Exhibit 99.1

FOR IMMEDIATE RELEASE

SALLIE MAE REPORTS FIRST-QUARTER 2013 FINANCIAL RESULTS

Loan Originations Up, Delinquency Rates Down

FFELP Sales, Share Repurchases Contribute to Earnings Per Share

Common Stock Dividends Increase

NEWARK, Del., April 17, 2013 — Sallie Mae (NASDAQ: SLM), formally SLM Corporation, today released first-quarter 2013 financial results that include increased year-over-year private education loan originations and decreased delinquency rates. Also during the quarter, the company realized gains from its first sale of a residual interest in a federal loan securitization trust, increased its quarterly common stock dividend and continued common share repurchases.

“Our recent results are good and about as expected with no surprises,” said Albert L. Lord, vice chairman and CEO. “I am optimistic about our prospective credit costs, though we will watch the next several months with some caution. While the economy and employment levels are still uncertain, capital markets liquidity has improved and enabled some important balance sheet structuring in the quarter. We will remain active market participants.”

For the first-quarter 2013, GAAP net income was $346 million ($0.74 diluted earnings per share), compared with $112 million ($0.21 diluted earnings per share) for the year-ago quarter.

Core earnings for the quarter were $283 million ($0.61 diluted earnings per share), compared with $284 million ($0.55 diluted earnings per share) for the year-ago quarter.

The first-quarter 2013 core diluted earnings per share increase includes a $55 million gain from the sale of the residual interest in a FFELP loan securitization trust, a $12 million decline in the provision for loan losses and a decline in the number of common shares outstanding which more than offset lower net interest income before provision for loan losses of $57 million and lower debt repurchase gains of $8 million. The company will continue to service the student loans in the trust that was sold.

Sallie Mae provides core basis earnings because management makes its financial decisions on such measures. The changes in GAAP net income are driven by the same core earnings items discussed above as well as changes in mark-to-market unrealized gains and losses on derivative contracts and amortization and impairment of goodwill and intangible assets that are recognized in GAAP, but not in core earnings results. First-quarter 2013 GAAP results included a $110 million gain from derivative accounting treatment that is excluded from core earnings results. In the year-ago period, these amounts were losses of $264 million.

Consumer Lending

In the consumer lending segment, Sallie Mae originates, finances and services private education loans.

Quarterly core earnings were $88 million compared with core earnings of $84 million in the year-ago quarter.

First-quarter 2013 private education loan portfolio results vs. first-quarter 2012 included:

 

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Loan originations of $1.4 billion, up 22 percent.

 

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Delinquencies of 90 days or more of 3.9 percent of loans in repayment, down from 4.4 percent.

 

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Loans in forbearance of 3.4 percent of loans in repayment and forbearance, down from 4.3 percent.

 

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Annualized charge-off rate of 3.0 percent of average loans in repayment for both the current and year-ago quarters.

 

 

 

 

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Provision for private education loan losses of $225 million, down from $235 million.

 

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Core net interest margin, before loan loss provision, of 4.15 percent, down from 4.26 percent.

 

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The portfolio balance, net of loan loss allowance, totaled $37 billion, a $733 million increase over the year-ago quarter.

Business Services

Sallie Mae’s business services segment includes fees from servicing, collections and college savings businesses.

Business services core earnings were $124 million in first-quarter 2013, compared with $137 million in the year-ago quarter. The decrease is primarily due to the lower balance of FFELP loans serviced by Sallie Mae.

Federally Guaranteed Student Loans (FFELP)

This segment represents earnings from Sallie Mae’s amortizing portfolio of FFELP loans.

Core earnings for the segment were $104 million in first-quarter 2013, compared with the year-ago quarter’s $80 million. The increase was the result of a $55 million gain from the sale of the residual interest in a FFELP loan securitization trust, which more than offset the decline in net interest income from the amortizing FFELP portfolio.

At March 31, 2013, the company held $119 billion of FFELP loans compared with $136 billion at March 31, 2012.

Operating Expenses

First-quarter 2013 operating expenses were $270 million compared with $262 million in the year-ago quarter. Excluding the result of a non-recurring $8 million pension termination gain in first-quarter 2012, operating expenses were unchanged.

Funding and Liquidity

During first-quarter 2013, the company issued $1.2 billion in FFELP asset-backed securities (ABS), $1.4 billion in private education loan ABS and $1.5 billion of unsecured bonds.

Total debt repurchases were $927 million in first-quarter 2013 compared with $204 million in first-quarter 2012.

Sallie Mae continues to issue FFELP ABS primarily as a means to finance the redemption of FFELP loans financed in the U.S. Department of Education’s conduit program. The company still expects to redeem all of these loans prior to the conduit program’s Jan. 19, 2014, maturity date.

Shareholder Distributions

In first-quarter 2013, Sallie Mae paid a common stock dividend of $0.15 per share, up from $0.125 per share in the prior quarter.

For the first-quarter 2013, Sallie Mae repurchased 10 million shares of common stock for $199 million. The shares were repurchased under the company’s February 2013 share repurchase program that authorizes up to $400 million of share repurchases.

Guidance

The company expects 2013 results to be as follows:

 

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Full-year 2013 private education loan originations of at least $4 billion.

 

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Fully diluted 2013 core earnings per share of $2.49 inclusive of the contributions from the two FFELP loan securitization trust residual sales that have occurred in 2013.

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Sallie Mae reports financial results on a GAAP basis and also provides certain core earnings performance measures. The difference between the company’s core earnings and GAAP results for the periods presented were the unrealized, mark-to-market gains/losses on derivative contracts and the goodwill and acquired intangible asset amortization and impairment. These items are recognized in GAAP but not in core earnings results. The company provides core earnings measures because this is what management uses when making management decisions regarding the company’s performance and the allocation of corporate resources. In addition, the company’s equity investors, credit rating agencies and debt capital providers use these core earnings measures to monitor the company’s business performance. See “Core Earnings — Definition and Limitations” for a further discussion and a complete reconciliation between GAAP net income and core earnings. Given the significant variability of valuations of derivative instruments on expected GAAP net income, the company does not provide a GAAP equivalent for its core earnings per share guidance.

Definitions for capitalized terms in this document can be found in the company’s Annual Report on Form 10-K for the year ended Dec. 31, 2012 (filed with the SEC on Feb. 26, 2013). Certain reclassifications have been made to the balances as of and for the three months ended March 31, 2012, to be consistent with classifications adopted for 2013, and had no effect on net income, total assets or total liabilities.

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The company will host an earnings conference call tomorrow, April 18, at 8 a.m. EDT. Sallie Mae executives will be on hand to discuss various highlights of the quarter and to answer questions related to the company’s performance. Individuals interested in participating in the call should dial 877-356-5689 (USA and Canada) or dial 706-679-0623 (international) and use access code 23719299 starting at 7:45 a.m. EDT. A live audio webcast of the conference call may be accessed at www.SallieMae.com/investors. A replay of the conference call via the company’s website will be available approximately two hours after the call’s conclusion. A telephone replay may be accessed approximately two hours after the call’s conclusion through May 2, by dialing 855-859-2056 (USA and Canada) or 404-537-3406 (international) with access code 23719299.

Presentation slides for the conference call, as well as additional information about the company’s loan portfolios, operating segments, and other details, may be accessed at www.SallieMae.com/investors under the webcasts tab.

This press release contains “forward-looking statements” and information based on management’s current expectations as of the date of this release. Statements that are not historical facts, including statements about the company’s beliefs or expectations and statements that assume or are dependent upon future events, are 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 Item 1A “Risk Factors” and elsewhere in the company’s Annual Report on Form 10-K for the year ended Dec. 31, 2012; 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 the company is a party; credit risk associated with the company’s exposure to third parties, including counterparties to the company’s 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). The company could also be affected by, among other things: changes in its funding costs and availability; reductions to its credit ratings or the credit ratings of the United States of America; failures of its operating systems or infrastructure, including those of third-party vendors; damage to its reputation; failures to successfully implement cost-cutting and restructuring initiatives and adverse effects of such initiatives on its business; 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 its customers; changes in the general interest rate environment, including the rate relationships among relevant money-market instruments and those of its earning assets vs. its funding arrangements; changes in general economic conditions; and changes in the demand for debt management services. The preparation of the company’s consolidated financial statements also requires management to make

 

 

 

 

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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 release are qualified by these cautionary statements and are made only as of the date of this release. The company 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.

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Sallie Mae (NASDAQ: SLM) is the nation’s No. 1 financial services company specializing in education. Celebrating 40 years of making a difference, Sallie Mae continues to turn education dreams into reality for American families, today serving 25 million customers. With products and services that include 529 college savings plans, Upromise rewards, scholarship search and planning tools, education loans, insurance, and online banking, Sallie Mae offers solutions that help families save, plan, and pay for college. Sallie Mae also provides financial services to hundreds of college campuses as well as to federal and state governments. Learn more at SallieMae.com. Commonly known as Sallie Mae, SLM Corporation and its subsidiaries are not sponsored by or agencies of the United States of America.

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Contact:

 

Media:		Patricia Nash Christel, 302-283-4076, patricia.christel@SallieMae.com Martha Holler, 302-283-4036, martha.holler@SallieMae.com
Investors:		Joe Fisher, 302-283-4075, joe.fisher@SallieMae.com Steven McGarry, 302-283-4074, steven.j.mcgarry@SallieMae.com

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Selected Financial Information and Ratios

(Unaudited)

 

		Quarters Ended
(In millions, except per share data)		March 31, 2013				December 31, 2012				March 31, 2012
GAAP Basis
Net income attributable to SLM Corporation		$	346			$	348			$	112
Diluted earnings per common share attributable to SLM Corporation		$	.74			$	.74			$	.21
Weighted average shares used to compute diluted earnings per share			458				463				510
Return on assets			.82	%			.79	%			.24	%
“Core Earnings” Basis(1)
“Core Earnings” attributable to SLM Corporation		$	283			$	257			$	284
“Core Earnings” diluted earnings per common share attributable to SLM Corporation		$	.61			$	.55			$	.55
Weighted average shares used to compute diluted earnings per share			458				463				510
“Core Earnings” return on assets			.67	%			.58	%			.62	%
Other Operating Statistics
Ending FFELP Loans, net		$	119,195			$	125,612			$	135,934
Ending Private Education Loans, net			37,465				36,934				36,732
Ending total student loans, net		$	156,660			$	162,546			$	172,666
Average student loans		$	160,261			$	164,800			$	174,942

 

(1)	“Core Earnings” are non-GAAP financial measures and do not represent a comprehensive basis of accounting. For a greater explanation of “Core Earnings,” see the section titled “‘Core Earnings’ — Definition and Limitations” and subsequent sections.

 

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Results of Operations

We present the results of operations below on a consolidated basis in accordance with GAAP. The presentation of our results on a segment basis is not in accordance with GAAP. We have four business segments: Consumer Lending, Business Services, FFELP Loans and Other. Since these segments operate in distinct business environments and we manage and evaluate the financial performance of these segments using non-GAAP financial measures, these segments are presented on a “Core Earnings” basis (see “‘Core Earnings’ — Definition and Limitations”).

GAAP Statements of Income (Unaudited)

 

														March 31,  2013 vs. December 31, 2012								March 31, 2013 vs. March 31, 2012
		Quarters Ended												Increase (Decrease)								Increase (Decrease)
(In millions, except per share data)		March 31, 2013				December 31, 2012				March 31, 2012				$				%				$				%
Interest income:
FFELP Loans		$	735			$	792			$	842			$	(57	)			(7	)%		$	(107	)			(13	)%
Private Education Loans			623				625				625				(2	)			—				(2	)			—
Other loans			3				4				5				(1	)			(25	)			(2	)			(40	)
Cash and investments			5				5				5				—				—				—				—
Total interest income			1,366				1,426				1,477				(60	)			(4	)			(111	)			(8	)
Total interest expense			571				594				666				(23	)			(4	)			(95	)			(14	)
Net interest income			795				832				811				(37	)			(4	)			(16	)			(2	)
Less: provisions for loan losses			241				314				253				(73	)			(23	)			(12	)			(5	)
Net interest income after provisions for loan losses			554				518				558				36				7				(4	)			(1	)
Other income (loss):
Losses on derivative and hedging activities, net			(31	)			(28	)			(372	)			(3	)			11				341				(92	)
Servicing revenue			96				92				97				4				4				(1	)			(1	)
Contingency revenue			99				95				90				4				4				9				10
Gains on debt repurchases			23				43				37				(20	)			(47	)			(14	)			(38	)
Other income			90				52				40				38				73				50				125
Total other income (loss)			277				254				(108	)			23				9				385				356
Expenses:
Operating expenses			270				252				262				18				7				8				3
Goodwill and acquired intangible assets impairment and amortization expense			4				14				5				(10	)			(71	)			(1	)			(20	)
Restructuring expenses			—				2				5				(2	)			(100	)			(5	)			(100	)
Total expenses			274				268				272				6				2				2				1
Income before income tax expense			557				504				178				53				11				379				213
Income tax expense			211				156				67				55				35				144				215
Net income			346				348				111				(2	)			(1	)			235				212
Less: net loss attributable to noncontrolling interest			—				—				(1	)			—				—				1				(100	)
Net income attributable to SLM Corporation			346				348				112				(2	)			(1	)			234				209
Preferred stock dividends			5				5				5				—				—				—				—
Net income attributable to SLM Corporation common stock		$	341			$	343			$	107			$	(2	)			(1	)%		$	234				219	%
Basic earnings per common share attributable to SLM Corporation		$	.76			$	.75			$	.21			$	.01				1	%		$	.55				262	%
Diluted earnings per common share attributable to SLM Corporation		$	.74			$	.74			$	.21			$	—				—	%		$	.53				252	%
Dividends per common share attributable to SLM Corporation		$	.15			$	.125			$	.125			$	.025				20	%		$	.025				20	%

 

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GAAP Balance Sheet (Unaudited)

 

(In millions, except share and per share data)		March 31, 2013				December 31, 2012				March 31, 2012
Assets
FFELP Loans (net of allowance for losses of $147; $159 and $180, respectively)		$	119,195			$	125,612			$	135,934
Private Education Loans (net of allowance for losses of $2,170; $2,171 and $2,190, respectively)			37,465				36,934				36,732
Cash and investments			4,691				4,982				4,042
Restricted cash and investments			4,828				5,011				5,884
Goodwill and acquired intangible assets, net			444				448				471
Other assets			7,463				8,273				8,629
Total assets		$	174,086			$	181,260			$	191,692
Liabilities
Short-term borrowings		$	17,254			$	19,856			$	27,123
Long-term borrowings			147,887				152,401				155,588
Other liabilities			3,791				3,937				3,936
Total liabilities			168,932				176,194				186,647
Commitments and contingencies
Equity
Preferred stock, par value $0.20 per share, 20 million shares authorized:
Series A: 3.3 million; 3.3 million and 3.3 million shares, respectively, issued at stated value of $50 per share			165				165				165
Series B: 4 million; 4 million and 4 million shares, respectively, issued at stated value of $100 per share			400				400				400
Common stock, par value $0.20 per share, 1.125 billion shares authorized: 540 million; 536 million and 532 million shares, respectively, issued			108				107				106
Additional paid-in capital			4,291				4,237				4,182
Accumulated other comprehensive loss, net of tax benefit			(4	)			(6	)			(9	)
Retained earnings			1,723				1,451				814
Total SLM Corporation stockholders’ equity before treasury stock			6,683				6,354				5,658
Less: Common stock held in treasury: 95 million; 83 million and 39 million shares, respectively			(1,535	)			(1,294	)			(620	)
Total SLM Corporation stockholders’ equity			5,148				5,060				5,038
Noncontrolling interest			6				6				7
Total equity			5,154				5,066				5,045
Total liabilities and equity		$	174,086			$	181,260			$	191,692

 

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Consolidated Earnings Summary — GAAP basis

Three Months Ended March 31, 2013 Compared with Three Months Ended March 31, 2012

For the three months ended March 31, 2013, net income was $346 million, or $0.74 diluted earnings per common share, compared with net income of $112 million, or $0.21 diluted earnings per common share, for the three months ended March 31, 2012. The increase in net income was primarily due to a $341 million decrease in net losses on derivative and hedging activities, a $50 million increase in other income and a $12 million decrease in provisions for loan losses, which were partially offset by a $16 million decrease in net interest income and a $14 million decrease in gains on debt repurchases.

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

 

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Net interest income declined by $16 million primarily due to a $15.3 billion decline in average FFELP Loans outstanding. The decline in average FFELP Loans outstanding was driven by normal loan amortization as well as $5.2 billion of loans that were consolidated by the U. S. Department of Education (“ED”) in 2012 under their Special Direct Consolidation Loan Initiative (“SDCL”).

 

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Provisions for loan losses declined $12 million compared with the year-ago quarter primarily as a result of the overall improvement in Private Education Loans’ credit quality and delinquency trends as well as expected decreases in future charge-offs.

 

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Other income increased by $50 million primarily as a result of a $55 million gain on the sale of the Residual Interest in a FFELP Loan securitization trust. See “FFELP Loans Segment” for further discussion.

 

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Gains (losses) on derivative and hedging activities resulted in a net loss of $31 million in the current quarter compared with a net loss of $372 million in the year-ago quarter. The primary factors affecting the change were interest rate and foreign currency fluctuations, which primarily affected the valuations of our Floor Income Contracts, basis swaps and foreign currency hedges during each period. Valuations of derivative instruments vary based upon many factors including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, net gains and losses on derivative and hedging activities may continue to vary significantly in future periods.

 

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Gains on debt repurchases decreased $14 million. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.

 

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First-quarter 2013 operating expenses were $270 million compared with $262 million in the year-ago quarter. Excluding the result of a non-recurring $8 million pension termination gain in first-quarter 2012, operating expenses were unchanged.

In addition, we repurchased 10 million shares of our common stock during the first-quarter 2013 as part of a common share repurchase program. Primarily as a result of ongoing common share repurchases, our average outstanding diluted shares decreased by 52 million shares from the year-ago quarter.

“Core Earnings” — Definition and Limitations

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

“Core Earnings” are not a substitute for reported results under GAAP. We use “Core Earnings” to manage each business segment because “Core Earnings” reflect adjustments to GAAP financial results for two items,

 

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discussed below, that create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that “Core Earnings” provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information as we believe it provides investors with additional information regarding the operational and performance indicators that are most closely assessed by management. The two items for which we adjust our “Core Earnings” presentations are (1) our use of derivative instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness and (2) the accounting for goodwill and acquired intangible assets.

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

Specific adjustments that management makes to GAAP results to derive our “Core Earnings” basis of presentation are described in detail in the section titled “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP” below.

 

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		Quarter Ended March 31, 2013
(Dollars in millions)		Consumer Lending				Business Services				FFELP Loans				Other				Eliminations(1)				Total “Core Earnings”				Adjustments												Total GAAP
																										Reclassifications				Additions/ (Subtractions)				Total Adjustments(2)
Interest income:
Student loans		$	623			$	—			$	599			$	—			$	—			$	1,222			$	212			$	(76	)		$	136			$	1,358
Other loans			—				—				—				3				—				3				—				—				—				3
Cash and investments			1				2				2				2				(2	)			5				—				—				—				5
Total interest income			624				2				601				5				(2	)			1,230				212				(76	)			136				1,366
Total interest expense			204				—				340				13				(2	)			555				18				(2	)(4)			16				571
Net interest income (loss)			420				2				261				(8	)			—				675				194				(74	)			120				795
Less: provisions for loan losses			225				—				16				—				—				241				—				—				—				241
Net interest income (loss) after provisions for loan losses			195				2				245				(8	)			—				434				194				(74	)			120				554
Servicing revenue			10				212				23				—				(149	)			96				—				—				—				96
Contingency revenue			—				99				—				—				—				99				—				—				—				99
Gains on debt repurchases			—				—				—				29				—				29				(6	)			—				(6	)			23
Other income			—				8				55				—				—				63				(188	)			184	(5)			(4	)			59
Total other income (loss)			10				319				78				29				(149	)			287				(194	)			184				(10	)			277
Expenses:
Direct operating expenses			66				122				157				—				(149	)			196				—				—				—				196
Overhead expenses			—				—				—				74				—				74				—				—				—				74
Operating expenses			66				122				157				74				(149	)			270				—				—				—				270
Goodwill and acquired intangible assets impairment and amortization			—				—				—				—				—				—				—				4				4				4
Total expenses			66				122				157				74				(149	)			270				—				4				4				274
Income (loss) before income tax expense (benefit)			139				199				166				(53	)			—				451				—				106				106				557
Income tax expense (benefit)(3)			51				75				62				(20	)			—				168				—				43				43				211
Net income (loss)		$	88			$	124			$	104			$	(33	)		$	—			$	283			$	—			$	63			$	63			$	346

 

(1)	The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

 

(2)	“Core Earnings” adjustments to GAAP:

 

		Quarter Ended March 31, 2013
(Dollars in millions)		Net Impact of Derivative Accounting				Net Impact of Goodwill and Acquired Intangibles				Total
Net interest income after provisions for loan losses		$	120			$	—			$	120
Total other loss			(10	)			—				(10	)
Goodwill and acquired intangible assets impairment and amortization			—				4				4
Total “Core Earnings” adjustments to GAAP		$	110			$	(4	)			106
Income tax expense											43
Net income										$	63

 

(3)	Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

(4)	Represents a portion of the $29 million of “other derivative accounting adjustments.”

 

(5)	Represents the $157 million of “unrealized gains on derivative and hedging activities, net” as well as the remaining portion of the $29 million of “other derivative accounting adjustments.”

 

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		Quarter Ended December 31, 2012
(Dollars in millions)		Consumer Lending				Business Services				FFELP Loans				Other				Eliminations(1)				Total “Core Earnings”				Adjustments												Total GAAP
																										Reclassifications				Additions/ (Subtractions)				Total Adjustments(2)
Interest income:
Student loans		$	625			$	—			$	654			$	—			$	—			$	1,279			$	215			$	(77	)		$	138			$	1,417
Other loans			—				—				—				4				—				4				—				—				—				4
Cash and investments			1				3				3				—				(2	)			5				—				—				—				5
Total interest income			626				3				657				4				(2	)			1,288				215				(77	)			138				1,426
Total interest expense			207				—				360				9				(2	)			574				20				—				20				594
Net interest income (loss)			419				3				297				(5	)			—				714				195				(77	)			118				832
Less: provisions for loan losses			296				—				18				—				—				314				—				—				—				314
Net interest income (loss) after provisions for loan losses			123				3				279				(5	)			—				400				195				(77	)			118				518
Servicing revenue			11				218				21				—				(158	)			92				—				—				—				92
Contingency revenue			—				95				—				—				—				95				—				—				—				95
Gains on debt repurchases			—				—				—				43				—				43				—				—				—				43
Other income (loss)			—				10				—				4				—				14				(195	)			205	(4)			10				24
Total other income (loss)			11				323				21				47				(158	)			244				(195	)			205				10				254
Expenses:
Direct operating expenses			65				121				165				1				(158	)			194				—				—				—				194
Overhead expenses			—				—				—				58				—				58				—				—				—				58
Operating expenses			65				121				165				59				(158	)			252				—				—				—				252
Goodwill and acquired intangible assets impairment and amortization			—				—				—				—				—				—				—				14				14				14
Restructuring expenses			—				2				—				—				—				2				—				—				—				2
Total expenses			65				123				165				59				(158	)			254				—				14				14				268
Income (loss) before income tax expense (benefit)			69				203				135				(17	)			—				390				—				114				114				504
Income tax expense (benefit)(3)			23				69				46				(5	)			—				133				—				23				23				156
Net income (loss)		$	46			$	134			$	89			$	(12	)		$	—			$	257			$	—			$	91			$	91			$	348

 

(1)	The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

 

(2)	“Core Earnings” adjustments to GAAP:

 

		Quarter Ended December 31, 2012
(Dollars in millions)		Net Impact of Derivative Accounting				Net Impact of Goodwill and Acquired Intangibles				Total
Net interest income after provisions for loan losses		$	118			$	—			$	118
Total other income			10				—				10
Goodwill and acquired intangible assets impairment and amortization			—				14				14
Total “Core Earnings” adjustments to GAAP		$	128			$	(14	)			114
Income tax expense											23
Net income										$	91

 

(3)	Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

(4)	Represents the $167 million of “unrealized gains on derivative and hedging activities, net” as well as the $38 million of “other derivative accounting adjustments.”

 

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		Quarter Ended March 31, 2012
(Dollars in millions)		Consumer Lending				Business Services				FFELP Loans				Other				Eliminations(1)				Total “Core Earnings”				Adjustments												Total GAAP
																										Reclassifications				Additions/ (Subtractions)				Total Adjustments(2)
Interest income:
Student loans		$	625			$	—			$	725			$	—			$	—			$	1,350			$	215			$	(98	)		$	117			$	1,467
Other loans			—				—				—				5				—				5				—				—				—				5
Cash and investments			2				3				3				—				(3	)			5				—				—				—				5
Total interest income			627				3				728				5				(3	)			1,360				215				(98	)			117				1,477
Total interest expense			202				—				424				5				(3	)			628				36				2	(4)			38				666
Net interest income (loss)			425				3				304				—				—				732				179				(100	)			79				811
Less: provisions for loan losses			235				—				18				—				—				253				—				—				—				253
Net interest income (loss) after provisions for loan losses			190				3				286				—				—				479				179				(100	)			79				558
Servicing revenue			12				236				25				—				(176	)			97				—				—				—				97
Contingency revenue			—				90				—				—				—				90				—				—				—				90
Gains on debt repurchases			—				—				—				37				—				37				—				—				—				37
Other income (loss)			—				8				—				3				—				11				(179	)			(164	)(5)			(343	)			(332	)
Total other income (loss)			12				334				25				40				(176	)			235				(179	)			(164	)			(343	)			(108	)
Expenses:
Direct operating expenses			69				120				185				—				(176	)			198				—				—				—				198
Overhead expenses			—				—				—				64				—				64				—				—				—				64
Operating expenses			69				120				185				64				(176	)			262				—				—				—				262
Goodwill and acquired intangible assets impairment and amortization			—				—				—				—				—				—				—				5				5				5
Restructuring expenses			1				1				—				3				—				5				—				—				—				5
Total expenses			70				121				185				67				(176	)			267				—				5				5				272
Income (loss) before income tax expense (benefit)			132				216				126				(27	)			—				447				—				(269	)			(269	)			178
Income tax expense (benefit)(3)			48				80				46				(10	)			—				164				—				(97	)			(97	)			67
Net income (loss)			84				136				80				(17	)			—				283				—				(172	)			(172	)			111
Less: net loss attributable to noncontrolling interest			—				(1	)			—				—				—				(1	)			—				—				—				(1	)
Net income (loss) attributable to SLM Corporation		$	84			$	137			$	80			$	(17	)		$	—			$	284			$	—			$	(172	)		$	(172	)		$	112

 

(1)	The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

 

(2)	“Core Earnings” adjustments to GAAP:

 

		Quarter Ended March 31, 2012
(Dollars in millions)		Net Impact  of Derivative Accounting				Net Impact of Goodwill  and Acquired Intangibles				Total
Net interest income after provisions for loan losses		$	79			$	—			$	79
Total other loss			(343	)			—				(343	)
Goodwill and acquired intangible assets impairment and amortization			—				5				5
Total “Core Earnings” adjustments to GAAP		$	(264	)		$	(5	)			(269	)
Income tax benefit											(97	)
Net loss										$	(172	)

 

(3)	Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

(4)	Represents a portion of the $27 million of “other derivative accounting adjustments.”

 

(5)	Represents the $193 million of “unrealized losses on derivative and hedging activities, net” as well as the remaining portion of the $27 million of “other derivative accounting adjustments.”

 

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Differences between “Core Earnings” and GAAP

The following discussion summarizes the differences between “Core Earnings” and GAAP net income (loss) and details each specific adjustment required to reconcile our “Core Earnings” segment presentation to our GAAP earnings.

 

		Quarters Ended
(Dollars in millions)		March 31, 2013				December 31, 2012				March 31, 2012
“Core Earnings” adjustments to GAAP:
Net impact of derivative accounting		$	110			$	128			$	(264	)
Net impact of goodwill and acquired intangible assets			(4	)			(14	)			(5	)
Net income tax effect			(43	)			(23	)			97
Total “Core Earnings” adjustments to GAAP		$	63			$	91			$	(172	)

 

1)

Derivative Accounting: “Core Earnings” exclude periodic unrealized gains and losses that are caused by the mark-to-market valuations on derivatives that do not qualify for hedge accounting treatment under GAAP as well as the periodic unrealized gains and losses that are a result of ineffectiveness recognized related to effective hedges under GAAP. These unrealized gains and losses occur in our Consumer Lending, FFELP Loans and Other business segments. Under GAAP, for our derivatives that are held to maturity, the cumulative net unrealized gain or loss over the life of the contract will equal $0 except for Floor Income Contracts where the cumulative unrealized gain will equal the amount for which we sold the contract. In our “Core Earnings” presentation, we recognize the economic effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest expense or revenue over the hedged item’s life.

 

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The table below quantifies the adjustments for derivative accounting between GAAP and “Core Earnings” net income.

 

		Quarters Ended
(Dollars in millions)		March 31, 2013				December 31, 2012				March 31, 2012
“Core Earnings” derivative adjustments:
Losses on derivative and hedging activities, net, included in other income(1)		$	(31	)		$	(28	)		$	(372	)
Plus: Realized losses on derivative and hedging activities, net(1)			188				195				179
Unrealized gains (losses) on derivative and hedging activities, net(2)			157				167				(193	)
Amortization of net premiums on Floor Income Contracts in net interest income for “Core Earnings”			(76	)			(77	)			(98	)
Other derivative accounting adjustments(3)			29				38				27
Total net impact of derivative accounting(4)		$	110			$	128			$	(264	)

 

(1)

See “Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” below for a detailed breakdown of the components of realized losses on derivative and hedging activities.

 

(2)

Unrealized gains (losses) on derivative and hedging activities, net” comprises the following unrealized mark-to-market gains (losses):

 

		Quarters Ended
(Dollars in millions)		March 31, 2013				December 31, 2012				March 31, 2012
Floor Income Contracts		$	189			$	237			$	136
Basis swaps			(4	)			(10	)			(22	)
Foreign currency hedges			(32	)			(55	)			(294	)
Other			4				(5	)			(13	)
Total unrealized gains (losses) on derivative and hedging activities, net		$	157			$	167			$	(193	)

 

(3)

Other derivative accounting adjustments consist of adjustments related to: (1) foreign currency denominated debt that is adjusted to spot foreign exchange rates for GAAP where such adjustments are reversed for “Core Earnings” and (2) certain terminated derivatives that did not receive hedge accounting treatment under GAAP but were economic hedges under “Core Earnings” and, as a result, such gains or losses are amortized into “Core Earnings” over the life of the hedged item.

 

(4)

Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income and positive amounts are added to “Core Earnings” net income to arrive at GAAP net income.

 

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Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities

Derivative accounting requires net settlement income/expense on derivatives and realized gains/losses related to derivative dispositions (collectively referred to as “realized gains (losses) on derivative and hedging activities”) that do not qualify as hedges to be recorded in a separate income statement line item below net interest income. Under our “Core Earnings” presentation, these gains and losses are reclassified to the income statement line item of the economically hedged item. For our “Core Earnings” net interest margin, this would primarily include: (a) reclassifying the net settlement amounts related to our Floor Income Contracts to student loan interest income and (b) reclassifying the net settlement amounts related to certain of our basis swaps to debt interest expense. The table below summarizes the realized losses on derivative and hedging activities and the associated reclassification on a “Core Earnings” basis.

 

		Quarters Ended
(Dollars in millions)		March 31, 2013				December 31, 2012				March 31, 2012
Reclassification of realized gains (losses) on derivative and hedging activities:
Net settlement expense on Floor Income Contracts reclassified to net interest income		$	(212	)		$	(215	)		$	(215	)
Net settlement income on interest rate swaps reclassified to net interest income			18				20				36
Net realized gains on terminated derivative contracts reclassified to other income			6				—				—
Total reclassifications of realized losses on derivative and hedging activities		$	(188	)		$	(195	)		$	(179	)

Cumulative Impact of Derivative Accounting under GAAP compared to “Core Earnings”

As of March 31, 2013, derivative accounting has reduced GAAP equity by approximately $1.0 billion as a result of cumulative net unrealized losses (after tax) recognized under GAAP, but not in “Core Earnings.” The following table rolls forward the cumulative impact to GAAP equity due to these unrealized after tax net losses related to derivative accounting.

 

		Quarters Ended
(Dollars in millions)		March 31, 2013				December 31, 2012				March 31, 2012
Beginning impact of derivative accounting on GAAP equity		$	(1,080	)		$	(1,183	)		$	(977	)
Net impact of net unrealized gains (losses) under derivative accounting(1)			53				103				(172	)
Ending impact of derivative accounting on GAAP equity		$	(1,027	)		$	(1,080	)		$	(1,149	)

 

(1)

Net impact of net unrealized gains (losses) under derivative accounting is composed of the following:

 

		Quarters Ended
(Dollars in millions)		March 31, 2013				December 31, 2012				March 31, 2012
Total pre-tax net impact of derivative accounting recognized in net income(a)		$	110			$	128			$	(264	)
Tax impact of derivative accounting adjustments recognized in net income			(60	)			(28	)			87
Change in unrealized gain on derivatives, net of tax recognized in other comprehensive income			3				3				5
Net impact of net unrealized gains (losses) under derivative accounting		$	53			$	103			$	(172	)

 

(a)

See “‘Core Earnings’ derivative adjustments” table above.

 

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Net Floor premiums received on Floor Income Contracts that have not been amortized into “Core Earnings” as of the respective year-ends are presented in the table below. These net premiums will be recognized in “Core Earnings” in future periods and are presented net of tax. As of March 31, 2013, the remaining amortization term of the net floor premiums was approximately 3.25 years for existing contracts. Historically, we have sold Floor Income Contracts on a periodic basis and depending upon market conditions and pricing, we may enter into additional Floor Income Contracts in the future. The balance of unamortized Floor Income Contracts will increase as we sell new contracts and decline due to the amortization of existing contracts.

 

(Dollars in millions)		March 31, 2013				December 31, 2012				March 31, 2012
Unamortized net Floor premiums (net of tax)		$	(498	)		$	(551	)		$	(711	)

 

2)

Goodwill and Acquired Intangible Assets: Our “Core Earnings” exclude goodwill and intangible asset impairment and the amortization of acquired intangible assets. The following table summarizes the goodwill and acquired intangible asset adjustments.

 

		Quarters Ended
(Dollars in millions)		March 31, 2013				December 31, 2012				March 31, 2012
“Core Earnings” goodwill and acquired intangible asset adjustments(1)		$	(4	)		$	(14	)		$	(5	)

 

 

(1)

Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income.

Business Segment Earnings Summary — “Core Earnings” Basis

Consumer Lending Segment

The following table includes “Core Earnings” results for our Consumer Lending segment.

 

		Quarters Ended												% Increase (Decrease)
(Dollars in millions)		Mar. 31, 2013				Dec. 31, 2012				Mar. 31, 2012				Mar. 31, 2013 vs. Dec. 31, 2012				Mar. 31, 2013 vs. Mar. 31, 2012
“Core Earnings” interest income:
Private Education Loans		$	623			$	625			$	625				—	%			—	%
Cash and investments			1				1				2				—				(50	)
Total “Core Earnings” interest income			624				626				627				—				—
Total “Core Earnings” interest expense			204				207				202				(1	)			1
Net “Core Earnings” interest income			420				419				425				—				(1	)
Less: provision for loan losses			225				296				235				(24	)			(4	)
Net “Core Earnings” interest income after provision for loan losses			195				123				190				59				3
Servicing revenue			10				11				12				(9	)			(17	)
Total other income			10				11				12				(9	)			(17	)
Direct operating expenses			66				65				69				2				(4	)
Restructuring expenses			—				—				1				—				(100	)
Total expenses			66				65				70				2				(6	)
Income before income tax expense			139				69				132				101				5
Income tax expense			51				23				48				122				6
“Core Earnings”		$	88			$	46			$	84				91	%			5	%

 

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Consumer Lending Net Interest Margin

The following table shows the Consumer Lending “Core Earnings” net interest margin along with reconciliation to the GAAP basis Consumer Lending net interest margin before provision for loan losses.

 

		Quarters Ended
		March 31, 2013				December 31, 2012				March 31, 2012
“Core Earnings” basis Private Education Loan yield			6.35	%			6.34	%			6.42	%
Discount amortization			.23				.22				.24
“Core Earnings” basis Private Education Loan net yield			6.58				6.56				6.66
“Core Earnings” basis Private Education Loan cost of funds			(2.02	)			(2.02	)			(2.01	)
“Core Earnings” basis Private Education Loan spread			4.56				4.54				4.65
“Core Earnings” basis other interest-earning asset spread impact			(.41	)			(.47	)			(.39	)
“Core Earnings” basis Consumer Lending net interest margin(1)			4.15	%			4.07	%			4.26	%
“Core Earnings” basis Consumer Lending net interest margin(1)			4.15	%			4.07	%			4.26	%
Adjustment for GAAP accounting treatment(2)			(.03	)			(.05	)			(.13	)
GAAP basis Consumer Lending net interest margin(1)			4.12	%			4.02	%			4.13	%

 

(1)

The average balances of our Consumer Lending “Core Earnings” basis interest-earning assets for the respective periods are:

 

		Quarters Ended
		March 31, 2013				December 31, 2012				March 31, 2012
(Dollars in millions)
Private Education Loans		$	38,406			$	37,926			$	37,749
Other interest-earning assets			2,662				2,977				2,327
Total Consumer Lending “Core Earnings” basis interest-earning assets		$	41,068			$	40,903			$	40,076

 

(2)

Represents the reclassification of periodic interest accruals on derivative contracts from net interest income to other income and other derivative accounting adjustments. For further discussion of these adjustments, see section titled “‘Core Earnings’ — Definition and Limitations — Difference between ‘Core Earnings’ and GAAP” above.

Private Education Loan Provision for Loan Losses and Charge-Offs

The following table summarizes the total Private Education Loan provision for loan losses and charge-offs.

 

		Quarters Ended
(Dollars in millions)		March 31, 2013				December 31, 2012				March 31, 2012
Private Education Loan provision for loan losses		$	225			$	296			$	235
Private Education Loan charge-offs		$	232			$	329			$	224

In establishing the allowance for Private Education Loan losses as of March 31, 2013, we considered several factors with respect to our Private Education Loan portfolio. In particular, as compared with the year-ago period, we continue to see improving credit quality and continuing positive delinquency, forbearance and charge-off trends in connection with this portfolio. Improving credit quality is seen in higher FICO scores and cosigner rates as well as a more seasoned portfolio. Total loans delinquent (as a percentage of loans in repayment) has decreased to 7.8 percent from 9.1 percent in the year-ago quarter. Loans greater than 90 days delinquent (as a percentage of loans in repayment) has decreased to 3.9 percent from 4.4 percent in the year-ago quarter. Loans in forbearance (as a percentage of loans in repayment and forbearance) has decreased to 3.4 percent from 4.3 percent in the year-ago quarter. The charge-off rate remained unchanged at 3.0 percent in both quarters.

The decline in charge-offs in first-quarter 2013 from fourth-quarter 2012 was primarily a result of a change in our policy for granting forbearance. During the second quarter of 2012, we increased our focus on encouraging customers to enter into repayment plans in lieu of using forbearance to better help our customers manage their overall payment obligations. As we expected, this change resulted in higher late-stage delinquencies in the third

 

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quarter of 2012 and higher charge-offs during the last six months of 2012. We believe most of this increase in charge-offs in the last six months of 2012 was an acceleration of charge-offs that would have occurred in future periods.

Additionally, Private Education Loans that have defaulted between 2008 and 2011 for which we have previously charged off estimated losses have, to varying degrees, not met our post-default recovery expectations to date and may continue not to do so. Our allowance for loan losses takes into account these potential recovery uncertainties.

The Private Education Loan provision for loan losses was $225 million in the first quarter of 2013, down $10 million from the first quarter of 2012, as a result of the overall improvement in credit quality and delinquency trends as well as expected decreases in future charge-offs. The $71 million decrease in provision from the fourth quarter of 2012 was primarily the result of the decrease in charge-offs as discussed above.

For a more detailed discussion of our policy for determining the collectability of Private Education Loans and maintaining our allowance for Private Education Loan losses, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Allowance for Loan Losses” in our Annual Report on Form 10-K for the year ended December 31, 2012.

Operating Expenses — Consumer Lending Segment

Operating expenses for our Consumer Lending segment include costs incurred to originate Private Education Loans and to service and collect on our Private Education Loan portfolio. The decrease in operating expenses in the quarter ended March 31, 2013 compared with the year-ago quarter was primarily the result of continued management focus on expense control and operating efficiencies. Operating expenses were 70 basis points and 77 basis points of average Private Education Loans in the quarters ended March 31, 2013 and 2012, respectively.

Business Services Segment

The following table includes “Core Earnings” results for our Business Services segment.

 

		Quarters Ended												% Increase (Decrease)
(Dollars in millions)		Mar. 31, 2013				Dec. 31, 2012				Mar. 31, 2012				Mar. 31, 2013 vs. Dec. 31, 2012				Mar. 31, 2013 vs. Mar. 31, 2012
Net interest income		$	2			$	3			$	3				(33	)%			(33	)%
Servicing revenue:
Intercompany loan servicing			149				158				176				(6	)			(15	)
Third-party loan servicing			27				24				22				13				23
Guarantor servicing			10				10				11				—				(9	)
Other servicing			26				26				27				—				(4	)
Total servicing revenue			212				218				236				(3	)			(10	)
Contingency revenue			99				95				90				4				10
Other Business Services revenue			8				10				8				(20	)			—
Total other income			319				323				334				(1	)			(4	)
Direct operating expenses			122				121				120				1				2
Restructuring expenses			—				2				1				(100	)			(100	)
Total expenses			122				123				121				(1	)			1
Income before income tax expense			199				203				216				(2	)			(8	)
Income tax expense			75				69				80				9				(6	)
“Core Earnings”			124				134				136				(7	)			(9	)
Less: net loss attributable to noncontrolling interest			—				—				(1	)			—				(100	)
“Core Earnings” attributable to SLM Corporation		$	124			$	134			$	137				(7	)%			(9	)%

Our Business Services segment includes intercompany loan servicing fees from servicing the FFELP Loans in our FFELP Loans segment. The average balance of this portfolio was $121 billion and $135 billion for the quarters ended March 31, 2013 and 2012, respectively. The decline in intercompany loan servicing revenue from the year-ago period is primarily the result of a lower outstanding principal balance in the underlying portfolio.

 

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We are servicing approximately 4.8 million accounts under the ED Servicing Contract as of March 31, 2013, compared with 4.3 million and 3.7 million accounts serviced at December 31, 2012 and March 31, 2012, respectively. Third-party loan servicing fees in the quarters ended March 31, 2013 and 2012 included $23 million and $17 million, respectively, of servicing revenue related to the ED Servicing Contract. This increase in ED loan servicing fees was driven by the increase in the number of accounts serviced as well as an increase in ancillary servicing fees earned.

Third-party loan servicing income increased $5 million from the year-ago quarter primarily due to the increase in ED servicing revenue (discussed above) as well as a result of the sale of a Residual Interest in a FFELP Loan securitization trust in the first quarter of 2013. (See “FFELP Loans Segment” for further discussion.) When we sold this Residual Interest, we retained the right to service the trust. As such, servicing income that had previously been recorded as intercompany loan servicing will now be recognized as third-party loan servicing income.

Other servicing revenue includes account asset servicing revenue and Campus Solutions revenue. Account asset servicing revenue represents fees earned on program management, transfer and servicing agent services and administration services for our various 529 college-savings plans. Assets under administration of 529 college savings plans totaled $47.9 billion as of March 31, 2013, a 16 percent increase from the year-ago quarter. Campus Solutions revenue is earned from our Campus Solutions business whose services include comprehensive financing and transaction processing solutions that we provide to college financial aid offices and students to streamline the financial aid process.

Our contingency revenue consists of fees we receive for collections of delinquent debt on behalf of third-party clients performed on a contingent basis. Contingency revenue increased $9 million in the current quarter compared with the year-ago quarter as a result of the higher volume of collections.

The following table presents the outstanding inventory of contingent collections receivables that our Business Services segment will collect on behalf of others. We expect the inventory of contingent collections receivables to decline over time as a result of the elimination of FFELP.

 

(Dollars in millions)		March 31, 2013				December 31, 2012				March 31, 2012
Contingency:
Student loans		$	13,549			$	13,189			$	11,004
Other			2,239				2,139				1,752
Total		$	15,788			$	15,328			$	12,756

Other Business Services revenue is primarily transaction fees that are earned in conjunction with our rewards program from participating companies based on member purchase activity, either online or in stores, depending on the contractual arrangement with the participating company.

Revenues related to services performed on FFELP Loans accounted for 74 percent and 76 percent, respectively, of total segment revenues for the quarters ended March 31, 2013 and 2012.

 

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FFELP Loans Segment

The following table includes “Core Earnings” results for our FFELP Loans segment.

 

		Quarters Ended												% Increase (Decrease)
(Dollars in millions)		Mar. 31, 2013				Dec. 31, 2012				Mar. 31, 2012				Mar. 31, 2013 vs. Dec. 31, 2012				Mar. 31, 2013 vs. Mar. 31, 2012
“Core Earnings” interest income:
FFELP Loans		$	599			$	654			$	725				(8	)%			(17	)%
Cash and investments			2				3				3				(33	)			(33	)
Total “Core Earnings” interest income			601				657				728				(9	)			(17	)
Total “Core Earnings” interest expense			340				360				424				(6	)			(20	)
Net “Core Earnings” interest income			261				297				304				(12	)			(14	)
Less: provision for loan losses			16				18				18				(11	)			(11	)
Net “Core Earnings” interest income after provision for loan losses			245				279				286				(12	)			(14	)
Servicing revenue			23				21				25				10				(8	)
Other income			55				—				—				100				100
Total other income			78				21				25				271				212
Direct operating expenses			157				165				185				(5	)			(15	)
Restructuring expenses			—				—				—				—				—
Total expenses			157				165				185				(5	)			(15	)
Income before income tax expense			166				135				126				23				32
Income tax expense			62				46				46				35				35
“Core Earnings”		$	104			$	89			$	80				17	%			30	%

 

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FFELP Loan Net Interest Margin

The following table shows the “Core Earnings” basis FFELP Loan net interest margin along with reconciliation to the GAAP basis FFELP Loan net interest margin.

 

		Quarters Ended
		March 31, 2013				December 31, 2012				March 31, 2012
“Core Earnings” basis FFELP Loan yield			2.61	%			2.63	%			2.67	%
Hedged Floor Income			.25				.24				.28
Unhedged Floor Income			.06				.11				.11
Consolidation Loan Rebate Fees			(.68	)			(.67	)			(.66	)
Repayment Borrower Benefits			(.11	)			(.13	)			(.13	)
Premium amortization			(.14	)			(.13	)			(.14	)
“Core Earnings” basis FFELP Loan net yield			1.99				2.05				2.13
“Core Earnings” basis FFELP Loan cost of funds			(1.06	)			(1.05	)			(1.17	)
“Core Earnings” basis FFELP Loan spread			.93				1.00				.96
“Core Earnings” basis FFELP other interest-earning asset spread impact			(.10	)			(.11	)			(.11	)
“Core Earnings” basis FFELP Loan net interest margin(1)			.83	%			.89	%			.85	%
“Core Earnings” basis FFELP Loan net interest margin(1)			.83	%			.89	%			.85	%
Adjustment for GAAP accounting treatment(2)			.40				.37				.27
GAAP basis FFELP Loan net interest margin			1.23	%			1.26	%			1.12	%

 

(1)

The average balances of our FFELP “Core Earnings” basis interest-earning assets for the respective periods are:

 

		Quarters Ended
		March 31, 2013				December 31, 2012				March 31, 2012
(Dollars in millions)
FFELP Loans		$	121,855			$	126,874			$	137,193
Other interest-earning assets			5,555				6,152				6,427
Total FFELP “Core Earnings” basis interest-earning assets		$	127,410			$	133,026			$	143,620

 

(2)

Represents the reclassification of periodic interest accruals on derivative contracts from net interest income to other income and other derivative accounting adjustments. For further discussion of these adjustments, see section titled “‘Core Earnings’ — Definition and Limitations — Difference between ‘Core Earnings’ and GAAP” above.

The decrease in the “Core Earnings” basis FFELP Loan net interest margin of 2 basis points for the quarter ended March 31, 2013 compared with the quarter ended March 31, 2012 was primarily the result of a general increase in our funding costs related to unsecured and ABS debt issuances over the last year.

As of March 31, 2013, our FFELP Loan portfolio totaled approximately $119.2 billion, comprised of $43.0 billion of FFELP Stafford and $76.2 billion of FFELP Consolidation Loans. The weighted-average life of these portfolios is 4.9 years and 9.9 years, respectively, assuming a Constant Prepayment Rate (“CPR”) of 4 percent and 3 percent, respectively.

FFELP Loan Provision for Loan Losses and Charge-Offs

The following table summarizes the FFELP Loan provision for loan losses and charge-offs.

 

		Quarters Ended
(Dollars in millions)		March 31, 2013				December 31, 2012				March 31, 2012
FFELP Loan provision for loan losses		$	16			$	18			$	18
FFELP Loan charge-offs		$	22			$	23			$	23

 

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Other Income

The increase in other income from the prior and year-ago quarters is the result of a $55 million gain from the sale of the Residual Interest in a FFELP Loan securitization trust. We will continue to service the student loans in the trust that was sold under existing agreements. The sale removed student loan assets of $3.8 billion and related liabilities of $3.7 billion from the balance sheet.

Operating Expenses — FFELP Loans

Operating expenses for our FFELP Loans segment primarily include the contractual rates we pay to service loans in term asset-backed securitization trusts or a similar rate if a loan is not in a term financing facility (which is presented as an intercompany charge from the Business Services segment who services the loans), the fees we pay for third-party loan servicing and costs incurred to acquire loans. The intercompany revenue charged by the Business Services segment and included in those amounts was $149 million and $176 million for the quarters ended March 31, 2013 and 2012, respectively. These amounts exceed the actual cost of servicing the loans. Operating expenses were 52 basis points and 53 basis points of average FFELP Loans in the quarters ended March 31, 2013 and 2012, respectively. The decline in operating expenses from the prior-year quarter was primarily the result of the reduction in the average outstanding balance of our FFELP Loans portfolio.

Other Segment

The following table shows “Core Earnings” results of our Other segment.

 

		Quarters Ended												% Increase (Decrease)
(Dollars in millions)		Mar. 31, 2013				Dec. 31, 2012				Mar. 31, 2012				Mar. 31, 2013 vs. Dec. 31, 2012				Mar. 31, 2013 vs. Mar. 31, 2012
Net interest loss after provision for loan losses		$	(8	)		$	(5	)		$	—				60	%			100	%
Gains on debt repurchases			29				43				37				(33	)			(22	)
Other income			—				4				3				(100	)			(100	)
Total other income			29				47				40				(38	)			(28	)
Expenses:
Direct operating expenses			—				1				—				(100	)			—
Overhead expenses:
Corporate overhead			46				29				36				59				28
Unallocated information technology costs			28				29				28				(3	)			—
Total overhead expenses			74				58				64				28				16
Total operating expenses			74				59				64				25				16
Restructuring expenses			—				—				3				—				(100	)
Total expenses			74				59				67				25				10
Loss before income tax benefit			(53	)			(17	)			(27	)			212				96
Income tax benefit			(20	)			(5	)			(10	)			300				100
“Core Earnings” (loss)		$	(33	)		$	(12	)		$	(17	)			175	%			94	%

Net Interest Loss after Provision for Loan Losses

Net interest loss after provision for loan losses includes net interest income related to our corporate liquidity portfolio as well as net interest income and provision expense related to our mortgage and consumer loan portfolios.

Gains on Debt Repurchases

We repurchased $927 million face amount of our debt for the quarter ended March 31, 2013 and $204 million for the quarter ended March 31, 2012, respectively.

 

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Overhead

Corporate overhead is comprised of costs related to executive management, the board of directors, accounting, finance, legal, human resources and stock-based compensation expense. Unallocated information technology costs are related to infrastructure and operations.

The increase in overhead for the quarter ended March 31, 2013 compared with the year-ago period was primarily the result of a non-recurring $8 million pension termination gain in first-quarter 2012. The increase in overhead from fourth-quarter 2012 was primarily the result of $9 million of seasonal stock-based compensation and $9 million of severance.

Financial Condition

This section provides additional information regarding the changes in our loan portfolio assets and related liabilities as well as credit quality and performance indicators related to our Consumer Lending portfolio.

 

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Summary of our Student Loan Portfolio

Ending Student Loan Balances, net

 

		March 31, 2013
(Dollars in millions)		FFELP Stafford and Other				FFELP Consolidation Loans				Total FFELP Loans				Private Education Loans				Total Portfolio
Total student loan portfolio:
In-school(1)		$	1,350			$	—			$	1,350			$	2,546			$	3,896
Grace, repayment and other(2)			41,080				75,628				116,708				36,522				153,230
Total, gross			42,430				75,628				118,058				39,068				157,126
Unamortized premium/(discount)			667				617				1,284				(772	)			512
Receivable for partially charged-off loans			—				—				—				1,339				1,339
Allowance for loan losses			(92	)			(55	)			(147	)			(2,170	)			(2,317	)
Total student loan portfolio		$	43,005			$	76,190			$	119,195			$	37,465			$	156,660
% of total FFELP			36	%			64	%			100	%
% of total			27	%			49	%			76	%			24	%			100	%
		December 31, 2012
(Dollars in millions)		FFELP Stafford and Other				FFELP Consolidation Loans				Total FFELP Loans				Private Education Loans				Total Portfolio
Total student loan portfolio:
In-school(1)		$	1,506			$	—			$	1,506			$	2,194			$	3,700
Grace, repayment and other(2)			42,189				80,640				122,829				36,360				159,189
Total, gross			43,695				80,640				124,335				38,554				162,889
Unamortized premium/(discount)			691				745				1,436				(796	)			640
Receivable for partially charged-off loans			—				—				—				1,347				1,347
Allowance for loan losses			(97	)			(62	)			(159	)			(2,171	)			(2,330	)
Total student loan portfolio		$	44,289			$	81,323			$	125,612			$	36,934			$	162,546
% of total FFELP			35	%			65	%			100	%
% of total			27	%			50	%			77	%			23	%			100	%
		March 31, 2012
(Dollars in millions)		FFELP Stafford and Other				FFELP Consolidation Loans				Total FFELP Loans				Private Education Loans				Total Portfolio
Total student loan portfolio:
In-school(1)		$	2,850			$	—			$	2,850			$	2,421			$	5,271
Grace, repayment and other(2)			45,966				85,674				131,640				36,104				167,744
Total, gross			48,816				85,674				134,490				38,525				173,015
Unamortized premium/(discount)			803				821				1,624				(853	)			771
Receivable for partially charged-off loans			—				—				—				1,250				1,250
Allowance for loan losses			(111	)			(69	)			(180	)			(2,190	)			(2,370	)
Total student loan portfolio		$	49,508			$	86,426			$	135,934			$	36,732			$	172,666
% of total FFELP			36	%			64	%			100	%
% of total			29	%			50	%			79	%			21	%			100	%

 

(1)	Loans for customers still attending school and are not yet required to make payments on the loan.

 

(2)	Includes loans in deferment or forbearance.

 

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Average Student Loan Balances (net of unamortized premium/discount)

 

		Quarter Ended March 31, 2013
(Dollars in millions)		FFELP Stafford and Other				FFELP Consolidation Loans				Total FFELP Loans				Private Education Loans				Total Portfolio
Total		$	43,721			$	78,134			$	121,855			$	38,406			$	160,261
% of FFELP			36	%			64	%			100	%
% of total			27	%			49	%			76	%			24	%			100	%
		Quarter Ended December 31, 2012
(Dollars in millions)		FFELP Stafford and Other				FFELP Consolidation Loans				Total FFELP Loans				Private Education Loans				Total Portfolio
Total		$	44,955			$	81,919			$	126,874			$	37,926			$	164,800
% of FFELP			35	%			65	%			100	%
% of total			27	%			50	%			77	%			23	%			100	%
		Quarter Ended March 31, 2012
(Dollars in millions)		FFELP Stafford and Other				FFELP Consolidation Loans				Total FFELP Loans				Private Education Loans				Total Portfolio
Total		$	50,149			$	87,044			$	137,193			$	37,749			$	174,942
% of FFELP			37	%			63	%			100	%
% of total			28	%			50	%			78	%			22	%			100	%

Student Loan Activity

 

		Quarter Ended March 31, 2013
(Dollars in millions)		FFELP Stafford and Other				FFELP Consolidation Loans				Total FFELP Loans				Total Private Education Loans				Total Portfolio
Beginning balance		$	44,289			$	81,323			$	125,612			$	36,934			$	162,546
Acquisitions and originations			101				53				154				1,405				1,559
Capitalized interest and premium/discount amortization			295				313				608				200				808
Consolidations to third parties			(445	)			(275	)			(720	)			(24	)			(744	)
Sales(1)			(72	)			(3,749	)			(3,821	)			—				(3,821	)
Repayments and other			(1,163	)			(1,475	)			(2,638	)			(1,050	)			(3,688	)
Ending balance		$	43,005			$	76,190			$	119,195			$	37,465			$	156,660
		Quarter Ended December 31, 2012
(Dollars in millions)		FFELP Stafford and Other				FFELP Consolidation Loans				Total FFELP Loans				Total Private Education Loans				Total Portfolio
Beginning balance		$	45,278			$	82,469			$	127,747			$	37,101			$	164,848
Acquisitions and originations			390				266				656				510				1,166
Capitalized interest and premium/discount amortization			393				325				718				328				1,046
Consolidations to third parties			(548	)			(267	)			(815	)			(18	)			(833	)
Sales			(103	)			—				(103	)			—				(103	)
Repayments and other			(1,121	)			(1,470	)			(2,591	)			(987	)			(3,578	)
Ending balance		$	44,289			$	81,323			$	125,612			$	36,934			$	162,546

 

(1)	Includes $3.7 billion of student loans in connection with the sale of a Residual Interest in a FFELP Loan securitization trust.

 

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		Quarter Ended March 31, 2012
(Dollars in millions)		FFELP Stafford and Other				FFELP Consolidation Loans				Total FFELP Loans				Total Private Education Loans				Total Portfolio
Beginning balance		$	50,440			$	87,690			$	138,130			$	36,290			$	174,420
Acquisitions and originations			819				78				897				1,151				2,048
Capitalized interest and premium/discount amortization			335				398				733				245				978
Consolidations to third parties			(719	)			(225	)			(944	)			(23	)			(967	)
Sales			(135	)			—				(135	)			—				(135	)
Repayments and other			(1,232	)			(1,515	)			(2,747	)			(931	)			(3,678	)
Ending balance		$	49,508			$	86,426			$	135,934			$	36,732			$	172,666

Private Education Loan Originations

The following table summarizes our Private Education Loan originations.

 

		Quarters Ended
(Dollars in millions)		March 31, 2013				December 31, 2012				March 31, 2012
Smart Option — interest only(1)		$	365			$	132			$	358
Smart Option — fixed pay(1)			439				160				345
Smart Option — deferred(1)			590				211				432
Other			17				11				25
Total Private Education Loan originations		$	1,411			$	514			$	1,160

 

(1)

Interest only, fixed pay and deferred describe the payment option while in school or in grace period.

 

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Consumer Lending Portfolio Performance

Private Education Loan Delinquencies and Forbearance

 

		March 31, 2013								December 31, 2012								March 31, 2012
(Dollars in millions)		Balance				%				Balance				%				Balance				%
Loans in-school/grace/deferment(1)		$	6,434							$	5,904							$	6,917
Loans in forbearance(2)			1,101								1,136								1,372
Loans in repayment and percentage of each status:
Loans current			29,069				92.2	%			28,575				90.7	%			27,499				90.9	%
Loans delinquent 31-60 days(3)			731				2.3				1,012				3.2				859				2.8
Loans delinquent 61-90 days(3)			491				1.6				481				1.5				544				1.9
Loans delinquent greater than 90 days(3)			1,242				3.9				1,446				4.6				1,334				4.4
Total Private Education Loans in repayment			31,533				100	%			31,514				100	%			30,236				100	%
Total Private Education Loans, gross			39,068								38,554								38,525
Private Education Loan unamortized discount			(772	)							(796	)							(853	)
Total Private Education Loans			38,296								37,758								37,672
Private Education Loan receivable for partially charged-off loans			1,339								1,347								1,250
Private Education Loan allowance for losses			(2,170	)							(2,171	)							(2,190	)
Private Education Loans, net		$	37,465							$	36,934							$	36,732
Percentage of Private Education Loans in repayment							80.7	%							81.7	%							78.5	%
Delinquencies as a percentage of Private Education Loans in repayment							7.8	%							9.3	%							9.1	%
Loans in forbearance as a percentage of loans in repayment and forbearance							3.4	%							3.5	%							4.3	%
Loans in repayment greater than 12 months as a percentage of loans in repayment(4)							79.1	%							78.5	%							74.1	%

 

(1)	Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

 

(2)	Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with established loan program servicing policies and procedures.

 

(3)	The period of delinquency is based on the number of days scheduled payments are contractually past due.

 

(4)	Based on number of months in an active repayment status for which a scheduled monthly payment was due.

 

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Allowance for Private Education Loan Losses

The following table summarizes changes in the allowance for Private Education Loan losses.

 

		Quarters Ended
(Dollars in millions)		March 31, 2013				December 31, 2012				March 31, 2012
Allowance at beginning of period		$	2,171			$	2,196			$	2,171
Provision for Private Education Loan losses			225				296				235
Charge-offs(1)			(232	)			(329	)			(224	)
Reclassification of interest reserve(2)			6				8				8
Allowance at end of period		$	2,170			$	2,171			$	2,190
Charge-offs as a percentage of average loans in repayment (annualized)			2.97	%			4.19	%			2.96	%
Charge-offs as a percentage of average loans in repayment and forbearance (annualized)			2.87	%			4.04	%			2.84	%
Allowance as a percentage of the ending total loans			5.37	%			5.44	%			5.51	%
Allowance as a percentage of ending loans in repayment			6.88	%			6.89	%			7.24	%
Average coverage of charge-offs (annualized)			2.3				1.7				2.4
Ending total loans(3)		$	40,407			$	39,901			$	39,775
Average loans in repayment		$	31,645			$	31,267			$	30,378
Ending loans in repayment		$	31,533			$	31,514			$	30,236

 

(1)

Charge-offs are reported net of expected recoveries. The expected recovery amount is transferred to the receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the difference between what was expected to be collected and any shortfalls in what was actually collected in the period. See “Receivable for Partially Charged-Off Private Education Loans” for further discussion.

 

(2)

Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

 

(3)

Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans.

 

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The following table provides detail for our traditional and non-traditional Private Education Loans for the quarters ended.

 

		March 31, 2013												December 31, 2012												March 31, 2012
(Dollars in millions)		Traditional				Non- Traditional				Total				Traditional				Non- Traditional				Total				Traditional				Non- Traditional				Total
Ending total loans(1)		$	36,746			$	3,661			$	40,407			$	36,144			$	3,757			$	39,901			$	35,755			$	4,020			$	39,775
Ending loans in repayment			29,022				2,511				31,533				28,930				2,584				31,514				27,588				2,648				30,236
Private Education Loan allowance for loan losses			1,643				527				2,170				1,637				534				2,171				1,587				603				2,190
Charge-offs as a percentage of average loans in repayment (annualized)			2.5	%			8.7	%			3.0	%			3.4	%			13.2	%			4.2	%			2.3	%			10.3	%			3.0	%
Allowance as a percentage of ending total loans			4.5	%			14.4	%			5.4	%			4.5	%			14.2	%			5.4	%			4.4	%			15.0	%			5.5	%
Allowance as a percentage of ending loans in repayment			5.7	%			21.0	%			6.9	%			5.7	%			20.7	%			6.9	%			5.8	%			22.8	%			7.2	%
Average coverage of charge-offs (annualized)			2.3				2.4				2.3				1.7				1.6				1.7				2.5				2.2				2.4
Delinquencies as a percentage of Private Education Loans in repayment			6.7	%			20.5	%			7.8	%			8.1	%			23.4	%			9.3	%			7.7	%			23.3	%			9.1	%
Delinquencies greater than 90 days as a percentage of Private Education Loans in repayment			3.3	%			11.2	%			3.9	%			3.9	%			12.6	%			4.6	%			3.6	%			12.5	%			4.4	%
Loans in forbearance as a percentage of loans in repayment and forbearance			3.2	%			5.1	%			3.4	%			3.3	%			5.1	%			3.5	%			4.1	%			6.8	%			4.3	%
Loans that entered repayment during the period(2)		$	553			$	23			$	576			$	1,049			$	60			$	1,109			$	729			$	54			$	783
Percentage of Private Education Loans with a cosigner			69	%			30	%			66	%			68	%			30	%			65	%			66	%			29	%			63	%
Average FICO at origination			728				624				720				728				624				720				727				624				718

 

(1)	Ending total loans represent gross Private Education Loans, plus the receivable for partially charged-off loans.

 

(2)	Includes loans that are required to make a payment for the first time.

As part of concluding on the adequacy of the allowance for loan losses, we review key allowance and loan metrics. The most significant of these metrics considered are the allowance coverage of charge-offs ratio; the allowance as a percentage of total loans and of loans in repayment; and delinquency and forbearance percentages.

Receivable for Partially Charged-Off Private Education Loans

At the end of each month, for loans that are 212 days past due, we charge off the estimated loss of a defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as the “receivable for partially charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately charged off through the allowance for loan losses with an offsetting reduction in the receivable for partially charged-off Private Education Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. Private Education Loans which defaulted between 2008 and 2011 for which we have previously charged off estimated losses have, to varying degrees, not met our post-default recovery expectations to date and may continue not to do so. According to our policy, we have been charging off these periodic shortfalls in expected recoveries against our allowance for Private Education Loan losses and the related receivable for partially charged-off Private Education Loans and we will continue to do so. There was $209 million, $198 million and $151 million in allowance for Private Education Loan losses at March 31, 2013, December 31, 2012 and March 31, 2012, respectively, providing for possible additional future charge-offs related to the receivable for partially charged-off Private Education Loans (see “Consumer Lending Segment — Private Education Loan Provision for Loan Losses and Charge-Offs” for a further discussion).

 

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The following table summarizes the activity in the receivable for partially charged-off Private Education Loans.

 

		Quarters Ended
(Dollars in millions)		March 31, 2013				December 31, 2012				March 31, 2012
Receivable at beginning of period		$	1,347			$	1,303			$	1,241
Expected future recoveries of current period defaults(1)			78				113				69
Recoveries(2)			(68	)			(49	)			(50	)
Charge-offs(3)			(18	)			(20	)			(10	)
Receivable at end of period			1,339				1,347				1,250
Allowance for estimated recovery shortfalls(4)			(209	)			(198	)			(151	)
Net receivable at end of period		$	1,130			$	1,149			$	1,099

 

(1)	Represents the difference between the defaulted loan balance and our estimate of the amount to be collected in the future.

 

(2)	Current period cash collections.

 

(3)	Represents the current period recovery shortfall — the difference between what was expected to be collected and what was actually collected. These amounts are included in total charge-offs as reported in the “Allowance for Private Education Loan Losses” table.

 

(4)	The allowance for estimated recovery shortfalls of the receivable for partially charged-off Private Education Loans is a component of the $2.2 billion overall allowance for Private Education Loan losses as of March 31, 2013, December 31, 2012 and March 31, 2012.

The tables below show the composition and status of the Private Education Loan portfolio aged by number of months in active repayment status (months for which a scheduled monthly payment was due). As indicated in the tables, the percentage of loans in forbearance status decreases the longer the loans have been in active repayment status. At March 31, 2013, loans in forbearance status as a percentage of loans in repayment and forbearance were 5.9 percent for loans that have been in active repayment status for less than 25 months. The percentage drops to 1.2 percent for loans that have been in active repayment status for more than 48 months. Approximately 70 percent of our Private Education Loans in forbearance status has been in active repayment status less than 25 months.

 

		Monthly Scheduled Payments Due
(Dollars in millions) March 31, 2013		0 to 12				13 to 24				25 to 36				37 to 48				More than 48				Not Yet in Repayment				Total
Loans in-school/grace/deferment		$	—			$	—			$	—			$	—			$	—			$	6,434			$	6,434
Loans in forbearance			587				184				145				79				106				—				1,101
Loans in repayment — current			5,645				5,156				5,345				4,505				8,418				—				29,069
Loans in repayment — delinquent 31-60 days			252				139				132				85				123				—				731
Loans in repayment — delinquent 61-90 days			189				95				82				54				71				—				491
Loans in repayment — delinquent greater than 90 days			513				260				204				115				150				—				1,242
Total		$	7,186			$	5,834			$	5,908			$	4,838			$	8,868			$	6,434				39,068
Unamortized discount																											(772	)
Receivable for partially charged-off loans																											1,339
Allowance for loan losses																											(2,170	)
Total Private Education Loans, net																										$	37,465
Loans in forbearance as a percentage of loans in repayment and forbearance			8.2	%			3.2	%			2.5	%			1.6	%			1.2	%			—	%			3.4	%

 

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		Monthly Scheduled Payments Due
(Dollars in millions) December 31, 2012		0 to 12				13 to 24				25 to 36				37 to 48				More than 48				Not Yet in Repayment				Total
Loans in-school/grace/deferment		$	—			$	—			$	—			$	—			$	—			$	5,904			$	5,904
Loans in forbearance			602				195				149				83				107				—				1,136
Loans in repayment — current			5,591				5,366				5,405				4,403				7,810				—				28,575
Loans in repayment — delinquent 31-60 days			353				189				175				116				179				—				1,012
Loans in repayment — delinquent 61-90 days			185				95				81				49				71				—				481
Loans in repayment — delinquent greater than 90 days			640				292				227				129				158				—				1,446
Total		$	7,371			$	6,137			$	6,037			$	4,780			$	8,325			$	5,904				38,554
Unamortized discount																											(796	)
Receivable for partially charged-off loans																											1,347
Allowance for loan losses																											(2,171	)
Total Private Education Loans, net																										$	36,934
Loans in forbearance as a percentage of loans in repayment and forbearance			8.2	%			3.2	%			2.5	%			1.7	%			1.3	%			—	%			3.5	%

 

		Monthly Scheduled Payments Due
(Dollars in millions) March 31, 2012		0 to 12				13 to 24				25 to 36				37 to 48				More than 48				Not Yet in Repayment				Total
Loans in-school/grace/deferment		$	—			$	—			$	—			$	—			$	—			$	6,917			$	6,917
Loans in forbearance			892				198				132				64				86				—				1,372
Loans in repayment — current			6,529				5,920				5,204				3,626				6,220				—				27,499
Loans in repayment — delinquent 31-60 days			381				171				136				72				99				—				859
Loans in repayment — delinquent 61-90 days			265				107				79				39				54				—				544
Loans in repayment — delinquent greater than 90 days			663				270				186				93				122				—				1,334
Total		$	8,730			$	6,666			$	5,737			$	3,894			$	6,581			$	6,917				38,525
Unamortized discount																											(853	)
Receivable for partially charged-off loans																											1,250
Allowance for loan losses																											(2,190	)
Total Private Education Loans, net																										$	36,732
Loans in forbearance as a percentage of loans in repayment and forbearance			10.2	%			3.0	%			2.3	%			1.7	%			1.3	%			—	%			4.3	%

The number of loans in a forbearance status as a percentage of loans in repayment and forbearance decreased to 3.4 percent for the quarter ended March 31, 2013 compared with 4.3 percent in the year-ago quarter. As of March 31, 2013, 2.2 percent of loans in current status were delinquent as of the end of the prior month, but were granted a forbearance that made them current as of March 31, 2013 (customers made payments on approximately 37 percent of these loans as a prerequisite to being granted forbearance).

 

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Liquidity and Capital Resources

We expect to fund our ongoing liquidity needs, including the origination of new Private Education Loans and the repayment of $2.8 billion of senior unsecured notes that mature in the next twelve months, primarily through our current cash and investment portfolio, the issuance of additional bank deposits and unsecured debt, the predictable operating cash flows provided by earnings, the repayment of principal on unencumbered student loan assets and the distributions from our securitization trusts (including servicing fees which are priority payments within the trusts). We may also draw down on our FFELP ABCP Facilities and the facility with the Federal Home Loan Bank in Des Moines (the “FHLB-DM Facility”); and we may also issue term ABS.

Currently, new Private Education Loan originations are initially funded through deposits and subsequently securitized to term. We have $1.4 billion of cash at the Bank as of March 31, 2013 available to fund future originations. We no longer originate FFELP Loans and therefore no longer have liquidity requirements for new FFELP Loan originations.

We will continue to opportunistically purchase FFELP Loan portfolios from others. Additionally, we still expect to redeem all remaining FFELP Loans we currently finance in the ED Conduit Program on or before the program’s anticipated January 19, 2014, maturity date (the “ED Maturity Date”). We plan to rely primarily on securitizing these loans to term through securitization trusts. However, we may also utilize existing FFELP ABCP and FHLB-DM Facility capacities, as well as additional capital markets funding sources.

Since December 31, 2010, we have refinanced approximately $11.6 billion in principal amount of our FFELP Loans previously financed through the ED Conduit Program, most being funded to term through the use of securitization trusts. As of March 31, 2013, we have $6.9 billion in principal amount of FFELP Loans remaining in the ED Conduit Program. If we cannot obtain sufficient cost-effective funding to finance any or all of the FFELP Loans remaining in the ED Conduit Program on or before the ED Maturity Date, any remaining FFELP Loans still in the program must be put to ED at 97 percent of their principal balance which results in us forfeiting three percent of the principal amount of those loans. In addition, we will also no longer collect future servicing revenues or interest income on any loans put to ED.

Sources of Liquidity and Available Capacity

Ending Balances

 

(Dollars in millions)		March 31, 2013				December 31, 2012				March 31, 2012
Sources of primary liquidity:
Unrestricted cash and liquid investments:
Holding Company and other non-bank subsidiaries		$	2,290			$	2,376			$	2,439
Sallie Mae Bank(1)			1,472				1,598				670
Total unrestricted cash and liquid investments		$	3,762			$	3,974			$	3,109
Unencumbered FFELP Loans		$	1,753			$	1,656			$	1,080

Average Balances

 

		Quarters Ended
(Dollars in millions)		March 31, 2013				December 31, 2012				March 31, 2012
Sources of primary liquidity:
Unrestricted cash and liquid investments:
Holding Company and other non-bank subsidiaries		$	2,820			$	2,511			$	1,656
Sallie Mae Bank(1)			1,229				1,316				880
Total unrestricted cash and liquid investments		$	4,049			$	3,827			$	2,536
Unencumbered FFELP Loans		$	1,695			$	1,476			$	1,080

 

(1)	This amount will be used primarily to originate or acquire student loans at the Bank. See discussion below on restrictions on the Bank to pay dividends.

 

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Liquidity may also be available under secured credit facilities to the extent we have eligible collateral and capacity available. Maximum borrowing capacity under the FFELP ABCP Facility and FHLB-DM Facility will vary and be subject to each agreement’s borrowing conditions, including, among others, facility size, current usage and availability of qualifying collateral from unencumbered FFELP Loans. As of March 31, 2013 and December 31, 2012, the maximum additional capacity under these facilities was $9.8 billion and $11.8 billion, respectively. For the quarters ended March 31, 2013, December 31, 2012 and March 31, 2012, the average maximum additional capacity under these facilities was $10.8 billion, $11.3 billion and $12.1 billion, respectively.

We also hold a number of other unencumbered assets, consisting primarily of Private Education Loans and other assets. Total unencumbered student loans, net, comprised $12.5 billion of our unencumbered assets of which $10.8 billion and $1.7 billion related to Private Education Loans, net and FFELP Loans, net, respectively. At March 31, 2013, we had a total of $21.2 billion of unencumbered assets inclusive of those described above as sources of primary liquidity and exclusive of goodwill and acquired intangible assets.

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 from its net profits without regulatory approval if, following the payment of the dividend, the Bank’s capital and surplus would not be impaired. While applicable Utah and FDIC regulations differ in approach as to determinations of impairment of capital and surplus, neither method of determination has historically required the Bank to obtain consent to the payment of dividends. For the quarters ended March 31, 2013, December 31, 2012 and March 31, 2012, the Bank paid dividends of $120 million, $75 million and $50 million, respectively.

For further discussion of our various sources of liquidity, such as the ED Conduit Program, the FFELP ABCP Facility, the Bank, our continued access to the ABS market, our asset-backed financing facilities, the lending agreement we entered into with the FHLB-DM and our issuance of unsecured debt, see “Note 6 — Borrowings” in our Annual Report on Form 10-K for the year ended December 31, 2012.

The following table reconciles encumbered and unencumbered assets and their net impact on total tangible equity.

 

(Dollars in billions)		March 31, 2013				December 31, 2012				March 31, 2012
Net assets of consolidated variable interest entities (encumbered assets) — FFELP Loans		$	6.4			$	6.6			$	7.2
Net assets of consolidated variable interest entities (encumbered assets) — Private Education Loans			6.7				6.6				5.6
Tangible unencumbered assets(1)			21.2				21.2				20.9
Unsecured debt			(26.7	)			(26.7	)			(25.4	)
Mark-to-market on unsecured hedged debt(2)			(1.5	)			(1.7	)			(1.7	)
Other liabilities, net			(1.4	)			(1.4	)			(2.0	)
Total tangible equity		$	4.7			$	4.6			$	4.6

 

(1)

Excludes goodwill and acquired intangible assets.

 

(2)

At March 31, 2013, December 31, 2012 and March 31, 2012, there were $1.2 billion, $1.4 billion and $1.5 billion, respectively, of net gains on derivatives hedging this debt in unencumbered assets, which partially offset these losses.

 

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“Core Earnings” Basis Borrowings

The following table presents the ending balances of our “Core Earnings” basis borrowings.

 

		March 31, 2013												December 31, 2012												March 31, 2012
(Dollars in millions)		Short Term				Long Term				Total				Short Term				Long Term				Total				Short Term				Long Term				Total
Unsecured borrowings:
Senior unsecured debt		$	2,778			$	15,167			$	17,945			$	2,319			$	15,446			$	17,765			$	2,192			$	16,182			$	18,374
Brokered deposits			1,170				2,782				3,952				979				3,088				4,067				1,455				1,957				3,412
Retail and other deposits			3,643				—				3,643				3,247				—				3,247				2,311				—				2,311
Other(1)			1,240				—				1,240				1,609				—				1,609				1,284				—				1,284
Total unsecured borrowings			8,831				17,949				26,780				8,154				18,534				26,688				7,242				18,139				25,381
Secured borrowings:
FFELP Loan securitizations			—				100,750				100,750				—				105,525				105,525				—				107,211				107,211
Private Education Loan securitizations			—				20,252				20,252				—				19,656				19,656				—				18,334				18,334
ED Conduit Program facility			6,967				—				6,967				9,551				—				9,551				18,539				—				18,539
FFELP ABCP Facility			—				5,114				5,114				—				4,154				4,154				—				5,459				5,459
Private Education Loan ABCP Facility			539				—				539				—				1,070				1,070				—				2,666				2,666
Acquisition financing(2)			—				576				576				—				673				673				—				856				856
FHLB-DM Facility			880				1,220				2,100				2,100				—				2,100				1,250				—				1,250
Total secured borrowings			8,386				127,912				136,298				11,651				131,078				142,729				19,789				134,526				154,315
Total “Core Earnings” basis			17,217				145,861				163,078				19,805				149,612				169,417				27,031				152,665				179,696
Hedge accounting adjustments			37				2,026				2,063				51				2,789				2,840				92				2,923				3,015
Total GAAP basis		$	17,254			$	147,887			$	165,141			$	19,856			$	152,401			$	172,257			$	27,123			$	155,588			$	182,711

 

(1)	“Other” primarily consists of the obligation to return cash collateral held related to derivative exposure.

 

(2)	Relates to the acquisition of $25 billion of student loans at the end of 2010.

Transactions during the First-Quarter 2013

The following financing transactions have taken place in the first quarter of 2013:

Unsecured Financings:

 

Ÿ

January 28, 2013 — issued $1.5 billion senior unsecured bonds.

FFELP Financings:

 

Ÿ

February 14, 2013 — issued $1.2 billion FFELP ABS.

Private Education Loan Financings:

 

Ÿ

January 31, 2013 — issued $0.3 billion Private Education Loan subordinate ABS previously retained.

 

Ÿ

March 7, 2013 — issued $1.1 billion Private Education Loan ABS.

In first-quarter 2013, Sallie Mae paid a common stock dividend of $0.15 per share.

For the first-quarter 2013, Sallie Mae repurchased 10 million shares of common stock for $199 million.

On February 13, 2013, we sold the Residual Interest in a FFELP Loan securitization trust to a third party. We will continue to service the student loans in the trust under existing agreements. The sale removed student loan assets of $3.8 billion and related liabilities of $3.7 billion from our balance sheet. The gain from the transaction added $0.08 to our first-quarter 2013 GAAP and “Core Earnings” diluted earnings per share.

Transactions during the Second-Quarter 2013

On April 11, 2013, we sold the Residual Interest in a FFELP Loan securitization trust to a third party. We will continue to service the student loans in the trust under existing agreements. The sale will remove student loan assets of approximately $2.03 billion and related liabilities of approximately $1.99 billion from our balance sheet. The gain from the transaction will add approximately $0.13 to our second-quarter 2013 GAAP and “Core Earnings” diluted earnings per share.

 

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