 170      $ 170,834   

Charge-offs as a percentage of average loans in repayment

      .08 %      3.72 %      11.30 %   

Charge-offs as a percentage of average loans in repayment and forbearance

      .07 %      3.55 %      11.30 %   

Allowance as a percentage of the ending total loan balance

      .14 %      5.52 %      26.26 %   

Allowance as a percentage of the ending loans in repayment

      .20 %      7.19 %      26.26 %   

Allowance coverage of charge-offs

      2.4        2.0        2.1     

Ending total loans(3)

    $ 136,643      $ 39,334      $ 263     

Average loans in repayment

    $ 94,359      $ 28,790      $ 294     

Ending loans in repayment

    $ 94,181      $ 30,185      $ 263     

 

  (1) 

Charge-offs are reported net of expected recoveries. For Private Education Loans, the expected recovery amount is transferred to the receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the difference between what was expected to be collected and any shortfalls in what was actually collected in the period. See “Receivable for Partially Charged-Off Private Education Loans” for further discussion.

 

  (2) 

Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

 

  (3) 

Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.

 

F-29

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. Allowance for Loan Losses (Continued)

 

Key Credit Quality Indicators

FFELP Loans are substantially insured and guaranteed as to their principal and accrued interest in the event of default; therefore, the key credit quality indicator for this portfolio is loan status. The impact of changes in loan status is incorporated quarterly into the allowance for loan losses calculation.

For Private Education Loans, the key credit quality indicators are school type, FICO scores, the existence of a cosigner, the loan status and loan seasoning. The school type/FICO score are assessed at origination and maintained through the traditional/non-traditional loan designation. The other Private Education Loan key quality indicators can change and are incorporated quarterly into the allowance for loan losses calculation. The following table highlights the principal balance (excluding the receivable for partially charged-off loans) of our Private Education Loan portfolio stratified by the key credit quality indicators.

 

     Private Education Loans
Credit Quality Indicators		  
     December 31, 2013     December 31, 2012  

(Dollars in millions)

    Balance(3)      % of Balance     Balance(3)      % of Balance  

Credit Quality Indicators

           

School Type/FICO Scores:

           

Traditional

    $ 36,140         93 %    $ 35,347         92 % 

Non-Traditional(1)

      2,860         7        3,207         8   
  

 

 

     

 

 

    

 

 

     

 

 

  

Total

    $ 39,000         100 %    $ 38,554         100 % 
  

 

 

     

 

 

    

 

 

     

 

 

  

Cosigners:

           

With cosigner

    $ 26,321         67 %    $ 24,907         65 % 

Without cosigner

      12,679         33        13,647         35   
  

 

 

     

 

 

    

 

 

     

 

 

  

Total

    $ 39,000         100 %    $ 38,554         100 % 
  

 

 

     

 

 

    

 

 

     

 

 

  

Seasoning(2):

           

1-12 payments

    $ 5,171         14 %    $ 7,371         19 % 

13-24 payments

      5,511         14        6,137         16   

25-36 payments

      5,506         14        6,037         16   

37-48 payments

      5,103         13        4,780         12   

More than 48 payments

      11,181         29        8,325         22   

Not yet in repayment

      6,528         16        5,904         15   
  

 

 

     

 

 

    

 

 

     

 

 

  

Total

    $ 39,000         100 %    $ 38,554         100 % 
  

 

 

     

 

 

    

 

 

     

 

 

  

 

(1) 

Defined as loans to customers attending for-profit schools (with a FICO score of less than 670 at origination) and customers attending not-for-profit schools (with a FICO score of less than 640 at origination).

 

(2) 

Number of months in active repayment for which a scheduled payment was due.

 

(3) 

Balance represents gross Private Education Loans.

 

F-30

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. Allowance for Loan Losses (Continued)

 

The following tables provide information regarding the loan status and aging of past due loans.

 

     FFELP Loan Delinquencies  
     December 31,  
     2013     2012     2011  

(Dollars in millions)

    Balance     %     Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

    $ 13,678        $ 17,702        $ 22,887     

Loans in forbearance(2)

      13,490          15,902          19,575     

Loans in repayment and percentage of each status:

             

Loans current

      63,330        82.8 %      75,499        83.2 %      77,093        81.9 % 

Loans delinquent 31-60 days(3)

      3,746        4.9        4,710        5.2        5,419        5.8   

Loans delinquent 61-90 days(3)

      2,207        2.9        2,788        3.1        3,438        3.7   

Loans delinquent greater than 90 days(3)

      7,221        9.4        7,734        8.5        8,231        8.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total FFELP Loans in repayment

      76,504        100 %      90,731        100 %      94,181        100 % 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total FFELP Loans, gross

      103,672          124,335          136,643     

FFELP Loan unamortized premium

      1,035          1,436          1,674     
  

 

 

      

 

 

      

 

 

    

Total FFELP Loans

      104,707          125,771          138,317     

FFELP Loan allowance for losses

      (119 )        (159 )        (187 )   
  

 

 

      

 

 

      

 

 

    

FFELP Loans, net

    $ 104,588        $ 125,612        $ 138,130     
  

 

 

      

 

 

      

 

 

    

Percentage of FFELP Loans in repayment

        73.8 %        73.0 %        68.9 % 
    

 

 

      

 

 

      

 

 

  

Delinquencies as a percentage of FFELP Loans in repayment

        17.2 %        16.8 %        18.1 % 
    

 

 

      

 

 

      

 

 

  

FFELP Loans in forbearance as a percentage of loans in repayment and forbearance

        15.0 %        14.9 %        17.2 % 
    

 

 

      

 

 

      

 

 

  

 

(1) 

Loans for customers who may still be attending school or engaging in other permitted educational activities and are not required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for customers who have requested and qualify for other permitted program deferments such as military, unemployment, or economic hardships.

 

(2) 

Loans for customers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors.

 

(3) 

The period of delinquency is based on the number of days scheduled payments are contractually past due.

 

F-31

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. Allowance for Loan Losses (Continued)

 

     Private Education Traditional Loan
Delinquencies		  
     December 31,  
     2013     2012     2011  

(Dollars in millions)

    Balance     %     Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

    $ 6,088        $ 5,421        $ 5,866     

Loans in forbearance(2)

      969          996          1,195     

Loans in repayment and percentage of each status:

             

Loans current

      26,977        92.8 %      26,597        91.9 %      25,110        91.4 % 

Loans delinquent 31-60 days(3)

      674        2.3        837        2.9        868        3.2   

Loans delinquent 61-90 days(3)

      420        1.4        375        1.3        393        1.4   

Loans delinquent greater than 90 days(3)

      1,012        3.5        1,121        3.9        1,096        4.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total traditional loans in repayment

      29,083        100 %      28,930        100 %      27,467        100 % 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total traditional loans, gross

      36,140          35,347          34,528     

Traditional loans unamortized discount

      (629 )        (713 )        (792 )   
  

 

 

      

 

 

      

 

 

    

Total traditional loans

      35,511          34,634          33,736     

Traditional loans receivable for partially charged-off loans

      799          797          705     

Traditional loans allowance for losses

      (1,592 )        (1,637 )        (1,542 )   
  

 

 

      

 

 

      

 

 

    

Traditional loans, net

    $ 34,718        $ 33,794        $ 32,899     
  

 

 

      

 

 

      

 

 

    

Percentage of traditional loans in repayment

        80.5 %        81.9 %        80.0 % 
    

 

 

      

 

 

      

 

 

  

Delinquencies as a percentage of traditional loans in repayment

        7.2 %        8.1 %        8.6 % 
    

 

 

      

 

 

      

 

 

  

Loans in forbearance as a percentage of loans in repayment and forbearance

        3.2 %        3.3 %        4.2 % 
    

 

 

      

 

 

      

 

 

  

 

(1) 

Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

 

(2) 

Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with established loan program servicing policies and procedures.

 

(3) 

The period of delinquency is based on the number of days scheduled payments are contractually past due.

 

F-32

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. Allowance for Loan Losses (Continued)

 

     Private Education Non-Traditional Loan
Delinquencies		  
     December 31,  
     2013     2012     2011  

(Dollars in millions)

    Balance     %     Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

    $ 440        $ 483        $ 656     

Loans in forbearance(2)

      133          140          191     

Loans in repayment and percentage of each status:

             

Loans current

      1,791        78.3 %      1,978        76.5 %      2,012        74.0 % 

Loans delinquent 31-60 days(3)

      128        5.6        175        6.8        208        7.7   

Loans delinquent 61-90 days(3)

      93        4.1        106        4.1        127        4.7   

Loans delinquent greater than 90 days(3)

      275        12.0        325        12.6        371        13.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total non-traditional loans in repayment

      2,287        100 %      2,584        100 %      2,718        100 % 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total non-traditional loans, gross

      2,860          3,207          3,565     

Non-traditional loans unamortized discount

      (75 )        (83 )        (81 )   
  

 

 

      

 

 

      

 

 

    

Total non-traditional loans

      2,785          3,124          3,484     

Non-traditional loans receivable for partially charged-off loans

      514          550          536     

Non-traditional loans allowance for losses

      (505 )        (534 )        (629 )   
  

 

 

      

 

 

      

 

 

    

Non-traditional loans, net

    $ 2,794        $ 3,140        $ 3,391     
  

 

 

      

 

 

      

 

 

    

Percentage of non-traditional loans in repayment

        80.0 %        80.6 %        76.2 % 
    

 

 

      

 

 

      

 

 

  

Delinquencies as a percentage of non-traditional loans in repayment

        21.7 %        23.4 %        26.0 % 
    

 

 

      

 

 

      

 

 

  

Loans in forbearance as a percentage of loans in repayment and forbearance

        5.5 %        5.1 %        6.6 % 
    

 

 

      

 

 

      

 

 

  

 

(1) 

Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

 

(2) 

Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with established loan program servicing policies and procedures.

 

(3) 

The period of delinquency is based on the number of days scheduled payments are contractually past due.

Receivable for Partially Charged-Off Private Education Loans

At the end of each month, for loans that are 212 days past due, we charge off the estimated loss of a defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as the “receivable for partially charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately charged off through the allowance for loan losses with an offsetting reduction in the receivable for partially charged-off Private Education Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. Private Education Loans which defaulted between 2008 and 2013 for which we have previously charged off estimated losses have, to varying degrees, not met our post-default recovery expectations to date and may continue not to do so. According to our policy, we have been charging off these periodic shortfalls in expected recoveries against our allowance for Private Education Loan losses and the related receivable for partially charged-off Private Education Loans and we will continue to do so. There was $336 million and $198

 

F-33

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. Allowance for Loan Losses (Continued)

 

million in the allowance for Private Education Loan losses at December 31, 2013 and 2012, respectively, providing for possible additional future charge-offs related to the receivable for partially charged-off Private Education Loans.

The following table summarizes the activity in the receivable for partially charged-off loans.

 

     Years Ended December 31,  

(Dollars in millions)

    2013     2012     2011  

Receivable at beginning of period

    $ 1,347      $ 1,241      $ 1,040   

Expected future recoveries of current period defaults(1)

      290        351        391   

Recoveries(2)

      (230 )      (189 )      (155 ) 

Charge-offs(3)

      (94 )      (56 )      (35 ) 
  

 

 

    

 

 

    

 

 

  

Receivable at end of period

      1,313        1,347        1,241   

Allowance for estimated recovery shortfalls(4)

      (336 )      (198 )      (148 ) 
  

 

 

    

 

 

    

 

 

  

Net receivable at end of period

    $ 977      $ 1,149      $ 1,093   
  

 

 

    

 

 

    

 

 

  

 

  (1) 

Represents the difference between the loan balance and our estimate of the amount to be collected in the future.

 

  (2) 

Current period cash collections.

 

  (3) 

Represents the current period recovery shortfall – the difference between what was expected to be collected and what was actually collected. These amounts are included in the Private Education Loan total charge-offs as reported in the “Allowance for Loan Losses Metrics” tables.

 

  (4) 

The allowance for estimated recovery shortfalls of the receivable for partially charged-off Private Education Loans is a component of the $2.1 billion, $2.2 billion and $2.2 billion overall allowance for Private Education Loan losses as of December 31, 2013, 2012 and 2011, respectively.

Troubled Debt Restructurings (“TDRs”)

We modify the terms of loans for certain customers when we believe such modifications may increase the ability and willingness of a customer to make payments and thus increase the ultimate overall amount collected on a loan. These modifications generally take the form of a forbearance, a temporary interest rate reduction or an extended repayment plan. For customers experiencing financial difficulty, certain Private Education Loans for which we have granted either a forbearance of greater than three months, an interest rate reduction or an extended repayment plan are classified as TDRs. Approximately 45 percent and 43 percent of the loans granted forbearance have qualified as a TDR loan at December 31, 2013, and 2012, respectively. The unpaid principal balance of TDR loans that were in an interest rate reduction plan as of December 31, 2013 and 2012 was $1.5 billion and $1.0 billion, respectively.

 

F-34

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. Allowance for Loan Losses (Continued)

 

At December 31, 2013 and 2012, all of our TDR loans had a related allowance recorded. The following table provides the recorded investment, unpaid principal balance and related allowance for our TDR loans.

 

     TDR Loans  

(Dollars in millions)

    Recorded
Investment(1) 		     Unpaid
Principal
Balance		      Related
Allowance		  

December 31, 2013

         

Private Education Loans — Traditional

    $ 7,515       $ 7,559       $ 812   

Private Education Loans — Non-Traditional

      1,434         1,427         236   
  

 

 

     

 

 

     

 

 

  

Total

    $ 8,949       $ 8,986       $ 1,048   
  

 

 

     

 

 

     

 

 

  

December 31, 2012

         

Private Education Loans — Traditional

    $ 5,999       $ 6,074       $ 844   

Private Education Loans — Non-Traditional

      1,295         1,303         282   
  

 

 

     

 

 

     

 

 

  

Total

    $ 7,294       $ 7,377       $ 1,126   
  

 

 

     

 

 

     

 

 

  

 

  (1) 

The recorded investment is equal to the unpaid principal balance and accrued interest receivable net of unamortized deferred fees and costs.

The following table provides the average recorded investment and interest income recognized for our TDR loans.

 

    Years Ended December 31,  
    2013     2012     2011  

(Dollars in millions)

   Average
Recorded
Investment		     Interest
Income
Recognized		     Average
Recorded
Investment		     Interest
Income
Recognized		     Average
Recorded
Investment		     Interest
Income
Recognized		  

Private Education Loans — Traditional

   $ 6,805      $ 418      $ 5,181      $ 333      $ 1,960      $ 121   

Private Education Loans — Non-Traditional

     1,376        112        1,205        106        560        48   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

   $ 8,181      $ 530      $ 6,386      $ 439      $ 2,520      $ 169   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

F-35

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. Allowance for Loan Losses (Continued)

 

The following tables provide information regarding the loan status and aging of TDR loans that are past due.

 

     TDR Loan Delinquencies  
     December 31,  
     2013     2012     2011  

(Dollars in millions)

    Balance      %     Balance      %     Balance      %  

Loans in deferment(1)

    $ 913         $ 574         $ 285      

Loans in forbearance(2)

      740           544           696      

Loans in repayment and percentage of each status:

                

Loans current

      5,613         76.5 %      4,619         73.8 %      3,018         69.7 % 

Loans delinquent 31-60 days(3)

      469         6.4        478         7.6        427         9.8   

Loans delinquent 61-90 days(3)

      330         4.5        254         4.1        215         5.0   

Loans delinquent greater than 90 days(3)

      921         12.6        908         14.5        672         15.5   
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  

Total TDR loans in repayment

      7,333         100 %      6,259         100 %      4,332         100 % 
  

 

 

     

 

 

    

 

 

     

 

 

    

 

 

     

 

 

  

Total TDR loans, gross

    $ 8,986         $ 7,377         $ 5,313      
  

 

 

       

 

 

       

 

 

     

 

(1) 

Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

 

(2) 

Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with established loan program servicing policies and procedures.

 

(3) 

The period of delinquency is based on the number of days scheduled payments are contractually past due.

The following table provides the amount of modified loans that resulted in a TDR in the periods presented. Additionally, the table summarizes charge-offs occurring in the TDR portfolio, as well as TDRs for which a payment default occurred in the current period within 12 months of the loan first being designated as a TDR. We define payment default as 60 days past due for this disclosure. The majority of our loans that are considered TDRs involve a temporary forbearance of payments and do not change the contractual interest rate of the loan.

 

    Years Ended December 31,  
    2013     2012     2011  

(Dollars in millions)

   Modified
Loans(1)		     Charge-
Offs(2)		     Payment-
Default		     Modified
Loans(1)		     Charge-
Offs(2)		     Payment-
Default		     Modified
Loans(1)		     Charge-
Offs(2)		     Payment-
Default		  

Private Education Loans — Traditional

   $ 2,114      $ 372      $ 680      $ 2,375      $ 389      $ 1,351      $ 4,103      $ 99      $ 1,036   

Private Education Loans — Non-Traditional

     314        132        184        443        152        420        951        55        414   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

   $ 2,428      $ 504      $ 864      $ 2,818      $ 541      $ 1,771      $ 5,054      $ 154      $ 1,450   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(1) 

Represents period ending balance of loans that have been modified during the period and resulted in a TDR.

 

(2) 

Represents loans that charged off that were classified as TDRs.

 

F-36

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. Allowance for Loan Losses (Continued)

 

Accrued Interest Receivable

The following table provides information regarding accrued interest receivable on our Private Education Loans. The table also discloses the amount of accrued interest on loans greater than 90 days past due as compared to our allowance for uncollectible interest. The allowance for uncollectible interest exceeds the amount of accrued interest on our 90 days past due portfolio for all periods presented.

 

     Accrued Interest Receivable
As of December 31,		  

(Dollars in millions)

    Total      Greater Than
90 Days
Past Due		      Allowance for
Uncollectible
Interest		  

2013

         

Private Education Loans — Traditional

    $ 926       $ 35       $ 46   

Private Education Loans — Non-Traditional

      97         13         20   
  

 

 

     

 

 

     

 

 

  

Total

    $ 1,023       $ 48       $ 66   
  

 

 

     

 

 

     

 

 

  

2012

         

Private Education Loans — Traditional

    $ 798       $ 39       $ 45   

Private Education Loans — Non-Traditional

      106         16         22   
  

 

 

     

 

 

     

 

 

  

Total

    $ 904       $ 55       $ 67   
  

 

 

     

 

 

     

 

 

  

2011

         

Private Education Loans — Traditional

    $ 870       $ 36       $ 44   

Private Education Loans — Non-Traditional

      148         18         28   
  

 

 

     

 

 

     

 

 

  

Total

    $ 1,018       $ 54       $ 72   
  

 

 

     

 

 

     

 

 

  

 

5. Goodwill and Acquired Intangible Assets

Goodwill

All acquisitions must be assigned to a reporting unit or units. A reporting unit is the same as, or one level below, an operating segment. We have four reportable segments: Consumer Lending, Business Services, FFELP Loans and Other. The following table summarizes our goodwill, accumulated impairments and net goodwill for our reporting units and reportable segments.

 

     As of December 31, 2013      As of December 31, 2012  

(Dollars in millions)

    Gross      Accumulated
Impairments		     Net      Gross      Accumulated
Impairments		     Net  

Total FFELP Loans reportable segment

    $ 194       $ (4 )    $ 190       $ 194       $ (4 )    $ 190   

Total Consumer Lending reportable segment

      147         —        147         147         —        147   

Business Services reportable segment:

                

Servicing

      50         —        50         50         —        50   

Contingency Services

      136         (129 )      7         136         (129 )      7   

Wind-down Guarantor Servicing

      256         (256 )      —         256         (256 )      —   

Insurance Services

      9         (9 )      —         9         (9 )      —   

Upromise

      43         (43 )      —         140         (140 )      —   
  

 

 

     

 

 

    

 

 

     

 

 

     

 

 

    

 

 

  

Total Business Services reportable segment

      494         (437 )      57         591         (534 )      57   
  

 

 

     

 

 

    

 

 

     

 

 

     

 

 

    

 

 

  

Total

    $ 835       $ (441 )    $ 394       $ 932       $ (538 )    $ 394   
  

 

 

     

 

 

    

 

 

     

 

 

     

 

 

    

 

 

  

 

F-37

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5. Goodwill and Acquired Intangible Assets (Continued)

 

Goodwill Impairment Testing

We perform our goodwill impairment testing annually in the fourth quarter as of October 1. No goodwill was deemed impaired in 2013. As part of the 2013 annual impairment testing, we retained a third-party appraisal firm to assist in the valuations required to perform Step 1 impairment testing. The income approach was the primary approach used to estimate the fair value of each reporting unit.

The income approach measures the value of each reporting unit’s future economic benefit determined by its discounted cash flows derived from our projections plus an assumed terminal growth rate adjusted for what we believe a market participant would assume in an acquisition. These projections are generally five-year projections that reflect the anticipated cash flow fluctuations of the respective reporting units. If a component of a reporting unit is winding down or is assumed to wind down, the projections extend through the anticipated wind-down period and no residual value is ascribed.

Under our guidance, the third-party appraisal firm developed the discount rate for each reporting unit incorporating such factors as the risk free rate, a market rate of return, a measure of volatility (Beta) and a company-specific and capital markets risk premium, as appropriate, to adjust for volatility and uncertainty in the economy and to capture specific risk related to the respective reporting units. We considered whether an asset sale or an equity sale would be the most likely sale structure for each reporting unit and valued each reporting unit based on the more likely hypothetical scenario.

The discount rates reflect market-based estimates of capital costs and are adjusted for our assessment of a market participant’s view with respect to execution, source concentration and other risks associated with the projected cash flows of individual reporting units. We reviewed and approved the discount rates provided by the third-party appraiser including the factors incorporated to develop the discount rates for each reporting unit.

We and the third-party appraisal firm also considered a market approach for each reporting unit. Market-based multiples for comparable publicly traded companies and similar transactions were evaluated as an indicator of the value of the reporting units to assess the reasonableness of the estimated fair value derived from the income approach.

The following table illustrates the carrying value of equity for each reporting unit with remaining goodwill as of December 31, 2013, and the percentage by which the estimated fair value determined in conjunction with Step 1 impairment testing in the fourth quarter of 2013 exceeds the carrying value of equity.

 

(Dollars in millions)

    Carrying Value
of Equity		      % of Fair Value
in Excess of
Carrying Value		  

FFELP Loans

    $ 930         202 % 

Consumer Lending

      4,335         80 % 

Servicing

      137         966 % 

Contingency Services

      53         193 % 

We acknowledge that continued weakness in the economy coupled with changes in legislation and the regulatory environment could adversely affect the operating results of our reporting units. If the forecasted performance of our reporting units is not achieved, or if our stock price declines resulting in deterioration in our total market capitalization, the fair value of one or more of the reporting units could be significantly reduced, and we may be required to record a charge, which could be material, for an impairment of goodwill.

 

F-38

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5. Goodwill and Acquired Intangible Assets (Continued)

 

To assess impairment for the FFELP, Consumer Lending, and Servicing reporting units at October 1, 2012 and 2011, we assessed relevant qualitative factors to determine whether it was “more-likely-than-not” that the fair value of an individual reporting unit was less than its carrying value. These qualitative factors included consideration of the significant amount of excess fair value over the carrying values of these reporting units as of October 1, 2010 when we performed a Step 1 goodwill impairment test and engaged an appraisal firm to estimate the fair values of these reporting units, the current legislative environment, our stock price during 2012 and 2011, market capitalization and EPS results as well as significant reductions in our operating expenses. After assessing these relevant qualitative factors, we determined that it was more-likely-than-not that the fair values of these reporting units exceeded their carrying amounts.

During 2012, we finalized the purchase accounting for a Contingency Services acquisition that resulted in goodwill. We performed Step 1 impairment testing for the Contingency Services reporting unit as of October 1, 2012, resulting in no indicated impairment.

Acquired Intangible Assets

Acquired intangible assets include the following:

 

     As of December 31, 2013      As of December 31, 2012  

(Dollars in millions)

    Cost
Basis(1) 		     Accumulated
Impairment and
Amortization(1)		     Net      Cost
Basis(1) 		     Accumulated
Impairment and
Amortization(1)		     Net  

Intangible assets subject to amortization:

                

Customer, services and lending relationships

    $ 278       $ (261 )    $ 17       $ 303       $ (270 )    $ 33   

Software and technology

      79         (79 )      —         93         (93 )      —   

Tradenames and trademarks

      34         (21 )      13         54         (34 )      20   
  

 

 

     

 

 

    

 

 

     

 

 

     

 

 

    

 

 

  

Total acquired intangible assets

    $ 391       $ (361 )    $ 30       $ 450       $ (397 )    $ 53   
  

 

 

     

 

 

    

 

 

     

 

 

     

 

 

    

 

 

  

 

(1) 

Accumulated impairment and amortization includes impairment amounts only if the acquired intangible asset has been deemed partially impaired. When an acquired intangible asset is considered fully impaired, and no longer in use, the cost basis and any accumulated amortization related to the asset is written off.

 

(2) 

Intangible assets not subject to amortization include tradenames and trademarks totaling $6 million and $10 million, net of accumulated impairment as of December 31, 2013 and 2012, respectively.

We recorded amortization of acquired intangible assets from continuing operations totaling $13 million, $18 million, and $21 million in 2013, 2012 and 2011, respectively. We will continue to amortize our intangible assets with definite useful lives over their remaining estimated useful lives. We estimate amortization expense associated with these intangible assets will be $9 million, $7 million, $5 million, $2 million and $2 million in 2014, 2015, 2016, 2017 and 2018, respectively.

 

F-39

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6. Borrowings

Borrowings consist of secured borrowings issued through our securitization program, borrowings through secured facilities, unsecured notes issued by us, term and other deposits at Sallie Mae Bank, and other interest-bearing liabilities related primarily to obligations to return cash collateral held. To match the interest rate and currency characteristics of our borrowings with the interest rate and currency characteristics of our assets, we enter into interest rate and foreign currency swaps with independent parties. Under these agreements, we make periodic payments, generally indexed to the related asset rates or rates which are highly correlated to the asset rates, in exchange for periodic payments which generally match our interest obligations on fixed or variable rate notes (see “Note 7 — Derivative Financial Instruments”). Payments and receipts on our interest rate and currency swaps are not reflected in the following tables.

The following table summarizes our borrowings.

 

     December 31, 2013      December 31, 2012  

(Dollars in millions)

    Short
Term		      Long
Term		      Total      Short
Term		      Long
Term		      Total  

Unsecured borrowings:

                  

Senior unsecured debt

    $ 2,213       $ 16,056       $ 18,269       $ 2,319       $ 15,446       $ 17,765   

Bank deposits

      6,133         2,807         8,940         4,226         3,088         7,314   

Other(1)

     691         —         691         1,609         —         1,609   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total unsecured borrowings

      9,037         18,863         27,900         8,154         18,534         26,688   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Secured borrowings:

                  

FFELP Loan securitizations

      —         90,756         90,756         —         105,525         105,525   

Private Education Loan securitizations

      —         18,835         18,835         —         19,656         19,656   

FFELP Loan — other facilities

      4,715         5,311         10,026         11,651         4,827         16,478   

Private Education Loan — other facilities

      —         843         843         —         1,070         1,070   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total secured borrowings

      4,715         115,745         120,460         11,651         131,078         142,729   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total before hedge accounting adjustments

      13,752         134,608         148,360         19,805         149,612         169,417   

Hedge accounting adjustments

      43         2,040         2,083         51         2,789         2,840   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 13,795       $ 136,648       $ 150,443       $ 19,856       $ 152,401       $ 172,257   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

 

(1) 

“Other” primarily consists of the obligation to return cash collateral held related to derivative exposures.

 

F-40

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6. Borrowings (Continued)

 

Short-term Borrowings

Short-term borrowings have a remaining term to maturity of one year or less. The following tables summarize outstanding short-term borrowings (secured and unsecured), the weighted average interest rates at the end of each period, and the related average balances and weighted average interest rates during the periods. Rates reflect stated interest of borrowings and related discounts and premiums.

 

    December 31, 2013     Year Ended December 31, 2013  

(Dollars in millions)

   Ending Balance     Weighted Average
Interest Rate		     Average Balance     Weighted Average
Interest Rate		  

Bank deposits

   $ 6,133        1.14 %    $ 5,221        1.44 % 

FFELP Loan — other facilities

     4,715        .21        7,386        .84   

Private Education Loan — other facilities

     —        —        272        1.86   

Senior unsecured debt

     2,256        3.09        2,814        3.59   

Other interest bearing liabilities

     691        .07        1,037        .14   
 

 

 

    

 

 

    

 

 

    

 

 

  

Total short-term borrowings

   $ 13,795        1.09 %    $ 16,730        1.46 % 
 

 

 

    

 

 

    

 

 

    

 

 

  

Maximum outstanding at any month end

   $ 20,038         
 

 

 

        

 

    December 31, 2012     Year Ended December 31, 2012  

(Dollars in millions)

   Ending Balance     Weighted Average
Interest Rate		     Average Balance     Weighted Average
Interest Rate		  

Bank deposits

   $ 4,226        1.40 %    $ 3,537        1.54 % 

FFELP Loan — other facilities

     11,651        .72        17,606        .78   

Senior unsecured debt

     2,370        4.24        2,214        4.49   

Other interest bearing liabilities

     1,609        .31        1,474        .21   
 

 

 

    

 

 

    

 

 

    

 

 

  

Total short-term borrowings

   $ 19,856        1.25 %    $ 24,831        1.19 % 
 

 

 

    

 

 

    

 

 

    

 

 

  

Maximum outstanding at any month end

   $ 29,160         
 

 

 

        

 

F-41

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6. Borrowings (Continued)

 

Long-term Borrowings

The following tables summarize outstanding long-term borrowings (secured and unsecured), the weighted average interest rates at the end of the periods, and the related average balances during the periods. Rates reflect stated interest rate of borrowings and related discounts and premiums.

 

     December 31, 2013     Year Ended
December 31,
2013		  
           

Weighted

Average

    

(Dollars in millions)

    Ending
Balance(1)		      Interest
Rate(2)		     Average
Balance		  

Floating rate notes:

        

U.S. dollar-denominated:

        

Interest bearing, due 2015-2048

    $ 96,724         .99 %    $ 102,241   

Non-U.S. dollar-denominated:

        

Interest bearing, due 2021-2041

      9,249         .62        9,525   
  

 

 

     

 

 

    

 

 

  

Total floating rate notes

      105,973         .96        111,766   

Fixed rate notes:

        

U.S. dollar-denominated:

        

Interest bearing, due 2015-2047

      18,510         5.61        16,149   

Non-U.S.-dollar denominated:

        

Interest bearing, due 2015-2039

      3,204         2.72        2,420   
  

 

 

     

 

 

    

 

 

  

Total fixed rate notes

      21,714         5.18        18,569   

Brokered deposits — U.S. dollar-denominated, due 2015-2018

      2,807         1.32        2,488   

FFELP Loan — other facilities

      5,311         .76        5,504   

Private Education Loan — other facilities

      843         .96        355   
  

 

 

     

 

 

    

 

 

  

Total long-term borrowings

    $ 136,648         1.63 %    $ 138,682   
  

 

 

     

 

 

    

 

 

  

 

     December 31, 2012     Year Ended
December 31,
2012		  
           

Weighted

Average

    

(Dollars in millions)

    Ending
Balance(1)		      Interest
Rate(2)		     Average
Balance		  

Floating rate notes:

        

U.S. dollar-denominated:

        

Interest bearing, due 2014-2048

    $ 112,408         1.04 %    $ 113,236   

Non-U.S. dollar-denominated:

        

Interest bearing, due 2021-2041

      10,819         .53        11,463   
  

 

 

     

 

 

    

 

 

  

Total floating rate notes

      123,227         1.00        124,699   

Fixed rate notes:

        

U.S. dollar-denominated:

        

Interest bearing, due 2014-2046

      16,096         5.57        14,203   

Non-U.S.-dollar denominated:

        

Interest bearing, due 2014-2039

      4,061         3.39        2,882   
  

 

 

     

 

 

    

 

 

  

Total fixed rate notes

      20,157         5.13        17,085   

Brokered deposits — U.S. dollar-denominated, due 2014-2017

      3,120         1.77        2,216   

FFELP Loan — other facilities

      4,827         1.29        5,517   

Private Education Loan — other facilities

      1,070         1.45        1,880   
  

 

 

     

 

 

    

 

 

  

Total long-term borrowings

    $ 152,401         1.57 %    $ 151,397   
  

 

 

     

 

 

    

 

 

  

 

  (1) 

Ending balance is expressed in U.S. dollars using the spot currency exchange rate. Includes fair value adjustments under hedge accounting for notes designated as the hedged item in a fair value hedge.

 

  (2) 

Weighted average interest rate is stated rate relative to currency denomination of debt.

 

F-42

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6. Borrowings (Continued)

 

At December 31, 2013, we had outstanding long-term borrowings with call features totaling $1.7 billion. In addition, we have $6.2 billion of pre-payable debt related to our secured facilities. Generally, these instruments are callable at the par amount. As of December 31, 2013, the stated maturities and maturities if accelerated to the call dates are shown in the following table.

 

     December 31, 2013  
     Stated Maturity(1)      Maturity to Call Date(1)  

(Dollars in millions)

    Senior
Unsecured
Debt		      Brokered
Deposits		      Secured
Borrowings		      Total(2)      Senior
Unsecured
Debt		      Brokered
Deposits		      Secured
Borrowings		      Total  

Year of Maturity

                        

2014

    $ —       $ —       $ 14,408       $ 14,408       $ 1,611       $ —       $ 14,408       $ 16,019   

2015

      1,506         1,195         11,672         14,373         1,595         1,195         11,672         14,462   

2016

      2,284         648         9,498         12,430         2,283         648         9,498         12,429   

2017

      1,829         538         10,157         12,524         1,807         538         10,157         12,502   

2018

      2,796         426         8,597         11,819         2,547         426         8,597         11,570   

2019 and after

      7,641         —         61,413         69,054         6,213         —         61,413         67,626   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  
     16,056         2,807         115,745         134,608         16,056         2,807         115,745         134,608   

Hedge accounting adjustments

      727         —         1,313         2,040         727         —         1,313         2,040   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 16,783       $ 2,807       $ 117,058       $ 136,648       $ 16,783       $ 2,807       $ 117,058       $ 136,648   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

 

(1) 

We view our securitization trust debt as long-term based on the contractual maturity dates and projected principal paydowns based on our current estimates regarding loan prepayment speeds. The projected principal paydowns in year 2014 include $14.4 billion related to the securitization trust debt.

 

(2) 

The aggregate principal amount of debt that matures in each period is $14.5 billion in 2014, $14.4 billion in 2015, $12.5 billion in 2016, $12.6 billion in 2017, $11.9 billion in 2018, and $69.6 billion in 2019 and after.

 

F-43

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6. Borrowings (Continued)

 

Variable Interest Entities

We consolidate the following financing VIEs as of December 31, 2013 and 2012, as we are the primary beneficiary. As a result, these VIEs are accounted for as secured borrowings.

 

    December 31, 2013  
    Debt Outstanding     Carrying Amount of Assets Securing Debt
Outstanding		  

(Dollars in millions)

   Short
Term		     Long
Term		     Total     Loans     Cash     Other Assets     Total  

Secured Borrowings — VIEs:

              

FFELP Loan securitizations

   $ —      $ 90,756      $ 90,756      $ 91,535      $ 2,913      $ 683      $ 95,131   

Private Education Loan securitizations

     —        18,835        18,835        23,947        338        540        24,825   

FFELP Loan — other facilities

     3,655        3,791        7,446        7,719        128        91        7,938   

Private Education Loan — other facilities

     —        843        843        1,583        16        30        1,629   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total before hedge accounting adjustments

     3,655        114,225        117,880        124,784        3,395        1,344        129,523   

Hedge accounting adjustments

     —        1,313        1,313        —        —        978        978   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

   $ 3,655      $ 115,538      $ 119,193      $ 124,784      $ 3,395      $ 2,322      $ 130,501   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  
    December 31, 2012  
    Debt Outstanding     Carrying Amount of Assets Securing Debt
Outstanding		  

(Dollars in millions)

   Short
Term		     Long
Term		     Total     Loans     Cash     Other Assets     Total  

Secured Borrowings — VIEs:

              

FFELP Loan securitizations

   $ —      $ 105,525      $ 105,525      $ 107,009      $ 3,652      $ 608      $ 111,269   

Private Education Loan securitizations

     —        19,656        19,656        24,618        385        545        25,548   

FFELP Loan — other facilities

     9,551        4,154        13,705        14,050        487        197        14,734   

Private Education Loan — other facilities

     —        1,070        1,070        1,454        302        33        1,789   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total before hedge accounting adjustments

     9,551        130,405        139,956        147,131        4,826        1,383        153,340   

Hedge accounting adjustments

     —        1,113        1,113        —        —        929        929   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

   $ 9,551      $ 131,518      $ 141,069      $ 147,131      $ 4,826      $ 2,312      $ 154,269   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

F-44

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6. Borrowings (Continued)

 

Securitizations

The following table summarizes the securitization transactions issued in 2012 and 2013.

 

(Dollars in millions)

               AAA-rated bonds

Issue

    Date Issued    Total
Issued		     Weighted Average
Interest Rate		   Weighted
Average
Life

FFELP:

          

2012-1

    January 2012    $ 765      1 month LIBOR plus 0.91%   4.6 years

2012-2

    March 2012      824      1 month LIBOR plus 0.70%   4.7 years

2012-3

    May 2012      1,252      1 month LIBOR plus 0.65%   4.6 years

2012-4

    June 2012      1,491 (1)    1 month LIBOR plus 1.10%   8.2 years

2011-3

    July 2012      24      N/A (Retained B Notes sold)

2012-4

    July 2012      45      N/A (Retained B Notes sold)

2012-5

    July 2012      1,252      1 month LIBOR plus 0.67%   4.5 years

2012-6

    September 2012      1,249      1 month LIBOR plus 0.62%   4.6 years

2012-7

    November 2012      1,251      1 month LIBOR plus 0.55%   4.5 years

2012-8

    December 2012      1,527      1 month LIBOR plus 0.90%   7.8 years
     

 

 

      

Total bonds issued in 2012

       $ 9,680       
     

 

 

      

Total loan amount securitized in 2012

       $ 9,565       
     

 

 

      

2013-1

    February 2013    $ 1,249      1 month LIBOR plus 0.46%   4.3 years

2013-2

    April 2013      1,246      1 month LIBOR plus 0.45%   4.4 years

2013-3

    June 2013      1,246      1 month LIBOR plus 0.54%   4.5 years

2013-4

    August 2013      747      1 month LIBOR plus 0.55%   4.4 years

2013-5

    September 2013      996      1 month LIBOR plus 0.64%   4.6 years

2007-6 to 2007-8, 2008-2 to 2008-9

    October 2013      629      N/A (Retained B Notes sold)

2013-6

    November 2013      996      1 month LIBOR plus 0.60%   4.6 years
     

 

 

      

Total bonds issued in 2013

       $ 7,109       
     

 

 

      

Total loan amount securitized in 2013

       $ 6,495       
     

 

 

      

Private Education:

          

2012-A

    February 2012    $ 547      1 month LIBOR plus 2.17%   3.0 years

2012-B

    April 2012      891      1 month LIBOR plus 2.12%   2.9 years

2012-C

    May 2012      1,135      1 month LIBOR plus 1.77%   2.6 years

2012-D

    July 2012      640      1 month LIBOR plus 1.69%   2.5 years

2012-E

    October 2012      976      1 month LIBOR plus 1.22%   2.6 years
     

 

 

      

Total bonds issued in 2012

       $ 4,189       
     

 

 

      

Total loan amount securitized in 2012

       $ 5,557       
     

 

 

      

2013-R1

    January 2013    $ 254      1 month LIBOR plus 1.75%   6.3 years

2013-A

    March 2013      1,108      1 month LIBOR plus 0.81%   2.6 years

2013-B

    May 2013      1,135      1 month LIBOR plus 0.89%   2.7 years

2013-C

    September 2013      624      1 month LIBOR plus 1.21%   3.1 years
     

 

 

      

Total bonds issued in 2013

       $ 3,121       
     

 

 

      

Total loan amount securitized in 2013

       $ 3,387       
     

 

 

      

 

(1) 

Total size excludes subordinated tranche that was retained at issuance totaling $45 million.

 

F-45

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6. Borrowings (Continued)

 

2013 Sales of FFELP Securitization Trust Residual Interests

On February 13, 2013, we sold the Residual Interest in a FFELP Loan securitization trust to a third party. We will continue to service the student loans in the trust under existing agreements. The sale removed securitization trust assets of $3.82 billion and related liabilities of $3.68 billion from our balance sheet.

On April 11, 2013, we sold the Residual Interest in a FFELP Loan securitization trust to a third party. We will continue to service the student loans in the trust under existing agreements. The sale removed securitization trust assets of $2.03 billion and related liabilities of $1.99 billion from our balance sheet.

On June 13, 2013, we sold the three Residual Interests in FFELP Loan securitization trusts to a third party. We will continue to service the student loans in the trusts under existing agreements. The sale removed securitization trust assets of $6.60 billion and related liabilities of $6.42 billion from our balance sheet.

FFELP Loans — Other Secured Borrowing Facilities

We have various secured borrowing facilities that we use to finance our FFELP loans. Liquidity is available under these secured credit facilities to the extent we have eligible collateral and available capacity. The maximum borrowing capacity under these facilities will vary and is subject to each agreement’s borrowing conditions. These include but are not limited to the facility’s size, current usage and the availability and fair value of qualifying unencumbered FFELP Loan collateral. Our borrowings under these facilities are non-recourse. The maturity dates on these facilities range from June 2014 to January 2016. The interest rate on certain facilities can increase under certain circumstances. The facilities are subject to termination under certain circumstances. As of December 31, 2013 there was approximately $10.0 billion outstanding under these facilities with approximately $10.4 billion of assets securing these facilities. As of December 31, 2013, the maximum unused capacity under these facilities was $10.6 billion. As of December 31, 2013, we had $2.7 billion of unencumbered FFELP Loans.

Private Education Loans — Other Secured Borrowing Facilities

We have a facility that was used to fund the call and redemption of our SLM 2009-D Private Education Loan Trust ABS, which occurred on August 15, 2013. The maturity date of the new facility is August 15, 2015. Our borrowings under this facility are non-recourse. The interest rate can increase under certain circumstances. The facility is subject to termination under certain circumstances. As of December 31, 2013, there was $843 million outstanding under the facility. The book basis of the assets securing the facility as of December 31, 2013 was $1.6 billion. Additional borrowings are not available under this facility.

Other Funding Sources

Deposits

Sallie Mae Bank raises deposits through intermediaries in the brokered Certificate of Deposit (“CD”) market and through direct retail deposit channels. As of December 31, 2013, bank deposits totaled $9.2 billion of which $4.5 billion were brokered term deposits, $4.4 billion were retail and other deposits and $299 million were deposits from affiliates that eliminate in our consolidated balance sheet. Cash and liquid investments totaled $2.2 billion as of December 31, 2013.

In addition to its deposit base, Sallie Mae Bank has borrowing capacity with the Federal Reserve Bank (“FRB”) through a collateralized lending facility. FRB is not obligated to lend; however, in general we can borrow as long as Sallie Mae Bank is generally in sound financial condition. Borrowing capacity is limited by the

 

F-46

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

6. Borrowings (Continued)

 

availability of acceptable collateral. As of December 31, 2013, borrowing capacity was approximately $900 million and there were no outstanding borrowings.

Senior Unsecured Debt

We issued $3.75 billion, $2.7 billion and $2.0 billion of unsecured debt in 2013, 2012 and 2011, respectively.

Debt Repurchases

The following table summarizes activity related to our senior unsecured debt and asset-backed securities (“ABS”) repurchases. “Gains on debt repurchases” is shown net of hedging-related gains and losses.

 

     Years Ended December 31,  

(Dollars in millions)

    2013      2012      2011  

Debt principal repurchased

    $ 1,279       $ 711       $ 894   

Gains on debt repurchases

      42         145         38   

 

7. Derivative Financial Instruments

Risk Management Strategy

We maintain an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize the economic effect of interest rate changes. Our goal is to manage interest rate sensitivity by modifying the repricing frequency and underlying index characteristics of certain balance sheet assets and liabilities so the net interest margin is not, on a material basis, adversely affected by movements in interest rates. We do not use derivative instruments to hedge credit risk associated with debt we issued. As a result of interest rate fluctuations, hedged assets and liabilities will appreciate or depreciate in market value. Income or loss on the derivative instruments that are linked to the hedged assets and liabilities will generally offset the effect of this unrealized appreciation or depreciation for the period the item is being hedged. We view this strategy as a prudent management of interest rate sensitivity. In addition, we utilize derivative contracts to minimize the economic impact of changes in foreign currency exchange rates on certain debt obligations that are denominated in foreign currencies. As foreign currency exchange rates fluctuate, these liabilities will appreciate and depreciate in value. These fluctuations, to the extent the hedge relationship is effective, are offset by changes in the value of the cross-currency interest rate swaps executed to hedge these instruments. Management believes certain derivative transactions entered into as hedges, primarily Floor Income Contracts and basis swaps, are economically effective; however, those transactions generally do not qualify for hedge accounting under GAAP (as discussed below) and thus may adversely impact earnings.

Although we use derivatives to offset (or minimize) the risk of interest rate and foreign currency changes, the use of derivatives does expose us to both market and credit risk. Market risk is the chance of financial loss resulting from changes in interest rates, foreign exchange rates and market liquidity. Credit risk is the risk that a counterparty will not perform its obligations under a contract and it is limited to the loss of the fair value gain in a derivative that the counterparty owes us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, have no credit risk exposure to the counterparty; however, the counterparty has exposure to us. We minimize the credit risk in derivative instruments by entering into transactions with highly rated counterparties that are reviewed regularly by our Credit Department. We also maintain a policy of requiring that all derivative contracts be governed by an International Swaps and Derivative Association Master

 

F-47

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. Derivative Financial Instruments (Continued)

 

Agreement. Depending on the nature of the derivative transaction, bilateral collateral arrangements generally are required as well. When we have more than one outstanding derivative transaction with the counterparty, and there exists legally enforceable netting provisions with the counterparty (i.e., a legal right to offset receivable and payable derivative contracts), the “net” mark-to-market exposure, less collateral the counterparty has posted to us, represents exposure with the counterparty. When there is a net negative exposure, we consider our exposure to the counterparty to be zero. At December 31, 2013 and 2012, we had a net positive exposure (derivative gain positions to us less collateral which has been posted by counterparties to us) related to SLM Corporation and Sallie Mae Bank derivatives of $83 million and $79 million, respectively.

Our on-balance sheet securitization trusts have $10.7 billion of Euro and British Pound Sterling denominated bonds outstanding as of December 31, 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 $12.8 billion of interest rates swaps which are primarily used to convert Prime received on securitized student loans to LIBOR paid on the bonds. At December 31, 2013, the net positive exposure on swaps in securitization trusts is $968 million.

Our securitization trusts had total net exposure of $772 million related to financial institutions located in France; of this amount, $577 million carries a guaranty from the French government. The total exposure relates to $5.1 billion notional amount of cross-currency interest rate swaps held in our securitization trusts, of which $3.4 billion notional amount carries a guaranty from the French government. Counterparties to the cross currency interest rate swaps are required to post collateral when their credit rating is withdrawn or downgraded below a certain level. As of December 31, 2013, no collateral was required to be posted and we are not holding any collateral related to these contracts. Adjustments are made to our derivative valuations for counterparty credit risk. The adjustments made at December 31, 2013 related to derivatives with French financial institutions (including those that carry a guaranty from the French government) decreased the derivative asset value by $63 million. Credit risks for all derivative counterparties are assessed internally on a continual basis.

Accounting for Derivative Instruments

Derivative instruments that are used as part of our interest rate and foreign currency risk management strategy include interest rate swaps, basis swaps, cross-currency interest rate swaps, and interest rate floor contracts with indices that relate to the pricing of specific balance sheet assets and liabilities. The accounting for derivative instruments requires that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded on the balance sheet as either an asset or liability measured at its fair value. As more fully described below, if certain criteria are met, derivative instruments are classified and accounted for by us as either fair value or cash flow hedges. If these criteria are not met, the derivative financial instruments are accounted for as trading.

Fair Value Hedges

Fair value hedges are generally used by us to hedge the exposure to changes in fair value of a recognized fixed rate asset or liability. We enter into interest rate swaps to economically convert fixed rate assets into variable rate assets and fixed rate debt into variable rate debt. We also enter into cross-currency interest rate swaps to economically convert foreign currency denominated fixed and floating debt to U.S. dollar denominated variable debt. For fair value hedges, we generally consider all components of the derivative’s gain and/or loss when assessing hedge effectiveness and generally hedge changes in fair values due to interest rates or interest rates and foreign currency exchange rates or the total change in fair values.

 

F-48

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. Derivative Financial Instruments (Continued)

 

Cash Flow Hedges

We use cash flow hedges to hedge the exposure to variability in cash flows for a forecasted debt issuance and for exposure to variability in cash flows of floating rate debt. This strategy is used primarily to minimize the exposure to volatility from future changes in interest rates. Gains and losses on the effective portion of a qualifying hedge are recorded in accumulated other comprehensive income and ineffectiveness is recorded immediately to earnings. In the case of a forecasted debt issuance, gains and losses are reclassified to earnings over the period which the stated hedged transaction affects earnings. If we determine it is not probable that the anticipated transaction will occur, gains and losses are reclassified immediately to earnings. In assessing hedge effectiveness, generally all components of each derivative’s gains or losses are included in the assessment. We generally hedge exposure to changes in cash flows due to changes in interest rates or total changes in cash flow.

Trading Activities

When derivative instruments do not qualify as hedges, they are accounted for as trading instruments where all changes in fair value are recorded through earnings. We sell interest rate floors (Floor Income Contracts) to hedge the embedded Floor Income options in student loan assets. The Floor Income Contracts are written options which have a more stringent hedge effectiveness hurdle to meet. Specifically, our Floor Income Contracts do not qualify for hedge accounting treatment because the pay down of principal of the student loans underlying the Floor Income embedded in those student loans does not exactly match the change in the notional amount of our written Floor Income Contracts. Additionally, the term, the interest rate index and the interest rate index reset frequency of the Floor Income Contracts are different from that of the student loans. Therefore, Floor Income Contracts do not qualify for hedge accounting treatment, and are recorded as trading instruments. Regardless of the accounting treatment, we consider these contracts to be economic hedges for risk management purposes. We use this strategy to minimize our exposure to changes in interest rates.

We use basis swaps to minimize earnings variability caused by having different reset characteristics on our interest-earning assets and interest-bearing liabilities. These swaps possess a term of up to 13 years and are primarily indexed to LIBOR or Prime rates. The specific terms and notional amounts of the swaps are determined based on a review of our asset/liability structure, our assessment of future interest rate relationships, and on other factors such as short-term strategic initiatives. Hedge accounting requires that when using basis swaps, the change in the cash flows of the hedge effectively offset both the change in the cash flows of the asset and the change in the cash flows of the liability. Our basis swaps hedge variable interest rate risk; however, they generally do not meet this effectiveness criterion because the index of the swap does not exactly match the index of the hedged assets. Additionally, some of our FFELP Loans can earn at either a variable or a fixed interest rate depending on market interest rates and, therefore, swaps economically hedging these FFELP Loans do not meet the criteria for hedge accounting treatment. As a result, these swaps are recorded at fair value with changes in fair value reflected currently in the statement of income.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. Derivative Financial Instruments (Continued)

 

Summary of Derivative Financial Statement Impact

The following tables summarize the fair values and notional amounts or number of contracts of all derivative instruments at December 31, 2013 and 2012, and their impact on other comprehensive income and earnings for 2013, 2012 and 2011.

Impact of Derivatives on Consolidated Balance Sheet

 

        Cash Flow     Fair Value     Trading     Total  

(Dollars in millions)

  

Hedged Risk

Exposure

   Dec. 31,
2013		     Dec. 31,
2012		     Dec. 31,
2013		     Dec. 31,
2012		     Dec. 31,
2013		     Dec. 31,
2012		     Dec. 31,
2013		     Dec. 31,
2012		  

Fair Values(1)

                  

Derivative Assets:

                  

Interest rate swaps

   Interest rate   $ 24      $ —      $ 738      $ 1,396      $ 61      $ 150      $ 823      $ 1,546   

Cross-currency interest rate swaps

   Foreign currency and
interest rate		     —        —        1,185        1,165        —        70        1,185        1,235   

Other(2)

  Interest rate     —        —        —        —        2        4        2        4   
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total derivative assets(3)

       24        —        1,923        2,561        63        224        2,010        2,785   

Derivative Liabilities:

                  

Interest rate swaps

   Interest rate     —        (11 )      (149 )      (1 )      (215 )      (197 )      (364 )      (209 ) 

Floor Income Contracts

   Interest rate     —        —        —        —        (1,384 )      (2,154 )      (1,384 )      (2,154 ) 

Cross-currency interest rate swaps

   Foreign currency and
interestrate		     —        —        (155 )      (136 )      (31 )      —        (186 )      (136 ) 

Other(2)

  Interest rate     —        —        —        —        (23 )      —        (23 )      —   
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total derivative liabilities(3)

       —        (11 )      (304 )      (137 )      (1,653 )      (2,351 )      (1,957 )      (2,499 ) 
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net total derivatives

     $ 24      $ (11 )    $ 1,619      $ 2,424      $ (1,590 )    $ (2,127 )    $ 53      $ 286   
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(1) 

Fair values reported are exclusive of collateral held and pledged and accrued interest. Assets and liabilities are presented without consideration of master netting agreements. Derivatives are carried on the balance sheet based on net position by counterparty under master netting agreements, and classified in other assets or other liabilities depending on whether in a net positive or negative position.

 

(2) 

“Other” includes embedded derivatives bifurcated from securitization debt as well as derivatives related to our Total Return Swap Facility and back-to-back private credit floors.

 

(3) 

The following table reconciles gross positions with the impact of master netting agreements to the balance sheet classification:

 

     Other Assets      Other Liabilities  

(Dollar in millions)

    December 31,
2013		      December 31,
2012		      December 31,
2013		      December 31,
2012		  

Gross position

    $ 2,010       $ 2,785       $ (1,957 )     $ (2,499 ) 

Impact of master netting agreements

      (386 )       (544 )       386         544   
  

 

 

     

 

 

     

 

 

     

 

 

  

Derivative values with impact of master netting agreements (as carried on balance sheet)

      1,624         2,241         (1,571 )       (1,955 ) 

Cash collateral (held) pledged

      (687 )       (1,423 )       777         973   
  

 

 

     

 

 

     

 

 

     

 

 

  

Net position

    $ 937       $ 818       $ (794 )     $ (982 ) 
  

 

 

     

 

 

     

 

 

     

 

 

  

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. Derivative Financial Instruments (Continued)

 

The above fair values include adjustments for counterparty credit risk for both when we are exposed to the counterparty, net of collateral postings, and when the counterparty is exposed to us, net of collateral postings. The net adjustments decreased the overall net asset positions at December 31, 2013 and 2012 by $91 million and $111 million, respectively. In addition, the above fair values reflect adjustments for illiquid derivatives as indicated by a wide bid/ask spread in the interest rate indices to which the derivatives are indexed. These adjustments decreased the overall net asset positions at December 31, 2013 and 2012 by $84 million and $107 million, respectively.

 

     Cash Flow      Fair Value      Trading      Total  

(Dollars in billions)

    Dec. 31,
2013		      Dec. 31,
2012		      Dec. 31,
2013		      Dec. 31,
2012		      Dec. 31,
2013		      Dec. 31,
2012		      Dec. 31,
2013		      Dec. 31,
2012		  

Notional Values:

                        

Interest rate swaps

    $ 0.7       $ 0.7       $ 16.0       $ 15.8       $ 46.3       $ 56.9       $ 63.0       $ 73.4   

Floor Income Contracts

      —         —         —         —         31.8         51.6         31.8         51.6   

Cross-currency interest rate swaps

      —         —         11.1         13.7         .3         0.3         11.4         14.0   

Other(1)

     —         —         —         —         3.9         1.4         3.9         1.4   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

Total derivatives

    $ 0.7       $ 0.7       $ 27.1       $ 29.5       $ 82.3       $ 110.2       $ 110.1       $ 140.4   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

  

 

(1) 

“Other” includes embedded derivatives bifurcated from securitization debt, as well as derivatives related to our Total Return Swap Facility and back-to-back private credit floors.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. Derivative Financial Instruments (Continued)

 

Impact of Derivatives on Consolidated Statements of Income

 

    Years Ended December 31,  
    Unrealized Gain
(Loss) on
Derivatives(1)(2)		     Realized Gain
(Loss) on
Derivatives(3)		     Unrealized Gain
(Loss) on
Hedged Item(1)		     Total Gain (Loss)  

(Dollars in millions)

   2013     2012     2011     2013     2012     2011     2013     2012     2011     2013     2012     2011  

Fair Value Hedges:

                        

Interest rate swaps

   $ (806 )    $ (75 )    $ 503      $ 414      $ 449      $ 481      $ 873      $ 41      $ (554 )    $ 481      $ 415      $ 430   

Cross-currency interest rate swaps

     1        42        (723 )      98        167        314        (183 )      (182 )      664        (84 )      27        255   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total fair value derivatives

     (805 )      (33 )      (220 )      512        616        795        690        (141 )      110        397        442        685   

Cash Flow Hedges:

                        

Interest rate swaps

     —        (1 )      (1 )      (9 )      (26 )      (39 )      —        —        —        (9 )      (27 )      (40 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total cash flow derivatives

     —        (1 )      (1 )      (9 )      (26 )      (39 )      —        —        —        (9 )      (27 )      (40 ) 

Trading:

                        

Interest rate swaps

     (107 )      (66 )      183        71        108        69        —        —        —        (36 )      42        252   

Floor Income Contracts

     785        412        (267 )      (815 )      (859 )      (903 )      —        —        —        (30 )      (447 )      (1,170 ) 

Cross-currency interest rate swaps

     (101 )      (59 )      29        35        7        8        —        —        —        (66 )      (52 )      37   

Other

     (19 )      5        22        (2 )      (1 )      11        —        —        —        (21 )      4        33   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total trading derivatives

     558        292        (33 )      (711 )      (745 )      (815 )      —        —        —        (153 )      (453 )      (848 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

     (247 )      258        (254 )      (208 )      (155 )      (59 )      690        (141 )      110        235        (38 )      (203 ) 

Less: realized gains (losses) recorded in interest expense

     —        —        —        503        590        756        —        —        —        503        590        756   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Gains (losses) on derivative and hedging activities, net

   $ (247 )    $ 258      $ (254 )    $ (711 )    $ (745 )    $ (815 )    $ 690      $ (141 )    $ 110      $ (268 )    $ (628 )    $ (959 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(1) 

Recorded in “Gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.

 

(2) 

Represents ineffectiveness related to cash flow hedges.

 

(3) 

For fair value and cash flow hedges, recorded in interest expense. For trading derivatives, recorded in “Gains (losses) on derivative and hedging activities, net.”

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. Derivative Financial Instruments (Continued)

 

Impact of Derivatives on Consolidated Statements of Changes in Stockholders’ Equity (net of tax)

 

     Years Ended
December 31,		  

(Dollars in millions)

    2013      2012     2011  

Total gains (losses) on cash flow hedges

    $ 16       $ (7 )    $ (4 ) 

Realized losses recognized in interest expense(1)(2)(3)

      6         16        35   
  

 

 

     

 

 

    

 

 

  

Total change in stockholders’ equity for unrealized gains on derivatives

    $ 22       $ 9      $ 31   
  

 

 

     

 

 

    

 

 

  

 

  (1) 

Amounts included in “Realized gain (loss) on derivatives” in the “Impact of Derivatives on Consolidated Statements of Income” table above.

 

  (2) 

Includes net settlement income/expense.

 

  (3) 

We expect to reclassify $0.3 million of after-tax net losses from accumulated other comprehensive income to earnings during the next 12 months related to net settlement accruals on interest rate swaps.

Collateral

The following table details collateral held and pledged related to derivative exposure between us and our derivative counterparties.

 

(Dollars in millions)

    December 31,
2013		      December 31,
2012		  

Collateral held:

      

Cash (obligation to return cash collateral is recorded in short-term borrowings)(1)

    $ 687       $ 1,423   

Securities at fair value — on-balance sheet securitization derivatives (not recorded in financial statements)(2)

      629         613   
  

 

 

     

 

 

  

Total collateral held

    $ 1,316       $ 2,036   
  

 

 

     

 

 

  

Derivative asset at fair value including accrued interest

    $ 1,878       $ 2,570   
  

 

 

     

 

 

  

Collateral pledged to others:

      

Cash (right to receive return of cash collateral is recorded in investments)

    $ 777       $ 973   
  

 

 

     

 

 

  

Total collateral pledged

    $ 777       $ 973   
  

 

 

     

 

 

  

Derivative liability at fair value including accrued interest and premium receivable

    $ 948       $ 1,204   
  

 

 

     

 

 

  

 

(1) 

At December 31, 2013 and 2012, $0 million and $9 million, respectively, were held in restricted cash accounts.

 

(2) 

The trusts do not have the ability to sell or re-pledge securities they hold as collateral.

Our corporate derivatives contain credit contingent features. At our current unsecured credit rating, we have fully collateralized our corporate derivative liability position (including accrued interest and net of premiums receivable) of $762 million with our counterparties. Further downgrades would not result in any additional collateral requirements, except to increase the frequency of collateral calls. Two counterparties have the right to terminate the contracts with further downgrades. We currently have a liability position with these derivative counterparties (including accrued interest and net of premiums receivable) of $148 million and have posted $148 million of collateral to these counterparties. If the credit contingent feature was triggered for these two

 

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Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. Derivative Financial Instruments (Continued)

 

counterparties and the counterparties exercised their right to terminate, we would not be required to deliver additional assets to settle the contracts. Trust related derivatives do not contain credit contingent features related to our or the trusts’ credit ratings.

 

8. Other Assets

The following table provides the detail of our other assets.

 

     December 31, 2013     December 31, 2012  

(Dollars in millions)

    Ending
Balance		      % of
Balance		     Ending
Balance		      % of
Balance		  

Accrued interest receivable, net

    $ 2,161         30 %    $ 2,147         26 % 

Derivatives at fair value

      1,624         22        2,241         27   

Income tax asset, net current and deferred

      1,299         18        1,478         18   

Accounts receivable

      881         12        1,111         13   

Benefit and insurance-related investments

      477         7        474         6   

Fixed assets, net

      237         3        215         3   

Other loans, net

      101         1        137         2   

Other

      507         7        470         5   
  

 

 

     

 

 

    

 

 

     

 

 

  

Total

    $ 7,287         100 %    $ 8,273         100 % 
  

 

 

     

 

 

    

 

 

     

 

 

  

The “Derivatives at fair value” line in the above table represents the fair value of our derivatives in a gain position by counterparty, exclusive of accrued interest and collateral. At December 31, 2013 and 2012, these balances included $1.6 billion and $2.4 billion, respectively, of cross-currency interest rate swaps and interest rate swaps designated as fair value hedges that were offset by an increase in interest-bearing liabilities related to the hedged debt. As of December 31, 2013 and 2012, the cumulative mark-to-market adjustment to the hedged debt was $(2.1) billion and $(2.8) billion, respectively.

 

9. Stockholders’ Equity

Preferred Stock

At December 31, 2013, we had outstanding 3.3 million shares of 6.97 percent Cumulative Redeemable Preferred Stock, Series A (the “Series A Preferred Stock”) and 4.0 million shares of Floating-Rate Non-Cumulative Preferred Stock, Series B (the “Series B Preferred Stock”). Neither series has a maturity date but can be redeemed at our option. Redemption would include any accrued and unpaid dividends up to the redemption date. The shares have no preemptive or conversion rights and are not convertible into or exchangeable for any of our other securities or property. Dividends on both series are not mandatory and are paid quarterly, when, as, and if declared by the Board of Directors. Holders of Series A Preferred Stock are entitled to receive cumulative, quarterly cash dividends at the annual rate of $3.485 per share. Holders of Series B Preferred Stock are entitled to receive quarterly dividends based on 3-month LIBOR plus 170 basis points per annum in arrears. Upon liquidation or dissolution of the Company, holders of the Series A and Series B Preferred Stock are entitled to receive $50 and $100 per share, respectively, plus an amount equal to accrued and unpaid dividends for the then current quarterly dividend period, if any, pro rata, and before any distribution of assets are made to holders of our common stock.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

9. Stockholders’ Equity (Continued)

 

Common Stock

Our shareholders have authorized the issuance of 1.125 billion shares of common stock (par value of $.20). At December 31, 2013, 429 million shares were issued and outstanding and 31 million shares were unissued but encumbered for outstanding stock options, restricted stock units and dividend equivalent units for employee compensation and remaining authority for stock-based compensation plans. The stock-based compensation plans are described in “Note 11 — Stock-Based Compensation Plans and Arrangements.”

In March 2011, we retired 70 million shares of common stock held in treasury. This retirement decreased the balance in treasury stock by $1.9 billion, with corresponding decreases of $14 million in common stock and $1.9 billion in additional paid-in capital. There was no impact to total equity from this transaction.

Dividend and Share Repurchase Program

In 2013, we increased the quarterly dividend on our common stock to $.15 per share, up from $.125 per share in the prior year. In 2013, we authorized the repurchase of up to $800 million of outstanding common stock in open market transactions and we repurchased 27 million shares for an aggregate purchase price of $600 million. In 2012, we authorized the repurchase of up to $900 million of outstanding common stock in open market transactions and we repurchased 58 million shares for an aggregate purchase price of $900 million. In 2011, we authorized the repurchase of up to $300 million of outstanding common stock in open market transactions and we repurchased 19 million shares for an aggregate purchase price of $300 million.

The following table summarizes our common share repurchases and issuances.

 

     Years Ended December 31,  
     2013      2012      2011  

Common stock repurchased(1)

      26,987,043         58,038,239         19,054,115   

Average purchase price per share(2)

    $ 22.26       $ 15.52       $ 15.77   

Shares repurchased related to employee stock-based compensation plans(3)

      6,365,002         4,547,785         3,024,662   

Average purchase price per share

    $ 21.76       $ 15.86       $ 15.71   

Common shares issued(4)

      9,702,976         6,432,643         3,886,217   

 

  (1) 

Common shares purchased under our share repurchase program, of which $200 million remained available as of December 31, 2013.

 

  (2) 

Average purchase price per share includes purchase commission costs.

 

  (3) 

Comprises shares withheld from stock option exercises and vesting of restricted stock for employees’ tax withholding obligations and shares tendered by employees to satisfy option exercise costs.

 

  (4) 

Common shares issued under our various compensation and benefit plans.

The closing price of our common stock on December 31, 2013 was $26.28.

 

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Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

10. Earnings (Loss) per Common Share

Basic earnings (loss) per common share (“EPS”) are calculated using the weighted average number of shares of common stock outstanding during each period. A reconciliation of the numerators and denominators of the basic and diluted EPS calculations follows.

 

     Years Ended December 31,  

(In millions, except per share data)

    2013      2012      2011  

Numerator:

         

Net income attributable to SLM Corporation

    $ 1,418       $ 939       $ 633   

Preferred stock dividends

      20         20         18   
  

 

 

     

 

 

     

 

 

  

Net income attributable to SLM Corporation common stock

    $ 1,398       $ 919       $ 615   
  

 

 

     

 

 

     

 

 

  

Denominator:

         

Weighted average shares used to compute basic EPS

      440         476         517   

Effect of dilutive securities:

         

Dilutive effect of stock options, non-vested deferred compensation and restricted stock, restricted stock units and Employee Stock Purchase Plan (“ESPP”)(1)

      9         7         6   
  

 

 

     

 

 

     

 

 

  

Dilutive potential common shares(2)

      9         7         6   
  

 

 

     

 

 

     

 

 

  

Weighted average shares used to compute diluted EPS

      449         483         523   
  

 

 

     

 

 

     

 

 

  

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

         

Continuing operations

    $ 2.94       $ 1.93       $ 1.12   

Discontinued operations

      .24         —         .07   
  

 

 

     

 

 

     

 

 

  

Total

    $ 3.18       $ 1.93       $ 1.19   
  

 

 

     

 

 

     

 

 

  

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

         

Continuing operations

    $ 2.89       $ 1.90       $ 1.11   

Discontinued operations

      .23         —         .07   
  

 

 

     

 

 

     

 

 

  

Total

    $ 3.12       $ 1.90       $ 1.18   
  

 

 

     

 

 

     

 

 

  

 

(1) 

Includes the potential dilutive effect of additional common shares that are issuable upon exercise of outstanding stock options, non-vested deferred compensation and restricted stock, restricted stock units, and the outstanding commitment to issue shares under the ESPP, determined by the treasury stock method.

 

(2) 

For the years ended December 31, 2013, 2012 and 2011, securities covering approximately 3 million, 12 million and 16 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.

 

11. Stock-Based Compensation Plans and Arrangements

As of December 31, 2013, we have one active stock-based compensation plan that provides for grants of equity awards to our employees and non-employee directors. We also maintain the ESPP. Shares issued under these stock-based compensation plans may be either shares reacquired by us or shares that are authorized but unissued.

Our SLM Corporation 2012 Omnibus Incentive Plan was approved by shareholders on May 24, 2012. At December 31, 2013, 20 million shares were authorized to be issued from this plan.

An amendment to our ESPP was approved by our shareholders on May 24, 2012 that authorized the issuance of 6 million shares under the plan and kept the terms of the plan substantially the same.

 

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Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

11. Stock-Based Compensation Plans and Arrangements (Continued)

 

The total stock-based compensation cost recognized in the consolidated statements of income for 2013, 2012 and 2011 was $47 million, $47 million and $56 million, respectively. As of December 31, 2013, there was $19 million of total unrecognized compensation expense related to unvested stock awards net of estimated forfeitures, which is expected to be recognized over a weighted average period of 1.8 years. We amortize compensation expense on a straight-line basis over the related vesting periods of each tranche of each award.

Stock Options

Stock options granted prior to 2012 expire 10 years after the grant date, and those granted since 2012 expire in 5 years. The exercise price must be equal to or greater than the market price of our common stock on the grant date. We have granted time-vested, price-vested and performance-vested options to our employees and non-employee directors. Time-vested options granted to management and non-management employees generally vest over three years. Price-vested options granted to management employees vest upon our common stock reaching a targeted closing price for a set number of days. Performance-vested options granted to management employees vest one-third per year for three years based on corporate earnings-related performance targets. Options granted to non-employee directors vest upon the director’s election to the Board.

The fair values of the options granted in the years ended December 31, 2013, 2012 and 2011 were estimated as of the grant date using a Black-Scholes option pricing model with the following weighted average assumptions:

 

     Years Ended December 31,  
     2013     2012     2011  

Risk-free interest rate

      .65 %      .60 %      1.57 % 

Expected volatility

      31 %      44 %      54 % 

Expected dividend rate

      3.35 %      3.13 %      2.58 % 

Expected life of the option

      2.8 years        2.8 years        4.1 years   

Weighted average fair value of options granted

    $ 3.11      $ 4.12      $ 5.18   

The expected life of the options is based on observed historical exercise patterns. Groups of employees (and non-employee directors) that have received similar option grant terms are considered separately for valuation purposes. The expected volatility is based on implied volatility from publicly-traded options on our stock at the grant date and historical volatility of our stock consistent with the expected life of the option. The risk-free interest rate is based on the U.S. Treasury spot rate at the grant date consistent with the expected life of the option. The dividend yield is based on the projected annual dividend payment per share based on the dividend amount at the grant date, divided by the stock price at the grant date.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

11. Stock-Based Compensation Plans and Arrangements (Continued)

 

The following table summarizes stock option activity in 2013.

 

(Dollars in millions, except per share data)

    Number of
Options		     Weighted
Average
Exercise
Price per
Share		      Weighted
Average
Remaining
Contractual
Term		      Aggregate
Intrinsic
Value(1) 		 

Outstanding at December 31, 2012

      25,992,747      $ 19.84         

Granted

      3,980,008        17.92         

Exercised(2)(3)

      (7,614,500 )      12.81         

Canceled

      (2,085,495 )      34.94         
  

 

 

    

 

 

        

Outstanding at December 31, 2013(4)(5)

      20,272,760      $ 20.55         4.1 yrs       $ 198   
  

 

 

    

 

 

     

 

 

     

 

 

  

Exercisable at December 31, 2013

      14,426,174      $ 21.84         4.1 yrs       $ 145   
  

 

 

    

 

 

     

 

 

     

 

 

  

 

  (1) 

The aggregate intrinsic value represents the total intrinsic value (the aggregate difference between our closing stock price on December 31, 2013 and the exercise price of in-the-money options) that would have been received by the option holders if all in-the-money options had been exercised on December 31, 2013.

 

  (2) 

The total intrinsic value of options exercised was $73 million, $27 million and $14 million for 2013, 2012 and 2011, respectively.

 

  (3) 

No cash was received from option exercises in 2013. The actual tax benefit realized for the tax deductions from option exercises totaled $28 million for 2013.

 

  (4) 

As of December 31, 2013, there was $4 million of unrecognized compensation cost related to stock options net of estimated forfeitures, which is expected to be recognized over a weighted average period of 1.5 years.

 

  (5) 

For net-settled options, gross number is reflected.

Restricted Stock

Restricted stock awards generally vest over three years and in some cases based on corporate earnings-related performance targets. Outstanding restricted stock is entitled to dividend equivalent units that vest subject to the same vesting requirements or lapse of transfer restrictions, as applicable, as the underlying restricted stock award. The fair value of restricted stock awards is based on our stock price at the grant date.

The following table summarizes restricted stock activity in 2013.

 

     Number of
Shares		     Weighted
Average Grant
Date
Fair Value		  

Non-vested at December 31, 2012

      187,792      $ 11.55   

Granted

      51,073        17.91   

Vested(1)

      (193,370 )      12.47   

Canceled

      (6,140 )      17.91   
  

 

 

    

 

 

  

Non-vested at December 31, 2013(2)

      39,355      $ 14.29   
  

 

 

    

 

 

  

 

  (1) 

The total fair value of shares that vested during 2013, 2012 and 2011 was $2 million, $4 million and $6 million, respectively.

 

  (2) 

As of December 31, 2013, there was $.01 million of unrecognized compensation cost related to restricted stock net of estimated forfeitures, which is expected to be recognized over a weighted average period of .1 years.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

11. Stock-Based Compensation Plans and Arrangements (Continued)

 

Restricted Stock Units and Performance Stock Units

Restricted stock units (“RSUs”) and performance stock units (“PSUs”) are equity awards granted to employees that entitle the holder to shares of our common stock when the award vests. RSUs may be time-vested over three years or vested at grant but subject to transfer restrictions, while PSUs vest based on corporate earnings-related performance targets over a three-year period. Outstanding RSUs and PSUs are entitled to dividend equivalent units that vest subject to the same vesting requirements or lapse of transfer restrictions, as applicable, as the underlying award. The fair value of RSUs and PSUs is based on our stock price at the grant date.

The following table summarizes RSU and PSU activity in 2013.

 

     Number of
RSUs/
PSUs		     Weighted
Average Grant
Date
Fair Value		  

Outstanding at December 31, 2012

      4,473,464      $ 15.49   

Granted

      2,457,570        17.98   

Vested and converted to common stock(1)

      (1,730,669 )      15.32   

Canceled

      (73,478 )      16.52   
  

 

 

    

 

 

  

Outstanding at December 31, 2013(2)

      5,126,887      $ 16.72   
  

 

 

    

 

 

  

 

  (1) 

The total fair value of RSUs/PSUs that vested and converted to common stock during 2013, 2012 and 2011 was $27 million, $13 million and $.4 million, respectively.

 

  (2) 

As of December 31, 2013, there was $15 million of unrecognized compensation cost related to RSUs/PSUs net of estimated forfeitures, which is expected to be recognized over a weighted average period of 1.8 years.

Employee Stock Purchase Plan

Under the ESPP, employees can purchase shares of our common stock at the end of a 12-month offering period at a price equal to the share price at the beginning of the 12-month period, less 15 percent, up to a maximum purchase price of $7,500 plus accrued interest. The purchase price for each offering is determined at the beginning of the offering period.

The fair values of the stock purchase rights of the ESPP offerings were calculated using a Black-Scholes option pricing model with the following weighted average assumptions.

 

     Years Ended December 31,  
     2013     2012     2011  

Risk-free interest rate

      .15 %      .13 %      .27 % 

Expected volatility

      29 %      29 %      42 % 

Expected dividend rate

      3.51 %      3.27 %      1.87 % 

Expected life of the option

      1 year        1 year        1 year   

Weighted average fair value of stock purchase rights

    $ 2.95      $ 3.01      $ 3.63   

The expected volatility is based on implied volatility from publicly-traded options on our stock at the grant date and historical volatility of our stock consistent with the expected life. The risk-free interest rate is based on the U.S. Treasury spot rate at the grant date consistent with the expected life. The dividend yield is based on the projected annual dividend payment per share based on the current dividend amount at the grant date divided by the stock price at the grant date.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

11. Stock-Based Compensation Plans and Arrangements (Continued)

 

The fair values were amortized to compensation cost on a straight-line basis over a one-year vesting period. As of December 31, 2013, there was $.1 million of unrecognized compensation cost related to the ESPP net of estimated forfeitures, which is expected to be recognized in January 2014.

During 2013, 2012 and 2011, plan participants purchased 218,389 shares, 192,755 shares and 278,266 shares, respectively, of our common stock.

 

12. Fair Value Measurements

We use estimates of fair value in applying various accounting standards for our financial statements.

We categorize our fair value estimates based on a hierarchical framework associated with three levels of price transparency utilized in measuring financial instruments at fair value. For additional information regarding our policies for determining fair value and the hierarchical framework, see “Note 2 — Significant Accounting Policies — Fair Value Measurement.”

During 2013, there were no significant transfers of financial instruments between levels.

Student Loans

Our FFELP Loans and Private Education Loans are accounted for at cost or at the lower of cost or market if the loan is held-for-sale. FFELP Loans classified as held-for-sale are those which we have the ability and intent to sell under various ED loan purchase programs. In these instances, the FFELP Loans are valued using the committed sales price under the programs. For all other FFELP Loans and Private Education Loans, fair values were determined by modeling loan cash flows using stated terms of the assets and internally-developed assumptions to determine aggregate portfolio yield, net present value and average life.

FFELP Loans

The significant assumptions used to determine fair value of our FFELP loans are prepayment speeds, default rates, cost of funds, capital levels, and expected Repayment Borrower Benefits to be earned. In addition, the Floor Income component of our FFELP Loan portfolio is valued with option models using both observable market inputs and internally developed inputs. A number of significant inputs into the models are internally derived and not observable to market participants. While the resulting fair value can be validated against market transactions where we are a participant, these markets are not considered active. As such, these are level 3 valuations.

Private Education Loans

The significant assumptions used to determine fair value of our Private Education Loans are prepayment speeds, default rates, recovery rates, cost of funds and capital levels. A number of significant inputs into the models are internally derived and not observable to market participants nor can the resulting fair values be validated against market transactions. As such, these are level 3 valuations.

Cash and Investments (Including “Restricted Cash and Investments”)

Cash and cash equivalents are carried at cost. Carrying value approximates fair value. Investments classified as trading or available-for-sale are carried at fair value in the financial statements. Investments in mortgage-backed securities are valued using observable market prices. These securities are primarily collateralized by real

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12. Fair Value Measurements (Continued)

 

estate properties in Utah and are guaranteed by either a government sponsored enterprise or the U.S. government. Other investments (primarily municipal bonds) for which observable prices from active markets are not available were valued through standard bond pricing models using observable market yield curves adjusted for credit and liquidity spreads. These valuations are immaterial to the overall investment portfolio. The fair value of investments in commercial paper, asset-backed commercial paper, or demand deposits that have a remaining term of less than 90 days when purchased are estimated to equal their cost and, when needed, adjustments for liquidity and credit spreads are made depending on market conditions and counterparty credit risks. No additional adjustments were deemed necessary. These are level 2 valuations.

Borrowings

Borrowings are accounted for at cost in the financial statements except when denominated in a foreign currency or when designated as the hedged item in a fair value hedge relationship. When the hedged risk is the benchmark interest rate and not full fair value, the cost basis is adjusted for changes in value due to benchmark interest rates only. Foreign currency-denominated borrowings are re-measured at current spot rates in the financial statements. The full fair value of all borrowings is disclosed. Fair value was determined through standard bond pricing models and option models (when applicable) using the stated terms of the borrowings, observable yield curves, foreign currency exchange rates, volatilities from active markets or from quotes from broker-dealers. Fair value adjustments for unsecured corporate debt are made based on indicative quotes from observable trades and spreads on credit default swaps specific to the Company. Fair value adjustments for secured borrowings are based on indicative quotes from broker-dealers. These adjustments for both secured and unsecured borrowings are material to the overall valuation of these items and, currently, are based on inputs from inactive markets. As such, these are level 3 valuations.

Derivative Financial Instruments

All derivatives are accounted for at fair value in the financial statements. The fair value of a majority of derivative financial instruments was determined by standard derivative pricing and option models using the stated terms of the contracts and observable market inputs. In some cases, we utilized internally developed inputs that are not observable in the market, and as such, classified these instruments as level 3 fair values. Complex structured derivatives or derivatives that trade in less liquid markets require significant estimates and judgment in determining fair value that cannot be corroborated with market transactions. It is our policy to compare our derivative fair values to those received by our counterparties in order to validate the model’s outputs. Any significant differences are identified and resolved appropriately.

When determining the fair value of derivatives, we take into account counterparty credit risk for positions where there is exposure to the counterparty on a net basis by assessing exposure net of collateral held. The net exposures for each counterparty are adjusted based on market information available for the specific counterparty, including spreads from credit default swaps. When the counterparty has exposure to us under derivatives with us, we fully collateralize the exposure, minimizing the adjustment necessary to the derivative valuations for our credit risk. While trusts that contain derivatives are not required to post collateral, when the counterparty is exposed to the trust the credit quality and securitized nature of the trusts minimizes any adjustments for the counterparty’s exposure to the trusts. The net credit risk adjustment (adjustments for our exposure to counterparties net of adjustments for the counterparties’ exposure to us) decreased the valuations by $91 million at December 31, 2013.

 

F-61

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12. Fair Value Measurements (Continued)

 

Inputs specific to each class of derivatives disclosed in the table below are as follows:

 

  •  

Interest rate swaps — Derivatives are valued using standard derivative cash flow models. Derivatives that swap fixed interest payments for LIBOR interest payments (or vice versa) and derivatives swapping quarterly reset LIBOR for daily reset LIBOR or one-month LIBOR were valued using the LIBOR swap yield curve which is an observable input from an active market. These derivatives are level 2 fair value estimates in the hierarchy. Other derivatives swapping LIBOR interest payments for another variable interest payment (primarily T-Bill or Prime) or swapping interest payments based on the Consumer Price Index for LIBOR interest payments are valued using the LIBOR swap yield curve and observable market spreads for the specified index. The markets for these swaps are generally illiquid as indicated by a wide bid/ask spread. The adjustment made for liquidity decreased the valuations by $84 million at December 31, 2013. These derivatives are level 3 fair value estimates.

 

  •  

Cross-currency interest rate swaps — Derivatives are valued using standard derivative cash flow models. Derivatives hedging foreign-denominated bonds are valued using the LIBOR swap yield curve (for both USD and the foreign-denominated currency), cross-currency basis spreads, and forward foreign currency exchange rates. The derivatives are primarily British Pound Sterling and Euro denominated. These inputs are observable inputs from active markets. Therefore, the resulting valuation is a level 2 fair value estimate. Amortizing notional derivatives (derivatives whose notional amounts change based on changes in the balance of, or pool of, assets or debt) hedging trust debt use internally derived assumptions for the trust assets’ prepayment speeds and default rates to model the notional amortization. Management makes assumptions concerning the extension features of derivatives hedging rate-reset notes denominated in a foreign currency. These inputs are not market observable; therefore, these derivatives are level 3 fair value estimates.

 

  •  

Floor Income Contracts — Derivatives are valued using an option pricing model. Inputs to the model include the LIBOR swap yield curve and LIBOR interest rate volatilities. The inputs are observable inputs in active markets and these derivatives are level 2 fair value estimates.

The carrying value of borrowings designated as the hedged item in a fair value hedge is adjusted for changes in fair value due to benchmark interest rates and foreign-currency exchange rates. These valuations are determined through standard bond pricing models and option models (when applicable) using the stated terms of the borrowings, and observable yield curves, foreign currency exchange rates, and volatilities.

 

F-62

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12. Fair Value Measurements (Continued)

 

The following table summarizes the valuation of our financial instruments that are marked-to-market on a recurring basis.

 

    Fair Value Measurements on a Recurring Basis  
    December 31, 2013     December 31, 2012  

(Dollars in millions)

    Level 1       Level 2       Level 3       Total       Level 1       Level 2      Level 3       Total   

Assets

                

Available-for-sale investments:

                

Agency residential mortgage-backed securities

   $ —      $ 102      $ —      $ 102      $ —      $ 63      $ —      $ 63   

Guaranteed investment contracts

     —        —        —        —        —        9        —        9   

Other

     —        7        —        7        —        9        —        9   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total available-for-sale investments

     —        109        —        109        —        81        —        81   

Derivative instruments:(1)

                

Interest rate swaps

     —        785        38        823        —        1,444        102        1,546   

Cross-currency interest rate swaps

     —        27        1,158        1,185        —        48        1,187        1,235   

Other

     —        —        2        2        —        —        4        4   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total derivative assets(3)

     —        812        1,198        2,010        —        1,492        1,293        2,785   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

   $ —      $ 921      $ 1,198      $ 2,119      $ —      $ 1,573      $ 1,293      $ 2,866   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Liabilities(2)

                

Derivative instruments(1)

                

Interest rate swaps

   $ —      $ (239 )    $ (125 )    $ (364 )    $ —      $ (34 )    $ (175 )    $ (209 ) 

Floor Income Contracts

     —        (1,384 )      —        (1,384 )      —        (2,154 )      —        (2,154 ) 

Cross-currency interest rate swaps

     —        (35 )      (151 )      (186 )      —        (2 )      (134 )      (136 ) 

Other

     —        —        (23 )      (23 )      —        —        —        —   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total derivative liabilities(3)

     —        (1,658 )      (299 )      (1,957 )      —        (2,190 )      (309 )      (2,499 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total

   $ —      $ (1,658 )    $ (299 )    $ (1,957 )    $ —      $ (2,190 )    $ (309 )    $ (2,499 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(1) 

Fair value of derivative instruments excludes accrued interest and the value of collateral.

 

(2) 

Borrowings which are the hedged items in a fair value hedge relationship and which are adjusted for changes in value due to benchmark interest rates only are not carried at full fair value and are not reflected in this table.

 

(3) 

See “Note 7 — Derivative Financial Instruments” for a reconciliation of gross positions without the impact of master netting agreements to the balance sheet classification.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12. Fair Value Measurements (Continued)

 

The following tables summarize the change in balance sheet carrying value associated with level 3 financial instruments carried at fair value on a recurring basis.

 

     Year Ended December 31, 2013  
     Derivative Instruments  

(Dollars in millions)

    Interest
Rate Swaps		     Cross
Currency
Interest
Rate Swaps		     Other     Total
Derivative
Instruments		  

Balance, beginning of period

    $ (73 )    $ 1,053      $ 4      $ 984   

Total gains/(losses) (realized and unrealized):

         

Included in earnings(1)

      9        63        (22 )      50   

Included in other comprehensive income

      —        —        —        —   

Settlements

      (23 )      (109 )      (3 )      (135 ) 

Transfers in and/or out of level 3

      —        —        —        —   
  

 

 

    

 

 

    

 

 

    

 

 

  

Balance, end of period

    $ (87 )    $ 1,007      $ (21 )    $ 899   
  

 

 

    

 

 

    

 

 

    

 

 

  

Change in unrealized gains/(losses) relating to instruments still held at the reporting date(2)

    $ (2 )    $ 116      $ (19 )    $ 95   
  

 

 

    

 

 

    

 

 

    

 

 

  

 

     Year Ended December 31, 2012  
     Derivative Instruments  

(Dollars in millions)

    Interest
Rate Swaps		     Cross
Currency
Interest
Rate Swaps		     Other      Total
Derivative
Instruments		  

Balance, beginning of period

    $ (40 )    $ 1,021      $ 1       $ 982   

Total gains/(losses) (realized and unrealized):

          

Included in earnings(1)

      (5 )      159        3         157   

Included in other comprehensive income

      —        —        —         —   

Settlements

      (28 )      (127 )      —         (155 ) 

Transfers in and/or out of level 3

      —        —        —         —   
  

 

 

    

 

 

    

 

 

     

 

 

  

Balance, end of period

    $ (73 )    $ 1,053      $ 4       $ 984   
  

 

 

    

 

 

    

 

 

     

 

 

  

Change in unrealized gains/(losses) relating to instruments still held at the reporting date(2)

    $ (31 )    $ 55      $ 4       $ 28   
  

 

 

    

 

 

    

 

 

     

 

 

  

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12. Fair Value Measurements (Continued)

 

     Year Ended December 31, 2011  
     Derivative Instruments  

(Dollars in millions)

    Interest
Rate Swaps		     Cross
Currency
Interest
Rate Swaps		     Other     Total
Derivative
Instruments		  

Balance, beginning of period

      $(90)        $1,427        $26        $1,363   

Total gains/(losses) (realized and unrealized):

         

Included in earnings(1)

      69        (176 )      33        (74 ) 

Included in other comprehensive income

      —        —        —        —   

Settlements

      (19 )      (230 )      (58 )      (307 ) 

Transfers in and/or out of level 3

      —        —        —        —   
  

 

 

    

 

 

    

 

 

    

 

 

  

Balance, end of period

    $ (40 )    $ 1,021      $ 1      $ 982   
  

 

 

    

 

 

    

 

 

    

 

 

  

Change in unrealized gains/(losses) relating to instruments still held at the reporting date(2)

    $ 6      $ (408 )    $ 11      $ (391 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  

 

  (1) 

“Included in earnings” is comprised of the following amounts recorded in the specified line item in the consolidated statements of income:

 

     Years Ended December 31,  

(Dollars in millions)

      2013          2012          2011    

Gains (losses) on derivative and hedging activities, net

    $ (27 )     $ 37       $ (298 ) 

Interest expense

      77         120         224   
  

 

 

     

 

 

     

 

 

  

Total

    $ 50       $ 157       $ (74 ) 
  

 

 

     

 

 

     

 

 

  

 

  (2) 

Recorded in “gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.

The following table presents the significant inputs that are unobservable or from inactive markets used in the recurring valuations of the level 3 financial instruments detailed above.

 

(Dollars in millions)

   Fair Value at
December 31, 2013		     Valuation
Technique		   Input   Range
(Weighted Average)

Derivatives

        

Consumer Price Index/LIBOR basis swaps

   $ 33      Discounted cash flow   Bid/ask adjustment

to discount rate

   0.05% — 0.05%
(0.05%)

Prime/LIBOR basis swaps

     (120 )    Discounted cash flow   Constant Prepayment Rate   4.2%
      Bid/ask adjustment to
discount rate		   0.08% — 0.08%
(0.08%)

Cross-currency interest rate swaps

     1,007      Discounted cash flow   Constant Prepayment Rate   2.6%

Other

     (21 )       
 

 

 

        

Total

   $ 899         
 

 

 

        

 

F-65

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12. Fair Value Measurements (Continued)

 

The significant inputs that are unobservable or from inactive markets related to our level 3 derivatives detailed in the table above would be expected to have the following impacts to the valuations:

 

  •  

Consumer Price Index/LIBOR basis swaps — These swaps do not actively trade in the markets as indicated by a wide bid/ask spread. A wider bid/ask spread will result in a decrease in the overall valuation.

 

  •  

Prime/LIBOR basis swaps — These swaps do not actively trade in the markets as indicated by a wide bid/ask spread. A wider bid/ask spread will result in a decrease in the overall valuation. In addition, the unobservable inputs include Constant Prepayment Rates of the underlying securitization trust the swap references. A decrease in this input will result in a longer weighted average life of the swap which will increase the value for swaps in a gain position and decrease the value for swaps in a loss position, everything else equal. The opposite is true for an increase in the input.

 

  •  

Cross-currency interest rate swaps — The unobservable inputs used in these valuations are Constant Prepayment Rates of the underlying securitization trust the swap references. A decrease in this input will result in a longer weighted average life of the swap. All else equal in a typical currency market, this will result in a decrease to the valuation due to the delay in the cash flows of the currency exchanges as well as diminished liquidity in the forward exchange markets as you increase the term. The opposite is true for an increase in the input.

The following table summarizes the fair values of our financial assets and liabilities, including derivative financial instruments.

 

     December 31, 2013     December 31, 2012  

(Dollars in millions)

    Fair
Value		     Carrying
Value		     Difference     Fair
Value		     Carrying
Value		     Difference  

Earning assets

             

FFELP Loans

    $ 104,481      $ 104,588      $ (107 )    $ 125,042      $ 125,612      $ (570 ) 

Private Education Loans

      37,485        37,512        (27 )      36,081        36,934        (853 ) 

Cash and investments(1)

      9,732        9,732        —        9,994        9,994        —   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total earning assets

      151,698        151,832        (134 )      171,117        172,540        (1,423 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Interest-bearing liabilities

             

Short-term borrowings

      13,807        13,795        (12 )      19,861        19,856        (5 ) 

Long-term borrowings

      133,578        136,648        3,070        146,210        152,401        6,191   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total interest-bearing liabilities

      147,385        150,443        3,058        166,071        172,257        6,186   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Derivative financial instruments

             

Floor Income Contracts

      (1,384 )      (1,384 )      —        (2,154 )      (2,154 )      —   

Interest rate swaps

      459        459        —        1,337        1,337        —   

Cross-currency interest rate swaps

      999        999        —        1,099        1,099        —   

Other

      (21 )      (21 )      —        4        4        —   
      

 

 

        

 

 

  

Excess of net asset fair value over carrying value

        $ 2,924          $ 4,763   
      

 

 

        

 

 

  

 

(1) 

“Cash and investments” includes available-for-sale investments that consist of investments that are primarily agency securities whose cost basis is $113 million and $78 million at December 31, 2013 and 2012, respectively, versus a fair value of $109 million and $81 million at December 31, 2013 and 2012, respectively.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

13. Commitments, Contingencies and Guarantees

At the time of this filing, Sallie Mae Bank remains subject to a cease and desist order originally issued in August 2008 by the FDIC and the UDFI. In July 2013, the FDIC notified us that it plans to replace the existing cease and desist order on Sallie Mae Bank with a new formal enforcement action against Sallie Mae Bank that would more specifically address certain cited violations of Section 5 of the Federal Trade Commission Act (the “FTC Act”), including practices relating to payment allocation practices and the disclosures and assessments of certain late fees, as well as alleged violations under the Servicemembers Civil Relief Act (the “SCRA”). In November 2013, the FDIC notified us that the new formal enforcement action would be against Sallie Mae Bank and an additional enforcement action would be against Sallie Mae, Inc. (“SMI”), in its capacity as a servicer of education loans for other financial institutions, and would 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 any new enforcement action. With respect to alleged civil violations of the SCRA, Sallie Mae Bank and SMI are also separately negotiating a comprehensive settlement, remediation and restitution plan with the Department of Justice (the “DOJ”), in its capacity as the agency having primary authority for enforcement of such matters. As of December 31, 2013, we reserved $70 million for estimated amounts and costs that are probable of being incurred for expected compliance remediation efforts with respect to the FDIC and DOJ matters described above.

We have made and continue to make changes to Sallie Mae Bank’s oversight of significant activities performed outside Sallie Mae Bank by affiliates and to our business practices in order to comply with all applicable laws and regulations and the terms of any cease and desist orders, including in connection with our pursuit of a strategic plan to separate our existing organization into two publicly-traded companies. We are cooperating fully with the FDIC, DOJ and Consumer Financial Protection Bureau (the “CFPB”) in response to their investigations and requests for information and are in active discussions with each with respect to any potential actions to be taken against us. We could be required to, or otherwise determine to, make further changes to the business practices and products of Sallie Mae Bank and our other affiliates to respond to regulatory concerns.

Contingencies

In the ordinary course of business, we and our subsidiaries are defendants in or parties to pending and threatened legal actions and proceedings including actions brought on behalf of various classes of claimants. These actions and proceedings may be based on alleged violations of consumer protection, securities, employment and other laws. In certain of these actions and proceedings, claims for substantial monetary damage are asserted against us and our subsidiaries.

In the ordinary course of business, we and our subsidiaries are subject to regulatory examinations, information gathering requests, inquiries and investigations. In connection with formal and informal inquiries in these cases, we and our subsidiaries receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of our regulated activities.

In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, we cannot predict what the eventual outcome of the pending matters will be, what the timing or the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.

We are required to establish reserves for litigation and regulatory matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

13. Commitments, Contingencies and Guarantees (Continued)

 

Based on current knowledge, reserves have been established for certain litigation or regulatory matters where the loss is both probable and estimable. Based on current knowledge, management does not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our consolidated financial position, liquidity, results of operations or cash flows.

 

14. Income Taxes

Reconciliations of the statutory U.S. federal income tax rates to our effective tax rate for continuing operations follow:

 

     Years Ended December 31,  
       2013         2012         2011    

Statutory rate

      35.0 %      35.0 %      35.0 % 

State tax, net of federal benefit

      2.0        0.1        .8   

Other, net

      .1        (0.5 )      (.5 ) 
  

 

 

    

 

 

    

 

 

  

Effective tax rate

      37.1 %      34.6 %      35.3 % 
  

 

 

    

 

 

    

 

 

  

The effective tax rates for discontinued operations for the years ended December 31, 2013, 2012 and 2011 are 16.2 percent, 40.7 percent, and 37.7 percent, respectively. The effective tax rate varies from the statutory U.S. federal rate of 35 percent primarily due to the release of valuation allowances against capital loss carryforwards for 2013, and due to the impact of state taxes, net of federal benefit, for 2013, 2012 and 2011.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

14. Income Taxes (Continued)

 

Income tax expense consists of:

 

     December 31,  

(Dollars in millions)

    2013     2012     2011  

Continuing operations current provision/(benefit):

       

Federal

    $ 567      $ 474      $ 436   

State

      47        27        38   

Foreign

      —        —        —   
  

 

 

    

 

 

    

 

 

  

Total continuing operations current provision/(benefit)

      614        501        474   

Continuing operations deferred provision/(benefit):

       

Federal

      142        23        (121 ) 

State

      20        (26 )      (25 ) 

Foreign

      —        —        —   
  

 

 

    

 

 

    

 

 

  

Total continuing operations deferred provision/(benefit)

      162        (3 )      (146 ) 
  

 

 

    

 

 

    

 

 

  

Continuing operations provision for income tax expense/(benefit)

      776        498        328   
  

 

 

    

 

 

    

 

 

  

Discontinued operations current provision/(benefit):

       

Federal

    $ 32      $ 1      $ (49 ) 

State

      1        —        (5 ) 

Foreign

      —        —        —   
  

 

 

    

 

 

    

 

 

  

Total discontinued operations current provision/(benefit)

      33        1        (54 ) 

Discontinued operations deferred provision/(benefit):

       

Federal

      (12 )      (2 )      68   

State

      (1 )      —        6   

Foreign

      —        —        —   
  

 

 

    

 

 

    

 

 

  

Total discontinued operations deferred provision/(benefit)

      (13 )      (2 )      74   
  

 

 

    

 

 

    

 

 

  

Discontinued operations provision for income tax expense/(benefit)

      20        (1 )      20   
  

 

 

    

 

 

    

 

 

  

Provision for income tax expense/(benefit)

    $ 796      $ 497      $ 348   
  

 

 

    

 

 

    

 

 

  

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

14. Income Taxes (Continued)

 

The tax effect of temporary differences that give rise to deferred tax assets and liabilities include the following:

 

     December 31,  

(Dollars in millions)

    2013      2012  

Deferred tax assets:

      

Loan reserves

    $ 893       $ 940   

Market value adjustments on student loans, investments and derivatives

      572         671   

Stock-based compensation plans

      66         77   

Accrued expenses not currently deductible

      61         34   

Deferred revenue

      57         60   

Other

      55         42   
  

 

 

     

 

 

  

Total deferred tax assets

      1,704         1,824   
  

 

 

     

 

 

  

Deferred tax liabilities:

      

Gains/(losses) on repurchased debt

      304         306   

Other

      81         65   
  

 

 

     

 

 

  

Total deferred tax liabilities

      385         371   
  

 

 

     

 

 

  

Net deferred tax assets

    $ 1,319       $ 1,453   
  

 

 

     

 

 

  

Included in other deferred tax assets is a valuation allowance of $19 million and $29 million as of December 31, 2013 and 2012, respectively, against a portion of our federal, state and international deferred tax assets. The valuation allowance is primarily attributable to deferred tax assets for federal and state capital loss carryovers and state and international net operating loss carryovers that management believes it is more likely than not will expire prior to being realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income of the appropriate character (i.e. capital or ordinary) during the period in which the temporary differences become deductible. Management considers, among other things, the economic slowdown, the scheduled reversals of deferred tax liabilities, and the history of positive taxable income available for net operating loss carrybacks in evaluating the realizability of the deferred tax assets.

As of December 31, 2013, we have apportioned state net operating loss carryforwards of $438 million which begin to expire in 2024 and international net operating loss carryforwards of $.3 million which begin to expire in 2032.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

14. Income Taxes (Continued)

 

Accounting for Uncertainty in Income Taxes

The following table summarizes changes in unrecognized tax benefits:

 

     December 31,  

(Dollars in millions)

    2013     2012     2011  

Unrecognized tax benefits at beginning of year

    $ 41.2      $ 45.9      $ 41.7   

Increases resulting from tax positions taken during a prior period

      5.8        20.0        20.5   

Decreases resulting from tax positions taken during a prior period

      (7.7 )      (18.0 )      (2.1 ) 

Increases/(decreases) resulting from tax positions taken during the current period

      28.1        11.3        (9.1 ) 

Decreases related to settlements with taxing authorities

      (7.7 )      (14.7 )      —   

Increases related to settlements with taxing authorities

      —        —        0.4   

Reductions related to the lapse of statute of limitations

      (3.7 )      (3.3 )      (5.5 ) 
  

 

 

    

 

 

    

 

 

  

Unrecognized tax benefits at end of year

    $ 56.0      $ 41.2      $ 45.9   
  

 

 

    

 

 

    

 

 

  

As of December 31, 2013, the gross unrecognized tax benefits are $56.0 million. Included in the $56.0 million are $28.1 million of unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate.

The Company or one of its subsidiaries files income tax returns at the U.S. federal level, in most U.S. states, and various foreign jurisdictions. U.S. federal income tax returns filed for years 2010 and prior have either been audited or surveyed and are now resolved. Various combinations of subsidiaries, tax years, and jurisdictions remain open for review, subject to statute of limitations periods (typically 3 to 4 prior years). We do not expect the resolution of open audits to have a material impact on our unrecognized tax benefits.

 

15. Segment Reporting

We monitor and assess our ongoing operations and results by three primary operating segments — the Consumer Lending operating segment, the Business Services operating segment and the FFELP Loans operating segment. These three operating segments meet the quantitative thresholds for reportable segments. Accordingly, the results of operations of our Consumer Lending, Business Services and FFELP Loans segments are presented separately. We have smaller operating segments that consist of business operations that have either been discontinued or are winding down. These operating segments do not meet the quantitative thresholds to be considered reportable segments. As a result, the results of operations for these operating segments (Purchased Paper business and mortgage and other loan business) are combined with gains/losses from the repurchase of debt, the financial results of our corporate liquidity portfolio and all overhead within the Other reportable segment. The management reporting process measures the performance of our operating segments based on our management structure, as well as the methodology we used to evaluate performance and allocate resources. Management, including our chief operating decision makers, evaluates the performance of our operating segments based on their profitability. As discussed further below, we measure the profitability of our operating segments based on “Core Earnings.” Accordingly, information regarding our reportable segments is provided based on a “Core Earnings” basis.

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

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

15. Segment Reporting (Continued)

 

through financial aid, federal loans or customers’ resources. We continue to offer loan products to parents and graduate students where we believe we are competitive with similar federal education loan products. In this segment, we earn net interest income on our Private Education Loan portfolio (after provision for loan losses). Operating expenses for this segment include costs incurred to acquire and to service our loans. With the elimination of FFELP in July 2010, these FFELP-related revenue sources will continue to decline.

Managed growth of our Private Education Loan portfolio is central not only to our strategy for growing the Consumer Lending segment but also for the future of Sallie Mae Bank. In 2013, we originated $3.8 billion of Private Education Loans, an increase of 14 percent and 39 percent from the years ended December 31, 2012 and 2011, respectively. As of December 31, 2013, 2012 and 2011, we had $37.5 billion, $36.9 billion, and $36.3 billion of Private Education Loans outstanding, respectively.

Private Education Loans bear the full credit risk of the customer and cosigner. We manage this risk by underwriting and pricing based upon customized credit scoring criteria and the addition of qualified cosigners. For the year ended December 31, 2013, our annual charge-off rate for Private Education Loans (as a percentage of loans in repayment) was 2.8 percent, as compared with 3.4 percent for the prior year.

Since the beginning of 2006, virtually all of our Private Education Loans have been originated and funded by Sallie Mae Bank. At December 31, 2013, Sallie Mae Bank had total assets of $10.7 billion, including $6.7 billion in Private Education Loans and $1.4 billion of FFELP Loans. As of the same date, Sallie Mae Bank had total deposits of $9.2 billion. Sallie Mae Bank currently relies on both retail and brokered deposits to fund its assets and periodically sells originated Private Education Loans to affiliates for inclusion in securitization trusts or collection.

We face competition for Private Education Loans from a group of the nation’s larger banks and local credit unions.

The following table includes asset information for our Consumer Lending segment.

 

     December 31,  

(Dollars in millions)

    2013      2012  

Private Education Loans, net

    $ 37,512       $ 36,934   

Cash and investments(1)

      2,555         2,731   

Other

      2,934         3,275   
  

 

 

     

 

 

  

Total assets

    $ 43,001       $ 42,940   
  

 

 

     

 

 

  

 

  (1) 

Includes restricted cash and investments.

Business Services Segment

We are currently the largest holder, servicer and collector of loans made under the previously existing FFELP, and the majority of our income has been derived, directly or indirectly, from our portfolio of FFELP Loans and servicing we have provided for FFELP Loans. In 2010, Congress passed legislation ending the origination of education loans under FFELP. The terms and conditions of existing FFELP Loans were not affected by this legislation. Our FFELP Loan portfolio will amortize over approximately 20 years. The fee income we have earned from providing servicing and contingent collections services on such loans will similarly decline over time. We also provide servicing, loan default aversion and defaulted loans collection services on

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

15. Segment Reporting (Continued)

 

behalf of Guarantors of FFELP Loans and other institutions, including the ED. With the elimination of FFELP in July 2010, these FFELP-related revenue sources will continue to decline.

 

  •  

Servicing revenues from the FFELP Loans we own and manage represent intercompany charges to the FFELP Loans segment at rates paid to us by the trusts which own the loans. These fees are legally the first payment priority of the trusts and exceed the actual cost of servicing the loans. Intercompany loan servicing revenues declined to $530 million in 2013 from $670 million in 2012. Intercompany loan servicing revenues will decline as the FFELP portfolio amortizes. Prepayments of FFELP Loans could further accelerate the rate of decline.

 

  •  

In 2013, we earned account maintenance fees on FFELP Loans serviced for Guarantors of $38 million, down from $44 million in 2012. These fees will continue to decline as the portfolio amortizes. Prepayments of FFELP Loans could further accelerate the rate of decline.

 

  •  

We provide default aversion, post default collections and claims processing to 15 of the 30 Guarantor 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. In 2013, collection revenue from Guarantor clients totaled $303 million, compared to $264 million the prior year. As FFELP Loans are no longer originated, these revenues will generally decline over time unless we acquire additional work for Guarantor clients. The rate at which these revenues will decrease will also be affected by the Bipartisan Budget Act (the “Budget Act”) enacted on December 26, 2013 and effective on July 1, 2014, which reduces the amount to be paid to Guarantor agencies for defaulted FFELP Loans that are rehabilitated under Section 428F of the Higher Education Act (the “HEA”). The precise effect of the Budget Act will depend on the decisions of our Guarantor agency clients about their continued participation in FFELP default collections, as well as by how the fee reduction is implemented by ED. We earned approximately $283 million in fee income from these activities in 2013.

In 2013, FFELP-related revenues accounted for 77 percent of total Business Services segment revenues, as compared with 82 percent and 82 percent, respectively, for the previous two years. Total Business Services segment revenues were $1.16 billion for the year ended December 31, 2013, down from $1.20 billion for the prior year.

ED Collection and Servicing Contracts

Since 1997, we have provided collection services on defaulted student loans to ED. The current contract runs through April 21, 2015. There are 21 other collection providers, of which we compete with 16 providers for account allocation based on quarterly performance metrics. The remaining five providers are small businesses that are ensured a particular allocation of business. As a consistent top performer, our share of allocated accounts has ranged from six percent to eight percent for this contract period. Currently, we are participating in ED’s procurement process for a new debt collection contract and expect them to announce the recipients by April 30, 2014.

Since the second quarter of 2009, we have been one of four large servicers awarded a servicing contract by ED to service Direct Student Loan Program (“DSLP”) federal loans owned by ED. We serviced approximately 5.7 million accounts under this DSLP servicing contract as of December 31, 2013. The DSLP servicing contract spans five years with one five-year renewal at the option of ED. In November 2013, ED gave notice to Sallie Mae of its intent to exercise its five-year renewal option to extend the DSLP servicing contract. As such, we will continue to compete for DSLP servicing volume from ED with the three other large servicing companies that also have similar contracts. New account allocations for the upcoming contract year are awarded annually based on each company’s performance on five different metrics over the most recently ended contract year: defaulted

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

15. Segment Reporting (Continued)

 

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 any servicer could be awarded is 40 percent of net new borrowers in that contract year. Our share of new loans serviced for ED under the contract increased to 18 percent in 2013 from 15 percent in the prior contract year as a result of our relative standing, as compared to other servicing companies, on the ED Scorecard. We earned $109 million of revenue under the contract for the year ended December 31, 2013.

Other

Upromise generates transaction fees through our Upromise consumer savings network. Since inception through December 31, 2013, members have earned approximately $800 million in rewards by purchasing products at hundreds of online retailers, booking travel, purchasing a home, dining out, buying gas and groceries, using the Upromise World MasterCard, or completing other qualified transactions. We earn a fee for the marketing and administrative services we provide to companies that participate in the Upromise savings network. We also compete with other loyalty shopping services and companies.

Previously, we provided program management services for 529 college-savings plans through our 529 college-savings plan administration business and our Campus Solutions business provided processing capabilities to educational institutions designed to help campus business offices increase their services to students and families. However, in the second quarter of 2013, we sold our Campus Solutions business and recorded an after-tax gain of $38 million. Additionally, in the fourth quarter of 2013, we sold our 529 college-savings plan administration business and recorded an after-tax gain of $65 million. The results of both of these businesses are reported in discontinued operations for all periods presented.

At December 31, 2013 and 2012, the Business Services segment had total assets of $892 million and $867 million, respectively.

FFELP Loans Segment

Our FFELP Loans segment consists of our FFELP Loan portfolio (approximately $104.6 billion as of December 31, 2013) and the underlying debt and capital funding the loans. We are currently the largest holder of FFELP 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 ED and these agencies. These guarantees generally cover at least 97 percent of a FFELP Loan’s principal and accrued interest for loans disbursed. In the case of death, disability or bankruptcy of the borrower, these guarantees cover 100 percent of the loan’s principal and accrued interest.

As a result of the long-term funding used in the FFELP Loan portfolio and the insurance and guarantees provided on these loans, the net interest margin recorded in the FFELP Loans segment is relatively stable and the capital we choose to retain with respect to the segment is modest.

In 2013, we sold Residual Interests in FFELP Loan securitization trusts to third parties. We continue to service the student loans in the trusts under existing agreements. As a result of the sale of the Residual Interests in FFELP securitizations, we removed securitization trust assets of $12.5 billion and the related liabilities of $12.1 billion from our balance sheet and recorded a $312 million gain as part of “gains on sales of loans and investments” for the year ended December 31, 2013.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

15. Segment Reporting (Continued)

 

Our FFELP Loan portfolio will amortize over approximately 20 years. Our goal is to maximize the cash flow generated by the portfolio. We will seek to acquire other third-party FFELP Loan portfolios to add net interest income and servicing revenue.

HEA continues to regulate every aspect of the FFELP, including ongoing communications with borrowers and default aversion requirements. Failure to service a FFELP Loan properly could jeopardize the insurance and guarantees and federal support on these loans. The insurance and guarantees on our existing loans were not affected by the July 2010 termination of the FFELP program.

The following table includes asset information for our FFELP Loans segment.

 

     December 31,  

(Dollars in millions)

    2013      2012  

FFELP Loans, net

    $ 104,588       $ 125,612   

Cash and investments(1)

      4,473         5,766   

Other

      3,587         4,286   
  

 

 

     

 

 

  

Total assets

    $ 112,648       $ 135,664   
  

 

 

     

 

 

  

 

  (1) 

Includes restricted cash and investments.

Other Segment

The Other segment consists primarily of the financial results related to activities of our holding company, including the repurchase of debt, the corporate liquidity portfolio and all overhead. We also include results from certain, smaller wind-down and discontinued operations within this segment. Overhead expenses include costs related to executive management, the Board of Directors, accounting, finance, legal, human resources, stock-based compensation expense and certain information technology costs related to infrastructure and operations.

At December 31, 2013 and 2012, the Other segment had total assets of $3.0 billion and $1.8 billion, respectively.

Measure of Profitability

The tables below include the condensed operating results for each of our reportable segments. Management, including the chief operating decision makers, evaluates the Company on certain performance measures that we refer to as “Core Earnings” performance measures for each operating segment. 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 adjusted for in 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. The tables presented below reflect “Core Earnings” operating measures reviewed and utilized by management to manage the business. Reconciliation of the “Core Earnings” segment totals to our consolidated operating results in accordance with GAAP is also included in the tables below.

 

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Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

15. Segment Reporting (Continued)

 

Our “Core Earnings” performance measures are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting. The management reporting process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. Our operating segments are defined by the products and services they offer or the types of customers they serve, and they reflect the manner in which financial information is currently evaluated by management. Intersegment revenues and expenses are netted within the appropriate financial statement line items consistent with the income statement presentation provided to management. Changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial information.

 

F-76

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

15. Segment Reporting (Continued)

 

Segment Results and Reconciliations to GAAP

 

    Year Ended December 31, 2013  

(Dollars in millions)

   Consumer
Lending		     Business
Services		     FFELP
Loans		     Other     Eliminations(1)     Total
“Core
Earnings”		     Adjustments     Total
GAAP		  
              Reclassi-
fications		     Additions/
(Subtractions)		     Total
Adjustments(2) 		   

Interest income:

                    

Student loans

   $ 2,527      $ —      $ 2,313      $ —      $ —      $ 4,840      $ 816      $ (307 )    $ 509      $ 5,349   

Other loans

     —        —        —        11        —        11        —        —        —        11   

Cash and investments

     7        5        6        4        (5 )      17        —        —        —        17   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total interest income

     2,534        5        2,319        15        (5 )      4,868        816        (307 )      509        5,377   

Total interest expense

     825        —        1,285        51        (5 )      2,156        55        (1 )(4)      54        2,210   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income (loss)

     1,709        5        1,034        (36 )      —        2,712        761        (306 )      455        3,167   

Less: provisions for loan losses

     787        —        52        —        —        839        —        —        —        839   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income (loss) after provisions for loan losses

     922        5        982        (36 )      —        1,873        761        (306 )      455        2,328   

Other income (loss):

                    

Gains (losses) on sales of loans and investments

     —        —        312        (10 )      —        302        —        —        —        302   

Servicing revenue

     34        710        76        —        (530 )      290        —        —        —        290   

Contingency revenue

     —        420        —        —        —        420        —        —        —        420   

Gains on debt repurchases

     —        —        —        48        —        48        (6 )      —        (6 )      42   

Other income (loss)

     —        34        —        4        —        38        (755 )      549 (5)      (206 )      (168 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total other income (loss)

     34        1,164        388        42        (530 )      1,098        (761 )      549        (212 )      886   

Expenses:

                    

Direct operating expenses

     299        400        557        80        (530 )      806        —        —        —        806   

Overhead expenses

     (1 )      —        —        237        —        236        —        —        —        236   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Operating expenses

     298        400        557        317        (530 )      1,042        —        —        —        1,042   

Goodwill and acquired intangible asset impairment and amortization expense

     —        —        —        —        —        —        —        13        13        13   

Restructuring and other reorganization expenses

     6        2        —        64        —        72        —        —        —        72   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total expenses

     304        402        557        381        (530 )      1,114        —        13        13        1,127   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Income (loss) from continuing operations, before income tax expense (benefit)

     652        767        813        (375 )      —        1,857        —        230        230        2,087   

Income tax expense (benefit)(3)

     239        281        298        (138 )      —        680        —        96        96        776   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss) from continuing operations

     413        486        515        (237 )      —        1,177        —        134        134        1,311   

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

     (1 )      112        —        1        —        112        —        (6 )      (6 )      106   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss)

     412        598        515        (236 )      —        1,289        —        128        128        1,417   

Less: net loss attributable to noncontrolling interest

     —        (1 )      —        —        —        (1 )      —        —        —        (1 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss) attributable to SLM Corporation

   $ 412      $ 599      $ 515      $ (236 )    $ —      $ 1,290      $ —      $ 128      $ 128      $ 1,418   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(1) 

The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

 

(2) 

“Core Earnings” adjustments to GAAP:

 

     Year Ended December 31, 2013  

(Dollars in millions)

    Net Impact of
Derivative
Accounting		      Net Impact of
Goodwill and
Acquired Intangibles		      Total  

Net interest income after provisions for loan losses

    $ 455       $ —       $ 455   

Total other loss

      (212 )       —         (212 ) 

Goodwill and acquired intangible asset impairment and amortization expense

      —         13         13   
  

 

 

     

 

 

     

 

 

  

Total “Core Earnings” adjustments to GAAP

    $ 243       $ (13 )       230   
  

 

 

     

 

 

     

Income tax expense

            96   

Loss from discontinued operations, net of tax benefit

            (6 ) 
        

 

 

  

Net income

          $ 128   
        

 

 

  

 

(3) 

Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

(4) 

Represents a portion of the $63 million of “other derivative accounting adjustments.”

 

(5) 

Represents the $487 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $63 million of “other derivative accounting adjustments.”

 

F-77

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

15. Segment Reporting (Continued)

 

    Year Ended December 31, 2012  

(Dollars in millions)

   Consumer
Lending		     Business
Services		     FFELP
Loans		     Other     Elimina-
tions(1) 		    Total
“Core
Earnings”		     Adjustments     Total
GAAP		  
              Reclassi-
fications		     Additions/
(Subtractions)		     Total
Adjustments(2) 		   

Interest income:

                    

Student loans

   $ 2,481      $ —      $ 2,744      $ —      $ —      $ 5,225      $ 858      $ (351 )    $ 507      $ 5,732   

Other loans

     —        —        —        16        —        16        —        —        —        16   

Cash and investments

     7        7        11        2        (6 )      21        —        —        —        21   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total interest income

     2,488        7        2,755        18        (6 )      5,262        858        (351 )      507        5,769   

Total interest expense

     822        —        1,591        37        (6 )      2,444        115        2 (4)      117        2,561   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income (loss)

     1,666        7        1,164        (19 )      —        2,818        743        (353 )      390        3,208   

Less: provisions for loan losses

     1,008        —        72        —        —        1,080        —        —        —        1,080   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income (loss) after provisions for loan losses

     658        7        1,092        (19 )      —        1,738        743        (353 )      390        2,128   

Other income (loss):

                    

Gain (losses) on sales of loans and investments

     —        —        —        —        —        —        —        —        —        —   

Servicing revenue

     46        813        90        —        (670 )      279        —        —        —        279   

Contingency revenue

     —        356        —        —        —        356        —        —        —        356   

Gains on debt repurchases

     —        —        —        145        —        145        —        —        —        145   

Other income (loss)

     —        33        —        15        —        48        (743 )      159 (5)      (584 )      (536 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total other income (loss)

     46        1,202        90        160        (670 )      828        (743 )      159        (584 )      244   

Expenses:

                    

Direct operating expenses

     265        364        702        12        (670 )      673        —        —        —        673   

Overhead expenses

     —        —        —        224        —        224        —        —        —        224   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Operating expenses

     265        364        702        236        (670 )      897        —        —        —        897   

Goodwill and acquired intangible asset impairment and amortization expense

     —        —        —        —        —        —        —        27        27        27   

Restructuring expenses

     3        3        —        5        —        11        —        —        —        11   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total expenses

     268        367        702        241        (670 )      908        —        27        27        935   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Income (loss) from continuing operations, before income tax expense (benefit)

     436        842        480        (100 )      —        1,658        —        (221 )      (221 )      1,437   

Income tax expense (benefit)(3)

     157        303        173        (36 )      —        597        —        (99 )      (99 )      498   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss) from continuing operations

     279        539        307        (64 )      —        1,061        —        (122 )      (122 )      939   

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

     (2 )      —        —        1        —        (1 )      —        (1 )      (1 )      (2 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss)

     277        539        307        (63 )      —        1,060        —        (123 )      (123 )      937   

Less: net loss attributable to noncontrolling interest

     —        (2 )      —        —        —        (2 )      —        —        —        (2 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss) attributable to SLM Corporation

   $ 277      $ 541      $ 307      $ (63 )    $ —      $ 1,062      $ —      $ (123 )    $ (123 )    $ 939   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(1) 

The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

 

(2) 

“Core Earnings” adjustments to GAAP:

 

     Year Ended December 31, 2012  

(Dollars in millions)

    Net Impact of
Derivative
Accounting		      Net Impact of
Goodwill and
Acquired Intangibles		      Total  

Net interest income after provisions for loan losses

    $ 390       $ —       $ 390   

Total other loss

      (584 )       —         (584 ) 

Goodwill and acquired intangible asset impairment and amortization expense

      —         27         27   
  

 

 

     

 

 

     

 

 

  

Total “Core Earnings” adjustments to GAAP

    $ (194 )     $ (27 )       (221 ) 
  

 

 

     

 

 

     

Income tax benefit

            (99 ) 

Loss from discontinued operations, net of tax benefit

            (1 ) 
        

 

 

  

Net loss

          $ (123 ) 
        

 

 

  

 

(3) 

Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

(4) 

Represents a portion of the $42 million of “other derivative accounting adjustments.”

 

(5) 

Represents the $115 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $42 million of “other derivative accounting adjustments.”

 

F-78

Table of Contents

SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

15. Segment Reporting (Continued)

 

    Year Ended December 31, 2011  

(Dollars in millions)

   Consumer
Lending		     Business
Services		     FFELP
Loans		     Other     Elimina-
tions(1) 		    Total
“Core
Earnings”		     Adjustments     Total
GAAP		  
              Reclassi-
fications		     Additions/
(Subtractions)		     Total
Adjustments(2) 		   

Interest income:

                    

Student loans

   $ 2,429      $ —      $ 2,914      $ —      $ —      $ 5,343      $ 902      $ (355 )    $ 547      $ 5,890   

Other loans

     —        —        —        21        —        21        —        —        —        21   

Cash and investments

     9        8        5        5        (8 )      19        —        —        —        19   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total interest income

     2,438        8        2,919        26        (8 )      5,383        902        (355 )      547        5,930   

Total interest expense

     801        —        1,472        54        (8 )      2,319        71        11 (4)      82        2,401   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income (loss)

     1,637        8        1,447        (28 )      —        3,064        831        (366 )      465        3,529   

Less: provisions for loan losses

     1,179        —        86        30        —        1,295        —        —        —        1,295   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income (loss) after provisions for loan losses

     458        8        1,361        (58 )      —        1,769        831        (366 )      465        2,234   

Other income (loss):

                    

Gain (losses) on sales of loans and investments

     (9 )      —        —        (26 )      —        (35 )      —        —        —        (35 ) 

Servicing revenue

     64        872        86        —        (739 )      283        —        —        —        283   

Contingency revenue

     —        333        —        —        —        333        —        —        —        333   

Gains on debt repurchases

     —        —        —        64        —        64        (26 )      —        (26 )      38   

Other income (loss)

     —        69        —        20        —        89        (805 )      (174 )(5)      (979 )      (890 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total other income (loss)

     55        1,274        86        58        (739 )      734        (831 )      (174 )      (1,005 )      (271 ) 

Expenses:

                    

Direct operating expenses

     291        393        772        19        (739 )      736        —        —        —        736   

Overhead expenses

     —        —        —        269        —        269        —        —        —        269   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Operating expenses

     291        393        772        288        (739 )      1,005        —        —        —        1,005   

Goodwill and acquired intangible asset impairment and amortization expense

     —        —        —        —        —        —        —        21        21        21   

Restructuring expenses

     3        5        1        3        —        12        —        —        —        12   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total expenses

     294        398        773        291        (739 )      1,017        —        21        21        1,038   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Income (loss) from continuing operations, before income tax expense (benefit)

     219        884        674        (291 )      —        1,486        —        (561 )      (561 )      925   

Income tax expense (benefit)(3)

     81        325        248        (107 )      —        547        —        (219 )      (219 )      328   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss) from continuing operations

     138        559        426        (184 )      —        939        —        (342 )      (342 )      597   

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

     (2 )      5        —        34        —        37        —        (2 )      (2 )      35   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss)

     136        564        426        (150 )      —        976        —        (344 )      (344 )      632   

Less: net loss attributable to noncontrolling interest

     —        (1 )      —        —        —        (1 )      —        —        —        (1 ) 
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss) attributable to SLM Corporation

   $ 136      $ 565      $ 426      $ (150 )    $ —      $ 977      $ —      $ (344 )    $ (344 )    $ 633   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(1) 

The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

 

(2) 

“Core Earnings” adjustments to GAAP:

 

     Year Ended December 31, 2011  

(Dollars in millions)

    Net Impact of
Derivative
Accounting		      Net Impact of
Goodwill and
Acquired
Intangibles		      Total  

Net interest income after provisions for loan losses

    $ 465       $ —       $ 465   

Total other loss

      (1,005 )       —         (1,005 ) 

Goodwill and acquired intangible asset impairment and amortization expense

      —         21         21   
  

 

 

     

 

 

     

 

 

  

Total “Core Earnings” adjustments to GAAP

    $ (540 )     $ (21 )       (561 ) 
  

 

 

     

 

 

     

Income tax benefit

            (219 ) 

Loss from discontinued operations, net of tax benefit

            (2 ) 
        

 

 

  

Net loss

          $ (344 ) 
        

 

 

  

 

(3) 

Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

(4) 

Represents a portion of the $(32) million of “other derivative accounting adjustments.”

 

(5) 

Represents the $(153) million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $(32) million of “other derivative accounting adjustments.”

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

15. Segment Reporting (Continued)

 

Summary of “Core Earnings” Adjustments to GAAP

The two adjustments required to reconcile from our “Core Earnings” results to our 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. The following table reflects aggregate adjustments associated with these areas.

 

     Years Ended December 31,  

(Dollars in millions)

        2013             2012             2011      

“Core Earnings” adjustments to GAAP:

       

Net impact of derivative accounting(1)

    $ 243      $ (194 )    $ (540 ) 

Net impact of goodwill and acquired intangible assets(2)

      (13 )      (27 )      (21 ) 

Net tax effect(3)

      (96 )      99        219   

Net effect from discontinued operations

      (6 )      (1 )      (2 ) 
  

 

 

    

 

 

    

 

 

  

Total “Core Earnings” adjustments to GAAP

    $ 128      $ (123 )    $ (344 ) 
  

 

 

    

 

 

    

 

 

  

 

       

(1)     Derivative accounting: “Core Earnings” exclude periodic unrealized gains and losses that are caused by the mark-to-market valuations on derivatives that do not qualify for hedge accounting treatment under GAAP as well as the periodic unrealized gains and losses that are a result of ineffectiveness recognized related to effective hedges under GAAP. These unrealized gains and losses occur in our Consumer Lending, FFELP Loans and Other business segments. Under GAAP, for our derivatives that are held to maturity, the cumulative net unrealized gain or loss over the life of the contract will equal $0 except for Floor Income Contracts where the cumulative unrealized gain will equal the amount for which we sold the contract. In our “Core Earnings” presentation, we recognize the economic effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest expense or revenue over the hedged item’s life.

 

                

(2)    Goodwill and acquired intangible assets: Our “Core Earnings” exclude goodwill and intangible asset impairment and amortization of acquired intangible assets.

 

         

(3)    Net Tax Effect: Such tax effect is based upon our “Core Earnings” effective tax rate for the year.

 

        

 

16. Discontinued Operations

In 2013, we sold our Campus Solutions business and our 529 college-savings plan administration business and recorded an after-tax gain of $38 million and $65 million, respectively. These businesses comprise operations and cash flows that can be clearly distinguished operationally and for financial reporting purposes from the rest of the Company and we will have no continuing involvement. As a result, these businesses are presented in discontinued operations of our Business Services segment for the periods presented.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

16. Discontinued Operations (Continued)

 

The following table summarizes our discontinued assets and liabilities at December 31, 2013 and 2012.

 

     At December 31,  

(Dollars in millions)

        2013              2012      

Assets:

      

Cash and equivalents

    $ 5       $ 33   

Other assets

      98         202   
  

 

 

     

 

 

  

Assets of discontinued operations

    $ 103       $ 235   
  

 

 

     

 

 

  

Liabilities:

      

Liabilities of discontinued operations

    $ 94       $ 168   
  

 

 

     

 

 

  

At December 31, 2013, other assets of our discontinued operations and the offsetting liability consisted primarily of funds held in accordance with contractual requirements on behalf of the acquirer of our Campus Solutions business pending remittance to their school clients.

The following table summarizes our discontinued operations.

 

     Years Ended December 31,  

(Dollars in millions)

      2013          2012         2011    

Operations:

        

Income (loss) from discontinued operations before income tax expense (benefit)

    $ 126       $ (3 )    $ 55   

Income tax expense (benefit)

      20         (1 )      20   
  

 

 

     

 

 

    

 

 

  

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

    $ 106       $ (2 )    $ 35   
  

 

 

     

 

 

    

 

 

  

 

17. Concentrations of Risk

Our business is primarily focused in providing and/or servicing to help students and their families save, plan and pay for college. We primarily originate, service and/or collect loans made to students and their families to finance the cost of their education. We provide funding, delivery and servicing support for education loans in the United States, through our Private Education Loan programs and as a servicer and collector of loans for ED. In addition we are the largest holder, servicer and collector of loans under the discontinued FFELP. Because of this concentration in one industry, we are exposed to credit, legislative, operational, regulatory, and liquidity risks associated with the student loan industry.

Concentration Risk in the Revenues Associated with Private Education Loans

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

We are a leading provider of saving- and paying-for-college products and programs. This concentration gives us a competitive advantage in the marketplace. This concentration also creates risks in our business,

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

17. Concentrations of Risk (Continued)

 

particularly in light of our concentrations as a Private Education Loan lender and as a servicer for the FFELP and DSLP. If population demographics result in a decrease in college-age individuals, if demand for higher education decreases, if the cost of attendance of higher education decreases, if public resistance to higher education costs increases, or if the demand for higher education loans decreases, our consumer lending business could be negatively affected. In addition, the federal government, through the DSLP, poses significant competition to our private credit loan products. If loan limits under the DSLP increase, DSLP loans could be more widely available to students and their families and DSLP loans could increase, resulting in further decreases in the size of the Private Education Loan market and demand for our Private Education Loan products.

Concentration Risk in the Revenues Associated with FFELP Loans

On July 1, 2010, the HCERA legislation eliminated FFELP Loan originations, a major source of our net income. All federal loans to students are now made through the DSLP. The terms and conditions of existing FFELP Loans were not affected by this legislation. Despite the end of FFELP, Congress, ED and the Administration still exercise significant authority over the servicing and administration of existing FFELP Loans. Because of the ongoing uncertainty around efforts to reduce the federal budget deficit, the timing, method and manner of implementation of various education lending initiatives has become less predictable.

The net interest margin we earn on our FFELP Loan portfolio, which totaled $1.5 billion in 2013, will decline over time as the portfolio amortizes.

We also earn maintenance fees for the life of the loan for servicing the Guarantor’s portfolio of loans. The portfolio that generates the maintenance fee is now in runoff, and the maintenance fees we earn will decline ratably with the portfolio. We earned maintenance fees of $38 million in 2013.

Our student loan contingent collection business is also affected by HCERA. We currently have 15 Guarantors as clients. We earn revenue from Guarantors for collecting defaulted loans as well as for managing their portfolios of defaulted loans. In 2013, collection revenue from Guarantor clients totaled $303 million. We anticipate that revenue from Guarantors will begin to steadily decline as the portfolio of defaulted loans we manage is resolved and amortizes.

Concentration Risk in the Servicing of Direct Loans

The DSLP is serviced by four private sector institutions, including Sallie Mae. Defaulted Direct Loans are collected by 22 private sector companies, including Sallie Mae. Because of the concentration of our business in servicing and collecting on Direct Loans, we are exposed to risks associated with ED reducing the amount of new loan servicing and collections allocated to us or the termination of our servicing or collection contracts.

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

18. Quarterly Financial Information (unaudited)

 

     2013  

(Dollars in millions, except per share data)

    First
Quarter		     Second
Quarter		     Third
Quarter		     Fourth
Quarter		  

Net interest income

    $ 795      $ 784      $ 799      $ 789   

Less: provisions for loan losses

      241        201        207        190   
  

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income after provisions for loan losses

      554        583        592        599   

Gains (losses) on derivative and hedging activities, net

      (31 )      18        (127 )      (128 ) 

Other income

      281        472        196        203   

Operating expenses

      235        244        257        305   

Goodwill and acquired intangible asset impairment and amortization expense

      3        3        4        3   

Restructuring and other reorganization expenses

      10        23        12        26   

Income tax expense

      211        299        136        129   
  

 

 

    

 

 

    

 

 

    

 

 

  

Net income from continuing operations

      345        504        252        211   

Income (loss) from discontinued operations, net of taxes

      1        38        8        59   
  

 

 

    

 

 

    

 

 

    

 

 

  

Net income

      346        542        260        270   

Less: net loss attributable to noncontrolling interest

      —        (1 )      —        —   
  

 

 

    

 

 

    

 

 

    

 

 

  

Net income attributable to SLM Corporation

      346        543        260        270   

Preferred stock dividends

      5        5        5        5   
  

 

 

    

 

 

    

 

 

    

 

 

  

Net income attributable to SLM Corporation common stock

    $ 341      $ 538      $ 255      $ 265   
  

 

 

    

 

 

    

 

 

    

 

 

  

Basic earnings per common share attributable to SLM Corporation:

         

Continuing operations

    $ .76      $ 1.14      $ .56      $ .47   

Discontinued operations

      —        .08        .02        .14   
  

 

 

    

 

 

    

 

 

    

 

 

  

Total

    $ .76      $ 1.22      $ .58      $ .61   
  

 

 

    

 

 

    

 

 

    

 

 

  

Diluted earnings per common share attributable to SLM Corporation:

         

Continuing operations

    $ .74      $ 1.12      $ .55      $ .47   

Discontinued operations

      —        .08        .02        .13   
  

 

 

    

 

 

    

 

 

    

 

 

  

Total

    $ .74      $ 1.20      $ .57      $ .60   
  

 

 

    

 

 

    

 

 

    

 

 

  

 

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SLM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

18. Quarterly Financial Information (unaudited) (Continued)

 

     2012  

(Dollars in millions, except per share data)

    First
Quarter		     Second
Quarter		     Third
Quarter		     Fourth
Quarter		  

Net interest income

    $ 811      $ 746      $ 819      $ 832   

Less: provisions for loan losses

      253        243        270        314   
  

 

 

    

 

 

    

 

 

    

 

 

  

Net interest income after provisions for loan losses

      558        503        549        518   

Gains (losses) on derivative and hedging activities, net

      (372 )      6        (233 )      (28 ) 

Other income

      238        176        202        256   

Operating expenses

      236        216        220        226   

Goodwill and acquired intangible asset impairment and amortization expense

      5        5        5        14   

Restructuring and other reorganization expenses

      4        3        2        1   

Income tax expense

      68        169        104        157   
  

 

 

    

 

 

    

 

 

    

 

 

  

Net income from continuing operations

      111        292        187        348   

Income (loss) from discontinued operations, net of taxes

      —        (1 )      —        —   
  

 

 

    

 

 

    

 

 

    

 

 

  

Net income

      111        291        187        348   

Less: net loss attributable to noncontrolling interest

      (1 )      (1 )      (1 )      —   
  

 

 

    

 

 

    

 

 

    

 

 

  

Net income attributable to SLM Corporation

      112        292        188        348   

Preferred stock dividends

      5        5        5        5   
  

 

 

    

 

 

    

 

 

    

 

 

  

Net income attributable to SLM Corporation common stock

    $ 107      $ 287      $ 183      $ 343   
  

 

 

    

 

 

    

 

 

    

 

 

  

Basic earnings per common share attributable to SLM Corporation:

         

Continuing operations

    $ .21      $ .59      $ .39      $ .75   

Discontinued operations

      —        —        —        —   
  

 

 

    

 

 

    

 

 

    

 

 

  

Total

    $ .21      $ .59      $ .39      $ .75   
  

 

 

    

 

 

    

 

 

    

 

 

  

Diluted earnings per common share attributable to SLM Corporation:

         

Continuing operations

    $ .21      $ .59      $ .39      $ .74   

Discontinued operations

      —        —        —        —   
  

 

 

    

 

 

    

 

 

    

 

 

  

Total

    $ .21      $ .59      $ .39      $ .74   
  

 

 

    

 

 

    

 

 

    

 

 

  

 

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Appendix A

Glossary

Listed below are definitions of key terms that are used throughout this document. See also “Appendix B—Description of Federal Family Education Loan Program” for a further discussion of the FFELP.

Bank — The meaning is set forth on page 17 of this Information Statement.

Consolidation Loan Rebate Fee — All holders of FFELP Consolidation Loans are required to pay to the U.S. Department of Education an annual 105 basis point Consolidation Loan Rebate Fee on all outstanding principal and accrued interest balances of FFELP Consolidation Loans purchased or originated after October 1, 1993, except for loans for which consolidation applications were received between October 1, 1998 and January 31, 1999, where the Consolidation Loan Rebate Fee is 62 basis points.

Constant Prepayment Rate (“CPR”) — A variable in life-of-loan estimates that measures the rate at which loans in the portfolio prepay before their stated maturity. The CPR is directly correlated to the average life of the portfolio. CPR equals the percentage of loans that prepay annually as a percentage of the beginning of period balance.

“Core Earnings” — We prepare financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”). In addition to evaluating our GAAP-based financial information, management evaluates the business segments on a basis that, as allowed under the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” differs from GAAP. We refer to management’s basis of evaluating its segment results as “Core Earnings” presentations for each business segment and refer to these performance measures in its presentations with credit rating agencies and lenders. While “Core Earnings” results are not a substitute for reported results under GAAP, we rely on “Core Earnings” performance measures in operating each business segment because we believes these measures provide additional information regarding the operational and performance indicators that are most closely assessed by management.

“Core Earnings” performance measures are the primary financial performance measures used by management to evaluate performance and to allocate resources. Accordingly, financial information is reported to management on a “Core Earnings” basis by reportable segment, as these are the measures used regularly by our chief operating decision makers. “Core Earnings” performance measures are used in developing our financial plans, tracking results, and establishing corporate performance targets and incentive compensation. Management believes this information provides additional insight into the financial performance of our core business activities. “Core Earnings” performance measures are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Our “Core Earnings” presentation does not represent another comprehensive basis of accounting.

Direct Loans — Educational loans provided by the DSLP (see definition below) to students and parent borrowers directly through ED (see definition below) rather than through a bank or other lender.

DSLP — The William D. Ford Federal Direct Loan Program.

ED — The U.S. Department of Education.

Existing SLM — The meaning is set forth on page 17 of this Information Statement.

FFELP — The Federal Family Education Loan Program, formerly the Guaranteed Student Loan Program, a program that was discontinued in 2010.

 

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FFELP Consolidation Loans — Under the FFELP, borrowers with multiple eligible student loans may have consolidated them into a single student loan with one lender at a fixed rate for the life of the loan. The new loan is considered a FFELP Consolidation Loan. The borrower rate on a FFELP Consolidation Loan is fixed for the term of the loan and was set by the weighted average interest rate of the loans being consolidated, rounded up to the nearest 1/8th of a percent, not to exceed 8.25 percent. Holders of FFELP Consolidation Loans are eligible to earn interest under the Special Allowance Payment (“SAP”) formula. In April 2008, we suspended originating new FFELP Consolidation Loans.

FFELP Stafford and Other Student Loans — Education loans to students or parents of students that are guaranteed or reinsured under the FFELP. The loans are primarily Stafford loans but also include PLUS and HEAL loans. The FFELP was discontinued in 2010.

Fixed Rate Floor Income — Fixed Rate Floor Income is Floor Income associated with student loans with borrower rates that are fixed to term (primarily FFELP Consolidation Loans and Stafford Loans originated on or after July 1, 2006).

Floor Income — For loans disbursed before April 1, 2006, FFELP Loans 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 the SAP formula. We generally finance our student loan portfolio with floating rate debt whose interest is matched closely to the floating nature of the applicable SAP formula. If interest rates decline to a level at which the borrower rate exceeds the SAP formula rate, we continue to earn interest on the loan at the fixed borrower rate while the floating rate interest on our debt continues to decline. In these interest rate environments, we refer to the additional spread it earns between the fixed borrower rate and the SAP formula rate as Floor Income. Depending on the type of student loan and when it was originated, the borrower rate is either fixed to term or is reset to a market rate each July 1. As a result, for loans where the borrower rate is fixed to term, we may earn Floor Income for an extended period of time, and for those loans where the borrower interest rate is reset annually on July 1, we may earn Floor Income to the next reset date. In accordance with legislation enacted in 2006, lenders are required to rebate Floor Income to ED for all FFELP Loans disbursed on or after April 1, 2006.

The following example shows the mechanics of Floor Income for a typical fixed rate FFELP Consolidation Loan (with a LIBOR-based SAP spread of 2.64 percent):

 

Fixed Borrower Rate

      4.25 % 

SAP Spread over LIBOR

      (2.64 ) 
  

 

 

  

Floor Strike Rate(1)

      1.16 % 
  

 

 

  

 

(1) 

The interest rate at which the underlying index (LIBOR Treasury bill or commercial paper) plus the fixed SAP spread equals the fixed borrower rate. Floor Income is earned anytime the interest rate of the underlying index declines below this rate.

Based on this example, if the quarterly average LIBOR rate is over 1.61 percent, the holder of the student loan will earn at a floating rate based on the SAP formula, which in this example is a fixed spread to LIBOR of 2.64 percent. On the other hand, if the quarterly average LIBOR rate is below 1.61 percent, the SAP formula will produce a rate below the fixed borrower rate of 4.25 percent and the loan holder earns at the borrower rate of 4.25 percent.

Floor Income Contracts — We enter into contracts with counterparties under which, in exchange for an upfront fee representing the present value of the Floor Income that we expect to earn on a notional amount of underlying student loans being economically hedged, we will pay the counterparties the Floor Income earned on that notional amount over the life of the Floor Income Contract. Specifically, we agree to pay the counterparty the difference, if positive, between the fixed borrower rate less the SAP (see definition below) spread and the

 

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Table of Contents

average of the applicable interest rate index on that notional amount, regardless of the actual balance of underlying student loans, over the life of the contract. The contracts generally do not extend over the life of the underlying student loans. This contract effectively locks in the amount of Floor Income we will earn over the period of the contract. Floor Income Contracts are not considered effective hedges under ASC 815, “Derivatives and Hedging,” and each quarter we must record the change in fair value of these contracts through income.

GAAP — generally accepted accounting principles in the United States of America.

Guarantor(s) — State agencies or non-profit companies that guarantee (or insure) FFELP Loans made by eligible lenders under The Higher Education Act of 1965 (“HEA”), as amended.

HCERA — the Health Care and Education Reconciliation Act of 2010

Insurance Business — The meaning is set forth on page 17 of this Information Statement.

NEO — Named Executive Officer which includes the principal executive officer, the principal financial officer and the next three most highly paid executive officers of a company as of the end of the most recently completed fiscal year, based on total compensation as determined under rule 402 of Regulation S-K.

Navient — The meaning is set forth on page 17 of this Information Statement.

Preferred Stockholders — The meaning is set forth on page 18 of this Information Statement.

Private Education Loans — Education loans to students or their families that are non-federal loans and loans not insured or guaranteed under the FFELP. The Private Education Loans we make are largely to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans or borrowers’ resources. Private Education Loans include loans for higher education (undergraduate and graduate degrees) and for alternative education, such as career training, private kindergarten through secondary education schools and tutorial schools. Certain higher education loans have repayment terms similar to FFELP Loans, whereby repayments begin after the borrower leaves school while others require repayment of interest or a fixed pay amount while the borrower is still in school. Our higher education Private Education Loans are not dischargeable in bankruptcy, except in certain limited circumstances.

In the context of our Private Education Loan business, we use the term “non-traditional loans” to describe education loans made to certain customers that have or are expected to have a high default rate as a result of a number of factors, including having a lower tier credit rating, low program completion and graduation rates or, where the customer is expected to graduate, a low expected income relative to the customer’s cost of attendance.

Non-traditional loans are loans to customers attending for-profit schools with an original FICO score of less than 670 and customers attending not-for-profit schools with an original FICO score of less than 640. The FICO score used in determining whether a loan is non-traditional is the greater of the customer or cosigner FICO score at origination.

Private ServiceCo — The meaning is set forth on page 17 of this Information Statement.

Repayment Borrower Benefits — Financial incentives offered to borrowers based on pre-determined qualifying factors, which are generally tied directly to making on-time monthly payments. The impact of Repayment Borrower Benefits is dependent on the estimate of the number of borrowers who will eventually qualify for these benefits and the amount of the financial benefit offered to the borrower. We occasionally change Repayment Borrower Benefits programs in both amount and qualification factors. These programmatic changes must be reflected in the estimate of the Repayment Borrower Benefits discount when made.

 

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Residual Interest — When we securitize student loans, we retain the right to receive cash flows from the student loans sold to trusts that we sponsor in excess of amounts needed to pay servicing, derivative costs (if any), other fees, and the principal and interest on the bonds backed by the student loans. The Residual Interest, which may also include reserve and other cash accounts, is the present value of these future expected cash flows, which includes the present value of any Embedded Fixed Rate Floor Income described above. We value the Residual Interest at the time of sale of the student loans to the trust and as of the end of each subsequent quarter.

Risk Sharing — When a FFELP Loan first disbursed on and after July 1, 2006 defaults, the federal government guarantees 97 percent of the principal balance plus accrued interest (98 percent on loans disbursed before July 1, 2006) and the holder of the loan is at risk for the remaining amount not guaranteed as a Risk Sharing loss on the loan. FFELP Loans originated after October 1, 1993 are subject to Risk Sharing on loan default claim payments unless the default results from the borrower’s death, disability or bankruptcy.

Special Allowance Payment (“SAP”) — FFELP Loans disbursed prior to April 1, 2006 (with the exception of certain PLUS and Supplemental Loans to Students (“SLS”) loans discussed below) generally earn interest at the greater of the borrower rate or a floating rate determined by reference to the average of the applicable floating rates (LIBOR, 91-day Treasury bill rate or commercial paper) in a calendar quarter, plus a fixed spread that is dependent upon when the loan was originated and the loan’s repayment status. If the resulting floating rate exceeds the borrower rate, ED pays the difference directly to us. This payment is referred to as the Special Allowance Payment or SAP and the formula used to determine the floating rate is the SAP formula. We refer to the fixed spread to the underlying index as the SAP spread. For loans disbursed after April 1, 2006, FFELP Loans effectively only earn at the SAP rate, as the excess interest earned when the borrower rate exceeds the SAP rate (Floor Income) must be refunded to ED.

Variable rate PLUS Loans and SLS Loans earn SAP only if the variable rate, which is reset annually, exceeds the applicable maximum borrower rate. For PLUS Loans disbursed on or after January 1, 2000, this limitation on SAP was repealed effective April 1, 2006.

SDCL — Special Direct Consolidation Loan 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 Direct Loan Program 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.

SLM BankCo — The meaning is set forth on page 17 of this Information Statement.

SLMIC — The meaning is set forth on page 17 of this Information Statement.

SMI — The meaning is set forth on page 17 of this Information Statement.

TDR — Troubled Debt Restructuring. The accounting and reporting standards for loan modifications and TDR’s are primarily found in FASB’s ASC 310-40, “Troubled Debt Restructurings by Creditors.”

Unsecured Debt — The meaning is set forth on page 17 of this Information Statement.

Upromise — The meaning is set forth on page 17 of this Information Statement.

Variable Rate Floor Income — Variable Rate Floor Income is Floor Income that is earned only through the next date at which the borrower interest rate is reset to a market rate. For FFELP Stafford Loans whose borrower interest rate resets annually on July 1, we may earn Floor Income based on a calculation of the difference between the borrower rate and the then current interest rate.

 

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Appendix B

Description of Federal Family Education Loan Program

Note: On March 30, 2010, the President signed into law the Health Care and Education Reconciliation Act of 2010 (“HCERA”) which terminated the FFELP as of July 1, 2010. This appendix presents an abbreviated summary of the program prior to the termination date. The new law does not alter or affect the terms and conditions of existing FFELP Loans made before July 1, 2010 or the credit support related thereto.

This appendix describes or summarizes the material provisions of Title IV of the Higher Education Act (“HEA”), the FFELP and related statutes and regulations. It, however, is not complete and is qualified in its entirety by reference to each actual statute and regulation. Both the HEA and the related regulations has been the subject of extensive amendments over the years. We cannot predict whether future amendments or modifications might materially change any of the programs described in this appendix or the statutes and regulations that implement them.

General

The FFELP, under Title IV of HEA, provided for loans to students who were enrolled in eligible institutions, or to parents of dependent students who were enrolled in eligible institutions, to finance their educational costs. Payment of principal and interest on the student loans to the holders of the loans is insured by a state or not-for-profit guaranty agency against:

 

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default of the borrower;

 

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the death, bankruptcy or permanent, total disability of the borrower;

 

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closing of the student’s school prior to the end of the academic period;

 

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false certification of the borrower’s eligibility for the loan by the school; and

 

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an unpaid school refund.

Claims are paid from federal assets, known as “federal student loan reserve funds,” which are maintained and administered by state and not-for-profit guaranty agencies. In addition the holders of student loans are entitled to receive interest subsidy payments and Special Allowance Payments from ED on eligible student loans. Special Allowance Payments raise the yield to student loan lenders when the statutory borrower interest rate is below an indexed market value.

Four types of FFELP Loans were authorized under the HEA:

 

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Subsidized Federal Stafford Loans to students who demonstrated requisite financial need;

 

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Unsubsidized Federal Stafford Loans to students who either did not demonstrate financial need or require additional loans to supplement their Subsidized Stafford Loans;

 

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Federal PLUS Loans to graduate or professional students (effective July 1, 2006) or parents of dependent students whose estimated costs of attending school exceed other available financial aid; and

 

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FFELP Consolidation Loans, which consolidate into a single loan a borrower’s obligations under various federally authorized student loan programs.

Legislative Matters

The federal student loan programs are subject to frequent statutory and regulatory changes. The most significant change to the FFELP was with the enactment of the HCERA, which terminated the FFELP as of July 1, 2010.

 

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On December 23, 2011, the President signed the Consolidated Appropriations Act of 2012 into law. This law includes changes that permit FFELP lenders or beneficial holders to change the index on which the Special Allowance Payments are calculated for FFELP Loans first disbursed on or after January 1, 2000. The law allows holders to elect to move the index from the Commercial Paper (“CP”) Rate to the one-month London Inter Bank Offered Rate (“LIBOR”). Such elections have been made by April 1, 2012.

Eligible Lenders, Students and Educational Institutions

Lenders who were eligible to make loans under the FFELP generally included banks, savings and loan associations, credit unions, pension funds and, under some conditions, schools and guaranty agencies. FFELP Loans were made to, or on behalf of, a “qualified student.” A “qualified student” is an individual who

 

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is a United States citizen, national or permanent resident;

 

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has been accepted for enrollment or is enrolled and maintaining satisfactory academic progress at a participating educational institution; and

 

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is carrying at least one-half of the normal full-time academic workload for the course of study the student is pursuing.

A student qualified for a subsidized Stafford Loan if his family met the financial need requirements for the particular loan program. Only PLUS Loan borrowers have to meet credit standards.

Eligible schools included institutions of higher education, including proprietary institutions, meeting the standards provided in the HEA. For a school to participate in the program, the U.S. Department of Education (“ED”) had to approve its eligibility under standards established by regulation.

Financial Need Analysis

Subject to program limits and conditions, student loans generally were made in amounts sufficient to cover the student’s estimated costs of attending school, including tuition and fees, books, supplies, room and board, transportation and miscellaneous personal expenses as determined by the institution. Generally, each loan applicant (and parents in the case of a dependent child) underwent a financial need analysis.

Special Allowance Payments (“SAP”)

The HEA provides for quarterly Special Allowance Payments to be made by ED to holders of student loans to the extent necessary to ensure that they receive at least specified market interest rates of return. The rates for Special Allowance Payments depend on formulas that vary according to the type of loan, the date the loan was made and the type of funds, tax-exempt or taxable, used to finance the loan. ED makes a Special Allowance Payment for each calendar quarter.

The Special Allowance Payment equals the average unpaid principal balance, including interest which has been capitalized, of all eligible loans held by a holder during the quarterly period multiplied by the special allowance percentage.

Fees

Loan Rebate Fee. A loan rebate fee of 1.05 percent is paid annually on the unpaid principal and interest of each Consolidation Loan disbursed on or after October 1, 1993. This fee was reduced to .62 percent for loans made from October 1, 1998 to January 31, 1999.

 

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Stafford Loan Program

For Stafford Loans, the HEA provided for:

 

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federal reimbursement of Stafford Loans made by eligible lenders to qualified students;

 

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federal interest subsidy payments on Subsidized Stafford Loans paid by ED to holders of the loans in lieu of the borrowers’ making interest payments during in-school, grace and deferment periods; and

 

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Special Allowance Payments representing an additional subsidy paid by ED to the holders of eligible Stafford Loans.

We refer to all three types of assistance as “federal assistance.”

The HEA also permits, and in some cases requires, “forbearance” periods from loan collection in some circumstances. Interest that accrues during forbearance is never subsidized. Interest that accrues during deferment periods may be subsidized.

PLUS and Supplemental Loans to Students (“SLS”) Loan Programs

The HEA authorizes PLUS Loans to be made to graduate or professional students (effective July 1, 2006) and parents of eligible dependent students and previously authorized SLS Loans to be made to the categories of students subsequently served by the Unsubsidized Stafford Loan program. Borrowers who have no adverse credit history or who are able to secure an endorser without an adverse credit history are eligible for PLUS Loans, as well as some borrowers with extenuating circumstances. The federal assistance applicable to PLUS and SLS Loans are similar to those of Stafford Loans. However, interest subsidy payments are not available under the PLUS and SLS programs and, in some instances, Special Allowance Payments are more restricted.

The annual and aggregate amounts of PLUS Loans were limited only to the difference between the cost of the student’s education and other financial aid received, including scholarship, grants and other student loans.

Consolidation Loan Program

The enactment of HCERA ended new originations under the FFELP consolidation program, effective July 1, 2010. Previously, the HEA authorized a program under which borrowers may consolidate one or more of their student loans into a single FFELP Consolidation Loan that is insured and reinsured on a basis similar to Stafford and PLUS Loans. FFELP Consolidation Loans were made in an amount sufficient to pay outstanding principal, unpaid interest, late charges and collection costs on all federally reinsured student loans incurred under the FFELP that the borrower selects for consolidation, as well as loans made under various other federal student loan programs and loans made by different lenders. In general, a borrower’s eligibility to consolidate their federal student loans ends upon receipt of a Consolidation Loan. With the end of new FFELP originations, borrowers with multiple loans, including FFELP loans, may only consolidate their loans in the DSLP.

Guaranty Agencies under the FFELP

Under the FFELP, guaranty agencies insured FFELP loans made by eligible lending institutions, paying claims from “federal student loan reserve funds.” These loans are insured as to 100 percent of principal and accrued interest against death or discharge. FFELP loans are also insured against default, with the percent insured dependent on the date of the loans disbursement. For loans that were made before October 1, 1993, lenders are insured for 100 percent of the principal and unpaid accrued interest. From October 1, 1993 to June 30, 2006, lenders are insured for 98 percent of principal and all unpaid accrued interest. Insurance for loans made on or after July 1, 2006 was reduced from 98 percent to 97 percent.

 

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ED guarantees to the guaranty agencies reimbursement of amounts paid to lenders on FFELP Loans. Under the HEA, the guaranty agencies by way of guaranty agreements entered into with ED are, subject to conditions, deemed to have a contractual right against the United States during the life of the loan to receive reimbursement for these amounts.

After ED reimburses a guaranty agency for a default claim, the guaranty agency attempts to collect the loan from the borrower. However, ED requires that the defaulted loans be assigned to it when the guaranty agency is not successful. A guaranty agency also refers defaulted loans to ED to “offset” any federal income tax refunds or other federal reimbursement which may be due the borrowers. Some states have similar offset programs.

To be eligible, FFELP loans must meet the requirements of the HEA and regulations issued under the HEA. Generally, these regulations require that lenders determine whether the applicant is an eligible borrower attending an eligible institution, explain to borrowers their responsibilities under the loan, ensure that the promissory notes evidencing the loan are executed by the borrower; and disburse the loan proceeds as required. After the loan is made, the lender must establish repayment terms with the borrower, properly administer deferrals and forbearances, credit the borrower for payments made, and report the loan’s status to credit reporting agencies. If a borrower becomes delinquent in repaying a loan, a lender must perform collection procedures that vary depending upon the length of time a loan is delinquent. The collection procedures consist of telephone calls, demand letters, skiptracing procedures and requesting assistance from the guaranty agency.

A lender may submit a default claim to the guaranty agency after a student loan has been delinquent for at least 270 days. The guaranty agency must review and pay the claim within 90 days after the lender filed it. The guaranty agency will pay the lender interest accrued on the loan for up to 450 days after delinquency. The guaranty agency must file a reimbursement claim with ED within 45 days (reduced to 30 days July 1, 2006) after the guaranty agency paid the lender for the default claim. Following payment of claims, the guaranty agency endeavors to collect the loan. Guaranty agencies also must meet statutory and regulatory requirements for collecting loans.

If ED determines that a guaranty agency is unable to meet its insurance obligations, the holders of loans insured by that guaranty agency may submit claims directly to ED and ED is required to pay the full reimbursements amounts due, in accordance with claim processing standards no more stringent than those applied by the affected guaranty agency. However, ED’s obligation to pay reimbursement amounts directly in this fashion is contingent upon ED determining a guaranty agency is unable to meet its obligations. While there have been situations where ED has made such determinations regarding affected guaranty agencies, there can be no assurances as to whether ED must make such determinations in the future or whether payments of reimbursement amounts would be made in a timely manner.

Student Loan Discharges

FFELP Loans are not generally dischargeable in bankruptcy. Under the United States Bankruptcy Code, before a student loan may be discharged, the borrower must demonstrate that repaying it would cause the borrower or his family undue hardship. When a FFELP borrower files for bankruptcy, collection of the loan is suspended during the time of the proceeding. If the borrower files under the “wage earner” provisions of the Bankruptcy Code or files a petition for discharge on the ground of undue hardship, then the lender transfers the loan to the guaranty agency which then participates in the bankruptcy proceeding. When the proceeding is complete, unless there was a finding of undue hardship, the loan is transferred back to the lender and collection resumes.

Student loans are discharged if the borrower died or becomes totally and permanently disabled. A physician must certify eligibility for a total and permanent disability discharge. Effective January 29, 2007, discharge eligibility was extended to survivors of eligible public servants and certain other eligible victims of the terrorist attacks on the United States on September 11, 2001.

 

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If a school closes while a student is enrolled, or within 90 days after the student withdrew, loans made for that enrollment period are discharged. If a school falsely certifies that a borrower is eligible for the loan, the loan may be discharged. And if a school fails to make a refund to which a student is entitled, the loan is discharged to the extent of the unpaid refund.

Rehabilitation of Defaulted Loans

ED is authorized to enter into agreements with the guaranty agency under which the guaranty agency may sell defaulted loans that are eligible for rehabilitation to an eligible lender. For a loan to be eligible for rehabilitation the guaranty agency must have received reasonable and affordable payments for 12 months (reduced to 9 payments in 10 months effective July 1, 2006), then the loans will be submitted to a lender, and only after the sale to an eligible lender is the loan considered rehabilitated. Upon rehabilitation, a borrower is again eligible for all the benefits under the HEA. No student loan rehabilitated after August 14, 2008, is eligible to be more than once.

The July 1, 2009 technical corrections made to the HEA under H.R. 1777, Public Law 111-39, provide authority between July 1, 2009 through September 30, 2011, for a guaranty agency to assign a defaulted loan to ED depending on market conditions.

 

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Letter

 

LOGO

February 28, 2014

Ms. Stephanie Ciboroski

Senior Assistant Chief Accountant

Division of Corporation Finance

U.S. Securities and Exchange Commission

100 F Street, N.E.; Mail Stop 4561

Washington, DC 20549-4561

 

Re: New Corporation Amendment No. 2 to Registration Statement on Form 10 – File No. 001-36228

On behalf of New Corporation (f/k/a SLM Corporation), we hereby transmit via EDGAR for filing with the Securities and Exchange Commission the above-referenced amendment (the “Amendment No. 2”) to the above-referenced registration statement (the “Registration Statement”), marked to show changes from the Registration Statement as filed on February 7, 2014. The Registration Statement has been revised in response to the Staff’s comments and to update the Registration Statement for year-end financial information.

Furthermore, we are providing the following responses to your comment letter, dated February 20, 2014, regarding the Registration Statement. To assist your review, we have included the text of the Staff’s comments in italics below. Please note that all references to page numbers in our responses refer to the page numbers of the Amendment No. 2. Capitalized terms used but not otherwise defined herein shall have the same meaning ascribed to them in the Registration Statement.

On February 25th, we announced the new brand name for NewCo, which is “Navient.” Hence, the name “Navient” has replaced “NewCo” throughout the Registration Statement.

Item 1A. Risk Factors

Our credit ratings are important to our liquidity, page 20

 

1. We note your response to prior comment one. Please quantify the increased costs of funds for the fiscal year ended December 31, 2013 as a result of the negative ratings actions in May 2013.

Response

We have included Exhibit 1 “SLM Bond Curve” for your reference. It shows that our unsecured debt credit spreads increased immediately following the announcement of the spin as a result of the negative rating actions in May 2013. For example, for a bond that would mature in March 2020 the spread to LIBOR increased from 3.81% to 5.17%. However, as of February 20, 2014 that spread has decreased to LIBOR plus 3.47%. As a result, today Existing SLM actually has a lower unsecured debt cost of funds than existed immediately prior to the spin announcement. It would be very hard, if not impossible, to quantify the exact increased cost of funds for 2013 as it relates to just the negative rating actions in May 2013. There are many factors that impact our cost of funds (economic, legislative, regulatory, general market conditions, quarterly earnings results). We issued $2.25 billion of unsecured debt in 2013 subsequent to the announcement of the spin. As of December 31, 2013 we had approximately $150 billion of debt outstanding. Only the cost of funds on the $2.25 billion of unsecured debt issued in 2013 post the announcement of the spin would have been potentially impacted by the negative rating actions in May 2013. This $2.25 billion of unsecured debt is immaterial to our overall funding mix as well as our overall results for 2013 and as described above our unsecured cost of funds is now lower than the pre spin announcement cost of funds. Accordingly, we have made no further changes to this risk factor.

The Separation and Distribution, page 39

Treatment of Equity-Based Compensation, page 45

 

2. We note your disclosure that Existing SLM equity awards granted prior to February 4, 2014 will be divided into both SLM BankCo and NewCo equity awards, while equity awards granted on or after February 4, 2014 will become solely equity awards of the holder’s post-distribution employer. Please provide us with a detailed analysis explaining how the modification of Existing SLM equity awards will be accounted for. In this regard, we note that you intend to set the exercise prices of the new awards in order to maintain the “intrinsic value” of the Existing SLM awards immediately prior to the distribution; however, ASC 718-20-35-6 requires a comparison of the “fair values” of such awards both pre- and post-distribution in order to determine whether additional compensation cost must be recorded. Further, it is unclear how any unrecognized compensation expense related to unvested awards will be treated in both NewCo and BankCo financial statements post-separation.

Response

We agree that ASC 718-20-35-6 will require us to compare the fair value (not intrinsic value) of stock awards pre and post distribution in order to determine whether additional compensation cost must be recorded. The disclosure referenced above in Amendment No. 1 was not intended to be an accounting discussion. If the fair value of the stock awards is greater post distribution than pre distribution we will recognize the difference immediately through net income. Unrecognized compensation expense related to unvested awards will be amortized post spin consistently with their current amortization schedule and will follow the employee. We are still considering different manners in which stock awards may be adjusted based on pre and post distribution fair values. If there is compensation expense that is required to be recognized immediately upon distribution (because the fair value of the post distribution award is greater than pre distribution) the Company does not currently expect that to be a material amount.

 

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Unaudited Pro Forma Condensed Consolidated Financial Statements, page 49

Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 2013, page 51

Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements, page 54

 

3. We note your response to prior comment 8 and the revisions you made to your footnote disclosure of pro forma adjustment (c)4. We understand that part of this adjustment was to remove the intercompany payable from BankCo to NewCo that was eliminated in the consolidated financial statements of Existing SLM but shown as outstanding on the standalone financial statements of BankCo. However, we are unclear as to why this adjustment also includes the removal of an intercompany receivable from BankCo to NewCo, given that this amount should have been eliminated in the consolidated financial statements of Existing SLM. Please advise, and revise your disclosures as necessary.

Response

As of September 30, 2013 BankCo has a $325 million intercompany payable to Navient. On a consolidated basis (Existing SLM) this amount is eliminated. The adjustment to the “Other assets” line of the balance sheet is adding this $325 million intercompany receivable to Navient’s proforma balance sheet as it will be considered a third party receivable post spin. Existing SLM’s other assets is $7.420 billion. The $325 million intercompany receivable from BankCo is added to the $7.420 billion to include this receivable on a proforma basis. Because column 3 (“Less: Historical I/C charges,….) is being subtracted from column 1 (“Existing SLM”) the other asset adjustment is a negative. This results in the $325 million being added to Existing SLM to arrive at Navient proforma. The end result is Navient Proforma’s Other assets includes the $325 million receivable from BankCo.

2013 Management Objectives, page 65

 

4. Please revise the tone and tense of this section so that it consistently focuses on the results of your management objectives in 2013 rather than describing what you hoped to achieve in 2013.

Response

Please see pages 64 through 66 of this Amended Form 10. The Management Objectives are updated for full year results and are directly from our 2013 Form 10k filed on February 19, 2014. We believe it has been written to consistently focus on the results of our management objectives in 2013.

*************************************************

In addition to updating the Registration Statement for year-end financial data (including audited 2013 financial statements), we have made progress on the various inter-company separation and

 

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transition agreements referenced in “Certain Relationships and Related Party Transactions”. Forms of several of those agreements are being included as Exhibits with the current filing, and we anticipate all Exhibits will be filed by the second week of March, with appropriate updates to related disclosure in the Registration Statement.

In evaluating which of the inter-company agreements should be filed as an Exhibit to the Registration Statement, we have determined that the following agreements referenced in “Certain Transactions and Related Party Transactions” in the Registration Statement do not need to be filed: the joint marketing agreement; the data sharing agreement; and the key systems agreement. All three agreements are described for purposes of completeness of disclosure only. That having been said, none of them are material to the registrant, Navient. Navient is the primary service provider under the joint marketing agreement, and the sole service provider under the key systems and data sharing agreements. Hence, the conduct of Navient’s business will not be dependent upon, or materially impacted by, any of those agreements. In each case the amounts paid to Navient for its services will be de minimis. Under the joint marketing agreement, the amount payable by Navient to SLM BankCo will be a flat fee of approximately $50,000.

Please feel free to contact me at (703) 984-6829 or Robert W. Murray Jr. of Baker Botts L.L.P. at (212) 408-2540 should you require further information or have any questions regarding the contents of this letter or the Amendment.

 

Sincerely,
/s/ Ted Morris

Ted Morris

Senior Vice President and Controller

 

Copy to: Todd Schiffman
  Assistant Director – Financial Services I
  Securities and Exchange Commission

 

  Laurent C. Lutz
  Executive Vice President and General Counsel
  SLM Corporation

Exhibit

 

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Exhibit 1

 

LOGO

 

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