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SLM > SEC Filings for SLM > Form 8-K on 20-Dec-2013All Recent SEC Filings

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Form 8-K for SLM CORP


20-Dec-2013

Regulation FD Disclosure


Item 7.01. Regulation FD Disclosure.

Forward-Looking and Cautionary Statements

This Form 8-K contains "forward-looking" statements and information based on management's current expectations as of the date of this document. Statements that are not historical facts, including statements about our beliefs, opinions, or expectations and statements that assume or are dependent upon future events, are forward-looking statements. Where, in any forward-looking statement, an expectation or belief as to future results or events is expressed, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. In particular, information included under "The Spin-off," "SLM BankCo Following the Separation and Distribution," "Pro Forma Financial Information," and "Risk Factors" contain forward-looking statements. Forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in "Risk Factors" in this Form 8-K and in Item 1A "Risk Factors" and elsewhere in the 2013 quarterly reports on Form 10-Q, the 2012 annual report on Form 10-K and subsequent filings of SLM Corporation ("Existing SLM") with the Securities and Exchange Commission ("SEC"); increases in financing costs; limits on liquidity; increases in costs associated with compliance with laws and regulations; changes in accounting standards and the impact of related changes in significant accounting estimates; any adverse outcomes in any significant litigation to which Existing SLM or the other SLM entities mentioned herein are a party; credit risk associated with exposure to third parties, including counterparties to derivative transactions; and changes in the terms of student loans and the educational credit marketplace (including changes resulting from new laws and the implementation of existing laws). Existing SLM or the other SLM entities mentioned herein could also be affected by, among other things: changes in their funding costs and availability; reductions to their credit ratings or the credit ratings of the United States of America; failures of their operating systems or infrastructure, including those of third-party vendors; damage to their reputation; failures to successfully implement cost-cutting initiatives and adverse effects of such initiatives on their business; risks associated with restructuring initiatives, including their recently announced strategic plan to separate their existing operations into two, separate, publicly traded companies; changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; changes in law and regulations with respect to the student lending business and financial institutions generally; increased competition from banks and other consumer lenders; the creditworthiness of customers; changes in the general interest rate environment, including the rate relationships among relevant money-market instruments and those of earning assets versus our funding arrangements; changes in general economic conditions; the ability to successfully effectuate any acquisitions and other strategic initiatives; and changes in the demand for debt management services. The preparation of pro forma condensed consolidated financial statements also requires management to make certain estimates and assumptions including estimates and assumptions about future events. These estimates or assumptions may prove to be incorrect. All forward-looking statements contained in this Form 8-K are qualified by these cautionary statements and are made only as of the date of this document.


Existing SLM does not undertake any obligation to update or revise these forward-looking statements to conform the statement to actual results or changes in its expectations, including as to its expectations regarding the terms of the spin-off or the relationship between SLM BankCo and NewCo after the spin-off.

Background

On May 29, 2013, Existing SLM first announced that it intends to separate into two distinct publicly-traded entities - an education loan management business and a consumer banking business. The education loan management business will be comprised primarily of Existing SLM's portfolios of education loans not held by Sallie Mae Bank (the "Bank") at the effective date of the spin-off, as well as servicing and collection activities on these loans and loans held by third parties. The consumer banking business, comprised primarily of the Bank and its private education loan origination business, the private education loans it holds and a related servicing business, will be a consumer banking franchise with expertise in helping families save, plan and pay for college.

Existing SLM is in the process of implementing its announced separation by way of a spin-off of its education loan management business in a new public company ("NewCo"), which is to be preceded by a related internal corporate reorganization. In connection with the spin-off, a newly incorporated, publicly-traded holding company ("SLM BankCo") will succeed and continue to operate Existing SLM's consumer banking business through the Bank and Upromise, Inc. and the insurance business. SLM BankCo will continue using the brand name "Sallie Mae" and trade under the symbol "SLM".

Private education loan origination will continue to be operated out of the Bank as a subsidiary of SLM BankCo. The Bank was chartered in 2006 and is a Utah industrial bank regulated by the Utah Department of Financial Institutions (the "UDFI") and the Federal Deposit Insurance Corporation (the "FDIC"). The Bank had total assets of $9.7 billion as of September 30, 2013, $6.2 billion of which were private education loans.

Existing SLM will have the sole and absolute discretion to determine (and change) the terms of, and whether to proceed with, the spin-off of NewCo and, if it determines to proceed, to determine the distribution date for the shares of NewCo common stock to the U.S. holders of Existing SLM's common stock. It is expected that the spin-off, if completed, will occur in the first half of 2014. The ability of Existing SLM to timely effect the spin-off is subject to customary conditions, including receipt of a private letter ruling from the Internal Revenue Service ("IRS") to the effect the spin-off will be tax-free to SLM BankCo and Existing SLM stockholders. Existing SLM cannot assure that it will be able to complete the spin-off in a timely fashion, if at all. For these and other reasons, the spin-off may not be completed on the terms or timeline contemplated . Further, if the spin-off is completed, it may not achieve the intended results or SLM BankCo may, following the spin-off, not be composed as described in this Form 8-K. Any such difficulties could adversely affect Existing SLM's business, results of operations or financial condition. Further information on the spin-off and SLM BankCo may be contained in future filings of Existing SLM with the SEC to the extent Existing SLM determines, in its sole discretion, to provide such information.


The Spin-off

If Existing SLM determines to proceed with the spin-off, there will first be an internal corporate reorganization of Existing SLM followed by a distribution of the shares of common stock of NewCo, on a 1-to-1 basis, to the holders of shares of Existing SLM common stock that implements the actual separation of the education loan management business. Before the spin-off can be effected, the Existing SLM board of directors will need to approve the record date and distribution date for the distribution of all of the issued and outstanding shares of NewCo.

For more information about NewCo and the spin-off, please refer to NewCo's registration statement on Form 10 which was filed by New Corporation (the temporary name of NewCo) with the SEC on December 6, 2013 and which can be accessed at www.sec.gov/edgar. In reviewing the Form 10, investors should note that the plans regarding NewCo have not been finalized, and that the Form 10 is subject to amendment as those plans continue to evolve as well as in response to comments which may be received from the SEC.

Internal Corporate Reorganization

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

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

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

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

A limited liability company wholly owned by SLM BankCo that is referred to as "Merger Sub."

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

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

Each series of issued and outstanding shares of Existing SLM's 6.97% cumulative redeemable preferred stock, Series A, par value $.20 per share (the "Series A Preferred Stock") and its floating rate non-cumulative preferred stock, Series B, par value $.20 per share (the "Series B Preferred Stock") will be converted, through no action on the part of the holders thereof and by operation of law, into the same series of substantially identical shares of SLM BankCo preferred stock, on a 1-to-1 basis; and



Existing SLM will become a limited liability company wholly owned by SLM BankCo and will change its name.

SLM BankCo will change its name to "SLM Corporation." Following the SLM Merger, through a series of internal transactions, all of the assets and liabilities related to the consumer banking business of Existing SLM, including the Bank, a new private education loan servicing company, the Upromise Rewards business and the insurance business, will be distributed by Existing SLM to SLM BankCo. Existing SLM will also distribute the capital stock of NewCo to SLM BankCo. In addition, SLM BankCo will retain $566 million primarily to offset the liability represented by SLM BankCo becoming the issuer of the Series A Preferred Stock and the Series B Preferred Stock as a result of the SLM Merger. Existing SLM, which will continue to hold substantially all of the assets and liabilities related to its education loan management businesses, will then be contributed by SLM BankCo to NewCo. Existing SLM's liabilities included, as of September 30, 2013, its outstanding unsecured public debt of $18.7 billion and derivative contracts with a net liability of $792 million.

Once the internal corporate reorganization is completed, SLM BankCo (as the publicly-traded successor holding company to Existing SLM) will distribute all of the issued and outstanding shares of NewCo common stock, on the basis of one share of NewCo common stock for each share of Existing SLM common stock issued and outstanding as of the close of business on the record date for the distribution. The completion of the internal corporate reorganization is a condition to the distribution. For additional information regarding the internal corporate reorganization, please refer to NewCo's Form 10.

SLM BankCo's Post-Separation Relationship with NewCo

SLM BankCo will enter into a separation and distribution agreement with Existing SLM and NewCo (the "separation and distribution agreement"). In connection with the closing of the spin-off, SLM BankCo will enter into various other agreements with NewCo to effect the separation and provide a framework for its relationship with NewCo after the separation, such as a transition services agreement, a tax sharing agreement, an employee matters agreement, a loan servicing and administration agreement, a joint marketing agreement, a key services agreement, a data sharing agreement and a master lease agreement. For additional information regarding the separation and distribution agreement and the other transaction agreements, see the sections entitled "Risk Factors" and "Certain Relationships and Related Party Transactions"in this Form 8-K.


Reasons for the Separation

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

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

SLM BankCo would be expected to have future cash flows that significantly exceed its future Series A Preferred Stock and Series B Preferred Stock dividend and debt service obligations.

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

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

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

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



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

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

The Existing SLM board of directors also considered a number of potentially negative factors in evaluating the spin-off, including risks relating to the creation of a new publicly-traded company, increased expenses and one-time separation costs and the diversion of management time to oversee the separation and transition of services and functions between the two companies, but concluded that the potential benefits of the spin-off outweighed these factors. For more information, see the section entitled "Risk Factors" included in this Form 8-K.

Transaction Structure (simplified for illustrative purposes)

The diagram below shows the structure of Existing SLM before the internal corporate reorganization and the spin-off:

[[Image Removed: LOGO]]


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

[[Image Removed: LOGO]]

The diagram below shows the structure of SLM BankCo and NewCo immediately after completion of the spin-off:

[[Image Removed: LOGO]]


See the section entitled "The Spin-off-Internal Corporate Reorganization of Existing SLM Prior to the Distribution" for more information. As used in the three diagrams above and the descriptions of the internal corporate reorganization in this Form 8-K:

"Existing SLM" refers to the Delaware corporation that is SLM Corporation as of the date of this Form 8-K. As part of the internal corporate reorganization, Existing SLM will become a limited liability company and ultimately be contributed to, and become a wholly owned subsidiary of, NewCo.

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

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

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

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

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

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



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

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

"Unsecured Debt" refers to Existing SLM's unsecured public indebtedness of $18.7 billion outstanding as of September 30, 2013, consisting of the senior notes and medium term notes. After the internal corporate reorganization, the Unsecured Debt will remain the obligation of Existing SLM, which will be a subsidiary of NewCo.

"Preferred Stockholders" refers to the holders of Existing SLM's outstanding shares of the Series A Preferred Stock and the Series B Preferred Stock. As part of the internal corporate reorganization and pursuant to the SLM Merger, all of the outstanding shares of Existing SLM Series A Preferred Stock and Series B Preferred Stock will be converted, on a 1-to-1 basis, into shares of SLM BankCo preferred stock without any action being required by these holders.

SLM BankCo Following the Spin-off

Existing SLM, more commonly known as Sallie Mae, continues to be the nation's leading saving, planning and paying for education company. For over 40 years, Sallie Mae has made a difference in students' and families' lives, helping more than 31 million Americans pay for college. SLM BankCo will continue the Sallie Mae tradition of promoting responsible financial habits that help our customers dream, invest and succeed by providing a range of products to help families whether college is a long way off or right around the corner.

SLM BankCo will continue to originate private education loans by promoting products on campus through the financial aid office and through direct marketing to students and their families in the education loan market. "Private educations loans" means education loans that are non-federal loans, not insured, and subject to the full credit risk of the customer and co-signor. Private education loans are generally not dischargeable in bankruptcy.

SLM BankCo will provide ongoing private education loan servicing and collection on loans it originates and sells to third parties as a secondary fee-based business. It will also continue to offer various products both to help families save for college - including its free Upromise service that provides financial rewards on everyday purchases - and to protect their college investment through tuition, rental and life insurance services.

SLM BankCo will continue to fund private education loan originations through retail and brokered deposits, and obtain additional funding through sales of private education loans and their securitization.


Business of SLM BankCo

The following description of the business of SLM BankCo is based in part on the Bank's current business plan. The Bank's business plan has been approved and is subject to periodical review by the board of directors of each of Existing SLM and the Bank. The Bank's business plan is also being reviewed annually by the FDIC as the Bank's regulator. The business plan is based on assumptions and other factors that are subject to change.

Private Education Loans. SLM BankCo will market, price, underwrite and disburse its private education loan products. To maintain high credit standards, it will:

focus its business on helping students attending four year and graduate schools;

continue the use of regularly revised and updated statistical underwriting models utilizing ten or more years of proprietary credit performance data;

generally require a credit qualified co-signer as a co-obligor; and

certify and disburse all private education loans through schools.

In 2009, Existing SLM introduced, and SLM BankCo will continue, the Smart Option private education loan product emphasizing in-school payment features to minimize total finance charges. The product features three repayment types. The first two, Interest Only and $25 Fixed Pay options, require monthly payments while the student is in school and they accounted for approximately 57 percent of the private education loans originated during the nine months ended September 30, 2013. The third repayment option is the more traditional deferred private education loan product where customers do not begin making payments until after graduation.

Private Education Loan Servicing. A subsidiary of SLM BankCo ("Private ServiceCo") will provide servicing and loan collection for private education loans originated and held by the Bank, as well as those sold or securitized by SLM BankCo to third parties. As part of the separation of the consumer banking business and the education loan management business, SLM BankCo will obtain ownership and transition into management and operation of all assets and personnel needed to operate all aspects of its private education loan business from asset origination to asset servicing to asset funding. Over time, SLM BankCo's business plan contemplates seeking additional funding, liquidity and revenue from the sale or securitization of loan assets it originates as well as the servicing of these loan assets it sells to third parties. SLM BankCo's business plan does not contemplate servicing financial assets originated by . . .

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