SLM Corp 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis also contains forward-looking statements and should be read in conjunction with the disclosures and information contained in “Forward-Looking and Cautionary Statements” and Item 1A. “Risk Factors” in this Annual Report on Form 10-K. Through this discussion and analysis, we intend to provide the reader with some narrative context for how our management views our consolidated financial statements, additional context within which to assess our operating results, and information on the quality and variability of our earnings, liquidity and cash flows. Impact of COVID-19 on Sallie Mae During the first quarter of 2020, the outbreak of coronavirus 2019 or COVID-19 (“COVID-19”) began to spread worldwide and has caused significant disruptions to the U.S. and world economies. On March 11, 2020, the World Health Organization declared the COVID-19 outbreak to be a pandemic. On March 13, 2020, then President Trump declared a national emergency, which made federal funds available to respond to the crisis. Beginning on March 15, 2020, many businesses closed or reduced hours throughout the U.S. to combat the spread of COVID-19. All 50 states have reported cases of COVID-19 and each has implemented various containment efforts, including lockdowns on non-essential businesses. Early in the second quarter of 2020, severe restrictions were placed on businesses to slow the growth of COVID-19 infections. Many shut down, causing the unemployment rate to increase dramatically, while others instituted a work from home regime. In response, we offered disaster forbearance to those customers who contacted us and were negatively affected by COVID-19. As the second quarter of 2020 concluded, the country experienced a significant spike in COVID-19 infections as more people left homes for work and other activities. During the third quarter of 2020, economic and consumer trends appeared to be slightly improving and progress was made on vaccine trials and possible treatments to mitigate the spread of the virus. The fourth quarter of 2020 saw a rapid economic recovery from the initial onset of the COVID-19 pandemic. Concurrently, a significant spike in COVID-19 infections during the fourth quarter, and the continued threat of a surge in virus cases nationally, posed a renewed threat to the economic recovery. However, at the end of the fourth quarter, the rollout of new vaccines and the ratification of the Consolidated Appropriations Act, 2021 (the “CAA”), which provides for additional COVID-19 focused relief and extends certain provisions of the CARES Act (which was signed into law on March 27, 2020 by then President Trump), contributed to a more positive long-term outlook. In addition, the new Biden administration, which has control of both houses of the U.S. Congress, has proposed additional economic stimulus in early 2021. The impact of COVID-19 is felt by our colleagues, our customers, and our communities. In response to COVID-19, we implemented efforts to safeguard our team members and enabled a remote work environment. In addition, we have taken steps to help our customers in this time of crisis. Further, The Sallie Mae Fund, our charitable arm, has made contributions to assist in our hometown communities. The following discussion highlights how we are responding and the expected impacts of COVID-19 on our business. The COVID-19 crisis is unprecedented and has had a significant impact on the economic environment globally and in the U.S. While we have highlighted below how we have responded to the pandemic and described its financial impact, there is a significant amount of uncertainty as to the length and breadth of the impact to the U.S. economy and, consequently, on us. Economists expect the impact of COVID-19 on the U.S. economy to continue to be significant well into 2021. Accordingly, the information below should be read in conjunction with our COVID-19 pandemic risk factor, see Part I, Item 1A. “Risk Factors - Pandemic Risk ” in this annual report on Form 10-K. In addition, see the forward-looking and cautionary statements discussion in this annual report on Form 10-K. Forward-looking statements are subject to risks, uncertainties, assumptions, and other factors that may cause actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in Part I, Item 1A. “Risk Factors” and elsewhere in this annual report on Form 10-K. Customers and Credit Performance COVID-19 is having far reaching, negative impacts on individuals, businesses, and, consequently, the overall economy. Specifically, COVID-19 has materially disrupted business operations throughout the country, resulting in significantly higher levels of unemployment or underemployment. As a result, we expect many of our individual customers will experience financial hardship, creating a challenge to meet credit standards for new loan originations and making it difficult, if not 43 impossible, to fulfill their payment obligations to us without temporary assistance. We are monitoring key metrics as early warning indicators of financial hardship, including changes in weekly unemployment claims, enrollment in auto-debit payments, requests for new forbearances, enrollment in hardship payment plans, and early delinquency metrics. As a result of the negative impact on employment from COVID-19, our customers are experiencing higher levels of financial hardship, which has led to elevated levels of forbearance, especially during the initial months of the pandemic. We expect such higher levels of financial hardship to lead to higher levels of delinquencies and defaults in the future, as borrowers who had received disaster forbearance from us re-enter repayment status. We expect that, left unabated, this deterioration in forbearance, delinquency, and default rates will persist until such time as the economy and employment return to relatively normal levels. We maintain an allowance for credit losses that incorporates multiple economic scenarios. For the year ended December 31, 2020, we considered the current economic forecasts as well as how the significant uncertainty may affect future unemployment rates and the economy in estimating our allowance for credit losses. We could experience significant changes in our allowance for credit losses as the economic impact of the COVID-19 pandemic becomes clearer. The process for determining our allowance contemplates material external factors that may require management adjustments. We used Moody’s Analytics economic forecasts in estimating the losses on our loan portfolio. Historically we have utilized disaster forbearance for material events, including hurricanes, wildfires, and floods. Disaster forbearance defers payments for as many as 90 days upon enrollment. In accordance with regulatory guidance that encourages lenders to work constructively with customers who have been impacted by COVID-19, we have invoked this same disaster forbearance program to assist our customers through COVID-19 and offered this program across our operations, including through mobile and self-service channels such as chat and IVR to address initial high volumes at the onset of the pandemic. We have since returned to a policy of interacting with 100 percent of these customers through our customer care and collections personnel. Customers requesting a disaster forbearance or an extension of a disaster forbearance are required to speak with our customer care and collections personnel. The first wave of disaster forbearance was granted primarily in 90-day increments. As these forbearances ended in the late second quarter and early third quarter of 2020, we have reduced the disaster forbearance to one-month increments and implemented additional discussions between our servicing agents and borrowers to encourage borrowers/cosigners to enter repayment. Customers who receive a disaster forbearance do not progress in delinquency and are not assessed late fees or other fees. During a disaster forbearance, a customer’s credit file will continue to reflect the status of the loan as it was immediately prior to granting the disaster forbearance. During the period of the disaster forbearance, interest will continue to accrue, but is not capitalized to the loan balance after the loan returns to repayment status. If the financial hardship extends beyond 90 days, additional assistance will be available for eligible customers. For example, for borrowers exiting disaster forbearance and not eligible for GRP, we may allow them to make interest only payments for 12 months before reverting to full principal and interest payments. We observed a significant increase in the use of disaster forbearance at the onset of the pandemic as businesses closed in accordance with broadly adopted ‘shelter at home’ policies and unemployment rose. While the pandemic persists, we have seen a corresponding reduction in the usage of other payment programs and defaults, given the availability of the disaster forbearance. Additionally, we have seen lower usage of automatic direct debit payments as customers manage the uncertainty associated with the pandemic. For customers experiencing financial hardship unrelated to COVID-19, our normal collection efforts and programs are in place. In the second quarter of 2020, we had planned to revise our credit administration practices to phase in (i) a required six-month period between successive grants of forbearance and between forbearance grants and certain other repayment alternatives (with exceptions for forbearances granted during the first six months following a customer’s grace period and exceptions for contractual interest rate reductions), and (ii) a limitation on the participation of delinquent customers in certain short-term extended or interest-only repayment alternatives to once in 12 months and twice in five years. Prior to full implementation of the planned credit administration practices changes, which we originally expected to have been completed by year-end 2020, we planned to conduct a controlled testing program on randomly selected customers to measure the impact of the changes on our customers, our credit operations, and key credit metrics. The testing commenced in October 2019 for some of the planned changes on a very small percentage of our total portfolio and we originally expected to expand the number of borrowers in repayment who would be subject to the new credit administration practices. However, due to the COVID-19 pandemic, we postponed our efforts so that we can be more flexible in dealing with our customers’ financial hardship. In October 2020, we began to roll out in a methodical approach the implementation of the credit administration practices changes and related testing. Management now expects to have completed implementation of the planned credit 44 administration practices changes by year-end 2022. However, we may modify the contemplated practice changes, the proposed timeline, or the method of implementation as we learn more about the impacts of the program on our customers. To make it as easy as possible to access the assistance they need, we have communicated to our customers multiple times and in multiple ways. At the start of the pandemic, we sent all our customers an email explaining their self-serve options and how to contact us if they need assistance. We continue to send e-mails to those customers who have enrolled for COVID-19 disaster forbearance and we regularly update our website at www.SallieMae.com/coronavirus with the latest information on how our customers can access their account and get assistance or payment relief, if needed. We expect that, as the economic impact of COVID-19 evolves, we will continue to evaluate the measures we have put in place to assist our customers during this unprecedented time. We continue to adapt and evolve our customer care and collections practices to meet the needs of our customers, while operating in a safe and sound manner. Our Team Members Our team members have been affected by COVID-19 in many ways, including disruptions due to unexpected school and day-care closings, family underemployment or unemployment, and learning how to work remotely with, in some cases, new tools and technology to learn and support that work. Our goal has been to support our team members during the present uncertainty while meeting the needs of our customers and providing business continuity. Early in the crisis, we provided our team members with information about best practices to prevent the spread of COVID-19 and other viruses or illnesses. We enabled substantially all of our workforce to work remotely. In addition, we have limited in-person meetings, non-employee visits to our locations, and non-essential business travel. Based on the national and local guidelines, we developed a principles-based, phased-in approach for returning to the office, which will differ for each of our office locations. We have gathered team members’ feedback and are considering social distancing measures, workplace layout, employee schedules, and sanitation policies for each phase. The phases are a flexible framework that may shift over time as we monitor guidelines from our national and local governments and prepare for workplace readiness. To further protect the health and welfare of our people and respond to their individual circumstances, we have provided additional wellness assistance. We have also encouraged team members who potentially have been exposed to COVID-19 to self-quarantine for 14 days while we continue to pay them. To ease access to medical assistance, we are waiving co-payments for COVID-19 testing and telemedicine for those team members enrolled in our health insurance plans . Operations We have robust pandemic and business continuity plans that include our business units and technology environments. When COVID-19 advanced to a pandemic, we activated our business continuity plan. As an element of the plan, we activated our Executive Crisis Management Team (“ECMT”), a group of the most senior managers across the enterprise. The ECMT directed a series of activities to address the health and safety of our workforce, to assist customers, to sustain business operations, and to address our management of other ongoing pandemic activities. In response to a growing infected population across the United States, we executed plans for social-distancing in our facilities and implemented work-from-home contingencies. As the virus spread, we created remote-working capabilities for our call center agents and consulted with regulators about our plans. We also completed a series of additional steps to appropriately ensure compliance with our telecommuting policy. The policy is designed to create a secure at-home work environment that protects our customers’ information and transactions while also providing the necessary technology capabilities to enable effective remote-working for our team members. In addition, we enhanced the functionality of our chatbot, IVR, mobile app, and website features to help our customers manage their accounts. Initially there was a modest decline in productivity as our team members adjusted to the significant change in their work experience. However, we largely have seen productivity return to pre-COVID-19 rates and customer satisfaction survey results also have returned to pre-crisis levels. We currently believe our technology infrastructure is sufficient to maintain a remote-working environment for the vast majority of our workforce for the foreseeable future. The level and ability of our team members to continue working from home could change, however, as conditions surrounding COVID-19 evolve and infections increase, or if there are interruptions in the internet infrastructure where our team members live or if our internet service providers are otherwise adversely affected. 45 Liquidity and Capital Over the course of 2019, we significantly increased our overall liquidity position for risk management purposes and enhanced our liquidity stress testing regime. As a result of these efforts and the activities that occurred in the first quarter of 2020, described below, we currently believe our liquidity position is stable and we expect to be able to fund our business operations through 2021. However, because of the disruptions in the capital markets that occurred at the onset of the pandemic, we implemented our Contingency Funding Plan, which entailed monitoring and reporting to management our liquidity position and the health of deposit and asset-backed securities markets. In times of financial distress, we often see a flight to quality, where investors seek safer places to invest their money, such as insured bank deposits and in securities such as U.S. Treasuries and government- sponsored debt and mortgage-backed securities. We saw similar trends in the marketplace during this crisis and expect that as a well-capitalized insured depository institution, we will have ample access to deposit markets. As pandemic-related capital market disruptions abated, we de-activated the Contingency Funding Plan in October 2020, but remain watchful for signs of renewed market stress as the pandemic evolves. Maintaining our focus on earnings quality as well as prudent liquidity management, we have actively managed the cost of our retail deposits downward in response to the rapid downturn in short-term interest rates in the first nine months of 2020. Despite the lower deposit rates, we have experienced only moderate retail deposit outflows, primarily in term CDs, that are within the outflow targets our Asset and Liability Committee approved. In addition, we were able to access the brokered deposit, asset-backed security and unsecured debt markets throughout 2020. We manage our capital position through a rigorous capital stress testing regime. As a result, we believe that, given the high quality of our Private Education Loan portfolio, we have sufficient capital to withstand our current estimate of the expected downturn. If circumstances surrounding COVID-19 change in a significantly more adverse way, however, it is possible our liquidity and regulatory capital position could be materially and adversely affected, which could materially and adversely impact our business operations and our overall financial condition. See “Liquidity and Capital Resources” and “Borrowings” for additional discussion on our capital and funding activities. Regulatory agencies have also provided regulatory capital relief to financial institutions as a result of the crisis. See “ — Financial Results” for additional discussion regarding the regulatory relief. Regulatory We are regulated by the FDIC, the UDFI, and the CFPB. These agencies have encouraged regulated entities to work constructively with customers affected by COVID-19 and have provided guidance regarding loan modifications. The federal banking regulators have stated that working with customers who are current on existing loans, either individually or as part of a program for creditworthy customers who are experiencing short-term financial or operational problems as a result COVID-19, generally would not be considered TDRs. For modification programs, such as forbearance, designed to provide temporary relief for current customers affected by COVID-19, we may presume that customers who are current on payments are not experiencing financial difficulties at the time of the modification for purposes of determining TDR status, and thus no further TDR analysis is required for each loan modification in the program. In addition, the regulators have indicated their examiners will exercise judgment in reviewing loan modifications, including TDRs, and will not automatically adversely risk-rate credits that are affected by COVID-19, including those considered TDRs. Regardless of whether modifications result in loans being considered TDRs or adversely classified, bank examiners have indicated they will not criticize prudent efforts to modify the terms of existing loans to affected customers. We have briefed our regulators on the actions taken to date, including the vast majority of our employees working from home and the exceptions we have granted to our existing policies, and on privacy and security issues and how these risks have been mitigated in a work-from-home environment. Community We understand that the communities in which our employees live, work, and serve are also suffering financial distress as a result of COVID-19. Due to the growing needs of our neighbors, many of the organizations in place to provide assistance are overburdened. In March 2020, The Sallie Mae Fund donated a total of $1 million to local food banks in states home to Sallie Mae facilities. Each of the five organizations received a $200,000 grant from The Sallie Mae Fund to support emergency response efforts to combat food insecurity for those in the community impacted by the COVID-19 pandemic. Those efforts resulted in the donation of more than 900,000 meals and 2 million pounds of food and provided personal protective equipment for staff and food bank volunteers. 46 Financial Result s For the year ended December 31, 2020, we considered the current economic forecasts as well as the how the significant uncertainty surrounding COVID-19 may affect future unemployment rates and the economy in estimating our allowance for credit losses. While we remain cautious about the near-term economic forecasts, we changed the economic scenarios used in determining the allowance for credit losses in the fourth quarter of 2020 to a more balanced formula from the scenarios used in the second and third quarters of 2020, which gave a 50 percent weighting to the downside scenario. Provisions for credit losses for the year ended December 31, 2020, decreased by $261 million compared with the year-ago period. The allowance in 2019 was determined using an incurred loss model which, for the most part, based its allowance on expected losses over the next 12 months. On January 1, 2020, we adopted CECL, which required a life-of-loan loss allowance, and recorded an increase to the allowance for on-balance sheet loans and off-balance sheet loan commitments of $1.3 billion with an offsetting entry of $953 million in retained earnings and a $306 million deferred tax asset. After January 1, 2020, all future changes in the allowance were recorded through the provisions for credit losses. For the year ended December 31, 2020, we had provisions for credit losses of $93 million. This was the result of $290 million in additional provisions for credit losses related to new commitments made in 2020, an additional $129 million due to deteriorating economic conditions during the year as a result of the COVID-19 pandemic, and $99 million caused by lower recovery rates and various overlays and other adjustments applied during the year. Offsetting these was a $206 million reduction in the provisions for credit losses as a result of $2.9 billion of loans transferred to held-for-sale from held for investment in the fourth quarter of 2020, the sale of $3.1 billion of Private Education Loans in the first quarter of 2020, which resulted in a reduction to our provision for credit losses of $162 million, a benefit of $121 million from faster prepayment speeds, and the sale of our entire Personal Loan portfolio, which resulted in a reduction to our provision for credit losses of $43 million. The benefit from faster prepayment speeds reflected actual loan prepayment speeds being higher than what our models were predicting due to the significant amount of COVID-19 related government stimulus. As COVID-19 continues to impact the economy, the company could continue to experience significant changes in its allowance for credit losses in 2021. Private Education Loans (held for investment) in forbearance as a percentage of held for investment Private Education Loans in repayment and forbearance was 4.3 percent at December 31, 2020, compared to 4.1 percent at December 31, 2019. The majority of our disaster forbearances were entered into during March and April of 2020 because of COVID-19 and the resulting shelter-at-home guidance that caused many businesses to shut down during the early part of the pandemic. When these disaster forbearances expired in June and July of 2020, they were no longer considered in forbearance until the borrower requested, and was granted, an additional forbearance. Many of these borrowers went back into repayment status at the end of their original three-month disaster forbearance. Other borrowers asked for additional forbearance and we began granting those in one-month increments. In the third and fourth quarters of 2020, we saw our forbearance rate decline from the high levels we experienced in the second quarter of 2020. Higher forbearance rates in the year ended December 31, 2020 compared with the year-ago period are primarily a result of our working with customers affected by COVID-19. The majority of colleges, universities, and trade schools across the country shifted their fall 2020 semester to a hybrid model, which includes a mix of online, in-person classes and scaled back residential options. The remaining schools are executing a fully remote or on campus experience. Colleges and universities have reported their enrollment figures for fall 2020 and have indicated lower results due to an increase in freshmen deferring enrollment. With second semester courses underway, most campuses are continuing the learning model used in the fall semester. Our application volumes also decreased and our 2020 Private Education Loan origination volume was $5.3 billion, a decline of 5 percent compared to 2019. For some students, going back to school in the fall was not an option because of the pandemic, or for other reasons. Therefore, some students are taking a “gap year” before returning to school. In 2020, for those students that had unexpectedly separated from school, we provided an extension of time through fall 2021 to re-enroll, before beginning their grace period that occurs prior to entering full principal and interest repayment status. At December 31, 2020, $1.0 billion of Private Education Loans were granted this extended period of time. See “ — Financial Condition — Summary of Our Loans Held for Investment Portfolio — Ending Loans Held for Investment Balance, net” for an additional breakout of those loans. On March 27, 2020, then President Trump signed into law the CARES Act, which, among other things, allows us to (i) elect to suspend the requirements under GAAP for loan modifications related to COVID-19 that would otherwise be categorized as troubled debt restructurings (“TDRs”), and (ii) suspend any determination of a loan modified as a result of the effects of COVID-19 as being a TDR, including impairment for accounting purposes. Furthermore, on December 27, 2020, the CAA was signed into law. The CAA provides for additional COVID-19 focused relief and extends certain provisions of the CARES Act. 47 We have elected to suspend TDR accounting for modifications of loans that occur as a result of COVID-19 for the applicable period of the CARES Act and CAA relief. The relief from TDR guidance applies to modifications of loans that were not more than 30 days past due as of December 31, 2019, and that occur during the period beginning on March 1, 2020, and ending on the earlier of (i) sixty days after the date on which the national emergency related to the COVID-19 outbreak is terminated, or (ii) January 1, 2022. We are continuing to apply TDR accounting to those loans that were more than 30 days past due as of December 31, 2019 and were subsequently modified. On August 26, 2020, the federal banking agencies published a final rule that provides those banking organizations that adopt CECL during the 2020 calendar year with the option to delay for two years, and then phase in over the following three years, the effects on regulatory capital of CECL relative to the incurred loss methodology. We have elected to use this option. The final rule is substantially similar to an interim final rule issued on March 27, 2020. Under this final rule, because we have elected to use the deferral option, the regulatory capital impact of our transition adjustments recorded on January 1, 2020 from the adoption of CECL will be deferred for two years. In addition, from January 1, 2020 through the end of the two-year deferral period, 25 percent of the ongoing impact of CECL on our allowance for credit losses, retained earnings, and average total consolidated assets, each as reported for regulatory capital purposes, will be added to the deferred transition amounts (“adjusted transition amounts”) and deferred for the two-year period. At the conclusion of the two-year period (i.e., beginning January 1, 2022), the adjusted transition amounts will be phased in for regulatory capital purposes at a rate of 25 percent per year, with the phased-in amounts included in regulatory capital at the beginning of each year. Our January 1, 2020 CECL transition amounts increased the allowance for credit losses by $1.1 billion, increased the liability representing our off-balance sheet exposure for unfunded commitments by $116 million, and increased our deferred tax asset by $306 million, resulting in a cumulative effect adjustment that reduced retained earnings by $953 million. This transition adjustment was inclusive of qualitative adjustments incorporated into our CECL allowance as necessary, to address any limitations in the models used. At December 31, 2020, the adjusted transition amounts, subject to changes over the two-year phase-in period, that will be deferred for regulatory capital purposes are as follows: Transition Amounts Adjustments for the Year Ended Adjusted Transition Amounts (Dollars in thousands) January 1, 2020 December 31, 2020 December 31, 2020 Retained earnings $ 952,639 $ (57,859) $ 894,780 Allowance for credit losses 1,143,053 (55,811) 1,087,242 Liability for unfunded commitments 115,758 (2,048) 113,710 Deferred tax asset 306,171 — 306,171 48 Overview The following discussion and analysis presents a review of our business and operations as of and for the year ended December 31, 2020. Key Financial Measures Set forth below are brief summaries of our key financial measures. Our operating results are primarily driven by net interest income from our Private Education Loan portfolio, gains and losses on loan sales, provision expense for credit losses, and operating expenses. The growth of our business and the strength of our financial condition are primarily driven by our ability to achieve our annual Private Education Loan origination goals while sustaining credit quality and maintaining cost-efficient funding sources to support our originations. Net Interest Income Most of our earnings are generated from the interest income earned on assets in our education loan portfolios and on Credit Cards, net of the interest expense we pay on the funding for those loans. We report these earnings as net interest income. We also often refer to the net interest margin, which is the net interest yield earned on our interest-earning assets less the rate paid on our related interest-bearing liabilities. The majority of our interest income comes from our Private Education Loan portfolio. FFELP Loans have a lower net interest yield and carry lower risk than Private Education Loans, as a result of the federal government guarantee supporting FFELP Loans. Loan Sales and Secured Financings We may sell loans to third-parties through whole loan sales, securitizations or other similar transactions. We typically retain servicing of loans subsequent to their sale and earn revenue for this servicing at prevailing market rates for such services. Selling loans removes the loan assets from our balance sheet and helps us manage our asset growth, capital and liquidity needs. Alternatively, we may use loans as collateral in connection with the creation of asset-backed securitizations or secured funding facilities structured as financings. These types of transactions may provide us long-term financing, but they do not remove loan assets from our balance sheet, nor do they generate gains on sales of loans, net. Consequently, our operating results may be significantly affected by whether we choose to sell loans and recognize current gains on sale or continue to hold or finance loans, thereby retaining some or all the net interest income from those loans. In the first quarter of 2020, we sold $3.1 billion of our Private Education Loans, including $2.9 billion of principal, $199 million in capitalized interest, and $12 million in accrued interest, to unaffiliated third parties. In the third quarter of 2020, we sold our entire Personal Loan portfolio, including $697 million of principal and $7 million in accrued interest. For additional information, see Notes to Consolidated Financial Statements, Note 5, “Loans Held for Investment.” In the first quarter of 2021, we sold $3.0 billion of our Private Education Loans, including $2.8 billion of principal, $185 million in capitalized interest, and $15 million in accrued interest, to unaffiliated third parties. For additional information, see Notes to Consolidated Financial Statements, Note 6, “Loans Held for Sale.” Allowance for Credit Losses Management estimates and maintains an allowance for credit losses for the lifetime expected credit losses on loans in our portfolios, as well as for future loan commitments, at the reporting date. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Allowance for Credit Losses 2020.” Allowances for credit losses are an important indicator of management’s perspective on the future performance of a loan portfolio. Each quarter, management makes an adjustment to the allowance for credit losses to reflect its most up-to-date estimate of future losses by recording a charge against quarterly revenues known as provision expense. As they occur, actual loan charge-offs and recoveries are then charged or credited, respectively, against the allowance for credit losses rather than against earnings. The allowance for credit losses and provision expense rise when future charge-offs are expected to increase and fall when future charge-offs are expected to decline. We bear the full credit exposure on our Private Education Loans and Credit Cards. Losses on our Private Education Loans are affected by risk characteristics such as loan status (in-school, grace, forbearance, repayment and delinquency), loan seasoning (number of months in active repayment), underwriting criteria (e.g., credit scores), presence of a cosigner and the current economic environment. See “CREDIT RISK - Defaults on our loans, particularly Private Education Loans, could adversely affect our business, financial position, results of operations, and/or cash flows . ” in Item 1A. 49 “Risk Factors” for additional information. Losses typically emerge once a borrower separates from school and enters full principal and interest repayment after the borrower’s grace period (six months, typically) ends. As a larger proportion of our Private Education Loan portfolio enters full principal and interest repayment in the coming years, we would expect the amount of TDRs, and charge-offs, to increase. Our allowance for credit losses for FFELP Loans and related periodic provision expense are small because we generally bear a maximum of three percent loss exposure due to the federal guarantee on such loans. We maintain an allowance for credit losses for our FFELP Loans at a level sufficient to cover lifetime expected credit losses. We maintain an allowance for Credit Card losses at an amount sufficient to absorb losses estimated to cover lifetime expected credit losses. Because our Credit Card portfolio is new and we do not have historical loss experience, we use estimated loss rates reported by other financial institutions to estimate our allowance for credit losses for Credit Cards, net of expected recoveries. In addition, we use a model that utilizes purchased credit card information with risk characteristics similar to those of our own portfolio as a challenger model. We then consider any qualitative factors that may change our future expectations of losses. As all of our Credit Card loans are unconditionally cancelable by us, the issuer, we do not record any estimate of credit losses for unused portions of our Credit Card commitments. Charge-Offs and Delinquencies Delinquencies are another important indicator of potential future credit performance. When a Private Education Loan reaches 120 days delinquent, it is charged against the allowance for credit losses. We charge off Credit Cards when they are 180 days delinquent. Charge-off data provides relevant information with respect to the actual performance of a loan portfolio over time. Management focuses on delinquencies as well as the progression of loans from early to late stage delinquency as a key metric in estimating the allowance for credit losses and tailoring its future collections strategies. We manage our charged-off loans through a mix of in-house collectors, third-party collectors and sales to third-parties. Operating Expenses The cost of operating our business directly affects our profitability. We strive to manage growth in our business in a prudent fashion by focusing on investments to improve efficiency throughout the Company. We monitor and report internally various metrics, including cost to acquire and cost to service our loans (which include both owned and serviced loans), among others. The cost to acquire is affected by such variables as technology, personnel and marketing costs. Servicing expenses primarily include compensation and benefit expenses related to our collections, customer support and payment processing employees, and technology costs and other expenses associated with facilitating and servicing borrowers. Costs to service can vary period to period based upon seasonality and borrower payment status. The cost to service a delinquent borrower is significantly higher than the cost to service a current or in-school borrower. “Core Earnings” We prepare financial statements in accordance with GAAP. However, we also produce and report our after-tax earnings on a separate basis that we refer to as “Core Earnings.” The difference between our non-GAAP “Core Earnings” and GAAP results for periods presented generally is driven by the unrealized, mark-to-fair value gains (losses) on derivatives contracts recognized in GAAP, but not in “Core Earnings.” “Core Earnings” recognizes the difference in accounting treatment based upon whether a derivative qualifies for hedge accounting treatment. We enter into derivative instruments to economically hedge interest rate and cash flow risk associated with our portfolio. We believe that our derivatives are effective economic hedges and, as such, are a critical element of our interest rate risk management strategy. Those derivative instruments that qualify for hedge accounting treatment have their related cash flows recorded in interest income or interest expense along with the hedged item. Some of our derivatives do not qualify for hedge accounting treatment and the stand-alone derivative must be marked-to-fair value in the income statement with no consideration for the corresponding change in fair value of the hedged item. These gains and losses, recorded in “Gains (losses) on derivatives and hedging activities, net,” are primarily caused by interest rate volatility and changing credit spreads during the period as well as the volume and term of derivatives not receiving hedge accounting treatment. Cash flows on derivative instruments that do not qualify for hedge accounting are not recorded in interest income and interest expense; they are recorded in non-interest income: “Gains (losses) on derivatives and hedging activities, net.” For periods prior to July 1, 2018, the amount recorded in “Gains (losses) on derivatives and hedging activities, net” includes (a) the accrual of the current payment on those interest rate swaps that do not qualify for hedge accounting treatment, 50 (b) the change in fair values related to future expected cash flows for derivatives that do not qualify for hedge accounting treatment, and (c) ineffectiveness on derivatives that receive hedge accounting treatment. For purposes of “Core Earnings” in those periods prior to July 1, 2018, we include in GAAP earnings the current period accrual amounts (interest reclassification) on the swaps and exclude the remaining ineffectiveness (and change in fair values for those derivatives not qualifying for hedge accounting treatment). “Core Earnings” in those periods is meant to represent what earnings would have been had these derivatives qualified for hedge accounting and there was no ineffectiveness. In the third quarter of 2018, we changed our definition of “Core Earnings” to no longer exclude ineffectiveness related to derivative instruments that are receiving hedge accounting treatment. Accordingly, the only adjustments required to reconcile from our “Core Earnings” results to our GAAP results of operations, net of tax, relate to differing treatments for our derivative instruments used to hedge our economic risks that do not qualify for hedge accounting treatment. For periods beginning July 1, 2018, the amount recorded in “Gains (losses) on derivatives and hedging activities, net” includes (a) the accrual of the current payment on the interest rate swaps that do not qualify for hedge accounting treatment and (b) the change in fair values related to future expected cash flows for derivatives that do not qualify for hedge accounting treatment. For purposes of “Core Earnings,” we include in GAAP earnings the current period accrual amounts (interest reclassification) on the swaps and exclude the change in fair values for those derivatives not qualifying for hedge accounting treatment. “Core Earnings” is meant to represent what earnings would have been had these derivatives qualified for hedge accounting and there was no ineffectiveness. “Core Earnings” are not a substitute for reported results under GAAP. We provide a “Core Earnings” basis of presentation because (i) earnings per share computed on a “Core Earnings” basis is one of several measures we utilize in establishing management incentive compensation, and (ii) we believe it better reflects the financial results for derivatives that are economic hedges of interest rate risk, but which do not qualify for hedge accounting treatment. GAAP provides a uniform, comprehensive basis of accounting. Our “Core Earnings” basis of presentation differs from GAAP in the way it treats derivatives as described above. The following table shows the amount in “Gains (losses) on derivatives and hedging activities, net” that relates to the interest reclassification on the derivative contracts. Years Ended December 31, (Dollars in thousands) 2020 2019 2018 Hedge ineffectiveness gains prior to adoption of ASU No. 2017-12 (1) $ — $ — $ 2,684 Unrealized gains (losses) on instruments not in a hedging relationship 10,164 19,469 (1,400) Interest reclassification 39,380 (1,644) (1,371) Gains (losses) on derivatives and hedging activities, net $ 49,544 $ 17,825 $ (87) ______ (1) The hedge ineffectiveness gains of $3 million for the year ended December 31, 2018 related to hedging relationships that were discontinued in 2018 prior to the adoption of ASU No. 2017-12. 51 The following table reflects adjustments associated with our derivative activities. Years Ended December 31, (Dollars in thousands, except per share amounts) 2020 2019 2018 “ Core Earnings ” adjustments to GAAP: GAAP net income $ 880,690 $ 578,276 $ 487,476 Preferred stock dividends 9,734 16,837 15,640 GAAP net income attributable to SLM Corporation common stock $ 870,956 $ 561,439 $ 471,836 Adjustments: Net impact of derivative accounting (1) (10,164) (19,469) (1,284) Net tax expense (benefit) (2) (2,481) (4,758) (312) Total “Core Earnings” adjustments to GAAP (7,683) (14,711) (972) “Core Earnings” attributable to SLM Corporation common stock $ 863,273 $ 546,728 $ 470,864 GAAP diluted earnings per common share $ 2.25 $ 1.30 $ 1.07 Derivative adjustments, net of tax (0.02) (0.03) — “Core Earnings” diluted earnings per common share $ 2.23 $ 1.27 $ 1.07 ______ (1) Derivative Accounting: “Core Earnings” exclude periodic unrealized gains and losses caused by the mark-to-fair value valuations on derivatives that do not qualify for hedge accounting treatment under GAAP, but include current period accruals on the derivative instruments. For periods prior to July 1, 2018, “Core Earnings” also exclude the periodic unrealized gains and losses that are a result of ineffectiveness recognized related to effective hedges under GAAP, net of tax. Under GAAP, for our derivatives held to maturity, the cumulative net unrealized gain or loss over the life of the contract will equal $0. (2) “Core Earnings” tax rate is based on the effective tax rate at the Bank, where the derivative instruments are held. The following table reflects our provisions for credit losses and total portfolio net charge-offs: Years Ended December 31, (Dollars in thousands) 2020 2019 2018 Provisions for credit losses $ 93,133 $ 354,249 $ 244,864 Total portfolio net charge-offs (216,036) (253,143) (153,722) Beginning in 2020, we began to evaluate management’s performance internally using a measure that starts with “Core Earnings” net income as disclosed above for a period, and further adjusting it by increasing it by the impact of GAAP provisions for credit losses, and decreasing it by the total portfolio net charge-offs recorded in that period, net of the tax impact of these adjustments. 52 Private Education Loan Originations Private Education Loans are the principal asset on our balance sheet, and the amount of new Private Education Loan originations we generate each year is a key indicator of the trajectory of our business, including our future earnings and asset growth. Funding Sources Deposits We utilize brokered, retail and other core deposits to meet funding needs and enhance our liquidity position. These deposits can be term or liquid deposits. Our term brokered deposits have terms as long as seven years. Interest rates on a portion of our long-term deposits are swapped into one-month LIBOR. This structure has the effect of transforming the interest rate characteristics of these deposits to match the index on which the majority of our assets reset, thereby minimizing our exposure to interest rate risk. Retail deposits are sourced through a direct banking platform and serve as an important source of diversified funding. Brokered deposits are sourced through a network of brokers and provide a stable source of funding. In addition, we accept certain deposits considered non-brokered that are held in large accounts structured to allow FDIC insurance to flow through to underlying individual depositors. We diversify our funding sources with deposits from Educational 529 savings plan and Health Savings plans. These and other large omnibus accounts, aggregating the deposits of many individual depositors, represented $7.1 billion of our deposit totals as of December 31, 2020. Loan Securitizations We have diversified our funding sources by issuing term ABS and by entering into the Secured Borrowing Facility (which was previously called the asset-backed commercial paper facility, or ABCP Facility). Term ABS financing provides long-term funding for our Private Education Loan portfolio at attractive interest rates and at terms that effectively match the average life of the assets. Loans associated with these transactions will remain on our balance sheet if we retain the residual interest in these trusts. The Secured Borrowing Facility provides an extremely flexible source of funds that can be drawn upon on short notice to meet funding needs within the Bank. Borrowings under our Secured Borrowing Facility are accounted for as secured financings. 53 2020 Strategic Imperatives and Corporate Restructuring At the beginning of 2020, we were focused on executing our legacy strategy comprised of three main pillars: growing our primary student loan business, maintaining and enhancing our best-in-class customer experience platform, and continuing our efforts to diversify into other financial products. Based on these pillars, we set six goals: (1) prudently grow our Private Education Loan assets and revenues; (2) maintain our strong capital position; (3) continue our credit card initiative to increase the level of engagement with our existing customers and attract new customers; (4) manage operating expenses to improve the efficiency of our operations; (5) maintain our strong governance, risk oversight and compliance infrastructure; and (6) leverage our culture to engage employees, recognize and reward contributions to business results, and develop talent to support our business strategy and growth. With the arrival of a new CEO, and based on changing market dynamics, we undertook a comprehensive strategic review. The strategic review validated much of our previous strategy, but also highlighted several areas for greater focus. As a result, we introduced the following five strategic imperatives in the third quarter of 2020, which we believe will increase shareholder value: • Maximize the profitability and growth of our core business . Our goal is to build upon our position as the leading lender in the private student loan market to maximize profitability and growth. We will seek to expand our share of the market through initiatives to increase the volume of applications, approval rate on the applications we receive, and ultimate funding rate for customers. We will endeavor to accomplish this without diminishing our risk/return appetite and, in some cases, by enhancing it. We will also seek to improve the efficiency of our marketing and customer acquisition strategies through the implementation of robust direct to consumer marketing technologies. Finally, we will endeavor to drive greater efficiency and operating leverage through continued efficiency efforts and leveraging past investments in systems and platforms. • Optimize the value of our brand and our attractive client base. Our well-known brand, which is synonymous with student lending, is a strong asset. Our goal, however, is to improve upon it and make it a beloved brand that will strengthen our position in the private student loan industry. We will endeavor to do this by improving our current products and our servicing experience. We will focus on improving our already high customer satisfaction scores by simplifying our customer touch points. In addition, we plan to improve the presentation of our free products that help students and families plan and pay for college, such as our cost of college calculators and our scholarship search engine. A very large number of people who currently visit our website are not our borrowers. We would like to deepen our relationship with those customers to enhance our brand, improve our core business, and potentially develop new growth opportunities in the future. • Better inform the external narrative about student lending. The marketplace presents both real and perceived risk to private student lending. We will engage with bipartisan policymakers to help them better understand the role of private lenders and how Sallie Mae provides tools, resources, and responsible financing to help students and families access and complete college. • Maintain a rigorous and predictable capital allocation and return program to create shareholder value. Our goal is to remain very disciplined by generating high returns on equity in our core business and by returning capital to shareholders when it cannot be deployed in a way that generates high returns and supports our core private student lending business. We expect to continue to sell loans at premiums attractive to us and use the capital released and gains generated to repurchase shares of our common stock, if we believe the stock is undervalued by reasonable measures. Our focus on loan sales to generate capital to return to shareholders is likely to continue throughout the phase-in of the regulatory capital implications of CECL, after which period of time we intend to generate significant excess capital organically for shareholders. • Drive a mission-led culture. We believe, and research affirms, mission-led companies generate superior outcomes for customers, employees, shareholders, and other key stakeholders. To drive performance, we will continue to align and advance a culture tied directly to our mission: to power confidence as students begin their unique journey. To help align us to accomplish these initiatives, during the third quarter of 2020 we restructured our senior management team and assigned a senior management team member to be responsible for the progress of each of the imperatives described above. In addition to the senior management changes, during the third quarter of 2020, we initiated a restructuring program to reduce costs and improve operating efficiencies by better aligning our organizational structure with our new corporate strategic imperatives. In conjunction with the restructuring plan, involuntary termination benefit arrangements and certain other costs that are incremental and incurred as a direct result of our restructuring plan are classified as restructuring expenses in the 54 accompanying consolidated statements of income. Restructuring expenses of $26 million were recorded in the year ended December 31, 2020. The majority of these restructuring expenses incurred through December 31, 2020 were severance costs related to the elimination of approximately 165 positions, or approximately 9 percent of the workforce that existed as of December 31, 2019. During the third and fourth quarters of 2020, we began making progress on the corporate strategic imperatives. In the third quarter of 2020, we sold our entire Personal Loan portfolio, including $697 million of principal and $7 million in accrued interest. In the fourth quarter of 2020, we issued an unsecured debt offering of $500 million of 4.20 percent Senior Notes due October 29, 2025 at par. In October 2020, we initiated a cash tender offer to purchase up to 2,000,000 shares of our Series B preferred stock. On November 30, 2020, we accepted for purchase 1,489,304 shares of the Series B preferred stock at a purchase price of $45 per share plus an amount equal to accrued and unpaid dividends, for an aggregate purchase price of approximately $68 million. 55 Results of Operations We present the results of operations below on a consolidated basis in accordance with GAAP. GAAP Consolidated Statements of Income Increase (Decrease) Years Ended December 31, 2020 vs. 2019 2019 vs. 2018 (Dollars in millions, except per share data) 2020 2019 2018 $ % $ % Interest income: Loans $ 1,989 $ 2,249 $ 1,895 $ (260) (12) % $ 354 19 % Investments 12 8 6 4 50 2 33 Cash and cash equivalents 21 74 34 (53) (72) 40 118 Total interest income 2,022 2,331 1,935 (309) (13) 396 20 Total interest expense 542 708 522 (166) (23) 186 36 Net interest income 1,480 1,623 1,413 (143) (9) 210 15 Less: provisions for credit losses 93 354 245 (261) (74) 109 44 Net interest income after provisions for credit losses 1,387 1,269 1,168 118 9 101 9 Non-interest income (loss): Gains on sales of loans, net 238 — 2 238 100 (2) — Losses on sales of securities, net — — (2) — — 2 — Gains on derivatives and hedging activities, net 50 18 — 32 178 18 100 Other income (loss) 43 31 (52) 12 (39) 83 160 Total non-interest income (loss) 331 49 (52) 282 576 101 194 Non-interest expenses: Total operating expenses 538 574 557 (36) (6) 17 3 Restructuring expenses 26 — — 26 100 — — Total non-interest expenses 564 574 557 (10) (2) 17 3 Income before income tax expense 1,154 744 559 410 55 185 33 Income tax expense 273 165 72 108 65 94 131 Net income 881 578 487 302 52 91 19 Preferred stock dividends 10 17 16 (7) (41) 1 6 Net income attributable to SLM Corporation common stock $ 871 $ 561 $ 472 $ 310 55 % $ 89 19 % Basic earnings per common share attributable to SLM Corporation $ 2.27 $ 1.31 $ 1.08 $ 0.96 73 % $ 0.23 21 % Diluted earnings per common share attributable to SLM Corporation $ 2.25 $ 1.30 $ 1.07 $ 0.95 73 % $ 0.23 21 % Declared dividends per common share attributable to SLM Corporation $ 0.12 $ 0.12 $ — $ — — % $ 0.12 100 % 56 GAAP Consolidated Earnings Summary Year Ended December 31, 2020 Compared with Year Ended December 31, 2019 For the year ended December 31, 2020, net income was $881 million, or $2.25 diluted earnings per common share, compared with net income of $578 million, or $1.30 diluted earnings per common share, for the year ended December 31, 2019. The year-over-year increase was primarily attributable to increases in gains on sales of loans, net, lower provisions for credit losses, and lower operating expenses, which were offset by a decline in total net interest income. The primary contributors to each of the identified drivers of change in net income for the current year period compared with the year-ago period are as follows: • Net interest income in 2020 decreased by $143 million compared with the year-ago period primarily due to a 95 basis point decrease in net interest margin. Net interest margin decreased primarily due to (i) rates on our cash and short-term investments portfolio decreasing faster than our deposits repriced as interest rates fell as a result of the COVID-19 pandemic, as well as (ii) the sale of our higher yielding Personal Loan portfolio. • Provisions for credit losses for the year ended December 31, 2020, decreased by $261 million compared with the year-ago period. The allowance in 2019 was determined using an incurred loss model which, for the most part, based its allowance on expected losses over the next 12 months. On January 1, 2020, we adopted CECL, which required a life-of-loan loss allowance, and recorded an increase to the allowance for on balance sheet loans and off-balance sheet loan commitments of $1.3 billion with an offsetting entry of a $953 million reduction in retained earnings and a $306 million increase in our deferred tax asset. After January 1, 2020, all future changes in the allowance were recorded through the provisions for credit losses. For the year ended December 31, 2020, our provisions for credit losses were $93 million. This was primarily the result of $290 million in additional provision for credit losses related to new commitments made in 2020, an additional $129 million due to deteriorating economic conditions during the year as a result of the COVID-19 pandemic and $99 million caused by lower recovery rates and various overlays and other adjustments applied during the year. Offsetting these was a $206 million reduction in the provisions for credit losses as a result of $2.9 billion of loans transferred to held-for-sale from held for investment in the fourth quarter of 2020, the sale of $3.1 billion of Private Education Loans in the first quarter of 2020, which resulted in a reduction to our provision for credit losses of $162 million, a benefit of $121 million from faster prepayment speeds, and the sale of our entire Personal Loan portfolio, which resulted in a reduction to our provisions for credit losses of $43 million. The benefit from faster prepayment speeds was to reflect actual loan prepayment speeds being higher than what our models were predicting due to the significant amount of COVID-19 related government stimulus. • Gains on sales of loans, net, were $238 million in 2020, primarily as a result of the sale of $3.1 billion of Private Education Loans to unaffiliated third parties in the first quarter of 2020. There were no loan sales in 2019. • Gains on derivatives and hedging activities, net, increased $32 million in 2020 compared with the year-ago period. The increase was driven by a significant decrease in interest rates during 2020 as a result of the economic impact of the COVID-19 pandemic, which caused our receive-fixed/pay-variable interest rate swaps that are not designated as accounting hedges, but are economic hedges, to increase in value. • Other income increased $12 million in 2020 from the year-ago period primarily due to an $11 million gain from the sale of our Upromise subsidiary in the second quarter of 2020, and an increase of $17 million in third-party servicing fees, offset by $13 million in lower revenue from our divested Upromise business, and an $8 million gain we recorded in the year-ago period related to changes in the valuation of certain non-marketable securities. Third-party servicing fees increased primarily as a result of the sale of $3.1 billion of Private Education loans in the first quarter of 2020 (where we continued to service the loans after they were sold). • For the year ended December 31, 2020, total operating expenses were $538 million, compared with $574 million in the year-ago period. The decrease in operating expenses was primarily driven by reduced personnel and marketing costs as a result of the suspension of Personal Loan originations and the subsequent sale of our Personal Loan portfolio, the sale of our Upromise subsidiary, lower FDIC fees, and lower employee compensation costs as a result of the restructuring, which were offset by increased costs from growth in the serviced and owned loan portfolio, CEO transition costs, and costs related to other initiatives. • Restructuring expenses for the year ended December 31, 2020 were $26 million, related to the restructuring plan we implemented in the third quarter of 2020. These expenses were primarily related to involuntary termination benefit 57 arrangements, as well as certain other costs, such as legal and consulting fees that were incremental and incurred as a direct result of our restructuring plan. There were no restructuring expenses recorded in the year-ago period. • Income tax expense for the year ended December 31, 2020 was $273 million, compared with $165 million in the year-ago period. The effective tax rate increased in 2020 to 23.7 percent from 22.2 percent in the year-ago period. The increase in the effective tax rate was primarily driven by $14 million in tax credits recorded in 2019. Year Ended December 31, 2019 Compared with Year Ended December 31, 2018 For the year ended December 31, 2019, net income was $578 million, or $1.30 diluted earnings per common share, compared with net income of $487 million, or $1.07 diluted earnings per common share, for the year ended December 31, 2018. The year-over-year increase was primarily attributable to increases in net interest income and total non-interest income, which were offset by increases in provisions for credit losses, total non-interest expenses and an increase in income tax expense. The primary contributors to each of the identified drivers of change in net income for 2019 compared with 2018 are as follows: • Net interest income in 2019 increased by $210 million compared with 2018 primarily due to a $3.1 billion increase in average loans outstanding. Net interest margin decreased by 34 basis points primarily as a result of an additional $1.8 billion in average cash and other short-term investments held in 2019 compared with 2018. In 2019, we began increasing the amount of cash and cash equivalents held to increase overall liquidity levels for risk management purposes. Yields on deposits placed with the Federal Reserve and government and agency securities are below our cost of funds, which reduces the weighted average yield on our interest-earning assets and our net interest margin. The increase in yield on our education loan portfolios in 2019 compared with 2018 was primarily due to the carryover benefit in early 2019 from the increase in LIBOR rates during 2018, which increased the yield on our variable-rate Private Education Loan and FFELP portfolios. The increase in our cost of funds in 2019 compared to 2018 was also due to the increasing rates that occurred in the latter half of 2018. The increased liquidity levels in 2019 reduced the net interest margin by approximately $11 million compared with 2018. • Provisions for credit losses in 2019 increased $109 million compared with 2018 primarily due to a higher provision for our TDR portfolio as a result of the impact of declining interest rates, higher delinquencies, and a 14 percent growth in Private Education Loans in repayment. The allowance for a TDR loan equals the difference between the carrying amount of the loan and the present value of the expected future cash flows discounted at the effective interest rate of the loan just prior to the loan’s classification as a TDR. For our variable-rate TDR loans, we locked in the discount rate at the time of TDR classification and did not adjust that rate as interest rates changed. Therefore, when interest rates increased, which they did in 2018, we recorded a lower allowance on our variable-rate TDR portfolio because of the higher future expected cash flows. Conversely, when interest rates declined, as they did during 2019, the present value of future expected cash flows of the variable-rate TDR portfolio declined and the related allowance increased. • There were no gains on sales of loans, net, in 2019. Gains on sales of loans, net, resulted in a net gain of $2 million in 2018, as we sold the $43 million Split Loan (as hereinafter defined) portfolio in second-quarter 2018. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Arrangements with Navient Corporation — Amended Loan Participation and Purchase Agreement.” • There were no sales of securities in 2019, compared with losses on sales of securities, net, of $2 million in 2018, due to the sale of $41 million of mortgage-backed securities in second-quarter 2018. • Gains (losses) on derivatives and hedging activities, net, resulted in a net gain of $18 million in 2019 compared with a net loss of less than $1 million in 2018. The increase was driven by several factors, including an additional $2.6 billion of notional derivative contracts entered into during 2019 that were economic hedges but did not receive hedge accounting treatment. These derivatives, as well as other derivative contracts that did not receive hedge accounting treatment, were favorably affected by interest rates and future interest rate expectations during 2019. • Other income in the year ended December 31, 2019 increased $83 million from 2018. In 2019 and 2018, we reduced other income by $12 million and $94 million, respectively, to reflect the reduction in our tax indemnification receivable because of the expiration of certain statutes of limitations related to a portion of indemnified uncertain tax positions. Absent these tax-related items, other income in 2019 increased $1 million compared to 2018. In 2019, we 58 recorded an $8 million gain related to changes in the valuation of certain non-marketable securities, which was offset by lower revenue in our Upromise business. • For the year ended December 31, 2019, non-interest expenses were $574 million, compared with $557 million in 2018. Full-year non-interest expenses grew 3 percent year-over-year. The increase in non-interest expenses was driven by the growth in our Private Education Loan portfolio and increased investments in marketing, slightly offset by a reduction in initial costs related to our migration to the cloud. • Income tax expense increased to $165 million in 2019 from $72 million in 2018. Our effective income tax rate increased to 22.2 percent in 2019 from 12.8 percent in 2018. The increase in the effective tax rate was primarily the result of a $94 million decrease in income tax expense in 2018 due to the previously mentioned expiration of certain statutes of limitations regarding a portion of indemnified uncertain tax positions. Absent that item, our effective tax rate for 2018 would have been 25.4 percent. The further decrease in the effective tax rate in 2019 was primarily driven by $14 million of tax credits recorded in 2019, the majority of which related to prior year tax filings. 59 Financial Condition Average Balance Sheets - GAAP The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities and reflects our net interest margin on a consolidated basis. Years Ended December 31, 2020 2019 2018 (Dollars in thousands) Balance Rate Balance Rate Balance Rate Average Assets Private Education Loans $ 22,426,216 8.42 % $ 22,225,473 9.32 % $ 19,282,500 9.10 % FFELP Loans 757,953 3.76 814,198 4.79 888,301 4.57 Personal Loans 582,552 12.43 1,141,503 12.09 900,152 11.08 Taxable securities 1,547,837 0.73 324,849 2.35 235,700 2.61 Cash and other short-term investments 5,457,234 0.40 3,693,245 2.01 1,844,404 1.88 Total interest-earning assets 30,771,792 6.57 % 28,199,268 8.27 % 23,151,057 8.36 % Non-interest-earning assets 236,536 1,318,290 1,157,628 Total assets $ 31,008,328 $ 29,517,558 $ 24,308,685 Average Liabilities and Equity Brokered deposits $ 12,777,874 1.84 % $ 11,760,646 2.66 % $ 9,028,589 2.43 % Retail and other deposits 10,772,161 1.47 9,588,747 2.44 8,142,449 2.08 Other interest-bearing liabilities (1) 4,982,771 2.98 4,658,075 3.43 3,948,001 3.37 Total interest-bearing liabilities 28,532,806 1.90 % 26,007,468 2.72 % 21,119,039 2.47 % Non-interest-bearing liabilities 234,798 392,173 461,327 Equity 2,240,724 3,117,917 2,728,319 Total liabilities and equity $ 31,008,328 $ 29,517,558 $ 24,308,685 Net interest margin 4.81 % 5.76 % 6.10 % _________________ (1) Includes the average balance of our unsecured borrowings, as well as secured borrowings and amortization expense of transaction costs related to our term asset-backed securitizations and our Secured Borrowing Facility. 60 Rate/Volume Analysis - GAAP The following rate/volume analysis shows the relative contribution of changes in interest rates and asset volumes. (Dollars in thousands) Increase (Decrease) Change Due To (1) Rate Volume 2020 vs. 2019 Interest income $ (309,372) $ (508,217) $ 198,845 Interest expense (166,050) (229,719) 63,669 Net interest income $ (143,322) $ (282,344) $ 139,022 2019 vs. 2018 Interest income $ 395,680 $ (21,847) $ 417,527 Interest expense 185,429 56,072 129,357 Net interest income $ 210,251 $ (83,975) $ 294,226 _____________ (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 Loans Held for Investment Portfolio Ending Loans Held for Investment Balances, net December 31, 2020 (Dollars in thousands) Private Education Loans FFELP Loans Credit Cards Total Loans Held for Investment Total loan portfolio: In-school (1) $ 3,582,394 $ 81 $ — $ 3,582,475 Grace, repayment and other (2)(3) 16,146,943 737,512 12,238 16,896,693 Total, gross 19,729,337 737,593 12,238 20,479,168 Deferred origination costs and unamortized premium/(discount) 63,475 1,993 230 65,698 Allowance for credit losses (1,355,844) (4,378) (1,501) (1,361,723) Total loans held for investment portfolio, net $ 18,436,968 $ 735,208 $ 10,967 $ 19,183,143 % of total 96 % 4 % — % 100 % _________ (1) Loans for customers still attending school and who are not yet required to make payments on the loans. At December 31, 2020, the loans in the “in-school” category include $254 million of Private Education Loans whose borrowers did not return to school in the fall of 2020 because of the pandemic, or other reasons, and who received an extension of time from us to re-enroll before beginning their grace period and, therefore, currently are not required to make any payments. For further discussion, see “— Impact of COVID-19 on Sallie Mae — Financial Results.” (2) At December 31, 2020, the loans in the “grace, repayment and other” category include (a) $147 million of Private Education Loans whose borrowers are in a grace or deferred status and who did not return to school in the fall of 2020, who received an extension of time from us to re-enroll before beginning their grace period and, therefore, currently are not required to make any payments, and (b) $639 million of Private Education Loans whose borrowers are in a forbearance or repayment status and who did not return to school in the fall of 2020 and who received an extension of time from us to re-enroll before beginning their grace period. For further discussion, see “— Impact of COVID-19 on Sallie Mae — Financial Results.” (3) Includes loans in deferment or forbearance. Loans in repayment include loans on which borrowers are making interest only or fixed payments, as well as loans that have entered full principal and interest repayment status after any applicable grace period. 61 December 31, 2019 (Dollars in thousands) Private Education Loans FFELP Loans Personal Loans Credit Cards Total Loans Held for Investment Total loan portfolio: In-school (1) $ 4,288,239 $ 81 $ — $ — $ 4,288,320 Grace, repayment and other (2) 18,901,352 783,225 1,049,007 3,884 20,737,468 Total, gross 23,189,591 783,306 1,049,007 3,884 25,025,788 Deferred origination costs and unamortized premium/(discount) 81,224 2,143 513 36 83,916 Allowance for credit losses (374,300) (1,633) (65,877) (102) (441,912) Total loans held for investment portfolio, net $ 22,896,515 $ 783,816 $ 983,643 $ 3,818 $ 24,667,792 % of total 93 % 3 % 4 % — % 100 % December 31, 2018 (Dollars in thousands) Private Education Loans FFELP Loans Personal Loans Total Loans Held for Investment Total loan portfolio: In-school (1) $ 4,037,125 $ 163 $ — $ 4,037,288 Grace, repayment and other (2) 16,467,340 846,324 1,190,091 18,503,755 Total, gross 20,504,465 846,487 1,190,091 22,541,043 Deferred origination costs and unamortized premium/(discount) 68,321 2,379 297 70,997 Allowance for credit losses (277,943) (977) (62,201) (341,121) Total loans held for investment portfolio, net $ 20,294,843 $ 847,889 $ 1,128,187 $ 22,270,919 % of total 91 % 4 % 5 % 100 % _________ (1) Loans for customers still attending school and who are not yet required to make payments on the loans. (2) Includes loans in deferment or forbearance. Loans in repayment include loans on which borrowers are making interest only or fixed payments, as well as loans that have entered full principal and interest repayment status after any applicable grace period. 62 December 31, 2017 (Dollars in thousands) Private Education Loans FFELP Loans Personal Loans Total Loans Held for Investment Total loan portfolio: In-school (1) $ 3,740,237 $ 257 $ — $ 3,740,494 Grace, repayment and other (2) 13,691,930 927,403 400,280 15,019,613 Total, gross 17,432,167 927,660 400,280 18,760,107 Deferred origination costs and unamortized premium/(discount) 56,378 2,631 — 59,009 Allowance for credit losses (243,715) (1,132) (6,628) (251,475) Total loans held for investment portfolio, net $ 17,244,830 $ 929,159 $ 393,652 $ 18,567,641 % of total 93 % 5 % 2 % 100 % December 31, 2016 (Dollars in thousands) Private Education Loans FFELP Loans Personal Loans Total Loans Held for Investment Total loan portfolio: In-school (1) $ 3,371,870 $ 377 $ — $ 3,372,247 Grace, repayment and other (2) 10,879,805 1,010,531 12,893 11,903,229 Total, gross 14,251,675 1,010,908 12,893 15,275,476 Deferred origination costs and unamortized premium/(discount) 44,206 2,941 — 47,147 Allowance for credit losses (182,472) (2,171) (58) (184,701) Total loans held for investment portfolio, net $ 14,113,409 $ 1,011,678 $ 12,835 $ 15,137,922 % of total 93 % 7 % — % 100 % _________ (1) Loans for customers still attending school and who are not yet required to make payments on the loans. (2) Includes loans in deferment or forbearance. Loans in repayment include loans on which borrowers are making interest only or fixed payments, as well as loans that have entered full principal and interest repayment status after any applicable grace period. Average Loans Held for Investment Balances (net of unamortized premium/discount) Years Ended December 31, (Dollars in thousands) 2020 2019 2018 Private Education Loans $ 22,426,216 94 % $ 22,225,473 92 % $ 19,282,500 92 % FFELP Loans 757,953 3 814,198 3 888,301 4 Personal Loans 582,552 3 1,141,503 5 900,152 4 Total portfolio $ 23,766,721 100 % $ 24,181,174 100 % $ 21,070,953 100 % 63 Loans Held for Investment, Net Activity Year Ended December 31, 2020 (Dollars in thousands) Private Education Loans (1) FFELP Loans Personal Loans Credit Cards Total Loans Held for Investment, net (1) Beginning balance $ 22,896,515 $ 783,816 $ 983,643 $ 3,818 $ 24,667,792 Day 1 CECL adjustment to allowance (1,060,830) (2,852) (79,183) (188) (1,143,053) Balance at January 1, 2020 21,835,685 780,964 904,460 3,630 23,524,739 Acquisitions and originations: Fixed-rate 2,903,258 — 41 — 2,903,299 Variable-rate 2,439,029 — — 35,955 2,474,984 Total acquisitions and originations 5,342,287 — 41 35,955 5,378,283 Capitalized interest and deferred origination cost premium amortization 616,115 27,558 (253) (819) 642,601 Sales (2,925,478) — (588,285) — (3,513,763) Loan consolidations to third-parties (1) (1,332,802) (21,243) — — (1,354,045) Allowance 79,285 107 36,526 (1,211) 114,707 Transfer to loans held-for-sale (2,885,640) — — — (2,885,640) Repayments and other (1) (2,292,484) (52,178) (352,489) (26,588) (2,723,739) Ending balance $ 18,436,968 $ 735,208 $ — $ 10,967 $ 19,183,143 _________ (1) In our Form 10-Qs for the first three fiscal quarters of 2020: (i) the “loan consolidations to third-parties” line item incorrectly included consolidation activity for loans we serviced but did not own, and (ii) the “repayments and other” line item did not correctly reflect the total of all scheduled repayments and voluntary prepayments made on loans in repayment that we owned and held for investment. The “ending balance” line item, which includes the effects of those two line items, was reflected correctly in the Form 10-Qs. The “loan consolidations to third-parties” line item was overstated in the Form 10-Qs for the first, second, and third fiscal quarters by $13 million, $45 million, and $39 million, respectively. The “repayments and other” line item was understated in the Form 10-Qs for the first, second, and third fiscal quarters by $13 million, $45 million, and $39 million, respectively. In order to correctly reflect the activity that occurred throughout 2020 regarding those line items for loans we owned and held for investment, in this Form 10-K for the year ended December 31, 2020, the “loan consolidations to third-parties” line item reflects a reduction of $97 million to the line item amount to reflect the aggregate overstatement for the first three fiscal quarters, and the “repayments and other” line item reflects an increase of $97 million to the line item amount to reflect the aggregate understatement for the first three fiscal quarters. The “loan consolidations to third-parties” for Private Education Loans for the fourth quarter of 2020 were $345 million, and totaled $1.3 billion for the year ended December 31, 2020. The “repayments and other” for Private Education Loans for the fourth quarter of 2020 were $576 million and totaled $2.3 billion for the year ended December 31, 2020. 64 Year Ended December 31, 2019 (Dollars in thousands) Private Education Loans FFELP Loans Personal Loans Credit Cards Total Loans Held for Investment, net Beginning balance $ 20,294,843 $ 847,889 $ 1,128,187 $ — $ 22,270,919 Acquisitions and originations: Fixed-rate 3,784,860 — 480,398 — 4,265,258 Variable-rate 1,866,914 — — 5,933 1,872,847 Total acquisitions and originations 5,651,774 — 480,398 5,933 6,138,105 Capitalized interest and deferred origination cost premium amortization 722,153 28,258 (323) — 750,088 Sales — — — — — Loan consolidations to third-parties (1,512,279) (27,461) — — (1,539,740) Allowance (96,357) (656) (3,676) (102) (100,791) Repayments and other (2,163,619) (64,214) (620,943) (2,013) (2,850,789) Ending balance $ 22,896,515 $ 783,816 $ 983,643 $ 3,818 $ 24,667,792 Year Ended December 31, 2018 (Dollars in thousands) Private Education Loans FFELP Loans Personal Loans Total Loans Held for Investment, net Beginning balance $ 17,244,830 $ 929,159 $ 393,652 $ 18,567,641 Acquisitions and originations: Fixed-rate 3,082,544 — 1,157,875 4,240,419 Variable-rate 2,252,948 — — 2,252,948 Total acquisitions and originations 5,335,492 — 1,157,875 6,493,367 Capitalized interest and deferred origination cost premium amortization 597,997 31,093 (71) 629,019 Sales (43,988) — — (43,988) Loan consolidations to third-parties (991,044) (30,076) — (1,021,120) Allowance (34,228) 155 (55,573) (89,646) Repayments and other (1,814,216) (82,442) (367,696) (2,264,354) Ending balance $ 20,294,843 $ 847,889 $ 1,128,187 $ 22,270,919 “Loan consolidations to third-parties” and “Repayments and other” are both significantly affected by the volume of loans in our held for investment portfolio in full principal and interest repayment status. Loans in full principal and interest repayment status in our Private Education Loans held for investment portfolio at December 31, 2020 decreased by 15 percent compared with December 31, 2019, and now total 49 percent of our Private Education Loans held for investment portfolio at December 31, 2020. The balance of loans held for investment in full principal and interest repayment status was affected in 2020 by loan sales and the transfer of loans from held for investment to held-for-sale. “Loan consolidations to third-parties” for the year ended December 31, 2020 total 14.7 percent of our Private Education Loans held for investment portfolio in full principal and interest repayment status at December 31, 2020, or 7.2 percent of our total Private Education Loans held for investment portfolio at December 31, 2020, compared with the year-ago period of 14.2 percent of our Private Education Loan held for investment portfolio in full principal and interest repayment status, or 6.6 percent of our total Private Education Loans held for investment portfolio, respectively. One driver of the increase in the rate of consolidations in 2020 was the result of our transferring $2.9 billion in loans to held-for-sale. Absent this transfer, the rate of consolidation activity (as a percent of our total Private Education Loan held for investment portfolio in full principal and interest repayment status) would have been 12.9 percent for the year ended December 31, 2020. The other contributor to the increase in consolidations is attributable to consolidators having ready access to funding for much of 2020 in spite of the 65 COVID-19 pandemic impact on the economy. Historical experience has shown that loan consolidation activity is heightened in the period when the loan initially enters full principal and interest repayment status and then subsides over time. The “Repayments and other” category includes all scheduled repayments, as well as voluntary prepayments, made on loans in repayment (including loans in full principal and interest repayment status) and also includes charge-offs. Consequently, this category can be significantly affected by the volume of loans in repayment. Historically, voluntary prepayments and loan consolidations decrease when unemployment increases as borrowers and lenders look to conserve liquidity. While we saw a decrease in voluntary prepayments in the second quarter of 2020 (as compared to the first quarter of 2020) as a result of the COVID-19 pandemic, the decrease was not as significant as we expected based upon historical experience during higher unemployment periods and has increased to closer to pre-pandemic levels in 2020 (as compared to the year-ago period). Private Education Loan Originations The following table summarizes our Private Education Loan originations. Originations represent loans that were funded or acquired during the period presented. Years Ended December 31, (Dollars in thousands) 2020 % 2019 % 2018 % Smart Option - interest only (1) $ 1,222,148 23 % $ 1,234,246 22 % $ 1,164,229 22 % Smart Option - fixed pay (1) 1,498,578 28 1,560,496 28 1,410,124 27 Smart Option - deferred (1) 1,912,978 36 2,082,147 37 2,017,927 38 Smart Option - principal and interest 9,559 — 9,806 — 8,450 — Graduate Loan 579,451 11 622,181 11 609,742 11 Parent Loan 98,023 2 115,910 2 104,771 2 Total Private Education Loan originations $ 5,320,737 100 % $ 5,624,786 100 % $ 5,315,243 100 % Percentage of loans with a cosigner 86.0 % 86.6 % 87.2 % Average FICO at approval (2) 749 746 746 ________ (1) Interest only, fixed pay and deferred describe the payment option while in school or in grace period. See Item 1. “Business - Our Business - Private Education Loans” for further discussion. (2) Represents the higher credit score of the cosigner or the borrower. 66 Allowance for Credit Losses Allowance for Credit Losses Activity Years Ended December 31, 2020 2019 (Dollars in thousands) Private Education Loans FFELP Loans Personal Loans Credit Cards Total Portfolio Private Education Loans FFELP Loans Personal Loans Credit Cards Total Portfolio Beginning balance $ 374,300 $ 1,633 $ 65,877 $ 102 $ 441,912 $ 277,943 $ 977 $ 62,201 $ — $ 341,121 Day 1 adjustment for adoption of CECL 1,060,830 2,852 79,183 188 1,143,053 — — — — — Balance at January 1, 2020 1,435,130 4,485 145,060 290 1,584,965 277,943 977 62,201 — 341,121 Transfer from unfunded commitment liability (1) 320,808 — — — 320,808 — — — — — Less: Charge-offs (205,326) (519) (39,079) (119) (245,043) (208,978) (822) (74,313) (1) (284,114) Loan sales — — (108,534) — (108,534) — — — — — Plus: Recoveries 24,021 — 4,984 2 29,007 25,765 — 5,206 — 30,971 Provisions for credit losses: Provision, current period 148,673 412 40,485 1,328 190,898 279,570 1,478 72,783 103 353,934 Loan sale reduction to provision (161,793) — (42,916) — (204,709) — — — — — Loans transferred to held-for-sale (205,669) — — — (205,669) — — — — — Total provisions for credit losses (2) (218,789) 412 (2,431) 1,328 (219,480) 279,570 1,478 72,783 103 353,934 Ending balance $ 1,355,844 $ 4,378 $ — $ 1,501 $ 1,361,723 $ 374,300 $ 1,633 $ 65,877 $ 102 $ 441,912 Troubled debt restructurings (3) $ 1,274,590 $ — $ — $ — $ 1,274,590 $ 1,581,966 $ — $ — $ — $ 1,581,966 __________ (1) See Note 8, “Unfunded Loan Commitments,” in this Form 10-K for a summary of the activity in the allowance for and balance of unfunded loan commitments, respectively. (2) For the year ended December 31, 2020, below is a reconciliation of the provision for credit losses reported in the consolidated statements of income. When a new loan commitment is made, we record the CECL allowance as a liability for unfunded commitments by recording a provision for credit losses. When the loan is funded, we transfer that liability to the allowance for credit losses. Consolidated Statements of Income Provisions for Credit Losses Reconciliation (Dollars in thousands) Year Ended December 31, 2020 Private Education Loan provisions for credit losses: Provisions for loan losses $ (218,789) Provisions for unfunded loan commitments 312,613 Total Private Education Loan provisions for credit losses 93,824 Other impacts to the provisions for credit losses: Personal Loans (2,431) FFELP Loans 412 Credit Cards 1,328 Total (691) Provisions for credit losses reported in consolidated statements of income $ 93,133 (3) Represents the unpaid principal balance of loans classified as troubled debt restructurings. 67 Years Ended December 31, 2018 2017 2016 (Dollars in thousands) Private Education Loans FFELP Loans Personal Loans Total Portfolio Private Education Loans FFELP Loans Personal Loans Total Portfolio Private Education Loans FFELP Loans Personal Loans Total Portfolio Beginning balance $ 243,715 $ 1,132 $ 6,628 $ 251,475 $ 182,472 $ 2,171 $ 58 $ 184,701 $ 108,816 $ 3,691 $ — $ 112,507 Less: Charge-offs (154,701) (1,135) (19,690) (175,526) (130,063) (954) (579) (131,596) (90,203) (1,348) — (91,551) Loan sales (1) (1,216) — — (1,216) (4,871) — — (4,871) (6,034) — — (6,034) Plus: Recoveries 20,858 — 946 21,804 17,635 — 11 17,646 10,382 — — 10,382 Provisions for loan losses 169,287 980 74,317 244,584 178,542 (85) 7,138 185,595 159,511 (172) 58 159,397 Ending balance $ 277,943 $ 977 $ 62,201 $ 341,121 $ 243,715 $ 1,132 $ 6,628 $ 251,475 $ 182,472 $ 2,171 $ 58 $ 184,701 Troubled debt restructurings (2) $ 1,257,856 $ — $ — $ 1,257,856 $ 990,351 $ — $ — $ 990,351 $ 612,606 $ — $ — $ 612,606 _________ (1) Represents fair value adjustments on loans sold. (2) Represents the unpaid principal balance of loans classified as troubled debt restructurings. Private Education Loan Allowance for Credit Losses In establishing the allowance for Private Education Loan losses as of December 31, 2020, we considered several factors with respect to our Private Education Loan held for investment portfolio, in particular, credit quality and delinquency, forbearance and charge-off trends. Private Education Loans held for investment in full principal and interest repayment status were 49 percent of our total Private Education Loans held for investment portfolio at December 31, 2020, compared with 46 percent at December 31, 2019. For a more detailed discussion of our policy for determining the collectability of Private Education Loans and maintaining our allowance for Private Education Loans, see “—Allowance for Credit Losses” and Note 5, “Loans Held for Investment — Certain Collection Tools - Private Education Loans” in this Form 10-K. 68 The table below presents our Private Education Loans held for investment portfolio delinquency trends. Loans in repayment include loans on which borrowers are making interest only or fixed payments, as well as loans that have entered full principal and interest repayment status after any applicable grace period. Private Education Loans Held for Investment December 31, 2020 2019 2018 (Dollars in thousands) Balance % Balance % Balance % Loans in-school/grace/deferment (1)(2) $ 4,779,040 $ 5,687,405 $ 5,260,445 Loans in forbearance (1)(3) 645,476 714,516 577,164 Loans in repayment and percentage of each status (1) : Loans current 13,898,948 97.2 % 16,315,651 97.2 % 14,289,705 97.4 % Loans delinquent 31-60 days (4) 205,528 1.4 288,051 1.7 231,216 1.6 Loans delinquent 61-90 days (4) 119,643 0.8 121,302 0.7 95,105 0.7 Loans delinquent greater than 90 days (4) 80,702 0.6 62,666 0.4 50,830 0.3 Total Private Education Loans in repayment 14,304,821 100.0 % 16,787,670 100.0 % 14,666,856 100.0 % Total Private Education Loans, gross 19,729,337 23,189,591 20,504,465 Private Education Loans deferred origination costs and unamortized premium/(discount) 63,475 81,224 68,321 Total Private Education Loans 19,792,812 23,270,815 20,572,786 Private Education Loans allowance for losses (1,355,844) (374,300) (277,943) Private Education Loans, net $ 18,436,968 $ 22,896,515 $ 20,294,843 Percentage of Private Education Loans in repayment 72.5 % 72.4 % 71.5 % Delinquencies as a percentage of Private Education Loans in repayment 2.8 % 2.8 % 2.6 % Loans in forbearance as a percentage of Private Education Loans in repayment and forbearance 4.3 % 4.1 % 3.8 % _________ (1) At December 31, 2020, the loans in the “in-school/grace/deferment” category above include $401 million of Private Education Loans whose borrowers did not return to school in the fall of 2020 because of the pandemic, or for other reasons, and who received an extension of time from us to re-enroll before beginning their grace period. At December 31, 2020, the loans in the “in forbearance” category above include $30 million of Private Education Loans whose borrowers did not return to school in the fall of 2020 and who received an extension of time from us to re-enroll before beginning their grace period. At December 31, 2020, the loans in the “in repayment” category above include $609 million of Private Education Loans whose borrowers did not return to school in the fall of 2020 and who received an extension of time from us to re-enroll before beginning their grace period. For further discussion, see “— Impact of COVID-19 on Sallie Mae — Financial Results.” (2) 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). (3) 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. (4) The period of delinquency is based on the number of days scheduled payments are contractually past due. Delinquencies as a percentage of Private Education Loans (held for investment) in repayment remained unchanged at 2.8 percent at December 31, 2020 compared with December 31, 2019, and the forbearance rate increased to 4.3 percent at December 31, 2020 from 4.1 percent at December 31, 2019. While delinquency rates remained static, there were significantly higher unemployment rates in 2020, as a result of the COVID-19 pandemic, when compared with 2019. Typically, higher unemployment rates, as we saw in 2020, would cause delinquency rates to increase significantly; however, several factors contributed to lower than expected delinquencies, including the suspension of payments on federal loans which reduced the payment burden by our borrowers, as well as the disaster forbearance program we invoked to assist our customers. The first 69 wave of disaster forbearance was granted primarily in 90-day increments. When these disaster forbearances expired in June and July 2020, the loans were no longer considered in forbearance until the borrowers requested, and were granted, an additional forbearance. Many of these borrowers went back into repayment status at the end of their original three-month disaster forbearance. Other borrowers asked for additional forbearance and we began granting those in one-month increments. In the third and fourth quarters of 2020, we saw our forbearance rate decline from the high levels we experienced in the second of quarter 2020, as borrowers exited their original three-month disaster forbearance. As our borrowers exit forbearance and enter repayment status, we expect to see an increase in delinquency rates in future periods due to higher unemployment rates. Higher forbearance rates in 2020 compared with the year-ago period are primarily a result of our working with customers affected by COVID-19. Customers who receive a disaster forbearance do not progress in delinquency and are not assessed late fees or other fees. During a disaster forbearance, a customer’s credit file will continue to reflect the status of the loan as it was immediately prior to granting the disaster forbearance. See additional discussion related to collections activity and the COVID-19 pandemic in “ — Impact of COVID-19 on Sallie Mae — Customers and Credit Performance.” The following table summarizes changes in the allowance for Private Education Loan (held for investment) losses. Years Ended December 31, (Dollars in thousands) 2020 2019 2018 2017 2016 Beginning balance $ 374,300 $ 277,943 $ 243,715 $ 182,472 $ 108,816 Day 1 adjustment for adoption of CECL 1,060,830 — — — — Balance at January 1, 2020 1,435,130 277,943 243,715 182,472 108,816 Transfer from unfunded commitment liability (1) 320,808 — — — — Provision for credit losses: Provision, current period 148,673 279,570 169,287 178,542 159,511 Loan sale reduction to provision (161,793) — — — — Loans transferred to held for sale (205,669) — — — — Total provision (218,789) 279,570 169,287 178,542 159,511 Net charge-offs: Charge-offs (205,326) (208,978) (154,701) (130,063) (90,203) Recoveries 24,021 25,765 20,858 17,635 10,382 Net charge-offs (181,305) (183,213) (133,843) (112,428) (79,821) Loan sales (2) — — (1,216) (4,871) (6,034) Ending Balance $ 1,355,844 $ 374,300 $ 277,943 $ 243,715 $ 182,472 Allowance as a percentage of the ending total loan balance 6.87 % 1.61 % 1.36 % 1.40 % 1.28 % Allowance as a percentage of the ending loans in repayment (3) 9.48 % 2.23 % 1.90 % 2.00 % 1.88 % Allowance coverage of net charge-offs 7.48 2.04 2.08 2.17 2.29 Net charge-offs as a percentage of average loans in repayment (3) 1.17 % 1.17 % 1.01 % 1.03 % 0.96 % Delinquencies as a percentage of ending loans in repayment (3) 2.84 % 2.81 % 2.57 % 2.42 % 2.06 % Loans in forbearance as a percentage of ending loans in repayment and forbearance (3) 4.32 % 4.08 % 3.79 % 3.70 % 3.50 % Ending total loans, gross $ 19,729,337 $ 23,189,591 $ 20,504,465 $ 17,432,167 $ 14,251,675 Average loans in repayment (3) $ 15,518,851 $ 15,605,927 $ 13,303,801 $ 10,881,058 $ 8,283,036 Ending loans in repayment (3) $ 14,304,821 $ 16,787,670 $ 14,666,856 $ 12,206,033 $ 9,709,758 _______ (1) See Note 8, “Unfunded Loan Commitments,” in this Form 10-K for a summary of the activity in the allowance for and balance of unfunded loan commitments, respectively. (2) Represents fair value adjustments on loans sold. (3) Loans in repayment include loans on which borrowers are making interest only or fixed payments, as well as loans that have entered full principal and interest repayment status after any applicable grace period. 70 As part of concluding on the adequacy of the allowance for credit losses, we review key allowance and loan metrics. The most significant of these metrics considered are the allowance coverage of net charge-offs ratio; the allowance as a percentage of ending total loans and of ending loans in repayment; and delinquency and forbearance percentages. Use of Forbearance and Rate Modifications as a Private Education Loan Collection Tool We adjust the terms of loans for certain borrowers when we believe such changes will help our customers manage their student loan obligations, achieve better student outcomes, and increase the collectability of the loan. These changes generally take the form of a temporary forbearance of payments, a temporary interest rate reduction, a temporary interest rate reduction with a permanent extension of the loan term, and/or a short-term extended repayment alternative. Forbearance is granted prospectively for borrowers who are current in their payments and may be granted retroactively for certain delinquent borrowers. Forbearance allows a borrower to temporarily not make scheduled payments or to make smaller than scheduled payments, in each case for a specified period of time. Using forbearance extends the original term of the loan by the term of forbearance taken. Forbearance does not grant any reduction in the total principal or interest repayment obligation. While a loan is in forbearance status, interest continues to accrue and is capitalized to principal when the loan re-enters repayment status (except as described below in the case of disaster forbearance). We grant forbearance through our servicing centers to borrowers who are current in their payments and through our collections centers to certain borrowers who are delinquent. Our forbearance policies and practices vary depending upon whether a borrower is current or delinquent at the time forbearance is requested, generally with stricter payment requirements for delinquent borrowers. We view the population of borrowers that use forbearance positively because the borrowers are either proactively reaching out to us to obtain assistance in managing their obligations or are working with our collections center to bring their loans current. Forbearance may be granted through our servicing centers to customers who are exiting their grace period and to other customers who are current in their payments, 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 forbearance period, the customer will enter repayment status as current and is expected to begin making scheduled monthly payments. Currently, we generally grant forbearance in our servicing centers if a borrower who is current requests it for increments of up to three months at a time, for up to 12 months. Forbearance may also be granted through our collections centers to customers who are delinquent in their payments. If specific payment requirements are met, the forbearance can cure the delinquency and the customer is returned to a current repayment status. Forbearance as a collection tool is used most effectively when applying historical experience and our judgment to a customer’s unique situation. 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 assisting customers while mitigating the risks of delinquency and default as well as encouraging resolution of delinquent loans. In all instances, we require one or more payments before granting forbearance to delinquent borrowers. The COVID-19 pandemic is having far reaching, negative impacts on individuals, businesses, and, consequently, the overall economy. Specifically, COVID-19 has materially disrupted business operations throughout the country, resulting in significantly higher levels of unemployment or underemployment. As a result, we expect many of our individual customers will experience financial hardship, making it difficult, if not impossible, to meet their payment obligations to us without temporary assistance. We are monitoring key metrics as early warning indicators of financial hardship, including changes in weekly unemployment claims, enrollment in auto-debit payments, requests for new forbearances, enrollment in hardship payment plans, and early delinquency metrics. As a result of the negative impact on employment from COVID-19, our customers are experiencing higher levels of financial hardship, which led initially to higher levels of forbearance. We expect such higher levels of financial hardship to lead to higher levels of delinquencies and defaults in the future, as borrowers who had received disaster forbearance from us re-enter repayment status. We expect that, left unabated, this deterioration in forbearance, delinquency, and default rates will persist until such time as the economy and employment return to relatively normal levels. For some students, going back to school in the fall was not an option because of the pandemic, or for other reasons. Therefore, some students are taking a “gap 71 year” before returning to school. In 2020, for those students that had unexpectedly separated from school, we provided an extension of time through fall 2021 to re-enroll, before beginning their grace period that occurs prior to entering full principal and interest repayment status. At December 31, 2020, $1.0 billion of Private Education Loans were granted this extended period of time. We assist customers with an array of payment programs during periods of financial hardship as standard operating convention, including: forbearance, which defers payments during a short-term hardship; our GRP, which is an interest-only payment for 12 months; or a loan modification that, in the event of long-term hardship, reduces the interest rate on a loan to 4 percent for 24 months and/or permanently extends the maturity date of the loan. Historically, we have utilized disaster forbearance for material events, including hurricanes, wildfires, and floods. Disaster forbearance defers payments for as much as 90 days upon enrollment. We have invoked this same disaster forbearance program to assist our customers through COVID-19 and offer this program across our operations, including through mobile app and self-service channels such as chat and IVR. Customers who receive a disaster forbearance will not progress in delinquency and will not be assessed late fees or other fees. During a disaster forbearance, a customer’s credit file will continue to reflect the status of the loan as it was immediately prior to granting the disaster forbearance. During the period of the disaster forbearance, interest will continue to accrue, but is not capitalized to the loan balance after the loan returns to repayment status. The first wave of disaster forbearance was granted primarily in 90-day increments. As these forbearances ended, we reduced the disaster forbearance to one-month increments and implemented additional discussions between our servicing agents and borrowers to encourage borrowers/cosigners to enter repayment. If the financial hardship extends beyond 90 days, additional assistance will be available for eligible customers. For example, for borrowers exiting disaster forbearance and not eligible for GRP, we may allow them to make interest only payments for 12 months before reverting to full principal and interest payments. Management continually monitors our credit administration practices and may periodically modify these practices based upon performance, industry conventions, and/or regulatory feedback. In light of these considerations, we previously announced that we plan to implement certain changes to our credit administration practices in the future. As discussed below, however, we postponed until the fourth quarter of 2020 the implementation of the announced credit administration practices changes due to the COVID-19 pandemic. Specifically, we previously announced that we plan to revise our credit administration practices limiting the number of forbearance months granted consecutively and the number of times certain extended or reduced repayment alternatives may be granted. For example, we currently grant forbearance to borrowers without requiring any period of prior principal and interest payments, meaning that, if a borrower satisfies all eligibility requirements, forbearance increments may be granted consecutively. We previously announced that, beginning in the second quarter of 2020, we would phase in a required six-month period between successive grants of forbearance and between forbearance grants and certain other repayment alternatives. We announced this required period will not apply, however, to forbearances granted during the first six months following a borrower’s grace period and will not be required for a borrower to receive a contractual interest rate reduction. In addition, we announced we would limit the participation of delinquent borrowers in certain short-term extended or interest-only repayment alternatives to once in 12 months and twice in five years. As previously announced, prior to full implementation of the credit administration practices changes described above, management will conduct a controlled testing program on randomly selected borrowers to measure the impact of the changes on our customers, our credit operations, and key credit metrics. The testing commenced in October 2019 for some of the planned changes on a very small percentage of our total portfolio and we originally expected to expand the number of borrowers in repayment who would be subject to the new credit administration practices. However, due to the COVID-19 pandemic, we postponed our efforts so that we can be more flexible in dealing with our customers’ financial hardship. In October 2020, we began to roll out in a methodical approach the implementation of the credit administration practices changes and related testing. Management now expects to have completed implementation of the planned credit administration practices changes by year-end 2022. However, we may modify or delay the contemplated practice changes, the proposed timeline, or the method of implementation as we learn more about the impacts of the program on our customers. We also offer rate and term modifications to customers experiencing more severe hardship. Currently, we temporarily reduce the contractual interest rate on a loan to 4.0 percent for a two-year period and, in the vast majority of cases, permanently extend the final maturity date of the loan. As part of demonstrating the ability and willingness to pay, the customer must make three consecutive monthly payments at the reduced payment to qualify for the program. The combination of the rate reduction and maturity extension helps reduce the monthly payment due from the borrower and increases the likelihood the borrower will 72 remain current during the interest rate modification period as well as when the loan returns to its original contractual interest rate. At December 31, 2020 and December 31, 2019, 7.8 percent and 7.2 percent, respectively, of our Private Education Loans held for investment then currently in full principal and interest repayment status were subject to interest rate reductions made under our rate modification program. We currently have no plans to change the basic elements of the rate and term modifications we offer to our customers experiencing more severe hardship. While there are limitations to our estimate of the future impact of the credit administration practices changes described above, absent the effect of any mitigating measures, and based on an analysis of borrower behavior under our current credit administration practices, which may not be indicative of how borrowers will behave under revised credit administration practices, we expect that the credit administration practices changes described above will accelerate defaults and could increase life of loan defaults in our Private Education Loan held for investment portfolio by approximately 4 percent to 14 percent. Among the measures that we are planning to implement and expect may partly offset or moderate any acceleration of or increase in defaults will be greater focus on the risk assessment process to ensure borrowers are mapped to the appropriate program, better utilization of existing programs (e.g., GRP and rate modifications), and the introduction of a new program offering short-term payment reductions (permitting interest-only payments for up to six months) for certain early stage delinquencies. The full impact of these changes to our collections practices described above may only be realized over the longer term, however. In particular, when we calculate the allowance for credit losses under CECL, which became effective on January 1, 2020, our loan loss reserves increased materially because we expect the life of loan defaults on our overall Private Education Loan portfolio to increase, in part as a result of the planned changes to our credit administration practices. As we progress with the controlled testing program of the planned changes to our credit administration practices, we expect to learn more about how our borrowers are reacting to these changes and, as we analyze such reactions, we will continue to refine our estimates of the impact of those changes on our allowance for credit losses. The tables below show the composition and status of the Private Education Loan portfolio held for investment aged by number of months in active repayment status (months for which a scheduled monthly payment was due). Active repayment status includes loans on which borrowers are making interest only or fixed payments, as well as loans that have entered full principal and interest repayment status after any applicable grace period. Our experience shows that the percentage of loans in forbearance status generally decreases the longer the loans have been in active repayment status. At December 31, 2020, loans in forbearance status as a percentage of total Private Education Loans in repayment and forbearance were 3.0 percent for Private Education Loans (held for investment) that have been in active repayment status for fewer than 25 months. Approximately 69 percent of our Private Education Loans (held for investment) in forbearance status have been in active repayment status less than 25 months. 73 (Dollars in millions) December 31, 2020 Private Education Loans Held for Investment Monthly Scheduled Payments Due Not Yet in Repayment Total 0 to 12 13 to 24 25 to 36 37 to 48 More than 48 Loans in-school/grace/deferment $ — $ — $ — $ — $ — $ 4,779 $ 4,779 Loans in forbearance 353 91 71 54 76 — 645 Loans in repayment - current 3,987 3,181 2,215 1,624 2,892 — 13,899 Loans in repayment - delinquent 31-60 days 76 39 30 22 38 — 205 Loans in repayment - delinquent 61-90 days 49 21 17 12 21 — 120 Loans in repayment - delinquent greater than 90 days 33 15 12 8 13 — 81 Total $ 4,498 $ 3,347 $ 2,345 $ 1,720 $ 3,040 $ 4,779 19,729 Deferred origination costs and unamortized premium/(discount) 64 Allowance for credit losses (1,356) Total Private Education Loans, net $ 18,437 Loans in forbearance as a percentage of total Private Education Loans in repayment and forbearance 2.36 % 0.61 % 0.48 % 0.36 % 0.51 % — % 4.32 % (Dollars in millions) December 31, 2019 Private Education Loans Held for Investment Monthly Scheduled Payments Due Not Yet in Repayment Total 0 to 12 13 to 24 25 to 36 37 to 48 More than 48 Loans in-school/grace/deferment $ — $ — $ — $ — $ — $ 5,687 $ 5,687 Loans in forbearance 402 97 79 65 72 — 715 Loans in repayment - current 4,769 3,817 2,752 2,093 2,885 — 16,316 Loans in repayment - delinquent 31-60 days 108 53 45 35 47 — 288 Loans in repayment - delinquent 61-90 days 48 24 18 14 17 — 121 Loans in repayment - delinquent greater than 90 days 25 13 9 7 9 — 63 Total $ 5,352 $ 4,004 $ 2,903 $ 2,214 $ 3,030 $ 5,687 23,190 Deferred origination costs and unamortized premium/(discount) 81 Allowance for credit losses (374) Total Private Education Loans, net $ 22,897 Loans in forbearance as a percentage of total Private Education Loans in repayment and forbearance 2.30 % 0.55 % 0.45 % 0.37 % 0.41 % — % 4.08 % 74 (Dollars in millions) December 31, 2018 Private Education Loans Held for Investment Monthly Scheduled Payments Due Not Yet in Repayment Total 0 to 12 13 to 24 25 to 36 37 to 48 More than 48 Loans in-school/grace/deferment $ — $ — $ — $ — $ — $ 5,260 $ 5,260 Loans in forbearance 338 75 66 52 46 — 577 Loans in repayment - current 4,477 3,333 2,615 1,897 1,968 — 14,290 Loans in repayment - delinquent 31-60 days 94 43 38 27 29 — 231 Loans in repayment - delinquent 61-90 days 39 19 15 10 12 — 95 Loans in repayment - delinquent greater than 90 days 21 11 8 5 6 — 51 Total $ 4,969 $ 3,481 $ 2,742 $ 1,991 $ 2,061 $ 5,260 20,504 Deferred origination costs and unamortized premium/(discount) 69 Allowance for credit losses (278) Total Private Education Loans, net $ 20,295 Loans in forbearance as a percentage of total Private Education Loans in repayment and forbearance 2.22 % 0.49 % 0.44 % 0.34 % 0.30 % — % 3.79 % Private Education Loans Held for Investment Types The following table provides information regarding the loans in repayment balance and total loan balance by Private Education Loan held for investment product type for the years ended December 31, 2020 and 2019. December 31, 2020 (Dollars in thousands Signature and Other Parent Loan Smart Option Career Training Graduate Loan Total $ in repayment (1) $ 215,439 $ 285,323 $ 13,130,229 $ 12,250 $ 661,580 $ 14,304,821 $ in total $ 330,979 $ 289,572 $ 18,067,491 $ 12,797 $ 1,028,498 $ 19,729,337 December 31, 2019 (Dollars in thousands Signature and Other Parent Loan Smart Option Career Training Graduate Loan Total $ in repayment (1) $ 205,203 $ 248,662 $ 15,928,942 $ 12,394 $ 392,469 $ 16,787,670 $ in total $ 341,919 $ 251,104 $ 21,951,654 $ 12,895 $ 632,019 $ 23,189,591 _______ (1) Loans in repayment include loans on which borrowers are making interest only or fixed payments, as well as loans that have entered full principal and interest repayment status after any applicable grace period. 75 Accrued Interest Receivable The following table provides information regarding accrued interest receivable on our Private Education Loans held for investment. 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 majority of the total accrued interest receivable represents accrued interest on deferred loans where no payments are due while the borrower is in school and fixed-pay loans where the borrower makes a $25 monthly payment that is smaller than the interest accruing on that loan in that month. The accrued interest on these loans will be capitalized against the balance of the loans when the borrower exits the grace period upon separation from school. The allowance for uncollectible interest exceeds the amount of accrued interest on our 90 days past due portfolio for all periods presented. Private Education Loans Accrued Interest Receivable (Dollars in thousands) Total Interest Receivable Greater Than 90 Days Past Due Allowance for Uncollectible Interest December 31, 2020 $ 1,168,895 $ 4,354 $ 4,467 December 31, 2019 $ 1,366,158 $ 2,390 $ 5,309 December 31, 2018 $ 1,168,823 $ 1,920 $ 6,322 December 31, 2017 $ 951,138 $ 1,372 $ 4,664 December 31, 2016 $ 739,847 $ 845 $ 2,898 76 Liquidity and Capital Resources Funding and Liquidity Risk Management Our primary liquidity needs include our ongoing ability to fund our businesses throughout market cycles, including during periods of financial stress, our ongoing ability to fund originations of Private Education Loans and other loans and our ability to meet any outflows of our Bank deposits. To achieve these objectives, we analyze and monitor our liquidity needs, maintain excess liquidity and access to diverse funding sources, such as deposits at the Bank, issuance of secured debt primarily through asset-backed securitizations, and other financing facilities, and loan sales. It is our policy to manage operations so liquidity needs are fully satisfied through normal operations to avoid unplanned loan sales under all but the most dire emergency conditions. Our liquidity management is governed by policies approved by our Board of Directors. Oversight of these policies is performed in the Asset and Liability Committee, a management-level committee. These policies take into account the volatility of cash flow forecasts, expected asset and liability maturities, anticipated loan demand and a variety of other factors to establish minimum liquidity guidelines. Key risks associated with our liquidity relate to our ability to access the capital markets and the markets for bank deposits at reasonable rates. This ability may be affected by our performance, competitive pressures, the macroeconomic environment, and the impact they have on the availability of funding sources in the marketplace. We target maintaining sufficient on-balance sheet and contingent sources of liquidity to enable us to meet all contractual and contingent obligations under various stress scenarios, including severe macroeconomic stresses as well as specific stresses that test the resiliency of our balance sheet. As the Bank has grown, we have improved our liquidity stress testing practices to align more closely with the industry, which resulted in our adopting increased liquidity requirements. Beginning in the second quarter of 2019, we began to increase our liquidity levels by increasing cash and marketable investments held as part of our ongoing efforts to enhance our ability to maintain a strong risk management position. By early 2020 we held a significant liquidity buffer of cash and securities, which we expect to maintain through 2021. Due to the seasonal nature of our business, our liquidity levels will likely vary from quarter to quarter. Sources of Liquidity and Available Capacity Ending Balances December 31, (Dollars in thousands) 2020 2019 2018 Sources of primary liquidity: Unrestricted cash and liquid investments: Holding Company and other non-bank subsidiaries $ 1,117 $ 29,620 $ 25,990 Sallie Mae Bank (1) 4,454,175 5,534,257 2,533,116 Available-for-sale investments 1,927,726 487,669 176,245 Total unrestricted cash and liquid investments $ 6,383,018 $ 6,051,546 $ 2,735,351 ____ (1) This amount will be used primarily to originate Private Education Loans at the Bank. 77 Average Balances Years Ended December 31, (Dollars in thousands) 2020 2019 2018 Sources of primary liquidity: Unrestricted cash and liquid investments: Holding Company and other non-bank subsidiaries $ 20,307 $ 38,705 $ 22,570 Sallie Mae Bank (1) 5,202,302 3,455,216 1,677,922 Available-for-sale investments 1,495,155 323,930 201,937 Total unrestricted cash and liquid investments $ 6,717,764 $ 3,817,851 $ 1,902,429 ____ (1) This amount will be used primarily to originate Private Education Loans at the Bank. Deposits The following table summarizes total deposits. December 31, (Dollars in thousands) 2020 2019 Deposits - interest bearing $ 22,664,899 $ 24,282,906 Deposits - non-interest bearing 1,140 1,077 Total deposits $ 22,666,039 $ 24,283,983 Our total deposits of $22.7 billion were comprised of $11.9 billion in brokered deposits and $10.8 billion in retail and other deposits at December 31, 2020, compared with total deposits of $24.3 billion, which were comprised of $13.8 billion in brokered deposits and $10.5 billion in retail and other deposits, at December 31, 2019. Interest bearing deposits as of December 31, 2020 and 2019 consisted of retail and brokered non-maturity savings deposits, retail and brokered non-maturity money market deposit accounts (“MMDAs”) and retail and brokered CDs. Interest bearing deposits include deposits from Educational 529 and Health Savings plans that diversify our funding sources and add deposits we consider to be core. These and other large omnibus accounts, aggregating the deposits of many individual depositors, represented $7.1 billion of our deposit total as of December 31, 2020, compared with $6.8 billion at December 31, 2019. Some of our deposit products are serviced by third-party providers. Placement fees associated with the brokered CDs are amortized into interest expense using the effective interest rate method. We recognized placement fee expense of $19 million, $18 million, and $13 million in the years ended December 31, 2020, 2019 and 2018, respectively. Fees paid to third-party brokers related to brokered CDs were $5 million, $28 million, and $26 million during the years ended December 31, 2020, 2019 and 2018, respectively. 78 Interest bearing deposits at December 31, 2020 and 2019 are summarized as follows: December 31, 2020 December 31, 2019 (Dollars in thousands) Amount Year-End Weighted Average Stated Rate (1) Amount Year-End Weighted Average Stated Rate (1) Money market $ 10,159,657 0.83 % $ 9,616,547 2.04 % Savings 907,976 0.55 718,616 1.71 Certificates of deposit 11,597,266 1.34 13,947,743 2.44 Deposits - interest bearing $ 22,664,899 $ 24,282,906 __ (1) Includes the effect of interest rate swaps in effective hedge relationships. As of December 31, 2020 and 2019, there were $571 million and $963 million, respectively, of deposits exceeding FDIC insurance limits. Accrued interest on deposits was $50 million and $68 million at December 31, 2020 and 2019, respectively. 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. Excess cash is generally invested with the FRB on an overnight basis or in the FRB’s Term Deposit Facility, minimizing counterparty exposure on cash balances. Our investment portfolio is primarily comprised of a small portfolio of mortgage-backed securities issued by government agencies and government-sponsored enterprises that are purchased to meet CRA targets. Additionally, our investing activity is governed by Board-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. Related to derivative transactions, protection against counterparty risk is generally provided by International Swaps and Derivatives Association, Inc. Credit Support Annexes (“CSAs”), or clearinghouses for over-the-counter derivatives. 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 the Bank are covered under CSAs or clearinghouse agreements and require collateral to be exchanged based on the net fair value of derivatives with each counterparty. Our exposure is limited to the value of the derivative contracts in a gain position, less any collateral held by us and plus collateral posted with the counterparty. Title VII of the Dodd-Frank Act requires all standardized derivatives, including most interest rate swaps, to be submitted for clearing to central counterparties to reduce counterparty risk. Two of the central counterparties we use are the CME and the LCH. All variation margin payments on derivatives cleared through the CME and LCH are accounted for as legal settlement. As of December 31, 2020, $8.2 billion notional of our derivative contracts were cleared on the CME and $0.4 billion were cleared on the LCH. The derivative contracts cleared through the CME and LCH represent 95.3 percent and 4.7 percent, respectively, of our total notional derivative contracts of $8.6 billion at December 31, 2020. For derivatives cleared through the CME and LCH, the net gain (loss) position includes the variation margin amounts as settlement of the derivative and not collateral against the fair value of the derivative. The amount of variation margin included as settlement as of December 31, 2020 was $(179) million and $19 million for the CME and LCH, respectively. Changes in fair value for derivatives not designated as hedging instruments are presented as realized gains (losses). Our exposure is limited to the value of the derivative contracts in a gain position less any collateral held and plus any collateral posted. When there is a net negative exposure, we consider our exposure to the counterparty to be zero. At December 31, 2020 and 2019, we had a net positive exposure (derivative gain positions to us, less collateral held by us and plus collateral posted with counterparties) related to derivatives of $43 million and $52 million, respectively. 79 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 rates, may require us to return cash collateral held or may require us to access primary liquidity to post collateral to counterparties. The table below highlights exposure related to our derivative counterparties as of December 31, 2020. (Dollars in thousands) SLM Corporation and Sallie Mae Bank Contracts Total exposure, net of collateral $ 43,317 Exposure to counterparties with credit ratings, net of collateral $ 43,317 Percent of exposure to counterparties with credit ratings below S&P AA- or Moody’s Aa3 — % Percent of exposure to counterparties with credit ratings below S&P A- or Moody’s A3 — % Regulatory Capital The Bank is subject to various regulatory capital requirements administered by federal and state banking authorities. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on our business, results of operations and financial condition. Under U.S. Basel III and the regulatory framework for prompt corrective action, the Bank must meet specific capital standards that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and its classification under the prompt corrective action framework are also subject to qualitative judgments by the regulators about components of capital, risk weightings and other factors. The following capital amounts and ratios are based upon the Bank’s average assets and risk-weighted assets, as indicated. Actual U.S. Basel III Minimum Requirements Plus Buffer (1)(2) (Dollars in thousands) Amount Ratio Amount Ratio As of December 31, 2020: Common Equity Tier 1 Capital (to Risk-Weighted Assets) $ 3,579,005 14.0 % $ 1,794,780 > 7.0 % Tier 1 Capital (to Risk-Weighted Assets) $ 3,579,005 14.0 % $ 2,179,375 > 8.5 % Total Capital (to Risk-Weighted Assets) $ 3,849,820 15.0 % $ 2,692,169 > 10.5 % Tier 1 Capital (to Average Assets) $ 3,579,005 11.3 % $ 1,264,424 > 4.0 % As of December 31, 2019: Common Equity Tier 1 Capital (to Risk-Weighted Assets) $ 3,264,309 12.2 % $ 1,876,050 > 7.0 % Tier 1 Capital (to Risk-Weighted Assets) $ 3,264,309 12.2 % $ 2,278,060 > 8.5 % Total Capital (to Risk-Weighted Assets) $ 3,600,668 13.4 % $ 2,814,074 > 10.5 % Tier 1 Capital (to Average Assets) $ 3,264,309 10.2 % $ 1,282,642 > 4.0 % ________________ (1) Reflects the U.S. Basel III minimum required ratio plus the applicable capital conservation buffer. (2) The Bank’s regulatory capital ratios also exceeded all applicable standards for the Bank to qualify as “well capitalized” under the prompt corrective action framework. 80 Capital Management The Bank intends to maintain at all times regulatory capital levels that meet both the minimum levels required under U.S. Basel III (including applicable buffers) and the levels necessary to be considered “well capitalized” under the FDIC’s prompt corrective action framework, in order to support asset growth and operating needs, address unexpected credit risks and protect the interests of depositors and the DIF administered by the FDIC. The Bank’s Capital Policy requires management to monitor these capital standards and the Bank’s compliance with them. The Board of Directors and management periodically evaluate the quality of assets, the stability of earnings, and the adequacy of the allowance for credit losses for the Bank. The Company is a source of strength for the Bank and will provide additional capital if necessary. We believe that current and projected capital levels are appropriate for 2021. As of December 31, 2020, the Bank’s risk-based and leverage capital ratios exceed the required minimum ratios and the applicable buffers under the fully phased-in U.S. Basel III standards as well as the “well capitalized” standards under the prompt corrective action framework. Under U.S. Basel III, the Bank is required to maintain the following minimum regulatory capital ratios: a Common Equity Tier 1 risk-based capital ratio of 4.5 percent, a Tier 1 risk-based capital ratio of 6.0 percent, a Total risk-based capital ratio of 8.0 percent, and a Tier 1 leverage ratio of 4.0 percent. In addition, the Bank is subject to Common Equity Tier 1 capital conservation buffer of greater than 2.5 percent. Failure to maintain the buffer will result in restrictions on the Bank’s ability to make capital distributions, including the payment of dividends, and to pay discretionary bonuses to executive officers. As of December 31, 2020, the Bank had a Common Equity Tier 1 risk-based capital ratio and a Tier 1 risk-based capital ratio of 14.0 percent, a Total risk-based capital ratio of 15.0 percent and a Tier 1 leverage ratio of 11.3 percent, which exceed the capital levels required under U.S. Basel III and the “well capitalized” standard. Dividends The Bank is chartered under the laws of the State of Utah and its deposits are insured by the FDIC. The 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, the Bank may pay dividends to the Company from its net profits without regulatory approval if, following the payment of the dividend, the Bank’s capital and surplus would not be impaired. The Bank declared $579 million and $254 million in dividends for the years ended December 31, 2020 and 2019, respectively, with the proceeds primarily used to fund the 2020 and 2019 Share Repurchase Programs, respectively, and stock dividends. The Bank paid no dividends on its common stock for the year ended December 31, 2018. See Part I, Item 1. “Business — Supervision and Regulation — Regulation of Sallie Mae Bank — Dividends and Share Repurchase Programs,” regarding the expectation that the Bank will pay dividends to the Company as may be necessary to enable the Company to pay any declared dividends on its Series B Preferred Stock and common stock and to consummate any common share repurchases by the Company under the share repurchase programs. See also Part I, Item 1A. “Risk Factors — General Risks” for possible limitations on the payments of our dividends. 81 Borrowings Outstanding borrowings consist of unsecured debt and secured borrowings issued through our term ABS program and our Secured Borrowing Facility (which was previously called the asset-backed commercial paper facility or ABCP Facility). The issuing entities for those secured borrowings are variable interest entities and are consolidated for accounting purposes. The following table summarizes our secured borrowings at December 31, 2020 and 2019. For additional information, see Notes to Consolidated Financial Statements, Note 11, “Borrowings.” December 31, 2020 December 31, 2019 (Dollars in thousands) Short-Term Long-Term Total Short-Term Long-Term Total Unsecured borrowings: Unsecured debt (fixed-rate) $ — $ 692,879 $ 692,879 $ — $ 198,159 $ 198,159 Total unsecured borrowings — 692,879 692,879 — 198,159 198,159 Secured borrowings: Private Education Loan term securitizations: Fixed-rate — 3,261,233 3,261,233 — 2,629,902 2,629,902 Variable-rate — 1,235,105 1,235,105 — 1,525,976 1,525,976 Total Private Education Loan term securitizations — 4,496,338 4,496,338 — 4,155,878 4,155,878 Secured Borrowing Facility — — — 289,230 — 289,230 Total secured borrowings — 4,496,338 4,496,338 289,230 4,155,878 4,445,108 Total $ — $ 5,189,217 $ 5,189,217 $ 289,230 $ 4,354,037 $ 4,643,267 Short-term borrowings On February 19, 2020, we amended our Secured Borrowing Facility to, among other things, increase the amount that can be borrowed under the facility to $2 billion (from $750 million) and extend the maturity of the facility. We hold 100 percent of the residual interest in the Secured Borrowing Facility trust. Under the amended Secured Borrowing Facility, we incur financing costs on unused borrowing capacity and on outstanding advances. The amended Secured Borrowing Facility extended the revolving period, during which we may borrow, repay and reborrow funds, until February 17, 2021. On February 17, 2021, we further amended and extended the maturity of our Secured Borrowing Facility such that the revolving period now extends until February 16, 2022. The scheduled amortization period, during which amounts outstanding under the Secured Borrowing Facility must be repaid, now ends on February 16, 2023 (or earlier, if certain material adverse events occur). At December 31, 2020, there were no secured borrowings outstanding under the Secured Borrowing Facility and at December 31, 2019, $289 million secured borrowings were outstanding under the Secured Borrowing Facility. For additional information, see Notes to Consolidated Financial Statements, Note 11, “Borrowings” and Note 25, “Subsequent Events.” Short-term borrowings have a remaining term to maturity of one year or less. The Secured Borrowing Facility’s contractual maturity is two years from the date of inception or renewal (one-year revolving period plus a one-year amortization period); however, we classify advances under our Secured Borrowing Facility as short-term borrowings because it is our intention to repay those advances within one year. 82 Long-term borrowings Unsecured Debt On April 5, 2017, we issued at par an unsecured debt offering of $200 million of 5.125 percent Senior Notes due April 5, 2022. At December 31, 2020, the outstanding balance was $199 million. On October 29, 2020, we issued at par an unsecured debt offering of $500 million of 4.20 percent Senior Notes due October 29, 2025. At December 31, 2020, the outstanding balance was $494 million. Secured Financings 2020 Transactions On February 12, 2020, we executed our $636 million SMB Private Education Loan Trust 2020-A term ABS transaction, which was accounted for as a secured financing. We sold $636 million of notes to third parties and retained a 100 percent interest in the residual certificates issued in the securitization, raising approximately $634 million of gross proceeds. The Class A and Class B notes had a weighted average life of 4.18 years and priced at a weighted average LIBOR equivalent cost of 1-month LIBOR plus 0.88 percent. At December 31, 2020, $605 million of our Private Education Loans, including $567 million of principal and $38 million in capitalized interest, were encumbered because of this transaction. On August 12, 2020, we executed our $707 million SMB Private Education Loan Trust 2020-B term ABS transaction, which was accounted for as a secured financing. We sold $707 million of notes to third parties and retained a 100 percent interest in the residual certificates issued in the securitization, raising approximately $705 million of gross proceeds. The Class A and Class B notes had a weighted average life of 4.14 years and priced at a weighted average LIBOR equivalent cost of 1-month LIBOR plus 1.30 percent. At December 31, 2020, $748 million of our Private Education Loans, including $701 million of principal and $47 million in capitalized interest, were encumbered because of this transaction. 2019 Transactions On March 13, 2019, we executed our $453 million SMB Private Education Loan Trust 2019-A term ABS transaction, which was accounted for as a secured financing. We sold $453 million of notes to third parties and retained a 100 percent interest in the residual certificates issued in the securitization, raising approximately $451 million of gross proceeds. The Class A and Class B notes had a weighted average life of 4.26 years and priced at a weighted average LIBOR equivalent cost of 1-month LIBOR plus 0.92 percent. At December 31, 2020, $377 million of our Private Education Loans, including $355 million of principal and $22 million in capitalized interest, were encumbered because of this transaction. On June 12, 2019, we executed our $657 million SMB Private Education Loan Trust 2019-B term ABS transaction, which was accounted for as a secured financing. We sold $657 million of notes to third parties and retained a 100 percent interest in the residual certificates issued in the securitization, raising approximately $655 million of gross proceeds. The Class A and Class B notes had a weighted average life of 4.41 years and priced at a weighted average LIBOR equivalent cost of 1-month LIBOR plus 1.01 percent. At December 31, 2020, $578 million of our Private Education Loans, including $542 million of principal and $36 million in capitalized interest, were encumbered because of this transaction. Pre-2019 Transactions Prior to 2019, we executed a total of $5.8 billion in ABS transactions that were accounted for as secured financings. At December 31, 2020, $3.7 billion of our Private Education Loans, including $3.5 billion of principal and $159 million in capitalized interest, were encumbered as a result of these transactions. 83 Other Borrowing Sources We maintain discretionary uncommitted Federal Funds lines of credit with various correspondent banks, which totaled $125 million at December 31, 2020. The interest rate we are charged on these lines of credit is priced at Fed Funds plus a spread at the time of borrowing, and is payable daily. We did not utilize these lines of credit in the years ended December 31, 2020 and 2019. We established an account at the FRB to meet eligibility requirements for access to the Primary Credit borrowing facility at the FRB’s Discount Window (the “Window”). The Primary Credit borrowing facility is a lending program available to depository institutions that are in generally sound financial condition. All borrowings at the Window must be fully collateralized. We can pledge asset-backed and mortgage-backed securities, as well as FFELP Loans and Private Education Loans, to the FRB as collateral for borrowings at the Window. Generally, collateral value is assigned based on the estimated fair value of the pledged assets. At December 31, 2020 and December 31, 2019, the value of our pledged collateral at the FRB was $3.8 billion and $3.2 billion, respectively. The interest rate charged to us is the discount rate set by the FRB. We did not utilize this facility in the years ended December 31, 2020 and 2019. Contractual Loan Commitments When we approve a Private Education Loan at the beginning of an academic year, that approval may cover the borrowing for the entire academic year. As such, we do not always disburse the full amount of the loan at the time of such approval, but instead have a commitment to fund a portion of the loan at a later date (usually at the start of the second semester or subsequent trimesters). At December 31, 2020, we had $1.7 billion of outstanding contractual loan commitments which we expect to fund during the remainder of the 2020/2021 academic year. At December 31, 2020, we had a $110 million reserve recorded in “Other Liabilities” to cover expected losses that may occur during the one-year loss emergence period on these unfunded commitments. Contractual Cash Obligations The following table provides a summary of our contractual principal obligations associated with long-term Bank deposits, secured borrowings, unsecured debt, loan commitments and lease obligations at December 31, 2020. 1 Year or Less 1 to 3 Years 3 to 5 Years Over 5 Years Total (Dollars in thousands) Long-term bank deposits (1) $ 8,456,768 $ 6,311,200 $ 1,446,149 $ 51,797 $ 16,265,914 Secured borrowings (2) 612,195 1,770,041 1,659,191 634,186 4,675,613 Unsecured debt — 200,000 500,000 — 700,000 Loan commitments (1) 1,673,007 11 — — 1,673,018 Lease obligations 6,101 13,158 13,308 24,720 57,287 Total contractual cash obligations $ 10,748,071 $ 8,294,410 $ 3,618,648 $ 710,703 $ 23,371,832 ____ (1) Interest obligations are either variable or fixed in nature. (2) Amounts reflect the contractual requirements of the Private Education Loan term securitizations, based on the expected paydown of the underlying collateral. 84 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 GAAP. Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies” 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. On January 1, 2020, we adopted FASB’s ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“CECL”), which resulted in a significant change to our allowance for credit losses policy, and is outlined below. Recently Issued and Adopted Accounting Pronouncements ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” In June 2016, the FASB issued ASU No. 2016-13, which became effective for us on January 1, 2020. This ASU eliminated the previous accounting guidance for the recognition of credit impairment. Under the new guidance, for all loans carried at amortized cost, upon loan origination we are required to measure our allowance for credit losses based on our estimate of all current expected credit losses over the remaining contractual term of the assets. Updates to that estimate each period will be recorded through provision expense. The estimate of credit losses must be based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU does not mandate the use of any specific method for estimating credit loss, permitting companies to use judgment in selecting the approach that is most appropriate in their circumstances. In addition, Topic 326 made changes to the accounting for available-for-sale debt securities. One such change is to require an assessment of unrealized losses on available-for-sale debt securities that we have the ability and intent to hold for a period of time sufficient to recover the amortized cost of the security, for the purpose of determining credit impairment. If any credit impairment exists, an allowance for losses must be established for the amount of the unrealized loss that is determined to be credit-related. On January 1, 2020, we adopted CECL using the modified retrospective method and it had a material impact on how we record and report our financial condition and results of operations and on regulatory capital. The following table illustrates the impact of the cumulative effect adjustment made upon adoption of CECL: 85 January 1, 2020 (Dollars in thousands) As reported under CECL Pre-CECL Adoption Impact of CECL Adoption Assets: Allowance for credit losses: Private Education Loans $ 1,435,130 $ 374,300 $ 1,060,830 FFELP Loans 4,485 1,633 2,852 Personal Loans 145,060 65,877 79,183 Credit Cards 290 102 188 Total $ 1,584,965 $ 441,912 $ 1,143,053 Deferred tax asset $ 415,540 $ 109,369 $ 306,171 Liabilities: Allowance for credit losses: Off-balance sheet exposures $ 118,239 $ 2,481 $ 115,758 Equity: Retained Earnings $ 897,873 $ 1,850,512 $ (952,639) This transition adjustment is inclusive of qualitative adjustments incorporated into our CECL allowance as necessary, to address any limitations in the models used. Allowance for Credit Losses 2020 We maintain an allowance for credit losses for the lifetime expected credit losses on loans in our portfolios, as well as for future loan commitments, at the reporting date. In determining the lifetime expected credit losses on our Private Education Loan portfolio loan segments, we use a discounted cash flow model. This method requires us to project future principal and interest cash flows on our loans in those portfolios. To estimate the future expected cash flows, we use a vintage-based model that considers life of loan loss expectations, prepayments (both voluntary and involuntary), defaults, recoveries, and any other adjustments deemed necessary, to determine the adequacy of the allowance at each balance sheet date. These cash flows are discounted at the loan’s effective interest rate to calculate the present value of those cash flows. Management adjusts the effective interest rate used to discount expected cash flows to incorporate expected prepayments. The difference between the present value of those cash flows and the amortized cost basis of the underlying loans is the allowance for credit losses. Entities that measure credit losses based on the present value of expected future cash flows are permitted to report the entire change in present value as credit loss expense, but may alternatively report the change in present value due to the passage of time as interest income. We have elected to report the entire change in present value as credit loss expense. In determining the loss rates used for the vintage-based approach, we start with our historical loss rates, stratify the loans within each vintage, and then adjust the loss rates based upon economic factors forecasted over a reasonable and supportable forecast period. The reasonable and supportable forecast period is meant to represent the period in which we believe we can estimate the impact of forecasted economic factors in our expected losses. At the end of the reasonable and supportable forecast period, we immediately revert our forecast of expected losses to our historical averages. We use a two-year reasonable and supportable forecast period, although this period is subject to change as our view evolves on our ability to reasonably forecast economic conditions to estimate future losses. In estimating our current expected credit losses, we use a combination of expected economic scenarios coupled with our historical experience to derive a base case adjusted for any qualitative factors (as described below). We also develop an adverse and favorable economic scenario. At each reporting date, we determine the appropriate weighting of these alternate scenarios 86 based upon the current economic conditions and our view of the risks of alternate outcomes. This weighting of expectations is used in calculating our current expected credit losses recorded each period. In estimating recoveries, we use both estimates of what we would receive from the sale of defaulted loans as well as historical borrower payment behavior to estimate the timing and amount of future recoveries on charged-off loans. We use historical experience and economic forecasts to estimate future prepayment speeds. As with our loss forecasts, at the end of the two-year reasonable and supportable forecast for prepayments, we immediately revert to our historical long-term prepayment rates. In addition to the above modeling approach, we also take certain other qualitative factors into consideration when calculating the allowance for credit losses. These qualitative factors include, but are not limited to, changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off and recovery practices not already included in the analysis, and the effect of other external factors such as legal and regulatory requirements on the level of estimated current expected credit losses. The evaluation of the allowance for credit losses is inherently subjective, as it requires material estimates that may be susceptible to significant changes. If actual future performance in delinquency, charge-offs, and recoveries is significantly different than estimated, or management assumptions or practices were to change, this could materially affect the estimate of the allowance for credit losses, the timing of when losses are recognized, and the related provision for credit losses on our consolidated statements of income. When calculating our allowance for credit losses and liability for unfunded commitments, we incorporate several inputs that are subject to change period to period. These include, but are not limited to, CECL model inputs and any overlays deemed necessary by management. The most impactful CECL model inputs include: • Economic forecasts; • Weighting of economic forecasts; • Prepayment speeds; • New loan volume, including commitments made but not yet disbursed; and • Loan sales. Management overlays can encompass a broad array of factors not captured by model inputs, such as changes in servicing policies. Below we describe in further detail our policies and procedures for the allowance for credit losses as they relate to our Private Education Loan, Credit Card, and FFELP Loan portfolios. During the third quarter of 2020, we sold our entire Personal Loan portfolio. Allowance for Private Education Loan Losses In addition to the key assumptions/estimates described above, some estimates are unique to our Private Education Loan portfolio. Estimates are made on our Private Education Loans regarding when each borrower will separate from school. The cash flow timing of when a borrower will begin making full principal and interest payments is dependent upon when the student either graduates or leaves school. These dates can change based upon many factors. We receive information regarding projected graduation dates from a third-party clearinghouse. The separation from school date will be updated quarterly based on updated information received from the clearinghouse. Additionally, when we have a contractual obligation to fund a loan or a portion of a loan at a later date, we make an estimate regarding the percentage of this obligation that will be funded. This estimate is based on historical experience. For unfunded commitments, we recognize the related life of loan allowance as a liability. Once the loan is funded, that liability transfers to the allowance for Private Education Loan losses. 87 Key Credit Quality Indicators - Private Education Loans We determine the collectability of our Private Education Loan portfolio by evaluating certain risk characteristics. We consider credit score at original approval and periodically refreshed/updated credit scores through the loan’s term, existence of a cosigner, loan status, and loan seasoning as the key credit quality indicators because they have the most significant effect on the determination of the adequacy of our allowance for credit losses. Credit scores are an indicator of the creditworthiness of borrowers and the higher the credit scores the more likely it is the borrowers 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 a current loan. Additionally, loans in the 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 as well. We monitor and update these credit quality indicators in the analysis of the adequacy of our allowance for credit losses on a quarterly basis. We collect on defaulted loans through a mix of in-house collectors, third-party collectors and sales to third-parties. For December 31, 2020 and 2019, we used both an estimate of recovery rates from in-house collections as well as expectations of future sales of defaulted loans to estimate the timing and amount of future recoveries on charged-off loans. Private Education Loans generally do not require borrowers to begin principal and interest repayment until at least six months after the borrowers have graduated or otherwise separated from school. Consequently, the loss estimates for these loans are generally low while the borrower is in school and then increase upon the end of the grace period after separation from school. At December 31, 2020 and 2019, 24 percent and 25 percent, respectively, of the principal balance of the Private Education Loan portfolio was related to borrowers who are in an in-school (fully deferred), grace, or other deferment status and not required to make payments. Our collection policies for Private Education Loans allow for periods of nonpayment for certain borrowers requesting an extended grace period upon leaving school or experiencing temporary difficulty meeting payment obligations. This is referred to as forbearance and is considered in estimating the allowance for credit losses. As part of concluding on the adequacy of the allowance for credit losses for Private Education Loans, we review key allowance and loan metrics. The most relevant of these metrics considered are the allowance as a percentage of ending total loans, delinquency percentages, and forbearance percentages. We consider a Private Education Loan to be delinquent if the borrower has not made a required payment prior to the 31st day after such payment was contractually due. Troubled Debt Restructurings In estimating the expected defaults for our Private Education Loans that are considered TDRs, we follow the same discounted cash flow process described above but use the historical loss rates related to past TDR loans. The appropriate gross loss rates are determined for each individual loan by evaluating loan maturity, risk characteristics, and macroeconomic conditions. The allowance for our TDR portfolio is included in our overall allowance for Private Education Loans. Our TDR portfolio is comprised mostly of loans with interest rate reductions and loans with forbearance usage greater than three months, as further described below. We adjust the terms of loans for certain borrowers when we believe such changes will help our customers manage their student loan obligations, achieve better student outcomes, and increase the collectability of the loans. These changes generally take the form of a temporary forbearance of payments, a temporary interest rate reduction, a temporary interest rate reduction with a permanent extension of the loan term, and/or a short-term extended repayment alternative. When we give a borrower facing financial difficulty an interest rate reduction, we temporarily reduce the rate (currently to 4.0 percent) for a two-year period and, in the vast majority of cases, permanently extend the final maturity of the loan. The combination of these two loan term changes helps reduce the monthly payment due from the borrower and increases the likelihood the borrower will remain current during the interest rate modification period as well as when the loan returns to its original contractual interest rate. We classify a loan as a TDR due to forbearance using a two-step process. The first step is to identify a loan that was in full principal and interest repayment status and received more than three months of forbearance in a 24-month period; however, during the first nine months after a loan had entered full principal and interest repayment status, we do not count up to the first 88 six months of forbearance received during that period against the three-month policy limit. The second step is to evaluate the creditworthiness of the loan by examining its most recent refreshed FICO score. Loans that have met the criteria in the first test and have a FICO score above a certain threshold (based on the most recent quarterly FICO score refresh) will not be classified as TDRs. Loans that have met the criteria in the first test and have a FICO score under the threshold (based on the most recent quarterly FICO score refresh) will be classified as TDRs. A loan also becomes a TDR when it is modified to reduce the interest rate on the loan (regardless of when such modification occurs and/or whether such interest rate reduction is temporary). Once a loan qualifies for TDR status, it remains a TDR for allowance purposes for the remainder of its life. About half of our loans that are considered TDRs involve a temporary forbearance of payments and do not change the contractual interest rate of the loan. As of December 31, 2020 and 2019, approximately 47 percent and 50 percent, respectively, of TDRs were classified as such due to their forbearance status. For additional information, see Notes to Consolidated Financial Statements, Note 7, “Allowance for Credit Losses.” During the first quarter of 2020, COVID-19 began to spread worldwide and has caused significant disruptions to the U.S. and world economies. On March 27, 2020, then President Trump signed into law the CARES Act, which, among other things, allows us to (i) elect to suspend the requirements under GAAP for loan modifications related to COVID-19 that would otherwise be categorized as TDRs, and (ii) suspend any determination of a loan modified as a result of the effects of COVID-19 as being a TDR, including impairment for accounting purposes. We have elected to suspend TDR accounting for modifications of loans that occur as a result of COVID-19 for the applicable period of the CARES Act and CAA relief. The relief from TDR guidance applies to modifications of loans that were not more than 30 days past due as of December 31, 2019, and that occur during the period beginning on March 1, 2020, and ending on the earlier of (i) sixty days after the date on which the national emergency related to the COVID-19 outbreak is terminated, or (ii) January 1, 2022. We are continuing to apply TDR accounting to those loans that were more than 30 days past due as of December 31, 2019 and were subsequently modified. Off-Balance Sheet Exposure for Contractual Loan Commitments When we approve a Private Education Loan at the beginning of an academic year, that approval may cover the borrowing for the entire academic year. As such, we do not always disburse the full amount of the loan at the time of such approval, but instead have a commitment to fund a portion of the loan at a later date (usually the start of the second semester or subsequent trimesters). We estimate expected credit losses over the contractual period in which we are exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by us. The discounted cash flow approach described above includes expected future contractual disbursements. The portion of the allowance for credit losses related to future disbursements is shown as a liability on the face of the balance sheet, and related provision for credit losses is reflected on the income statement. Uncollectible Interest The majority of the total accrued interest receivable on our Private Education Loan portfolio represents accrued interest on deferred loans where no payments are due while the borrower is in school and on fixed-pay loans where the borrower makes a $25 monthly payment that is smaller than the interest accrued on the loan in that month. The accrued interest on these loans will be capitalized and increase the unpaid principal balance of the loans when the borrower exits the grace period after separation from school. The discounted cash flow approach described above considers both the collectability of principal as well as this portion of accrued interest that is expected to capitalize to the balance of the loan. Therefore, the allowance for this portion of accrued interest balance is included in our allowance for credit losses. The discounted cash flow approach does not consider interest accrued on loans that are in a full principal and interest repayment status or in interest-only repayment status. We separately capture the amount of expected uncollectible interest associated with these loans using historical experience to estimate the uncollectible interest for the next four months at each period-end date. This amount is recorded as a reduction of interest income. Accrued interest receivable is separately disclosed on the face of the balance sheet. Allowance for Credit Card Loans We use the gross loss approach when estimating the allowance for credit losses for our Credit Card portfolio. Because our Credit Card portfolio is new and we do not have historical loss experience, we use estimated loss rates reported by other financial institutions to estimate our allowance for credit losses for Credit Cards, net of expected recoveries. In addition, we use 89 a model that utilizes purchased credit card information with risk characteristics similar to those of our own portfolio as a challenger model. We then consider any qualitative factors that may change our future expectations of losses. As all of our Credit Card loans are unconditionally cancelable by us, the issuer, we do not record any estimate of credit losses for unused portions of our Credit Card commitments. 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 on or after July 1, 2006, we receive 97 percent reimbursement on all qualifying default claims. For loans disbursed after October 1, 1993, and before July 1, 2006, we receive 98 percent reimbursement on all qualifying claims. For loans disbursed prior to October 1, 1993, we receive 100 percent reimbursement. Because we bear a maximum of three percent loss exposure due to this federal guarantee, our allowance for credit losses for FFELP Loans and related periodic provision expense are relatively small. We use the gross loss approach when estimating the allowance for credit losses for the unguaranteed portion of our FFELP Loans. We maintain an allowance for credit losses for our FFELP Loans at a level sufficient to cover lifetime expected credit losses. The allowance for FFELP Loan losses uses historical experience of customer default behavior. We apply the default rate projections, net of applicable risk sharing, to our FFELP Loans for the current period to perform our quantitative calculation. Once the quantitative calculation is performed, we review the adequacy of the allowance for credit losses and determine if qualitative adjustments need to be considered. Loan Interest Income For all loans, including impaired loans, classified as held for investment, we recognize interest income as earned, adjusted for the amortization of deferred direct origination and acquisition costs. Deferred fees or costs are required to be recognized as yield adjustments over the life of the related loans and are recognized by the interest method. The objective of the interest method is to arrive at periodic interest income (including recognition of fees and costs) at a constant effective yield on the net investment in the receivable (i.e., the principal amount of the receivable adjusted by unamortized fees or costs, purchase premium or discount and any hedging activity—these unamortized costs will collectively be referred to as “basis adjustments”). The difference between the periodic interest income so determined and the interest income determined by applying the stated interest rate to the outstanding principal amount of the receivable is the amount of periodic amortization of deferred direct origination and acquisition costs. For the amortization of the basis adjustments, we determine the constant effective yield necessary to apply the interest method based upon the contractual terms of the loan contract, with no consideration given to expected prepayments. For fixed-rate loans, when a prepayment occurs the unamortized balance of the basis adjustments is adjusted so that future amortization (based upon the contractual terms of the loan) will result in a constant effective yield equal to the original effective interest rate. Prepayments do not result in a change in the effective interest rate of the loan. We determine the contractual payments on a pool basis; as such, when a prepayment occurs, future contractual payments will be determined assuming the pool will make smaller payments through the original term of the contract. The adjustment to the unamortized basis adjustment balance is recorded in interest income. For variable-rate loans, the effective interest rate at the time of origination is the loan’s effective interest rate assuming all future contractual payments. The effective interest rate remains the same for that loan until the loan rate changes. If there is no prepayment and no change in the stated interest rate, the periodic amortization of the basis adjustments is equal to the difference between the effective interest rate multiplied by the book basis and the contractual interest due. We determine the contractual payments on a pool basis; as such, when a prepayment occurs, future contractual payments will be determined assuming the pool will make smaller payments through the original term of the contract. The adjustment to the unamortized basis adjustment balance is recorded in interest income. When the interest rate on a variable-rate loan changes, the effective interest rate is recalculated using the same methodology described in the previous paragraph; however, the future contractual payments are changed to reflect the new interest rate. There is no forecasting of future expected changes in interest rates. The accounting basis used to determine the effective interest rate of the cash flows is equal to the balances of the unpaid principal balance and unamortized basis adjustments at the time of the rate change. 90 We also pay to the DOE an annual 105 basis point Consolidation Loan Rebate Fee on FFELP consolidation loans, which is netted against loan interest income. Additionally, interest earned on education loans reflects potential non-payment adjustments in accordance with our uncollectible interest recognition policy. We do not amortize any adjustments to the basis of loans when they are classified as held-for-sale. With the adoption of CECL on January 1, 2020, we continue to analyze the collectability of accrued interest associated with loans not currently in full principal and interest repayment status or in interest only repayment status as discussed above; however, we have changed the recognition of the allowance for this portion of uncollectible interest (amounts to be capitalized after separation from school and the expiration of the grace period) to the provision for loan losses from our historical practice of recording it as a reduction of interest income, as well as classifying this allowance as part of our allowance for credit losses as opposed to our historical practice of recording it as a reduction of accrued interest income receivable. The allowance for the portion of uncollectible interest on loans making full interest payments will continue to be recorded as a reduction of interest income. We recognize certain fee income (primarily late fees) on all loans when earned according to the contractual provisions of the promissory notes, as well as our expectation of collectability. Fee income is recorded when earned in “other non-interest income” in the accompanying consolidated statements of income. Allowance for Credit Losses 2019 Prior to the adoption of CECL on January 1, 2020, we maintained an allowance for credit losses at an amount sufficient to absorb probable losses incurred in our portfolios as well as regarding future loan commitments, at the reporting date based on a projection of estimated probable credit losses incurred in the portfolio. For a detailed description of this approach, see Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies—Allowance for Credit Losses 2019” for significant judgments related to the determination of the allowance for credit losses in 2019. 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 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. See Notes to Consolidated Financial Statements, Note 2, “Significant Accounting Policies — Fair Value Measurement” for significant judgments related to the valuation of derivatives. Although some of our valuations require more judgment than others, we compare the fair values of our derivatives that we calculate to those fair values 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. On July 1, 2018, we adopted FASB’s ASU No. 2017-12, “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities,” which (1) improved the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements, and (2) made certain targeted improvements to simplify the application of the hedge accounting guidance. One of the key changes was that the standard eliminated the separate measurement and reporting of hedge ineffectiveness. In accordance with the standard, certain provisions were required to be applied on a modified retrospective basis, which requires a cumulative effect adjustment to accumulated other comprehensive income with a corresponding adjustment to retained earnings as of the beginning of the fiscal year of adoption, or January 1, 2018 in our case. 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 fair value. Our derivative instruments are classified and accounted for by us as fair value hedges, cash flow hedges, or trading hedges. Fair Value Hedges We generally use fair value hedges to offset the exposure to changes in fair value of a recognized fixed-rate liability. We enter into interest rate swaps to economically convert fixed-rate liabilities into variable-rate liabilities. 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. For fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness is recorded in the same line item in the consolidated statements of income 91 that is used to present the earnings effect of the hedged component of the hedged item. The timing of recognition of the change in fair value of a hedging instrument included in the assessment of hedge effectiveness is the same as prior to the adoption of ASU No. 2017-12. Cash Flow Hedges We use cash flow hedges to hedge the exposure to variability in cash flows of floating-rate liabilities. This strategy is used primarily to minimize the exposure to volatility in cash flows from future changes in interest rates. In assessing hedge effectiveness, generally all components of each derivative’s gains or losses are included in the assessment. We hedge exposure to changes in cash flows due to changes in interest rates or total changes in cash flow. For cash flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness is recorded in other comprehensive income (loss). Those amounts are subsequently reclassified to earnings, in the same line item in the consolidated statements of income as impacted by the hedged item, when the hedged item affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate deposits. During the next twelve months, we estimate that $19 million will be reclassified as an increase to interest expense. Trading Activities When derivative instruments do not qualify for hedge accounting treatment, they are accounted for at fair value with all changes in fair value recorded through earnings. All of our derivative instruments entered into with maturities of less than three years are economically hedging risk, but do not receive hedge accounting treatment. Trading derivatives also include any hedges that originally received hedge accounting treatment, but lost hedge accounting treatment due to failed effectiveness testing, as well as the activity of certain derivatives prior to those derivatives receiving hedge accounting treatment. Cumulative effect of applying ASU No. 2017-12 As a result of the cumulative effect of applying the hedging standard to our fair value hedges on July 1, 2018, we recorded a $2 million basis increase to our hedged deposit balances with a corresponding increase to retained earnings of approximately $0.8 million, net of taxes and a $3 million loss to “gains (losses) on derivatives and hedging activities, net” in our consolidated statements of income to adjust the life-to-date ineffectiveness. To reflect the adoption of the hedging standard on our cash flow hedging relationships at July 1, 2018, we recorded a $0.2 million, net of taxes decrease to retained earnings and a corresponding $0.3 million increase to accumulated other comprehensive income. ASU No. 2020-04 On March 12, 2020, FASB issued Accounting Standards Update ASU No. 2020-04, “Reference Rate Reform (“Topic 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” On January 7, 2021, the FASB issued Accounting Standards Update ASU No. 2021-01, “Reference Rate Reform (“Topic 848”): Scope” that clarified the scope of Topic 848. Topic 848 contains temporary optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other transactions affected by reference rate reform. Our derivative portfolio is made up of interest rate swaps that are centrally cleared through either the CME or the LCH. On October 16, 2020, both the CME and the LCH changed the price alignment interest and discount rate applied when valuing these transactions to SOFR. The ISDA 2020 IBOR Fallbacks Protocol (the “ISDA Fallback Protocol”) was made available for adherence on October 23, 2020, with an effective date of January 25, 2021. Once adhered to by both counterparties in a bilateral relationship and the effective date is reached, the ISDA Fallback Protocol represents a change to the contractual terms of derivatives governed by each respective ISDA agreement between the Company and a derivative counterparty. We have elected the option provided in Topic 848 to not reassess previous accounting determinations as well as the option to not dedesignate a hedging relationship due to a current or future change in a critical or contractual term related to reference rate reform, including changes in the discount rate. As our liabilities may begin to use alternatives to LIBOR before LIBOR is no longer published, for cash flow hedges of forecasted LIBOR based payments, we have elected the expedient offered in Topic 848 to disregard the potential change in the designated hedged interest rate risk that may occur because of reference rate reform when we assesses whether the hedged forecasted transactions are probable, in accordance with the requirements of “Derivatives and Hedging” Topic 815. We have 92 also elected the expedient provided by Topic 848 to assume the reference rate will not be replaced for the remainder of the hedging relationship when assessing hedge effectiveness. Topic 848 allows for different elections to be made at different points in time. We intend to reassess our elections of optional expedients and exceptions included within Topic 848 when changes or additions are necessary. Risk Management Our Approach Risk is inherent in our business activities and the specialized lending industry we serve. The ability of management to anticipate, identify and remediate risk in a timely manner is critical to our continued success. Our enterprise risk management (“ERM”) framework is designed to identify, remediate, control and report these risks and escalate as appropriate to the Board of Directors or its designee. Risk Oversight Our Board of Directors oversees our overall strategic direction, including our risk management capability and effectiveness. The Board of Directors has oversight of key policies as well as the risk management framework developed and administered by the management team. We have a robust process to escalate to the Board meaningful departures from our risk appetite statements. The Board of Directors oversees the continued development of the ERM program. The Governance Framework Our overall objective is to ensure all significant risks inherent in our business can be identified, remediated where appropriate, controlled and reported. To this end, we have adopted the “three lines of defense” approach to governance. Specifically, the business units form the “first line of defense” and are the “owners” of risks inherent in their business activities. As the risk owner, the first line of defense is accountable for the day-to-day execution of risk and control policy and procedures (including activities performed by third-party contractors). Our Independent Risk Function constitutes the “second line of defense” and conducts oversight and effective challenge of the risk and control activities within the first line of defense. Rather than focusing on execution, the second line of defense is accountable for the related policy and standards executed upon by the first line of defense. Finally, the Internal Audit function comprises the “third line of defense.” The Internal Audit function provides opinions to the Board of Directors on the effectiveness of the first and second lines of defense, as reflected in audit reports. Enterprise Risk Management Policy and Framework The ERM policy and risk appetite framework are designed to establish a stable risk and control environment across the enterprise. The policy, which is approved by the Board of Directors, outlines the framework used to ensure that risk and control issues across the enterprise are identified, remediated, controlled and reported. The ERM policy, the risk appetite framework and the related policies and procedures constitute the core of the Independent Risk governance program. The risk appetite statements are at the core of the governance framework. The risk appetite statements establish the level of risk we are willing to accept within each risk category, described below, in pursuit of our business objectives. Compliance with our risk appetite is monitored using a set of key risk indicators, with thresholds and limits, for each risk type. The Enterprise Risk Committee (the “ERC”) provides oversight of the risk appetite framework with escalation to the Board of Directors, as appropriate. Our Board of Directors approves the risk appetite framework annually and requires that management provide ongoing updates on adherence to the risk appetites. 93 Board of Directors Committee Structure We have a robust Board of Directors committee structure that facilitates oversight, effective challenge and escalation of risk and control issues. Risk Committee. The Risk Committee was established to assist the Board of Directors in fulfilling its risk management oversight responsibilities. Annually, the Risk Committee recommends the ERM policy and the risk appetite framework to the Board of Directors for approval. The Risk Committee receives periodic updates on compliance with the framework from the Chief Risk Officer (the “CRO”). Audit Committee. The Audit Committee is responsible for oversight of the Internal Audit function. Additionally, the Audit Committee oversees the quality and integrity of our financial reporting process and financial statements; the qualifications, hiring, performance and independence of our independent registered accounting firm; and our system of internal financial controls. Nominations, Governance and Compensation Committee. The Nominations, Governance and Compensation Committee, among other things: (1) periodically reviews management’s succession planning; (2) confirms our compensation practices properly balance risk and reward and do not promote excessive risk-taking; (3) implements good governance policies for us and our Board of Directors; (4) approves all compensation and benefits for our Chief Executive Officer, Executive Vice Presidents, and independent members of our Board of Directors; (5) approves our equity-based compensation plans and management’s administration of employee benefit plans; (6) reviews related party transactions; (7) conducts assessments of the performance of our Board of Directors and its committees; and (8) recommends nominees for election to our Board of Directors. Preferred Stock Committee. The Preferred Stock Committee monitors and evaluates proposed actions that may impact the rights of holders of our preferred stock. Compliance Committee. The purpose of the Compliance Committee of the Board of Directors of the Bank is to assist the Board of Directors in: (1) overseeing the continuing maintenance and enhancement of a strong and sustainable compliance culture; (2) providing oversight of the compliance management system; (3) approving sound policies and objectives and effectively supervising all compliance - related activities; (4) ensuring that the Bank has a qualified Chief Compliance Officer with sufficient authority, independence and resources to administer an effective compliance management system; (5) ensuring our compliance with the Code of Business Conduct; and (6) exercising and performing all other duties and responsibilities delegated to the Committee. Management-Level Committee Structure Executive Committee (“EC”) . The EC is authorized by the Board of Directors to assist the Chief Executive Officer (“CEO”) in the general supervision of the business of the Bank. Specifically, the EC will (1) provide to the CEO advice and counsel, subject matter expertise, and recommendations as requested, and (2) through its subcommittees, facilitate the evaluation and decision-making on routine cross-functional matters, and assist management in the fulfillment of management’s duties related to specific risks. The EC has established the following sub-committees to assist in fulfilling its duties. Enterprise Risk Committee . The ERC provides independent oversight and effective challenge to risk and control activities across the enterprise. Additionally, the ERC informs the Risk and Compliance Committees of the Board of Directors, including escalation of instances of non-compliance with the framework. Credit Committee . The Credit Committee is responsible for credit and counterparty risk, product pricing, and credit and collections operations. Operational Risk Committee (“ORC”) . The ORC is the oversight body for risk related to inadequate or failed internal processes, people and systems or from external events. It also reviews information technology risk and regulatory and legal risks. Asset and Liability Committee (“ALCO”). ALCO is responsible for the strategy, processes and authorities with which the Bank’s interest rate risk, liquidity and capital adequacy are managed. Each of these sub-committees is comprised of subject matter experts from the senior management team and is accountable to the EC. Moreover, these sub-committees may be supported by steering or working groups, as appropriate. Disclosure Committee. Our Disclosure Committee assists our CEO and Chief Financial Officer in their review of periodic SEC reporting documents, earnings releases, investor materials and related disclosure policies and procedures. 94 Internal Audit Risk Assessment Internal Audit regularly 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 the Board of Directors. Annually, Internal Audit performs an independent risk assessment to evaluate the risk of all significant components of the Company and uses the results to develop their annual Internal Audit plan. Additionally, Internal Audit performs selected reviews of both risk management and compliance functions, including key controls, processes and systems, to assess the effectiveness of the overall risk management framework. Risk Categories Our ERM framework is designed to address the following risk categories: 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 other failure to perform as agreed. Credit risk is found in all activities where success depends on counterparty, issuer or borrower performance. The credit risk related to Private Education Loans is managed within a credit risk infrastructure that includes: (i) a well-defined underwriting, asset quality and collection policy framework; (ii) an ongoing monitoring and review process of portfolio composition and trends; (iii) assignment and management of credit authorities and responsibilities; and (iv) establishment of an allowance for credit losses that covers estimated future losses based upon an analysis of portfolio metrics and economic factors. Credit risk related to derivative contracts is managed by reviewing counterparties for credit strength on an ongoing basis and through our credit policies, which place limits on the amount of exposure we may take with any one counterparty and require collateral to secure the position. The credit and counterparty risk associated with derivatives is measured based on the replacement cost should the counterparty with contracts in a gain position to us fail to perform under the terms of the contract. Operational Risk . Operational risk is the risk to earnings resulting from inadequate or failed internal processes, people and systems and third-party vendors, or from external events. Operational risk is pervasive in that it exists in all business lines, functional units, legal entities and geographic locations, and it includes information technology risk, physical security risk on tangible assets, as well as regulatory and legal risk. Operational risk exposures are managed through a combination of first line of defense risk, and control activities and second line of defense oversight. The ORC is the management committee responsible for operational risk, and it supports the EC in its oversight duties. The ORC is responsible for escalation to the EC, as appropriate. Additionally, our key risk indicators include operational risk metrics, thresholds and limits and are included in the periodic reporting to the Risk Committee of the Board of Directors. Legal Risk. Legal risk is the risk to earnings, capital or reputation 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. Primary ownership and responsibility for legal risk is placed with the first lines of defense, working with their legal colleagues, to identify and manage. Compliance supports these activities by providing extensive training, monitoring and testing of the processes, policies and procedures utilized by the first lines of defense, maintaining relevant legal and regulatory requirements, and working in close coordination with our Legal group. The General Counsel provides periodic reports, as appropriate, to the Risk Committee of the Board of Directors. Our Code of Business Conduct and the on-going training our employees receive in many compliance areas provide a framework for our employees to conduct themselves with the highest integrity. We instill a risk-conscious culture through communications, training, policies and procedures. Market Risk. Market risk is the risk to earnings or capital resulting from changes in market conditions, such as interest rates, credit spreads or other volatilities. We are exposed to various types of market risk, in particular the risk of loss resulting 95 from interest rate risk, basis risk and other risks that arise through the management of our investment, debt and loan portfolios. Market risk exposures are managed primarily through ALCO. These activities are closely tied to those related to the management of our funding and liquidity risks. The Risk Committee of our Board of Directors periodically reviews and approves the investment and asset and liability management policies and contingency funding plan developed and administered by ALCO. The Chief Financial Officer provides reports to the Risk Committee of the Board of Directors on market risk management. Funding and 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 inability to fund liability maturities and deposit withdrawals, or invest in future asset growth and business operations at reasonable market rates, as well as the inability to fund Private Education Loan and other loan originations. Our primary liquidity needs include our ongoing ability to: meet our funding needs through market cycles, including periods of financial stress; manage the relative maturities of assets and liabilities on our balance sheet; fund disbursements of Private Education Loans and other loans; and service our indebtedness and bank deposits. Ultimately, our funding and liquidity risk relates to our ability to access the capital markets at reasonable rates and to maintain retail deposits and other funding sources through the Bank, as well as our maintenance of a reserve of cash and unencumbered highly-liquid investment securities that may be readily converted to cash if needed. Our funding and liquidity risk activities are centralized within our Corporate Finance department, which is responsible for developing and executing our funding strategy. We analyze and monitor our liquidity risk, maintain excess liquidity and access diverse funding sources depending on current market conditions. Funding and liquidity risks are overseen and recommendations approved primarily through ALCO. The Risk Committee of our Board of Directors is responsible for periodically reviewing the funding and liquidity positions and contingency funding plan developed and administered by ALCO. Reputational Risk . Reputational risk is the risk to shareholder value and growth trajectory from a negative perception, whether true or not, of an organization by its key stakeholders, the changing expectations of its stakeholders and/or inadequate internal coordination of business decisions. This could expose us to litigation, financial loss or other damage to our business or brand. Management proactively assesses and manages reputational risk. We have established our government relations function to manage our review of and response to all formal inquiries from members of Congress, state legislators, and their staff, as well as providing targeted messaging that reinforces our public policy goals. We review and consider reputational risk on matters as diverse as the launch of new products and services, our credit underwriting activities, and how we fund operations. Our public relations, marketing and media teams continuously monitor print, electronic and social media to understand how we are perceived; proactively address customer complaints; and endeavor to enhance the value of our corporate brand. Metrics related to reputational risk are reported to and monitored by the EC. Our Legal, Government Relations and Compliance groups regularly meet and collaborate with our Media and Investor Relations teams to provide more coordinated monitoring and management of our reputational risks. Strategic Risk . Strategic risk is the risk to shareholder value and growth trajectory from adverse business decisions and/or improper implementation of business strategies. Management must be able to develop and implement business strategies that leverage the organization’s core competencies and are appropriately structured, resourced and executed. The overall development of the strategic plan includes extensive engagement with the Board of Directors. Similarly, the Board of Directors provides oversight and effective challenge on performance, relative to the strategic plan. Common Stock Our shareholders have authorized the issuance of 1.125 billion shares of common stock (par value of $0.20). At December 31, 2020, 375 million shares were issued and outstanding and 35 million shares were unissued but encumbered for outstanding stock options, restricted stock, restricted stock units, performance stock units and dividend equivalent units for employee compensation and remaining authority for stock-based compensation plans. See Notes to Consolidated Financial Statements, Note 13, “Stockholders’ Equity” for additional details. 96 Arrangements with Navient Corporation In connection with the Spin-Off, we entered into a Separation and Distribution Agreement. We also entered into various other ancillary agreements with Navient to effect the Spin-Off and provide a framework for our relationship with Navient thereafter, such as a transition services agreement, a tax sharing agreement, an employee matters agreement, a loan servicing and administration agreement, a joint marketing agreement, a key services agreement, a data sharing agreement and a master sublease agreement. The majority of these agreements were transitional in nature with most having terms that have expired or will expire within the next year. We continue to have exposure to risks related to Navient’s creditworthiness. If we are unable to obtain indemnification payments from Navient, our results of operations and financial condition could be materially and adversely affected. Pursuant to the terms of the Spin-Off and applicable law, Navient is responsible for all liabilities (whether accrued, contingent or otherwise and whether known or unknown) arising out of or resulting from the conduct of pre-Spin-Off SLM and its subsidiaries’ businesses prior to the Spin-Off, other than certain specifically identified liabilities relating to the conduct of our consumer banking business for which the Bank is responsible. Nonetheless, given the prior usage of the Sallie Mae and SLM names by entities now owned by Navient, we and our subsidiaries may from time to time be improperly named as defendants in legal proceedings where the allegations at issue are the legal responsibility of Navient. Most of these legal proceedings involve matters that arose in whole or in part in the ordinary course of business of pre-Spin-Off SLM. Likewise, as the period of time since the Spin-Off increases, so does the likelihood any allegations that may be made may be in part for our own actions in a post-Spin-Off time period and in part for Navient’s conduct in a pre-Spin-Off time period. We will not be providing information on these proceedings unless there are material issues of fact or disagreement with Navient as to the bases of the proceedings or responsibility therefor that we believe could have a material, adverse impact on our business, assets, financial condition, liquidity or outlook if not resolved in our favor. We briefly summarize below some of the most significant agreements and relationships we continue to have with Navient. For additional information regarding the Separation and Distribution Agreement and the other ancillary agreements, see our Current Report on Form 8-K filed on May 2, 2014. Separation and Distribution Agreement The Separation and Distribution Agreement addresses, among other things, the following activities: • the obligation of each party to indemnify the other against liabilities retained or assumed by that party pursuant to the Separation and Distribution Agreement and in connection with claims of third-parties; • the allocation among the parties of rights and obligations under insurance policies; and • the creation of a governance structure by which matters related to the separation and other transactions contemplated by the Separation and Distribution Agreement are to be managed. The Separation and Distribution Agreement provides specific processes and procedures pursuant to which we may submit claims for indemnification to Navient. If for any reason Navient is unable or unwilling to pay claims made against it, our costs, operating expenses, cash flows and financial condition could be materially and adversely affected over time. Indemnification Obligations Pursuant to the terms of the Separation and Distribution Agreement, and as contemplated by the structure of the Spin-Off, Navient is legally obligated to indemnify the Bank against all claims, actions, damages, losses or expenses that may arise from the conduct of all activities of pre-Spin-Off SLM occurring prior to the Spin-Off, except for certain liabilities related to the conduct of the pre-Spin-Off consumer banking business that were specifically assumed by the Bank (and as to which the Bank 97 is obligated to indemnify Navient). Some significant examples of the types of indemnification obligations Navient has under the Separation and Distribution Agreement and related ancillary agreements include: • Navient is required to indemnify the Company and the Bank for any liabilities, costs or expenses they may incur arising from any action or threatened action related to the servicing, operations and collections activities of pre-Spin-Off SLM and its subsidiaries with respect to Private Education Loans and FFELP Loans that were assets of the Bank or Navient at the time of the Spin-Off; provided that written notice was provided to Navient on or prior to April 30, 2017, the third anniversary date of the Spin-Off. Navient is not required to indemnify for changes in law or changes in prior existing interpretations of law that occur on or after April 30, 2014. • In connection with the Spin-Off, we recorded a liability related to uncertain tax positions of $27 million for which we are indemnified by Navient. As of December 31, 2020, the remaining balance of the indemnification receivable related to those uncertain tax positions was $7 million. Long-Term Arrangements The loan servicing and administration agreement governs the terms by which Navient provides servicing, administration and collection services for the 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 term of the loan servicing and administration agreement has been extended to April 30, 2022. The data sharing agreement provided us the right to obtain from Navient certain post-Spin-Off performance data relating to Private Education Loans owned or serviced by Navient to support and facilitate ongoing underwriting, originations, forecasting, performance and reserve analyses. The term of the data sharing agreement expired on April 29, 2019, however. The tax sharing agreement governs the respective rights, responsibilities and obligations of us and Navient after the Spin-Off relating to taxes, including with respect to the payment of taxes, the preparation and filing of tax returns and the conduct of tax contests. Under this agreement, each party is generally liable for taxes attributable to its business. The agreement also addresses the allocation of tax liabilities that are incurred as a result of the Spin-Off and related transactions. Amended Loan Participation and Purchase Agreement Prior to the Spin-Off, the Bank sold substantially all of its Private Education Loans to several former affiliates, now subsidiaries of Navient (collectively, the “Purchasers”), pursuant to an amended loan participation and purchase agreement. The agreement predates the Spin-Off but was significantly amended and reduced in scope in connection with the Spin-Off. Post-Spin-Off, the Bank retained only the right to require the Purchasers to purchase loans whose borrowers had a lending relationship with both the Bank and Navient (“Split Loans”) (such purchases to be made at fair value) when the Split Loans either (1) are more than 90 days past due; (2) have been restructured; (3) have been granted a hardship forbearance or more than six months of administrative forbearance; or (4) have a borrower or cosigner who has filed for bankruptcy. In the second quarter of 2018, we sold our remaining $43 million portfolio of Split Loans (both current and non-current loans) to Navient and recognized a net gain of $2 million. 98